EDUCATIONAL OUTCOMES IN OECD COUNTRIES
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3.1. Property-rights and free-trade institutions
Most economists believe that fundamental economic institutions are important for a
well-functioning economy, and by implication for economic growth. The review in
Acemoglu, Johnson, and Robinson (2005) strongly supports this premise. Many studies
have by now confirmed that institutions such as security of property rights and openness
to international trade help to understand long-run differences in economic well-being
between developed and developing countries. However, the extent to which such
institutions also help to explain long-run growth differences among developed countries
is less clear. Indeed, most OECD countries do not differ much in this respect, as they
have all reached high levels of property-rights security and international openness.
While these institutional factors may have contributed historically to their development,
the lack of variation across countries would indicate that they lack power in explaining
growth differences with the OECD.
To test whether institutional differences contribute to our understanding of long-run
growth differences between OECD countries and whether their consideration alters our
result on the importance of educational outcomes, Table 3 enters basic institutional
measures into our growth models. Two measures have been most consistently found to
be associated with growth and income differences in global country samples. The first is
the measure of security of property rights used, among others, by Acemoglu, Johnson,
and Robinson (2001). The measure is an index of the protection against expropriation
risk, averaged over 1985-1995, from Political Risk Services, a private company which
assesses the risk that investments will be expropriated in different countries. The
measure is scaled from 0 to 10, with higher values corresponding to higher security of
property rights. The second is the measure of openness proposed by Sachs and Warner
(1995, 1997). The index reflects the fraction of years between 1960 and 1998 that a
country is classified as having an economy open to international trade, based on five
factors including tariffs, quotas, exchange rate controls, export controls, and whether or
not a socialist economy (see also Lucas (2009) for a recent application).
Without considering cognitive skills, protection against expropriation is significantly
associated with economic growth across the OECD countries between 1960 and 2000
(column (1) of Table 3). However, when cognitive skills are included in the model, the
coefficient on the institutional variable drops substantially in size and becomes
statistically insignificant, whereas the coefficient on cognitive skills remains highly
significant and close to our previous models without institutional controls (column (2)).
The statistical model clearly favors educational outcomes over institutions as a
fundamental source of long-run growth differences between OECD countries. This
result supports the view expressed in Glaeser, La Porta, Lopez-de-Silanes, and Shleifer
(2004) that human capital may be the more basic source of growth than institutions.11
11 The analysis of Acemoglu, Johnson, and Robinson (2001) has provided considerable support for the power of economic
institutions based on their development of instruments based on historical colonization patterns. An underlying argument is
that colonists could bring with them a set of fundamental institutions that can be useful in explaining current institutions.
Glaeser, La Porta, Lopez-de-Silanes, and Shleifer (2004) argue that the colonists not only brought knowledge of institutions
but also human capital - and that the human capital might be more fundamental to the growth process.