Theory and empirics of root causes of economic progress

Abstract

The thesis revisits the debate over the relative contribution of root causes (institutions, geography, trade openness, religion and culture, and knowledge) in economic growth. The results show that institutions, market proximity, malaria and Catholicism have direct effects on economic progress. Catholicism is associated with poor institutions and is not good for trade. Malaria is the most important factor for Africa. The Africa result is explained by an overlapping generations model which shows that high malaria incidence encourages households to consume more at the current period and save less for the future which leads to a poverty trap. Among institutions, ‘market creating institutions’ and ‘market stabilising institutions’ are important. Strong ‘market creating institutions’ characterized by the adequate protection of private property and contract enforcement are growth enhancing. ‘Market stabilizing institutions’ that ensures macroeconomic stability and does not undertake distortionary policies boosts investor confidence and are also good for growth. I notice that there is a growth maximizing level of ‘market regulation’ beyond which it increases red tape and kills the incentive for investment. The effect of ‘market legitimizing institutions’ is statistically insignificant