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Journal of Economic Growth, 9, 271303, 2004# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.Do Institutions Cause Growth?EDWARD L. GLAESERHarvard UniversityRAFAEL LA PORTADartmouth CollegeFLORENCIO LOPEZ-DE-SILANESYale UniversityANDREI SHLEIFERHarvard UniversityWe revisit the debate over whether political institutions cause economic growth, or whether, alternatively, growthand human capital accumulation lead to institutional improvement. We nd that most indicators of institutionalquality used to establish the proposition that institutions cause growth are constructed to be conceptuallyunsuitable for that purpose. We also nd that some of the instrumental variable techniques used in the literatureare awed. Basic OLS results, as well as a variety of additional evidence, suggest that (a) human capital is a morebasic source of growth than are the institutions, (b) poor countries get out of poverty through good policies, oftenpursued by dictators, and (c) subsequently improve their political institutions.Keywords: economic development, economic growth and aggregate productivity, political economy, propertyrights, institutionsJEL classication: O10, O40, P16, P141. IntroductionToday, both the United Statesand the international community face two majordevelopment challengesaround the world, from Iraq, to Haiti, to sub-Saharan Africa:
how to ignite growth and how to establish democracy. Economic research has identiedtwo broad approaches to confronting these challenges. The rst approach emphasizes theneed to start with democracy and other checks on government as the mechanisms forsecuring property rights. With such political institutions in place, investment in human andphysical capital, and therefore economic growth, are expected to follow. The secondapproach emphasizes the need for human and physical capital accumulation to start theprocess. It holds that even pro-market dictators can secure property rights as a matter of272 EDWARD L. GLAESER ET AL.policy choice, not of political constraints. From the vantage point of poor countries, it seesdemocracy and other institutional improvements as the consequences of increasededucation and wealth, not as their causes.Both approachesto development have extensive intellectual pedigree. The importanceof constraining government was stressed by Montesquieu (1748) and Smith (1776), as wellby the new institutional economics literature (Buchanan and Tullock, 1962; North and
Thomas, 1973; North, 1981, 1990). DeLong and Shleifer (1993) supplied early empiricalsupport for this view using data on urbanization of European regions during the lastmillennium, which showed faster city growth under more limited governments. Morerecently, the literature on economic growth, starting with early contributions by Knack andKeefer (1995) and Mauro (1995), hasturned to...