NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rule of Law, Democracy, Openness, and Income: Estimating the Interrelationships

Roberto Rigobon, Dani Rodrik

NBER Working Paper No. 10750
Issued in September 2004
NBER Program(s):   EFG   IFM   ITI

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross-national dataset into two sub-samples: (i) colonies versus non-colonies; and (ii) continents aligned on an East-West versus those aligned on a North-South axis. We exploit the difference in the structural variances in these two sub-samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.

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Document Object Identifier (DOI): 10.3386/w10750

Published: Rigobon, Roberto and Dani Rodrik. "Rule of Law, Democracy, Openness, and Income: Estimating the Interrelationships." The Economics of Transition 13, 3 (2005): 533-64.

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