IfW Press Release November 15, 2007

Development Policy: Improving the Efficiency of Institutions Is Not Enough

In development policy circles, a heated debate has broken out concerning how economic and institutional development affect each other. Some economists claim that efficient institutions such as ultimately occur in democracies cause economic growth, while other economists claim that economic growth causes the emergence of efficient institutions. The former thus advocate development policies based on improving institutions in poor countries, while the latter thus advocate development policies based on supplying medical and technical assistance to such countries.

In a new study forthcoming in Kyklos, Martin Paldam and Erich Gundlach use a large cross section of countries, together with democracy and corruption indicators, to study the empirical relationship between economic and institutional development. They show that income growth, as a rule, promotes the development of democracy in an economy and inhibits corruption. There are, however, exceptions to this rule. India, Mali, Mauritius, and the United States became democracies at early stages in their economic development (i.e., when per capita income was relatively low). Paldam and Gundlach conclude that institutional measures such as directly pro­moting democracy or directly fighting corruption are not enough to promote economic development in poor countries. Development policy should also concern itself especially with resolving various medical, biological, and technical problems that impede development in many of the poor countries.

Contact:

Dr. habil. Erich Gundlach
Phone +49 (0) 431-8814-284