Institutional change and persistence : what does the long-run evidence tell us?

There is a broad agreement that political and economic institutions matter for long-term development. Yet relatively little is known as to how to adopt good quality institutions and reform weak or poor institutions, for which one needs to know how institutions change. This paper provides a systematic econometric investigation of long-run patterns of institutional change, offering panel time series evidence that allows for different forms of country-specific heterogeneity and cross-section dependence. We use variables that capture the quality of four key political and economic institutions over 200 years for a sample of 161 countries from the V-Dem database: electoral democracy and executive constraints, for political institutions; and the rule of law and property rights, for economic institutions. We focus on two core hypotheses: (i) institutions display inertia, hence measures are stationary and, if a shock occurs, it is reabsorbed after a while; (ii) political and economic institutions tend to co-evolve. We find that political and economic institutions are non-stationary, suggesting that institutional change is more the norm than the exception. We also find that the long-run dynamic relationship between economic and political institutions may be different for different institutions and in different contexts, because their interplay may depend on country-specific factors.