Evidence on property rights
There are three broad strands of evidence supporting the importance of institu-
tions as a deeper determinant of economic growth: econometric studies,case
studies and examining the results of efforts to create or strengthen property
rights.
Econometric evidence
Econometrics seeks to construct a quantitative measure of institutions and
relate it to economic growth whilst accounting for other growth-relevant
factors. Using data from 127 countries Hall and Jones (1999) find a significant
and strong association between output per worker and ‘social infrastructure’,
which measures the extent to which individuals can capture the returns to their
actions rather than those returns being lost to crime, confiscatory taxation or
corruption. The index is a weighted average of five variables (law and order,
bureaucratic quality, corruption, risk of expropriation and government repudi-
ation of contracts). Knack and Keefer (1997) argue that trust (an informal insti-
tution) can facilitate economic transactions. Trust reduces or eliminates costs
Institutions 215Box 10.2 Collective property rightsWhen resources such as land are held on a common or tribal basis and subject to
free and open access by all there may be little incentive to conserve those assets.
Individuals will benefit from the conservation efforts of others and gain from
their own use of the asset. In extremiseach individual will have an incentive to
plunder those assets before others get the chance. This is known as the ‘tragedy
of the commons’ and is often cited as a reason why Sub-Saharan Africa, where
much land and other resources are held in common, has long experienced slow
economic growth (Stein, 1995). The re-establishment of a form of private rather
than collective state-owned property in agriculture and industry has been cited
as a key reason for rapid economic growth in China after the mid-1970s (Nolan,
1995). Nobel prize-winner Elinor Ostrom argued that collective property rights
can be efficient under some circumstances. For example, when rules governing
common access are well established, the group having access is clearly defined
and closely tied together (often through kinship groups), the group are able to
impose sanctions on those violating access rules, the resources can be easily
monitored and the community are able to resolve conflicts at relatively low cost.
Property rights entail two sets of costs: the cost involved in the establishment
and maintenance of property rights, and the cost of negotiating and enforcing the
rules of access to be obeyed by all members of the group. With private owner-
ship the second cost is negligible. With common property, while defining owner-
ship is easier, there are more costs associated with determining the rules of
access. The relative magnitude of the two costs determines which type of prop-
erty rights regime is viable (Southgate, 2002).