of written contracts, court-based litigation and protection through bribery or
private security (Chapter 12 examines the role of culture in determining the
level of trust). Using the World Values Survey, which contains data from thou-
sands of respondents in 29 developed countries, Knack and Keefer find trust
has a strong and positive relation with economic growth.
Rodrik and Subramanian (2003) measure the quality of institutions by a
composite indicator that includes the protection afforded to property rights and
the rule of law. They find this measure of institutions has a positive and signif-
icant impact on income levels. Fernandes (2009), comparing institutions in
South and East Asia, distinguishes between property rights institutions
(whether private property is secure from predation by the state), and contract-
ing institutions (the effectiveness of institutions such as the judicial system in
enforcing contracts or mediating disputes between private parties). He finds,
first, that South Asian countries have substantially weaker property rights and
contracting institutions than East Asian countries, and, second, that property
rights institutions have a significant causal impact on per capita GDP across
countries, while contracting institutions matter much less.
A big problem with measuring the impact of institutions on economic
growth is that causality can run in both directions. Institutions may generate
incentives for firms to undertake long-term investment. But institutions such
as registering and enforcing property rights and maintaining an independent
judiciary are costly and better afforded by a wealthy country. A study of land
titling in Madagascar found that it was hard to distinguish the positive impact
of property rights on productivity in rice-paddy agriculture from the reverse
causation,whereby there is more incentive to invest in land titling in areas
with productive land (Jacoby and Minten, 2007). Acemoglu et al. (2001)
famously and influentially engaged with this problem by seeking a measure
of institutions that was not influenced by incomes or,in the terminology of
economics, was ‘exogenous’. Their effort rested on three premises. First, that
historically there were different types of colonial policy which created differ-
ent sets of institutions. ‘Extractive states’, such as the Belgian Congo, did not
introduce much protection for private property nor checks and balances
against government appropriation; ‘neo-Europes’, such as New Zealand and
Canada,tried to replicate European institutions with an emphasis on private
property and checks against government power. Second, the colonization
strategy was influenced by the feasibility of settlement. Where the disease
environment was not favourable to European settlement the formation of
extractive states was more likely. And third, such colonial institutions
persisted after independence. Based on these premises Acemoglu et al.used
mortality rates experienced by the first European settlers as proxy measures
for current institutions in these countries. They found a strong cross-country
relationship between eighteenth-century settler mortality rates and current
institutions (property rights and checks against government power). Their
novel methodology reduces the causality problem (current institutions cannot
have influenced eighteenth-century settler mortality rates) and so lends more
216 Patterns and Determinants of Economic Growth