INSTITUTIONAL DISTORTIONS ,E CONOMIC FREEDOM, AND GROWTH

Abstract

Two developments in the 1980s revived interest in growth theory and modified the way most economists study the determinants of growth. First, the contributions by Romer (1986) and Lucas (1988) launched a host of new growth models that abandoned the neoclas-sical tenet of diminishing returns to capital and introduced monopo-listic competition as the underlying market form. Second, the contri-butions by North (1990) focused attention on institutions that shape the incentive structure which may either propel or impede productive activity within society. North and others emphasize that the existence of an implicit incentive structure drives both traditional growth mod-els and the new models built around increasing returns.1 These de-velopments laid the foundation for a large body of empirical work: some studies examine and compare the aggregate growth patterns, and others seek to identify the specific factors that correlate with growth. The latter studies include numerous attempts to measure empirically the effect of institutional factors on economic develop-ment (e.g., Barro 1991, Sachs and Warner 1997). A common thesis in the new institutional literature maintains that societies that have adopted infrastructures that favor production over diversion have typically done so through effective government (e.g., a strong judiciary and policies that secure property rights). As a result

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