Introduction to Modern Economic Growth 4.4 The Effect of Institutions on Economic Growth We now argue that there is convincing empirical support for the hypothesis that differences in economic institutions, rather than luck, geography or culture, cause differences in incomes per-capita Let us start by looking at the simplest correlation between a measure of economic institutions and income per capita 10 L o g G D P p e r c a p ita , P P P , in 9 LUX USA CHE JPN NOR DNK BEL CAN AUT FRA ISL NLD AUSITA GBR SWE FIN IRL NZL ESP PRT SGP HKG ARE KWT ISR QAT BHR MLT PAN IRN PER GTM SUR UGA BFA MDG ROM JAM JORPRY MAR EGY CZE HUN RUS BGR IDN CHN LKA ZWE CMR GIN SEN PAK GHA VNM COG HTI ZAR TUN ECU DZA PHL SYR BOL GUY SLV AGO HND NIC SDN DOM KOR GRC CHL BHS SAU OMN VEN URY MEX GAB ZAF BWA MYS CRI COL TTOTHA BRA TUR POL ARG CIV TGO MNG IND GMB KEN BGD NER NGA MLI SLE ETH ZMB YEM MOZ MWI TZA 6 Avg Protection Against Risk of Expropriation, 1985-95 Figure 4.1 Relationship between economic institutions, as measured by average expropriation risk 1985-1995, and GDP per capita Figure 4.1 shows the cross-country correlation between the log of GDP per-capita in 1995 and a broad measure of property rights, “protection against expropriation risk”, averaged over the period 1985 to 1995 The data on this measure of economic institutions come from Political Risk Services, a private company which assesses the risk that foreign investments will be expropriated in different countries These data are not perfect They reflect the subjective assessment of some analysts about how secure property rights are Nevertheless, they are useful for our purposes First, they emphasize the security of property rights, which is an essential aspect of economic institutions, especially in regards to their effect on economic incentives Second, 178 10