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Path dependence and interdependence between institutions and development

3 October 2016
Publication Type: Policy Brief, Working Paper
JEL Code: D01, K00, K11, N00, N1, N47, O1, O11, O17

Path dependence theory, within the institutions context, means that the path of institutions promulgated within a system historically determines the nature of institutions that will ensue within the same system in the present and in the future. The paper makes use of a newly constructed index of institutions quality, and addresses three related questions; the existence of path dependence in institutions, the interdependence and causality between political and economic institutions, and lastly the interdependence between economic development and institutions. In addressing the first question, I use unit root tests to test the hypothesis that institutions promulgated during colonial times still influence institutions promulgated during the post colonial era. I also test for interdependence between institutions in Nigeria using an error correction model in analysing the extent of interdependence between political and economic institutions. Lastly, I test the critical juncture hypothesis—which argues that better institutions lead to economic development and the modernisation hypotheses—which argues that economic development leads to better institutions. The results show support for early path dependence in both political and economic institutions. I also find evidence in support of interdependence running from economic to political institutions. Lastly, there is evidence of a long-run association between institutions and economic development, with the evidence supporting the critical juncture hypothesis, more than the modernisation hypothesis.

Working paper 637
1 October 2016
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