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Journal of Economics and Finance

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01-10-2016

Institutional convergence: exit or voice?

Author: Joshua C. Hall

Published in: Journal of Economics and Finance | Issue 4/2016

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Abstract

There is a small but growing literature on the determinants of economic freedom. This paper contributes to this literature in two ways. First, it is empirically shown that β-convergence in economic freedom occurred from 1980 to 2010. Countries with low levels of economic freedom in 1980 “catch up” at a rate of 0.7 percent a year on average, ceteris paribus. Second, the structural characteristics that contribute to this institutional convergence are documented. Conditional convergence estimates suggest democratic institutions do not con- tribute to conditional convergence. Exitability, a variable that captures how easy it is for citizens to “vote with their feet” is related to the change in economic freedom from 1980 to 2010 in a statistically significant manner across all specifications. This provides some preliminary evidence as to the importance of “exit” versus “voice” with respect to the question of institutional change.

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Gwartney and Lawson (2003) provides a good overview of the theoretical foundations behind the construction of the EFW index.

Apergis et al. (2014) actually finds bi-directional causality between income inequality and economic freedom.

Lawson and Clark (2010) find very few cases of countries with high levels of political freedom and economic freedom.

Nattinger and Hall (2012) find that the legal origins of U.S. states help explain their current levels of economic freedom.

In many ways, this variable and the thesis behind it is related to the work of Scott (2009). For more on the relationship between Scott (2009) and competition in governance, see Powell and Nair (2012) and Stringham and Miles (2012).

In addition to this literature on the deep determinants, there are a number of papers on how economic freedom responds to more short-run changes, such as in preferences (Crampton 2002), foreign aid (Powell and Ryan 2006; Young and Sheehan 2014), immigration (Clark et al. 2014), ideas (Leeson et al. 2012), changes in nearby countries (Leeson et al. 2012), internet access (Sheehan and Young 2014), and joining a monetary and fiscal union (Hall et al. 2011). While important, these are outside the scope of this paper, which focuses on initial conditions and time-invariant determinants such as exitability.

When an organization or country is declining, or not improving as fast as their neighbors, individuals have two possible responses to change things: leave for a better situation (exit) or political action (voice). In this paper, the level of democracy is a proxy for the degree of voice that citizens have to change policy.

Another similar recent paper is Heckelman (2015), who tests for σ-convergence in economic freedom.

The data is annual back to 2000 and at 5-year intervals from 1970 to 2000

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Title: Institutional convergence: exit or voice?
Author: Joshua C. Hall
Publication date: 01-10-2016
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 4/2016
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-015-9345-3

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