Institutions and growth: a developing country case study

Abstract

Purpose – The Brazilian municipalities show a huge disparity in income level. The GDP per capita difference between the richest and the poorest municipalities is about 190 times, according to IBGE (2000) database. This paper aims to analyze the impacts of Brazilian municipalities institutional quality on their levels of per capita income. Design/methodology/approach – Institutionalist theory provides a plausible explanation for the gap among municipalities income level. Many empirical studies based on cross-country data have found a high correlation between institutional quality and the level of economic development, but there is little research concerning the extreme inequality within the national territory and its relationship with institutional quality. The theory suggests that the institutions matter for the level of economic development because of their effects on political power distribution, generation of economic opportunities, innovation, human capital accumulation, and so on. Findings – Overall, an increase by one point in the average quality of the institutions is able to increase the average GDP per capita around 20 percent. This means that each point of increase in the quality of the municipality institutions is able to increase the municipality GDP per capita by R$1,000 (around US$600). Originality/value – This is an important research that sheds light to the importance of institutional quality at local level and its influence over growth in a developing country.