Institutions, Education, and Economic Peformance

Abstract: This paper considers the impact of governance on educational outcomes and economic performance. Specifically, we seek to establish the linkages by which institutional quality affects growth by considering its mediating impact on education. Studies that consider the contribution of human capital to growth (Mankiw, Romer & Weil 1992) typically find a large and significant influence of such capital---usually proxied by educational attainment---on income per capita. Concomitantly, recent theoretical and empirical work (Acemoglu, Johnson & Robinson 2005) has convincingly argued for how institutions matter for cross-country growth outcomes. The channels by which institutions affect human capital and, in turn, growth, has been relatively underexplored. Our empirical approach adopts a two-stage strategy. First, we estimate national-level educational production functions that include institutional governance as a covariate. Second, we use these estimates from the first stage as instruments for human capital in cross-country growth regressions. This method not only provides new cross-country estimates of the impact of governance on educational outcomes such as attainment and participation, but also addresses the endogeneity issues that arise when using direct measures of education in a growth regression.