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Strong government institutions more important than geography for economic development in the EU

airport runway 480

A new study from LSE has found that strong government institutions are more influential for economic growth than geographic conditions.

The study, which was published in Papers in Regional Science, compared whether governing institutions — such as governing effectiveness, the regulatory and legal environment, corruption, and levels of transparency — had a greater role in shaping economic growth than geographic factors — such as the access to coastal areas, remoteness, natural resources, and arable land.

The study analysed homogeneous countries within the European Union (EU) that have theoretically relatively low levels of geographical and institutional difference. The authors found that the strongest influence on economic growth was the government’s institutional capacity. By contrast, adverse geographic conditions had little impact on economic growth.

The study concluded that the investment program into regions in Europe, such as infrastructure and capital development, is likely to be of limited effect when institutional capacity is low. Parallel to investing in regional development, policy-makers should focus on improving governing capacity across European regions and countries.

The study offered new insights into the field economic development, which commonly analyses the conditions globally to compare countries with highly divergent geographic conditions, rather than homogeneous regions.

Professor Andrés Rodríguez-Pose, Professor of Economic Geography in the Department of Geography and Environment and one of the authors of the paper, said: “If you take the example of Spain and southern Italy, and you commit to building an airport using European funds, four years later, in Spain you have a functioning, although perhaps not viable, airport.

"But if you do the same thing the south of Italy, four years later you may end up with no airport and no funds, which are completely lost due to corruption. A better way forward for these regions would be to improve the institutional capacity before these investments are made.”

Professor Rodríguez-Pose said that there are number of ways in which the capacity of governing institutions can be improved to deliver better outcomes for internal and external investment: “One way of addressing corruption is to take a zero tolerance approach alongside increasing civil servants salaries to reduce the temptation for bribery and other forms of corruption.

“Secondly, transparency can be improved by developing e-government and placing all government records online so they are available to be scrutinised.

“Finally, membership of the EU can lead to an improvement in the quality of government. For example, Poland and the Ukraine had roughly the same levels of economic development at the end of the Soviet era. But Poland joined the EU and this provided the incentive to improve its institutional capacity, allowing rapid economic development compared to Ukraine, which has actually gone in reverse.”

For more information

Peter Carrol, LSE Media Relations, telephone: + 44 (0)207 955 6939, email: p.carrol@lse.ac.uk

Notes to editors

Institutions vs. ‘first-nature’ geography: what drives economic growth in Europe's regions? by Tobias D. Ketterer and Professor Andrés Rodríguez-Pose was published in Regional Science (ISSN 1056-8190). 

The paper investigated how differences in institutional and ‘first-nature’ geographical conditions have affected economic growth in Europe's regions during the period between 1995–2009.

Regional quality of government indicators and a geographical characteristics dataset were used in the analysis. Two-stage least squares and instrumental variables-generalized method of moments estimation techniques were employed with a number of regional historical variables as instruments.

While there was evidence of geographical factors affecting regional economic growth, the authors found the impact is dwarfed by the overriding influence of institutions.

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12 October 2016