Market power, institutions and economic growth

Rosendo Ramirez, Fordham University


Good institutions or what Douglas North (1990) calls the "rules of the game" are the key to sustained growth and prosperity if only because "they structure incentives in human exchange, whether political, social, or economic." Bad institutions can slow development by discouraging investment and creating barriers to entry. This study explores the impact of institutions and barriers to entry on markups or excess profits, and of markups on growth and income levels. Using Roeger's (1995) method, we estimate average margin of price over average cost in manufacturing for 49 developing and 23 OECD countries. Our average estimates for the 1980-2000 period are comparable to those of Hoekman et al.'s (2001) and Martins et al. (1996). Standard cross-country growth regressions similar to that of Barro (2000) suggest higher markups are associated with lower per capita income and lower investment. We also find an inverted U relationship between markups and GDP per capita growth: raising low markups increases but high markups reduce growth rates.^ What causes high markups? Is it bad institutions or the policy restrictions on competition, such as import controls, etc.? We find mixed evidence: both market power (constituencies) and institutional (historical accident) variables matter. Policy related market power variables that raise markups include trade restrictions on manufactured imports and number of days to import goods from abroad. Among "historical accident" variable, 19th century settler mortality rates and legal systems of French origin also raise markups. However, when we use instrumental variables, only "historical accident" variables landlocked countries, latitude and colonial origin robustly raise markups and reduce per capita income. This last bit of evidence seems to support the view exposed by De Soto (1990) and others that growth-inhibiting bad institutions are artifacts of history, serving the interests of no particular group.^

Subject Area

Economics, General|Economics, Theory

Recommended Citation

Ramirez, Rosendo, "Market power, institutions and economic growth" (2007). ETD Collection for Fordham University. AAI3271273.