Identifying the Causal E¤ect of Political Regimes on Employment¤

The question studied here is whether political regimes, dichotomized as democracies and autocracies, a¤ect the rate of growth of employment. But broader issues are at stake. The central claim of ”new institutionalism” is that institutions are the primary cause of economic development. The theoretical program has been laid out by North (1997: 224; italics supplied): ”To make sense out of historical and contemporary evidence, we must rethink the whole process of economic growth.... The primary source of economic growth is the institutional/organizational structure of a political economy....” (For similar assertions, see Rodrik, Subramanian, and Trebbi 2002 and Acemoglu 2003). Yet the new institutionalism also recognizes that institutions are endogenous. As already North and Thomas (1973: 6) observed, ”new institutional arrangements will not be set up unless the private bene...ts of their creation promise to exceed the costs.” The embarrassingly obvious thought is that if endogeneity is su¢ciently strong, causal e¤ects of institutions cannot be identi...ed. Imagine that only some particular institutions exist under the given conditions. Then the e¤ects of institutions cannot be distinguished from the e¤ects of the conditions under which these institutions are found. Consider the substantive question posed above in the context of the OECD countries. Since almost all of them had democratic regimes between 1950 and 1990 – the period studied here – it is not possible to ¤Revised paper prepared for a conference on Method and Substance in MacroComparative Analysis, Amsterdam, April 7-8, 2006.