Institutional Environment and Growth in Brazil

Topics: Economics, Economic growth, Gross domestic product Pages: 23 (6156 words) Published: June 2, 2010
1Introduction2
2The deductive model3
3Literature review4
4Theoretical framework and generation of hypothesis5
5Scientific Research Design8
5.1Methods of empirical analysis8
5.2Construct measurement of independent variables9
6Presentation of results9
7Discussion of results10
8Conclusion15
9Bibliography17

Introduction

The prosperity and wealth of nations are closely linked with economic growth. Accelerating the development of economic growth in a sustained way is therefore one of the most important issues in economics. Economists have long used a variety of approaches to shed light on why some countries experience faster growth than others. In the vast amount of literature on the subject there are three schools that stand out in particular. First, there is a group of scholars that places geographical factors such as climate, transport cost and natural resources as the main explanatory factors. Recent writings by Jared Diamond and Jeffery Sachs are important contributions in this paradigm (Diamond, 1997; Sachs, 2001). Second, there is a faction that emphasizes international trade as a key to economic growth. Important contributions to this market-integration view have been presented in the works of Frankel & Romer (1999) and Dollar & Kraay (2004). Finally, there is a third group focusing on the explanatory power that institutions veil in this matter. This paper will follow in this tradition, as there seems to bee an increasingly pervasive concurrence among economists studying the phenomena that the development and quality of the institutional environment holds the key to prevailing patterns of sustained growth and prosperity around the world. Rich countries are those with sustained rule of law and property rights, effective policies towards private enterprises and competition, the political system is stabile and effective, companies enjoys easy access to financing and superior tax regimes and there is a well functioning infrastructural system. Poor countries are those where the arrangements are nonexistent or ill formed.

This approach suggests a somewhat casual relationship between institutional development and economic growth. This implies that a poor country, which is able to revise the rules of the game in the direction of better institutional environment, is likely to experience a lasting economic growth. The causality of this relationship has however been questioned (Rodrik, 2004; Hausman et al, 2005b). In this article we want to investigate the relationship between institutional development and economic growth further in order to enhance the understanding of the relationship. Is this really the end of all policy development and a manifestation of an “institutions rule” approach to economic development?

Long run trends in the global economy suggest that emerging markets are the new drivers for global economic growth. Emerging markets can be defined as countries with lower level of development than EU, North America and Japan and high growth in recent years (Mygind, 2007). This makes emerging markets countries useable as laboratories for trend research related to economic growth. Brazil, as a part of the BRIC countries, has for a long time been defined as an emerging market country. In spite of quite impressive reforms (Hausmann et al, 2005b) the country has failed to show similar growth rates as China and India (DB, 2008). In this paper we therefore want to investigate how the economic growth in Brazil is related to the development in the institutional environment. Could the development and quality of the institutional environment in Brazil hold the key to understanding how to increase growth in the country? These notions has led to our research question, which is:

How does the institutional environment affect the economic growth in Brazil?

The deductive model

In order to answer our research question we will apply the traditional deductive method of...

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