Poverty, Geography and Institutional Path Dependence

Using seven alternative measures of the institutions, this study examines the impacts of the quality of institutions on poverty rates in developing countries. The estimates obtained using the instrumental variable method (2SLS) show that the quality of institutions is negatively related with poverty rates and explain a significant portion of the variation in poverty rates across countries. More precisely, the empirical results suggest that an economy with a robust system to control corruption, market-friendly policies, a working judiciary system, and in which people have freedom to exercise their citizenship will create the necessary conditions to promote economic development and reduce poverty. The results suggest that pro-poor policies aimed at reducing poverty should first consider improving the quality of institutions in developing countries as a pre-requisite for economic development and poverty eradication.