Factors of production, productivity, institutions, and development: Evidence from Brazil

• Published date: 01 May 2023
• Author: Luciano Nakabashi,Ana Elisa Pereira
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/rode.12975

REGULAR ARTICLE

Factors of production, productivity, institutions,

and development: Evidence from Brazil

Luciano Nakabashi

1

| Ana Elisa Pereira

2

1

Economics Department, University of

S˜

ao Paulo in Ribeir˜

ao Preto (FEARP/

USP), Ribeir˜

ao Preto, Brazil

2

School of Business and Economics,

Universidad de los Andes, Chile

Correspondence

Luciano Nakabashi, Economics

Department, University of S˜

ao Paulo in

Ribeir˜

ao Preto (FEARP/USP), Ribeirao

Preto, Brazil.

Email: luciano.nakabashi@gmail.com

Ana Elisa Pereira, School of Business and

Economics, Universidad de los Andes,

Chile.

Email: apereira@uandes.cl

Abstract

The economic growth and development literature

emphasizes that investment in technology and physical

and human capital is essential for achieving higher

levels of development. Political and economic institu-

tions are also relevant in this process. With a sample of

5,503 Brazilian municipalities, this study carries out a

development accounting exercise and measures the

effects of institutional quality on per capita gross

domestic product (GDP), physical capital intensity,

human capital stock, and productivity. The empirical

results indicate that institutional quality affects GDP

per capita mainly through human capital accumulation

and total factor productivity.

KEYWORDS

Brazilian municipalities, development accounting, income

level, institutions

JEL CLASSIFICATION

O11, O43, C13

1|INTRODUCTION

Understanding the relevant variables in determining a region's income level and how they are

related is crucial since it helps formulate effective economic policies. The literature that

addresses the issues related to economic growth and development emphasizes that investment

in physical capital, human capital, and technology is essential to achieve high income levels.

The importance of solid economic and political institutions in this process has also been

highlighted.

Received: 18 March 2019 Revised: 5 October 2022 Accepted: 14 November 2022

DOI: 10.1111/rode.12975

1034 © 2023 John Wiley & Sons Ltd. Rev Dev Econ. 2023;27:1034–1055.wileyonlinelibrary.com/journal/rode

Many studies in the last decades point to institutional quality as crucial to economic growth

and development. They find strong evidence that institutional quality accounts for much of the

variation in income per capita across economies (Acemoglu et al., 2001,2002,2005; Arbia

et al., 2010; Bruhn & Gallego, 2012; Cavalcanti et al., 2008; Easterly & Levine, 2003; Eicher &

Leukert, 2009; Engerman & Sokoloff, 2002; Hall & Jones, 1999; Lee & Kim, 2009; Madsen &

Yan, 2013; North, 1991; Pande and Udry, 2006; and Rodrik et al., 2004). However, institutions

do not generate output by themselves. If institutions explain per-worker output variation across

regions, it must be through their effects on factors of production accumulation and

productivity.

A central study relating institutions and economic development is that of Hall and Jones

(1999). The authors attribute economic performance to social infrastructure, broadly defined as

the set of “institutions and government policies that determine the economic environment

within which individuals accumulate skills, and firms accumulate capital and produce output”

(Hall & Jones, 1999, p. 84). Their results point to a causal effect of social infrastructure on capi-

tal accumulation, educational attainment, and productivity, which suggests that differences in

social infrastructure (institutions and government policies) explain large differences in income

across countries.

Following the methodology of Hall and Jones (1999), the present study aims to investigate

the role of institutions in determining factors of production accumulation and total factor pro-

ductivity (TFP) to understand the channels through which institutions influence long-term eco-

nomic development in the Brazilian municipalities. There are considerable disparities in GDP

per capita across them. For example, the lowest GDP per capita registered in 2000 (Presidente

Juscelino, at Maranh˜

ao State) is 34 times smaller than the Brazilian federal capital (Brasília).

These differences are substantial even in areas considered relatively more prosperous, such as

in the South and Southeast of Brazil. The present study's central hypothesis is that institutional

quality differences are the primary source of municipal income disparities.

There is a benefit in focusing on developing countries since institutions seem to be more

important for explaining income differences in these regions than in developed nations, as

suggested by the results of Eicher and Leukert (2009). Lee and Kim (2009) highlight the impor-

tance of institutions, mainly in low- and middle-income countries. As a country catches up to

the high-income group, factors such as tertiary education and technological innovation become

relatively more relevant. Moreover, as suggested by Pande and Udry (2006), because the “macro

institutions”are constant within countries, results tend to be more evident when analyzing the

effects of institutional quality using intra-country datasets. Proxies for institutional quality are

more difficult to compare across countries.

Two of the main difficulties in this type of study are the problem of reverse causality and

the measurement of institutional quality. The first problem arises because the institutional

framework tends to improve with the economic growth and development process as more

resources are available to improve the institutional quality. The second one is due to the diffi-

culty of capturing the relevant characteristics of the existing incentive mechanisms in a country

or region.

In this study, the measure of institutional quality is the municipal institutional quality indi-

cator (MIQI), elaborated by the Brazilian Ministry of Planning, Budget, and Management based

on the 1999 Basic Municipal Information Survey from the Brazilian Bureau of Geography and

Statistics (IBGE). It comprises the simple average of three sub-indicators: (1) degree of participa-

tion, (2) financial capacity, and (3) managerial capacity.

NAKABASHI and PEREIRA 1035