21
Problems and Pitfalls

In this chapter, I address three specific problems or shortcomings in the existing empirical work. My goal is not to belittle previous work, but to show what direction future work might consider and to motivate the empirical approach I use in the rest of this paper. Indeed, Cameron and Calmfors and Driffill have done a tremendous amount to advance the study of the relation between governance and economic growth.


21.1 Omitted variables

Informal empirical studies (e.g. Cameron, 1984; Calmfors and Driffill, 1988) do not do a good job of imposing ceteris paribus conditions on their hypotheses. Even many of the econometric models ignore the basic implications of growth theory in specifying their statistical models. For example, Rowthorn ( 1992) explains the differences in the change in unemployment across seventeen countries with the level and square of the CD (monotonic) Centralization Index. He uses no productivity variables or measures of initial conditions. Alvarez, Garrett and Lange use a lot of esoteric variables in their growth regressions, but they have no measure of initial conditions to allow for convergence. Further, they fail to use any variables to measure investment or fluctuations in the labour force growth.

As is well known, if relevant variables are omitted from a model, coefficients on any included variables that are correlated with the omitted regressors will be biased and inconsistent.


21.2 Inappropriate variables

Frequently, variables defined by Cameron or Calmfors and Driffill that are qualitative in nature and innocuous in an informal setting are used without much consideration in subsequent sta-

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