Rent seeking opportunities and economic growth in transitional economies

- A growth model is estimated by system GMM for a panel of 52 middle-income economies.
- Path-dependency is present; health is the preferred human capital measure.
- Institutional variables are used to index the extent of opportunities for rent-seeking.
- Democracy enhances growth and corruption retards growth, if democracy is strong.
- Growth is less sustainable in weakly democratic countries.

This study empirically explores the growth effects of rent seeking activity (RSA) for a group of 52 developing/transitional countries, using a dynamic panel data approach. The modeling framework is a Mankiw-Romer-Weil (MRW) conditional convergence model with path dependence and augmented by measures of the opportunities for RSA, namely indices for the extent of democracy and corruption control. The empirical analysis suggests that, for this group of countries, RSA retards economic growth, in that (i) democratic institutions - which are inimical to RSA, are growth enhancing and (ii) reduction in the extent of corruption is growth-enhancing if supported by well-developed democratic institutions. We find also that health is more relevant than educational participation as a measure of human capital development, that path dependence is absent where democracy is weak, and that the MRW model characterizes the growth process more successfully in the stronger democracies.