Economic Diversification and Institutional Quality-Issues of Concentrated Interests

Recent research has provided broad accounts of what high institutional quality is; bureaucrats should be impartial and recruited on merit, public power should not be used for private gain, there should be rule of law, and property rights should be secure. Many scholars argue the reason why, in spite of this knowledge, recent institutional reforms have had limited success is that improvements are not in the interest of incumbent elites. Constraining elites is, therefore, crucial for institutional improvements. In this article, I argue that economic diversification functions as one such constraint on elite behavior, affecting their ability to form collusive coalitions. When the economy is concentrated to a few sectors, elite interests are more uniform making it easier for them to organize. However, as the economy becomes more diverse, collusion becomes harder and elites must settle for impartial institutions more often. I test the theory using cross-national time series data covering the last 25 years; the results corroborate the theory, as the economy of a country becomes more diverse, institutions become more impartial.