Institutional Quality & Capacity

Guidance Lab > Institutional Quality & Capacity

What is institutional quality why it matters

Improving the governance of public institutions is a cornerstone for the success of the Next Generation EU. Modern and efficient public administrations are critical to ensure the effective implementation of recovery and resilience plans.

A recent strand of literature has demonstrated that institutional quality is not only crucial for the economic development of a country but also for shaping the growth of local economies, especially when considering sub-national institutions. Institutions, indeed, create the legal, regulatory, and economic frameworks that foster investment, innovation, and entrepreneurship, essential drivers of local and national economic growth (Rodrik et al., 2004; Acemoglu et al., 2005).

The concept of institutional quality is multidimensional, with each aspect playing a crucial role in driving economic growth. The rule of law, for example, contributes to development by ensuring personal security, protecting property rights, enforcing contracts, and holding both government and private actors accountable, thereby curbing corruption and private capture (Haggard & Tiede, 2011). A strong institutional framework also fosters innovation and technological progress by supporting research and development (Huang & Xu, 1999; Acemoglu & Robinson, 2012; Crescenzi & Rodríguez-Pose, 2013). Additionally, high-quality institutions are vital for attracting foreign investments, as they create a stable and transparent environment (Alguacil et al., 2011; Cipollina et al., 2012). Moreover, administrative capacity directly influences the success and efficiency of policy implementation (Becker et al., 2013; Bachtrögler-Unger et al., 2024).

In Italy, subnational administrative bodies – such as regions, provinces, and municipalities - have been historically actively involved in policy implementation. Within Cohesion Policy, in particular, these institutions oversee planning, fund management, project execution, and coordination with the central government. Specifically, they prepare projects, apply for funds, identify priorities, and, if financed, oversee the implementation. This involvement requires considerable effort in terms of institutional quality not only at the central but also at the local level.

Key findings on the conditioning role of institutional quality for the causal impact of cohesion policy. Learning from the evidence for guiding the implementation of the PNRR with critical administrative capacity

Focus on Cohesion Policy

References

Acemoglu, D., Johnson, S. (2005) Unbundling institutions. Journal of Political Economy, 113: 949–995. https://doi.org/10.1086/432166
Acemoglu, D., & Robinson, J. A. (2012) Why Nations Fail: The Origins of Power, Prosperity and Poverty. New York: Random House. http://www.tinyurl.com/29659to2
Alguacil, M.T., Cuadros, A., & Orts, V. (2011) Inward FDI and growth: the role of macroeconomic and institutional environment. Journal of Policy Modeling, 33: 481–496. https://doi.org/10.1016/j.jpolmod.2010.12.004
Bachtrögler-Unger, J., Fratesi, U., & Perucca, G. (2024) Administrative capacity and the territorial effects of EU support to firms: a two-step analysis, Regional Studies, 58:4, 719-732. https://doi.org/10.1080/00343404.2022.2109613
Becker, S. O., Egger, P. H., & Von Ehrlich, M. (2013). Absorptive capacity and the growth and investment effects of regional transfers: A regression discontinuity design with heterogeneous treatment effects. American Economic Journal: Economic Policy, 5(4), 29-77. https://doi.org/10.1257/pol.5.4.29
Cipollina, M., Giovannetti, G., Pietrovito, F., Pozzolo, A. F. (2012) FDI and growth: what crosscountry industry data say. The World Economy, 35: 1599–1629. https://doi.org/10.1111/j.1467-9701.2012.01478.x
Crescenzi, R., & Rodriguez-Pose, A. (2013) R&D, socio-economic conditions and regional innovation in the U.S. Growth and Change, 44: 287–320. https://doi.org/10.1111/grow.12011
Haggard, S., & Tiede, L. (2011) The rule of law and economic growth: where are we?. World development, 39(5), 673-685. https://doi.org/10.1016/j.worlddev.2010.10.007
Huang, H., & Xu, C. (1999) Institutions, innovations, and growth. American Economic Review, 89(2), 438-443. https://doi.org/10.1257/aer.89.2.438
Rodrik D., Subramanian A., & Trebbi, F. (2004) Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9: 131–165. http://dx.doi.org/10.1023/B:JOEG.0000031425.72248.85

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