Economic effects of institutions: three case studies on labour markets, monetary policy, and foreign aid

This thesis examines when and how institutional capacity dominates economic structure in determining shock transmission and policy effectiveness across developing economies. Through three complementary empirical investigations spanning labour markets, monetary policy, and international development cooperation, I provide systematic evidence that institutional factors appear to create substantially larger vulnerability differences than structural economic factors, though confidence intervals indicate considerable uncertainty around the precise magnitude.

The research employs rigorous quasi-experimental identification strategies across diverse contexts. Chapter 1 uses difference-in-differences analysis of Brazil’s 2009 oil price shock with administrative data from 250 municipalities, exploiting spatial variation in labour enforcement capacity. Chapter 2 applies difference-in-differences and triple-difference frameworks to Kenya’s 2019 demonetisation using Afrobarometer survey data across African countries. Chapter 3 employs a novel triple-difference design analysing nighttime satellite data across 50 African countries from 2000-2021 to examine how the 2008 financial crisis altered aid effectiveness patterns.

The central argument challenges conventional development economics by demonstrating institutional primacy across all three domains. In Brazilian labour markets, regulatory enforcement capacity creates differences in employment vulnerability to oil shocks, compared to differences from sectoral composition. Kenya’s demonetisation success depended critically on pre-existing mobile money infrastructure rather than policy design, with institutional capacity determining whether households could maintain financial stability during currency transitions. African aid effectiveness fundamentally shifted post-2008 in a “Great Aid Transition” where institutional enforcement capacity became the dominant determinant: Chinese infrastructure aid achieved high effectiveness specifically in well-governed countries (revealing institution-infrastructure complementarity), while traditional OECD aid lost its governance-dependent advantage as fiscal constraints reduced institutional development focus, demonstrating that aid effectiveness varies by orders of magnitude based on recipient institutional capacity rather than aid volumes or donor resources.

These findings reveal that strong institutional capacity provides shock resilience through regulated adjustment mechanisms, while weak capacity amplifies transmission by forcing actors into informal arrangements lacking legal protections and financial access. The systematic institutional dominance across labour markets, financial systems, and international cooperation—with institutional effects consistently exceeding economic effects —suggests that building enforcement capacity should be the cornerstone of development strategy rather than focusing primarily on economic diversification or increased resource transfers.