central in the context of graduation decisions, however, as all candidates for graduation have relatively high incomes already. What matters instead is their “capacity to _sustain_ a long term development program” [emphasis added] as reflected in part by “the extent of progress in establishing key institutions for economic and social development” (Shihata 2000: 496).

A more cautious approach toward graduation is thus warranted for countries where this sustainability is in question – that is, where the country has a higher likelihood of falling back below the income threshold. Relevant institutional indicators then are those associated with lower volatility in income levels and growth rates (Mobarak 2005; Quinn and Woolley 2001; Rodrik 1999).

Rodrik (1999) emphasizes “institutions of conflict management” that he argues are particularly important following adverse shocks that often trigger distributional conflicts. Institutions of conflict management are those that “adjudicate distributional contests within a framework of rules and accepted procedures,” including “an independent and effective judiciary” and “an honest and non-corrupt bureaucracy.” A stronger rule of law restricts the potential scope of redistribution, reducing the incentive and ability of social groups to make “opportunistic grabs” in countries with latent social conflicts. As empirical proxies, Rodrik uses the ICRG indicators described above, as well as indicators of civil liberties and political freedoms produced by Freedom House, arguing that: Democratic institutions—political parties, elected representatives, free speech, and the like—can be viewed as the ultimate institutions of conflict management, in that they allow for differences among social groups to be resolved in a predictable, inclusive, and participatory manner (p. 395).

Quinn and Woolley (2001) provide strong empirical evidence that democracies experience much less volatility in income growth than non-democracies, although average income growth is similar in the two groups.<sup>4</sup> Their explanation is somewhat different from Rodrik’s. They argue that voters are risk-averse, and show that voters reward incumbent governments only modestly for growth, but penalize them severely for volatility. This explanation is consistent with research by Sen and Dreze (1989), attributing India’s ability to avoid major famines (during a period when its average economic performance was weak) to its democratic institutions, including a free media. Mobarak (2005) provides additional supporting evidence, showing that democracy causes reduced volatility rather than the other way around. He argues that if policy makers “unilaterally set policies, the variance of policies and outcomes will generally be higher than if policies are chosen through consensus” by democratic procedures. As noted by Henisz (2004) and others, checks on executive power tend to increase the stability of economic policy.

We therefore use _Political Freedoms_ as a second indicator of institutional development. Following Rodrik (1999), Mobarak (2005), and others, we base this indicator on the Freedom House measures of Civil Liberties and Political Rights. The Civil Liberties index captures freedom of

> 4 Many cross-country time-series studies (for example, Burkhart and Lewis-Beck 1994) conclude that the link between democracy and high per capita income is explained mostly by causation from income to democracy.   Acemoglu, Johnson, Robinson, and Yared (2008) conclude from their analysis that there is no causal link between income and democracy, but that both are determined jointly by longer-run historical factors.

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