Institutions and Economic Growth: Evidence from Selected Economies

Abstract

This study is conducted to examine the relationship between institutional quality and economic growth using a panel data ranging from 2005-2013 for a sample of 42 developing countries. The empirical model was estimated in two different parts. First, the study attempted to examine the individual impact of institutions and other control variables on economic growth. Second, the study intended to evaluate the impact of institutional quality in a combined sense and other control variables on economic growth. To estimate the model in these two versions, we used Pooled OLS, Fixed Effects and System GMM models. Multiples diagnostic tests was implied to check for econometric problems in estimations. The most important finding of the study is the positive and significant impact of all types of institutions on economic growth. It is apparent from the positive coefficient of the formation variable. Likewise, the institutional quality also was found to be positively related with economic growth as indicated by highly significant coefficient with a meaningful magnitude. On the other hand, the study has shown a favorable impact of the trade openness and investment on economic growth of developing countries. The trade openness variable was found to be much significant in explaining economic growth. The study also highlighted negative relationship between inflation rate and economic growth as shown by the negative and highly significant coefficient of the inflation measures. In addition, the positive and significant coefficients of the secondary school enrollment and GDP assert that these variables significantly explain the behavior of economic growth.