Abstract
This paper attempts to empirically investigate the link between institutional quality and economic performance in a group of 72 countries during 1980–2001, using dynamic panel data analysis. Five institutional indicators that represent the overall institutional infrastructures of an economy are employed, namely corruption, rule of law, bureaucracy, repudiation of contracts and risk of expropriation. The empirical results demonstrate that institutions’ variables are statistically significant determinants of economic performance. The findings also suggest that the effects of institutional quality vary according to the level of economic development, where institutions are more responsive in the low-income and middle-income countries. In terms of specific effect of institutional development, the results reveal that the higher level of rule of law is most potent in delivering long-run economic benefits.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Blomstrom et al. (1996) show that increases in capital stock is generally not the igniting source of economic growth. Easterly and Levine (1997) find that the conventional factors of growth such as capital, labour, human capital and so on do not fully explain Africa’s experience and have turned to institutional explanations. Bils and Klenow (1998) point out that human capital does not have a causal impact on output growth.
According to their study, social infrastructure can be defined as the institutions and government policies that provide the incentives for individuals and firms in an economy. Incentives can encourage productive activities or instead encourage predatory behavior such as rent-seeking, corruption and theft.
In the neoclassical growth model only labour augmenting technological change is consistent with the existence of the steady-state. See Barro and Sala-i-Martin (1995).
While cross-sectional estimation methods may, in principle, capture the long-run relationship between the variables concerned, they do not take advantage of the time-series variation in the data, which could increase the efficiency of estimation. It is, therefore, preferable to estimate the growth model using panel data techniques.
The list of countries is presented in the Appendix.
For robustness check, this study also used different weight for each indicator to construct the aggregate index and the estimations are similar.
The lag structure is (1,0,0,0) for Eq. (7) and the order of variables is as follows: RGDPC, Capital Stock Per Capita, Time Trend and institutions.
References
Acemoglu D, Johnson S, Robinson JA (2001) The colonial origins of comparative development: an empirical investigation. Am Econ Rev 91:1369–1401
Acemoglu D, Johnson S, Robinson JA (2004) Institutions as the fundamental cause of long-run growth. National Bureau of Economic Research Working Paper No. 10481
Arellano M, Bond S (1991) Some tests of specification for panel data: Monte carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297
Assane D, Grammy A (2003) Institutional framework and economic development: international evidence. Appl Econ 35:1811–1817
Barro RJ (1997) Determinants of economic growth: a cross-country empirical study. Harvard Institute for International Development Discussion Paper 579
Barro RJ, Sala-i-Martin X (1995) Economic growth. McGraw-Hill, New York
Bernanke B, Gurkaynak RS (2001) Is growth exogenous? Taking Mankiw, Romer and Weil seriously. National Bureau of Economic Research Working Papar No. 8365
Bessler DA, Loper N (2001) Economic development: evidence from directed graphs. Manchester Sch 69:457–476
Bils M, Klenow P (1998) Does schooling cause growth or the other way around? National Bureau of Economic Research Working Paper: 6393
Block SA (2001) Does Africa grow differently? J Develop Econ 65:443–467
Blomstrom M, Lipsey R, Zejan M (1996) Is fixed investment the key to economic growth? Q J Econ 111:269–276
Brunt L (2007) Property rights and economic growth: evidence from a natural experiment. CEPR Discussion Papers No. 6404
Butkiewicz JL, Yanikkaya H (2006) Institutional quality and economic growth: maintenance of the rule of law or democratic institutions, or both? Econ Modell 23:648–661
Chong A, Calderon C (2000a) Causality and feedback between institutional measures and economic growth. Econ Polit 12:69–81
Chong A, Calderon C (2000b) Institutional quality and income distribution. Econ Dev Cult Change 48:761–786
Clague C (1993) Rule obedience, organizational loyalty, and economic development. J Inst Theor Econ 149:393–414
Clarke GRG (2001) How the quality of institutions affects technological deepening in developing countries? Country Economics Department Working Paper No. 2603, World Bank
Easterly W, Levine R (1997) Africa’s growth tragedy: policies and ethnic divisions. Q J Econ 112:1203–1250
Glaeser EL, La Porta R, Lopez-de-Silane F, Shleifer A (2004) Do institutions cause growth? National Bureau of Economic Research Working Paper No. 10568
Hall R, Jones C (1999) Why do some countries produce so much more output per worker than others? Q J Econ 114:83–116
Hausman J (1978) Specification tests in econometrics. Econometrica 46:1251–1271
Knack S, Keefer P (1995) Institutions and economic performance: cross-country tests using alternative institutional measures. Econ Polit 7:207–227
Keefer P, Knack S (1997) Why don’t poor countries catch up? A cross national test of institutional explanation. Econ Inq 35:590–602
Kostevc C, Redek T, Susjan A (2007) Foreign direct investment and institutional environment in transition economies. Trans Stud Rev 14:40–54
Nelson RR, Sampat BN (2001) Making sense of institutions as a factor shaping economic performance. J Econ Behav Organ 44:31–54
North DC (1990) Institutions, institutional change, and economic performance. Cambridge University Press, Cambridge
Olson M (1996) Distinguished lecture on economics in government: big bills left on the sidewalk: why some nations are rich, and others poor. J Econ Perspect 10:3–24
Pesaran MH, Shin Y, Smith RP (1999) Pooled mean group estimation of dynamic heterogeneous panels. J Am Stat Assoc 94:621–634
Rodrik D (1997) TFPG controversies, institutions and economic performance in East Asia. National Bureau of Economic Research Working Paper No. 5914
Rodrik D, Subramanian A, Trebbi F (2002) Institutions rule: the primacy of institutions over geography and integration in economic development. National Bureau of Economic Research Working Paper No. 9305
Vukotic V, Bacovic M (2006) Economic freedom and economic growth in South East Europe. Trans Stud Rev 13:81–91
Author information
Authors and Affiliations
Corresponding author
Appendix
About this article
Cite this article
Law, S.H., Bany-Ariffin, A.N. Institutional Infrastructure and Economic Performance: Dynamic Panel Data Evidence. Transit Stud Rev 15, 542–557 (2008). https://doi.org/10.1007/s11300-008-0026-1
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11300-008-0026-1