Differences in institutional quality across euro area countries: Which factors contribute most to inequality?

Philip Arestis,Elena Bárcena-Martín,Salvador Pérez-Moreno

doi:10.2298/pan1803363a

Philip Arestis, Elena Bárcena-Martín + Show 1 more

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https://doi.org/10.2298/pan1803363a

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Journal: Panoeconomicus	Publication Date: Jan 1, 2018
Citations: 2	License type: CC BY 4.0

Affiliation: University of Cambridge, Universidad de Málaga

Abstract

In recent years the differences in the institutional structure across the Euro area countries have become a cause of concern, both for some individual Member States and for the functioning of the Economic and Monetary Union (EMU). In this paper we analyse the inequality in institutional quality across Euro area countries and estimate which factors of public and private institutions contribute most to overall inequality in institutional quality. To this end, we consider the institutional indicators of the Global Competitiveness Index (GCI) from the World Economic Forum (WEF) during the period 2007-2017, with the most disaggregated data possible. Our findings support the call for structural reforms, particularly in the areas of ethics and corruption (in the public sphere but also in the business environment), undue influence on the judiciary and government decisions, and protection of property rights, as the major sources of inequality in institutional quality.

Highlights

A vast literature shows how institutions matter for economic performance, focusing on aspects such as the relationship between institutions and economic development
In this paper we examine the institutional indicators included in the first pillar of the Global Competitiveness Index (GCI) provided by the World Economic Forum (WEF), which comprise indicators of both public and private institutions (WEF 2017)1
This study highlights that institutional quality decreased on average across the Euro area countries during the period 2007-2017, but that its inequality increased considerably, as measured by the Gini coefficient, in the case of public institutions

Summary

Introduction

A vast literature shows how institutions matter for economic performance, focusing on aspects such as the relationship between institutions and economic development Fosu 2016) or the effects of institutions on income inequality and welfare There is a consensus in the argument that good institutions lead to good economic outcomes, and vice versa. This way, it is frequently pointed out that the institutional inequalities among countries would be a relevant element behind the differences in the economic performances among countries, even though institutional convergence has not necessarily come with a process of economic convergence (see e.g. Jesus Ferreiro et al 2017)

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