Evidence on the role of institutions in economic growth: A panel data study of developing countries

Abstract

The paper examines the role of various types of institutions on economic growth through capital formation and technological progress. The Solow residual is taken as a proxy of technological progress. The study uses panel data from twenty-one developing countries from the International Development Association. The sample period extends from 1990 to 2013. The institutions are categorized as economic, financial, political, and social institutions. The Solow growth model is the basic reference point of this study. The GMM panel estimation technique is applied due to the problem of endogeneity. The relationship between GDP per labor and institutions is explored through technology and stock of capital per labor. The results of this study show a significantly positive relationship between economic growth and economic, political, social, and financial institutions. Moreover, based on empirical results this study concludes that to achieve economic growth in developing countries, the government should strengthen its institutions and control the corruption, ethnic tension, injustice, terrorism, and intolerance in the society. The governments of developing countries should strengthen the financial and economic institutions to enhance growth via increasing investment in the country.