Institutional Quality and Economic Growth: A Dynamic Panel Data Analysis of MICs and HICs for 2000–2020

Abstract

ABSTRACT We investigate the dynamic impact of institutions on economic growth using a panel dataset of 77 countries, divided into MICs and HICs for the period 2000-2020. We critically examine the available institutional indices and construct three weighted indices from 20 indicators closely related to the meaning of the term ‘institutions’ as the ‘rules of the game’ defined by Douglas North. Next, we use the Generalized Method of Moments (GMM) to show that institutions significantly influence economic growth through investment and trade more than the total factor productivity channel. While the quality of the legal system and property rights and regulatory quality all positively and significantly influence output per capita, output gains from each unit of improvement in the quality of legal systems and protection of private property rights are comparatively higher than gains from a unit of improvement in the regulatory environment. An average MIC gains relatively more from improving its quality of legal system and property rights, whereas an average HIC benefits relatively more from each unit of improvement in its regulatory environment. The results from the Granger non-causality test demonstrate and unidirectional causality from institutions to economic growth in MICs but no significant causal relationship between institutions and economic growth in HICs