Public Policies, Institutions, and Economic Growth in Low-income and Lower Middle-income Countries: Further Empirical Evidence

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This paper examines the impact of public policies and institutions on economic growth in developing countries. The current study is superior to that by Dao [16] in that we specify a neoclassical growth model which incorporates public policies and institutions and subsequently formulate an empirical model to be estimated. This approach not only provides a more solid theoretical framework but also yields better empirical results that are not biased due to model misspecification. Based on data from the World Bank for the 2000-2015 period and a sample of thirty-nine low-income and lower middle-income economies we find that the growth rate of GDP is dependent on a country's economic management of its debt policy, its structural policies regarding the financial sector and the business regulatory environment, and its policies for social inclusion and equity dealing with gender equality, with building human resources, and with social protection and labor, along with the growth rates of inputs such as land, physical capital, general government consumption, and net exports. We observe that the coefficient estimates of two explanatory variables, namely, the structural policies regarding the financial sector and the policies for social inclusion and equity dealing with gender equality, do not have their expected sign, possibly to the collinearity between the structural policies regarding the financial sector and the debt policy variable, the business regulatory environment variable, the building human resources variable, and the social protection and labor variable and that between the gender equality variable and the business regulatory environment variable, the building human resources variable, and the social protection and labor variable. We also note that the business regulatory variable is not significant using the t-test, but its exclusion from the model results in a decrease in its explanatory power as measured by the adjusted coefficient of determination. We suspect that this is also due to the collinearity between this variable and three policies for social inclusion and equity variables. Statistical results of such empirical examination will assist governments in developing countries focus on appropriate policies dealing with the economic management of debt policy, those of a structural nature regarding the financial sector and the business regulatory environment, and those for social inclusion and equity such as improving gender equality, building human resources and providing social protection and labor in order to foster economic growth. Public sector management and institutions, on the other hand, do not seem to influence a developing country's rate of economic growth.