The Impact of Institutional Quality on Economic Performance: An Empirical Study of Turkey and 28 Countries in the European Union.

Abstract

Using a panel set of 28 European Union member states and Turkey over a period of 1995-2014, this paper examines to what extent institutional quality (economic freedom index) and its sub-indicators (rule of law, regulatory efficiency and market openness) can influence overall economic performance measured by gross value added per capita. The paper expands on existing literature by disaggregate the growth impact of institutions for all countries in the sample, high income and low income countries. The independent variables included in the model are gross fixed capital formation as a percentage of GDP, trade openness, government size, quality of institution, inflation and human capital while gross value added per capita is the dependent variable. Generally, the results show a positive and significant relationship between economic performance and the quality of institution. Precisely, a 1 per cent improvement in institutional quality is predicted to have an effect of increasing gross value added per capita by 1.092 per cent holding other things constant. However, decomposing countries according to their level of economic development the results reveal that the impact of institutional quality on economic performance is more pronounced in middle income countries than high income countries. Moreover, there is significant evidence that improvement of regulatory efficiency promotes economic performance for all countries and countries at different levels of development. Given these differences in the impact of institutional quality on economic performance across countries and also by institutional category this implies that different countries require different institutional settings to foster their growth.