Abstract
This study aims to assess to what extent the institutional environment is responsible for worldwide differences in economic development. To answer this question, a new concept of the in stitutions-augmented Solow model is constructed. The analysis covers 153 countries and the period 1994-2009. The empirical analysis confirms a large positive impact of the quality of the institutional environment on the level of economic development. This positive link has been evidenced for all six of the employed institutional indicators (although nonlinearities are present in some cases). Our own concept of the institutions-augmented Solow model fits the empirical data very well. It turns out that differences in physical capital, human capital and the institutional environment (which is measured by the governance indicator) explain approximately 75% of the differences in economic development among the countries of the world. According to the institutions-augmented Solow model, the production function that is consistent with the empirical data is Y = K0.372H0.315L0.313Q0.705, where K is the physical capital, H is the human capital, L is the labor and Q represents the institutional indicator.
Highlights
The economic growth and economic development of countries both depend on many factors
The value added of introducing more and more types of capital is diminishing. This decrease is occurring because economic growth and economic development depend on “direct” factors and on “deep” determinants that are related to the institutional environment
When analyzing the sources of income-level differences between countries from different parts of the world, we have to include institutional measures. This requirement is why we extend the Solow model to account for institutions
Summary
Mariusz Próchniak inter alia various types of investments or government spending or many more types of capital. We would like to choose the best concept of the index that measures the institutional environment Such an index should fit the empirical data very well and be useful in explaining the income differences of all of the countries in the world. The value added of introducing more and more types of capital is diminishing This decrease is occurring because economic growth and economic development depend on “direct” factors and on “deep” determinants that are related to the institutional environment. We use the following production function: F(K, H, Q, L, A), where Q is the qualitative index that measures the institutional environment of a country. Our aim is to choose the best concept of such an index and to estimate the impact of institutions on the level of economic development.
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