Level Of Institutional Quality Research Articles

Institutional Quality Causes Social Trust: Evidence from Survey and Experimental Data on Trusting Under the Shadow of Doubt

Social trust is a crucial ingredient for successful collective action. What causes social trust to develop, however, remains poorly understood. The quality of political institutions has been proposed as a candidate driver and has been shown to correlate with social trust. We show that this relationship is causal. We begin by documenting a positive correlation between quality of institutions, measured by embezzlement, and social trust using survey data. We then take the investigation to the laboratory: We first exogenously expose subjects to different levels of institutional quality in an environment mimicking public administration embezzlement. We then measure social trust among the participants using a trust game. Coherent with our survey evidence, individuals exposed to low institutional quality trust significantly less.

COAL AND MINERAL AND ITS IMPACT ON HUMAN DEVELOPMENT INDEX: AN EMPIRICAL STUDY IN SOUTH AND EAST KALIMANTAN REGION, INDONESIA

This article aims to analyse the effects of coal and minerals on human development index in South and East Kalimantan Provinces of Indonesia. Historically, Kalimantan was famously known as the largest contributor of coal and mineral production in Indonesia. Under Indonesia's fiscal decentralization policy which effectively ran since 2004, we test: do revenues from coal and minerals negatively affect Human Development Index (HDI)? By focusing on nine coal giant areas within these two provinces that have longer mining histories, and linking it with the coal boom event since the 2000’s, and using panel data analysis with fixed effects controlled, we find that coal and mineral revenues have a positive effect on HDI, contrary with resource curse hypothesis. The results remain consistent regardless of inclusion of other important covariates such as the past level of institutional quality and net student enrolment ratio, or whether revenues in all non-renewable resources are used. However, the positive impact found is small in magnitude. For example, for every 10 percentage points increase in the share in coal and mineral revenues in local government budgets, HDI increases by 0.0085 points, ceteris paribus

Central bank independence, elections and fiscal policy in Africa

Purpose The purpose of this paper is to primarily investigate the ability of independent central banks (central bank independence (CBI)) to improve fiscal performances in Africa, accounting for election years, and also to examine whether the effectiveness of CBI in improving fiscal performance is enhanced by higher political institutional quality. Design/methodology/approach Using recent CBI data from Garriga (2016) on 48 African countries, 90 other developing countries and 40 developed countries over the period 1970–2012, the authors apply a two stage system GMM with Windmeijer (2005) small sample robust correction estimator to examine the impact of CBI and elections on fiscal policy in Africa, other developing countries and developed countries. Findings The authors provide evidence that unlike in other developing countries and developed countries, CBI does not significantly improve fiscal performance in Africa. However, the effectiveness of CBI in improving fiscal performance in Africa is enhanced by higher levels of institutional quality. Although elections directly worsen fiscal performance in Africa, institutional quality enhances CBI’s effect on improving fiscal performance in election years across Africa, other developing countries and developed countries. Practical implications The findings of the study are significant as they provide insight into the benefits of having strong institutions to complement independent central banks in order to control fiscal indiscipline in election years. Originality/value The study is the first among the studies of CBI-fiscal policy nexus, to measure fiscal policy using net central bank claims on government as a percentage of GDP. In addition to the use of fiscal balance, this study also uses cyclically adjusted fiscal balance as a measure of fiscal policy. This is a critical channel through which independent central banks can constrain government spending. It also compares findings in Africa to other developing countries, noting some differences.

Foreign aid, institutional quality and economic growth: Evidence from the developing world

This paper examines the effect of sectoral foreign aid and institutional quality on the economic growth of 74 developing countries from Africa, Asia and South America, and covers the period 1980–2016. We consider bilateral aid flows into three sectors, namely education, health and agriculture, and find that among the three types of aid, education aid is more effective for aid-receiving countries. The effect is conditional on the current level of institutional quality and varies substantially across regions. While education aid is more effective in South America, health aid is more effective in Asia and agricultural aid is more effective in Africa. As the level of institutional quality improves, the gap between the marginal effect of education, health and agricultural aids widen. Our findings have strong policy implication for donor countries and international aid organisations, which shows that it is more desirable to shift aid flows towards the education sector as the level of institutional quality improves.

Threshold Effects of Institutional Quality in the Infrastructure-Growth Nexux

This study estimates the threshold level of institutional quality that will ensure the efficient use of infrastructure in stimulating growth in Sub-Saharan Africa based on panel data from 41 countries in the region between 1996 and 2015. It employs a dynamic panel threshold regression model which is derived from the New Institutional Economics theory and this is estimated using the first-differenced Generalized Method of Moments estimator. Results reveal that the relationship between infrastructure and growth is non-linear which provides support for the use of a threshold regression model, with institutional quality serving as the threshold variable. In terms of the threshold level, the findings show that the index of institutional quality that will ensure the efficient use of infrastructure in stimulating growth is 0.410. The study also finds that, on average, countries in the region operate below this threshold level, hence their poor growth. The conclusion that is drawn from the analysis is that poor or low institutional quality is one of the factors hampering the growth of countries in the SSA region. A major limitation of the study is that the estimator employed for the threshold analysis is developed for models with single threshold value only and so does not allow for multiple threshold values. Thus, it is recommended that governments in the region need to formulate and implement policies targeted at improving the level of institutional quality in their countries.

Dynamic interaction of tourism, finance, and institutions in explaining growth in Asia's little dragon economies

AbstractThis study attempts to investigate the role of institutions in enhancing the effect of tourism and financial development on economic growth in Asia using a panel sample from 1984 to 2016. Our findings reveal that tourism and finance are two important variables accountable for growth in our selected countries. Furthermore, our empirical results suggest that their effects on growth are enhanced by the level of institutional quality. Therefore, institutional reforms should thus precede tourism attraction and financial development policies used in these countries in an effort to enhance the benefits from the tourism and financial sector development on growth.

What Drives Stops in Cross-Border Bond Flows?

This paper empirically explores the determinants of stop episodes driven by bond flows using quarterly data from 38 economies over the period 1995–2011. Drastic bond-led stop episodes may greatly destabilize domestic financial markets and lead to financial crisis, threatening the sustainability of the financial system. Using the complementary log–log regression method, we found that bond-led stop episodes were associated with contagion and domestic factors rather than global factors. The results of our estimation showed that the probability of bond-led stop episodes was higher in countries with larger financial markets or with more overvalued real exchange rates. The main policy implications of our results, particularly for emerging economies, are that bond-led stop episodes were less likely to occur in countries with higher levels of institutional quality, lower capital account restrictions, or more flexible exchange-rate regimes. Finally, we found that capital control played a relatively greater role in predicting bond-led stops in emerging economies than did exchange-rate regimes.

Effect of Institutional Quality and Wealth from Oil Revenue on Economic Growth in Oil-Exporting Developing Countries

This article investigates the role of institutional quality in the oil wealth–economic growth nexus for 35 oil-exporting developing countries between 1984 and 2016. To achieve this objective, an empirical model was employed with linear interaction between oil wealth and institutional quality, and estimated by means of panel autoregressive distributed lag (ARDL) with a dynamic fixed effect estimator. From the results, a contingent effect of oil wealth on economic growth, both in the long run and in the short run, was established. Specifically, institutional quality was found to mitigate the negative effect of oil wealth on economic growth in the long run, while in the short run, institutional quality was found to enhance the positive effect of oil wealth on economic growth. Furthermore, the results provide the threshold levels of institutional quality, beyond which oil wealth enhances economic growth, both in the long run and in the short run, for the sampled countries. These results suggest that in order for oil-exporting developing countries to benefit from an increase in oil wealth, they must adopt appropriate policy measures to improve their levels of institutional quality and embed their entire oil wealth-generating mechanism in a sound institutional framework. Also of importance is that governments must ensure sustainable development through the benefits of wealth from oil.

Paths of economic development: A global evidence for the mediating role of human capital

ABSTRACTThis paper revisits the roles of institutions and human capital in the development process by using structural equation modeling with a latent construct. Two models are constructed by using the data of 143 countries with 14 publicly available indicators; non-mediated (Model A) and mediated one (Model B). A path between institutional quality and economic development is identified in Model A and found as significant. When human capital is added into the Model B as a mediator, the direct relationship between institutional quality and economic development which is confirmed in Model A becomes insignificant. This evidence contributes to the debate by explaining the roles of institutions and human capital in the development process, based on the existing level of institutional quality that determines conditions on decisions for starting or sustaining the development process. In other words, (a) improving institutions in addition to human capital is needed for the countries with low level of institutional quality to start development process and; (b) on the other hand, since the human capital develops immunity on the quality of the institutions, human capital plays a more basic role to sustain the development process for the countries with a high level of institutional quality.

Transmission channels of the resource curse in Africa: A time perspective

Most sub-Saharan African countries share the following characteristics: a strong dependence on natural resources, weak institutions, and relatively low growth levels preventing them to catch up with the rest of the developing world. This paper aims to unfold the natural resource curse by introducing a time perspective: long-term versus short-term effects. Following the two-step Engle and Granger procedure, an error-correction model is performed after a cointegration estimation. In addition, the paper clusters the countries to differentiate the natural resource curse mechanisms by level of institutional quality. Results are three-fold. On the long run, the negative impact of the dependence is confirmed for all categories. Countries with weak institutions are more vulnerable to the curse because the resource dependence not only negatively impacts long-term growth but also adversely impacts the recovery process. Finally, in a strong institutional environment, results point towards a potential positive impact of natural resources during recovery process.

Capital flows to Asia and Latin America: Does institutional quality matter?

AbstractUsing a sample of 28 emerging market economies from Asia and Latin America spanning 1990–2013, we show that the marginal effect of capital flows on growth is positive and contingent on the threshold level of institutional quality (IQ). The conditional effect of capital flows holds for both the income per capita growth and total factor productivity (TFP) growth. We also determine the different threshold levels of IQ at which the marginal effect of capital flows is positive. The overall level of IQ in the Asian countries is superior to the Latin American countries and requires a lower threshold level to exert any positive effect. While the same conditional effect of IQ holds in Latin America for TFP growth, this effect is reversed in Asia. For very high levels of IQ (91st percentile), the marginal effect of capital flows on TFP growth in Asia is almost negligible. The marginal effects also vary based on the composition of capital flows in each region.

Do Independent Central Banks Exhibit Varied Behaviour in Election and Non-Election Years?: The Case of Fiscal Policy in Africa

ABSTRACTThe study primarily investigates if the behavior and effectiveness of CBI on fiscal policy varies between non-election and election years. It also examines whether the effectiveness of CBI in improving fiscal performance is enhanced by higher institutional quality. Using recent CBI data f on 48 African countries, 90 other developing countries and 40 developed countries over the period 1970–2012, we apply a two-stage system GMM with Windmeijer small sample robust correction estimator and find that due to the strong incentives of political authorities to influence economic outcomes in election years, CBI has stronger effects on fiscal performance in election years compared to non-election years in developed countries only. However, given higher levels of institutional quality, CBI has stronger effects on fiscal performance in election years compared to non-election years in Africa and other developing countries also.

The interactive impact of government size and quality of institutions on economic growth- evidence from the states of India

This paper investigates the impact of government size on economic growth across 23 states in India between 2005 and 2014 for varying degrees of quality of institutions. Using pooled OLS, panel random effects estimation, as well as system-GMM estimation techniques, we find that in general, akin to findings in the literature, a bigger government is detrimental for state-level economic growth. However, the extent of the negative growth impact depends on the quality of institutions of the states, measured by a newly available index. States that have better quality of institutions register a lower negative impact on economic growth compared to their less progressive counterparts for similar increase in government size. Also, reduction in non-development government expenditure has a better growth impact compared to reduction in development government expenditure, especially for higher levels of institutional quality. Our results, that are robust to various specifications of government size, quality of institutions and estimation techniques, lead us to conclude that state governments should emphasize on quality of institutions to enhance state-level economic growth.

Regulations, institutional quality and entrepreneurship

This paper examines the impact of startup regulations and institutional quality on the level of new business activity in a panel of 119 countries between 2001 and 2012. We find robust evidence that new business creation is significantly lower in countries with excessive barriers to entry, a lack of high-quality governmental institutions, or both. Specifically, increasing by one, the number of steps required to start a new business, reduces entrepreneurial activity between 3 and 7%. Furthermore, a one standard deviation increase in the overall average level of institutional quality is associated with a 34% increase in new business activity.

The Informational Efficiency of Cross-Listed Securities and the Quality of Institutions

Keech and Munger (2015) argue that the failures of markets are often preceded by the failures of governments to define the necessary institutions needed for the success of markets. In this paper, we attempt to test this hypothesis by examining whether institutional quality is associated with higher levels of informational efficiency in financial markets. To do so, we use a unique empirical design that holds the structure of financial markets constant while exploiting crosssectional variation in the level of institutional quality. In particular, we examine the association between the informational efficiency of cross-listed securities on US markets and the home country’s level of institutional quality. Results provide some general evidence that the quality of institutions in the home country is associated with greater informational efficiency in the crosslisted securities. These findings are supportive of the Keech and Munger (2015) hypothesis.

The Development role of GCC Foreign Trade under Resources Curse, Openness and Institutional Quality

The current study was differentiated from previous empirical studies given its reliance on a panel dynamic model to analize the relationship between trade and economic growth, through addressing the impact of resource curse, openness and institutional quality on the economic growth of the Arab Gulf Cooperation Council (GCC) during the period (2002-2012). This model was based, on the long run, on the panel cointegration tests, the fully modified least squares method and dynamic least squares methods. On the short run, the relationship was estimated through the use of Impulse response functions. It concluded that trade openness has an important role in explaining the economic growth of the GCC on the long run, the role of oil exports is uncertain, while the role of institutional quality is absent. On the short run, the institutional quality level achieved by these countries may prevent the negative impact of dependence on oil exports. Accordingly, the resource curse hypothesis was not proven in the GCC countries on the long or short runs.

Does Government Subsidy Affect Firm Survival? Evidence from Chinese Manufacturing Firms

ABSTRACTThis article applies a matching approach to deal with the selection bias and use the complementary log-log model to analyze the impacts of subsidy on Chinese manufacturing firms’ survival from 1998 to 2007. Our empirical results show that government subsidies significantly decrease the likelihood of firm exit. However, the effect decreases as the level of subsidies increases for private and foreign firms, but displays a nonlinear relationship across subsidy levels for SOEs. We also show the effects vary across the levels of institutional quality measured by the prevalence of rent seeking and government intervention. Further results suggest that the potential channels include increased investment in intangible and fixed assets as well as enhanced profitability.

Natural resource abundance, institutional quality and manufacturing development: Evidence from resource-rich countries

The past decades provide many examples of the manufacturing sectors of resource-rich countries failing to develop more rapidly than their counterparts in countries lacking such resources. This study evaluates the impacts of natural resource rents and the quality of institutions on performance of tradable and non-tradable sectors in resource-rich countries. It examines data from 2000 to 2016 and the panel data model from 28 countries rich in natural resources and having different levels of institutional quality. The dependent variable is services etc. value added to manufacturing value added ratio. Model estimation results show that in the case of natural resource-dependent economies, this ratio increases unless there is a high level of institutional quality. Various panel regression estimations confirm that, the efficient institutional structure in natural resource-based countries, through alleviating the effects of the natural resource curse phenomenon, improves the manufacturing sector's performance in these economies. The paper concludes with a clear message to policy makers on the contributions of institutions in economic performance. It is apparent that enhancements in institutional quality allow for more effective utilization of a country's rich natural resources in strengthening the manufacturing sector to achieve higher economic growth and to mitigate the effects of the natural resource curse.

Socialization or Experience? Institutional Trust and Satisfaction with Democracy among Emigrants in Different Institutional Settings

In this article, we assess the explanatory power of two contrasting theories about the sources of political trust. Using a unique survey of expatriated Swedes together with two cross-country surveys, we investigate how a move from a context of high institutional quality to countries characterized by low institutional quality affects peoples’ institutional trust and satisfaction with democracy. Our analyses show that Swedes living in countries with low levels of institutional quality display significantly lower levels of political trust and support compared to the native population, demonstrating that experience of institutional quality is more important than socialization and culture. However, long-time exposure to, and socialization into, a new cultural and institutional setting triggers something like a process of resocialization, in which the difference in satisfaction and trust decreases over time. The results are robust to a wide array of specifications and statistical techniques.

A sticky trait: Social trust among Swedish expatriates in countries with varying institutional quality

Social trust is linked to many desirable economic and social outcomes. Using new data from a representative sample of 2668 Swedish expatriates, we examine the robustness of high social trust in countries with different levels of institutional quality. The results suggest that individual trust decreases with length of stay in countries with high corruption and low rule of law. The effect is relatively small and driven by expatriates who were aged 30 years or below upon arrival to the new country. While other studies have found that trust among migrants adapts to destination country trust levels, we find that after the (approximate) age of 30, high trust is a sticky personality trait. The results are robust to controlling for a large array of individual characteristics (including age) and support the view that social trust is sensitive to events that occur early in life.