Growth effects of institutions: A disaggregated analysis

- We examined the impact of institutions on growth through a panel of 56 countries.
- We found that improvement in institutional quality leads to acceleration in growth.
- The impact of different institutions on growth differs across the panel countries.
- In order to achieve high growth, the institutional quality needs to be strengthened.
- Different countries require different sets of institutions for attaining high growth.

This study attempts to examine the impact of various institutions on economic growth using panel data for 56 countries over the period 1981-2010. These impacts have been examined at aggregated level for world representative sample as well as for the sample disaggregated by the development level of the countries. We have estimated static panel using fixed effects model and dynamic panel using system GMM. The empirical analysis confirms a positive relationship between institutions and economic growth. The positive impact of control over corruption, qualitative and effective bureaucracy and desirable law and order situation on economic growth is greater in high income countries as compared to low income countries. The impact of investment profile is more growth enhancing in developing countries in contrast to developed economies. The crux of the analysis is that the institutions are indeed important in determining the long-run economic growth. It is also established that institutions play a greater role in determining growth in developed economies relative to developing economies. The implication of this finding is that different countries require different sets of institutions for ensuring long-term economic growth.