The effect of institutions on economic growth: A global analysis based on GMM dynamic panel estimation

This study examines how institutional indicators influence economic growth in a theoretical framework proposed by North (1981). Thirty-one indicators each covering 84 countries over a span of 5 years have been used to extract factors based on principal component analysis. Factors based on these indicators are classified as institutional and policy rents, political rents and risk-reducing technologies. These institutional factors are then used in a formal growth model employing panel OLS and GMM-based estimation methodologies. The findings suggest that favorable institutions positively affect economic growth. This study also shows that for a developing country the institutional and policy rent is more important than other two indices that curb political rents and those that reduce transaction risks. This study also highlights the positive complementarities between index of political rents and index of risk-reducing technologies.

► This study examines how institutions influence economic growth in a theoretical framework.
► Three factors extracted from thirty-one indicators through PCA are used in a formal growth model.
► The findings suggest that favorable institutions positively affect economic growth.
► The factor of institutional and policy rent is more important for growth than other two factors.
► There are positive complementarities between factors of political rents and risk-reducing technologies.