Institutional Quality and Economic Growth: Panel ARDL Analysis for Selected Developing Economies of Asia

AbstractThe role of institutions in economic growth has received much attention of the researchers and policy makers in the last two decades. The literature available on this issue is not clear. The literature reveals that there is a growing dissatisfaction over the neo-classical and endogenous growth models. In recent literature institutional economics has emerged for determining the economic growth. In view of this fact, the present study is an attempt to explain the impact of institutional quality on economic growth in developing economies of Asia. The study uses panel data for the period 1990-2013 for 13 developing economies of Asia. Institutional quality index has been constructed by using principal component analysis. The results of Panel ARDL show that institutional quality has positive impact on economic growth. The results of panel causality test show that causality runs from institutional quality to economic growth. The study stresses that for increasing economic growth there is a need to improve institutional quality in selected Asian developing countries.Keywords: Institutional quality, Economic growth, Panel data(ProQuest: . denotes formulae omitted.)IntroductionThe ongoing concern in the field of economics about the role of institutions may be considered as part of current search for the factors influencing economic growth. Up to large extent it can be viewed as increasing dissatisfaction that started in late 1980s about the neoclassical growth model introduced by Solow (1956) and Swan (1956). The standard neoclassical growth model considers capital formation or investment as the major determinant of economic growth. Several attempts have been made to test this model empirically but results appeared to be inconclusive. These findings lead to move towards the reconsideration about the determinants of economic growth and stress to include human capital in the model (Becker, 1962). New growth models developed in late 1980s by Romer (1986), Lucas (1988) and in early 1990s by Romer (1990), Barro and Lee (1994) reconnoiter the empirical relation between human capital and economic progress. The introduction of the new growth models leads to consider the technology and innovation an important factor of economic growth (Grossman and Helpman, 1991). However, these models fail to explain truly the causative questions. For example, keeping in view capital formation or technological advancement as a major determinant of economic growth, the literature fails to explain the difference in level of economic development among countries. North and Thomas (1973) explain that the capital accumulation and innovation are not determinants of growth in fact they are growth themselves. In this way the existing growth models have clarified only the channels of growth and not the determinants of growth. In the light of this background, a new branch of economic literature known as institutional economics, has emerged which tries to extend the neoclassical growth models by including institutional rule in determining the long run economic growth. There are some studies that have highlighted the role of institutions1 for economic growth (see for example, Acemoglu et al., 2000; 2002; 2003; 2005; Easterly and Levine, 2000; Dollar and Kraay, 2003; Hall and Jones, 1999; Rodrik et al., 2004; Rodrik et al., 2002; Rodrick, 1999; Knack and Keefer, 1995; Mauro, 1995). Rodrik et al. (2002) stress the role of institutions in determining the economic growth as compared to other factors. The literature reveals that institutions play an important role in reducing uncertainty and helps in mitigating economic volatility (for details, see North, 1990; Klomp and Haan, 2009; Aceomglu et al., 2003; Rodrik, 1999; Mobarak, 2005; Quinn and Wooley, 1996, 2001; Economides and Egger, 2009). Brousseau and Glachant (2008), Kirman (2007) and Furubotn and Richter (2005) explain that the literature of institutions has been becoming richer in economic growth over time. …