The Impact of Institutional Quality on Economic Growth: Panel Evidence

The aim of the present study is twofold. First, we develop a theoretical model which incorporates the role of institutions in promoting economic growth. The theoretical model predicts that rent seeking activities decrease as institutional quality improves, and hence income increases and vice versa. Second, we conduct an empirical analysis to quantify the impact of institutions on economic growth in selected Asian economies over the period 1996- 2012 by employing both static and dynamic panel system Generalised Method of Moments (GMM) technique with fixed effects. The empirical results reveal that institutions indeed are important in determining the long run economic growth in Asian economies. However, the impact of institutions on economic growth differs across Asian economies and depends on the level of economic development. The results reveal that institutions are more effective in developed Asia than developing Asia. This evidence implies that different countries require different set of institutions to promote long term economic growth.