The Effectiveness of Institutions in Economic Growth in Developing Countries: A Panel Data Analysis

Abstract

This study investigated the effect of institutions on economic growth for the panel of 17 developing countries which covers the period 2000-2014, using pooled ordinary least square model, fixed effect model, random effect model, and dynamic random effect model and generalized method of moments technique. It examined the direct impact of Institutions i.e., financial institutions, economic institutions, social institutions, and political institutions in economic growth in developing countries. This study shows that institutions significantly affect economic growth. This suggests that in emerging countries, institutions are the most important factor for an economy's growth. In this study, we have estimated panel ordinary least square model, fixed effect model, random effect model and dynamic random effect model". F-test is used between pooled ordinary least square model and fixed effect model. According to the f-test results; it shows us that pooled ordinary least square model is suitable model between fixed effect model and random effect model. Whereas fixed effect model shows significant impact of independent variables on dependent variable and random effect model also shows significant effect of independent variables on dependent variable. Between fixed effect model and random effect model. According to f-test statistic and Hausman test statistic, fixed effect model is a valid model. Fixed model is also valid model because it shows that GDP and independent variables have significant results. Our other explanatory variables i.e., capital stock, trade openness and four institutions also show significant impact on response variable. Adjusted R-square is also in favor of this model. Thus, the estimates are reliable, and we can use these estimates for policy making.