The roles of institutional quality on economic growth are still heavily debated in the literature. This paper investigates the impacts of institutional quality on economic growth for 29 emerging economies over the 2002-2015 period by employing System Generalized Method of Moments (SGMM) estimators. We find the significant positive impacts of institutional quality on economic growth. The institutional quality impedes the positive effects of foreign direct investments (FDIs) and trade openness on economic growth. However, institutional quality improvement can mitigate the competition brought by trade openness in the areas FDIs operate to optimize their spill-over effect.
An important issue for both academic and pratical studies is the extent to which determinants of economic growth play in different countries [
The literature also argues the indirect impact of institutional quality on Gross Domestic Product (GDP) via the growth effect of trade openness [
This study contributes to the literature on two fronts. First, the study provides new arguments on the impact of institutional quality on the economic growth effect of trade openness in the short run for emerging economies. In contrast to the evidence documented for developed countries, institutional quality improvement tends to impede the economic growth effect of trade openness and FDI in emerging countries in the short run. Second, the study extends the economic growth theories to incorporate the role of institutional quality on the mutual effects of trade and FDI on economic growth in emerging economies. The study finds that better institutional quality can mitigate the competition brought by trade openness in the areas that FDIs operate to optimize their spillover effect. The remaining of the study is organized as followings. Section two reviews the literature and develops hypotheses. Section three discusses data and methodology. Section four presents the data analysis. Section five concludes the study.
The impact of trade openness on economic growth has been well studied following endogenous growth model (see [
Endogenous growth theory posits that the FDI spillover effect (i.e. technology transfer and knowledge spillover) can be transformed into productivity improvement and consequently economic growth [
The study investigates both the direct effects of institutional quality on economic growth and the indirect effects of institutional quality on economic growth through the interactions with the international trade and capital flows in emerging markets. Following [
y i t = α 1 y i t − 1 + β j X j , i t + ∂ 1 Trade i t + ∂ 2 FDI i t + ∂ 3 Inst i t + ∂ 4 ( Trade ∗ FDI ) i t + ∂ 5 ( Inst ∗ Trade ) i t + ∂ 6 ( Inst ∗ FDI ) i t + ∂ 7 ( Inst ∗ Trade ∗ FDI ) i t + ε i t (1)
The economic growth (y) is proxied by the growth rate of real GDP (Gdpg) and the growth rate of real GDP per capita (Gdppcg). Trade openness (Trade) is measured as the total import and export value per GDP. FDI is measured as the ratio of net inflows foreign direct investment per GDP.
The vector of control variables (X) in this estimation includes the logarithm of real GDP per capita (Loggdppc), the growth rate of gross capital formation (Capg), the logarithm of total non-resident and resident patent applications (Tech), population growth (Popg) (for the equation of GDP growth rate as dependent variable, it is excluded in the case of GDP per capita growth rate since the dependent variable has reflected the dynamic in both output and population), and logarithms of ratio of tertiary school enrollment to population (Humcap). These variables are used to control for level of economic development, capital factor, technology change, labor and human capital, respectively [
The institutional quality (inst) is proxied alternatively by the percentage change in government effectiveness index (Goveff), and the percentage change in regulatory quality index (Requa), control of corruption (Concor), political stability (Politic), rule of law (Rulelaw), and voice and accountability (Voice). These are extracted from World Governance Indicators (WGI) and range from approximately −2.5 (weak) to 2.5 (strong) governance performance), and higher estimated values represents better institutional quality. Despite there are arguments for the reliability of these indicators for institutional quality, many previous studies have used and documented that they are our best choice until now (see [
The yearly data on institutional quality is collected from World Governance Indicators to the latest available time with continuous data from 2002 to 2015 for 29 emerging countries in Appendix 1. Other variables are collected from the World Development Index. All the definitions and calculations are presented in Appendix 2. The data description is presented in
The model is estimated with SGMM estimator to control for potential endonegeity ( [
Variables | Obs. | Mean | Std. Dev. | Min | Max |
---|---|---|---|---|---|
Gdpg | 405 | 4.112 | 3.685 | −14.800 | 14.231 |
Gdppcg | 405 | 3.273 | 3.601 | −14.421 | 13.636 |
Capg | 405 | 5.302 | 12.554 | −57.400 | 67.389 |
Tech | 396 | 8.285 | 1.712 | 5.455 | 13.913 |
Loggdppc | 405 | 8.718 | 1.004 | 6.285 | 10.408 |
Popg | 406 | 0.817 | 0.843 | −2.171 | 2.390 |
Humcap | 367 | 3.663 | 0.684 | 1.004 | 4.735 |
Trade | 405 | 4.202 | 0.517 | 3.096 | 5.349 |
Fdi | 405 | 3.382 | 4.536 | −16.071 | 50.742 |
Concor | 406 | −0.177 | 0.613 | −1.488 | 1.573 |
Goveff | 406 | 0.160 | 0.610 | −0.889 | 1.375 |
Politic | 406 | −0.433 | 0.895 | −2.806 | 1.202 |
Requa | 406 | 0.150 | 0.720 | −1.730 | 1.547 |
Rulelaw | 406 | −0.052 | 0.677 | −1.033 | 1.419 |
Voice | 406 | 0.005 | 0.791 | −1.687 | 1.244 |
data with relatively small time period and large cross-section groups (countries) ( [
The impacts of institutional quality on GDP per capita and GDP growth are presented in
Dep: GDP per capita growth | (1) | (2) | (3) |
---|---|---|---|
L1. GDPpcg | 0.3203*** [0.0334] | 0.2744*** [0.0421] | 0.2138*** [0.0446] |
Loggdppc | −0.3412*** [0.0870] | −0.5045*** [0.1014] | −0.6304*** [0.1021] |
Capg | 0.2600*** [0.0102] | 0.2487*** [0.0092] | 0.2425*** [0.0067] |
Tech | 0.2012*** [0.0340] | 0.2483*** [0.0437] | 0.2391*** [0.0400] |
Humcap | 0.5851*** [0.1625] | 0.8106*** [0.1625] | 0.5937*** [0.1563] |
FDI | 0.0549** [0.0226] | 0.0703** [0.0318] | |
Trade | 0.5277*** [0.1106] | ||
N | 315 | 261 | 260 |
No. of Group | 29 | 29 | 29 |
No. of IVs | 26 | 26 | 27 |
AR(2) test | 0.709 | 0.864 | 0.959 |
Sargan test | 0.309 | 0.215 | 0.160 |
Hansen test | 0.563 | 0.512 | 0.684 |
Notes: (*), (**), (***) are significant at 10%, 5%, and 1% level respectively.
Dep: GDP growth | (4) | (5) | (6) |
---|---|---|---|
L1. GDPg | 0.3018*** [0.0246] | 0.2717*** [0.0368] | 0.2433*** [0.0421] |
Loggdppc | −0.1288 [0.0963] | −0.1278 [0.0801] | −0.4348*** [0.1017] |
Capg | 0.2591*** [0.0102] | 0.2332*** [0.0087] | 0.2457*** [0.0099] |
Tech | 0.2679*** [0.0247] | 0.2788*** [0.0336] | 0.3040*** [0.0388] |
Humcap | 0.0578 [0.1962] | 0.0003 [0.1713] | 0.0198 [0.1618] |
Popg | 0.2801*** [0.0813] | 0.3742*** [0.0952] | 0.3590*** [0.1257] |
FDI | 0.0825* [0.0420] | 0.0764** [0.0343] | |
Trade | 0.5397*** [0.0997] | ||
N | 315 | 287 | 261 |
No. of Group | 29 | 29 | 29 |
No. of IVs | 27 | 28 | 28 |
AR(2) test | 0.734 | 0.803 | 0.848 |
Sargan test | 0.369 | 0.163 | 0.494 |
Hansen test | 0.491 | 0.579 | 0.413 |
Notes: (*), (**), and (***) are significant at 10%, 5%, and 1% level respectively.
Dep: GDP per capita growth | (7) Control of corruption (Concor) | (8) Government effectiveness (Goveff) | (9) Political stability (Politic) | (10) Regulatory quality (Requa) | (11) Rule of Law (Rulelaw) | (12) Voice & Accountability (Voice) |
---|---|---|---|---|---|---|
L1. GDPpcg | 0.2076*** [0.0535] | 0.2062*** [0.0531] | 0.1993*** [0.0529] | 0.2061*** [0.0523] | 0.2016*** [0.0538] | 0.1993*** [0.0519] |
Loggdppc | −0.8832*** [0.1187] | −0.8798*** [0.1081] | −0.8106*** [0.0969] | −0.9040*** [0.1201] | −0.8734*** [0.1050] | −0.8746*** [0.0912] |
Capg | 0.2482*** [0.0094] | 0.2486*** [0.0096] | 0.2467*** [0.0094] | 0.2488*** [0.0095] | 0.2498*** [0.0096] | 0.2456*** [0.0098] |
Tech | 0.3239*** [0.0598] | 0.3166*** [0.0491] | 0.3128*** [0.0595] | 0.3351*** [0.0605] | 0.3266*** [0.0515] | 0.3449*** [0.0441] |
Humcap | 0.7790*** [0.1767] | 0.8082*** [0.1794] | 0.7446*** [0.1886] | 0.8310*** [0.1776] | 0.7914*** [0.1722] | 0.7379*** [0.1970] |
FDI | 0.0683* [0.0386] | 0.0672* [0.0393] | 0.0796* [0.0391] | 0.0784* [0.0403] | 0.0720* [0.0390] | 0.0823** [0.0400] |
Trade | 0.7365*** [0.0949] | 0.6933*** [0.1030] | 0.6372*** [0.1275 | 0.6829*** [0.1047] | 0.6879*** [0.1092] | 0.7012*** [0.1118] |
Inst | 0.3291** [0.1481] | 0.3153** [0.1399] | 0.0896 [0.1278] | 0.2092 [0.1440] | 0.2978** [0.1342] | 0.2171** [0.0997] |
N | 232 | 232 | 232 | 232 | 232 | 232 |
No. of Group | 29 | 29 | 29 | 29 | 29 | 29 |
No. of IVs | 26 | 26 | 26 | 26 | 26 | 26 |
AR(2) test | 0.797 | 0.803 | 0.829 | 0.813 | 0.792 | 0.838 |
Sargan test | 0.147 | 0.153 | 0.135 | 0.147 | 0.147 | 0.130 |
Hansen test | 0.621 | 0.638 | 0.632 | 0.616 | 0.648 | 0.665 |
Notes: (*), (**), (***) are significant at 10%, 5%, and 1% level respectively.
Dep: GDP growth | (13) Control of corruption (Concor) | (14) Government effectiveness (Goveff) | (15) Political stability (Politic) | (16) Regulatory quality (Requa) | (17) Rule of Law (Rulelaw) | (18) Voice & Accountability (Voice) |
---|---|---|---|---|---|---|
L1. GDPg | 0.2360*** [0.0430] | 0.2422*** [0.0431] | 0.2376*** [0.0432] | 0.2402*** [0.0440] | 0.2379*** [0.0425] | 0.2431*** [0.0418] |
Loggdppc | −0.4659*** [0.1185] | −0.4672*** [0.1147] | −0.4491*** [0.1169] | −0.4779*** [0.1256] | −0.4602*** [0.1114] | −0.4414*** [0.0972] |
Capg | 0.2514*** [0.0085] | 0.2514*** [0.0083] | 0.2485*** [0.0091] | 0.2494*** [0.0087] | 0.2506*** [0.0087] | 0.2442*** [0.0103] |
Tech | 0.2877*** [0.0436] | 0.2853*** [0.0412] | 0.3006*** [0.0479] | 0.2985*** [0.0429] | 0.2914*** [0.0427] | 0.3171*** [0.0403] |
Humcap | 0.0831 [0.1956] | 0.0586 [0.1850] | 0.0536 [0.1965] | 0.0618 [0.1992] | 0.0398 [0.1865] | 0.0170 [0.1622] |
Popg | 0.3983*** [0.1098] | 0.3945*** [0.1078] | 0.4362*** [0.1029] | 0.4119*** [0.1043] | 0.4002*** [0.1077] | 0.3650*** [0.1296] |
FDI | 0.0597 [0.0356] | 0.0503 [0.0340] | 0.0669* [0.0358] | 0.0612* [0.0342] | 0.0586 [0.0362] | 0.0858** [0.0352] |
Trade | 0.5929*** [0.0976] | 0.6256*** [0.0931] | 0.5548*** [0.1001] | 0.6089*** [0.0972] | 0.6133*** [0.0953] | 0.5240*** [0.0947] |
Inst | −0.0858 [0.0879] | 0.0107 [0.1053] | 0.0430 [0.0648] | 0.0247 [0.0754] | 0.0281 [0.0741] | 0.0100 [0.0735] |
---|---|---|---|---|---|---|
N | 261 | 261 | 261 | 261 | 261 | 232 |
No. of Group | 29 | 29 | 29 | 29 | 29 | 29 |
No. of IVs | 29 | 29 | 29 | 29 | 29 | 26 |
AR(2) test | 0.900 | 0.907 | 0.878 | 0.888 | 0.899 | 0.838 |
Sargan test | 0.496 | 0.508 | 0.500 | 0.492 | 0.503 | 0.130 |
Hansen test | 0.384 | 0.397 | 0.381 | 0.396 | 0.397 | 0.665 |
Notes: (*), (**), (***) are significant at 10%, 5%, and 1% level respectively.
Dep: GDP per capita growth | (19) Control of corruption (Concor) | (20) Government effectiveness (Goveff) | (21) Political stability (Politic) | (22) Regulatory quality (Requa) | (23) Rule of Law (Rulelaw) | (24) Voice & Accountability (Voice) |
---|---|---|---|---|---|---|
L1. GDPpcg | 0.2622*** [0.0453] | 0.2333*** [0.0514 | 0.2480*** [0.0362] | 0.2589*** [0.0317] | 0.2797*** [0.0434] | 0.2204*** [0.0499] |
Loggdppc | −1.4224** [0.6062] | −1.2612*** [0.4525 | −1.4924*** [0.3643] | −1.6788*** [0.3450] | −1.2418*** [0.3554] | −1.8051*** [0.3796] |
Capg | 0.2588*** [0.0109] | 0.2610*** [0.0132] | 0.2647*** [0.0119] | 0.2699*** [0.0166] | 0.2533*** [0.0136] | 0.2734*** [0.0162] |
Tech | 0.1582* [0.0856] | 0.0354 [0.0970] | 0.2214** [0.0840] | 0.2869** [0.1104] | 0.1585** [0.0714] | 0.1597 [0.1529] |
Humcap | 0.8868 [0.7601] | 0.4363 [0.6042] | 0.5348 [0.3429] | 1.5257*** [0.3067] | 0.7264** [0.3162] | 1.1647*** [0.2257] |
FDI | 2.4150*** [0.7849] | 2.8993** [1.3912] | 4.1262*** [1.3319] | 1.5589 [0.9438] | 2.3971* [1.2419] | 2.9059** [1.1860] |
Trade | 2.1227*** [0.5060] | 2.4871*** [0.4486] | 2.6466*** [0.6576] | 1.8945*** [0.4658] | 1.8546*** [0.5362] | 2.7593*** [0.8358] |
Inst | 17.1791 [12.5776] | 25.8662*** [8.6664] | 10.3405* [5.2527] | 6.2348* [3.2789] | 12.5733 [8.0825] | 10.5071** [5.0678] |
Trade*Fdi | −0.5381*** [0.1621] | −0.6552** [0.2952] | −0.9948*** [0.3156] | −0.3813* [0.2107] | −0.5386** [0.2592] | −0.6871** [0.2768] |
Inst*Trade | −3.8082 [3.0576] | −5.8716*** [1.9622 | −2.6139** [1.2645] | −1.3243 [0.8283] | −2.5758 [1.8053] | −2.5423** [1.2176] |
Inst*Fdi | −5.4798*** [1.6192] | −3.0125* [1.6240] | −2.5881 [1.7234] | −1.7379* [1.0032] | −4.1871** [1.5818] | −1.8737 [1.4711] |
Inst*Trade*Fdi | 1.2419*** [0.3554] | 0.7023** [0.3428] | 0.7637* [0.4170] | 0.3995* [0.2027] | 0.8991*** [0.3246] | 0.4821 [0.3438] |
N | 260 | 261 | 260 | 232 | 260 | 261 |
No. of Group | 29 | 29 | 29 | 29 | 29 | 29 |
No. of IVs | 31 | 31 | 31 | 30 | 31 | 31 |
AR(2) test | 0.628 | 0.731 | 0.374 | 0.882 | 0.769 | 0.542 |
Sargan test | 0.618 | 0.665 | 0.707 | 0.545 | 0.422 | 0.805 |
Hansen test | 0.763 | 0.780 | 0.845 | 0.843 | 0.721 | 0.944 |
Notes: (*), (**), (***) are significant at 10%, 5%, and 1% level respectively.
Dep: GDP growth | (25) Control of corruption (Concor) | (26) Government effectiveness (Goveff) | (27) Political stability (Politic) | (28) Regulatory quality (Requa) | (29) Rule of Law (Rulelaw) | (30) Voice & Accountability (Voice) |
---|---|---|---|---|---|---|
L1. GDPg | 0.2486*** [0.0462] | 0.2625*** [0.0423] | 0.2226*** [0.0479] | 0.2010*** [0.0526] | 0.2291*** [0.0462] | 0.2419 [0.0449] |
Loggdppc | −0.8526* [0.4963] | −1.4012*** [0.4439] | −1.1187* [0.5744] | −1.5300*** [0.3998] | −1.0924*** [0.3331] | −1.3661 [0.4123] |
Capg | 0.2410*** [0.0106] | 0.2400*** [0.0097] | 0.2550*** [0.0106] | 0.2523*** [0.0142] | 0.2423*** [0.0108] | 0.2518 [0.0132] |
Tech | 0.1934*** [0.0639] | 0.1567*** [0.0521] | 0.2751*** [0.0920] | 0.2291*** [0.0820] | 0.1759** [0.0644] | 0.1782 [0.0963] |
Humcap | 0.0667 [0.7282] | 0.5417 [0.5589] | 0.3392 [0.9711] | 1.0353* [0.5431] | 0.4188 [0.4742] | 0.8041 [0.4948] |
Popg | 0.4079** [0.1956] | 0.2195** [0.0859] | 0.2443 [0.1887] | 0.4187* [0.2359] | 0.4895* [0.2435] | 0.4360 [0.2466] |
FDI | 2.1709** [0.8703] | 3.4587** [1.2694] | 1.6079 [1.0958] | 2.8189*** [0.9326] | 2.1747*** [0.6599] | 3.0573 [1.3057] |
Trade | 1.6511*** [0.3780] | 2.3589*** [0.4328] | 1.8513*** [0.5957] | 2.1147*** [0.5443] | 1.8476*** [0.3168] | 1.9541 [0.6773] |
Inst | 19.2223 [14.3523] | 10.8902* [6.3954] | 3.6832 [8.2781] | 2.4483 [3.6222] | 10.8101 [7.0245] | 5.0460 [4.4149] |
Trade*Fdi | −0.4749** [0.1886] | −0.7678* [0.2737] | −0.3812 [0.2574] | −0.6377*** [0.1961] | −0.4807*** [0.1378] | −0.6559 [0.2862] |
Inst*Trade | −4.5542 [3.4630] | −2.3409 [1.4330] | −0.8113 [1.9992] | −0.5867 [0.8620] | −2.2846 [1.4802] | −0.9764 [1.0487] |
Inst*Fdi | −3.9483* [2.2542] | −4.2323*** [1.2988] | −2.6174** [1.2795] | −1.1435 [0.8396] | −3.6231* [2.0299] | −3.6142 [1.4751] |
Inst*Trade*Fdi | 0.9398* [0.5107] | 0.9615*** [0.2878] | 0.6174* [0.3140] | 0.2981* [0.1748] | 0.7888* [0.4072] | 0.7680 [0.3082] |
N | 261 | 261 | 260 | 233 | 261 | 261 |
No. of Group | 29 | 29 | 29 | 29 | 29 | 29 |
No. of IVs | 33 | 33 | 33 | 31 | 33 | 31 |
AR(2) test | 0.422 | 0.652 | 0.679 | 0.911 | 0.652 | 0.542 |
Sargan test | 0.335 | 0.319 | 0.452 | 0.142 | 0.233 | 0.805 |
Hansen test | 0.817 | 0.873 | 0.740 | 0.820 | 0.835 | 0.944 |
Notes: (*), (**), (***) are significant at 10%, 5%, and 1% level respectively.
and Trade respectively on economic growth via interaction terms. While Trade and FDI show the expected positive impacts on economic growth, the interactions between institutional quality and trade openness (Trade)/financial openness (FDI) have significant negative coefficients. These results indicate that the improvement in institutional quality will have less positive impacts on economic growth in the case of more opened trade account. This confirms hypothesis 1. The increasing trade openness of emerging markets invites competition from foreign firms especially from developed countries, and institutional quality improvement will further strengthen the competition, leading to economic slowdown in the short run. This result is in line with findings from African countries [
The coefficient of the interaction between institutions and FDI is negative. This does not support hypothesis 2 and contradicts the findings of [
Interestingly, we find that the interaction between FDI and Trade has a negative impact on economic growth. We posit that trade openness brings fierce international competition to emerging markets [
Institutional quality has an important role in stimulating economic activities and accelerating economic growth especially in emerging markets where great efforts have been put to improve institutional quality. In this paper, we collect data in the period of 2002-2015 for 29 emerging markets to examine the impacts of institutional quality on economic growth. By conducting the system-GMM estimators, we find that the institutional quality has positive impacts on economic growth in emerging markets. In addition, institutional quality improvement has negative impacts on the economic growth effect of trade openness and FDI. The findings also demonstrate that the competition brought by trade openness may impede the spill-over effect of FDI. However, better institutional can mitigate the competition brought by trade openness in the areas that FDIs operate to optimize their spill-over effect. Policy makers in emerging economies should improve institutional quality and competitive capacity of domestic firms before promoting trade openness and FDI. This also provides implication to trade policies for the period 2015-2018 that emerging economies should focus on improving their capability in absorbing the benefits from economic integration with stronger institutional reforms.
This study is funded by University of Economics Ho Chi Minh City, Vietnam.
Nguyen, C.P., Su, T.D. and Nguyen, T.V.H. (2018) Institutional Quality and Economic Growth: The Case of Emerging Economies. Theoretical Economics Letters, 8, 1943-1956. https://doi.org/10.4236/tel.2018.811127
Appendix 1. List of emerging countries in the sample.
Note: the list of emerging economies is followed the classification of MSCI (https://www.msci.com/emerging-markets) in combining with other sources as IMF (www.imf.org/external/pubs/ft/weo/2015/02/pdf/text.pdf).
Appendix 2. Variable definitions.