Institutions and Economic Growth Nexus: A Cross Country Analysis

Differences in economic growth among countries are likely to arise because of differences in capacity of regulatory institutions. It is believed that good quality institutions lead towards higher economic growth. This study is designed to investigate the impact of institutional quality on economic growth for 50 developing and developed countries over 1996-2013, using OLS and 2SLS methods. The major determinants of growth include institutions along with physical capital, human capital and inflation. The results obtained revealed that institutions have significant and positive influence on economic growth for the whole sample. The results are highly significant for developed countries. In developing countries human capital and a reduction in corruption are the most powerful institutional measures for boosting growth. This study recommends that governments of developing and developed countries should focus on development of quality institutions.