All Theses and Dissertations

Degree

Master of Science in Economics

Department

Department of Economics

Date of Award

Spring 2020

Advisor

Dr. Asma Hyder

Committee Member 1

Dr. Asma Hyder, Institute of Business Administration, Karachi

Project Type

Thesis

Access Type

Restricted Access

Document Version

Final

Pages

v, 83

Subjects

Economics

Abstract

This study incorporates institutional quality as one of the determinants in the equation for economic output. The impact of institutional quality is then studied by running an instrumental variable fixed effects panel data model to estimate the coefficients. The data consists of 121 countries for the period of 33 years spanning from 1984 to 2016. Institutional quality is measured in a disaggregated manner so that the impact of each dimension of institutional quality can be measured. Further, the impact of each dimension is studied for four different stages of development to see if the effect of institutional quality is the same across all stages. The development stages include: (i) High Income, (ii) Upper Middle Income, (iii) Lower Middle Income and (iv) Low Income countries. The dimensions studied are: (i) Democracy, (ii) Rule of Law, (iii) Bureaucratic Quality, (iv) Government Stability, and (v) Control of Corruption. A distinctive feature of this study is that, in addition to estimating regressions on unbalanced data, it also estimates the impact after addressing the issue of missing data through imputation techniques. The results for both cases show that not all institutional quality variables affect economic output in a linear fashion and that the direction of the effect of institutional quality on output differs with different stages of development. The major implications for policy relates to low income countries who need to develop sufficient human capital to outweigh the negative effects of democracy and develop incentives that motivate local investments rather than foreign investment. This is because heavy reliance on foreign investment can allow foreign countries to manipulate laws that are not in favor of low income countries and as such, cause rule of law to have a negative impact on economic performance. Consequently, low income countries should favor the development of effective property rights independently over stability as stability with manipulative property rights law can hinder economic performance. Lastly, controls on corruption should be the main focus of low income countries as far as institutional policy is concerned since this will ensure that the limited resources in such countries are not diverted to inefficient activities due to corruption. For upper, upper middle and lower middle income countries, on the other hand, controls on corruption hamper growth and as such, institutional policy should reallocate resources from the development of controls to the development of rule of law, a fair and stable democratic system with a sound structure of bureaucracy that can implement government plans without fail.

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