Three essays on determinants and impact of institutional quality

A sizeable recent literature has convincingly demonstrated that the quality of institutions is a fundamental determinant of economic growth. However, there is still much debate on the determinants of institutional quality and the channels through which it influences economic policies and growth. This thesis aims to contribute to this debate by focusing on three selected themes. The three papers are enveloped in a stage-setting survey of the wider literature on institutional change and economic growth, and a concluding chapter which summarizes the key findings and makes suggestions for further research. The approach of the three papers is empirical in nature, but the model formulation is well informed by the relevant theory. The empirical analysis is based on annual panel data covering a large number of countries at varying stages of development and the models are estimated using state-of-the-art econometric methodology, paying particular attention to potential endogeneity of the explanatory variables. The first paper (Chapter 2) investigates the implications of the composition of government revenue for the quality of political institutions. It is found that an increase in tax revenue increases political openness, whereas higher natural resource rents are detrimental to democracy. These relationships, however, become less pronounced with an increase in the level of GDP per capita. Overall, the findings are consistent with the historical political-economy literature which postulates that fiscal imperatives of the state are the driving force for the development of democratic systems of government. The second paper (Chapter 3) examines the implications of foreign trade exposure for the quality of economic institutions as represented by the extent of corruption and bureaucratic quality. The novelty of the analysis is the estimation of the impact of trade intensity (trade to GDP ratio) on institutional quality conditional on the nature of the trade policy regime. The results indicate that increased trade intensity improves institutional quality only in the context of liberalized trade policy regimes. There is also evidence that the dependence on exports of natural resources is harmful for institutional quality, but liberalization of the policy regime has the potential to mitigate this adverse impact. The findings are consistent with the predictions relating to the determinants of institutional quality in the 'rent-seeking' and 'resource-curse' literatures. The third paper (Chapter 4) explores the implications of political openness and corruption for the size and the growth impact of public-sector infrastructure investment. Based on a public choice literature, it is hypothesized that the relationship between institutional quality and public investment differs across democratic and autocratic countries. The results suggest that corruption enhances public investment in fixed capital, only in countries with autocratic regimes. Moreover, the growth impact of public investment in fixed capital is also negative only in these countries; the negative impact, however, is mitigated as autocratic countries become more politically open. These findings point to the suboptimal nature of the use of public funds in autocratic countries