Institutions and economic development

This thesis composes of four empirical studies with an attempt to assess the role of institutions as key determinant of cross-country development. We have unbundled the different facets of institutions, including the security of property rights, democracy, regulation and stability of monetary policy. In Chapter 2, we investigate the direct impact of institutions on economic growth using dynamic panel data estimations. Employing this estimator aims at alleviating the technical problems embedded in the existing literature. Our results suggest that the security of property rights and stability of monetary policy have direct impact on economic growth, whereas democracy and regulation are not directly growth-enhancing. In Chapter 3, we further explore the role of democracy and regulation in the development process. We empirically test whether economic reform is more likely to take place in democratic economies. The answer seems affirmative. More specifically, our empirical results show that democracy causes reforms in redistributive policies, trade liberalisation and credit market deregulation. In the next Chapter, we consider the institutional barriers as compared to natural barrier and at-the-board barriers as determinants of bilateral FDI. The augmented gravity model provides empirical evidences to support that geography, regional integration and domestic regulatory environment of the destination economies all have significant impacts on FDI inflows. In particular, credit market regulation is amongst the most important, which echoes the view that financial development is essential to economic development. In the final empirical work, we hypothesise that institutions matter to cross-country economic performances as economies with better institutions are technically more efficient. We estimate a global stochastic production frontier, where countries lie below the frontier are less efficient. Our empirical results suggest that countries with better security of property rights and fewer regulations allocate their production inputs more efficiently. The effects of democratic regime and stability of monetary policy are also positive to improve inefficiency, if a threshold level of human capital is reached. Other possible factors like openness and human capital, in turn, seem not to play direct role. Our research provides empirical basis to understand how particular aspects of institutions could affect development outcomes