Do institutions affect economic growth? An empirical analysis of selected South Asian countries
| DOI | 10.1177/2057891116671833 |
| Date | 01 September 2017 |
| Author | Jayanti Bhattacharjee |
| Published date | 01 September 2017 |
| Subject Matter | Research articles |
Research article
Do institutions affect economic
growth? An empirical analysis of
selected South Asian countries
Jayanti Bhattacharjee
Department of Economics, Women’s College, Agartala, Tripura, India
Abstract
In this article we estimate the role of institutions in conjunction with physical capital stock, human
capital stock, openness and liberalisation in economic growth of the four major economies of
South Asia. We apply both time series and panel data analysis for estimation. The time series
analysis shows that physical capital stock positively influences economic growth of the four major
South Asian countries. The influence of the other factors varies across the countries in the long
run. When we control for institutional quality, the speed of adjustment diminishes for every
country. The panel data analysis shows that voice and accountability and regulation impart positive
and significant influence while government effectiveness and rule of law imparts negative significant
influence on PCGDP of the countries. The study shows the need for higher investment in human
capital, physical capital. Additionally, the quality of institutions in South Asia needs attention, to
sustain growth in future.
Keywords
growth, human capital, institutions, openness, physical capital
Introduction
A glance at the South Asian economies during recent times reveals that their overall macroeco-
nomic performance has increased considerably compared to the pre-1980s period. The transforma-
tion of this region is now drawing international attention. South Asia’s growth is all the more
impressive because the region suffers from many growth-retarding factors like poverty, corruption,
conflicts, high fiscal deficits, political instability and weak governance. Mallik and Chowdhury
(2001) have observed that the four South Asian countries – India, Pakistan, Sri Lanka and Ban-
gladesh – share a very similar economic structure and until very recently have followed roughly
Corresponding author:
Jayanti Bhattacharjee, Department of Economics, Women’s College, Agartala, Tripura 799001, India.
Email: bhattacharjee_jayanti@yahoo.co.in
Asian Journal of Comparative Politics
2017, Vol. 2(3) 243–260
ªThe Author(s) 2016
Reprints and permission:
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DOI: 10.1177/2057891116671833
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similar economic policies, viz. a relatively large public sector, a nationalized financial sector and
five-year plans, though with varying emphasis.
With a population of more than 1.2 billion, India is the world’s largest democracy. Over the past
decade the country’s integration into the global economy has been accompanied by impressive
growth. India has now emerged as a global player, being the world’s fourth largest economy in
purchasing power parity terms (World Bank, 2016a).
Pakistan faces significant economic, governance and security challenges to achieve durable
development outcomes. The persistence of conflict in border areas, and security challenges
throughout the country are a reality that affects all aspects of life in Pakistan and impedes devel-
opment. A range of governance and business environment indicators suggest that deep improve-
ments in governance are needed to unleash Pakistan’s growth potential (World Bank, 2016b).
After Sri Lanka gained independence from Britain in 1948, political power alternated between
the conservative United National Party (UNP) and the leftist Sri Lanka Freedom Party (SLFP).
While the country made impressive gains in education, basic health care and other social needs, its
economic development was stunted and its social fabric tested by a long civil war between the
government and the ethnic Tamil rebels.
Bangladesh gained independence from Britain in 1947 as part of the newly formed state of
Pakistan and successfully split from Pakistan in December 1971, after a nine-month war. The 1975
assassination of independence leader and prime minister Sheik Mujibur Rahman by soldiers
precipitated 15 years of military rule and continues to polarize Bangladeshi politics. The last
military ruler resigned in 1990 after weeks of prodemocracy demonstrations.
These economic and political realities, along with other social and cultural factors and simila-
rities in education, health, etc., make South Asia a highly appropriate setting to study the deter-
minants of economic growth.
Our study proceeds as follows. In the first section, we provide a brief review of literature on the
subject. The following section discusses the model along with data and methodology. In the section
after that we estimate the various factors, namely physical and human capital, OPENNESS,
liberalization and various institutional measures pertinent to the ec onomic growth of the four
South Asian countries, using time-series econometrics. We report the results and provide economic
explanations for the results of the econometric analysis. The final section draws conclusions and
discusses policy implications.
The contribution of the article to the literature is threefold. First, it explores the state of
governance and its various institutions in the South Asian economies. Secondly, there are very
few existing studies on the determinants of economic growth for the South Asian region under
the purview of New Growth Theory (NGT). The present study makes an a ttempt in this direction
and finds evidence in favour of both economic policies and institutions. Physical capital stock
positively influences economic growth in the major South Asian countries; however, a positive
and significant influence of human capital stock is observed for India, Pakistan and Sri Lanka
only. The influence of OPENNESS (measured as trade-GDP ratio) varies across the countries in
the long run. A significant negative influence of liberalization is observed in the case of Pakistan
only. The time-series study incorporating the institutional quality of the individual countries
shows t hat poli tical institution (measuredby POLITY) has a significant negativeinfluence on the per
capita GDP(PCGDP) of Pakistan only.No significant influenceof political institutionon PCGDP for
theother three countriesis observed. The influenceof executive constraints(measuredby XCONST) is
positive and significant for Pakistan, and insignificant for the other countries. When we control for
institutional quality, the speed of adjustment diminishes for every co untry. Thirdly, the article
244 Asian Journal of Comparative Politics 2(3)
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