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Institutions and economic development: A Granger causality analysis of panel data evidence

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  • Law, Siong Hook
  • Lim, Thong Cheen
  • Ismail, Normaz Wana

Abstract

This study examines the causal relationship between institutions and economic development using a panel Granger causality test. The study incorporates two institutional datasets, the International Country Risk Guide (ICRG) and World Governance Indicators (WGI). The empirical results based on 60 countries show that there is a bi-directional causality between institutions and economic development. The findings also suggest that causality patterns between institutions and economic performance vary at different stages of income level. Better institutional quality fosters economic development in higher income countries, whereas economic development tends to enhance institutional quality in lower income countries.

Suggested Citation

  • Law, Siong Hook & Lim, Thong Cheen & Ismail, Normaz Wana, 2013. "Institutions and economic development: A Granger causality analysis of panel data evidence," Economic Systems, Elsevier, vol. 37(4), pages 610-624.
    • Handle: RePEc:eee:ecosys:v:37:y:2013:i:4:p:610-624
    DOI: 10.1016/j.ecosys.2013.05.005
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    More about this item

    Keywords

    Economic performance; Institutions; Governance; Panel Granger causality test;
    All these keywords.

    JEL classification:

    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • P0 - Political Economy and Comparative Economic Systems - - General

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