Do institutions moderate globalization’s effect on growth?

The hypothesis that institutional factors affect real economic growth has received support in both the theoretical and empirical literature. Globalization has also, though not unanimously, been found to affect growth outcomes. Bridging the gap between the two strands of the literature, this paper investigates the existence and strength of the interaction between institutional quality and globalization on real economic growth using a panel dataset covering 82 countries and spanning 25 years (1986 – 2010). Dimensionality reduction techniques are employed to identify key components of ‘institutional quality’: rule of law, civil liberties and political rights. The empirical results reveal that while ‘institutional quality’ robustly and positively affects growth, the direct effect of economic globalization is not significant and the interaction effects, perhaps as a consequence, are muted over the review period. Direct and interaction effects of institutional quality and economic globalization on growth are, however, observed for the sub-sample of developing countries.