The Impact of Formal and Informal Institutions on Economic Performance: A Cross-Country Analysis

This study is an attempt to understand the relative contribution of culture and economic freedom to economic growth. Through applying fixed effect to the panel of fifty four developed, developing and less developed countries for the period of 1980 to 2007, study explores direct and indirect influence of culture relative to economic freedom on economic performance. The analysis shows that human capital is an appropriate transmission channel for cultural effects. It reveals that culture play fundamental role in shaping human behaviour that further lead to determine the level of accumulation and productivity of human capital. In this analysis significance of the culture relative to economic freedom is confirmed after the inclusion of a transmission channel for cultural influences. Study shows that cross-country differences in economic growth are fundamentally related to the differences in level of underlying cultural values like trust, respect, self-determination and obedience. To reduce differences in productivity and accumulation rate of human capital across countries this analysis advocates integration of cultural values into national education policy and investment in cultural capital.