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The Role of Institutions in the Economic Growth of OECD Countries

Author

Listed:
  • Gunter Merdzan

    (Ss. Cyril and Methodius University in Skopje, Faculty of Economics - Skopje)

  • Predrag Trpeski

    (Ss. Cyril and Methodius University in Skopje, Faculty of Economics - Skopje)

  • Daniela Bojadjieva

    (Ss. Cyril and Methodius University in Skopje, Faculty of Economics - Skopje)

  • Biljana Tashevska

    (Ss. Cyril and Methodius University in Skopje, Faculty of Economics - Skopje)

Abstract

This paper analyzes the role of institutional quality in determining economic growth in the OECD countries from 1995 to 2021, concerning the institutional economics framework developed by North (1990) and further advanced by Rodrik (2000) and Acemoglu et al. (2005). Institutions are viewed as the formal and informal structures that regulate economic, political and social activities and are considered the key to influencing economic performance through the minimization of transaction costs, encouragement of innovation and human capital development. The theoretical framework assumes that inclusive institutions foster sustained economic growth while extractive institutions stifle development by consolidating power and assets. This paper hypothesizes that institutional quality positively influences economic growth in OECD countries. Using panel regression models and employing the Fraser Institute’s Economic Freedom Index and the Heritage Foundation’s Index of Economic Freedom as measures of institutional quality, it examines how government size, property rights, regulation, and trade freedom affect growth. The findings reveal that institutional quality—measured through indicators of economic freedom—has a positive and statistically significant impact on economic growth, particularly in the areas of small government (reflected through lower tax burden and government spending) and sound monetary policy, indicating the importance of fiscal and monetary stability for promoting growth in OECD countries. This study is useful for policymakers who wish to improve economic growth through institutional change.

Suggested Citation

  • Gunter Merdzan & Predrag Trpeski & Daniela Bojadjieva & Biljana Tashevska, 2025. "The Role of Institutions in the Economic Growth of OECD Countries," Economy, Business & Development: An International Journal, Ss. Cyril and Methodius University in Skopje, Faculty of Economics-Skopje, vol. 6(1), pages 37-53, May.
    • Handle: RePEc:aoh:journl:v:6:y:2025:i:1:p:37-53
    DOI: 10.47063/ebd.00023
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    References listed on IDEAS

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    1. Daron Acemoglu & Simon Johnson & James Robinson, 2005. "The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth," American Economic Review, American Economic Association, vol. 95(3), pages 546-579, June.
    2. Olson, Mancur, 1993. "Dictatorship, Democracy, and Development," American Political Science Review, Cambridge University Press, vol. 87(3), pages 567-576, September.
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    More about this item

    Keywords

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    JEL classification:

    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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