Institutions and Economic Growth: Does Income Level Matter?

This paper investigates whether a country’s level of income matters to the effectiveness of institutions in fostering economic growth. The institutional variables are represented by democracy, corruption levels, and armed conflicts. The countries in the data-set are divided into high-, middle- and low-income countries based on the World Bank criteria. The overall results indicate that institutional variables have offsetting effects on economic growth. The performance of these variables appears to have been influenced by the countries’ level of income. Labour, capital and human capital are found to be positive and significant variables for economic growth, irrespective of whether the countries are in high-, middle- and low-income groups. On the contrary, corruption affects GDP negatively in high- and middle-income groups, but positive, although insignificant in low-income countries. Democracy has a mixed effect on economic growth and largely negative in high- and low-income countries, but positive in middle-income group. Armed conflicts do not appear to have any statistically significant effect on high and middle-income countries’ economic growth. However, it has a significant negative effect on low-income countries’ economic growth.