Prague Economic Papers 2021, 30(6):654-674 | DOI: 10.18267/j.pep.789

Impact of Institutions on Economic Growth Across OECD Countries

Óscar Afonso ORCID...a, Inês Almeidaa, Natércia Fortunaa
a Universidade do Porto, Faculdade de Economia, CEF.UP, Portugal

This paper provides empirical evidence in support of the view that quality of institutions is an important determinant of medium and long-term growth in OECD countries. Regarding the methodology, a panel data analysis with two-stage least squares (2SLS) estimation will be used to account for the endogeneity of the institutional variable. Besides institutional quality, we also consider other relevant determinants of potential growth such as the initial level of GDP per capita, public debt, and structural variables typically referred to in economic growth theory. Our estimation results show a positive impact of institutions on subsequent economic growth: an increase in 1 point in institutional quality leads to an estimated increase of 16.88 percentage points in potential GDP per capita growth, in the case of high-debt countries. With this, we notice a particular rel- evance of institutions in countries with high levels of debt. Therefore, our findings support the necessary attention to the institutional tissue of societies since improvements in institutional quality can subsequently improve economic growth.

Keywords: Economic growth, institutions, panel data, TSLS, endogeneity
JEL classification: C23, O10, O43

Received: January 11, 2021; Revised: September 10, 2021; Accepted: September 30, 2021; Prepublished online: November 25, 2021; Published: December 15, 2021  Show citation

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Afonso, Ó., Almeida, I., & Fortuna, N. (2021). Impact of Institutions on Economic Growth Across OECD Countries. Prague Economic Papers, 30(6), 654-674. doi: 10.18267/j.pep.789
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