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The Impact of Institutional Quality on Economic Performance: An Empirical Study of European Union 28 and Prospective Member Countries

Puruweti Siyakiya ()
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Puruweti Siyakiya: Marmara University, Department of Economics

World Journal of Applied Economics, 2017, vol. 3, issue 2, 3-24

Abstract: Using a panel set of 28 European Union member states and 8 prospective members to the bloc over a period of 1996-2014, this paper examines to what extent institutional quality (governance index) and its sub-indicators (control over corruption, government effectiveness, political stability, regulatory quality, rule of law and voice and accountability) can influence overall economic performance measured by gross value added per capita. The paper expands on existing literature by disaggregating the growth impact of institutions for all countries in the sample, developed and less developing countries. The independent variables included in the model are gross fixed capital formation as a percentage of GDP, net barter terms of trade, government size (expenditure), quality of institution and inflation while gross value added per capita is the dependent variable. Because of the weakness of the fixed effects model, system GMM is used to estimate the coefficients. Generally, the results show a positive and significant relationship between economic performance and the quality of institution. Precisely holding other things constant, a 10 units improvement in the quality of overall institution is predicted to increase gross value added per capita by 1.33 units. Also, the impact of institutional improvements on economic performance is higher and more predominant in developed countries than in less developed. A disintegrated analysis of institutions reveals that government effectiveness and voice and accountability have positive and significant impacts on economic performance of the 36 countries. However, control over corruption and political stability and absence of violence have negative signs. Also, there is no evidence of influence of regulatory quality and rule of law on economic growth.

Keywords: Economic Growth; Institutional Quality; European Union; Turkey (search for similar items in EconPapers)
JEL-codes: O11 O17 O43 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.22440/wjae.3.2.1

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