Economic *growth and institutions: Empirical evidence from a cross -national analysis

The relationship between institutional infrastructure and economic growth rates across nations is examined in this study. Within the framework of the neoclassical growth model augmented to include human capital and institutions, this study integrates a broad set of institutional variables which together proxy for the overall institutional infrastructure of an economy. Security of property rights, governance, political freedom, economic freedom and size of government are the indicators used, facilitating identification of the most important institutions that account for the observed variations in economic growth rates among nations.;The relationship between economic growth and the institutional infrastructure in both a cross-section as well as a panel setting for the years 1975 to 1990 is examined. Forty-three nations are analyzed in a cross-section framework and sixty-three in a panel setting. A panel data set of thirty-four nations is further analyzed to identify the most important components of the index of economic freedom that account for the differences in economic growth rates.;In all three data sets, the addition of the variables that proxy for the quality of institutions improves the fit of the neoclassical growth model. Broadly, the results indicate that there is a size effect of government consumption on economic growth. However, this relationship is non-linear, with growth rates declining if government consumption exceeds a certain optimum level.;There is also some indication of a non-linear relationship between political freedom and economic growth. Greater political freedom enhances growth at low levels, but depresses growth when a moderate level of political freedom has already been attained. The security of property rights was the other institutional variable that explained the differences in economic growth rates across nations to a significant extent. In conclusion, it appears from this study that the institutions reflecting the quality of governance, the security of property rights, size of government and the level of political freedom explain differences in economic growth rates across countries to a significant extent. These results maybe interpreted as indicative of empirical regularities that we might expect to find in a larger sample of countries observed over a longer period of time.;Future researchers would benefit from including measures that reflect differences in informal institutions in the analysis, as well as employing a more structural approach to modeling using data covering a longer time period, both of which are currently constrained by lack of comparable and consistent data. Another potential extension would be a study of region-specific effects of institutions.