The Impact of Institutions on Economic Growth.

Author

Hala M. Nour, Southern Illinois University CarbondaleFollow

Date of Award

5-1-2022

Degree Name

Master of Science

Department

Agribusiness Economics

First Advisor

Moon, Wanki

Abstract

TITLE: The Impact of Institutions on Economic Growth.MAJOR PROFESSOR: Dr. Wanki Moon. Based on the cross-sectional data, my thesis examined the relationship between the Economic Freedom Indices and per capita GDP. This thesis demonstrates that the rule of law category, which includes the property right variable, is the category that most affects per capita GDP which demonstrates the importance of the institution. Data from 184 countries published by Heritage Foundation and the Wall Street Journal were used. I analyzed the data using the OLS regression model to explore the relationship between Economic Freedom index and per capita GDP. The first model I analyzed is simple regression which regress economic freedom indices on per capita GDP. The result of the regression showed that all variables are significant, except the Tax Burden and Fiscal Health variables which were insignificant. The Government Spending and Tax Burden are the only variables have a negative effect on per capita GDP. The second model I analyzed was multiple regression for each category’s components, then I repeated the model four times, since there are four different categories with three components each. It is important to analyze each category by itself to explore what the relationship is between the component in each category and per capita GDP. The results of regression on each category including the three different components show that government integrity (from the rule of law category), government spending and fiscal health (from government size category), business freedom (from regulatory efficiency category), trade freedom and financial freedom (from open market category) are significant variables and affected per capita GDP positively except for government spending which has a negative effect on per capita GDP. On the other hand, the variables which are insignificant like property right from the rule of law category, monetary freedom from regulatory efficiency category have a positive effect on per capita GDP. But the Judicial Efficiency from the rule of law category, tax burden from government size, labor freedom from regulatory efficiency category and investment freedom from open markets are insignificant and have a negative effect on per capita GDP. However, when we look to the category as a group, we find that all four grouped index freedom is significant at 99% significant level. R-square is highest for rule of law category (68%) and very low for government size (16.7%). The third model I used includes four categories by computing the average of each category’s components, we found, by looking at R-square, that 65.4% of per capita GDP is explained by these four categories. Surprisingly, I found that the rule of law category is the only significant variable with positive effect on GDP per capita. On the other hand, Government Size, and Regulatory Efficiency are insignificant variables and have a negative effect on per capita GDP. Open Market category is insignificant variable and has a positive effect on per capita GDP.