Institutions and economic growth: A study in a cross-section of countries

The neoclassical prediction, which is that lower income countries tend to grow faster than the high income countries, is often found to be inconsistent with the empirical research results. Researchers argue that neoclassical hypothesis holds merely when countries are similar with respect to structural parameters for preferences, hence institutions, and technology. If this similarity dissolves, no convergence should be expected between poor and rich countries. As countries tend to become more similar in institutional climate, faster growth should emerge. In this work, we endeavor to examine the relationships between economic growth and institutional variables such as overall economic freedom as well as its components. Having introduced a formal model, we found that the growth rate of real per capita GDP was positively associated with overall economic freedom, government size, fiscal freedom and trade freedom for a sample of countries in the period 1995 to 2008. Other components of economic freedom in the Heritage index were not significantly related to economic growth. We also found that growth was unrelated to Socialism and to Weberian thesis. Finally, customary variables, which are level of real per capita GDP, initial human capital, physical capital and population, were also found to be significant.