Thirteenth Global Studies Conference

Abstract

This paper examines the existence of non-linearities between economic institutions and economic growth and in particular the presence of threshold effects for advanced and emerging economies. The dynamic panel threshold strategy adopted deals with non-linear asymmetric dynamics, unobserved heterogeneity, and treats economic institutions as endogenous by using political institutions as instrument. In general, the results revealed the existence of institutional-threshold effect. Specifically, for economic institutions to have an effect towards growth it must on average develop to about 6.33 and 7.84 (out of a score of 10) for emerging and advanced economies respectively. The estimated threshold from the pooled sample is on average around 6.31(out of 10). The long-run effect of economic institutions on growth is positive for emerging countries approximated at 0.12% and neutral for advanced countries. To understand the results better, I further investigate the sub-dimensions of economic institutions. The results show the primacy of sub-dimensions such as freedom to trade internationally, legal structures and property rights to economic growth. There is also the need to look at policy measures such as government expenditure and taxes as well as strict regulations to credit, labour, and business environment since they are found to negatively affect economic growth after the threshold. Several robustness exercises are carried out.