Empirical analysis of the role of institutions in economic development

Differences in the economic development of countries constitute the most important field of interest of growth and development models. In the related literature, it is observed that the income differences between countries have been explained in general by means of the differences in factor accumulation and factor productivity in recent years, and also some explanations on the basis of institution variables have also been developed beyond economic variables. In this study, with this perspective, the studies explaining the theoretical and empirical effects of institutions within the framework of institutional economics by highlighting institutions have been examined. According to the institutional economics literature, efficient institutions create factor accumulation and increase factor productivity by forming an incentive structure for positive economic activities by decreasing uncertainties and transaction costs in economy, and therefore institutions play positive roles in the economic development of countries. In this study, the role of institutions in economic development has been examined empirically on the basis of theoretical and empirical literature. In empirical analysis, the panel data analysis has been applied for 90 countries in the period of 1992-2010. According to the World Bank classification, these countries have been examined in two groups as the low and middle income countries and the high-income countries. Also the results for Turkey have been obtained by using institutional indicators. In the empirical analysis, the effects of institutions in real gross domestic product per capita, total factor productivity and investment have been examined. Models have been created by using the political risk composite index in the International Country Risk Guide and the twelve sub-indicators such as corruption, internal conflict, external conflict, investment profile, government stability, democratic accountability, socio-economic conditions, bureaucratic quality, law and order, ethnic tension, religion tension and military in politics as the institution-variable. When the composite index is used as the institution-indicator, it has been concluded that the institutions influence the real gross domestic product per capita, the total factor productivity and the investment positively in 90 countries. The expected impacts could not be observed in the context of sub-indices; more consistent results have been obtained with the composite index. In the high-income countries which are considered to have effective institutions, most of the sub-indices have been found as more effective than the low and middle-income countries. It has been determined that the development and better-functioning of law and order, assurance of governmental stability have positive effects on the real gross domestic product per capita and the total factor productivity, whereas the prevention of corruption, the decrease of external conflicts and the increase in the bureaucratic quality have positive effects on the investments in Turkey. It has been also concluded that the assurance of democratic accountability and the decrease in ethnic tension have positive effects on both investment and total factor productivity. Keywords: Economic development, institutions, institutional economics, investment, total factor productivity