Institutional Quality and Economic Welfare Nexus: Evidence from Panel ARDL Models

International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue XII, December 2019 | ISSN 2454–6186

Institutional Quality and Economic Welfare Nexus: Evidence from Panel ARDL Models

Christopher Eho Olong¹, Dobdinga Cletus Fonchamyo², Molem C. Sama^3
1Ph.D Student in Economics, University of Buea, Cameroon
²Associate Professor of Economics, Vice Dean Faculty of Economic and Management, University of Bamenda, Cameroon
³Professor of Economics, Vice Dean Faculty of Social and Management Sciences, University of Buea, Cameroon

Abstract: The development agenda for many African countries in the last few decades has been geared towards improving their quality of institutions and economic transformation through human development. This paper investigates the relationship between formal and informal institutional quality on human development using the Auto Regression Distribution Lag (ARDL) models. The paper makes use of secondary data collected from, Heritage Foundation, World Development Indicators, United Nations Development Program and Transparency International, from 2001 to 2018. The study reveals a long-run robust inverse relationship between institutional quality and human development with an adjustment speed of 10% for any deviation from equilibrium. The formal institutional quality (economic freedom) has a direct and significant relationship with economic welfare while informal institutional quality (corruption) has a significant inverse relationship with economic welfare. To mitigate the effect of institutional quality on human development, it is recommended that governments in African should enact laws to effectively fight corruption but should also allow some level of corruption to exist since this significantly increases entrepreneurial activity in the short-run.

Key words: Institutional Quality, Economic Welfare

I. INTRODUCTION

Improving the quality of institutions through economic transformation has been recognized as a necessary tool for the achievement of economic welfare over time. Yet the debate on how institutional quality affect economic welfare is still inconclusive. This is because the relationship between institutional quality and economic welfare has been studied using different analytical tool with different set of data in different context. Some of the conclusions from the studies are that institutions regulate human actions(North, 1990 and Bruinshoofd, 2016).Institutions in most cases are not chosen for the common interest of society but rather imposed by groups with political power for their economic gains (Acemoglu, Johnson & Robinson, 2005) yet they constrain and enable group behaviour(Schimid, 2005). Thereby making institutions the best indicators of structural transformation and long term welfare creator of a nation, (Bruinshoofd, 2016)“If you want to predict the prosperity of a country, just look at its institutions” (Drzeniek, 2015).

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