Institutional quality and economic performance in South Asia

• Published date: 01 February 2022
• Author: Bhanu Pratap Singh,Kailash Chandra Pradhan
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2401

ACADEMIC PAPER

Institutional quality and economic performance in South Asia

Bhanu Pratap Singh

1

| Kailash Chandra Pradhan

2

1

Economics Section, Mahila Mahavidyalaya,

Banaras Hindu University, Varanasi, India

2

Department of Economics, Mahatma Gandhi

Central University, Motihari, India

Correspondence

Bhanu Pratap Singh, Economics Section,

Mahila Mahavidyalaya, Banaras Hindu

University, Varanasi, U.P., 221005, India.

Email: bhanuatindia@gmail.com; bpsingheco@

bhu.ac.in

The study empirically examines the impact of institutional quality on economic per-

formance in South Asia for the period 2002 to 2016. The study employed six World

Bank Governance indicators and constructed a composite governance index to mea-

sure institutional quality. Per capita real GDP is taken as a measure of economic per-

formance. The study uses conventional determinants of growth such as labor supply

and physical capital stocks. Fixed effects regression and Fully Modified Ordinary

Least Square (FMOLS) methods are employed to examine the long-run equilibrium

relationship. Dumitrescu-Hurlin (2012) panel causality test is used as a short-run

diagnostics test for the long-run relationship. The empirical results reveal institutional

quality has a positive impact on economic performance in the long-run whereas, gov-

ernance indicators such as control of corruption, government effectiveness and polit-

ical stability are vital for better economic performance in South Asian countries. The

short-run diagnostics results reveal that institutional quality has no impact on eco-

nomic performance. On the other side, economic performance helps to improve intu-

itional quality in the short-run. Hence, in the short-run South Asian countries should

focus on non-good governance indicators such as effective taxation, health, educa-

tion, infrastructure and skill development to achieve good governance and better

economic outcome in the long-run.

1|INTRODUCTION

South Asia is the fastest-growing region in the world (Figure 1). In the

current scenario, when growth rates across the globe are sluggish,

South Asia is still growing with an average 5% growth rate (Figure 2).

There is a substantial reduction in poverty in India, Pakistan and

Bangladesh with the impressive economic growth and poverty

declined 10 percentage points or more in these countries in the past

few decades. There is also evidence that poverty declined in similar

magnitude in Nepal with relatively weak economic growth

(Nabi, 2010). On the contrary, it is the home of 400 million people liv-

ing in abject poverty, several regions with violent conflicts, ill-health

and weak education. However, the poor institutional quality, and,

more importantly, the political instability and crisis are preventing the

growth and development of this region (Devarajan, 2005; Devarajan &

Nabi, 2006; Vadlamannati, 2009). South Asian countries have a low

and medium level of per capita income (The World Bank Atlas

method, 2020) and recent literature on new institutional economics

show governance issues are critical for growth and development of

any region (North, 1990). Historically, most of the South Asian coun-

tries were part of British India. Rizavi, Khan, and Mustafa (2010) have

found that South Asia region has homogeneous on common history

and historical relations. The economic and political factors along with

other social and cultural association make South Asia a highly appro-

priate setting for the study. Moreover, it is very important to under-

stand the governance structures and their impact on their economic

behavior and vice-versa of these countries in the current situation.

In South Asia, India is the largest economy in terms of Gross

Domestic Product (GDP) and the second-fastest growing economy in

the region after Bangladesh (Table 1). From past -four quarters, the

growth rate of Indian economy came down because of a decline in

the private consumption which accounts for 60% of the total GDP of

the country. The union budget 2020–2021 introduced a dual tax sys-

tem which aims to boost domestic consumption. The biggest chal-

lenge for the country is its huge population and mass youth

unemployment. The country is facing major economic and governance

problems such as mass absolute poverty, illiteracy, ill-health, corrup-

tion and weak property rights.

Received: 2 April 2020 Revised: 14 June 2020 Accepted: 14 August 2020

DOI: 10.1002/pa.2401

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https://doi.org/10.1002/pa.2401