Institutional quality and economic growth: Evidence from South‐Asian countries

• Published date: 01 February 2023
• Author: Waqas Mehmood,Sajid Mohy Ul Din,Attia Aman‐Ullah,Ali Burhan Khan,Muhammad Fareed
• Date: 01 February 2023
• DOI: http://doi.org/10.1002/pa.2824

RESEARCH ARTICLE

Institutional quality and economic growth: Evidence from

South-Asian countries

Waqas Mehmood

1

| Sajid Mohy Ul Din

2

| Attia Aman-Ullah

3

|

Ali Burhan Khan

4

| Muhammad Fareed

3

1

School of Economics, Finance and Banking,

Universiti Utara Malaysia, Sintok, Malaysia

2

Lahore Business School, University of Lahore,

Gujrat Campus, Pakistan, Lahore, Pakistan

3

School of Business Management, Universiti

Utara Malaysia, Sintok, Malaysia

4

Department of Management Sciences,

National University of Modern Languages,

Islamabad, Pakistan

Correspondence

Waqas Mehmood, School of Economics,

Finance and Banking, Universiti Utara

Malaysia, Sintok, Kedah, Malaysia.

Email: waqas.mehmood61@gmail.com

The current study investigates the relationship between institutional quality and eco-

nomic growth, focusing on South-Asian countries entailing Bangladesh, Bhutan,

India, Nepal, Pakistan, and Sri Lanka, from 2002 to 2018. The data are analysed using

the dynamic heterogeneous panel (panel autoregressive distributed lag [ARDL]

model) approach, specifically the dynamic fixed effect (DFE), mean group (MG), and

pooled mean group (PMG). Based on the findings, the three governance indicators,

namely corruption control, accountability, and the rule of law, positively and signifi-

cantly affect economic growth. All the nations have consistent long-run estimates

but varied short-run estimates and adjustment speed for the long-term equilibrium.

This is due to governance volatility that is evident in all the nations. This article offers

both practical and theoretical contributions. This article contributes to the institu-

tional quality and economic growth literature from a theoretical perspective from the

South-Asian perspective. From a practical perspective, the study findings are signifi-

cant for policymakers, particularly those from the countries that demonstrate major

fiscal and external imbalance due to war and terrorism, low oil prices and weak trade.

Hence, there is a pressing need to address economic growth issues instigated by the

policymakers' negligence to ensure appropriate governance and macroeconomic

management. Regulators can improve economic growth through national and

regional image building by developing a stable economic and political landscape and

maintaining macroeconomic stability by improving the institutional quality indicators.

There is evidence that institutional quality improvement leads to better economic

growth.

KEYWORDS

economic growth, institutional quality, pooled mean group analysis, South-Asian countries

1|INTRODUCTION

Due to global GDP growth and stagnation in trade and industrial pro-

duction, particularly in South-Asia, it is prevalent that South-Asia is no

longer the world's fastest-growing region. Growth has been below

average in most South-Asian countries, with data from the

manufacturing sector. There is an increase in the current account defi-

cit, a typical phenomenon during economic recessions (Beyer, 2019).

Therefore, the growth in this region is projected to experience a huge

downward spiral because of uncertainty in the global market and a

deteriorating global outlook. The projected recoveries of 6.3% and

6.7% in 2020 and 2021, respectively, are a cautious stance on invest-

ment forecasts, which remain extremely uncertain (World

Bank, 2020a,2020b). As such, it has been a priority in this region to

work on decentralisation policies as part of the movement to boost

local service delivery worldwide (Beyer, 2019). The efficacy of

Received: 27 May 2021 Revised: 6 December 2021 Accepted: 27 May 2022

DOI: 10.1002/pa.2824

J Public Affairs. 2023;23:e2824. wileyonlinelibrary.com/journal/pa © 2022 John Wiley & Sons Ltd. 1of13

https://doi.org/10.1002/pa.2824