Exploring the Nexus Between Inclusive Growth and Institutional Quality

Abstract

This research conducts an empirical investigation to identify the relationship between institutional quality and inclusive growth. For this purpose, it first examines the existing situation of inclusive growth and institutional quality of 86 countries. Later, it constructs indices of inclusive growth using social welfare function and institutional quality by apply principal component methodology on worldwide governance indicators. The fixed effect results suggest that Institutional quality is a major driver for achieving growth inclusiveness. A deep underpinning of the institutional variable indicates that inclusive growth is positively affected by the quality of economic and political institutions, while the effect of legal institutions was found insignificant. Furthermore, cross country evaluation of inclusive growth presented few thoughtful insights such as; in low income and lower income economies inclusive growth can be achieved by increasing the overall opportunities. Whereas, middle and high income economies need to enhance the equity prospects of opportunities to attain growth inclusiveness. This study by highlighting the role of institutional quality majorly contributes in existing set of literature of growth inclusiveness. It suggests that improved quality of institutions (rule of law, reduced corruption, regulatory quality, securing property rights and effective governance) can help in extending the opportunities to the unprivileged segment of the society, ensuring long term growth.

Keywords

• Institutional Quality
• Inclusive growth
• Equity