Institutions, Fiscal Policy and Economic Growth
Author: Saima Nawaz

This dissertation seeks to examine, both theoretically and empirically, the impact of institutions and fiscal policy on economic growth and the impact of institutions on growth via fiscal policy. These impacts have been examined at the aggregate level for a world representative sample as well as for the samples disaggregated by the development level of the countries. We have extended the Solow growth model by incorporating fiscal policy and institutions. This variant of the Solow model shows that the fiscal policy and institutions may impact economic growth through total factor productivity. Secondly, the model suggests that the institutions also influence economic growth through the fiscal policy. The empirical analysis is based on a panel of 56 countries using annual data over 1981-2010. We have estimated static panel using fixed effects model and dynamic panel using system GMM. The overall results suggest that institutions have a positive impact on economic growth. The impact of fiscal policy on growth is statistically insignificant at the aggregate level, however the association of fiscal policy with economic growth is positive in developed economies and negative in the developing economies. Finally, the results show that good quality institutions constrain aggregate spending in both the developed and developing economies. Chapter 5 reveals that institutions have a positive impact on economic growth at all stages of development but the impact of improvement in institutional quality is relatively more growth enhancing in developed countries. Chapter 5 also reveals that the impact of fiscal policy on growth, measured by government spending and tax revenues, is statistically insignificant at the aggregate level (i.e. for the sample representing the world). However the disaggregated estimation for the developed and developing economies shows that fiscal policy has a positive association with economic growth in developed economies and negative in the developing countries. The finding thus informs that the fiscal policy contributes positively to growth only in the developed economies. Our disaggregated analysis in chapter 6 suggests that different institutions have different implications for development at different stages of development. The positive impact of control over corruption, bureaucratic quality and law and order on economic xi growth is greater in high income countries relative to low income countries. The impact of investment profile is more growth enhancing in developing countries as compared to developed economies. In chapter 7, we have estimated the impact of institutions at aggregated as well as disaggregated level on government spending as a potential channel through which institutions may influence economic growth. The estimation shows that institutions put constraints on aggregate spending in developed as well as developing economies. However, the role of institutions varies with the level of development, the negative impact of institutions on government spending being greater in the developed countries. The impact of government stability, control over corruption and rule of law are important in controlling public spending. The analysis further demonstrates that government stability and rule of law are relatively more important at higher level of income while control over corruption is more important at lower level of income in constraining public spending. Supervised by:-Dr. Musleh ud Din Co-Supervisor:- Dr. Idrees Khawaja

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Keywords : Economic Growth, Fiscal Policy, Institutional Economics
Supervisor: Musleh ud Din
Cosupervisor: M. Idrees Khawaja

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