Role Of Institutions In Growthconvergence A Cross-countryanalysis
Author: Muhammad Safdar Bajwa

Growth theory has been a great focus in economic research. Our study is concerned with the evolution and change of institutions across countries over time based on the real per capita GDP. We focused on, whether contemporary differences in per capita income and institutional quality across countries have become wider or narrower? i.e. finding growth and institutional quality convergence, because theoretically institutions affect the growth of economy. Enormous literature regarding convergence of per capita GDP levels is available across countries, but neither theoretical nor the previous empirical literature provided any clear evidence of institutional quality convergence. Controversial analysis on catching-up hypothesis that “Why doesn’t capital flow from rich to poor countries” by Lucas (1990), concludes three reasons which hinders the capital flow, namely; differences in human capital, external benefits of human capital and imperfect capital market. Kalemli-Ozcan et al. (2003) called it “Lucas Paradox”. He argues two factors, which hinders the way of capital flow (I) differences in fundamentals of affecting production and (II) international capital market imperfections. Authors investigated that institutional quality is the most natural variable in explaining the “Lucas Paradox”. We observed growth and institutional quality ‘catch-up’ across the world by presenting cross-section and panel data tests of convergence based on OLS estimates and 2SLS for the period 1984-2015 in six groups, categorized by IMF system. Result of panel data analysis and 2SLS shows the improvement in per capita GDP and institutional quality levels which means poor economies are catching-up the richer ones in both measures (growth & institutional quality), implies strong evidence of convergence within each group. The cross-sectional dispersion in both measures is also reducing overtime, implies strong evidence of sigma convergence within group and across the world. Dispersion in per capita GDP and institutional quality is diminishing overtime, implies strong evidence of sigma convergence across countries. We concluded that speed of convergence is significantly enhanced in both measures and data analysis by incorporating set of control variables, implies strong evidence of conditional convergence. Finally, we finished with that institutions are fundamentals to long-run growth and institutional quality convergence lead to growth convergence, within the group and across the countries. Supervisor:- Dr. Wasim Shahid Malik

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Keywords : Convergence, Growth, Institutional Quality, Lucas Paradox
Supervisor: Wasim Shahid Malik

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