Institutional quality and economic performance in South Asia

The study empirically examines the impact of institutional quality on economic performance in South Asia for the period 2002 to 2016. The study employed six World Bank Governance indicators and constructed a composite governance index to measure institutional quality. Per capita real GDP is taken as a measure of economic performance. 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, governance indicators such as control of corruption, government effectiveness and political stability are vital for better economic performance in South Asian countries. The short‐run diagnostics results reveal that institutional quality has no impact on economic performance. On the other side, economic performance helps to improve intuitional 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, education, infrastructure and skill development to achieve good governance and better economic outcome in the long‐run.