A comparative analysis of causality between institutional structure and economic performance for developed and developing countries

Abstract

The aim of the present study is to investigate the relation between countries’ structural transformation and institutional factors. The causality relationship between ‘economic complexity level’ representing structural transformation and six institutional indicators revealed by the World Bank (government effectiveness, political stability, control of corruption, rule of law, regulation quality, voive and accountability) was investigated via Dumitrescu-Hurlin causality test for both E-7 and G-7 countries for the period of 1996-2017. The research question of the study is that whether there is a difference among developed and developing countries in terms of the interaction and causal relationship among institutional indicators and economic performance. On this purpose, E-7 country group is selected to represent developing countries whereas G-7 community is selected to represent developed one. As a result of the analysis, it was determined that institutional factors in E-7 countries comprised of developing countries displayed greater causality relationships with economic complexity level representing structural transformation in comparison with G-7 countries. Besides, causal relationships among institutional indicators themselves are also greater in E-7 countries than G-7 countries. This finding suggests that economic performance of developing countries are more sensitive to institutional structure in comparison to developed ones. That’s why developing countries are required to pay more attention to institutional factors with greater rigorously.