Institutions and economic growth: the role of financial inclusion, public spending on education and the military

Abstract

Purpose: The paper aims to investigate the relationship between institutions and economic growth in developing countries, considering the role of financial inclusion, education spending and military spending. Design/methodology/approach: The study employs dynamic panel analysis, specifically two-step system generalized method of moments (GMM), on a sample of 61 developing countries over the period 2009–2020. Findings: The results confirm that weak institutional quality, weak financial inclusion and increased military spending are barriers to economic growth, conversely, increased spending on education and gross capital formation contribute to economic growth in developing countries. Regarding the specific institutional factor, we find that corruption, ineffective government, voice and accountability and weak rule of law contribute negatively to growth. Practical implications: The study calls for strengthening institutions so that the financial system supports economic growth and suggests increasing spending on education to improve access to and the quality of human capital, which is an important determinant of economic growth. Originality/value: The study contributes to scarce literature by empirically analyzing the relationship between institutions and economic growth by considering the role of financial inclusion, public spending on education and military spending, factors that have been ignored in previous studies. In addition, the study identifies the institutional dimension that contributes to reduced economic growth in developing countries.