The impact of institutions on economic growth and income in southeast asian countries

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIE THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF INSTITUTIONS ON ECONOMIC GROWTH AND INCOME IN SOUTHEAST ASIAN COUNTRIES BY PHAN CHANH PHONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2015 UNIVERSITY OF ECONOMICS STUDIES HO CHIMINH CITY VIETNAM INSTITUTE OF SOCIAL THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF INSTITUTIONS ON ECONOMIC GROWTH AND INCOME IN SOUTHEAST ASIAN COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By PHAN CHAHH PHONG Academic Supervisor: DR CAO HAO THI HO CHI MINH CITY, DECEMBER 2015 DECLARATION I declare that: “The Impact of Institutions on Economic Growth and Income in Southeast Asian Countries” is my own work; it has not been submitted for any degree at other universities I confirm that I have made all possible effort and applied all knowledge for finishing this thesis to the best of my ability Ho Chi Minh City, December 2015 Phan Chanh Phong i ACKNOWLEDGEMENTS I would like to express my deepest gratitude to my academic supervisor, Assoc Prof PhD Cao Hao Thi, for his helpful comments, guidance and regular feedbacks in this thesis I am also grateful to Prof Dr Nguyen Trong Hoai and Dr Pham Khanh Nam for their great advice when this thesis is just in form of ideas I would like to thank all lecturers for the knowledge and lessons they gave me and their support during the time I studied at the programme Last but not least, my sincerest thanks are for my family, especially my mom Without their frequent encouragement as well as spiritual support, I would not have been able to complete this thesis ii ABSTRACT The role of institutions has generated considerable interest among researchers and practitioners recently, with the various result approaches and proposals The studies often investigate the direct impact of institutions on growth; moreover, there are few researches on this topic in Southeast Asian area and Vietnam This thesis investigates both direct and indirect impact of institutions on economic growth and income in the context of Southeast Asian countries over the period 2000-2013 by using six measures of institutional indicators, all of which are developed by the World Bank in 2014 The model is estimated using an Ordinary Least Squares, a Fixed Effect as well as a Random Effect estimation strategy Estimation results show that the direct impact of the institutions on growth is insignificant; however, the direct impact on the income and indirect impact on growth through trade policies are high significant In addition, the results also show that the influence of corruption on income is stronger in low-income countries From that, respective policies are suggested to stimulate growth and income in Southeast Asian countries Keywords: Institutions, Economic Growth, Income, OLS, Fixed Effect, Random iii Effect ABBREVIATIONS AEC Asean Economic Community COC Control of Corruption FE Fixed Effects GE Government Effectiveness ICRG International Country Risk Institutional Guide NIE New Institutional Economics OLS Ordinary Least Squares PCI Provincial Competitiveness Index PSNV Political Stability and Absence of Violence/Terrorism RE Random Effects RL Rule of Law RQ Regulatory Quality VAA Voice and Accountability iv CONTENTS DECLARATION i ACKNOWLEDGEMENTS ii ABSTRACT iii ABBREVIATIONS iv LIST OF TABLES viii LIST OF FIGURES ix Chapter INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Research questions 1.4 Contribution of the research 1.5 Structure of the research Chapter LITERATURE REVIEW 2.1 Theoretical literature 2.1.1 Definition of institutions 2.1.2 Informal and formal institutions 2.1.3 The New Institutional Economics 2.1.4 How institutions influences economic 2.1.5 Solow model 2.1.6 Measuring institution 10 2.2 Empirical review 11 Chapter RESEARCH METHODOLOGY 15 3.1 Analytical framework 15 3.1.1 Model of institutional impact on growth 15 3.1.2 Model of institutional impact of income 17 3.1.3 Model of indirect impact of institutions on economic performance 19 3.2 Data and Variables 19 3.2.1 Data source 19 v 3.2.2 Variable measurement 19 3.3 Estimation method and model validation 29 3.3.1 Heteroscedastic testing 29 3.3.2 White Heteroscedasticity –Consistent Stand Errors or Robust Standard Errors 29 3.3.3 Breusch-Pagan LM test for Random Effects 29 3.3.4 Hausman test for Fixed versus Random Effects model 29 3.3.5 Omission of relevant variables 30 Chapter ANALYSIS RESULTS 32 4.1 Overall explanation and hypothesis testing 32 4.1.1 Statistical test of model overall significance 32 4.1.2 Heteroscedastic testing 33 4.1.3 Model Testing 34 4.2 Impact of institutions on economic growth 35 4.2.1 Voice and Accountability, Political Stability and Absence of Violence/Terrorism 36 4.2.2 Government Effectiveness, Regulation Quality 39 4.2.3 Rule of Law, Control of Corruption 41 4.2.4 Summary results of growth 45 4.3 Impact of institutions on income 46 4.3.1 Voice and Accountability, Political Stability and Absence of Violence/Terrorism 46 4.3.2 Government Effectiveness, Regulation Quality 50 4.3.3 Rule of Law, Control of Corruption 53 4.3.4 Summary results of income 56 Chapter CONCLUSIONS 58 5.1 Conclusions 58 5.2 Policy implications 59 5.2.1 Policies for economic growth 59 5.2.2 Policies for income 59 5.3 Limitations and further researches 60 vi REFERENCES 61 APPENDIX A HETEROSCEDASTIC TEST 65 APPENDIX B BREUSCH-PAGAN LM TEST FOR RANDOM EFFECTS 71 APPENDIX C HAUSMAN TEST FOR FIXED VERSUS RANDOM EFFECTS MODEL 75 vii LIST OF TABLES Table 3.1 Explaining the variables in growth model 16 Table 3.2 Explaining the variables in income model 18 Table 3.3 Institutional variables from World Bank .21 Table 3.4 Summary statistics of key variables 21 Table 3.5 Between and within variations of key variables 23 Table 3.6 Average of the institutional indicators of Southeast Asian countries in 2000-2013 27 Table 4.1 Hypothesis testing of the overall significance of regression 32 Table 4.2 Heteroscedasticity test .33 Table 4.3 Breusch-Pagan LM test for Random Effects 35 Table 4.4 Hausman test for Fixed versus Random Effects model 35 Table 4.5 Impact of institutions on growth - Voice and Accountability .37 Table 4.6 Impact of institutions on growth- Political Stability and Absence of Violence/Terrorism.37 Table 4.7 Impact of institutions on growth - Government Effectiveness 39 Table 4.8 Impact of institutions on growth - Regulation Quality .41 Table 4.9 Impact of institutions on growth - Rule of Law 42 Table 4.10 Impact of institutions on growth - Control of Corruption 43 Table 4.11 Summary of impact of institutions on growth 45 Table 4.12 Effect of institutions on income - Voice and Accountability .48 Table 4.13 Effect of institutions on income - Political 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Do institutions impact indirectly on economic growth through export trade? Do institutions impact directly on income