The Role of Institutional Quality for Economic Growth in Europe

Abstract

There is an ongoing debate within the economic growth and development literature whether institutions or human capital are more decisive for explaining differences in economic performance across countries. Our study adds further arguments to this discussion by focusing on 35 European countries. In particular, we estimate the effect of institutional quality and human capital on economic growth over the period 1996–2014 in a dynamic panel data model. We employ system GMM estimation to control for endogeneity and heterogeneity problems. Our findings suggest that institutional quality is the key driver of the growth of per capita income in Europe. At a more disaggregated level, we find that political stability, rule of law, regulatory quality, and control of corruption appear to be particularly important, whereas voice and accountability as well as government effectiveness are less relevant.

Keywords: institutional quality, economic growth, Europe, dynamic panel data models, system GMM

JEL Classification: O11, O43, O52