The impact of politico-economic institutions on economic performance : evidence from East Asia and Latin America, 1990-2009

Abstract

How do the political and economic institutions of a country affect its economic performance? What is the appropriate structure of politico-economic institutions for economic development? These questions have been of significant interest among not only economists and political scientists, but also policymakers in all countries around the world. This is because knowledge of the relationship between politico-economic institutions and economic performance will enable them to develop political and economic institutions which are conductive to their countries’ economic growth and efficiency. The objective of this study is three-fold: to study the political and economic institutions in East Asia and Latin America, to examine the relationship between politico-economic institutions and economic performance in selected East Asian and Latin American countries over the period of 1990-2009; and to help improve policy decisions with respect to institutional building and economic efficiency in developing countries. This study employs a time-series, cross-country analysis. Unlike most empirical studies on the subject which take only political institutions into consideration, this study determines the effects of both political and economic institutions on economic performance. These effects need to be studied together in order to capture various aspects of institutions. In this study, the comparison of East Asia and Latin America is driven by the belief that Latin America has much to learn from East Asian countries’ economic success. This study adopts both time-series and cross-country approaches rather than only a cross-country approach, which is more common. Using cross-country data from 10 East Asian countries and 17 Latin American countriesover the period from 1990 to 2009, this study relies on secondary data by employing cross-country economic and political data from several sources. Descriptive statistics reveal that East Asia is ahead of Latin America in terms of economic performance gauged by economic growth, unemployment, poverty, and income inequality. In addition, the political institutions in East Asia are more effective than those in Latin America, while the economic institutions in East Asia are less effective than those in Latin America. The results from the empirical analysis indicate thatin the full sample, the institutional factor which has a significant impact on annual growth rates of GDP per capita is rule of law. However, the relationship is in an unexpected way. The institutional factor which has a significant influence on unemployment rates in East Asia and Latin America is economic freedom. That is, the more economic freedom, the lower are the unemployment rates. It was also found that that regulatory quality has a significant and negative impact on the percentage of the population falling below the poverty line. In addition, the institutional factor which has a significant impact on income inequality in East Asia and Latin America is political rights. However, the relationship is in an unexpected way. That is, the greater the political rights, the higher is income inequality. In the case of East Asia, there is no institutional factor that has a significant impact on annual growth rates of GDP per capita. The institutional factors which have an impact on unemployment rates in East Asia are political rights, press freedom, rule of law, and control of corruption. Political rights and rule of law have the expected impact on unemployment rates, while press freedom and control of corruption have an unexpected impact. The institutional factor which affects the percentage of the population falling below the poverty line in East Asia is economic freedom. Nevertheless, the relationship is in an unexpected way. The finding of this study indicates that economic freedom does not guarantee poverty reduction. Moreover, press freedom and economic freedom have the expected impact on income inequality in East Asia, while control of corruption has an unexpected impact.