Institutions and Economic Growth: A Panel Granger Causality Analysis

This paper revisits the direction of causality between institutions and economic growth for a sample of 119 countries over the period 1999-2018, divided into four groups according to income level: high income, upper middle income, lower middle income and low income. The study uses two institutional datasets, the International Country Risk Guide (ICRG) for the main estimation and the World Governance Indicators (WGI) for check the robustness of the results. Using the non-causality Granger test in a heterogeneous panel model with fixed coefficients, developed by Dumitrescu and Hurlin (2012), the empirical results show a unidirectional relationship for all panels except for lower middle-income countries, where causality is bidirectional. The findings also suggest that causality patterns are heterogeneous and depend on the level of development of the countries. Based on these results, we propose some interesting recommendations. The types of reforms to prioritize must be determined according to the direction of causality between institutions and economic growth. Moreover, heterogeneous causality implies the implementation of different policies adapted to the level of development of each panel, rather than considering a common policy.