The Impact Of Institutional Quality On Labour And Economic Growth

The seminal work of Daron Acemoglu, Simon Johnson and James Robinson, the Nobel Laureates in Economics in 2024, shows that institutional quality is the fundamental determinant of long-run economic growth across nations. Efficient institutions confer property rights and freedom of exchange, which enhance labour productivity, share of labour income in total output and GDP growth. Poor institutions are exploitative and divisive, often in favour of a minority of elites than the masses. A skewed distribution of resources reduces the incentives to work, save, innovate and invest. In this paper, we examine the impact of human capital and pro-labour institutional quality on GDP growth, in terms of a simple neoclassical model. We illustrate that higher labour productivity and share of labour income in total output, cet. par., increase the steady-state output growth rate. These results have serious policy implications for the pattern of government expenditure and foreign aid, in order to accelerate GDP growth rates. They also highlight the need for appropriate institutional reforms, policy initiatives to address demand- side constraints and sustained efforts to reap demographic dividends