Productivity vs Institutions: An Empirical Evidence on Convergence

Abstract

Various empirical studies highlight the importance of productivity and institutions along with the traditional economic growth determinants in the growth process. Comparative role of productivity and institutions in convergence, however, remains ambiguous. This paper aims to find out the relative importance of productivity and institutions on conditional convergence across middle-income countries by including 36 countries over 1984-2009 period. Main reason for selecting this type of countries is their huge convergent potential emerged when they possess adequate level of human and physical capital.

In this study, panel data fixed and random effect techniques are applied and Monte Carlo simulation is run as robustness check. Accordingly, baseline model including education, investment, government consumption, population growth, advancement of knowledge, and depreciation as independent variable indicates conditional convergence. Moreover, productivity represented by Total Factor Productivity and Capital Productivity and institutions proxied by five different variables are included in the model separately and results reveal that total factor productivity accelerates the estimated conditional convergence more than institutions does. Bearing in mind the importance of institutions, this finding implies that immediate growth determinants boost economic growth more in the process of development.

Keywords: Convergence, Productivity, Institutions

JEL Classification: C23, O43, D24