The Role of Institutions in Poverty Reduction

Abstract

In the last decades, institutional economics has gained increasing relevance in the economic literature, highlighting the essential role of institutions in enhancing socio-economic development. Although the relationship between institutional factors and people at risk of poverty rate has been extensively explored by many researchers important gaps remain in the literature regarding the intensity and variability on this impact, which may be higher or lower depending on the period and geographical area covered. Moreover, recent economic and social challenges within the European Union justify a reassessment of these relationships in the current economic context. The analysis applied Panel FGLS to estimate the impact of business freedom and government integrity (two of the most relevant institutional factors) on poverty rate in European Union over the period 2010-2024. The assessment process highlights an important negative impact of both factors on poverty rate, this raising the need to reflect corruption and business environment challenges in government policies. Nevertheless, human capital vulnerabilities, particularly early school leaving and poor health status, remain major drivers of poverty. Consequently, poverty alleviation may become a feasible objective only if EU Member States and European authorities will promote a balance policy approach by enhancing human capital without affecting economic freedom or increasing corruption.