The paper aims to examine the role of institutions relative to economic policy and geography in explaining the differential level of development across countries over time. To that end, it attempts to construct a Development Quality Index (DQI) and an Institutional Quality Index (IQI) by using multivariate statistical method of principal components. It shows that (i) higher level of IQI along with economic policy and geography factors lead to a positive improvement in the level of DQI; and (ii) results remain robust for IQI and relatively robust for economic policy and geography even when it is compared across cross-section and panel data estimation for a set of 102 countries over 1980 to 2004. The results strongly indicate that institutions matter in the context of specific economic policy mixes and geography related factors illustrated by disease burden, etc. It demonstrates that relative influence of institutions varies across stages of development.
Development Institutions Economic policy Geography Principal component Instrumental variables Panel data