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Institutional Quality, Trade Openness and Economic Growth in South Asian

Economies: Some New Insights from a Panel Data Analysis

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South Asian Studies
A Research Journal of South Asian Studies
Vol. 36, No. 1, January – June, 2021, pp. 17 – 38

Institutional Quality, Trade Openness and Economic

Growth in South Asian Economies: Some New Insights
from a Panel Data Analysis
Hafiz Muhammad Qasim
Lecturer, Department of Economics, Lahore Leads University & Ph.D Scholar, Center for
South Asian Studies, University of the Punjab, Lahore, Pakistan.
Email: [email protected]
Dr. Abdul Majid
Assistant Professor, Center for South Asian Studies, University of the Punjab, Lahore,
Pakistan.
Email: [email protected]
Dr. Atif Jadoon
Assistant Professor, Department of Economics, University of the Punjab, Lahore, Pakistan.
Email: [email protected]

ABSTRACT

The main aim of the present study is to empirically investigate into the question
whether the Institutional Quality (IQ) and Trade Openness (TO) are competitors or
complements in Economic Growth (EG) in case of sample South Asia Economies;
“India, Bangladesh, Pakistan, and Sri Lanka”. The panel data for the period of
1984-2018 has been utilized. The Fixed Effects Model (FEM) estimation
technique has been applied for empirical investigation. The empirical results of
FEM confirm the positive and statically significant impact of IQ and Interaction
Term on Economic Growth in sample countries. The positive significant results
strongly supported the hypothesis of this study, the IQ and TO are complements in
EG in the case of sample SAE. The IQ measure has also established positive and
significant effects on EG while the TO has a negative impact. Based on empirical
findings, this study recommends that the policymakers of sample countries should
make policies that strengthen the IQ, in order to improve trade and, consequently,
the EG.

Keywords: Institutions, Trade Openness, Economic Growth & Panel

Data Model
JEL Classification Codes: O43, F13, C23,

A Research Journal of South Asian Studies 17

Hafiz Muhammad Qasim, Abdul Majid & Atif Jadoon
Introduction

This research work provides new insight into the relationship between Institutional
Quality (IQ), Trade Openness (TO), and Economic Growth (EG) in the case of
sample South Asian Economies (SAE) viz “Bangladesh, India, Pakistan, and Sri
Lanka”. More precisely speaking, this study analyzes whether TO and IQ are
complements or competitors in EG. This study considers the definition of
institutions proposed by (Douglass C North, 1990):

“Institutions are the rules of the game in a society or,

more formally, are the humanly devised constraints
that shape human interaction. In consequence they
structure incentives in human exchange, whether
political, social, or economic.”

Hence, IQ has a multidimensional effect: for instance, firstly it quantifies the

standard of formal rules, such as rule of law, property rights, government stability,
governance, and democracy; secondly, it measures the informal norms like, code
of conducts, conventions, trusts and religious affairs; and last but not the least, it
checks the effects of the formal and informal rules on TO and EG of economies.
The Economists, for instance, (Douglass C North, 1990; Douglass C North &
Thomas, 1973) discuss the impact of IQ on EG while a large number of studies
establish the empirical relationship between trade openness, IQ, and EG, and
confirm the positive and significant linkages between institutions and EG
(Acemoglu & Johnson, 2005; Acemoglu, Johnson, Robinson, & Thaicharoen,
2003; Acemoglu, Johnson, & Robinson, 2001, 2002; Dollar, 1992; Dollar &
Kraay, 2002, 2003; Frankel & Romer, 1999; Hodgson, 2006; Rodrik, 1999, 2000;
Rodrik, Rodrik, Subramanian, & Trebbi, 2002).
There are two main classifications of IQ, (i) political institutions (Democracy)
and (ii) economic institutions (Property rights). Both types of institutions are
crucial for EG. Human capital (HC) and Physical Capital (PC) are considered to be
very important for EG. Strong economic institutions, like property rights, are
helpful in attracting investments in HC and PC. (Jones, 1981; Douglass Cecil
North, 1981; Douglass C North & Thomas, 1973) indicate low per capita income
as the result of absence of safeguards in property rights in most of the poor
nations. Whereas, political institutions like democracy have established rules for
the security of private property rights and investment in human and physical
capital. Political institutions also legislate different types of constraints
(punishment) or incentives for human interaction in exchange and production
((Douglass C North, 1990). Similarly, the studies of (Hall & Jones, 1999; Knack
& Keefer, 1995; Mauro, 1995; Rodrik, 1999) find a highly significant and positive
correlation between IQ and EG.

18 A Research Journal of South Asian Studies

 Institutional Quality, Trade Openness and Economic Growth in South Asian
Economies: Some New Insights from a Panel Data Analysis
As far as other important determinants of EG are concerned, many empirical
studies such as (Dollar & Kraay, 2004; Frankel & Romer, 1999; Hall & Jones,
1999; Sachs, Warner, Åslund, & Fischer, 1995) find the positive and statistically
significant relationship between TO and EG. In the same lines, Dollar (1992)
investigated an empirical relationship between TO and EG and confirm the
positive and significant relationship in trade-growth nexus. Similarly, Frankel and
Romer (1999) carried out an empirical study with a large sample of 150 countries.
Their study provides strong evidence to conclude that trade integration doubles
EG. Similarly Dollar and Kraay (2003) studied the openness measure and found
that doubling the volume of international trade resulted in enhancing the EG by
2.5% per annum.
Despite the consensus of majority of the scholars on positive trade-growth
nexus, some studies question the presumption that trade boosts EG. For instance,
De Matteis (2004) mentions that trade integration leads to creation of external
obstacles in the way of EG. Similarly Rodrik (1992) argues TO is the major source
of volatility in macroeconomic variables.
Furthermore (Levine & Renelt, 1992) claim that TO hampers the growth of
the local infant industry, hence it discourages internal investment. Lastly, (Batra &
Slottje, 1993; Leamer, 1988) state that the low-income countries fall in recession
due to trade integration.
From the above discussion, this study concludes that most of the studies
documented on trade, institutions, and EG investigate the partial impact of EG.
The main contribution of present research work in the existing body of literature is
that this study empirically examines the question whether IQ and EG are
competitors or complements in the EG of selected SAE.
This study utilizes the panel dataset covering the period of 1984-2018. To
differentiate the competitiveness or complementarity the researchers have
introduced the interaction term1. The data on IQ variables has been extracted from
the “International Country Risk Guide ICRG” dataset.
The remaining part of the paper is organized as follows: the section two is an
in-depth analysis relevant to the subject matter, section three briefly explains the
data and methodological framework, section four comprises data analysis and
interpretation, section five presents the concluding remarks of this study.

1
Interaction is the product of IQ and TO variables. The direct effect of the interaction term indicates
the trade and institutions are complement in EG.

A Research Journal of South Asian Studies 19

Hafiz Muhammad Qasim, Abdul Majid & Atif Jadoon
Figure 1. GDP Growth Rates of SAE

GDP Growth Rates of SAE

15

10

5
GDP Growth

0
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
-5

-10

-15

-20
Years

Bangladesh India Pakistan

Sri LLanka Linear (Pakistan)
Data Source: WDI Dataset

Figure 1, exhibits the growth rates of GDP from 1961 through 2017. The
negative growth rates during 1971-1973 indicate the political turmoil in
Bangladesh and Pakistan. Bangladesh economy achieved highest growth 10.95%
in 1965. While the economy of BNG facing negative growth with magnitude -
13.97%, 1973. The highest growth rate of Pakistan is 11.35% in 1971. Whereas
the lowest growth is 0.47% in 1972. Indian economy achieved highest score 9.62%
in 1989 while its economy faced negative growth rate -5.23% in 1980. Similarly,
the Sri Lanka maximum growth rate was 9.14%, and minimum growth rate was -
1.54% in 2002. Pakistan ranked top with highest score 11.35%. BNG Placed
second with 10.95%. IND and LKA on third and forth position with the scores
9.62% & 9.14% respectively.

20 A Research Journal of South Asian Studies

 Institutional Quality, Trade Openness and Economic Growth in South Asian
Economies: Some New Insights from a Panel Data Analysis
Figure 2. Trade Percentage of GDP for SAE

Trade Percentagre of GDP of SAE

100
90
80
70
Trade % of GDP

60
50
40
30
20
10
0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Years

Bangladesh India Pakistan

Sri Lanka Linear (Pakistan)

Data Source: WDI Dataset

Figure 2, shows the growth in Trade % of GDP over time for sample south
Asian countries. The maximum trade of Bangladesh was 6.49% in 2008, while
minimum value was1.97% in 1976.Similarly, India economy highest trade volume
was 13.60% in 2006, and lowest volume was 2.1% in 1976. The highest trade
score of Pakistan was 9.37% in 2005, whereas the lowest score was 4.23% in
2000. The Sri-Lankan economy achieved maximum 19.7% trade volume in 2001.
And the minimum score was 4.89% in 1976. Sri-Lanka seems more open economy
in terms of trade. Sri-Lanka ranked top subsequently, India, Pakistan, and then
Bangladesh.

A Research Journal of South Asian Studies 21

Hafiz Muhammad Qasim, Abdul Majid & Atif Jadoon
Figure 3. IQ of SAE

Figur 3: IQ of SAE
70
60
Overall Score

50
40
30
20
10
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Years

Bangladesh India
Pakistan Sri Lanka
Linear (Pakistan)

Dara Source: Heritage Foundation

Figure 3, depicts the average condition of IQ in SAE. Over-all score of

institutional index, ranging from 0-100. Zero, means absence of IQ whereas score
of nearly 100 countries is mostly free. Score 0 to below 50 means repressed, 50 to
60 un-free, while 65 and above indicate strong IQ. SAE falls in the average
category. These nations have improved their IQ condition with the passage of
time. In a nutshell, Sri Lanka is on top with the highest score 66, Pakistan is
second with 58.4, India is third with 56.2, and Bangladesh is in the fourth position
with overall score of 55.1.

Research objectives

This study focuses on the following Objectives:

 To empirically examine the relationship between Institutional Quality
(IQ), Trade Openness (TO), and Economic Growth (EG)
 To examine whether IQ and, TO are competitors or complements in EG
in SEA

Literature review

During the past three decades, a large number of research papers have documented
the key drivers of EG. These studies (Acemoglu et al., 2001; Dollar & Kraay,
2003; Hall & Jones, 1999; Mankiw, Romer, & Weil, 1992; Douglass Cecil North,

22 A Research Journal of South Asian Studies

 Institutional Quality, Trade Openness and Economic Growth in South Asian
Economies: Some New Insights from a Panel Data Analysis
1981; Romer, 1989; Solow, 1956; Swan, 1956) identify many important indicators
of EG, for instance, technology, infrastructure, human capital, education, physical
capital, innovation, geographical location of the country. The present research
work explores the significant role of TO and IQ for the economy of sample
countries.
Dollar (1992) investigated the link between EG and trade liberalization for the
period 1976-1685. He has suggested two indices namely, exchange rate variability
and exchange rate distortion index for measuring trade. This study concludes that
the countries with international trade grew rapidly as compared to close
economies. Further (Sachs et al., 1995) very comprehensively and empirically
demonstrated the role of TO and EG. They reported the growth rates of open low
income and high- income nations are 4.49% and 2.29% per annum individually.
While the closed high income and low-income countries 0.74% and 0.69 % grew
annually. Edwards (1998) to strengthen the proposition that is the trade enhances
the EG, he studied the nexus between TO and total factor productivity (TFP) with
a relatively new and large dataset of 93 countries. To check the robustness of
estimates, this study uses 9 different alternative proxies. The empirical findings of
this research work suggest that the economies were more open for international
trade experienced rapid TFP growth. Whereas Frankel and Romer (1999)
addressed the methodological and endogeneity problems related with the trade-
growth association. They estimate the results with the instrumental variable
approach and gravity model. Empirical findings surprisingly confirm the positive
and statistically significant relationship between instrumental TO and actual trade
volume.
Matthew and Adegboye (2014) probe linear association between TO, IQ, and
EG in 30 sample sub-Saharan African countries. Cross-sectional time-series data
over the period of 1985-2012 has been utilized. Least Square Dummy Variable
LSDV, Pooed OLS, and Generalized Method of Moment GMM confirm the
positive and statistically significant relationship between TO, IQ, & EG in case all
sample countries. Based on empirical findings, this study recommends that the
sample countries should adopt such procedures that strengthen the IQ and promote
free trade, international and international trade to enhance the EG and
development of the nations concerned.
Hadhek and Mrad (2015) analyzed the dynamic relationship between the
policy of trade openness, institutions, and EG in the sample of 23 OECD countries.
IQ is measured by voice and accountability, rule of law, regulatory quality,
democratic accountability, political stability, control of corruption, and
government effectiveness. The findings of this study confirm the positive effect of
IQ on the relationship between trade openness, and EG in the sample countries.
George (2019) examined the nexus among EG, democracy, and TO in 56
countries selected form 4 regions, namely, “Africa, Latin America, Asia, and
A Research Journal of South Asian Studies 23
Hafiz Muhammad Qasim, Abdul Majid & Atif Jadoon
Europe”. Panel data over the period of 1996-2012 were utilized. The study
divided the sample countries into two broad classifications i.e., democratic regime
and authoritarian regime. The three stage-least square 3SLS econometric model
confirmed the direct negative impact on EG while an indirect positive effect of
democratic institutions on EG through TO channel. Similarly Farooq, Chaudhary,
and Nawaz (2019) looked at the long-run and short-run linkages between TO, IQ,
and EG in the case of Pakistan. Their study applied a relatively new co-integration
approach proposed by (Bayer & Hanck, 2013). It confirmed the long-run
relationship between institutions, trade openness, and industrial GDP. IQ and
openness had a positive and significant impact on industrial GDP in Pakistan.
Bonnal and Yaya (2015) investigated the strong positive trade openness, EG,
and education. They compiled a large data set of 200 sample countries from all
over the world. The findings of their study confirmed that political institutions did
not hinder EG. Similarly, (Le, 2009) empirically evaluated the association among
remittances, trade TO, IQ, and EG. This study included 123 sample counties with
30 time periods. He estimated association between both static and dynamic panel
data models. The findings of this research work revealed that IQ and TO had a
strong positive and statistically significant impact on the EG of sample economies
while remittances had a comparatively lower effect. The policymakers of those
nations advised to emphasize strengthening the IQ and trade in order to enhance
the EG and development of their economies.
The main focus of the surveyed empirical literature was to estimate the partial
impact of openness and institution in EG. This study tested the new insight in
nexus between trade, institution, and EG of south economies. The next section
briefly discusses the data and econometric methodology applied for the study.

Data and methodology

This section briefly explains the data sources, variables description, and
econometric strategy for testing the hypothesis of this research work.

Data sources

To analyze the nexus between TO, IQ, and EG, this study uses the panel data from
1985 to 2018 in the case of sample countries. The data on variables of interest, like
Real GDP, Exports imports have been collected from World Development
Indicators (WDI) CD Room 2019 and Penn World Table 9.0 (PWT). The data on
institutional variables, such as, “Government Stability, Socioeconomic Conditions,
Investment Profile, Internal Conflict, External Conflict, Corruption, Military in
Politics, Religious Tensions, Law and Order, Ethnic Tensions, Democratic
Accountability, & Bureaucracy Quality has been taken from International Country
Risk Guide (ICRG) Group.”

24 A Research Journal of South Asian Studies

 Institutional Quality, Trade Openness and Economic Growth in South Asian
Economies: Some New Insights from a Panel Data Analysis
Methodology

This section briefly explains the modeling framework used in this present
manuscript. To explore the nexus between TO, IQ, and EG, the present study uses
panel data modeling. Panel data is the special type of pooled data in which the
homogeneous cross-section (individual, entities, or countries) is observed over a
time at equal intervals. According to Hsiao (2007) Panel data also called
longitudinal data has many benefits over time series or cross-sectional data. For
instance, panel data overcomes the problem of data deficiency and it takes care of
the problem of heterogeneity. Due to the combination of cross-section and time-
series, it is more informative and also it has more variability. It overcomes the
problem of co-linearity. It is more efficient as compared to cross-sectional data or
time-series data.

Modeling framework in panel data

Pooled data is the combination of the time series and cross-sectional data, whereas
the panel data is the special type of pooled data in which the data on similar
individual units, like firms, individuals, or countries have collected over time. In
the case of panel data, the three types of models are estimated, for instance Pooled
OLS or Constant Coefficient Model, Fixed Effects Model (FEM), and Random
Effects Model (REM). The model choice depends upon the different diagnostic
tests. For instance, F Test or Redundant Fixed Effects Test is estimated for choice
between Pooled OLS or FEM. The null hypothesis of this test is the pooled OLS is
appropriate while alternatively the FEM. The second test is the Housman
Specification Test proposed by Housman (1978). The null hypothesis is FEM
while the alternate hypothesis is REM is a more suitable model. The third test is
the Lagrange Multiplier LM test used to apt between REM and FEM. The null
hypothesis is in the favor of REM model (Greene, 2003; Gujarati, 2009;
Wooldridge, 2002).

Model Specification

To explore the impact of TO and institutional variables on EG, the several

functional forms had been experimented, however, the best is given below,

(
) ( )

A Research Journal of South Asian Studies 25

Hafiz Muhammad Qasim, Abdul Majid & Atif Jadoon

The econometric model of the above-mentioned functional form is given below;

(
) ( )

Where
L= natural log
= Real GDP per capita the proxy of EG
= trade volume the proxy of TO, it is the sum of exports plus imports
divided by GDP.
= it is an interaction term. The interaction term is the product of trade
volume and institutions.
= log of investment profile
= log of the military in politics
= log of religious tension
= log of democratic accountability
Intercept of term = ,
= subscripts I indicate the cross-sectional units while t uses for numbers of
times
= epsilon is the white noise error term

Fixed effects model (FEM)

FEM estimation technique has been applied to look at the link between TO, IQ,
and EG. FEM is also called the Least Square Dummy Variable Model (LSDV).
The special feature of fixed effects regression, it incorporates the separate intercept
for each cross-section to control the time-invariant unobserved individual
characteristics that may be associated with the observed explanatory variables. The
phrase “fixed effects” is used in the econometric literature due to the following
reason. The intercept of each entity varies across cross-sectional unit but does not
change across time i. e., time-invariant (Baltagi, 2008; Greene, 2003; Gujarati,
2009).
Let’s consider the following Panel data model:

( )
Where:
= (include the country-specific unobserved effects).
(indicate the cross-sectional units),
Here our objective is to compute that is the average change in due to change
in . To do this, let’s consider:
, substituting in model (3) to obtain:
( )

26 A Research Journal of South Asian Studies

 Institutional Quality, Trade Openness and Economic Growth in South Asian
Economies: Some New Insights from a Panel Data Analysis
The general form of the fixed effects estimator is as follow:
( )
The above model is called the Fixed Effects Regression, is the
intercept, the subscript i on intercept term indicates that each cross-sectional unit
varies across countries i. e., time-invariant but does not do so across the time.

F-Test

In panel data modeling, F-test is used for efficient model selection between Pooled
OLS and FEM. Under the null hypothesis pooled OLS is suitable whereas
alternatively FEM is efficient (Baltagi, 2008; Greene, 2003; Hsiao, 1979). The test
statistic of F-test is as follows:

( )

Empirical results and interpretation

The previous section in detail discussed the data, data sources, variables, panel
data modeling framework, model specification, and diagnostic tests that were apt
to examine the hypotheses of current research work. This section consists of
tables, graphs, and panel data, estimated model (Fixed Effect Model) and their
interpretation (Wathen, Marchal, & Lind, 2017).

Descriptive statistics

In statistics, Descriptive statistics usually consist of central tendencies and

measures of dispersion. The main objective of descriptive statistics is to provide
the summary statistics for series or variables included in this research work.

A Research Journal of South Asian Studies 27

Hafiz Muhammad Qasim, Abdul Majid & Atif Jadoon
Table 1. Descriptive statistics

Variable Obs Mean Std.Dev. Min Max

Lrgdppc 140 6.876 .564 5.956 8.278

Lto 140 3.592 .47 2.503 4.485

Lip 140 1.835 .26 .882 2.286

Lmp 133 .818 .662 -2.079 1.749

Lrt 140 .753 .489 0 1.609

Lda 138 1.249 .447 0 1.792

Lemp 136 3.81 1.54 1.474 6.288

Lrnna 137 13.823 1.507 11.764 17.214

literm_0 140 5.016 .554 3.776 6.047

Source: Author’s own estimation

Table 1 shows the descriptive statistics of the variables included in this study.
Summary statistics include the total number of observations, mean, standard
deviation, minimum, and maximum values in the datasets. The overall mean score
of lrgdppc is 6.876, while the std. dev. is 0.564. The max score of lrgdppc 8.728
and min is 5.956. The average scores of institutional variables are 1.835, 0.818,
0.753, & 1.249, respectively. while the std. dev. of institutional measures is 0.26,
0.662, 0.489, & 0. 447.The central value of the interaction term is 5.016 and the
std. dev. is 0.554. Similarly, the mean score of lto is 3.592 and std. dev. is 0.47.
The minimum value of lto is 2.503 while maximum score is 4.485. The average
score of lemp 3.81 and std. dev. is 1.54. The max and min values of lemp are 6.288
and 1.474 respectively. The mean score of lrnna is 13.823 whereas the std. dev. is
1.507. The max and min scores of lrnna are 17.2 and 11.7 respectively. These
results confirmed that there is no outlier in the given data sets.

28 A Research Journal of South Asian Studies

 Institutional Quality, Trade Openness and Economic Growth in South Asian
Economies: Some New Insights from a Panel Data Analysis
Table 2. Cross-Correlation

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Variable
s
(1) 1.00
lrgdppc 0
(2) lto 0.76 1.00
4 0
(3) lip 0.55 0.36 1.00
5 0 0
(4) lmp 0.17 0.14 0.21 1.00
2 6 7 0
(5) lrt - 0.27 - 0.49 1.00
0.00 5 0.10 7 0
4 6
(6) lda 0.27 0.23 0.36 0.65 0.37 1.00
6 0 8 2 5 0
(7) lemp - - 0.13 0.26 - 0.24 1.00
0.38 0.58 1 2 0.21 8 0
4 4 0
(8) lrnna 0.14 - 0.39 0.36 - 0.37 0.81 1.00
6 0.18 6 6 0.31 8 9 0
5 3
(9) 0.79 0.94 0.54 0.25 0.24 0.39 - - 1.00
literm_0 3 1 3 1 3 3 0.40 0.00 0
4 2

Source: Author’s own estimation

Table 2 presents the results of cross-correlation among the variables. The

estimated results of correlation coefficients show the lto, lip, and iterm_0 have
strong positive correlation with lrgdppc with the correlation coefficients of 0.76,
0.56, & 0.79 respectively. While the institutional variables like, lmp and lda have
weak positive correlation with lrgdppc. The correlation between lemp and lrgdppc
is -0.38 while lrnna positively correlated with lrgdppc with the magnitude of 0.14.

A Research Journal of South Asian Studies 29

Hafiz Muhammad Qasim, Abdul Majid & Atif Jadoon
Fixed effects models (FEM) (1-4) dependent variable log real gdp per
capita (LRGDPPC)

This section is specifically designed to test the hypothesis whether TO and IQ are
competitors or complement in economic development. Theory suggests that IQ
and trade are complements if the estimated interaction term coefficient is positive.
On the other hand, both trade and institutions are competitors if the interaction
term is negative (Bhattacharyya, 2012; Bhattacharyya, Dowrick, & Golley, 2009)

Table 3. fixed effects models (FEM) (1-4) dependent variable log real gdp per capita (LRGDPPC)

(1) (2) (3) (4)

Variables Fixed Effect Fixed Effect Fixed Effect Fixed Effect
Model 1 Model 2 Model 3 Model 4

Lto -0.135*** -0.201*** -0.134*** -0.187***

(0.0377) (0.0349) (0.0366) (0.0368)
Lip 0.0847***
(0.0255)
Lemp -0.447*** -0.336*** -0.408*** -0.412***
(0.0492) (0.0488) (0.0468) (0.0492)
Lrnna 0.941*** 0.906*** 0.911*** 0.941***
(0.0240) (0.0245) (0.0244) (0.0247)
literm_0 0.0122 0.0889*** 0.0582** 0.0709**
(0.0315) (0.0277) (0.0283) (0.0304)
Lmp -0.0387***
(0.0109)
Lrt -0.0832***
(0.0206)
Lda -0.0210
(0.0152)
Constant -4.184*** -4.066*** -3.936*** -4.228***
(0.165) (0.160) (0.176) (0.167)
Fixed Effect Test 679.63*** 872.16*** 783.68*** 736.75 ***
that all u_i=0:
Observations 136 129 136 134
R-squared 0.980 0.984 0.981 0.980
Number of id 4 4 4 4
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

Table 3 summarize the empirical results of Fixed-Effect models (1-4). In this

table, columns present the different regression models. Whereas the rows reported

30 A Research Journal of South Asian Studies

 Institutional Quality, Trade Openness and Economic Growth in South Asian
Economies: Some New Insights from a Panel Data Analysis
the repressors and diagnostic tests. The dependent variable is lrgdppc while the
independent variables are trade % of GDP (lto), interaction term (literm_0),
employed labor force (lemp), real physical capital (lrnna), and institutional
variables, investment profile (lip), military in politics (lmp), religious tension (lrt),
& democratic accountability (da). All variables are in the log form.
Column 1 reported the estimated results of FE model 1. Trade openness is
negatively associated with lrgdppc. It is statistical significant at one percent level
of significance. One percent change in lto, hamper the lrgdppc by 0.15 percent.
Investment profile lip positively associated with lrgdppc. One percent increase in
lip, the lrgdppc rises by 0.085 percent. Labor and capital are considering the
important drivers of economic growth and production function (Mankiw et al.,
1992; Solow, 1956; Swan, 1956). The labor force has a negative while physical
capital positive impact on lrgdppc. One percent change in labor force, hinder the
lrgdppc by 0.45 percent. Whereas one percent change in lrnna, the lrgdppc
increases by 0.94 percent. Interaction term capture the combine effect of trade and
institutions. The literm_0 positively associated with the lrgdppc. These findings
similar to (Bhattacharyya, 2012; Gries & Redlin, 2012; Rodrik, Subramanian, &
Trebbi, 2002).
Column 2 exhibits results of FE model 2, similar to previous specification, the
lto has negative and significant impact on lrgdppc. One rises the lto, reduces the
lrgdp by 0.20 percent during the period 1984-2018. Institutional quality was
measured by military in politics lmp. lmp negatively connected with lrgdppc. One
percent increase in the interventions in government, hamper the lrgdppc by 0.039
percent. These results in the line with the literature (Abdullah, Habibullah, &
Baharumshah, 2020; Acemoglu et al., 2002; Acemoglu, Johnson, & Robinson,
2005; Akpan & Atan, 2016; Bhattacharyya et al., 2009; Rodrik, Subramanian, &
Trebbi, 2004). Similar to previous specification, labor force negatively associated
with lrgdppc, while capital positively affected the lrgdppc. the literm_0 has
positive and significant impact on lrgdppc.
Column 3 summarize the findings of FE model 3, likewise previous two
specifications, the results of trade and institutions consistent with this specification
as well. In this specification, institutions were measured by religious tension lrt.
Alternatively, by mitigating the lrt, accelerate the lrgdppc. The lto and lrt
negatively correlated with lrgdppc. one percent increase in lto and lrt, decreases
the lrgdppc by 0.13 & 0.083 percent respectively. Similarly, labor force has
negative and significant impact on lrgdppc. one changes the labor force reduces
the lrgdppc by 0.41 percent. On the other hand, capital shows the direct linkages
with lrgdppc. one percent increase in capital, lrgdppc stimulated by 0.91 percent.
Like previous models, literm_0 positively correlated with economic growth in
sample countries. The combine positive effect of trade and IQ has confirmed that
TO and IQ complement with each other.
A Research Journal of South Asian Studies 31
Hafiz Muhammad Qasim, Abdul Majid & Atif Jadoon
Column 4 presented the results of FE model 4, like last three models, the
results of TO and IQ analogous. The TO and democratic accountability da the
proxy of institutions have negative and significant impact on economic growth.
One percent enhance the lto, lrgdppc reduces by 0.19 percent. While one percent
increases the da, hamper the lrgdppc by 0.021 percent in sample countries. Similar
to previous regressions, the labor force has negative whereas capital positively
correlated with lrgdppc. one percent increase in the labor force, lrgdppc decreases
by 0.41 percent. While one percent increases the capital, lrgdppc rises by 0.94
percent. These findings consistent with (Lucas, 1988; Mankiw et al., 1992; Solow,
1956; Swan, 1956) in the literature. Similarly, literm_0 positively associated with
lrgdppc. one percent increase in literm_0, intensifies the lrgdppc by 0.071. The
positive and significant results of literm_0 support the hypothesis of this study, TO
and IQ are complements in EG. The results of this study also support and similar
to (Bhattacharyya et al., 2009). To verify the robustness of the empirical results of
this study has used `the different measures of IQ. Our results are consistent with all
specifications. The interaction term has a positive and statistically significant
impact on lrgdppc in all specifications (1-4). Trade openness appear negative.
These results support the (Batra & Slottje, 1993; Leamer, 1988; Levine & Renelt,
1992; Rigobon & Rodrik, 2005) studies in the literature. They investigated the
effects of democracy, rule of law and TO on EG and found a negative association
between openness on EG and opposite to (Dollar & Kraay, 2003; Frankel &
Romer, 1999; Lee & Kim, 2009). The results of the F-test for all four models,
p<0.05=679.63***, p<0.05=872.16***, p<0.05=783.68***, & p<0.05=736.75 ***
rejected the H0= pooled OLS model that is FEM is appropriate. This study also
estimated the Pooled OLS and Random Effect Models 2. The R-square is the ratio
of explained variation to total variation. It is the model selection criterion. The
range of R2 between 0-1. The coefficient of R2 near one implies that the model is
good. The estimated R2 =0.98, in all four models. It implies that the explained
variation is approximately 98%. The number of id represent the cross-sections.
While total number of observations are 136.

Conclusion and recommendations

The key focus of the present research work is on analyzing whether the IQ and TO
are competitors or compliments in EG in the case of SAE countries. The
longitudinal data for the duration of 1984-2018 has been utilized. EG is measured
by lrgdppc. TO is measured by trade % of GDP. It is calculated by summing up
“exports of goods and services plus imports of goods and services divided by
current GDP”. The IQ variables have been taken from the International Country
Risk Guide (ICRG). To check the robustness, this study includes four different
institutional variables in the regression model, namely, “Investment Profile,

2
For Pooled OLS & REM, See Appendix 2-3.

32 A Research Journal of South Asian Studies

 Institutional Quality, Trade Openness and Economic Growth in South Asian
Economies: Some New Insights from a Panel Data Analysis
democratic accountability, Military in Politics, and Religious Tensions.” To
analyze the hypothesis, current research, introduced the interaction term in the
regression model. The TO negatively associated with lrgdppc. While the IQ
positively correlated with lrgdppc. These findings similar to (Gries & Redlin,
2012; Jawaid, 2014; Umer, 2014). the combine effect of TO and IQ positively
associated with lrgdppc. these results are consistent with all four estimations. The
positive and statistically significant impact of literm_0 on lrgdppc has confirmed
that IQ and TO are complements in the economic development. These results
support the hypothesis of this study that IQ and TO are complements in the
economic development of sample countries. These findings similar to studies of
(Bhattacharyya, 2012; Bhattacharyya et al., 2009; Rigobon & Rodrik, 2005) in the
literature. Similarly, lemp negatively associated while lrnna positively connected
with largppc. These results analogous to (Mankiw et al., 1992; Robert, 1988;
Solow, 1956; Swan, 1956). Based on empirical findings, this study recommends
that the government and policymaker of these countries should make such policies
which established the strong institutional framework to improve the living
standards of the masses of sample countries. Although the integration negatively
correlated with lrgdppc, but the combine effect of trade and institutions are
positive. This implies that institutions and trade are complement in economic
growth, and trade has a potential to accelerate lrgdppc. The policymaker of sample
countries should formulate such policies which encourage trade, especially export
oriented growth policies. The labor force appeared negative, the government
should introduce the labor reforms to increase the labor productivity for positive
contribution in output per capita. Similarly, real capital has positive impact on
lrgdppc. the policymaker should apt steps to improve infrastructure for accelerate
growth.

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Appendices

Appendix Table 1: List of Sample Countries

Sr. No Country Name Abbreviation Region
1 Bangladesh BGD South Asia
2 India IND South Asia
3 Pakistan PAK South Asia
4 Sri Lanka LKA South Asia

Appendix Table 2: Pooled OLS Models (1-4) Dependent Variable Log Real GDP Per
Capita
(LRGDPPC)
(1) (2) (3) (4)
VARIABLES Pooled OLS Pooled OLS Pooled OLS Pooled OLS
Model 1 Model 2 Model 3 Model 4

Lto -0.0813 -0.266* -0.306** -0.271*

(0.152) (0.160) (0.150) (0.152)
Lip 0.373***
(0.0971)
Lemp -0.407*** -0.417*** -0.427*** -0.420***
(0.0313) (0.0344) (0.0363) (0.0340)
Lrnna 0.365*** 0.386*** 0.397*** 0.383***
(0.0263) (0.0283) (0.0318) (0.0277)
literm_0 0.320** 0.541*** 0.556*** 0.531***
(0.125) (0.122) (0.112) (0.121)
Lmp 0.00206
(0.0328)
Lrt 0.0540
(0.0460)
Lda 0.0491
(0.0524)
Constant 1.360*** 1.368*** 1.269*** 1.412***
(0.238) (0.266) (0.259) (0.258)

Observations 136 129 136 134

R-squared 0.866 0.854 0.853 0.854
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

A Research Journal of South Asian Studies 37

 Hafiz Muhammad Qasim, Abdul Majid & Atif Jadoon
Appendix Table 3: Random Effects Models (1-9) Dependent Variable Log Real GDP
Per Capita (LRGDPPC)

(1) (2) (3) (4)

Variables Random Effect Random Effect Random Effect Random Effect
Model 1 Model 2 Model 3 Model 4

Lto -0.0813 -0.266* -0.306** -0.271*

(0.152) (0.160) (0.150) (0.152)
Lip 0.373***
(0.0971)
Lemp -0.407*** -0.417*** -0.427*** -0.420***
(0.0313) (0.0344) (0.0363) (0.0340)
Lrnna 0.365*** 0.386*** 0.397*** 0.383***
(0.0263) (0.0283) (0.0318) (0.0277)
literm_0 0.320** 0.541*** 0.556*** 0.531***
(0.125) (0.122) (0.112) (0.121)
Lmp 0.00206
(0.0328)
Lrt 0.0540
(0.0460)
Lda 0.0491
(0.0524)
Constant 1.360*** 1.368*** 1.269*** 1.412***
(0.238) (0.266) (0.259) (0.258)

Observations 136 129 136 134

Number of 4 4 4 4
id
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0

_______________________________

38 A Research Journal of South Asian Studies

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