Institutional Quality and Welfare in BRICS-T Countries: A Panel Data Analysis

Abstract

The primary aim of this study was to investigate the nexus between institutional quality and welfare in BRICS-T countries. To achieve this objective, the World Bank Worldwide Governance Index was employed as a proxy for institutional quality, while its impact on economic growth, serving as a key indicator of welfare, was analyzed over the period spanning from 2002 to 2014. By utilizing the Worldwide Governance Index, which encompasses various dimensions of institutional quality including rule of law, government effectiveness, regulatory quality, control of corruption, and political stability, this study sought to comprehensively assess the quality of governance across BRICS-T nations. The analysis focused on examining the extent to which variations in institutional quality, as measured by the Governance Index, influenced economic growth dynamics within the BRICS-T countries. Economic growth was chosen as a pivotal determinant of welfare, reflecting the overall prosperity and standard of living experienced by individuals within these nations. Through rigorous econometric analysis and statistical modeling techniques, this study aimed to elucidate the nuanced relationship between institutional quality and economic growth, shedding light on the mechanisms through which institutional factors contribute to the welfare outcomes of BRICS-T countries. By examining data spanning more than a decade, from 2002 to 2014, this study provided valuable insights into the long-term trends and dynamics shaping the relationship between institutional quality and welfare in the BRICS-T context. The findings of this research have significant implications for policymakers, informing strategic decisions aimed at enhancing institutional quality and fostering sustainable economic development to improve overall welfare outcomes in these countries. The analysis revealed cross-sectional dependence and heterogeneity in the slope coefficients across the panel. Subsequently, employing the panel cointegration test proposed by Westerlund and Edgerton (2007), evidence of cointegration among the variables was established. In light of these findings, the Panel Seemingly Unrelated Regressions method was selected as the preferred approach for estimating the coefficients. By employing the Panel-SUR technique, this study accounted for the interdependencies and variations in the relationships between the variables across the panel of BRICS-T countries. This methodological choice allowed for the simultaneous estimation of multiple regression equations, accommodating the cross-sectional dependencies and potential heterogeneities observed in the data. The decision to employ Panel-SUR reflects a robust approach to addressing the complexities inherent in panel data analysis, particularly in the context of studying the relationship between institutional quality and welfare across a diverse group of countries over an extended period. The application of the Panel Seemingly Unrelated Regressions method proves particularly advantageous when the number of observational units is less than the number of time periods, and notably so when the number of units is fewer than 12. Leveraging this method has facilitated robust analyses despite the constraints posed by the panel data structure. The empirical findings underscore a positive relationship between welfare and several key factors, including institutional quality, gross capital formation, and trade. These results highlight the importance of robust institutional frameworks, investment in capital formation, and engagement in international trade as drivers of improved welfare outcomes across the BRICS-T countries. The significance of the inflation coefficient, particularly its negative sign in the cases of Russia and South Africa, underscores the critical importance of addressing inflationary pressures within these economies. Policymakers stand to benefit from implementing substantive reforms aimed at enhancing institutional quality and enacting positive policy measures. By prioritizing these reforms, policymakers can contribute to a tangible improvement in the welfare outcomes of the respective countries. It is imperative for decision-makers to heed these findings and incorporate them into the formulation and implementation of economic policies. By doing so, they can effectively navigate the complexities of their economic landscapes and work towards fostering environments conducive to sustainable growth and enhanced welfare for their populations.