The country’s economic growth depends on institutional quality

DECENT employment and economic growth are key objectives of sustainable development. To achieve inclusive and sustainable economic growth, the role of the government is crucial, especially in providing job opportunities and political stability for business continuity.

The development of political and institutional quality is, therefore, crucial for developing countries to promote economic growth and maintain macroeconomic stability.

Unfortunately, most developing countries have lower institutional quality compared to developed ones, and this situation remains unchanged due to corruption and poor economic institutions.

The institutional framework consists of rules and legal norms that constrain the behaviour of policymakers.

These rules and legal norms should ensure that government actions do not hinder economic growth through efficient fiscal policies and a lack of movement toward personal gain.

Empirically, previous studies have shown that good governance and institutional quality play a crucial role in ensuring effective management of macroeconomic policies to pursue economic growth and improve the quality of life for the population.

Healthy institutions ensure that a country’s resources are optimally utilised to create a robust economic ecosystem that attracts investors and consumer confidence.

Quality institutions encourage more capital and talent to enter the economy, boosting productivity and creating economic prosperity for all stakeholders.

On the other hand, weak governance can lead to negative externalities, such as moral hazard behaviour, poor management, and other negative externalities that increase transaction costs, thereby reducing investor confidence and hindering sustainable economic growth.

In the context of ASEAN, member countries are not immune to institutional quality issues, such as high government corruption.

The 2021 Transparency International survey revealed that only one ASEAN country in the Asia Pacific region ranked at the top, namely Singapore, with a Corruption Perceptions Index (CPI) score of 85, indicating higher scores are better.

(Pic credit: Bernama)

Meanwhile, other ASEAN countries are well below the national average, with CPI scores around 43.

Institutional issues in developing countries, including ASEAN members, often revolve around informal political networks and family connections, leading to a lack of transparency and accountability in government institutions.

One empirical study in ASEAN suggests that the quality of institutions, measured by the effectiveness of governance in previous periods, significantly influences economic growth.

This implies that improving institutional quality is essential to achieving economic growth in a country. Institutions govern incentives and penalties, playing a crucial role as catalysts and paving the way for rapid economic growth.

Institutional quality can affect economic growth through the efficient allocation of resources for providing goods and services in the public sector. Decisions on efficient resource allocation also contribute to the sustainability of the market.

Good institutional quality will enhance economic performance by reducing corruption levels and rent-seeking behaviour. Improved institutional quality should be complemented by up-to-date information on the current market situation, creating a conducive and business-friendly investment environment.

Consequently, the influx of foreign capital will further drive economic growth. Additionally, to achieve sustainable economic growth, the quality of tax collection and government spending needs to be supplemented with cutting-edge technology to ensure transparency, accountability, and efficiency in governance.

Given the importance of institutional quality for economic growth in ASEAN countries, participatory decision-making and transparency must be enforced to reduce corruption and uphold accountability.

Understanding the differences in institutional quality influence between regions is crucial for policymakers.

Each region has a different economic structure, requiring different institutional policies to drive growth. Each region needs to formulate and implement clear institutional policies for its economy.

In countries with low institutional quality, institutions become a means of enrichment for individuals or groups in power.

For example, as a country with the lowest rank of corruption perception index in ASEAN, Myanmar needs to prioritise accountability and reduce corruption rates to improve the quality of its institutions and subsequently enhance economic growth. – Feb 1, 2024


The author is a Postdoctoral Research Fellow at Ungku Aziz Centre for Development Studies, Universiti Malaya, and an Assistant Professor at the Department of Economics, Universitas Muhammadiyah Yogyakarta, Indonesia.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

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