INFLUENCE OF INSTITUTIONAL FACTORS ON THE ECONOMIC EFFICIENCY OF THE COUNTRIES OF THE WORLD

Abstract

This research focuses on the problem of uneven economic development of the world economy.  Within the modern scientific paradigm, uneven economic development is studied through the prism of effectiveness of institutional mechanisms of the state as the main tool to create conditions for economic growth. The goal is to show the effect of economic and institutional variables (namely the level of economic freedom, the level of political freedom which takes into account political rights and civil liberties, human capital, labor force and gross fixed capital accumulation) on economic growth which is calculated using econometric models for panel data with fixed effects of countries and fixed temporal effects. The model is built for 119 countries of the world and takes into account observations in 1990, 2000 and 2010. A correlation analysis is made which shows that the correlation coefficients between most of the variables are high which confirms the assumption that economic freedom is a prerequisite for economic development and contributes to the improvement of the quality of life of the people. The paper also presents a generalized translogarithmic model constructed on the basis of the production function with constant elasticity of the substitution (CES function), which is a nonlinear modification of the Cobb-Douglas function. The calculations prove that, in particular, the level of political and economic freedoms that are taken by institutional factors significantly influence the economic efficiency. The relation between efficiency and failed state index is identified, indicating that the controllability of the state’s borders and political stability largely affect economic development because wars and conflicts have the most devastating impacts on the economy.