WHAT DRIVES THE QUALITY OF INSTITUTIONS IN ASIAN ECONOMIES? DIRECTIONS FOR ECONOMIC REFORMS

Abstract

This study constructs an indicator of institutional quality for eleven Asian countries using exploratory factor analysis and subsequently identifies its possible determinants. We employed the data from ICRG, WDI and DPI for the period from 1984 to 2010. Our panel data regression analysis revealsan increase in the efficiency of the tax system, income per capita, international openness, adult literacy rate along with a decrease in the level of national indebtedness and military spending have the potential to improve the institutional quality of these countries. Though, quantile analysis shows that an increase in income per capita, tax collection and a decrease in military spending have better potential to enhance the institutional quality in Bangladesh, India, Sri Lanka, Pakistan, Philippines, and Thailand; whereas an increase in adult literacy rate, international openness, tax collection and a decrease in indebtedness have better potential to improve the institutional quality in Singapore, South Korea, Malaysia, Indonesia, and China. A striking fact is that adult literacy rate, a proxy for the education system, does not have any potential to impact the institutional quality of the above-mentioned first set of countries. This requires that such countries should re-examine their education policies and systems to better serve the societal needs.