Dmitry Evdokimov, Researcher at the Gaidar Institute’s Quantitative Analysis of Economic Effects Department, presented analysis of the impact of institutions on economic development.
In recent decades, research on economic growth has increasingly focused not only on traditional macroeconomic factors—such as investment, trade, and demographics—but also on the quality of the institutional environment (institutions). Institutions are understood to be the rules and mechanisms that determine how the economy functions: protection of property rights, the functioning of the judicial system, the quality of public administration, government accountability, the business environment, as well as financial and innovation infrastructure.
Meanwhile, expert and public discussions often feature conflicting assessments of the role of institutions—ranging from assertions of their decisive importance to skeptical conclusions that growth rates are largely determined by external conditions, the resource base, or macroeconomic policy.
These discrepancies are largely due to the fact that different studies use varying indicators of institutional quality, time horizons, and analytical methods.
The Gaidar Institute’s study aimed to identify and analyze in greater detail which specific institutional characteristics are associated with economic growth, for which groups of countries, and over which time periods. The analysis includes data on 140 countries for the period 2000–2023; from more than 100 international indicators, 13 were selected for their best coverage and comparability, and 5 indicators were identified as consistently significant across various specifications. The study utilized an expanded set of institutional quality indicators, conducted a test of the completeness of these indicators, and applied modern panel analysis methods, which allow for the comparison of various aspects of the institutional environment within a unified empirical approach.
The findings of the econometric analysis provide estimates confirming the positive impact of institutions on economic growth, which is, however, heterogeneous and context-dependent.
Firstly, not all institutional characteristics are equally linked to growth. On average, a 10% improvement in institutional environment indicators is associated with a change in economic growth rates of +0.1 to +1.1 p.p., depending on the indicator and the country group by income level. The strongest positive relationship is observed for indicators related to the quality of regulatory policy (on average, +0.3 to +0.4 percentage points per 10% improvement, and up to +1.1 p.p. for upper-middle-income countries), political stability (+0.1 p.p. for lower-middle-income countries and +0.2…+0.3 p.p. for upper-middle-income countries), and economic freedom (+0.6 p.p. per 10% increase).
Secondly, the impact of institutions varies significantly depending on a country’s level of economic development. In low-income economies, the most important institutions are the rule of law, control of corruption, and protection of property rights, which create a predictable economic environment and reduce transaction costs. In middle-income economies, institutional effects generally persist; however, for certain income groups, their sustainability may be overshadowed by macroeconomic and structural factors (capital accumulation, demographics, and external conditions). In higher-income countries, the institutional effect is more pronounced but is primarily linked to the quality of regulation, financial rules, and the innovation environment.
An analysis of the time structure shows that some institutional changes can influence growth relatively quickly, while other aspects are characterized by a more delayed impact. Moreover, a high initial level of institutional development does not in itself guarantee accelerated growth: the pace of improvements and the ability of institutions to adapt to changing conditions play an important role.
Estimates show that raising the level of key institutions in Russia to the global average could be associated with an additional acceleration in economic growth of approximately +0.4 p.p. per year, while convergence with the OECD level could lead to an acceleration of up to +1.1 p.p. per year. For catch-up economies (such as India), calculations indicate a higher potential gain from institutional convergence with developed economies, whereas for countries with already high baseline institutional levels (such as Estonia and Japan), the marginal returns from further improvements are generally lower, and differences in growth dynamics are largely attributable to structural and external factors.
Overall, the study’s findings suggest that measures to develop various aspects of the institutional environment cannot be one-size-fits-all. Effective directions for institutional change depend on the stage of economic development and the overall structure of the economy. For catch-up economies, basic institutions for law enforcement and the protection of property rights remain a priority. As countries grow and develop, it makes sense to shift the focus toward the quality of market regulation, financial rules, and support for innovation. While institutional changes alone cannot fully offset severe external shocks, they are largely what determine the sustainability of growth and the speed of economic recovery in the long term.