Institutional Quality, Human Capital, and Economic Growth: Evidence from a Panel of Developing Countries

Abstract

This paper analyzes the joint role of human capital and institutional quality in shaping economic growth across a panel of 62 developing countries, including African economies, over the period 2000-2020. Using Panel-Corrected Standard Errors (PCSE) and dynamic System-GMM estimations to account for heterogeneity and endogeneity, the results indicate that both education and institutional quality exert a positive effect on economic growth, whether considered in aggregate or disaggregated forms.

A central finding is the existence of a complementary interaction between human capital and institutional quality. Education significantly enhances growth in upper-middle- and high-income developing countries characterized by strong institutions. In contrast, in low- and lower-middle-income countries with weak governance structures, the growth impact of human capital is limited or may even turn negative, suggesting the presence of institutional thresholds.

These findings underscore the importance of effective institutions, such as secure property rights, political stability, regulatory quality, bureaucratic efficiency, and control of corruption, in translating investments in human capital into sustainable economic growth. The study highlights the need for policymakers to coordinate education strategies with institutional reforms to fully harness the growth potential of human capital in developing economies.