A new look at the effect of the determinants of government institutions: A cross-sectional analysis

Many papers have found mixed results in studying the relationship between institutional quality and some of its determinants, namely openness to trade, GDP per capita and economic globalization. This paper reexamines the relationship between government institutions and these factors. The main findings in this paper is that the three factors have a threshold effect on institutional quality. Specifically, there exists a significant nonlinear relationship between three measures of government institutions (government efficiency, political stability and the rule of law) and trade. Moreover, GDP per capita has a significant nonlinear effect on government effectiveness, political stability, regulatory quality, rule of law and control of corruption. Finally, there is a significant nonlinear relationship between each of the six measures of institutional quality and globalization. Some of the findings are robust to controlling for average IQ levels and regional grouping of countries while others are not. Specifically, the results show that the nonlinear relationship was robust only two measures of institutional quality both for trade and GDP per capita. Accounting for the level of IQ revealed a significant nonlinear relationship between Voice and Accountability and both trade and GDP per capita.