INSTITUTIONAL QUALITY, STRUCTURAL CONSTRAINTS, AND ECONOMIC GROWTH IN DEVELOPING ECONOMIES

Abstract

This paper examines the relationship between institutional quality, structural constraints, and economic growth in developing economies. Despite extensive theoretical and empirical work linking institutions to growth, the mechanisms through which structural constraints condition institutional effectiveness remain underexplored. Drawing on neoclassical growth theory, endogenous growth models, and new institutional economics, this study synthesizes evidence from panel data econometrics, instrumental variables estimation, and threshold regression analyses across diverse developing country contexts. The analysis reveals that institutional quality exerts heterogeneous growth effects contingent upon the severity of structural constraints including infrastructure deficits, human capital limitations, financial market inefficiencies, and market structure imperfections. Threshold effects are pronounced, with institutional improvements yielding substantial growth dividends only after economies surpass critical infrastructure and human capital thresholds. Regional evidence demonstrates significant variation, with institutional quality showing stronger growth impacts in East Asia and Latin America compared to Sub-Saharan Africa, where binding structural constraints attenuate institutional effectiveness. The findings suggest that institutional reforms must be sequenced with investments in infrastructure and human capital to maximize growth outcomes. This research contributes to development economics by providing a systematic framework for understanding the conditional nature of institutions-growth relationships and identifying policy-relevant interaction effects between institutional quality and structural constraints.