INSTITUTIONAL FOUNDATIONS OF ECONOMIC GROWTH IN THE UK

Abstract

In recent years, economies that focused on long-term stable growth rates have made institutions an important variable to be examined because institutions are key determinants of long-term growth. The first view is that the institutional structure is essential for growth, while the second view is that economic development paves the way for institutional development. This study investigates the relationship between institutions and growth in the UK by employing the Johansen Cointegration Test, Vector Error Correction Model (VECM) and the VAR Granger Causality Test. According to the analysis results, property rights, legal constraints on executive and democracy affect positively GDP in the long run. VECM estimation results show that there is a long-run causality between property rights, legal constraints on executive, democracy and GDP. In addition, there is causality from GDP to property rights and legal constraints on executive, and there is a bilateral causality from democracy to GDP. Based on the causality relationship between GDP and property rights and legal constraints on executive, the second view is valid for the UK. Interpreted the results for causality way between democracy and GDP, it is shown that both views are valid for the UK.