Abstract
The main purpose of this chapter is to analyze the theoretical relationship between globalization and institutional quality and the empirical analysis of this linking in developing countries. For this aim, this chapter seeks to answer three main questions: (1) How do institutions affect globalization (trade openness)? (2) Can the economic globalization and trade openness cause institutional changes? If the answer is positive, does globalization lead to an improvement in the institutional quality or its deterioration? (3) Is there any causal relationship between globalization and institutional quality in developing countries?
To answer these questions, we use analytical-descriptive methods and econometric methods including Granger-type causality test based on panel vector error correction model (PVECM).
The theoretical findings of this chapter show that the good institutional quality via various channels affects the volume, structure, and composition of the trade. Also, economic globalization may improve (or deteriorate) the quality of institutions, but the kind and the extent of its influence depend on the type of institutional system and institutional structure of countries.
The descriptive analysis of data (status of globalization and institutional quality) in developing countries showed that the trend of economic globalization is not favorable in comparison with the world trend. In addition, compared to both three dimensions of globalization and the world as a whole, it presents an unfavorable situation. On the other hand, the position of institutional quality, in particular the quality of regulation and the effectiveness of governments (of the vital factors of trade expansion), has the worst situation. The results of Granger-type causality test showed that there is no causal relationship between economic globalization and legal-economic institutions (such as the rule of law and government effectiveness) in the short term, but there is at least one causal relationship in the long run. This relationship with the index of the rule of law is bidirectional and with other indexes is unidirectional. Also, the findings of this study show that in the short and long run, political globalization is the cause of political institutions (political stability and voice) and social globalization is the cause of social institutions. Therefore, the globalization view of institutional change can be cautiously supported.
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Notes
- 1.
These findings are presented in Sect. 4 of this chapter in detail.
- 2.
- 3.
The contract institutions seek to support private contracts, but property rights institutions are seeking to limit expropriation of private property by the government and political elites (Bhattacharyya 2012: 257).
- 4.
This naming is from the author.
- 5.
- 6.
It should be noted that financial openness and FDI have impact on domestic institutions via various channels, especially in developing countries, that are not discussed in this chapter. For further study, refer to the study of Kant (2016).
- 7.
- 8.
- 9.
Three-step methodology has been used in this chapter. In the first step, a Pesaran (2007) cross-sectional dependency test is used to determine the cross-sectional dependency or independency. In the second step, based on the results of these tests, we use Pesaran’s CIPS unit root test. In the third step, we used the panel vector error correction model (PVECM) as Eqs. (1) and (2):
\( \Delta {\mathrm{Glob}}_{it}={\sum}_{j=1}^n{b}_{1j}\Delta {\mathrm{Glob}}_{i,t-j}+{\sum}_{j=1}^n{c}_{1j}\Delta {\mathrm{Insti}}_{i,t-j}+{d}_1{\mathrm{ECT}}_{i,t-1}+\Delta {\varepsilon}_{1 it} \) (1)
\( \Delta {\mathrm{Insti}}_{it}={\sum}_{j=1}^n{b}_{2j}\Delta {\mathrm{Glob}}_{i,t-j}+{\sum}_{j=1}^n{c}_{2j}\Delta {\mathrm{Insti}}_{i,t-j}+{d}_2{\mathrm{ECT}}_{i,t-1}\Delta {\varepsilon}_{2 it} \) (2)
where Δ indicates the first-order difference of the variables and ECTi, t − 1 is the error correction term with lag (1). Glob stands for subindexes of the Globalization Index (KOF), and Insti stands for subindexes of the World Governance Index. Also n and m are optimal lag length which are determined by some information criteria. According to the estimation of Eqs. (1) and (2) and by the joint significance test, the coefficients of the endogenous variables and the coefficient of ECT can perform the short-term and long-term Granger-type causality test. If the coefficient of ECT in Eq. 1 (2) is statistically significant, it can be said that the institution’s quality (globalization) causes globalization (institutional quality) in the long run. If two variables are significant (d1 = d2 ≠ 0), thus there is a bidirectional causality between two variables. But for diagnosing the existence or lack of causality in the short term between these variables, the hypotheses test of 3 and 4 should be done:
H0 : c11 = c12 = … = c1n = 0 (3)
H0 : b21 = b22 = … = b2n = 0 (4)
The alternative hypothesis in these cases is that at least one of c1j or b2j is different from zero. If the null hypothesis of the 3 (4) is rejected, then institutional quality (globalization) causes globalization (institutional quality). Otherwise, if the hypotheses 3 and 4 are rejected simultaneously, the direction of causality will be bidirectional.
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Acknowledgment
I would like to express my sincere appreciation to Prof. Dr. Nezameddin Faghih for providing the opportunity to contribute the compilation of one chapter of this book and accepting my proposal for the compilation of this chapter. I am also thankful to the Springer Publishing Company by providing the right conditions for the publication of the book. I also would like to appreciate two honored anonymous reviewers of this chapter for their meticulous reviews, valuable comments, and useful suggestion to improve this study. Explicitly, I’m responsible for possible mistakes in the present chapter.
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Samadi, A.H. (2019). Institutional Quality and Globalization in Developing Countries. In: Faghih, N. (eds) Globalization and Development. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-14370-1_6
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