Abstract

Purpose: This study aimed to explore the factors affecting the institutional quality in Bangladesh, with a dataset spanning 1984-2022, focusing on the factors susceptible to policy changes rather than predetermined historical or geographic factors. 

Methodology: The study employs an autoregressive distributed lag (ARDL) time series econometric model to examine both short-run and long-run dynamics. ARDL bound testing approach and Johansen cointegration techniques are also used followed by pairwise Granger causality test. Mandatory diagnostic and parameter stability tests are also carried out.

Findings: The ARDL model reveals that human capital, natural resource rent, openness, and urbanization pressure, are significant long-run determinants of Bangladesh's institutional quality. The existence of long-run relationships among the variables of the model is confirmed by both ARDL bounds test and Johansen cointegration test.

Policy implications: To improve institutional quality in the long run, there should be increased investment in human capital and better management of natural resources. The country appears to be unable to reap the benefits of openness in the long run, despite short-term gains. Additionally, policies should focus on effectively managing urbanization pressure.

Novelty: The paper is the first to analyze the drivers of institutional quality in Bangladesh.