Examining the Roles of Institutional Quality and Financial Openness in Enhancing Economic Performance: Evidence from BRICS Countries

Abstract

Purpose: The aim is to examine the roles of institutional quality and financial openness on the economic performance of BRICS, using annual series that covered the period from 1996 to 2020.

Methods: Principal component analysis (PCA) was used to select the institutional quality variables, while analysis of the study was conducted under the panel data random effect model. Findings indicate that FDI inflows and capital account openness positively impacted on GDP per capita significantly; however the impact of FDI outflows on GDP per capita, though positive, was not significant. Moreover, control of corruption and government effectiveness both had positive and significant impact on GDP per capita, while trade openness impacted GDP per capita negatively, though the result was not significant.

Findings: The outcome of the study reveals that the economy of the BRICS improved by removing restrictions on capital controls which retard capital inflows, but liberalization of trade had adverse effect on growth in the bloc. Equally revealed in the study is that effective government which reduces corrupt tendencies lead to improved economic performance. The study therefore recommends the removal of all bottlenecks that hinder FDI inflows and the building of strong institutions in BRICS.

Practical Implications: With respect to the institutional variables employed in the study, findings revealed that when governance is effective, it encourages improvement in the economy. Effectiveness in governance encourages reduction in corruption which is the bane of underdevelopment in many developing countries.

Originality/Value: The panel random effect results showed that of the three financial openness indicators employed,  FDI inflows and capital account openness significantly impacted on GDP per capita positively, while the impact of FDI outflows was positive but negligible.