Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
Institutional quality and Democracy: The case of Bangladesh
Chowdhury Nawsheen Farooqui and A. F. M. Ataur Rahman
Institutions, operating within economic mandate, have intrinsic values in enhancing
growth as well as economic well-being of any society. However to extract such benefits
we need to nurture institutions after considering their peculiarities. Sound property rights,
carefully designed and implemented market regulations, competence of monetary and
fiscal authorities, freedom to choose economic activities can create a birthplace for
delivering economic prosperity (see Acemoglu, Johnson, & Robinson, 2005; Rodrik, 2005
among others). Early references to the importance of institutions date back to Adam
Smith. There is a sizable literature that have dedicated their attention to find possible
relationship between such institutions and economic progress (for property rights
systems see La Porta, Lopez-de-Silanes, & Shleifer (2007) and Levine (2005), for overall
economic freedom see De Haan and Sturm (2003) among others).
Democracy on the other hand is also a revered factor in growth arguments. People
selecting their law makers by exercising their voting rights, is a concept that fascinated
economists for a long time. Although success of such system in achieving economic
growth is far from conclusive yet it is admired, as its competing theories do not have
remarkable successes either. Therefore existing literature actively evolves around the
arguments of democracy.
This proposed empirical study tries to investigate influences of democracy on various
measures of economic institutions in the perspective of Bangladesh. First, different
measures of institutional dimensions will be discussed and then their relationship with
achievement in democracy is econometrically tested. Using data of 2002-2014 and
econometric methods of cointegration (based on Engle & Granger, 1987 after checking
existence of unit root), preliminary results show that governance indicators such as voice
accountability, political stability, corruption, government effectiveness have significant
impact on democracy. Taking polity 2 variable from the Polity IV database as proxy of
democracy measure. We found the coefficient of political stability and voice accountability
is positive which indicates that political stability increases and country will become more
democratic and voice accountability increase democracy of a nation will increase too.
Causality effect indicates political stability causes polity 2. Coefficients of government
effectiveness and corruption is found to be negative, which means that as Bangladesh
becomes more corrupted, country will become less democratic. So as government
effectiveness increases this decreases democracy as well.
The paper will be structured as follows. After introductory remarks there will be a
discussion on relevant literature, which will be followed by discussion on different
parameters of economic freedom on Bangladesh. Then methodology and data will be
presented which will be followed by econometric results and related discussion.
Concluding remarks will be presented in the last section.
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Chowdhury Nawsheen Farooqui (corresponding author), Lecturer, Department of Economics, North
South University, Email: chowdhury.farooqi@northsouth.edu, PABX: 55668200, ext.1810.
A. F. M. Ataur Rahman, Vice President, Bangladesh Development Research center and Professor
Department of Economics, North South University, Dhaka, Bangladesh, Email:
ataur.rahman@northsouth.edu