Institutions as Growth Enablers: Do Weak Institutions Neutralize Human Capital Returns in Pakistan? Evidence from ARDL (1990–2024)

Abstract

This paper investigates the hypothesis on whether the institutional quality is a limiting factor on growth returns of human capital investment in Pakistan in the 1990-2024. Conventional growth theory is a hypothesis that predicts that when there is a public investment in education and health, it will boost productivity and economic growth where such effects may not show up in the settings that are typified by weak institutional governance and inefficiency. This study estimates the short-run and long-run relationships between real GDP growth, institutional quality, education expenditure, health expenditure, financial development, and foreign direct investment using annual time-series data and carrying out the autoregressive distributed lag (ARDL) bounds-testing approach. The findings show that the long-term economic growth was positively related to institutional quality with significant evidence and education expenditure was statistically irrelevant and health expenditure had a significant adverse effect. These results indicate that the quality of institutions is an enabling factor: with weak institutions, higher human capital expenditure will not lead to productive capacity or long-run economic growth. The research is an addition to the institutional economics literature which offers country-specific evidence that the quality of governance is the conditioner of human capital investment effectiveness. The policy implications put more stress on governance reforms and accountability systems and efficiency in service delivery as preconditions to turn education and health spending into growth enhancing human capital.

Keywords: institutional quality; human capital; economic growth; governance; ARDL; Pakistan