Determinants of political institutions and their influence on financial inclusion and economic growth

This thesis aims to investigate the role of political institution and remittance on economic outcomes, and their influence on financial inclusion and economic growth in developing countries. Notably, political institution is chosen based on the hierarchy of institutional hypothesis (HIH) and it is applied in the three objectives of this thesis. Remittance considers as an important factor of capital flow, due to its stable and huge inflow to developing countries. Remittance has played a pivotal role in poverty alleviation and increasing of recipients’ human capital. For instance, remittance signaled to be a lifeline for millions of recipients that are mostly under poverty, which is a cause of poverty alleviation in emigrants’ countries of origin (Migration Development brief, 2017). The small amounts of $200 or $300 that each migrant sends home make up about 60% of the family’s household income (IFAD, 2017). However, remittance flow parallel with the level of financial inclusion and economic growth in the nations remain in low levels. The first objective examines the nonlinear effect of political institutions on financial inclusion. The sample size of this objective is 75 developing countries over 10 years from 2007 to 2016 using system GMM estimator. Results indicated that political institution contributes more to financial inclusion compare with low level of political institution as indicated by a U-shape effect on bank account, ATM machines, bank branches and financial inclusion index. The concluding remark is that the enhancement of political institution is a key factor for developing countries to establish wide means of financial services. One policy implication is that high level of political institution is crucial determinant of the inclusion of financial services. Better environment of political institution such as democracy leads to wide spread of financial inclusion to the population. Second objective focuses on the impact of remittance on political institution. The sample size of this objective is 97 developing countries over 9 years from 2009 to 2017 by using system GMM estimator. This study goes deeper to examine the nonlinear effect of remittance on political institution. The results on remittance-institution link confirm the existing of an inverted U-shape relationship between remittance and the three political institution components namely, democracy, political stability, and civil liberties. The results show that too much remittance harms countries political institution. The more remittance flow, the lower political institution in the country and vice versa. Therefore, it can be concluded that remittance plays two roles in obtaining political institution, at certain level remittance spurs political institution, however if remittance surpasses the optimal level will lead to deteriorate political institution. One important policy implication is that developing countries can have pessimistic impact of remittance on the level of political institution, however, these countries could gain from remittances if the level of remittance is under the turning point. Finally, the last objective examined the contingent role of political institution on the growth effect of remittance. The sample size of this objective is 97 developing countries over 9 years from 2009 to 2017 by using system GMM estimator. The results strongly showed the existence of negative interaction impact of remittance and political institution on growth. Remittance has negative impacts when it is directly linked with growth, on the other hand institution was found to have positive impact on growth. Whereas, the interaction impact turns to negative when political institution is linked with remittance. This indicates that political institution does not stimulates benefits of remittance on growth, and remittance negatively impacts growth in the presence of sound political institution. The last policy implication for this objective is that countries with better platform and better institutional environment, leads to better payoffs in terms of positive benefits brought over by remittance.

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