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Paths of economic development: A global evidence for the mediating role of human capital

ABSTRACT This paper revisits the roles of institutions and human capital in the development process by using structural equation modeling with a latent construct. Two models are constructed by using the data of 143 countries with 14 publicly available indicators; non-mediated (Model A) and mediated one (Model B). A path between institutional quality and economic development is identified in Model A and found as significant. When human capital is added into the Model B as a mediator, the direct relationship between institutional quality and economic development which is confirmed in Model A becomes insignificant. This evidence contributes to the debate by explaining the roles of institutions and human capital in the development process, based on the existing level of institutional quality that determines conditions on decisions for starting or sustaining the development process. In other words, (a) improving institutions in addition to human capital is needed for the countries with low level of institutional quality to start development process and; (b) on the other hand, since the human capital develops immunity on the quality of the institutions, human capital plays a more basic role to sustain the development process for the countries with a high level of institutional quality.