The Effect of Government Size, Resource Governance, and Institutional Quality on the Human Development Index in Iran Using the Nonlinear Autoregressive Distributed Lag (NARDL) Threshold Approach

Abstract

This study investigates the effects of government size, resource governance, and institutional quality on the Human Development Index (HDI) in Iran using the nonlinear autoregressive distributed lag (NARDL) threshold approach to estimate long-run coefficients, short-run dynamics, and the error correction mechanism (ECM). The short-run estimation results indicate that negative shocks to government size exert a positive effect, while positive shocks have a negative effect on the Human Development Index; thus, government size influences human development asymmetrically. Furthermore, positive shocks to institutional quality and resource governance have a positive effect, whereas negative shocks exert a negative effect on the Human Development Index, highlighting the direct and asymmetric role of these variables in human development. Financial development, physical investment, population, and foreign direct investment demonstrate positive and statistically significant effects on human development, while inflation and external debt exert negative impacts. The ECM coefficient, estimated at -0.723252, indicates a high speed of adjustment from short-run disequilibrium toward long-run equilibrium and confirms model convergence. Diagnostic tests, including the normality test, Wald test for symmetry, heteroskedasticity test, serial correlation test, and functional form specification test, confirm the validity of the model and indicate the absence of statistical issues. The Banerjee and Dolado test also confirms the existence of a long-run relationship (cointegration) among the variables. Long-run coefficients reveal a negative effect of government size and inflation rate, and a positive effect of institutional quality, resource governance, financial development, investment, population, and foreign direct investment on the Human Development Index, all statistically significant at the 95% confidence level. Finally, structural stability tests (CUSUM and CUSUMSQ) confirm the stability of the model and indicate the absence of structural breaks. The findings emphasize the importance of considering the asymmetric effects of economic and institutional shocks and their critical role in enhancing the Human Development Index.