The Role of Institutional Quality in the Human Capital development and Fiscal Capacity Nexus in South Asia

Abstract While global economies continue advancing toward the Sustainable Development Goals (SDGs), South Asia struggles to keep pace, facing deep-rooted structural barriers that impede transformative progress. This study, grounded in an extensive empirical review and supported by novel hypotheses, examines the direct, unconditional, and moderated effects of critical socioeconomic, energy, and sociodemographic factors on SDG 4 outcomes, proxied by fiscal capacity (FC), and human capital development index (HDI). Focusing on eight South Asian countries from 2000 to 2023, this research introduces an innovative institutional quality metric, developed using a distance-based scoring methodology, offering a more precise and dynamic assessment of governance effectiveness across the region. Employing the cross-sectionally augmented autoregressive distributed lags (CS-ARDL) model, validated by dynamic common correlated effects mean group (DCCEMG) estimators, the findings uncover significant long-run positive effects of per capita GDP, per capita health expenditures, renewable energy, urbanization, school enrollment, and employment rates on both FC and HDI. These impacts are markedly amplified when moderated by institutional quality index, underscoring the pivotal role of robust governance. However, child mortality rates and gender inequality persistently hinder SDG 4 outcomes, both directly and conditionally, exposing the inadequacy of South Asia’ institutional frameworks in mitigating these challenges. By bridging critical gaps in the literature, this study offers actionable insights for policymakers to accelerate sustainable development in the region.