Governance and agricultural productivity: A cross-national analysis

Abstract

In this study we examine the relationship between governance and agricultural performance by employing the World Bank’s Aggregate Governance Indicators. Based on a cross-country panel sample, two methods are employed to test the hypothesis that better governance fosters agricultural productivity. The empirical results of both methods support the hypothesis. As for the first method, the estimation results of the widely-used inter-country aggregate agricultural production function show that a country with better governance can produce more agricultural outputs, given the same amounts of agricultural inputs, the same education level, and the same climate condition. As for the second method, the empirical results of a structural equation model reveal that, given the same amounts of agricultural capital stock and land, an agricultural worker in a country with better governance produces more. Better governance can indirectly improve agricultural productivity by driving agricultural capital accumulation. Our empirical work lends support to the claim of Hayami and Ruttan [Hayami, Y., Ruttan, V., 1985. Agricultural Development: An International Perspective. John Hopkins University Press, Baltimore] that governance is a basic factor explaining the poor economic performance of many developing countries. In order to improve the agricultural performance of many developing countries, apart from physical and education investments, more emphasis should be placed on improving the governance infrastructure of these countries.