Governance and Economic Growth: Evidence from 14 Latin America and Caribbean Countries

Abstract

This article empirically explores the impact of governance indicators (corruption, government effectiveness, and political stability) along with some other macroeconomic variables (inflation, trade openness, worker remittances, direct foreign investment, and population growth rate) on economic growth of 14 countries located in Latin American and Caribbean(LAC) region between 2002Q1 and 2018Q4. The panel autoregressive distributed lag (ARDL)/pooled mean group (P.M.G.) estimation techniques are used for empirical investigation. The P.M.G. results disclose that corruption has a significantly inverse effect on growth, while both political stability and government effectiveness have positive impacts in the long run. These results indicate that increasing corruption discourages growth, while political stability and government effectiveness encourage the process of economic growth. Empirical findings demonstrate the need of good governance, where corruption needs to be miniaturized, while government effectiveness and political stability be strengthened to boost economic growth and thereby improve social welfare. The present study is different from the erstwhile studies in three folds: (i) it focuses on 14 countries from LAC region (highest number of LAC countries investigated so far in a single study), (ii) the data covers a long time span of 16 years, and (iii) it employs relatively holistic panel data and empirical techniques for estimation purpose. Therefore, the outcomes of this study will not only contribute to the literature on LAC region but can also be extended globally with the objective to understand the significance of governance for national economic development.