Impact of governance on economic growth in developing countries: a case of HIDC vs. LIDC

Abstract

The purpose of this study is to find whether governance contributes to positive or negative economic growth in developing countries. The connections between the Worldwide Governance Indicators were examined in 111 high- and low-income developing countries (HIDC and LIDC) between 1996 and 2018 to determine which, if any indicators, have a positive or negative effect on the per capita GDP, and therefore the economy. We use fixed effects and perform three different regressions in our analysis. One for the entire sample then another two regressions, one for HIDC and one for LIDC. We find that two governance indicators, Rule of Law and Control of Corruption have positive effects on developing countries’ GDP per capita where Voice and Accountability had a small negative effect on developing counties’ GDP per capita. We find that controlling for corruption and accounting for rule of law is of paramount importance to drive economic growth for developing economics. Within the existing literature, there is neither a theoretical consensus nor consistent empirical evidence that would lead us to believe the relationship is positive, negative or non-existent, for low- and high-income developing countries. We find strong evidence that voice and accountability exacerbate per capita income in LIDC, while it helps promote higher per capita income in HIDC.