Abstract
This study provides evidence on the relationship between governance quality and economic growth. We use the six Worldwide Governance Indicators (WGI) published by the World Bank and a sample of 29 countries (23 developed countries and 6 emerging economies) covering the period. To account for the potential endogeneity problem, we employ panel GMM estimators. The analysis proceeds in three stages. Firstly, we examine the effect of these six governance indicators on economic growth for the whole sample. Next, we apply a principal component analysis (PCA) to these indicators to construct a global governance index (GGI) and test its impact on economic growth. Finally, to examine the effect of the GGI on economic growth in emerging economies relative to developed countries, we introduce an interaction dummy variable. The results show a positive relationship between governance quality and economic growth in both developed and emerging economies. Moreover, the contribution of the GGI to the economic growth of emerging economies is more than that of developed ones.Keywords: Worldwide Governance Indicators, Economic growth, Principal component analysis, Panel GMM estimatorJEL Classifications: O40; O43; C36; C38DOI: https://doi.org/10.32479/ijefi.9927
Highlights
In today’s globalized business environment, countries guard against uncertainty by pursuing prudent macroeconomic policies, strengthening their financial systems, and improving their governance frameworks
The purpose of this study is to examine the impact of governance and institutional quality on economic growth, utilizing Worldwide Governance Indicators (WGI)
Recall that the Generalized Method of Moments (GMM) estimator is employed to correct for the potential endogeneity problem by using internal instruments (e.g. voice of accountability (VA), political stability (PS), government effectiveness (GE), regulatory quality (RQ), rule of law (RL), control of corruption (CC))
Summary
In today’s globalized business environment, countries guard against uncertainty by pursuing prudent macroeconomic policies, strengthening their financial systems, and improving their governance frameworks. Schneider (1999) defines good governance as the exercises of authority in controlling a country’s affairs and resources, while Norris and Zinnbauer (2002) define it as striving for the rule of law, transparency, equity, effectiveness, accountability, and strategic vision in the exercises of political, economic, and administrative authority. Over the past two decades, significant empirical research has aimed to improve our understanding of the long-term determinants of economic development (Acemoglu and Robinson, 2012). According to Pinar (2015), institutional quality is the main determinant of long-term development, followed by geography and macroeconomic policies.
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