THE ROLE OF FIRST-BEST GOVERNANCE INSTITUTIONS ON GROWTH IN LEAST DEVELOPED COUNTRIES

Abstract

The study addresses the issue of the low level of GDP per capita growth in Least Developed Countries (LDCs), with special emphasis on the role of first-best governance institutions as a main determinant of growth. LDCs can be characterized by a clear deficit in first-best governance institutions compared to high-income OECD countries supporting the argument that economies that are different for a variety of reasons will differ both in their institutions and in their income per capita. The contribution of the study is to fill the gap in the new political economy of growth by establishing the mechanism of how first-best governance institutions affect growth through the political, economical, administrative and democratic channels. Although the adoption of first-best governance institutions of advanced countries to LDCs is not a panacea to sustainable economic growth, improvement of first-best governance institutions in LDCs significantly induce growth, since investments in governance institutions are subject to diminishing returns, so that the benefits are most pronounced for smaller and developing economies.