Underlying the Relationship Between Governance and Economic Growth in Developed Countries

Abstract

This paper uses panel data from 31 developed countries over the period 2002 to 2018 by applying a generalized method of moments (GMM) and system generalized method of moments (Sys GMM), pooled OLS, fixed effect, and random effect to look at the effect of six indicators of governance on economic growth. The study finds direct significant effect of rule of law, control of corruption, and voice and accountability on economic growth of developed countries which indicate that developed countries’ economy increases due to increase in rule of law or control of corruption or voice and accountability. The study also finds indirect significant effect of government effectiveness, political stability, and regulatory quality on economic growth which imply decline in the economy of developed countries due to 1% increase in government effectiveness, political stability, and regulatory quality. The results of this study apparently demonstrate the importance of governance indicators to get better the developed countries’ economy.