Governance and Growth in Developing Countries: New Insights from a Cross-Regional Empirical Analysis

Abstract

This paper investigates the impact of governance on growth for a sample of 20 developing countries. We address the complementarity between the various dimensions of governance by constructing a global governance index and comparing its effect across different groups of countries. The PCA’s results indicate that variables relative to the economic and administrative dimensions weigh more on the global index than those reflecting the political dimension. The SGMM results reveal that the different dimensions of governance contribute significantly to promote growth. In particular, the administrative governance index is producing the most important effect on growth in all groups of countries, except in Sub-Saharan Africa where the political governance index outperforms the administrative one. Results also show that the higher the governance indicator, the greatest is the impact on growth, which suggests that the impact of governance on growth increases as the quality of the institutional framework improves. Another important finding of this study is that the global governance index does not necessarily produce the expected positive impact on growth, particularly when the variables composing this indicator are following divergent trends. According to these results, developing countries must be involved in the three dimensions of governance on an equal basis. Giving priority to one dimension at the expense of others can compromise the economic outcomes of the whole governance process.