Do Governance Indicators Explain Development Performance? A Cross-Country Analysis

Abstract

The central question addressed by this study is whether countries with above-average governance grew faster than countries with below-average governance. Using the World Bank’s worldwide governance indicators to measure governance performance, it examines whether a country with governance “surplus” in a given base year (1998) grew faster on average in a subsequent period (1998- 2011) than a country with governance “deficit.” Governance is defined in several dimensions, including government effectiveness, political stability, control of corruption and regulatory quality, voice and accountability, and rule of law. The study finds that government effectiveness, political stability, control of corruption and regulatory quality all have a more significant positive impact on country growth performance than voice and accountability and rule of law. Developing Asian countries with a surplus in government effectiveness, regulatory quality and corruption control are observed to grow faster than those with a deficit in these indicators—up to 2 percentage points annually, while Middle East and North African countries with a surplus in political stability, government effectiveness, and corruption control are observed to grow faster than those with a deficit in these indicators by as much as 2.5 percentage points annually. Good governance is associated with both a higher level of per capita GDP as well as higher rates of GDP growth over time. This suggests that good governance, while important in and of itself, can also help in improving a country’s economic prospects.