Does Governance Matter in Economic Growth: A Multi-Country Panel Data Analysis

Several studies have called attention to the effect of governance on countries’ economic growth, using various analytical approaches. However, there is limited understanding of the longitudinal effect of governance dimensions on the economic growth of various countries as well as the effect of governance on the aggregate growth of countries as measured through gross domestic product (GDP) and gross national income (GNI). This study investigated the effect of governance on economic development using 10-year panel data across 177 counties worldwide through the years 2010-2019. A panel data analysis was used to determine the effect of the World Bank’s World Governance Indicators (WGIs) which were summarized into four governance dimensions after considering various tests. The valid estimates were provided by GMM-Difference and GMM-System. The results reveal that the areas of governance such as citizens’ participation, political freedom, quality government, and quality laws and regulations are jointly significant in affecting economic growth. Specific results emphasize the positive effect of citizens’ participation, political freedom, and quality of laws and regulations while also pointing out the diminishing impact of the perceived quality of government on economic growth.