Governance quality and long-run economic growth: comparative evidence from G7 and E7 economies

Abstract The present study investigates the impact of the level of governance on long-run economic growth in the G7 and E7 economies from 2002 to 2023. Institutional variables such as rule of law, regulatory quality and accountability are incorporated into the neoclassical growth framework. The empirical study uses data from the World Bank and the IMF, with advanced panel data techniques including Pesaran’s (2007) CADF unit root test, Pedroni’s (1999) cointegration test and a panel vector error correction model (VECM). To ensure robustness of the analysis, both Augmented Mean Group (AMG) and Common Correlated Effects Mean Group (CCEMG) estimators are used. The results show that there is a stable long-run equilibrium relationship which exists between the governance and some measure of economic growth for both sets of economies. However, the G7 economies tend to adjust to this equilibrium nearly five times faster than the E7 economies. Rule of law and regulatory quality are consistently found to be important determinants of the level of economic growth while weak accountability also constrains performance, especially in emerging markets. These results indicate the important role played by the governance of an economy in this regard, especially in the case of advanced economies but point to the need for judicial independence and regulatory stability before a country can inaugurate a series of reforms and hope to derive a sustainable rate of growth.