Revisiting the governance-growth nexus: Evidence from the world’s largest economies

Abstract

This study delves into the symmetric effects of governance on economic growth for the world’s ten largest economies, employing a model augmented with well-known growth, governance, and control predictors to inform model specification. Using panel and time-series techniques, both collectively and individually, the initial results reveal that governance predictors and growth postulate a long-run symmetric nexus. Applying the autoregressive distributed lags (ARDL) model, the results show that although governance predictors positively impact the economic growth of the panel both in the short and long runs, growth is weakly sensitive to governance predictors. The results of the ARDL estimates for cross-country show that Canada’s growth is highly sensitive to governance predictors, followed by France, showing moderate sensitivity. Moreover, the findings support the notion that the US, China, Germany, India, the UK, Brazil, and Italy exhibit weak sensitivity to governance predictors. Besides, the error-correction results demonstrate a high speed of adjustment of the short-run symmetries of the panel to its long-run equilibrium. Since economic growth swiftly responds to the rise and fall of governance predictors, specific policy adjustments are required to maintain sustainable and long-run growth.

Keywords:

• Governance indicators
• ARDL
• symmetric effects
• economic growth
• nexus

JEL code:

• K0
• C01
• O4

PUBLIC INTEREST STATEMENT

Governance is a multi-faceted and broad concept that explains the degree of power a state exercises to control and govern its economic, social, technological, and political endeavors for the benefit of its nation. Effective and productive governance of the economic and social components of a nation posits a significant nexus and postulates a non-monotonous impact on economic growth. In an empirical sense, everyone assumes that effective governance is an important and essential element of economic growth both in developing and developed economies, implying that the larger the economy, the greater the positive effects of governance quality on economic growth. This study adds to the existing literature that the general assumption does not hold perfectly, as clear variations are evident with respect to the effects of good governance on economic growth in the largest economies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Abbreviations

ADF: Augmented Dicky & Fuller, ARDL: Autoregressive distributed lags, CC: control of corruption, CUSUM: cumulative sum, CUSUMSQ: Cumulative sum of squares, ECM: error-correcting mechanism, ECT: error-correction term, GDPG: GDP growth, GE: government effectiveness, PS: political stability, NSR: Net national saving rate, HC: Human capital, PC: Physical capital, RQ: regulatory quality, RL: rule of law, VA: voice and accountability, PP: Philips-Perron, WDI: World Development Indicators, WGI: Worldwide Governance Indicators.

Availability of data and materials

The data relevant to governance indicators including control of corruption, government effectiveness, political stability, regulatory quality, rule of law, and voice & accountability are collected from WGI (Worldwide Governance Indicators) available at (https://info.worldbank.org/governance/wgi/) and data for GDP growth come from WDI (World Development Indicators) available at (https://databank.worldbank.org/source/world-development-indicators).

Author’s contribution

This article is solely written and completed by Mohammad Naim Azimi.

Additional information

Funding

The author did not receive any funds from any organization to conduct and publish this study.

Notes on contributors

Mohammad Naim Azimi

Mohammad Naim Azimi (PhD) is an associate professor serving in the department of statistics and econometrics of the Faculty of Economics at Kabul University, located in the capital of Afghanistan. He served the university in different positions, such as the vice chancellor for academic affairs and director of quality assurance, where one of his main tasks was to manage and lead the research committee of the university. Based on his academic background, his research areas include financial economics, financial econometrics, and government economics. Considering the emerging needs for research outputs to formulate public policies, Dr. Azimi has greatly focused on public economic studies to help policymakers design effective growth tools through good governance.