Governance and sustainable development: How effective is governance?¹

1. This study was presented at the KOP Development Symposium 2015 in Aksaray, Turkey from 22 to 24 October 2015.

ABSTRACT

Sustainable development argues that the current use of resources should minimize the level of harm to the future use of resources. Governance is capable of common sense and the versatile planning that is required for sustainable development. In the literature, the relationship between governance and sustainability has been empirically examined in terms of the rule of law, bureaucratic quality and corruption. However, governance is a versatile variable that contains such variables as pluralism, accountability, political stability and the absence of violence and government effectiveness. According to the results from estimates obtained in the study, governance has an important and positive effect on sustainable development. This powerful effect applies to all developed and developing countries. Thus, to prevent resources from becoming scarce, countries should increase their governance levels. Accordingly, the level of welfare will be protected.

KEYWORDS:

• Sustainable development
• governance
• adjusted net saving
• endogeneity

JEL CLASSIFICATIONS:

• Q56
• O11

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. This study was presented at the KOP Development Symposium 2015 in Aksaray, Turkey from 22 to 24 October 2015.

2. Similar findings are obtained by Bentzen (2012), Reiter and Steensma (2010), Mendez and Sepulveda (2006) and Mo (2001).

3. There is a wealth of literature about the impact of corruption on economic growth and development. Please see the Barbier (2010), Svensson (2005) and Lambsdorff (1999) studies in the literature. Please also see Meon and Sekkat (2005), Welsch (2004), and Ehrlich and Lui (1999) for the relationship between corruption and economic growth. You can also see Otusanya's (2011) study on developing countries in the literature.

4. In addition to these studies, there are also studies that theoretically address the relationship between governance and sustainable development. Meadowcraft (2007) highlights that governance is necessary for sustainable development, whereas Kemp, Parto, and Gibson (2005) emphasize that making policy integration, programming system innovation, encouraging practical applications and balancing environmental indicators and rules with a broad perspective is essential. In addition, OECD (2002a), OECD (2002b), Saldanha (2004) and Lennan and Ngoma (2004) emphasize the importance of social transformation for attaining sustainable development and that governance assumes a directive character in this transformation.

5. Please see the Williams and Siddique (2008) for the relationship between governance indicators and economic variables.

6. In this study, governance refers to the institutional quality. Please see the Williams and Siddique (2008) for the details of the governance concept.

7. You can also find details in the following studies: Kaufmann, Kraay, and Mastruzzi (2010), Keefer (2004), Plumptre and Graham (1999), and UNDP (1997).

8. Countries are provided in the Appendix.

9. Natural capital variables consist of bauxite, copper, gold, iron ore, lead, nickel, phosphate rock, silver, tin, zinc, oil, coal, gas, and wood.

10. It is a measurement difference of the democracy variable through ANS. Increases in ANS lead to an increase in the development level; however, it also leads to a decrease in the democracy level. To eliminate the measurement difference between the two variables, the democracy variables are multiplied by (–1).

11. The period effect model is preferred for all models. The period 1996–2012 is a period when countries gave more importance to good governance. For instance, it is observed that countries make a greater effort to minimize the corruption indicator of good governance. However, because country specific effects require an estimation of more coefficients than period effects, thus draining the statistical power of estimations, the period effect model is chosen.

12. Researchers such as Acemoglu, Johnson, and Robinson (2001), Rodrik, Subramanian, and Trebbi (2004) and Glaeser et al. (2004) show that geographical and historical variables used as potential instrumental variables may be related to institutional quality and economic growth.

13. If the Cragg–Donald F-statistic exceeds the 10% maximal IV size reported in Stock and Yogo (2005), the instrument is considered to be ‘very powerful.’ If it is between 10% and 15% of the maximal IV sizes, it is labeled as ‘powerful.’ If it is between 15% and 20% of the maximal IV sizes, it is considered to be ‘medium’. For values between 20% and 25% of the maximal IV sizes, it is marked as ‘weak’.

14. For country classification, the classification constructed by the WB was used.