New empirical evidence of the linkages between governance and economic output in the European Union

Abstract

This paper uses data for the 27 Member States of the European Union (EU) from 2000 to 2010 to support the thesis that a positive and significant correlation exists between a nation’s quality of governance and its economic output. To achieve this goal, the elements of governance that have been reported by the Worldwide Governance Indicators project are considered. Four individual indicators for the quality of policies and institutions and a global indicator of governance quality are constructed. We estimate that, for our database, a standard deviation shock in these indicators causes changes between 0.03-fold and 0.05-fold in income per capita.

Keywords:

• governance
• economic growth
• Worldwide Governance Indicators
• exploratory factor analysis

JEL Classification:

• O43

Acknowledgements

The authors thank two anonymous reviewers, and Paldam Martin, Hristos Doucouliagos, Benjamin Volland, Sebastian Coll and Atin Basuchoudhary.