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Governance and Economic Growth: Evidence from 14 Latin America and Caribbean Countries

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Abstract

This article empirically explores the impact of governance indicators (corruption, government effectiveness, and political stability) along with some other macroeconomic variables (inflation, trade openness, worker remittances, direct foreign investment, and population growth rate) on economic growth of 14 countries located in Latin American and Caribbean(LAC) region between 2002Q1 and 2018Q4. The panel autoregressive distributed lag (ARDL)/pooled mean group (P.M.G.) estimation techniques are used for empirical investigation. The P.M.G. results disclose that corruption has a significantly inverse effect on growth, while both political stability and government effectiveness have positive impacts in the long run. These results indicate that increasing corruption discourages growth, while political stability and government effectiveness encourage the process of economic growth. Empirical findings demonstrate the need of good governance, where corruption needs to be miniaturized, while government effectiveness and political stability be strengthened to boost economic growth and thereby improve social welfare. The present study is different from the erstwhile studies in three folds: (i) it focuses on 14 countries from LAC region (highest number of LAC countries investigated so far in a single study), (ii) the data covers a long time span of 16 years, and (iii) it employs relatively holistic panel data and empirical techniques for estimation purpose. Therefore, the outcomes of this study will not only contribute to the literature on LAC region but can also be extended globally with the objective to understand the significance of governance for national economic development.

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Notes

  1. According to the WB, WGI there are six broad dimensions of governance, however, this study uses only three indicators out of six which can satisfy broad objectives of the study

  2. Upper middle income countries [Colombia, Dominica, Dominican Republic, Ecuador, Jamaica, Nicaragua, and Peru], lower middle income [Belize, Bolivia, El Salvador, Guatemala, Guyana, Honduras], and low income [Haiti].

  3.  See for detail the study of (Chibba, 2009), and on the “successful society” (Abdelbary , 2018), the “governance for growth school-“cautionary school of governance for growth” (Rodrik, 2008), and the “social order” school.” (North et al., 2009).

  4. The World Governance Indicators (WGI) “Estimate of governance (ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance)” (see for details WGI 2019; Kaufmann et al., 2010). The WGI are based on over 30 fundamental data sources reporting the insights of governance of a large number of survey respondents and expert judgments globally. Details on the fundamental data sources, the accumulation method, and the explanation of the indicators are available in the WGI.

  5. The model of this study is the modified improved version of the empirical model used by erstwhile studies including Mauro (1995), Mo (2001), Barro (2013), Azam and Emirullah (2014), Omoteso and Mobolaji (2014), Lahouij (2016), Awan et al. (2018), and Uzelac et al. (2020).

  6. Samargandi et al. (2014).

  7. See Azam (2020)

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  1. Department of Economics, Faculty of Business & Economics, Abdul Wali Khan University Mardan, , Mardan, Khyber Pakhtunkhwa, Pakistan

    Muhammad Azam

  2. School of Economics, Finance & Banking, College of Business, Universiti Utara Malaysia, Sintok, Kedah, Malaysia

    Muhammad Azam

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Azam, M. Governance and Economic Growth: Evidence from 14 Latin America and Caribbean Countries. J Knowl Econ 13, 1470–1495 (2022). https://doi.org/10.1007/s13132-021-00781-2

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