GII

Comparing 2011 with 1998, there is also strong persistence in the governance scores and regional rankings within Asia East Asia improved significantly in most of the six governance dimensions, especially government effectiveness, regulatory quality, and rule of law. For developing Asia In government effectiveness, regulatory quality, and control of corruption, governance surplus countries grew close to 2 percentage points faster annually than those with governance in deficit. For the Middle East and North Africa, The difference in political stability was statistically significant at the 5% level and in government effectiveness and control of corruption, it was significant at the 10% level. In the other three dimensions, the difference in growth performance between surplus and deficit countries was statistically insignificant.

Using Log GDP per Capita as the Dependent Variable.

First, we apply the ordinary least squares (OLS) method to estimate a simple fixed effects model without controlling for the endogeneity as our benchmark. In this model, in addition to common effects from the lagged log GDP per capita and the four principal components of governance, human development, openness, and FDI, it is assumed that there is a country-specific unobserved fixed effect capturing the influence of all the other unobserved variables. As Table 8 shows, the lagged log GDP per capita has a dominant effect on the dependent variable. The governance component also has a significant positive effect, as do the human development, openness, and FDI components. The analysis also tested whether the governance component acts differently in Asian countries by interacting it with a dummy variable for Asia. The results indicate that governance factors in Asia contribute less to economic growth compared with the other regions. The model has an adjusted R-squared at 0.8041 and all the coefficients are significant at the 1% level. As Table 9 shows, after controlling for endogeneity, there are still significant positive effects of the governance component on log GDP per capita. The coefficient of 0.25 is an average contribution of governance to log GDP per capita. The results again suggest that governance appears to matter less for economic development in Asia relative to other regions. The new results are consistent with the OLS method as presented in Table 8. A comparison of Tables 8 and 9 suggests that the control for endogeneity raises the estimated effect of governance on economic development from 0.11 to 0.25 for non-Asian countries and from 0.07 to 0.15 for Asian countries. The results show that all coefficients are statistically significant at the 1% level, implying that governance quality in all six dimensions has a positive and significant effect on log GDP per capita. Among the indicators, government effectiveness contributes more to economic growth. government effectiveness, political stability, control of corruption, and regulatory quality have a positive and more significant impact on growth performance than voice and accountability, and rule of law. The dynamic panel data model suggests two key results. First, the governance component has a positive and significant effect on economic outcomes using both the log GDP per capita and annual growth rate as the dependent variable; the lagged log GDP per capita and the four principal components as the explanatory variables; and by applying both OLS and the GMM methods; which controls for fixed effects, endogeneity, and multicollinearity. Entering the governance indicators one at a time, together with other controlling variables through principal components, and by applying the GMM method, it is found that the six governance indicators each has a significant positive effect on both the log GDP per capita and annual growth rate. Second, at an aggregated level, the linkage of governance with economic performance appears to be weaker in Asia than the rest of the world. At the disaggregated level, the linkage of voice and accountability with log GDP per capita and annual growth rate is significantly weaker for Asia than for the rest of the world, whereas the effect of government effectiveness and regulatory quality on economic performance is significantly higher in Asia than in the rest of the world. These results suggest that governance matters for development—better governance correlates with faster growth and higher income levels, but its relationship with development may vary across dimensions of governance and a country’s stage of development. In terms of policy, these suggest that priorities of governance reform are likely to be country-specific. Low-income countries should perhaps strive for more effective government, better regulatory quality, and rule of law, and tighter control of corruption. Graduating to higher income entails improving governance quality with respect to citizen participation and government accountability. Middle- and high-income countries are likely to reap considerable rewards from their citizens’ greater voice, political stability, and word-class institutions. By focusing on the biggest hurdles to growth and development, countries are more likely to see their governance reform efforts succeed.