Governance, Quality of Institutions and Economic Growth: Empirical Evidence from a Cross-National Analysis

Governance, Quality of Institutions and

Economic Growth: Empirical Evidence

from a Cross-National Analysis

Abdelkarim YAHYAOUI, Ouidade CHATTI & Nouri CHTOUROU

Governance, Quality of Institutions and Economic Growth:
Empirical Evidence from a Cross-National Analysis

Abdelkarim YAHYAOUI^*

Ouidade CHATTI^**

Nouri CHTOUROU^*** February 2008

Abstract: This paper examines the relationship between the quality of institutions and economic growth. The first part will be devoted to the definition of the concept of governance and its measurements. In the second part we will briefly review the literature on the relation between governance and growth. Finally, we will carry out an empirical investigation by using an endogenous model of growth, which deals with the relation between governance and growth in 96 countries. Using a cross section analysis, the estimation results prove that there is a strongly significant relation between the institutional variables used in our work and the income per capita.

Résumé: Ce papier examine le lien entre la qualité des institutions et la croissance économique. La première partie sera consacrée à la définition du concept de gouvernance et à ses mesures. La deuxième partie fera l'objet d'une revue de la littérature sur la relation entre gouvernance et croissance. Enfin, dans la dernière partie, on va effectuer une investigation empirique en utilisant un modèle de croissance endogène, traitant de la relation entre gouvernance et croissance dans 96 pays. Les résultats d'estimation avec l'analyse en coupe transversale prouvent qu'il y a une relation fortement significative entre les variables institutionnelles utilisées dans notre travail et le revenu par tête.

Key words: Governance, Quality of Institutions, Economic Growth, Cross-Section. Classification JEL: O43, C2 1

* URED, Faculty of Economics and Management of Sfax 3029, Tunisia :abdelkarim.yahyaoui@ fsegs.rnu.tn ** CEMAFI-URED, Faculty of Right, Political Sciences, Economic and Management of Nice: [e-mail] *** URED, Faculty of Economics and Management of Sfax: [e-mail]

1. Introduction

Since the beginning of the 1990^is, the concept of governance has gained a remarkable importance. It has currently become part of the common vocabulary used by financial institutions and by in the international development institutions as well (WB, IMF, and UNDP). It is based primarily on the introduction of new reforms neither economic nor financial but institutional, aiming essentially at the improvement of the State. In the same time, we witness a renewed interest for the concept of institutions and in particular for the question of their capability of supporting the growth. These two concepts, governance and institutions, have become truly operational and have been actually introduced into the studying process of developing countries only recently, following the first evaluations of the Structural Adjustment Programs (SAP). Ever since, they have become dominant concepts in the management of public affairs. So, the role of the governance and institutional quality in the determination of long run economic performances is a subject which has preoccupied the economists of development and economic growth for many years.

On the theoretical level, a very great agreement has already been achieved toward recognizing the benefits of good governance when it comes to developing countries and the fact that good public institutions lead to a better governance. So the question of governance joins that of the institutions and analyzing the first one necessarily requires studying the question of the institutions capacity of supporting the growth.

After a decade of hard work to figure out the role of the governance in the development, several basic questions persist: what does the concept of governance consist of? How to measure it? What is the link between governance and growth?

Our principal objective in this work is to try to contribute to a more precise knowledge of this concept of governance and measurement in order to evaluate it, as well as of the links between the governance and the economic growth both on the theoretical level and on the empirical one.

Our article is organized in the following way. The first section will be devoted to the definition of the concept of governance and its measurements. In the second section we will briefly review the literature about the relation between governance and growth. Finally the last section consists of an empirical investigation through an endogenous growth model explaining the relation between governance and growth in 96 countries.