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Governance, Institutions, and Economic Development

Literature suggests a positive relationship between a country’s social and economic development, good governance, and institutions. However, there is not a consensus on the nature of this relationship and the aspects of the governance that are most important for economic development. This paper addresses this question by empirically examining the relationship between a country’s economic performance and governance indicators in 1996-2019. Economic performance indicators include GDP per capita and GDP. Governance indicators are adopted from the World Bank’s Worldwide Governance Indicators. The paper shows that while most governance indicators have a positive and statistically significant impact on economic growth, their importance varies with the income level of the country. As such, improvements in different aspects of governance become more effective for economic growth as countries move through different stages of economic development.