Governance, Corruption and Economic Growth: A Panel Data Analysis of Selected Saarc Countries

Author:REHMAT ULLAN AWAN, TAHSEEN AKHTAR, SHAZIA RAHIM, FALAK SHER AND AHMED RAZA CHEEMA
 
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Abstract

Present study examines the association among governance, corruption and economic growth in five selected SAARC countries including Bangladesh, India, Nepal, Pakistan and Sri-Lanka using panel data for the period 1996-2014. Panel regression was run using Fixed Effects Method of estimation based on Hausman specification test results. Fixed Effects Model with specific cross-section coefficient was also employed. Findings reveal that two institutional indicators of Governance, namely Government Effectiveness and Political Stability have positive and significant effect on Economic growth in selected SAARC countries. Corruption exerts adverse effect on Economic growth which is according to theory. Moreover, results show that among Governance indicators, Government effectiveness has greater influence on GDP growth in selected SAARC countries. Results of Education index have appeared to be significant predictors of growth of selected SAARC countries in the given time period.

Keywords: Governance, Corruption, Economic Growth, SAARC Countries, Panel Data, FEM

  1. INTRODUCTION

    Governance is a wide spread concept and defined by many scholars, researchers and policy makers but no satisfactory and precise definition of governance has been obtained. The definition by Kaufmann and Kraay covers all the components of governance. They describe governance as an authority working out through institutions and customs in a country. This broad definition of governance consists of three parts, first a procedure through which regimes are elected, examined and substituted, second potential of governments to originate and put into action the prescribed policies effectively and third is to have social and economic interface between civilians and state so as they should have respect for institutions (Mastruzzi et al., 2011).

    Governance is the procedure of basic leadership and implementation. Governance is a tool of economic, political and administrative establishments to manage a nation’s affairs (Chaudhry et al., 2009). Literature enlightens institutions as “a set of rules and regulations, procedures and ethical and moral behavioral norms which are shaped to restrict the actions of individuals to maximize utility of principals” (North, 1981 P. 201). According to United Nations Development Program (UNDP, 1997), Governance means the implementation of administrative, economic and political authority to control the affairs of a country at each and every level. Because all the institutions are considered responsible to perform their prescribed activities in order to fulfill the needs of common man.

    Furthermore, International Monetary Fund (IMF) gives more importance to the economic side of governance and those issues are focused which enhance the quality of resources available to public and to make the activities of private sectors more efficient. For investment and growth, government institutions are important mostly those ones which protect the property rights (Knack and Keefer, 1995). Kaufmann et al. (2002) and Chaudhry et al. (2009) argued that in order to achieve rapid economic growth, good governance plays effective role with the help of better and useful provision of resources including both the capital and labor.

    Corruption is the misuse of public office for private advantages. Corruption is a global issue. In small developing nations it is considered as a key variable that influences all the economic and social facets of life.

    The sale of government property by public administrators, misuse of public assets, bribery and discrimination are the examples of corruption. Due to corruption more than one trillion US dollars are vanished annually reflecting almost 5% of the world gross domestic product, reported by World Bank (2000). According to World Bank, the major hindrance in the way of economic and social progress is corruption. Institutional fundamentals are badly affected by corruption which leads to poor economic growth (Craigwell andWright, 2012). Mostly corruption is linked to smuggling, remuneration exercises, rent seeking, and conspiracy (Milelli andSindzingre, 2010).

    Leff (1964) and Huntington (1968) defined corruption as an obligatory oil to grease up the solid wheels of rigid government organizations. It implies that corruption can be favorable in those nations where alternate parts of governance are frail. Prior empirical research shows that presence of corruption hampers economic growth of countries (Gupta et al., 2000; Mauro, 1995 and Tanzi, 1998). Corruption exists in several forms like dishonesty, fraud, bribery, embezzlement, blackmailing, nepotism and favoritism etc. it is divided into different sectors like judicial corruption, bureaucratic corruption, political corruption and electoral corruption etc.

    In all South Asian countries, the subject of governance and issue of corruption have been observed since early 1980s. The concern of Internal and international (IMF, World Bank) agencies about corruption is now rising. Governance indicators like stability and property rights, the operation of judicial system and performance of democracy are closely related with the problem of corruption. Issue of corruption is getting more attention as it is considered an indicator of other failures of governance. During recent time periods, it is observed that by and large the economic growth and financial performance of South Asian countries has increased as compared to the era of 1980s. But political instability, poor quality of institutions bad governance and other crises are the key factors affecting South Asian countries to have further improvement in their economic growth and performance (Devarajan, 2005; Devarajan and Nabi, 2006 and Vadlamannati, 2009).

    Due to new rising issues in South Asian countries like political and economic pragmatism including some other cultural and social aspects, it needs attention to study the elements of economic growth in this area (Bhattacharjee and Haldar, 2015).

    In recent time period SAARC countries are facing the issues of poor governance and worse conditions of corruption so there is utmost need to learn about the issue with the goal that strong measures might be taken for solutions. The current study is an addition to literature as it finds the specific effects of each governance indicator including control variables on economic growth of selected countries. The association among governance, corruption and growth has been widely studied, there is still a dearth of research exploring the same phenomenon in the SAARC region. The current research work is an attempt to fill this gap.

    Rest of the study is organized as section 2 gives literature review that provides theoretical and empirical background. Section 3 explains data and methodology. In section 4 results and discussion of study are presented. Section 5 is about conclusion and policy implications.

  2. LITERATURE REVIEW

    This section presents a brief analysis of how empirically governance and corruption affect growth. The theories of growth given by classical and neo-classical school of thought consider labor and capital as conventional sources of growth. Governance was not given much importance in growth process. After economic reforms in 1990s, the importance of governance has been realized. Importance of Governance was even felt by Adam Smith (1776). He claimed that governance is a prerequisite for economic growth in an economy but mostly work on governance was done during 1990’s. Several empirical and theoretical works have been done to check relationship between institutional and economic performance. Seminal work done by North (1990) indicates that institutions do matter for economic growth.

    Deyshappriy (2015) checked the impact of corruption and peace on economic growth using panel data for 126 countries. To represent corruption and peace, Corruption Perception Index (CPI) and Global Peace Index presented by Transparency international and institute for finance and peace were used. Ordinary Least Square (OLS) estimates found that GDP growth per capita is negatively affected by...

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