Growth and governance: A nonparametric analysis

According to conventional wisdom, a positive relationship exists between governance and growth. This paper reexamines this empirical relationship using nonparametric methods. We use different governance measures, as defined in World Governance Indicators Provided by the World Bank. The findings show that only three of the six measures: voice and accountability, political stability, and rule of law are significantly correlated with economic growth. Regulatory control, control of corruption, and government effectiveness were found to be insignificant. The concept of growth profile curves are introduced as a visual device to interpret the results of the nonparametric analysis. We find that the empirical relationship between voice and accountability, political stability, and growth are highly nonlinear. These effects demonstrate heterogeneity across indicators, regions, and time. These empirical results are complementary to the literature on growth diagnostics in demonstrating that specific, targeted reforms to improve governance may be a more effective policy lever to encourage economic growth rather than wholesale reform. Finally, they provide a cautionary tale to practitioners using parametric methods. Journal of Comparative Economics 37 (1) (2009) 121-143. Indiana University, 105 Wylie Hall, 100 South Woodlawn Avenue, Bloomington, IN 47405-7104, USA. (C) 2008 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.