Causal link between governance and economic growth: empirical evidence from the SAARC countries

Abstract

Good governance is influential in boosting a country's GDP growth and economic development. This paper investigates the causal link between the governance indicators and GDP growth of SAARC countries, employing panel data from 1996-2020. The empirical results obtained from panel ARDL/PMG techniques indicate that corruption negatively and significantly impacts GDP growth (later on GDPg) with long-term effects. The influence of political stability on economic growth is positive and significant. However, the impact of political stability and control of corruption on GDP growth is unimportant in the short run, meaning that these factors do not immediately impact economic growth. The influence of labour participation, capital, human capital, FDI, and inflation on GDP growth is noteworthy in the long term. Still, these variables have an unimportant impact on GDP growth in the short run. The results of the pairwise Granger causality test indicate the presence of no causality between political stability and GDP growth, as well as corruption and GDP growth. Based on the empirical results, the study recommends a dire need for good governance in the SAARC countries, where political stability should be strengthened, and corruption has to be minimised to enhance GDP growth.