Unravelling Structural Underdevelopment: Is Governance Quality the Key?

Abstract

Structural underdevelopment remains a critical economic challenge globally. Despite significant advancements, many countries and regions continue to face developmental hurdles due to historical and systemic factors. Among the myriad of factors, the quality of governance has garnered extensive focus for its role in economic outcomes. This study investigates the relationship between governance quality and economic performance of the countries, guided by institutional theory. Employing data from 197 countries over 1996 to 2022, sourced from the World Bank and the World Governance Indicators, we apply fixed effects and random effects Initial findings indicate considerable disparities in governance quality and GDP per capita among income groups. The beta coefficients from our regression analysis elucidate the influence of governance on economic outcomes. Specifically, a beta of -201.23 for Voice and Accountability implies a non-significant decrease of $201.23 in GDP per capita per unit increase, whereas Regulatory Quality and Rule of Law exhibit significant positive impacts with betas of 1384.57 and 1079.35, respectively (p < 0.01). Stronger positive relationships are evident in the random effects model, with betas of 1485.63, 2437.61, and 2222.58 (p < 0.001), reinforcing the connection between governance improvements and economic growth. This research aims to inform public policy in Pakistan and similar contexts, highlighting how governance quality can affect macro-economic outcomes