Governance and Economic Growth : Interpretations for MENA Countries

Using Two-stage Least Square (TSLS) regression for cross-sectional observations of 197 countries for the year 2009, the study estimates the impact of the improvement in the quality of governance on per capita income and the increase in per capita income on the quality of governance. Following Kaufman and Kraay (2002) methodology, the results suggest a positive, strong statistically significant causation from quality of governance to per capita income. In addition, the results suggest a positive causation from per capita income to quality of governance. The estimation results are used to interpret the relationship between governance and growth for 22 MENA countries. A striking result suggests that despite the relatively low performance of most of these countries on almost all of the six measures of governance, their estimated levels of per capita of income are relatively higher than the rest of the countries in the sample. This implies that most MENA countries have achieved a relatively high but fragile standard of living for their citizens that is not based on firm governance. The fragility of standard of living in most these countries was manifested by the latest uprising in Tunisia followed by Egypt and Libya. The study has two policy implications; first development requires a strong intervention in improving governance and secondly, though to a lesser extent, improving governance requires an exogenous increase in income through multilateral aid for instance