Study of the Impact of Governance and Economic Corruption on Economic Welfare in Selected Developing Countries using the Panel Smooth Transition Regression Models (PSTR)

Economic welfare is one of the key indicators for evaluating the economic and social performance of countries and is influenced by institutional, human, technological, and macroeconomic factors. This study aims to examine the impact of good governance and economic corruption on economic welfare in 18 selected developing countries over the period 2000 to 2022. For this purpose, a Panel Smooth Transition Regression (PSTR) model has been employed. In this study, the Human Development Index is considered as a proxy for economic welfare, the good governance index as a proxy for formal institutional quality, and the economic corruption index as a proxy for informal institutional quality. In addition, the model includes the control variables education, life expectancy, population growth rate, mobile phone subscription, unemployment rate, and inflation rate. The stationarity test results showed that the study variables are stationary at first differences. Furthermore, the results of the linearity test and the goodness-of-fit criteria confirmed the existence of a nonlinear, threshold relationship between institutional variables and economic welfare. Based on the results, economic corruption was found to be a more appropriate transition variable than good governance, and a model with two threshold regimes was selected as the optimal specification. The findings indicate that the effects of the variables on economic welfare differ across regimes. In the high regime, education has a positive and significant effect, while inflation has a negative and significant effect. Therefore, reducing corruption, strengthening human capital, and controlling inflation can play an important role in improving economic welfare in developing countries.