Governance and economic growth: The case of Middle Eastern and North African countries

Using a Two-stage Least Square (TSLS) regression for cross-sectional observations of 197 countries for the year 2009, the study estimates the impact of: i) an improvement in the quality of governance on per capita income, and ii) an increase in per capita income on the quality of governance. In line with previous empirical studies, the results suggest a positive, strong, and statistically significant causation from quality of governance to per capita income. In addition, the results suggest a statistically significant causation from per capita income to quality of governance. The estimation results are used to interpret the relationship between governance and growth for the 22 MENA countries. One of the striking results of the study is that, despite the relatively low performance of most of these countries in nearly all of the six measures of governance, their estimated levels per capita of income are higher than for the majority 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 in the face of poor governance. The fragility of the standard of living in most of these countries was demonstrated by the uprisings in Tunisia, Egypt, and Libya, which had economic grievances as one of their key motivating factors. The findings of the study have two major policy implications. First, development requires a strong effort to improve governance, and second, though to a lesser extent, improving governance requires an exogenous increase in income through means such as multilateral aid.