Impact of Governance Quality on Economic Growth

Abstract

This study investigates the heterogeneous impact of governance quality on economic growth across 155 countries from 1996 to 2024. Utilizing the six Worldwide Governance Indicators (WGI) and an interaction fixed-effects model, the analysis disaggregates effects across least developed, developing, transitional, and developed economies. Results reveal that institutional impacts are highly development-contingent. While Political Stability consistently supports growth, dimensions such as Government Effectiveness and Rule of Law exhibit contrasting contemporaneous and lagged effects across several development groups, suggesting that rapid formalization and administrative reforms can impose short-term adjustment costs. Furthermore, Control of Corruption and Voice and Accountability show limited or context-specific significance, lending partial support to the “grease the wheels” and institutional sequencing hypotheses. These findings challenge the “one-size-fits-all” approach to institutional reform, suggesting that governance priorities must be calibrated to a country’s specific developmental stage and administrative capacity to effectively foster sustained economic growth. Additionally, the study contributes to the empirical literature by offering policy-relevant insights into how the sequencing and pacing of institutional reforms can mitigate unintended economic disruptions across different development contexts.