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FreeBalance Clients on the Road to Government Effectiveness

 

August 12, 2013

FreeBalance Clients on the Road to Success, Part 7

Carlos Lipari, FreeBalance Advisory Services

We considered the association between the six standard World Goverannce Indicators (among which government effectiveness) and the economic growth rate of 172 countries making use of cross-sectional econometric analysis for the year 2010. In addition to the governance indicators we also added multiple control variables to our analysis, selected based on the literature available on economic growth (Robert Barro (1991), Sala-I-Martin (1997)). Finally, in order to increase the robustness of our benchmark scenario, we also added seven additional specifications, where the number and type of control variables was changed. Results suggest that among the governance indicators used only governance effectiveness has a statistically significance association with economic growth but government effectiveness appears to have a strong economic significance on economic growth. Investment also appears positively associated with economic growth.

The basic methodology used consisted of running cross-sectional regressions of the form of:

         γ=α+βx1+βX2+…+βxn+ε

Where γ is the vector of rates of economic growth and x1, …, xn are vectors of explanatory variables and the variables used where:

  • Rule of Law
  • Governance Effectiveness
  • Voice & Accountability
  • Political Stability & Absence of Violence
  • Control of Corruption
  • Regulatory Quality
  • Gross Investment in % of the GDP
  • Human Development Index
  • Cost of Living
  • Output Gap
  • Sub-Saharan Countries Dummy
  • Latin America & Caribbean Dummy

Also, robust standard errors were used in order to account for the likely possibility of heteroskedasticity. By heteroskedasticity we mean that the variance of the errors conditional of x might not be constant.

Contents

  1. Introduction to the Study
  2. Government Revenue
  3. Government Expenditures
  4. Government Gross Debt
  5. Country Investment
  6. Real Investment Growth Rates
  7. Government Effectiveness
  8. Interpretation
  9. Conclusions
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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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