Do Governance Indicators Matter for Economic Growth? The Case of Sri Lanka

Published date01 June 2019
Date01 June 2019
DOI10.1177/0019556119844616
Subject MatterArticles
Do Governance
Indicators Matter for
Economic Growth?
The Case of Sri Lanka
T. Vinayagathasan1
R. Ramesh2
Abstract
This study attempts to identify the impact of governance indicators on economic
growth using time series data for Sri Lanka from 1996 to 2016 published by
the World Bank. The Phillips–Perron (PP) unit root test confirmed that all the
variables are integrated in order one and suggested the use of cointegration
technique to identify the long-run relationship between the variables. All the lag
length selection criteria except Schwarz Information Criterion (SIC) advocated
the use of one lag as an optimal lag length for this study. Johansen cointegration
method detected three cointegrating relationships among the variables.
Further, this technique identified a significant and positive relationship between
government effectiveness (GE) and gross domestic product per capita (GDPPC)
in the long run. This result is in contrast to all the three traditional approaches,
such as correlation test, scatter plot and ordinary least squared (OLS), in which
they do not identify any clear relationship between them. Moreover, Johansen
test found a negative and statistically significant link between political stability and
absence of violence (PSAV) and GDPPC in the long run, while all three traditional
approaches identified a positive correlation between them. The findings of this
study indicate a negative association between rule of law (ROL) and GDPPC in
the long run, which coincides with theory, some of the empirical studies and
with findings of all three traditional approaches used in this study. Even though
OLS did not identify a significant relationship between control of corruption
(COC) and GDPPC, Johansen test, correlation test and scatter plot detected a
significant and negative correlation between them in the long run as expected
by the theoretical evidence. Granger’s causality test identified the bidirectional
Article
Indian Journal of Public
Administration
65(2) 430–450, 2019
© 2019 IIPA
Reprints and permissions:
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DOI: 10.1177/0019556119844616
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1 Department of Economics and Statistics, University of Peradeniya, Sri Lanka.
2 Department of Political Science, University of Peradeniya, Sri Lanka.
Corresponding author:
R. Ramesh, Department of Political Science, Faculty of Arts, University of Peradeniya, Galaha Road
20400, Sri Lanka.
E-mail: ramnaresh45@yahoo.com
Vinayagathasan and Ramesh 431
causality between GE and ROL and unidirectional causality between ROL and
COC. However, relationship between governance variables and GDPPC vary
based on the estimation methods. These findings suggest that the policymakers
need to take considerable attention on the above when they formulate and
implement policy to improve GE.
Keywords
Control of corruption, gross capital formation, government effectiveness, gross
domestic product per capita, political stability and absence of violence, rule of
law, world development indicator, cointegration
Introduction
There is a growing body of evidence that government effectiveness (GE) is more
likely to improve economic growth (Acemoglu, Johnson, & Robinson, 2001,
2005; Emara & Chiu, 2015; Fayissa & Nsiah, 2010; Kaufman & Kraay, 2002;
Knack & Keefer, 1997; Mauro, 1995). This set of influential studies do not only
show the importance of investment, labour, trade, aid, foreign direct investment
and so on for economic growth but also indicate the imperative of governance
indicators such as control of corruption (COC), GE, political stability and absence
of violence (PSAV), rule of law (ROL) and regulatory control for growth. Issues,
such as corruption, political instability, violence, ROL and accountability, con-
tinue to be a serious problem in developing countries in general and Sri Lanka
in particular. Against this backdrop, since the early 1990s, the notion of good
governance has received immense attention in the international and national
development debates, and policy discourses regarding economic growth and
development. Since then, international financial institutions including the World
Bank (WB), International Monetary Fund (IMF), Asian Development Bank
(ADB) and others continue to impose good governance practices as a condition to
release grants and loans.
Rothstein and Teorell (2008) argued that the quality of government seems
to have a significant impact on economic growth and human well-being. Some
scholars have demonstrated that lack of good governance practices has a direct
impact on economic growth in developing countries (ibid.; Holmberg & Rothstein,
2012). Some studies argue that poor governance affects the sources for economic
growth (Fayissa & Nsiah, 2010, p. 4). In addition, real economic growth improves
quality of life and subjective human well-being. In a paper presented at the 5th
Economia Panel Meeting at Harvard University in 2002, titled ‘Growth without
Governance’, WB economists Daniel Kaufmann and Aart Kraay have argued
that the quality of governance has a very strong positive impact on per capita
income (PCI) across countries. Similarly, Emara and Chiu (2015, p. 1), based on
a cross-country study of twenty-one Middle Eastern and North African countries,
found that if the composite governance index (CGI) increases by one unit, gross
domestic product per capita (GDPPC) would rise by about 2 per cent. Most of
the research works of the IMF, the United Nations and the WB show that good

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