Governance and Institutional Quality and the Links with Economic Growth and Income Inequality: With Special Reference to Developing Asia

62 Pages Posted: 2 Jun 2010

See all articles by Juzhong Zhuang

Juzhong Zhuang

Asian Development Bank

Emmanuel de Dios

University of the Philippines, Diliman - School of Economics

Anneli Lagman Martin

Asian Development Bank - Economic Research

Date Written: February 1, 2010

Abstract

This paper looks at the role of governance and institutions in supporting growth and broadening inclusiveness with special reference to developing Asia. While the intrinsic value of good governance and institutions as ends of development in their own right is now universally accepted and underlies the very notion of inclusiveness, their instrumental value as a means toward better growth performance and more equal income distribution is still not well understood – despite the emergence of a large literature. This paper provides a review of this still growing literature, and, in the process, takes a close look at two critical issues that have attracted a great deal of attention: the measurement of governance and institutional quality, and direction of causality between institutional development and economic development. The paper then examines where developing Asia stands in various widely used measures of governance/institutional quality relative to the rest of the world, and the power of governance indicators in explaining cross-country variations in growth performance and income inequality in the region.

The paper argues that given its intrinsic value and positive association with the level of development, good governance should be pursued in all dimensions as a basic development goal. To maximize its instrumental value, the current literature points to the need for recognizing the context-specific nature of the linkages between governance and institutional quality, on one hand, and growth and inequality, on the other, and for focusing on the aspects that are most binding and critical to a country’s development in a particular period. The empirical analysis shows that developing Asian economies with government effectiveness, regulatory quality, and rule of law scoring above the global means (after controlling for per capita income) in 1998 grew faster on average during 1998- 2008 (by 1.6, 2.0, and 1.2 percentage points annually, respectively) than those economies scoring below the global means. On the basis of these findings, the paper argues that improving governance in these dimensions could be used as potential entry points of development strategies for many countries in the region. The paper also highlights the need for more efforts to improve the measurement of governance and institutional quality and more research to better understand the complex relationships between institutional quality and economic development.

Suggested Citation

Zhuang, Juzhong and de Dios, Emmanuel and Martin, Anneli Lagman, Governance and Institutional Quality and the Links with Economic Growth and Income Inequality: With Special Reference to Developing Asia (February 1, 2010). Asian Development Bank Economics Working Paper Series No. 193. Available at SSRN: https://ssrn.com/abstract=1619116 or http://dx.doi.org/10.2139/ssrn.1619116

Juzhong Zhuang (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Emmanuel De Dios

University of the Philippines, Diliman - School of Economics ( email )

Encarnacion Hall
F. M. Guerrero corner S. Osmena Sts
U.P. Diliman, Quezon City
Philippines

Anneli Lagman Martin

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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