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The Role of Governance in Economic Development: Evidence from Some

Selected Countries in Asia and the Pacific

Article  in  International Journal of Social Economics · January 2014

DOI: 10.1108/IJSE-11-2013-0262

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 International Journal of Social Economics
The role of governance in economic development: Evidence from some selected
countries in Asia and the Pacific
Muhammad Azam Chandra Emirullah
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International Journal of Social Economics, Vol. 41 Iss 12 pp. 1265 - 1278
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The role of governance The role of

governance
in economic development in economic
development
Evidence from some selected countries
in Asia and the Pacific 1265
Muhammad Azam Received 24 November 2013
School of Economics, Finance & Banking, Universiti Utara Malaysia, Revised 31 January 2014
Accepted 6 March 2014
Kedah, Malaysia, and
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Chandra Emirullah
School of Government, University Utara Malaysia, Kedah, Malaysia

Abstract
Purpose – The purpose of this paper is to explore the impact of corruption as an important element of
weak governance, with control variables such as inflation rate, openness to trade and dependency ratio
on gross domestic product (GDP) per capita income of nine selected countries in Asia and the Pacific.
Design/methodology/approach – This study is based on an annual panel data covering the period
from 1985 to 2012, and a simple multiple regression for empirical investigation is used. Both fixed
effects and random effects models were used as analytical techniques.
Findings – The study reveals that both corruption and inflation rate are negatively related to GDP per
capita and are statistically significant. As to the impacts of the control variables i.e., dependency ratio
is found to be negative and openness to trade to be statistically significant which shows a positive
impact on GDP per capita.
Practical implications – The results resoundingly confirmed the importance of good governance,
therefore, reducing endemic corruption and controlling inflation needs to be among the foremost
factors for consideration for policymakers in adopting and implementing macroeconomic and public
policies. In order to be most effective in tackling corruption, it is important to get to the root of the
problem. In light of the study findings, it is suggested that corruption need to be put under control and
economies be made more open to attain more benefits and accelerate economic growth and
development.
Originality/value – Explicitly, this study provides some valuable evidence on the linkage between
endemic corruption and economic growth in some Asia and the Pacific countries in particular and
on developing world in general. Presumably, this is the first inclusive investigation on the subject
under the study in the context of Asia and the Pacific countries and will emphatically contribute to the
literature as well.
Keywords Governance, Corruption, Economic growth and development
Paper type Research paper

1. Introduction
Undeniably, the quality of governance plays a crucial role to facilitate an environment
for sustainable development and poverty alleviation especially for developing
countries. Mr Kofi Annan, emphasized many times that “good governance was perhaps
the single most important factor in eradicating poverty and promoting development”
(United Nations, 1998). The International Monetary Fund (IMF) expresses its view International Journal of Social
about the linkage between good governance and economic development stating that Economics
“promoting good governance in all its aspects, including ensuring the rule of law, Vol. 41 No. 12, 2014
pp. 1265-1278
© Emerald Group Publishing Limited
0306-8293
JEL Classifications — C23, D73, H11, J11, O40, O53 DOI 10.1108/IJSE-11-2013-0262
 IJSE improving the efficiency and accountability of the public sector, and tackling
corruption” can make economies prospers (International Monetary Fund, 1997). Good
41,12 governance is important to achieve investment and thus economic growth by creating
sound business environment. Good governance would minimize persistent occurrence
of bad policy and therefore, enhance policy implementation.
Keefer (2009) noted ‘there is no single solid definition available for the term
1266 governance. Generally, the term governance is often referred to as an act of
government. Governance as defined by United Nations Development Programme
(1997) is “the exercise of economic, political, and administrative authority to manage
a country’s affairs at all levels. It comprises of mechanisms, processes, and institutions,
through which citizens and groups articulate their interests, exercise their legal rights,
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meet their obligations, and mediate their differences”. According to the Organization
for Economic Co-operation and Development (1995), good governance is defined as it is
“[…] among other things participatory, transparent and accountable. It is also effective
and equitable and it promotes the rule of law.” Likewise, good governance
is referred to as it “[…] encompasses the role of public authorities in establishing the
environment in which economic operators function and in determining the distribution
of benefits as well as the relationship between the ruler and the ruled”.
Bardhan (1997) has also elaborated that corruption, over centralization, and inside
conflicts are common in various parts of the world. Weak governance would create
distortions in economic policy and thus an environment for corruption. This is
especially more so if there is no clear demarcation lines between the public and private
spheres and if there is no proper regulation. If weak governance continues to persist,
the state capacity to perform its functions (such as the public good provider, market
regulator, or redistributive agent) will be undermined (Abed and Davoodi, 2000). The
United Nations Development Program (UNDP) categorized the main impediment/risk
factors into internal and external factors that affect the process of development in less
developed countries (LDCs). One component of internal impediment factors is weak
governance (e.g. rarity of transparency, no human rights respect, ineffectual public
administration and corruption).
Corruption remains a serious problem worldwide and in the Asia-Pacific region,
thus LDCs seem to be particularly affected. UNDP (2005) reported “that rampant
corruption has the major distributional implications on growth, equity and poverty as
well. Corruption causes social disintegration and distorts economic systems; it entails
discrimination, injustice and disregard for human self-respect; it imperils the stability
of democratic institutions, discriminates in the delivery of government services and
therefore violates the rights of the people and the poor in particular. Corruption is
considered a failure of institutions, in particular those in charge of investigation,
prosecution and enforcement”. The World Bank (2006) states “Bad governance is
associated with corruption, distortion of government budgets, inequitable growth,
social exclusion, and lack of trust in authorities”.
Therefore, mitigating corruption should be one of the important government efforts
which can directly affect poverty. In this context, the Pacific and South Asian LDCs are
considered to be high risk countries due to sundry internal and external hindrances to
good governance. After the Asian crisis, macro and fiscal performances were sustained,
while in most of the Asia-Pacific, LDCs governance and institutional performance
remain an issue of great importance (Keuleers, 2004). Meanwhile, another symptom
of weak governance is the lack of fiscal discipline. Consistent budget deficits
often financed by money creation by weak Central Bank can lead to persistent inflation.
 This will reduce the real purchasing power of the consumers and create distortions and The role of
uncertainty in the economy which bring negative consequences for growth. Shera
(2011) summarized that corruption is just like cockroaches. The government failure is
governance
in itself a function of corruption, but in the long run; it should have an unfavorable in economic
impact on economic growth. The study recommended that the government should development
enlarge its political determination to eliminate corruption in the system.
For the purpose of this study, we adopt the definition of governance as “the 1267
traditions and institutions by which authority in a country is exercised for the common
good”. This includes the process by which governments are selected and replaced, the
capacity of the government to formulate and implement sound policies, and the respect
for citizens and the state for the institutions that govern economic and social interaction
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among them. Whereas, corruption is defined as the “abuse of public office for private
gain” (Kaufmann, 2005). This definition is in line with that proposed by other authors
whereby public officials whether they are bureaucrats or politicians break the formal
rules by receiving something illegally either for their own private benefits or political
gains at the expense of the public (Khan, 2004).
In this sense, weaknesses in the systems and institutions which lead to the failure of
a country’s authority or government to serve its people show weak governance of the
concerned country. Therefore, it is clear in this regard that a condition that is permissive
of widespread corruption practices which benefits certain groups of people at the expense
of public interest is one form of weak governance. Thus governance and corruption is
very closely related. The lower corruption level the better is the governance in a country.
Along this line, Kaufmann (2005) has made control of corruption as one of six indicators
of governance besides voice and accountability, political instability and violence,
government effectiveness, regulatory burden and rule of law.
Therefore, it is the purpose of this study to reveal the true impact of weak
governance, which is the effect of corruption on growth performance of these Asian
countries by carrying out empirical investigation of some of countries with varying
degrees of the level of corruption and economic development. For analysis, this study
selected some lower, lower middle and upper middle income countries from Asia
and the Pacific (see the list of countries included in Table AI). It is assumed that the
characteristics peculiar to each of all these countries are held constant. However, this
study is different from the earlier studies because it not only theoretically, but also
quantitatively analyzes the impact of corruption on economic growth. Presumably, this
is the first inclusive investigation on the subject under the study in the context of Asia
and the Pacific, and thus will emphatically contribute to the growth and development
literature as well.
This paper is organized into five sections. They include.
Section 1 introduces the background of the study. Section 2 presents a brief
summary of the review of relevant literature. Section 3 describes the empirical
methodology and data sources. Section 4 interprets the results and discussion. Finally,
Section 5 deals with conclusions and presents some policy recommendations.

2. A brief summary of related literature

Though, empirical studies on the linkage between corruption and economic growth are
abundant in general, but on Asia and the Pacific are relatively minimal. For example,
Mauro (1995) discovered that corruption deters private investment which ultimately
impairs economic growth using data for 58 countries during 1960-1985. In a study,
Brunetti et al. (1998) did not find any significant linkage between corruption and
 IJSE economic growth. Ehrlich and Lui (1999) and Meon and Sekkat (2005) have shown the
negative effect of corruption on business development, economic growth, local and
41,12 foreign investment and public expenditures. Corruption hurts the process of economic
development. Chauvet and Collier (2004) find that an average GDP growth is less at 2.3
percentages per year in those countries which are suffering from poor governance
when compared with the other developing countries. Record (2005) reported that high
1268 levels of corruption and poor governance are broadly believed to be constraints to
economic growth in developing countries. The study found evidence in support of the
argument that in actual fact, causality runs from higher income to lower corruption,
rather than the other way around in VietNam.
The adverse negative impact of corruption on economic development has been
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observed by many studies[1]. Mo (2001) found that using the ordinary least squares
method, a 1 percent rise in the corruption level lowers the growth rate at 0.72 percent.
The effect of corruption on economic growth is mostly through political instability.
The study also found that corruption decreases the human capital potential and the
contribution of private investment. Guillaummemeoni and Sekkat (2005) found that
corruption is not conducive for growth. However, the impact follows the degree of
governance whereby the worse is the governance the more significant is the negative
effect on growth. This finding supports the hypothesis that corruption is “sanding the
wheels” and contradicts the view of the alternative one of “greasing the wheels”.
In a study, Akcay (2006) analyzed that corruption impair many macroeconomic
variables, which in turn, makes economic growth sluggish. Hence, Pulok (2010)
confirmed that corruption has direct negative impact on GDP per capita in the case of
Bangladesh. Azam et al. (2013) have found a negative and statistically significant
impact of endemic corruption on economic growth in five South and South East Asian
countries during 1985-2011. Dzhumashev (2014) concludes that upsurges in
government spending may push larger social losses caused by an increase in
corruption and government inefficiency. Consequently, economic growth decline in low
income countries. Ertimi and Saeh (2013) study indicates that it can be theoretically and
empirically proven that economic growth is indubitably influenced by corruption
through the variables of trade and foreign direct investment. Dridi (2013) conducted a
study based on cross-country data covering 82 countries, both developed and
developing, during 1980-2002. Thus, the results suggested that the inverse effect of
corruption on economic growth is primarily transmitted by its impact on human capital
and political instability.
Besides corruption, the literature also shows a number of important variables
that affect economic progress. Gillman and Harris (2009) found a robust negative
impact of inflation on economic growth during 1990-2003 in 13 transition countries.
Barro (2013) found that the impact from an increase in average inflation by
10 percentage points are a decline in growth rate of real per capita GDP by 0.2 to
0.3 percentage point per year and a decrease in the ratio of investment to GDP by 0.4
to 0.6 percentage point from 1960 to 1990 in around 100 countries. Kasidi and
Mwakanemela (2013) reported that inflation has a negative impact on economic growth
during 1990-2011 in Tanzania.
Edwards (1998) found that faster productivity growth has been seen when the
countries are more open and the results are applicable throughout the decades from
1960 to 1990. Some empirical studies in the past, for example, Fayissa and Nsiah (2010)
found positive relationship between openness to trade and growth. Marelli and
Signorelli (2011) calculated trade openness as exports plus imports as ratio of GDP and
 employed 2SLS. Thus, they found that trade openness has positive impact on economic The role of
growth during 1980-2007. Chatterji et al. (2014) suggested that growth in trade volumes
accelerated economic growth of India during the period of 1970-2010.
governance
High dependency ratio has been linked with low economic growth in the available in economic
literature. The argument put forth is that high dependency ratio mitigates the development
contribution of per worker to real per capita GDP growth. Some prior studies found
negative relationship between old-age dependency rates and real economic growth, 1269
for example, Masson et al. (1998) and Graham (1987). Krugman (1994) disclosed the
importance of changes in dependency ratio as the foremost factor that affect the rapid
growth of many Asian economies; whereas, Lindh and Malmberg (1999) found that it
has positive impact on economic growth for a rise in the 50-64 year old-age group but
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a negative impact for rise in the 65 plus age group.

2.1 Some facts about corruption in Asia and the Pacific

According to the Transparency International (TI) (2013), the Chair of TI, Huguette
Labelle, said that “Governments need to make sure that there are strong, independent
and well-resourced institutions to prevent and redress corruption. A lot of people are
harmed when these core institutions and basic services are undermined by corruption”.
Corruption levels have either increased or have not changed in many Asian countries
except Philippines and Taiwan, where bribery has somewhat diminished. The report
further revealed that 37 and 71 percent of respondents felt that corruption had
decreased in the Philippines and Taiwan, respectively. Likewise, 39, 71, and 71 percent
respondents thought that the level of corruption had increased in Malaysia, Indonesia
and India, respectively. Similarly, Lim (2003) concluded that countries such as
Indonesia, Philippines and Thailand based on all the available indices during the last
30-40 years, have been classified among highly corrupt countries in the world. Though,
China, received abundant foreign investment during this period, however, China is
surely a highly corrupt country.
A former minister of railways, Mr Liu Zhijun was sentenced to death, for corrupt
practices in China. Mr Liu slowly ascended from a low level office worker through the
hierarchy until he was named minister in 2003. The investigation authority discovered
around 350 flats and 16 cars with him (The Guardian, 2013). Many Chinese public
officers embezzled billions of currency and relocated mainly to the US, as it was
mentioned in a report titled: “How corrupt officials transfer assets overseas and a study
of monitoring” (Haiguang, 2013). In a recent report of NITI Central (2013), corruption
scandals such as: Agusta Westland chopper deal scam, in 2013, where the deal
amounts to INDRS 74.5 crore shamed India. There were several other corruption cases
like Italian firm Finmeccanica and Vodafone tax scandal etc. in 2013 in India. Likewise,
in Indonesia, Suharto’s reign (1967-1998) is notorious for its endemic corrupt practices.
During his authoritarian rule of 32-year, Suharto was suspected with having stolen US$
571 million. He used self-led charity programs to enrich his own family, relatives and
friends ( Jubilee, 2007). Mr Bukhari (2012) Chairman of the National Accountability
Bureau (NAB) The News International (2012) disclosed that corruption involving more
than PKR 6-8 billion occurs daily in Pakistan. The NAB shows corruptions cost the
country PKR 2.9 trillion in one year and in aggregate PKR 11.6 trillion in four years.
According to the TI Pakistan report, Pakistan had lost more than PKR 8,500 billion
(PKR 8.5 trillion or US$94 billion) in corruption, and bad governance during 2008-2011.
For further insights, Table I presents a summary of erstwhile empirical studies that
show the significant impact of corruption on economic growth.
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IJSE
41,12

Table I.
1270

Effect of corruption
on economic growth
Author(s) Sample periods and countries Methodology Independent variables Dependent variable Coefficient

Mauro (1995) 1960-1985 OLS, 2SLS Real GDP per capita growth Corruption 0.002 significant
68 countries
Mo (2001) 1970-1985 OLS, 2SLS GDP growth rate Corruption 0.55 significant
54 countries 0.989 significant
Mocan (2007) 1975-1995 Middle East and Instrumental variables Average annual growth Corruption −0.007 significant
North Africa countries estimation
Pulok (2010) 1984-2008 Bangladesh ARDL Per capita GDP Corruption −0.10 significant
Saha and 1984-2009 Fixed effects, GMM Real GDP per capita Corruption 0.0054 significanta
Mallik (2012) 150 countries 0.0220 significant

Notes: Data are in annual and corruption measured by International Country Risk Guide (ICRG) index. aSee Table I, column 4 for FE and column 5 for GMM
Source: Author’s compilation
 3. Empirical analysis The role of
3.1 Methodology governance
The purpose of this empirical exercise is to estimate the impact of corruption, using
a weak governance indicator with other controls variables such as inflation rate, in economic
openness to trade and dependency ratio on economic growth. Thus, for the empirical development
investigation the following general regression equation is to be used, which can be
expressed as: 1271
GDPPCI it ¼ a0 þ b1 P it þ b2 CP it þ b3 OP it þ b4 DPRit þ eit (1)

where, εit ¼ vit+µit .

In Equation (1) βs denotes the estimated coefficients, i and t represent the ith
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country and the tth time period, respectively (i ¼ 1, 2, …, N; t ¼ 1, 2,…, T ). GDPPCIit is

GDP per capita converted into the natural log form; Pit denotes inflation rate,
CP is corruption index, OPit is openness to trade; DPRit denotes age dependency ratio;
and εit is error term. The error term εit is encompassed vit which is time invariant
and accounts for any unobservable individual source country-specific effect that is
not incorporated in the regression model and µit is assumed to be white noise (Kimino
et al., 2007).
The expected signs of the different variables for Equation (1) are as follows:
(1) inflation rate and age dependency ratio are postulated to be negatively related
to the economic growth;
(2) the expected impact of openness to trade is postulated to be positively related
to the economic growth; and
(3) the coefficient sign of the corruption index is to be determined, however, since
the index scale runs from 1 to 6, 6 being the most corrupt, its impact on
economic growth would be negatively interpreted.
Based on the nature of the data, the panel data method is to be employed in this study for
empirical investigation. The Hausman’s test will be utilized to select whether fixed or
random effects (RE) models is relatively more appropriate for the estimation purposes.

3.2 Data
Our data set consists of a cross-section of nine Asia and the Pacific countries covering
the period ranging from 1985 to 2012. The countries and annual panel of data have
been selected based on the availability of data. Considering the relatively small sample
in this study, the results cannot be generalized to the whole countries in the Asia and
the Pacific regions, which is a limitation of this study.
Data on GDP per capita, inflation rate measured by GDP deflator (annual
percentage), age dependency ratio (percentage of working-age population), GDP,
exports and imports are extracted from the World Development Indicator, the World
Bank database (2013). The GDP per capita represents the dependent variable in our
regression analysis. Openness to trade is calculated as exports of goods and services
plus imports of goods and services (i.e. trade) as a percentage of GDP i.e. (X+M/GDP),
where X and M denote exports and imports and the data are in current US$.
Corruption index is an institutional quality variable and according to the
International Country Risk Guide (ICRG), it is constructed by the Political Risk
Service (PRS) Group Inc. East Syracuse, NY-USA. It ranks countries on a scale ranging
 IJSE from 0 to 6, where 0 denotes higher level and 6 represent lower level of corruption
(Akcay, 2006).
41,12
4. Results and discussion
In this study for empirical analysis, a balanced panel data set of 28 years is employed
for nine Asia and the Pacific countries. The sample size is 252 (n ¼ 28 × 9). A brief
1272 summary of the correlation matrix and descriptive statistics is given in Table II. It is
evident from Table II that the results obtained have expected signs and support the
hypotheses of this study.
The Panel method is used because it is relatively appropriate for empirical
investigation. The Hausman’s specification test (Hausman, 1978) is used for selection of
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fixed effects (FE) or RE model (see Greene, 2008). An insignificant p-value (p W 0.05)
shows that using RE model is safe, otherwise the FE model should be used (Klarner,
2010). In this study, the Hausman’s test indicates that RE model is preferable to the
FE model because Prob W χ2 is greater than 0.05. However, we use both of them and
the results are given in Table III.
Five versions of Equation (1) are tested by the RE and fixed-effects models based on
panel data for nine Asia and the Pacific countries spanning from 1985 to 2012, in order
to obtain a model which yields robust and cogent results and which best fits the data.
Accordingly, Table III, Column 1-5, presents the estimation results of the RE and FE
model. In Table III, column RE 1 and FE 1, all four explanatory variables are regressed.
Similarly, in column RE 2 and FE 2, three variables are also regressed and so on.
The results indicate that the estimation has mostly significant explanatory power
based on the adjusted R2 value 0.469. It means that the R2 explains almost 47 percent
variations by the incorporated explanatory variables namely corruption index,
inflation, dependency ratio and openness to trade in the response variable (see Table III,
columns 1-2). The reported F-ratio is relatively large to accept that there is joint
significance of the selected explanatory variables. Interestingly, all of the four
explanatory variables examined do in fact impact economic growth in Asia and the
Pacific countries, and are also individually significant which validate and suggest that
the model is almost technically and statistically desirable.
The results from this study model (see Table III, column 1-2) reveal that most of the
variables have expected signs and statistically significant effects on the GDP per capita
(at p o 0.05) for these Asia and the Pacific countries.

4.1 Corruption index

One of the important elements of weak governance is corruption measured by
corruption index, which is one of the components of political risk rating system and

Summary statistics Correlation matrix

Variables Mean SD Min. Max. G DPR P OP CP

G 1,024.118 821.233 218.481 5,192.119 1

Table II. DPR 66.017 13.566 38.882 90.335 −0.622 1
Descriptive P 10.817 24.592 −9.172 318.897 −0.101 0.074 1
statistics and OP 68.833 35.977 12.009 150.326 0.522 −0.343 0.118 1
correlation matrix CP 2.329 0.948 0.000 4.000 0.074 −0.087 0.181 0.131 1
 Downloaded by UNIVERSITI UTARA MALAYSIA At 19:18 19 November 2014 (PT)

Dependent variable: GDP per capita (G)

RE 1 FE 1 RE 2 FE 2 RE 3 FE3 RE 4 RE 5

Intercept 8.472 8.749 8.892 8.908 −0.004 6.509 6.727 6.582

[0.292] [0.297] [0.245] [0.179] [0.001] [0.076] [0.185] [0.194]
(29.048) (29.420) (36.342) (49.644) (−3.015) (85.254) (36.245) (33.944)
CP 0.112* 0.109* 0.104* 0.104* 0.056 0.096* – 0.045
[0.028] [0.029] [0.028] [0.029] [0.037] [0.030] [0.037]
(4.001) (3.811) (3.749) (3.759) (1.523) (3.161) (1.207)
P −0.003** −0.002** −0.002** −0.002** 6.599* −0.004** −0.004** –
[0.0009] [0.0009] [0.0009] [0.0009] [0.203] [0.002] [0.001]
(−2.737) (−2.546) (−2.486) (−2.477) (32.526) (−2.665) (−2.865)
DPR −0.0333* −0.036* −0.037* −0.037* – – – –
[0.003] [0.003] [0.003] [0.003]
(−11.111) (−11.234) (−13.949) (−13.853)
OP 0.003*** 0.0011 – – – – – –
[0.001] [0.002]
(1.862) (0.671)
R2 0.479 0.752 0.475 0.752 0.042 0.629 0.033 0.006
Adjusted R2 0.469 0.739 0.468 0.739 0.034 0.614 0.029 0.002
F-stat. ( p-value) 54.596 (0.000) 58.210 (0.000) 72.018 (0.000) 63.612 (0.000) 0.465 (5.307) 39.446 (0.000) 8.240 (0.004) 1.459 (0.228)
Hausman test ( p-value) 7.758 0.401 0.904 0.083 0.775
(0.100) (0.940) (0.636) (0.771) (0.378)
Notes: Standard errors are in brackets [ ] and t-ratio in parentheses ( ). RE and FE denotes random effects model and fixed effects model, *,**,***Statistically
significant at 1, 5 and 10 percent level, respectively
governance

development
in economic

Panel data estimates

1273

Table III.
The role of
 IJSE alsois an institutional quality variable.The result shows, it is positively related to
economic growth, meaning in this case that high corruption discourages economic
41,12 growth. The coefficient of the corruption index variable accurately reflects theoretical
expectations. The coefficient of 0.112 is found for the corruption index (column RE 1)
variable and significant statistically at the 0.000 significance level (t-ratio 4.001).
The results indicate that one unit change in the corruption index will dampen 0.112
1274 units in the GDP per capita. Therefore, empirical result is in accordance with the
findings by Mauro (1995), Mo (2001) and Record (2005).

4.2 Inflation rate

Inflation rate is included in the model to measure the macroeconomic instability and
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is also one of the elements of the weak governance which supposedly discourages
economic growth. The result indicates that it carries the expected negative sign. The
empirical results do support the hypothesized negative impact of inflation on GDP
per capita. The estimated coefficient of −0.003 is obtained for the inflation variable
which is statistically significant at the 0.006 significance level (t-ratio −2.738). The
result demonstrates that if the inflation upsurges by one percentage point, it will impair
GDP per capita by 2.738 percent. In this study, the strong, robust, negative effect of
inflation on economic growth is consistent with the prior studies like Gillman and
Harris (2009), Kasidi and Mwakanemela (2013) and Barro (2013).

4.3 Openness to trade

It is evident from Table III, column RE 1 based on our estimated model that
international trade is perhaps the most important factor that contributes to economic
growth. The estimated coefficient of 0.003 is obtained for the openness to trade variable
(measured as exports plus imports to GDP ratio) significant at the 0.063 significance
level (t-ratio 1.862), a result that follows to the general consensus. An increase of one
percentage point in openness to trade leads to arise in GDP per capita by 0.003 unit
percentage for each specific country. This study findings is therefore in accordance
with Edwards (1998), Fayissa and Nsiah (2010) and Chatterji et al. (2014).

4.4 Dependency ratio

Too much dependency on the working segment of population is usually considered
negative in the sense that it makes economic growth sluggish and thus is negatively
linked to economic growth. The results obtained havethe expected negative sign that
supports the hypotheses of the study and is statistically significant. The coefficient
of −0.0333 is found for the age dependency ratio (measured as the percentage of
working-age population) which is significant at 0.000 (t-ratio 11.111). The result reveals
that if the dependency ratio increases by one percentage point, it will discourage GDP
per capita by 0.0333 percent. The result of negative relationship between dependency
ratio and economic growth of this study is in accordance with the other studies, for
example, Masson et al. (1998) and Fayissa and Nsiah (2010).

5. Conclusions and policy recommendations

This study is motivated by the need to find out the impact of weak governance, in this
case, in the form of corruption on economic growth. The result confirms erstwhile
studies that corruption discourages economic growth which are also in line with
theoretical expectations. As to the impact of control variables they are also supportive
 both of theoretical expectations and previous empirical findings. The negative The role of
impact of inflation on GDP per capita as hypothesized is also confirmed. The other
independent variable which has also a significant effect on growth is international
governance
trade. A country which has openness to trade will benefit from increasing business in economic
activities in exports and imports. The study result also shows that high dependency development
ratio is not supportive of economic growth.
It can be concluded that corruption is a barrier to economic growth by creating 1275
economic distortions, reducing investment as the result of higher costs of doing
business and increasing inequality. High corruption shows that a country suffers from
a governance problem as the result of weakness in its institutions such as lack of
accountability, transparency, competent bureaucracy and particularly lack of rule of
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law. Therefore, improvements in governance by reducing corruption will strengthen

the country’s institutions, create a more efficient and effective bureaucracy and a better
investment climate, as well as improve allocation of resources. All of these will enhance
economic development.

5.1 Policy recommendations

The results resoundingly confirmed the importance of good governance; therefore,
reducing corruption and controlling inflation should be among the main factors for
consideration for policymakers in adopting and implementing macroeconomic and
public policies. In order to be most effective in tackling corruption, it is important to get
to the root of the problem. Policy distortions can be minimized by adopting structural
reforms such as in trade, fiscal, financial, monetary, investment and competition
policies. Meanwhile, weak state institutions can be upgraded by reforming the
bureaucracy i.e. increasing their capacity, improving their pay, adopting performance
indicators, streamlining public service processes, enhancing accountability and
transparency as well as enforcing ethics, laws and regulations for all civil servants.
Controlling inflation can be done through appropriate, prudent and coordinated
monetary and fiscal policies without causing any negative impacts on growth. On the
supply side, the governments should facilitate the production and distribution of the basic
needed social amenities such as food, energy and other necessities through the provision
of needed infrastructure and investment enabling environment. All of these measures will
be more successful to creating good governance if there are an adequate rule of law and
strong commitment on the part of the top leadership in the concerned countries.
Due to the relatively limited country sample and data in this study, a suggestion for
future studies would be to enlarge the sample and investigate the significance of other
important factors which are not included in this study to attain more robust analyses.

Note
1. However, some earlier studies such as Friedrich (1972) and Adit (2003) argued that
corruption facilitates business, commerce, economic growth and investment.

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Appendix

S. No. Economy Income group Group Region

1 Bangladesh Lower income 1 South Asia

2 India Lower middle income 2 South Asia
3 Indonesia Lower middle income 2 East Asia and Pacific
4 Mongolia Lower middle income 2 East Asia and Pacific
5 Pakistan Lower middle income 2 South Asia
6 Papua Guinea Lower middle income 2 East Asia and Pacific
7 Philippine Lower middle income 2 East Asia and Pacific
Table AI. 8 Sri Lanka Lower middle income 2 South Asia
Classification of 9 Thailand Upper middle income 3 East Asia and Pacific
countries on the Notes: Group: 1, low income: US$1,025 or less; 2, lower middle income: US$1,026 to US$4,035; 3, upper
basis of 2011 GNI middle income: US$4,036 to US$12,475; and 4, high income: US$12,476 or more
per capita Sources: Global Finance (2013) and World Bank (2012)

About the authors

Dr Muhammad Azam is PhD in Economics from the University of Peshawar, Pakistan and did
work as a Post Doc Fellow in the Department of Economics, the University of Illinois, at Urbana
Champaign-USA. Currently serving as a visiting Senior Lecturer at School of Economics, Finance
& Banking, College of Business, Universiti Utara Malaysia. Dr Muhammad Azam is the
corresponding author and can be contacted at: drazam75@yahoo.com
Chandra Emirullah is PhD in Political Economy & Public Policy, the University of Southern
California, USA. Currently serving as visiting Associate Professor at School of Government,
College of Government, Law and International Studies, the Universiti Utara Malaysia.

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