The Role of Good Governance in Economic Growth: Evidence from Income Groups

This study explores the impact of governance indicators, such as rule of law, political stability, and control of corruption, on economic growth across different income groups. using dynamic panel data estimation with the one-step system gmm method, we analyze data from low-income (15 country), lower-middle-income (40 country), upper-middle-income (40 country), and high-income economies (52 country) in 2007-2022. the findings suggest that governance indicators have varying effects on economic growth depending on the income group. the analysis reveals that the impact of governance indicators on economic growth varies significantly across income groups. in low- income economies, control of corruption and regulatory quality have the strongest positive effects, emphasizing the critical role of governance improvements in fostering growth in these settings. for lower-middle-income economies, the rule of law and government effectiveness are key drivers, reflecting the importance of legal frameworks and efficient public services during economic transitions. in upper-middle-income economies, government effectiveness and voice and accountability are significant, though the moderate coefficients suggest structural and external constraints limit governance's role in driving growth. for high-income economies, regulatory quality, rule of law, and political stability are essential for sustaining growth, highlighting the role of efficient, stable, and innovation-friendly institutions. these findings underscore the evolving importance of governance indicators across development stages and the need for tailored institutional priorities to maximize growth potential. interestingly, covid-19 had a significant negative impact on economic growth across all groups, though its magnitude varied. the results show that the negative impact of the corona shock on economic growth has increased as countries' income levels have decreased. in other words, economic growth in low-income countries has experienced the greatest negative impact from the corona shock, while in high- income countries it has experienced the least negative impact. overall, this research underscores the importance of good governance in driving economic growth, especially in middle-income and low-income countries, and calls for policies that improve institutional quality to leverage trade and capital for sustainable development.