The Non-Linear Effects of Good Governance Index and Natural Recourses Abundance on Economic Growth in D8 Countries (Smoothing Transition Regression in Panel Data)

Abstract

Objective: The relationship between institutions and economic growth is one of the main issues in economic development debates and has been considered empirically in recent years. Hence, the main purpose of this paper is to investigate the effects of institutions and recourses management improvement on economic growth in D8 countries during the period of 1996-2019. Method: For achieving this objective, the econometric model is estimated by applying PSTR method in panel data. Results: The results of threshold estimation show that the threshold of good governance index is -0.67 and its effect on economic growth of Islamic developing countries before and after this value will be different. Since the value of good governance index in 8 developing Islamic countries is between -1.28 and -0.19, so it is expected that the estimated threshold is in the range between low and high. In addition, the value of the estimated threshold is in the neighborhood of its average value, -0.71. Moreover, the speed of transmission to the nonlinear section for these countries is 1.46. Furthermore, the good governance index in both regimes has a positive effect on economic growth, which, of course, increases its intensity by exceeding the threshold or entering the second regime or above average. It is expected that at high levels of governance (low levels of corruption and redundant regulations and political constraints and high levels of political stability and the rule of law and the effectiveness of government) where the quality of institutions is also high, all good governance components attract domestic and foreign investment, Accelerate economic growth rate.The impact of human capital in both regimes is positive. In this regard, it can be argued that when governance and the quality of institutions are low, the necessary investments in human resources are not take place in this group of countries. The coefficients of abundance of natural resources are positive in both regimes, and with the transition to high levels of good governance (the second regime), the intensity of its positive influence increases. In other words, with the improvement of the good governance index and its components, the effect of natural resource management on production and economic growth has also improved, while in the low state of the good governance index, the abundance of natural resources has had a small effect on economic growth. Therefore, the effect of improving natural resources at a high level of good governance on the economic growth of Islamic countries is significant. The FDI has positive and significant impact on the GDP growth rate in every linear and non-linear parts.So, in every regimes (linear and non-linear) good governance and natural resource abundance variables have positive and significant impacts on the economic growth and other explanatory variables such as gross capital formation, FDI and human capital have positive effects on GDP growth in every linear and nonlinear parts. Conclusion: in the high level of governance accompanied with low corruption, redundant rules, political constraints, all indices of good governance attract domestic and foreign investment and accelerate economic growth.

Keywords

• good governance index
• natural recourses abundance
• economic growth
• d8 countries
• pstr method