Governance and Economic Growth : - A Vector Autoregressive approach on the Frontiermarket

Abstract: Economic growth is a hot topic among economists around the world. The last century many parts of the world have faced an acceleration in the economic growth. However, that is not the case for all countries and today there is a large economic gap between the rich and poor countries. But why have some parts of the world succeeded to create economic growth while others do not? The purpose of this study is to create a deeper understanding of the mechanism between economic growth and governance in the frontier market. To do this, a Vector autoregressive time series model will be used. The frontier market is an ad-hoc market index containing 22 countries that have not been classified as developing countries yet. In the poor parts of the world high level corruption and lack of political stability such as rule of law is a fact. Hence, the study will use control of corruption, rule of law as governance variables to investigate the association between governance and economic growth among the countries in the frontier market. Further it will investigate if there is a Granger causality between governance and economic growth and whether it is running from economic growth to governance or conversely. The results implies that there is association between governance and economic growth for Bahrain, Bangladesh, Croatia, Kazakhstan, Lebanon, Lithuania, Mauritius, Morocco, Pakistan, Romania, Slovenia, Serbia, Sri Lanka and Vietnam. But, the question remains if it is good governance that creates economic growth or if it is economic growth that creates good governance in the frontier market