Governance, Capital and Economic Growth in the Arab Region

Abstract

Arab countries (ACs) started their developmental process several years back. However, they still suffer from numerous economic, political and social problems, culminating in poor livelihoods, which was a key focus of the recent ‘Arab Spring’. This paper aims to contribute to the continuing debate on the factors that boost economic growth in the ACs in comparison to other regions in the world with an emphasis on the often neglected role of governance in growth. The analysis is underpinned by a neoclassical growth framework augmented with institutional controls, and panel data estimation techniques applied to a balanced panel data set over the period 1995 to 2014 for 97 countries including 19 from the Arab Region. The study found strong evidence of a significant positive impact of human capital and investment on growth but a significantly negative impact of regulatory quality. The most striking result from the baseline model is that the coefficient of governance is significant and positively determines growth in the whole sample, while it is negative in ACs sample. The outcomes of the empirical analyses clearly underline the importance of human capital and governance to improve the growth prospects of the ACs economies. The latter variable may have additional benefits of minimising the occurrence of political and economic instability leading to such events as the ‘Arab Spring’.