Revisiting the growth-governance relationship in developing Asian and Oceanic economies

In recent decades, aid agencies, international financial institutions, and developed countries have placed an increased focus on institutional quality (governance) as a criterion for the allocation of financial assistance to the developing countries. Such foreign aid conditionality is based on the general consensus that better governance leads to better economic outcomes. For Asian and Oceanic economies, however, previous studies have reported a negative relationship between economic growth and governance terming it the ‘growth-governance paradox’. We revisit the role of governance and economic growth using panel data for 37 Asian and Oceanic countries over the period of 1996–2013. Unlike previous studies, we employ panel analytic methodologies that account for different sources of biases and find that governance has, in fact, a positive relationship with growth in developing Asian and Oceanic economies.