Governance Indicators and Their Impact on Economic Growth: A Comparison between Developed and Developing European Countries

Abstract

Purpose – This study examines the impact of governance indicators on economic growth in developed and developing European countries from 2005 to 2023. It focuses on GDP per capita as the dependent variable and governance indicators, alongside FDI, inflation, and population growth as explanatory variables. Design/methodology/approach – The study applies pooled OLS, fixed effects, random effects, and the Hausman-Taylor IV model to address endogeneity concerns and ensure robust estimates. Findings – Governance indicators significantly influences GDP per capita growth. Developed countries experience more stable growth trajectories, while developing economies benefit more from stable governance improvements. Control of corruption and political stability being key in developing economies, while government effectiveness and regulatory quality are more influential in developed nations. Inflation negatively impacts growth, while FDI fosters economic expansion, particularly where institutions are strong. Practical implications – The findings highlight the need for governance reforms: developed countries should focus on regulatory efficiency, while developing economies should prioritize political stability and anti-corruption measures. Originality/value – This study provides empirical insights into how governance indicators affect economic growth across different development stages, informing policy strategies for institutional improvement.