الحوكمه في اليمن والنمو الاقتصادي دراسه تحليليه THE IMPACT OF GOVERNANCEON ECONOMIC GROWTH IN YEMEN

THE IMPACT OF GOVERNANCEON ECONOMIC GROWTH IN YEMEN: AN EMPIRICAL STUDY

By

                                                             Mr. Najeeb Alomaisi

                                                                          Advisors 

 Dr,  Adel Shmaileh     

Dr. Rahel Schomacker, prof

ABSTRACT

      This study seeks  to answer the question, to what extent governance dimensions affect economic growth represented by GDP  to see which indicator of governance has more impact on growth.  The results shows governance indicators with economic growth confirm the existence of correlation and effect between the variables of the study, which is consistent with previous literature. So, main null hypotheses rejected. The researcher also discussed points of view for a number of researchers in a number of previous literatures about governance effects on growth. Based on theoretical analysis, review of governance indicators to see whether governance affects economic growth or not. The study confirms governance is an important concept for any country, particularly developing ones. Although, the two variables rule of law and political instability has real impact but we cannot neglect the rest of variables and this is what confirmed in backward and stepwise analysis where they also confirmed the existence of the effects of governance indicators on growth. According to the whole analysis methods rule of law and political instability index repeated as the most important indicators play a pivotal role in determination of the growth on economic of Yemen.

Key words, governance, economic growth, Yemen, governance worldwide indicators

1.1: Introduction

Governance has become one of the most important concepts in both developed and developing countries. Consequently, many countries, especially in the developing world, are trying to pursue good governance and adapt according to the established concept of governance in order to achieve the desired economic growth and development. Thus, Kaufmann and Kraay (2002) stated that high ranks/levels of institutions by international monitoring agencies, meaning good governance, is essential for increasing a country’s GDP. Moreover, international organizations such as the World Bank and the Organization for Economic Cooperation and Development (OECD) have confirmed that governance cannot be isolated from the process of development: e.g., a 2003 World Bank report indicated that there is link between governance and the development process. Meanwhile, the United Nations (UNDP, 2014) added that governance is connected to sustainable development, asserting that the only way to guarantee efficient economic and social development is through moderated and accepted public policies. The UN previously described governance as“…a merging of democratic and effective Governance (UNDP, 2002).Hence, Governance is a concept that is used as a major indicator of the wellness of countries around the world (Zubir& Khan, 2014).

1.2: Study context

·         This study focuses on the link between economic growth on the one hand and various indicators of governance on the other. The study tries to answer the following research questions:

·         To what extent does weak governance in Yemen affect economic growth?

·         To what extent do programs and regulatory reforms have a positive impact on economic growth?

·         Which dimension or indicator of governance from amongst those identified by the World Bank, contributes the most to economic growth in Yemen?

1.3: Relevance of the Study:

Yemen is a developing country, not all of its efforts to move ahead have been successful. There is more than one reason for its failure to achieve sustainable economic growth, but one is absence of good governance. International organizations, donors, and researchers have prescribed good governance as a solution to persistent development problems. However, in Yemen specifically, no single study on this subject has yet been carried out according to the researcher knowledge.  This study is an attempt to fill this gap, at least in part, by examining the impact of governance on economic growth.

1.4: Study Scope and Objectives:

The study aims to identify the impact of governance indicators on economic growth, represented by GDP, in Yemen. More specifically, the objectives of the study are:

·         To determine which one of the six indicators of governance has the greatest impact on economic growth.

·         To evaluate the outcome, in terms of economic performance, of the adoption governance initiative in Yemen as a part of a reform program.

·         To highlight the hindrances to implementing good governance, which restrain economic growth, and recommend procedures for implementing governance to facilitate sustainable development and growth?

3.1: Study Hypotheses 

In order to answer the study questions, the study investigates the following hypotheses:

H0: Governance has no impact on economic growth (GDP) in Yemen at α= .05.
H0 (a) Voice and accountability has no impact on economic growth (GDP) in Yemen at α= .05
H0 (b) Control of corruption has no impact on economic growth (GDP) in Yemen at α= .05.
H0 (c) Rule of law has no impact on economic growth (GDP) in Yemen at α= .05.
H0 (d) Government effectiveness has no impact on economic growth (GDP) in Yemen at α= .05.
H0 (e) Political instability has no impact on economic growth (GDP) in Yemen at α= .05.
H0 (f) Regulatory quality has no impact on economic growth (GDP) in Yemen at α= .05. 

   

3.3.3: The Framework Econometric Analysis

According to the aforementioned study objectives, the model adopted for the study is as follows[1]:

Independent Variables                                              Dependent Variable

Fig (5) the study model

The purpose of this empirical study is to test the hypothesis that governance influences real economic growth. In reality, there is no one fully elaborated model of economic growth including governance. Instead, many practical experiences spread, and empirical research has been based on experts ‘experience (Bađun, 2005). The degree of influence is measured in this study by a multiple regressions model using the following functions:

Y_t= β₀ + β₁ X_1t+ β₂ X_2t+ β₃X_3t+ β₄ X_4t+ β₅ X_5t+ β₆ X_6t+U₀

Y: represents the economic growth real GDP variable.

X1: represents the voice and accountability variable.

X2: represents the control of corruption variable.

X3: represents the government effectiveness variable.

X4: represents the rule of law variable.

X5: represents the regulatory quality variable.

X6: represents the political instability and absent of violence variable.

α= .05 represents the level of significance.

Results and Discussion:

To fulfill the study following tables depict the most important tests undertaken. Researcher started with the normality check, variance inflation factor, followed by correlation, and finally, regression. 

For the purposes of this study we estimated missing data for three years to cover the entire period of the study. As explained, the data for the independent governance variables were collected only every two years; therefore, we estimated data for the years 1997, 1999, and 2001, in order to be consistent with the dependent variable, GDP.

Table (4.1)

                                                        Tests of Normality

	Kolmogorov-Smirnova			Shapiro-Wilk
	Statistic	D.f	Sig.	Statistic	Df	Sig.
(V.A)	.158	18	.200*	925	18	.158
(CC)	.101	18	.200*	.958	18	.559
(G.E)	.149	18	.200*	.961	18	.616
(P.INS)	.265	18	.002	.783	18	.001
(RQ)	.134	18	.200*	.919	18	.126
(RL)	.142	18	.200*	.961	18	.624
GDP log	.180	18	.127	.900	18	.058

a. Lilliefors Significance Correction

  *. This is a lower bound of the true significance.

Table 4.1 shows the results of the normality test for the study variables. It can be seen from the table that normality was achieved for all of the study variables; only one governance variable, political instability, was less than the significant level .05, which does not affect the overall distribution. It is important to notice that with the dependent variable (GDP in current US$), we used a logarithm to reduce the values using the log function (Gelman and Hill, 2007)

Table (4.3)

Variance inflation factor to test multi-co-linearity of independent variables

Model	Co linearity Statistics
	Tolerance	VIF
(V.A)	.104	9.602
(CC)	.218	4.595
(G.E)	.110	9.099
(P.INS)	.119	8.423
(RQ)	.344	2.910
(RL)	.467	2.142

Table 4.3shows the results of the multi-co-linearity test between the independent variables. It can be seen that the VIF values are close to 1 and do not exceed 10, which indicates that the co-linearity is not a problem in this regression model (Gujarati and Porter, 2010)

Correlation:

Tables4.3a to 4.3f below shows the correlations. It was found that all of the indicators have a correlation with GDP because the p-values are below the significance level of .05.Only the variable regularity quality has no relationship with GDP because of the P. value higher than the significance level.

                             

                              Correlations

			GDP Log	(V.A)	(G.E)	(PINS)	RQ)	(CC)	(RL)
Spearman's rho	GDP Log	Correlation Coefficient	1.000	-.930(**)	.916(**)	-.887(**)	-.398	-603(**)	.643(**)
		Sig. (2-tailed)	.	.000	.000	.000	.102	.008	.004
		N	18	18	18	18	18	18	18
	(V.A)	Correlation Coefficient	-.930(**)	1.000	.909(**)	.841(**)	.428	.672(**)	-.461
		Sig. (2-tailed)	.000	.	.000	.000	.076	.002	.054
		N	18	18	18	18	18	18	18
	(G.E)	Correlation Coefficient	-.916(**)	.909(**)	1.000	.769(**)	.461	.711(**)	-.476(*)
		Sig. (2-tailed)	.000	.000	.	.000	.054	.001	.046
		N	18	18	18	18	18	18	18
	(PINS)	Correlation Coefficient	-.887(**)	.841(**)	.769(**)	1.000	.230	.542(*)	-.622(**)
		Sig. (2-tailed)	.000	.000	.000	.	.358	.020	.006
		N	18	18	18	18	18	18	18
	RQ)	Correlation Coefficient	-.398	.428	.461	.230	1.000	.331	-.061
		Sig. (2-tailed)	.102	.076	.054	.358	.	.179	.810
		N	18	18	18	18	18	18	18
	(CC)	Correlation Coefficient	-.603(**)	.672(**)	.711(**)	.542(*)	.331	1.000	.044
		Sig. (2-tailed)	.008	.002	.001	.020	.179	.	.861
		N	18	18	18	18	18	18	18
	(RL)	Correlation Coefficient	.643(**)	-.461	-.476(*)	-.622(**)	-.061	.044	1.000
		Sig. (2-tailed)	.004	.054	.046	.006	.810	.861	.
		N	18	18	18	18	18	18	18

**  Correlation is significant at the 0.01 level (2-tailed).

*  Correlation is significant at the 0.05 level (2-tailed).

Regression: Enter method

Linear regression enter method (full model)

Table 4.4

The linear regression enter method (full model)

Model Summary

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.987a	.974	.960	.05514500

a.                   Predictors: (Constant),(RL),(CC),(RQ),(P.INS),(GE),(VA)

b.                  GDP.log

Table 4.5

ANOVA test to determine the full regression model

ANOVAs
Model		Sum of Squares	Df	Mean Square	F	Sig.
1	Regression	1.273	6	.212	69.759	.000a
	Residual	.033	11	.003
	Total	1.306	17

a. Predictors: (Constant), (RL), (CC), (RQ), (P.INS), (GE), (VA)

b. Dependent Variable: GDP log

As table (4-4), (4-5) Where the value of R2 is considered an indicator of the amount of variation and differences in the dependent variable (economic growth), that it is attributed or due to the variance in the independent variable (governance). The tables show R²value of the Full Model regression is 0.974 at P-Value of 0.00, which is less than Significance level of 0.05 so it provides enough evidence that our model is significant. Therefore, the main hypotheses will be rejected. 

Table 4.6

Coefficients^a

Model	Unstandardized Coefficients		Sig .P.V
	R2	B
(Constant)	.974	9.854	.000
(V.A)		-.281	.118
(CC)		-.017	.891
(G.E)		-.232	.309
(P.INS)		-.182	.049
(RQ)		-.370	.068
(RL)		.606	.000

a. Dependent Variable: GDP log

 Tables 6-4 show political instability and rule of law sub-hypotheses also rejected because of sig value less than .05 which indicate the positive impact with rule of law dimension and negative impact with political instability.

Full Model: Y = 9.854- .281X- .017 X2 - .232 X3-.182X4-.370x5+.606x6. Consequently, we reject the null hypothesis that governance has no impact on economic growth, in terms of GDP.

While the best model will be: Y= 9.854+.606x6- .182x4.

Conclusion

Governance is an important matter for countries to succeed, in order to foster economic growth and citizens’ wellbeing. The six indicators of governance chosen by the World Bank were examined in this study to test their impact on economic growth in Yemen. After a thorough analysis, the following observations could be made. Relationship and impact are founded and this is clear with political instability and rule of law.

Recommendations

Based on the empirical findings and the theoretical part of this study, our recommendations can be categorized and addressed to two groups, as delineated below. Even if these recommendations are, at the current stage of Yemen’s development, far removed from reality, they may provide a starting point for policy action as well as further research.

A: Government Officials and Policy Makers

ü    Improve governance quality as main tool for stemming deterioration in general. Enhance the transparency of the government’s performance.

ü    Based on the result more efforts to monitor corruption and application of the provisions of the law when found officers guilty  and bring them to justice

ü    Political instability and the rule of law should be considered by policy makers and government to be primary goals, because they have the clearest effect on growth.

ü    Adopt the principles of international governance and work to create local principles that suit Yemen environment and culture.

ü  B: Academic Researchers

This study examined and elaborated on the relationship between governance and growth, and the impact of the former on the latter. More studies related to good governance, its roots and consequences, as well as ways to improve it are required to help countries around the world implement sustainable good governance. As this study focused on Yemen only, adding other Arab countries may be beneficial, as a cross-country comparison could identify country- or region-specific factors that influence governance quality. Additionally, panel studies might contribute by providing insights into the extent to which changes over time have taken place and the consequences that resulted from variations in governance quality in specific countries or regions.

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[1]The researcher developed this model based on previous studies, some of which take the six indicators as independent variables while some select a few of the variables. Referring to worldwide indicators taken from the World Bank and the literature review of many articles, e.g. Syed SohaibZubai and Makar Ali Khan(2014),2-Debaggie(2008).