MPRA Munch Personal RePEc Archve Governance and economc growth: The case of Mddle Eastern and North Afrcan countres Noha Emara and Erc Jhonsa Columba Unversty, Columba Unversty 014 Onlne at https://mpra.ub.un-muenchen.de/68683/ MPRA Paper No. 68683, posted 8. January 016 03:03 UTC
Governance and economc growth: The case of Mddle Eastern and North Afrcan countres Noha Emara, Ph. D. * Erc Jhonsa.** Columba Unversty Nme109@columba.edu Columba Unversty evj10@columba.edu ABSTRACT: Usng a Two-stage Least Square (TSLS) regresson for crosssectonal observatons of 197 countres for the year 009, the study estmates the mpact of: ) an mprovement n the qualty of governance on per capta ncome, and ) an ncrease n per capta ncome on the qualty of governance. In lne wth prevous emprcal studes, the results suggest a postve, strong, and statstcally sgnfcant causaton from qualty of governance to per capta ncome. In addton, the results suggest a statstcally sgnfcant causaton from per capta ncome to qualty of governance. The estmaton results are used to nterpret the relatonshp between governance and growth for the MENA countres. One of the strkng results of the study s that, despte the relatvely low performance of most of these countres n nearly all of the sx measures of governance, ther estmated levels per capta of ncome are hgher than for the majorty of the countres n the sample. Ths mples that most MENA countres have acheved a relatvely hgh, but fragle, standard of lvng for ther ctzens n the face of poor governance. The fraglty of the standard of lvng n most of these countres was demonstrated by the uprsngs n Tunsa, Egypt, and Lbya, whch had economc grevances as one of ther key motvatng factors. The fndngs of the study have two major polcy mplcatons. Frst, development requres a strong effort to mprove governance, and second, though to a lesser extent, mprovng governance requres an exogenous ncrease n ncome through means such as multlateral ad. JEL Classfcaton Numbers: O16; O43; N0 KEYWORDS: MENA; Corrupton; Democracy; Poltcal Freedoms; Economc Growth I. INTRODUCTION From the moment that the frst protests erupted n Tunsa n December 010, followng the decson of a vegetable cart owner, Mohamed Bouazz, to mmolate hmself over the confscaton of hs cart and produce, economc grevances have played a pvotal role n fuelng the wave of protests and uprsngs n the Arab world that have already toppled the regmes of Tunsan Presdent Zne El Abedne Ben Al and Egyptan Presdent Hosn Mubarak, and more recently Lbyan Presdent Muammar El Gaddaf, and have created serous poltcal strfe n Bahran, Yemen, and Syra. Wth the excepton of ol and gas-rch Bahran, where tensons have been exacerbated by an age-old dvde between the country s Sh a majorty and Sunn poltcal and economc elte, every Arab naton whose poltcal foundatons have been serously threatened over the last three months has a per capta ncome that places t squarely n mddle or lower-ncome status and often wth hgh ncome nequalty attached. Popular anger over the economc msmanagement demonstrated by varous autocratc Arab governments and the poverty, unemployment, and lmted optons for upward moblty that have resulted from t has arguably been as mportant a factor durng the Arab Sprng n untng fractous socetes n opposton to the status quo as the yearnng for greater poltcal freedoms. Lkewse, one could argue that, whle far from the only motvatng factor, economc dscontent has played a meanngful role n drvng the protest movement n Iran n recent years. Ths paper consders the hstorcal reasons cted for such falures of governance among MENA states, and seeks to assgn relatve levels of mportance to each of these factors wth regards to ther harmful effect on both macroeconomc growth, and the actual economc opportuntes avalable to the general populace of these natons. By the standards of vrtually any sgnfcant metrc measurng the qualty of governance n a partcular country, the natons of the Mddle East and North Afrca routnely rank well below the global average. The fndngs of the World Bank s Worldwde Governance Indcators (WGI) project provde perhaps the starkest evdence of the msmanagement and msrule produced by many of the regon s governments. *Adjunct Assstant Professor, SIPA, Columba Unversty **Economcs Department, Columba Unversty
The WGI project seeks to measure the qualty of governance n a partcular naton usng sx metrcs: Voce and Accountablty, Poltcal Stablty, Government Effectveness, Regulatory Qualty, Rule of Law, and Control of Corrupton. These metrcs are measured both by a Governance Score that ranges from -.5 to +.5, and a Percentle Rank relatve to natons worldwde. For the Voce and Accountablty metrc, 19 of the Mddle East and North Afrca regon s 0 largest countres by populaton were gven a negatve Governance Score, and ranked n the 36 th percentle or lower. 14 out of 0 ranked below the 5 th percentle. For the Poltcal Stablty metrc, 13 out of 0 ranked n the 41 st percentle or lower; and two of the natons ranked above the 50 th percentle (Tunsa and Lbya) at the tme of the project s last report (009) would lkely see ther rankngs drop n an updated study. For the Government Effectveness metrc, 1 out of 0 natons had negatve scores, and 5 out of 0 ranked below the 5 th percentle. For Regulatory Qualty, 10 out of 0 had negatve scores, and 5 out of 0 agan ranked below the 5 th percentle. For Rule of Law, 11 out of 0 had negatve scores, and 4 out of 0 ranked below the 5 th percentle. And for Control of Corrupton, negatve scores were gven to 11 out of 0 natons, wth 6 out of 0 rankng below the 5 th percentle. Explanatons for the falure of the governments of varous MENA states to provde the knd of sound governance for ther populatons that can delver strong economc growth and meanngful upward moblty have tended to fall nto one of three categores: the mplementaton of msguded economc polces that provded government offcals wth an excessve amount of authorty over the allocaton of natonal resources, datng to the tme of the Cold War; the presence of rampant corrupton and cronysm throughout the organs of the state; and the lack of accountablty caused by a dearth of democracy and poltcal freedoms. For mpovershed states wth lttle natural resource ncome relatve to the sze of ts populaton, crtques of economc polcy have revolved around the socalst, state-drven economc models adopted by many Arab governments from the 1950s onward. These models, wth ther emphass on state control of major ndustres, the delegatng of major resource-allocaton decsons to central planners, and strngent controls on foregn trade and captal nflows, have been cted as a key reason why resource-poor Arab natons have faled to keep pace wth countres possessng more market-orented economc polces. For natons awash n natural resource wealth, economc polcy crtques have shned a lght on both the harmful mpact of heavy-handed state control by poltcans and bureaucrats, and a general dsnterest that s often seen regardng the development of export-orented ndustres that are not ted to resource extracton. The explanatons for poor governance that center on nsttutonal corrupton, meanwhle, are often quck to pont to nternatonal studes and rankngs that gve many MENA states poor marks wth regards to corrupton and government transparency. The harmful mpact of the wdespread need for brbes and kckbacks on both the cultvaton of domestc ndustry and the attractng of foregn nvestment s welldocumented, as s the effect of lucratve busness deals and favorable regulatory treatment beng provded to the crones and famly members of promnent government offcals. And researchers have noted that a lack of poltcal lberty not only prevents autocrats and ther underlngs from beng held accountable for ther poor economc judgment, by means of electons, but also prevents crtcs and whstleblowers from pontng out government ncompetence, corrupton, and malfeasance to ther fellow countrymen. Consderng the mpact that the embrace of market reforms, and ther mplct reducton of the economc authorty of government offcals, has had on many developng economes throughout the world, t s not dffcult to argue that questonable decson-makng by government authortes n MENA countres wth statst economc systems has been a major detrment to economc growth. In her paper, Parameters of Economc Reform n North Afrca, Karen Pfefer takes account of the economc damage done to Tunsa by ts bloated, neffcent publc sector enterprses (PSEs), whch grew n number from 5 n the 1960s to 400 by 1989 (448), and the government dktats that kept them overszed and unproftable. Wth PSEs assgned objectves other than proft-maxmzaton such as producng mport substtutes...and not free to fre workers or rase prces, ther losses ended up accountng for 0% of government outlays between 1977 and 1981 (449). The falures of Tunsa s PSEs, and the laws that left them n a partcularly woeful state, undoubtedly played a large role n Tunsa s GDP per capta growth declnng from an annual rate of 5.1% from 1970-1980 to merely 1.1% from 1980-1990 (449). Egypt was also crtczed by Pfefer for ts heavy-handed support of PSEs. In Egypt s case, not only dd massve state nvestment n PSEs have a detrmental effect on the domestc economy due to ther neffcency, they requred enormous mports of captal, technology, and other nputs n order to functon thereby roncally thwartng the Egyptan government s stated goal of mport substtuton. Moreover, as the Egyptan government offcals took an actve role n managng quanttes and prces for varous nputs and outputs, Pfefer notes that central plannng became very complex (44). After achevng 5.7% annual growth from 1970-1980, Egypt s per capta GDP grew only.4% per year from 1980-1990, and declned 0.5% per year from 1990-1995. As wth many other developng economes, a state-drven approach to ndustralzng what was ntally a predomnantly agraran economy yelded healthy economc growth at frst, but then wtnessed ncreasngly dmnshng returns due to neffcent captal spendng and general msmanagement. That corrupton and arbtrary rule-enforcement s wdespread and deeply nsttutonalzed n many MENA countres s undenable. Relyng on ten ndcators from several major thnk tanks, economst Tark M. Yousef sought to compare
Insttutonal Qualty, whch measures factors such as corrupton, the sze of the black market, the enforcement of rules and rghts, and the qualty of bureaucracy, n the OECD and sx dfferent sets of developng natons, sorted by geography. In Yousef s study, found n hs 004 paper Development, Growth and Polcy Reform n the Mddle East and North Afrca snce 1950, the Mddle East and North Afrca was gven an Insttutonal Qualty score of -0.3 ahead of only South Asa and Sub-Saharan Afrca, and well behnd the OECD, whch had a score of 1.38 (98). To make matters worse, wth a score of -0.78, the Mddle East and North Afrca ranked last (by far) n Yousef s rankngs of Publc Accountablty, whch measured factors such as poltcal partcpaton, cvl lbertes, and government transparency and responsveness. OECD natons, by contrast, reported a score of 1.89 (98). Needless to say, Yousef s fndngs dovetal very well wth the WGI project s ratngs of MENA natons n the areas of Voce and Accountablty, Regulatory Qualty, and Government Effectveness. However, the endemc corrupton found wthn many governments cannot merely be attrbuted to the falngs of autocratc governments: n many stuatons, cultural factors also appear to play an mportant role. In hs paper, Expectng the Unexpected: The Cultural Components of Arab Governance, Lawrence Rosen remarks that Arabs tend to characterze corrupton not as abuse of some formal set of crtera assocated wth a gven poston, but as the falure to share whatever largesse comes one's way wth those to whom one has forged tes of oblgaton (171). Rosen goes on to note how certan nformants of hs half-jokngly remarked that corrupton s our form of democracy, snce t allows ndvduals to dsregard an autocrat s rules n exchange for a brbe. Thus, corrupton can sometmes take on a whole dfferent meanng than what t s typcally vewed as n the West, wth the Western concept of corrupton beng sometmes tolerated, dependng on the crcumstances. And so, whle potentally detrmental to economc growth, corrupton n the Western sense of the term could reman n place to some extent even f poltcal eltes show a commtment to clean, transparent government. The hstorcal democracy defct of the Mddle East and North Afrca has clearly kept many autocrats (and untl recently, a couple of others) from beng held to account for ther falure to delver economc growth, as well as major mprovements n other human development ndcators. The chllng effect of the broader lack of poltcal freedoms n a number of countres n the regon, as manfested by wdespread reports of journalsts, wrters, and actvsts beng arrested and/or beaten, has also contrbuted to the lack of accountablty for poor governance, as many potental crtcs are frghtened nto slence, lest they run afoul of the state. And on a mcro level, evdence appears to exst that a lack of poltcal freedom has a strongly negatve effect on the governng competence of the state. In ther paper, Cvl Lbertes, Democracy, and the Performance of Government Projects, Jonathan Isham, Danel Kaufmann, and Lant H. Prtchett sought to examne the relatve effectveness of World Bank-fnanced government projects n natons that do and don t possess cvl lbertes, human rghts achevement, meda pluralsm, and the freedom to organze, after controllng for economc, project, and regonal varables. Whle the study found lttle relatonshp between the freedom to organze and performance, t found a moderately postve relatonshp wth human rghts achevement, and a hghly postve relatonshp wth both cvl lbertes and meda pluralsm (9-30). Gven the evdence, sound arguments exst for all three of the analyzed factors unsound economcs doctrnes, rampant corrupton, and a lack of poltcal accountablty havng a harmful effect on the qualty of governance n MENA countres, and thereby damagng economc growth. But at frst glance at least, economc polcy appears to be the largest culprt, gven that t can be harmful not only n ts own rght, but can aggravate the other two factors. Consderng the extent of the cultural roots of corrupton n many MENA natons, t could be argued that the most effectve soluton for mnmzng ts economc mpact s to mgrate away from a centrally-planned economy, and thereby elmnatng the power of fallble government offcals to manage the economy. And to the extent that msguded economc polces can stunt socoeconomc development, they can also nhbt a varety of factors (hgher educaton levels, a more developed cvl socety, greater exposure to the outsde world) that serve to ncrease the demand for poltcal reform. Thus, whle the effects of an mproved economc polcy on the general qualty of governance may vary tremendously from naton to naton, ts postve rpple effects are lkely to be consderable. II. EMPIRICAL SPECIFICATION The man focus of ths secton s to estmate the causal effect of governance on per capta ncome. The model s frst estmated usng Ordnary Least Squares (OLS) and Twostages Least Squares (TSLS). The model s estmated usng the cross-sectonal data of the 197 countres n 009. Next, the estmaton results are used to nterpret the relatonshp between governance and growth for MENA 1 countres. Followng Kaufmann and Kraay (00), equaton (1) below provdes a parsmonous specfcaton of the model; pgdp = α + β gov + e, (1) Where pgdp s the log per capta ncome, gov s governance, e represents all the other factors not ncluded n ths parsmonous equaton, and the subscrpt represents the country beng studed. The model s complemented by the followng equaton; * gov = gov + () u 1 Algera, Bahran, Cyprus, Djbout, Egypt, Iran, Iraq, Israel, Jordan, Kuwat, Lebanon, Lbya, Morocco, Oman, Qatar, Saud Araba, Syra, Tunsa, Turkey, Unted Arab Emrates, West Bank and Gaza, and Yemen.
Where * gov refers to the observed governance (a nosy measure of actual governance) and u refers to the measurement error. The measurement error s assumed to have a zero mean and varance σ. The man am of the above model s to estmate the long-run mpact of governance on per capta ncome. The governance ndcator covers the sx man facets of governance: voce and accountablty, poltcal stablty, government effectveness, rule of law, regulatory qualty, and control of corrupton. Accordngly, equaton (1) above s estmated sx tmes - once for each type of governance. The second part of the emprcal model ams to estmate reverse causalty, the mpact of ncome per capta on governance. Ths relatonshp s represented by equaton (3) as follows; gov = µ + γ pgdp + δ x + υ (3) Where gov and pgdp are as defned above, and x represents geographc locaton measured n lattude. Smlar to e n equaton (1) above, υ s the measurement error term wth zero mean and a varance σ v u and t captures all other factors not ncluded n ths smple parsmonous model. Followng Kauffman and Kraay (00), t s assumed that the error terms, or the omtted varables, of equatons (1) and (3) could be correlated together such that E[ e. v] = ρ. σ. σ, thereby allowng for the possblty that other factors affectng ncome per capta could be related wth other factors affectng governance. Fnally, as n equaton () above, the observed level of per * capta ncome pgdp s a nosy measure of actual per capta ncome such that; * pgdp = pgdp + w. (4) where w refers to the measurement error wth zero mean and varance σ w The leadng study by Acemoglu et al. (001) uses settler mortalty as an nstrument for nsttutons, assumng hgh settler mortalty n a country s an ndcaton of bad nsttutons. Hall and Jones (1999) have used colonal orgn, as measured by the percentage of the populaton speakng a major European language. Kaufman and Aaray (00), n ther sample of 156 countres, use tropcal locaton and colonal orgn to mpute the mssng values n Acemoglu s settler mortalty data, whch s only avalable for 56 countres. Moreover, Easterly and Wllam (00) fnd that tropcal weather, germs, and crops have an ndrect effect on development, whch passes through to nsttutons. Based on prevous emprcal lterature on nsttutons, geographc locaton or tropcal locaton s proven to be correlated wth a country s level of governance, and can be assumed as an exogenous varable n equaton (3), or not correlated wth other factors affectng per capta GDP n e v equaton (1). Accordngly, wthout gong through relevance and exogenety tests, t s far to assume that x s a vald nstrument for governance. III. DATA The data set conssts of cross-sectonal observatons for 197 countres, usng the latest avalable data on governance n 009. The parsmonous model under study ncludes economc growth as the dependent varable, measured as the log of per capta GDP (constant 000 US$), and taken from the World Development Indcators (WDI) data n the World Bank database. Data on the sx measured areas of governance - voce and accountablty, poltcal stablty, government effectveness, regulatory qualty, rule of law, and corrupton - s taken from the Worldwde Governance Indcators (WGI) project (World Bank database), and constructed by Kaufman, Aary, and Massmo. Fnally, data on lattudes was taken from the CEPII research center databases. IV. ESTIMATION RESULTS The man am of the model represented n equaton (1) s to estmate the mpact of dfferent areas of governance on economc growth. The equaton was estmated sx tmes, wth the log of per capta GDP as the dependent varable n each nstance, and the sx types of governance as regressors, each one n a turn. Table (1) below shows the results of estmatng equaton (1) usng both Ordnary Least Squares (OLS) and Two-stage Least Squares (TSLS). In lne wth prevous emprcal research, our results confrm the postve mpact of mprovng governance on the log of per capta GDP. All the coeffcents show a postve and statstcally sgnfcant mpact of governance on economc growth. For nstance, OLS Column (1) shows that a one standard devaton ncrease n the regulatory qualty measure ncreases per capta ncome by nearly three-fold n the very long run. An mpact of smlar magntude s shown for the rule of law measure on per capta ncome. Usng country lattudes as the selected nstrument, Column () of Table (1) shows the results of the TSLS. Two thngs to notce about the results; frst, the sgns of all sx governance measures are postve and statstcally sgnfcant, confrmng the results of the OLS. Secondly, n lne wth pror emprcal lterature such as Kaufmann and Kraay (00), the estmated coeffcents of the TSLS are larger than the OLS. For nstance, usng the TSLS, the mpact of a one standard devaton ncrease n the rule of law measure leads to an eght-fold ncrease n per capta ncome n the very long run, as compared wth only a three-fold ncrease usng OLS. Table 1: The Causal Effect of Governance on Income Per Capta Centre d'etudes Prospectves et d'informatons Internatonales (EPII) http://www.cep.fr/anglasgraph/bdd/bdd.htm
Regressors Ordnary Least Squares (1) Intercept 7.93 (0.091) Voce and 0.99 Accountablty (0.093) Two-stage Least Squares () 7.987 (0.199) 3.4 (1.168) No. of observaton 189 189 R 0.38 0.38 Intercept 7.938 (0.091) 8.05 (0.48) Poltcal Stablty 1.037 (0.095) 4.56 (1.789) No. of observaton 189 189 R 0.39 0.39 Intercept 7.883 (0.065) 7.880 (0.071) Government Effectveness 1.353 (0.067) 1.747 (0.17) No. of observaton 188 188 R 0.69 0.63 Intercept 7.868 (0.074) 7.859 (0.079) Regulatory Qualty 1.79 (0.077) 1.660 (0.30) No. of observaton 188 188 R 0.59 0.54 Intercept 7.99 (0.068) 7.936 (0.077) Rule of Law 1.37 (0.070) 1.836 (0.44) No. of observaton 189 189 R 0.66 0.56 Intercept 7.894 (0.078) 7.891 (0.110) Control of Corrupton 1.178 (0.079).4 (0.434) No. of observaton 188 188 R 0.55 0.10 Notes: The dependent varable s log per capta GDP. The table summarzes the results of runnng sx dfferent regressons. The numbers n parentheses are the standard errors. Fgures 1 through 3 show the estmaton of log per capta ncome regresson on the sx governance measures, wth a 95% confdence nterval. Regardng the voce and accountablty measure, as s obvous from the graph to the left of Fgure 1, nearly all MENA states le above the average estmated ncome per capta for the countres n the sample. Ths s very obvous for countres such as Qatar, Bahran, Kuwat, Oman, Lbya, and Saud Araba. Few countres n the MENA regon performed below the average for the 197 countres n the sample wth regards to the voce and accountablty measure. More specfcally, only three countres out of the MENA natons, namely Djbout, Iraq, and Yemen, le below the regresson lne. Smlarly, wth the excepton of Djbout and Yemen, most of the MENA states le above the average poltcal stablty score for the 197 countres. A strkng fact about ths fgure s that, except for two countres, Cyprus and Israel, all of the MENA states have a negatve score n the voce and accountablty measure. Moreover, except for Lbya, Oman, Qatar, Unted Arab Emrates, all countres score near zero n the poltcal stablty/no volence measure. Ths fndng suggests that the relatvely hgh per capta ncome of many MENA countres s derved from sources other than frm governance. Fgure 1: Voce & Accountablty and Poltcal Stablty 4 6 8 10 1 BHR IRN DZA EGYMAR MENA countres Log Per Capta GDP (constant 000 US$) CYP - -1 0 1 Voce & Accountablty Regardng government effectveness, Fgure demonstrates that, except for Cyprus, Jordan, Morocco, and Tunsa, every MENA state s on or above the ftted per capta regresson lne. Lbya, wth a low government effectveness measure, turns n a per capta ncome way above the sample s average. Smlarly, regardng the regulatory qualty measure, Lbya s per capta ncome measure s well above the sample s average, though Egypt, Tunsa, and Yemen s are below t. Fgure : Government Effectveness and Regulatory Qualty n MENA countres 4 6 8 10 1 IRN DZA EGY MAR BHR CYP Log Per Capta GDP (constant 000 US$) - -1 0 1 Government Effectveness Next, regardng the performance of MENA countres n the rule of law measure, as s obvous from the left panel of Fgure 3, n spte of only 8 countres n the MENA regon 4 6 8 10 1 4 6 8 10 1 IRNDZA EGY MAR BHR CYP -3 - -1 0 1 Poltcal Stablty No Volence IRN DZA EGY MAR BHR CYP -3 - -1 0 1 Regulatory Qualty
scorng above zero n the rule of law measure, the majorty of these countres land above the ftted regresson lne. For example, Lebanon and Lbya, wth respectve rule of law scores of only -0.63 and -0.75, are both well above the lne. Fnally, despte the fact that almost half of all MENA countres perform poorly on the corrupton measure, only fve countres (Djbout, Jordan, Morocco, West Bank and Gaza and Yemen) perform below the regresson lne. Fgure 3: Rule of Law and Corrupton n MENA countres 4 6 8 10 1 IRN DZA MAR EGY Log Per Capta GDP (constant 000 US$) BHR CYP -3 - -1 0 1 Rule of Law IRNDZA EGY MAR The second part of estmatng results nvolves the estmaton of the reverse causalty from per capta ncome to governance. The man dea behnd ths estmaton s to check whether the ncrease n ncome can lead to an mprovement n governance or not. By observng the performance of developed countres, for nstance, t can be expected that countres able to acheve hgh ncome levels are also able to obtan hgh-qualty governance. Table : The Causal Effect of Income Per Capta on Governance The numbers n parentheses are the standard errors. Table below shows the results of estmatng equaton (3) sx tmes, wth each governance ndcator takng a turn as the dependent varable, and per capta ncome and lattude actng as ndependent varables. For the sake of brevty, column (1) 4 6 8 10 1 BHR CYP - -1 0 1 Corrupton Dependent Varables Ordnary Least No. of R Squares Observatons (1) () Voce and Accountablty 0.380 189 0.38 (0.036) Poltcal Stablty 0.377 189 0.39 (0.034) Government Effectveness 0.510 188 0.69 (0.05) Regulatory Qualty 0.465 188 0.59 (0.08) Rule of Law 0.497 189 0.66 (0.06) Control of Corrupton 0.464 188 0.55 (0.031) Notes: The table summarzes the results of runnng sx dfferent regressons. of the table below shows the estmates of γ n equaton (3). As s obvous from the results, an ncrease n per capta ncome has a postve and a statstcally sgnfcant mpact on all governance measures. For nstance, a one percent ncrease n per capta ncome leads to an ncrease of about 0.4 ponts n voce and accountablty and poltcal stablty, and an ncrease of around 0.5 ponts n the government effectveness, regulatory qualty, rule of law, and corrupton measures. The results of the reverse causalty suggests postve feedback exsts from ncome to governance. An exogenous ncrease n ncome, from multlateral ad for nstance, leads to better nsttutons. Thus, the results ndcate the presence of vrtuous crcles n whch economc development brngs about better nsttutons. It s mportant to note, however, that estmatng the reverse causalty robustly requres estmatng equaton (3) usng nstrumental varable regresson. However, fndng an nstrument for per capta ncome s not an easy task, and there are no good nstruments for ncome n the lterature. To tackle the nstrument problem, future extenson of ths study wll follow Kaufmann and Kraay s (00) methodology to nfer the slope of effect of ncome on governance ndrectly, through comparson of OLS and IV results. V. CONCLUSION A varety of factors have been responsble for the falure of the governments of varous MENA states to provde the knd of sound governance for ther populatons that can delver strong economc growth and meanngful upward moblty. As prevously noted, the largest of these factors nclude the mplementaton of msguded economc polces that dstorted resource allocaton; rampant corrupton and cronysm; and a general lack of accountablty caused n large part by a shortage of democracy and poltcal freedom. Nonetheless, n spte of these crpplng factors, numerous MENA countres have estmated per capta ncome levels that are above the estmated average for the 197 countres n the sample. Ths mples that many MENA countres have acheved a relatvely hgh standard of lvng for ther ctzens thanks to other factors, such as an abundance of natural resources. Lbya, Saud Araba, Kuwat, Oman, Bahran, and Unted Arab Emrates depend on ol exports as ther man source of ncome. Meanwhle, major sources of ncome for Egypt nclude toursm, remttances from Egyptans workng abroad, revenues from the Suez Canal, and ol. Progress towards the formaton of democratc nsttutons that could produce greater government accountablty, as well as a more stable foundaton for an elevated standard of lvng, has been very slow n most MENA countres, wth ctzens enjoyng relatvely lmted amount of socal, economc and poltcal freedom. A fragle standard of lvng, easly upended by economc shocks such as rsng food costs, was a key factor behnd the Tunsan, Egyptan, and Lbyan uprsngs. The man mplcaton of ths study s that strong efforts are
needed wthn Mddle Eastern and North Afrcan countres to mprove the qualty and effectveness of regulatory mechansms; to brng down corrupton levels, to strengthen the rule of law, to acheve poltcal stablty and reduce nternal volence; and to make governments more accountable to ther own ctzens. Furthermore, an exogenous ncrease n ncome through multlateral ad, for nstance wll feed n better governance. A future extenson of ths study wll work on testng the robustness of the latter mplcaton by calbratng the reverse causalty regresson, and comparng the results of the TSLS wth the OLS. REFERENCES Acemoglu, D., Johnson S., Robnson J., and Thacharoen Y. 003. Insttutonal Causes, Macroeconomc Symptoms: Volatlty, Crses and Growth. Journal of Monetary Economcs 50, 49 13. CEPII database, Centre d'etudes Prospectves et d'informatons Internatonales (EPII) http://www.cep.fr/anglasgraph/bdd/bdd.htm Hall, R. and Charles J. 1999. Why Do Some Countres Produce So Much More Output per Worker than Others? Quarterly Journal of Economcs,83-116. Isham, J., Kaufmann, D., and Prtchett, L. 1997. Cvl Lbertes, Democracy, and the Performance of Government Projects. The World Bank Economc Revew, Vol. 11, No. ; May; pp 19-4 Kaufmann, D. and Kraay, A., 00. Growth Wthout Governance. World Bank Polcy Research Workng Paper No. 98. November. Pfefer, K. 1999. Parameters of Economc Reform n North Afrca; Revew of Afrcan Poltcal Economy, Vol. 6, No. 8; Dec, pp 441-454 Rosen, L. 006. Expectng the Unexpected: Cultural Components of Arab Governance; Annals of the Amercan Academy of Poltcal and Socal Scence, Vol. 603; Jan.; pp 163-178 Yousef, T. 004. Development, Growth and Polcy Reform n the Mddle East and North Afrca snce 1950; The Journal of Economc Perspectves; Vol. 18, No. 3; Summer; pp 91-115 Worldwde Governance Indcators. 009. The World Bank Group. <http://nfo.worldbank.org/governance/wg/mc_countres.asp >