WHY DO SOME COUNTRIES LAG BEHIND? THE ROLE OF GOVERNANCE QUALITY IN ACCELERATING ECONOMIC CATCH-UP

Abstract

This study investigates the role of governance quality in accelerating economic catch-up with advanced economies, using a panel dataset of 145 countries (51 countries in the lower-middle-income group and 94 countries in the higher-middle-income group) over the period 2002–2022. A novel catch-up index is constructed, capturing the relative income dynamics of each country vis-à-vis the G7 benchmark. The analysis is conducted separately for lower-middle-income and higher-middle-income country groups using a panel ARDL model with pooled mean group estimators. The results demonstrate a robust and significant long-run effect of governance on economic convergence, particularly for lower-middleincome countries, where a 1% improvement in the governance index is associated with an approximate 0.1071% increase in the convergence index. In contrast, the effect is positive but notably weaker (0.0201%) in higher-middle-income countries, indicating diminishing returns to governance reforms in more institutionally developed settings. Importantly, we also find statistically significant short-run effects of governance for lower-middle-income economies, suggesting that governance reforms can yield not only long-term but also immediate gains in economic catch-up. In contrast, short-run effects remain insignificant for higher-middleincome economies, where convergence appears to rely more heavily on innovation, education, and technology upgrading. Moreover, the estimated speed of adjustment towards the longrun equilibrium is approximately 1.4 times higher in lower-middle-income economies than in higher-middle-income economies, indicating a faster return to equilibrium in the former . Overall, the findings confirm that governance quality is a critical and catalytic driver of longterm convergence, especially where institutional gaps remain wide. The study highlights the importance of incorporating governance reform into development strategies and provides new empirical evidence on the asymmetric impact of institutions across income levels.