The Impact of Regulation on Economic Growth in Developing Countries: a Cross-Country Analysis

THE IMPACT OF REGULATION ON ECONOMIC GROWTH IN DEVELOPING COUNTRIES: A CROSS-COUNTRY ANALYSIS

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ABSTRACT

The role of an effective regulatory regime in promoting economic growth and development has generated considerable interest among researchers and practitioners in recent years. In particular, building effective regulatory structures in developing countries is not simply an issue of the technical design of the most appropriate regulatory instruments, it is also concerned with the quality of supporting regulatory institutions and capacity. This paper explores the role of state regulation using an econometric model of the impact of regulation on growth. The results based on two different techniques of estimation suggest a strong causal link between regulatory quality and economic performance.

Key words - economic growth; regulation; governance; developing countries; institutions. JEL classification: C23,I18, L33, L51, L98, O38, O50

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Acknowledgement

We would like to thank three referees for their perceptive comments on an earlier draft of this paper. The usual disclaimer applies.

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INTRODUCTION

The role of an effective regulatory regime in promoting economic growth and development has generated considerable interest among researchers and practitioners in recent years (e.g. World Bank, 2004). Regulation can take many forms and the form of regulation policy adopted in developing countries has shifted over time (Minogue, 2005). From the 1960s to the 1980s, market failure was used to legitimise direct government involvement in productive activities in developing countries, by promoting industrialisation through import substitution, investing directly in industry and agriculture, and by extending public ownership of enterprises. However, following the apparent success of market liberalisation programmes in some developed countries, and the evidence of the failure of state-led economic planning in developing ones (World Bank,

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