Governance Institutions and Private Investment: An Application to the Middle East and North Africa

Abstract

This paper addresses the issue of the low level of private investment in the Middle East and North Africa (MENA) region, with special emphasis on the role of governance. Based on the existing published reports, we categorize what types of governance institutions are more detrimental to entrepreneurial investments. We then estimate a simultaneous model of private investment and governance quality where economic policies concurrently explain both variables. Our empirical results show that governance plays a significant role in private investment decisions. This result is particularly true in the case of "administrative quality" in the form of control of corruption, bureaucratic quality, investment-friendly profile of administration, law and order, as well as for "political stability." Evidence in favor of "public accountability" is also found. Our estimations also stress that structural reforms like financial development, trade openness, and human development affect privateinvestment decisions directly, and/or through their positive effect on governance.

Social infrastructure and the preservation of physical capital: Equilibria and transitional dynamics

“…This 5 As we discuss above, we consider that social infrastructure is acting in order to preserve physical capital, decreasing its net depreciation rate. However, we would obtain similar results if we considered a direct and positive effect of social infrastructure on investment.…”

“…However, we go further and consider that the channel is through the protection of physical capital or investment. In fact, empirical literature has found a negative relation between corruption levels and capital accumulation (Campos and Lien, 1999), corruption and productivity (Salinas-Jiménez and Salinas-Jiménez, 2007), social barriers and capital accumulation (Grafton et al, 2007), and social capital and corruption (Bjørnskov, 2003a); it also found a positive relationship between governance institutions and investment (Aysan et al, 2007), responsibility and capital accumulation (Breuer and McDermott, 2009), and trust and capital accumulation (Yamamura and Inyong, 2010). Closer to our work, Bu (2006) presented evidence according to which depreciation rates are higher in developing countries than in developed ones.…”

Context, law and reinvestment decisions: Why the transitional periphery differs from other post-state socialist economies

“…'Administrative quality' in the form of control of corruption as well as the investment-friendly profile of administration, law and order is an important influence in decisions about resource commitment (Aysan, Nabli, & Veganzones-Varoudakis, 2007), with strong legal institutions critical in securing property rights and integrity of contract (Haggard, MacIntyre, & Tiede, 2008).…”

A Good Turn Deserves Another: Political Stability, Corruption and Corruption-Control

“…(i) no impacts 1 , negative effects (Ugur & Dasgupta, 2011;Mo, 2001;Mauro, 1995) or positive impacts 2 on investment and economic prosperity; (ii) slight weak impact of corruption on economic growth via the investment channel (Mauro, 1997); (iii) negative effect in specifically investment-oriented lines of inquiry (Everhart et al, 2009;Baliamoune-Lutz & Ndikumana, 2008;Aysan et al, 2007;Brunetti et al, 1998;Mauro, 1997); (iv) perilous effect of foreign investment (Wei, 2000a) and bank credit (Ahlin & Pang, 2008;Wei & Wu, 2001;Wei, 2000b) in studies focused on capital flows; (v) negative return (De la Croix & Delavallade, 2007;Haque & Kneller, 2008) and quality (Tanzi & Davoodi, 1997) of public expenditure, particularly in general (Delavallade, 2006) and military (Gupta et al, 2001) expenditure and (vi) the depletion of governance income (Blackburn et al, 2008;Friedman et al, 2000;Ghura, 1998;Tanzi & Davoodi, 1997).…”