Governance And Economic Growth Nexus In China And Taiwan: A Frequency Domain Approach

The purpose of this study is to investigate the causal relationship between governance and economic growth in China and Taiwan, which have different levels of democracy; classified as “Not Free” country, and “Free” country, respectively. The Worldwide Governance Indicators (WGI) is analyzed in this study over the 1996 to 2012 period for China and Taiwan. The empirical results show that the causality between various dimension of governance and economic growth for China and Taiwan is not the same. There is a bidirectional causal relationship between economic growth and governance indicator (such as regulatory quality, or political stability) for Taiwan. Similarly, there is a twoway nexus between economic growth and regulatory quality (or government effectiveness) for China. Meanwhile, a unidirectional causal relationship exists running from voice and accountability (or rule of law; or control of corruption) to economic growth in Taiwan but conversely from rule of law to economic growth in China. However, for China, there is no Granger causality between control of corruption and economic growth, while for Taiwan, there is no Granger causality between government effectiveness and economic growth. The findings of this study indicate that policy makers in China could use governance indicators such as government effectiveness, regulatory quality, and rule of law while Taiwan’s policy makers could use the six governance indicators with the exception of government effectiveness, to improve their predictions of the future real GDP per capita.