The Role of Governance Institutions in Private Investment Decisions: The Case of Middle East and North Africa

This paper investigates the link between private investment decisions and various governance institutions in the form of corruption, quality of bureaucracy, judiciary, security of property rights, regulations and taxation, political stability, as well as political rights and civil liberties. This link is empirically tested for a panel of 32 countries by estimating a simultaneous model of private investment and governance institutions, where economic policy and other variables explain concurrently both variables. This empirical model also illustrates that economic reforms — in the form of financial development and trade openness — and human capital affect private investment decisions in two ways; directly, as well as through their positive impact on the quality of governance institutions. In MENA, deficient administration quality, political instability and low public accountability contributed significantly to the low investment decisions of the 1980s and the 1990s. Our empirical analysis also confirms that structural reforms constitute another challenge, if the region wants to catch up with more successful developing economies.