Impact of governance on economic growth: the case of an emerging economy namely Nepal

Abstract

This thesis examines the influence of governance indicators on Nepal’s economic growth from 1996 to 2023 along with assessment of the moderating role of macroeconomic variables such as Foreign Direct Investment (FDI), Gross Capital Formation (GCF) and Inflation, using the Auto Regressive Distribution Lag (ARDL) approach and qualitative semi-structured open-ended interview responses from five governance and economic expert participants. The econometric analysis reveals a long run cointegration relationship between the explanatory variables, Comp variable (aggregate of World Governance Indicators), Foreign Direct Investment (FDI), Gross Capital Formation (GCF), Inflation and dependent variable, GDP growth. It also highlights the short-term dynamics and volatility of economic growth of Nepal to political and external shocks. FDI is the only variable which shows a positive and significant relationship with GDP growth in the long run ARDL while, GCF shows negative and marginally significant at 10%. Further, Comp variable and Inflation show positive influence on GDP growth in the long run but is not statistically significant. Complementary qualitative expert insights underline governance challenges such as corruption, weak government effectiveness and political instability as major impediments and suggest governance reforms paired with strategies to mobilize domestical capital, attract and monitor foreign investments and channelize them into high return as vital if Nepal is to achieve inclusive and sustainable economic growth. The study contributes by integrating both empirical and qualitative evidences offering wide-ranging vision and policy direction to strengthen governance and sustain economic growth in Nepal.