Impact Of Economic Governance On Total Investment Volatility

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A sustained level of investment plays a critical role for the growth and development of an economy. However, the investment levels are subject to high degree of variability and fluctuations within and across countries. Volatility in investment triggers uncertainty and deters capital accumulation and thereby substantially reduces the growth potentials. Good governance is a critical stimulant for backward and forward linkages of sustained productive investment. In view of this, the present study analyses the impact of economic governance on total investment volatility in a sample of 24 Asian and African countries during the period 1985-2011. The total investment volatility has been calculated using Hodrick-Prescott (HP) filter and economic…show more content…
It is considered as the most volatile part of aggregate demand. Several growth models have advanced the rate of investment as a primary driver of an economy’s performance. However, the investment rates have not been the same among different regions of the world. Within Asia, investment has been comparatively lower in South Asia as compared to East Asia. The investment rate in Sub-Saharan Africa has shown a decline over a period of time. In addition, the investment rates in Asia and Africa have exhibited significant variability with time, thereby indicating its volatility.
The investment climate is believed to be influenced by the quality of governance in an economy. According to Dixit (2001), the concept of economic governance can be defined as, “the structure and functioning of the legal and social institutions that support economic activity and economic transactions by protecting property rights, enforcing contracts and taking collective action to provide physical and organizational infrastructure.”
The catalytic role played by institutions in the performance of an economy came into prominence in the post First World War, in the form of ‘Old Institutional Economics’ but gained its momentum in the 70’s. The emergence of ‘New Institutional Economics’, a term put forth by Oliver Williamson in 1975, owes itself mainly to Douglass North (North and Thomas 1976; North 1981, 1990 and 2005). It aims at expanding the neo classical model by incorporating the
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