The Explorer Islamabad: Journal of Social Sciences

ISSN (E): 2411-0132, ISSN (P): 2411-5487

Vol-1, Issue (7):237-240
www.theexplorerpak.org

GOOD GOVERNANCE AS A TOOL TO COMBAT INFLATION

Muhammad Waqas Khalid, Aadil Hameed Shah
Students of MPhil Economics, PMAS-Arid Agriculture University, Rawalpindi
Corresponding Author :
Muhammad Waqas Khalid
PMAS-Arid Agriculture University Rawalpindi, Pakistan
Waqaskhalid2711@gmail.com

Abstract: Now a days good governance is a burning issue of the modern world. Good governance helps maintain social
equality as well as economic growth. The paper is presents the effect of good governance on inflation. Good Governance is
divided into three basic dimensions; Economic Governance, Political Governance and Institutional Governance while each
dimension is further divided into two dimension. The data used in this paper is time series data, world governance
indicators presented by Kaufmann et al., which is Upper bound of 90% confidence interval for governance, in percentile
rank terms. By using methodology of Engle Granger it is found that every dimension of basic dimension has short run as
well as long run relationship with inflation.

Key Words: Economic Governance, Political Governance, Institutional Governance, World Governance Indicators
INTRODUCTION
Good governance is a term that describes us how
public institutions manage public affairs and manage
public resources. Governance is a process through
which government makes decisions and makes
policies to implement those decisions. The term
governance correlates with different sectors of
society, international, national as well as local
governance.
The concept of "good governance" often emerges to
compare ineffective economies or political bodies
with sustainable economies and political bodies. The
concept cores lies on the responsibility of
governments and governing bodies to meet the
needs of the masses as opposed to select groups in
society.
Asian Development Bank (1995) identified four basic
elements of good governance such as accountability,
participation, predictability and transparency.
Governance is known to be good democratic
governance at domestic level if all these elements are
to be fulfilled; fair election & citizen participation,
Citizen expectations are met, Efficiency &
Effectiveness, Transparency, Law & Judicial decisions
are respected, No Ethical Conduct , Skill and Capacity
are continually improved ,Openness to change &
Innovation, Development is Sustainable , Sound
Financial Management , Respect for Human Rights &

Cultural Diversity and Accountability (Grindle 2010).

Despite some differences in the definition, the idea of
good governance has also reverberated across a wide
political spectrum. For those on the political right,
good governance has intended order, rule of law, and
the institutional conditions for free markets to
flourish. For those on the political left, good
governance include a concept of equity and justice,
security for the poor, for subgroups, and for females,
and a positive role for the state.
Governance issues at the macro and micro level.
Constitution, size and resources of government, and
relationship among legislator, judiciary and the
military are included in macro issues, while
commercial firms, social institutions and civil society
affairs are being included in micro issues (McCawley
2005).
Governance is the exercise of political, economic and
governmental ability to manage affairs at all level of
country. It consist of processes, mechanisms and
institutions through which citizens of the country
articulate their securities, use their legal rights, meet
their obligations and mediate their differences(
United Nation Development Program 1997). The
definitions of governance used by international
organizations vary substantially (Weiss 2000). For the
OECD, governance denotes use political authority to
exercise the control in economy to manage resources

237

for social and economic development (Kaufmann, et

al. 2000). In determining the component rating on
the basis of ICRG, the political category contributes
50 percent to the rating while other two categories
that are financial and economic categories contribute
25% each. This development is predictable to
improve the quality and expand the scope of works to
Augmented Dickey
Stationary
At Level

Fuller

(ADF)

Test

for

Varia
bles

Interc
ept

Trend
&
interc
ept

At
1st
Difference
Interc Trend Diffe
ept
&
renc
interc e
ept

Infl

-1.80

-2.82

-4.35

-4.07

I(1)

G.E

-1.01

-2.29

-3.03

-3.94

I(1)

R.Q

-2.35

-2.20

-3.32

-3.17

I(1)

V.A

-2.63

-2.34

-3.70

-2.27

I(1)

P.I.V

-1.37

-1.79

-4.60

-4.82

I(1)

R.L
-0.95
-4.73
-7.32
-6.79
I(1)
C.C
-2.19
-2.94
-3.90
-3.75
I(1)
find the determinants and consequences of good and
bad governance. Although this new dataset of the
categories is suitable for mapping out governance
profiles and gaps across the countries as well as
within the country, it is less useful for making causal
inferences about the relationship between
institutions and growth.
MATERIALS AND METHODS
The good governance divided into three dimensions ie Economic Governance, Political Governance,
Institutional Governance while each dimension is
further divided into two dimensions i-e Government
effectiveness, Regulatory quality, Voice and
accountability, Political instability and violence, Rule
of law, Control of corruption (Kaufmann, et al. 2000).
Here in this paper we follow the dimensions of world
good governance indicators provided by Kaufmann et
al.
Functional form:
Y=F(X1, X2, X3 ,X4 ,X5 ,X6)
Infl= F(G.E, R.Q, V.A, P.I.V, R.L, C.C )
Where
Infl = Inflation
G.E= Government effectiveness
R.Q=Regulatory quality
V.A=Voice and accountability

P.I.V=Political instability and violence

R.L= Rule of law
C.C= Control of corruption
Engle Granger Methodology are used to show short
run as well as long run relationship among the
variables. The data used in this paper is time series
data, world governance indicators presented by
Kaufmann et al., which is Upper bound of 90%
confidence interval for governance, in percentile rank
terms.
RESULTS AND DISCUSSIONS
The above mentioned model is simple regression
model, the estimation of this model is taken through
ordinary least square (OLS) method which states that
parameters are chosen in such a way that residual
sum of square is minimum. For ordinary least square
method the parameters and variables should be
linear; the model in this study satisfies this
assumption so it is the justification of using OLS
method. The correctness of data set is judged by
applying unit root test for testing the stationarity of
data. It is important to decide whether the time
series is level or difference. The data is stationary
when its mean, variance and covariance are constant
over time.
Analysis of the above mentioned tables is that all the
variables are found non stationary at level and
intercept. The variables become stationary when the
t-calculated value is more negative than the t-critical
value. Consequently, ADF (Augmented Dickey Fuller)
test has been used to check the stationarity of the
variables. However, all the variables are stationary at
1st difference which are shown above table. It is
important to mention here that if the stationary
variables are used, then the results achieved, would
be considerable and non-spurious.
There is also a problem of multicolinearity between
two independent variables which means that there is
linear relationship between two independent
variables. The correlation matrix has been used to see
linear relationship between variables. The results of
correlation matrix is as follows.
G.E
R.Q
V.A
P.I.V R.L
C.C
G.E
1.00 0.29
0.58 0.56
0.5
7
0.03
7
3
46
1
R.Q
0.29 1.00 0.77 0.15 0.22 0.2
7
4
9
7
38
V.A

238

P.I.
V

0.03
1

0.77
4

1.00

0.15
6

0.22
3

0.2
21

0.58
7

0.15
9

0.15
6

1.00

0.55
3

0.3
65

0.56
3

0.22
7

0.22
3

0.55
3

1.00

0.0
78

0.54
6

0.23
4

R.L

C.C
0.36 0.07 1.0
0.22
5
8
0
1
The variance inflation factors have also been used to
detect the multicollinearity; the value of VIF is 11.11
which show that no multicollinearity exists in the
independent variables. Another problem that exists
in the presence of two independent variables is
hetroscedasticity which means variance of error
terms
differs
across
observations
but
hetroscedasticity is the problem of cross-sectional
data but here time series data has been used, so
there is no need of hetroscedasticity check. The other
problem which is associated with the time series data
is autocorrelation, which means correlation between
members of observation ordered in time. By Using
Durbin Watson test there is no autocorrelation
detected in the data.
Variable
Coefficients Std.
tProb
Error value .
C
29.25
10.51 2.78
0.02
7
G.E
-0.36
0.24
-1.49 0.17
R.Q
0.44
0.28
1.56
0.16
V.A
-0.16
0.31
-0.51 0.63
P.I.V
-0.08
0.13
-0.65 0.53
R.L
-0.30
0.27
-1.10 0.31
C.C
-0.20
0.18
-1.11 0.30
After applying simple OLS and applying ADF test on
residual at level the value of residual -4.12 which is
more negative then Engle Granger table value -3.17.
SO results shows that there exist long run
relationship and result are not spurious according
Engle Granger while results are against the classicals
point of view which said that if we run OLS on with
making data stationary our results are spurious. So
our results are supporting the theory of Engle
Granger and reject the theory of Classicals. The
theory of Engle Granger are detailed discuss in
methodology.
Engle Granger result with 1st difference and ECM

Variabl
e
C
G.E
R.Q
V.A
P.I.V
R.L
C.C
ECM
RSquare
d
(0.907)

Coefficie
nts
0.69
-0.50
0.55
-0.07
0.23
-0.31
-0.43
-0.58
Adj-R-Sqr
(0.77)

Std.
Error
1.19
0.28
0.27
0.25
0.38
0.17
0.20
0.19
F-Stat
(7.01)
Prob
(0.024)

t-value

Prob.

0.58
-1.74
2.10
-0.27
0.61
-1.82
-2.11
-3.06
J-B Test
(2.41)
Prob
(0.298)

0.58
0.14
0.08
0.80
0.57
0.13
0.08
0.02
DW
(1.98)

After using the methodology of Engle Granger we get

the results above. As ECM is used to identify the short
run relationship among the variables so in our model
p-value of ECM is 0.02 which indicates that there is
short run relationship among the variables of our
model. R2 show the goodness of fit of the model as
Value of R2 is 0.907 which states that 90.7% variation
in the inflation due to explained variables i-e
Government Effectiveness, Regulatory Quality, Voice
& Accountability, Political instability, Rule of law,
Control of corruption and rest of the 9.3% due to
other factors which are not included in our model.
Which states that our model is good fitted. As F-Stat
shows the overall significance of the model so value
of F-Stat is 7.01 which shows that our model is overall
significant. As Durban Watson test is used to identify
the problem of autocorrelation here value of it is 1.98
which shows that model is not affected by this
problem. As JB test tell us either residual of our
model is normally distributed or not so here value of
it is 2.41 which indicates that residual of our model is
normally distributed. CUSUM test is used to check the
stability of the model which is represented below
8
6
4
2
0
-2
-4
-6
-8
8

10
CUSUM

11

12

13

14

5% Significance

239

As the values lies in the 5% interval this show that the

model structurally stable over the period of the time.
CONCLUSION
One of the major macroeconomic targets of the
countries is to keep the inflation low. Low levels of
inflation represent good economy while higher levels
of inflation are harmful for the economy. All the main
dimensions of governance i-e Average Economic,
Average Institutional and Average Political
governance inversely effect the inflation. While some
are highly affected and some are little depend upon
the elasticity of their trend lines. When econometric
model is used to check the short run as well as long
run relationship among inflation and each dimension
of main dimension; government effectiveness,
regulatory quality, voice and accountability, political
instability, rule of law and control of corruption, then
according to Engle Granger methodology it was found
that there exists short run as well as long run
relationship among the dependent and independent
variables.
REFERENCES
Asian Development Bank
1995 Governance: Sound Development
Management. Asian Development Bank,
Manila.
Grindle, Merilee Serrill
2010 Good Governance: The Inflation of
an Idea. HKS Faculty Research Working
Paper Series. John F. Kennedy School
of
Government, Harvard University.
Kaufmann, Daniel, Kraay Aart and Zoido Pablo
Governance Matters II: Updated Indicators
for 2000-01 (January 2002). World Bank
Policy http://ssrn.com/abstract=297497
McCawley, Peter
2005 Governance in Indonesia:
Comments. Asian Development
Institute, Tokyo.

Some
Bank

Weiss, Thomas G.
2000 Governance, Good Governance and
Global Governance: Conceptual and Actual
Challenges. Third world quarterly 21 (5): 795814.
2015The Explorer Islamabad Journal of Social Sciences-Pakistan

240