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Assessing Of The Impact Of Good

Governance And Institutions On
Economic Growth In Indonesia
Muhammad Ramadhan

International Journal of Scientific and Technology Research

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 INTERNATIONAL JOURNAL OF SCIENTIFIC & TECHNOLOGY RESEARCH VOLUME 8, ISSUE 11, NOVEMBER 2019 ISSN 2277-8616

Assessing Of The Impact Of Good Governance

And Institutions On Economic Growth In
Indonesia
Muhammad Ramadhan

Abstract: Government performance and quality of government institutions will encourage economic growth through the creation of effective government
systems. The goal of good governance is to manage resources in a country more effectively for sustainable economic development. The research
objective is to analyze the relationship between government performance and the quality of government institutions with economic growth in Indonesia.
The analysis in this study uses the method Generalized Methods of Moments (GMM) time series. The variables used in this study are the variables of
economic growth (GDP), then to describe Good Governance the variable voice and accountability (VA), political stability and absence of violence (PV),
control of corruption (CC) and government effectiveness (GE) ) which is used to describe government performance. While the variable used to describe
the quality of the institution is variable the rule of law (RL) and quality of regulation (QR). The results showed that government performance and
institutional quality have a role in driving economic growth. Strategies that need to be carried out in improving government performance and institutional
quality through evaluation and monitoring.

Index Terms: Good Governance, Institutional, GMM, economic growth

——————————  ——————————

1. INTRODUCTION negative effects of good management on economic growth

Management of government performance accompanied by a depend on the economic system adopted by a country such as
good quality institutional system will support the fulfillment of the exchange rate system and economic openness of that
regional development. According to the World Bank, good country . The difference in income in explaining the
government governance or good governance is a reflection of relationship of good governance with economic growth makes
management and management in the orientation of the need for in-depth research. Based on previous research
development policies that ware directed more positively. explaining the relationship between good governance and
Besides that good governance is a concentration of various economic growth, but the impact of a positive or negative
world institutions such as the UN, World Bank, IMF, OECD relationship depends on a country's economic conditions.
and several other world organizations (Huang and Ho, 2017). Indonesia is a developing country with economic growth
A good system of government performance and institutional influenced by various external and internal factors. On the
quality will drive a country's economic growth. Literally explain other hand, the government system in managing government
that a country that has good governance will positively and institutional performance is regulated in regulations.
correlate to economic growth (Mira and Hammadeche, 2017; Regulations that form the basis of conducting government
Huang and Ho, 2017). Different results with research systems and running institutional systems sometimes
conducted by Liu et al (2018) and Kim et al. (2018) which encounter several obstacles. This makes the performance of
explains that good governance has a positive correlation with government and institutional systems in Indonesia still not
economic growth. Meanwhile, research conducted by Huang good.
and Ho (2017) and Fraj et al (2018) shows that the positive or

Source: World Bank (2019) and ARIC-ADB (2019), edited

Figure 1. Economic Growth and Indicators of Good Governance in Indonesia
————————————————
 Muhammad Ramadhan is lecturer in North Sumatra Islamic
University, Indonesia. E-mail: mramadhan030169@gmail.com

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Figure 1 explains the relationship of fluctuations in resources the application of good governance can have an
economic growth with indicators of good governance in impact on increasing economic growth and the size of
Indonesia in 2002 to 2018. Indonesia has a volatile power through increased productivity and increased output.
economic growth with a range of between 4 to 6% during Liu et al. (2018) is slightly different from the results of
2002-2018 except in 2002, which had economic growth of research conducted by Fraj et al. (2018) who found that
only 4.50%. Meanwhile, when viewed in terms of governance does not have a significant influence on
management and institutional quality in Indonesia tends to economic growth, while the exchange rate system adopted
increase from 2002 to 2018 except for the indicator of by a country has more significant influence on economic
control of Corruption, which experienced a significant growth, especially on the market. On the other hand, a
decline in 2009. This shows that the level of corruption in government that adheres to a flexible exchange rate system
Indonesia in 2009 was greater than previous years. In requires good governance to stimulate economic growth so
addition to Control of Corruption, several indicators of Good Fraj et a. (2018) concludes that the exchange rate system
Governance, which also experienced a decline, were adopted by a country will determine the quality of
Political Stability, Government Effectiveness, Rule of Law, governance used. Nirola and Sahu (2019) who examined
Regulatory Quality, Voice, and Accountability. A decrease in the impact of the size of government power on economic
several indicators of indicators Good Governance occurred growth on various quality institutions in 23 Indian states
in the same year, namely 2015. The decline shows that found that greater government power has a negative
there was a decrease in performance and the quality of relationship to economic growth, especially in the State.
institutions from the government, on the other hand the The size of the negative influence of government power on
level of economic growth in 2015 also slowed. Therefore, economic growth in the State depends on the quality of
the research will focus on the relationship between good institutions in each State. The negative impact received by
management and the quality of institutions on economic States that have good quality institutions will be smaller
growth in Indonesia. than those that have poor quality institutions.

2. LITERATURE REVIEW 3 DATA AND METHODOLOGY

Theoretically, the relationship between good governance The type of data used in this study is the time series with a
and economic growth is still a debate among scientists. The time range of 2000Q1 - 2018Q4. The variables used in this
World Bank explains that good or bad management of a study are economic growth (GDP), government
country's governance can be assessed from the performance and the quality of government institutions.
implementation of a country's governance principles and Government performance variables are reflected in voice
the development of a framework within the framework of and accountability (VA), political stability and absence of
economic growth and market development (Mira and violence (PV), control of corruption (CC) and government
Hammadache, 2017). While the definition of management effectiveness (GE). While the proxy of the institution quality
according to the World Bank is how to exercise power in the variable is the rule of law (RL) and quality of regulation
decision making process and the implementation of the (QR). Data sources used in this study were from the
management of a country's social and economic resources International Monetary Fund (IMF) and the Asia Regional
(Rahman, 2016). While the goal of implementing good Integration Center - Asian Development Bank (ARIC -
governance according to the World Bank is to build ADB). The model specifications used in this
effective institutions in order to support sustainable
economic and social development and development in a
study modify the research conducted by Mira
country. Therefore, if it is concluded that the application and and Hemmadahi (2017), Liu et al (2018) and
implementation of good governance in a country will have a Siddique et al (2016).
positive correlation with the growth and economic
development of that country. Various studies on the (1)
relationship between the quality of governance and
economic growth have been carried out, such as the Equation (1) explains the performance of government and
research conducted by Huang and Ho (2017) that examines the quality of government institutions have an influence on
the causal relationship between governance and economic improving economic growth. The research method used in
growth in all countries in the ASIA region. The results of this study is Generalized Methods of Moments (GMM). The
research conducted by Hang and Ho (2017) show that choice of method is based on the need not to make
countries with a more open economic system show that classical assumptions. On the other hand, the GMM
governance does not have a significant causality method uses past variables and instrument variables to
relationship while more closed countries show that explain the dependent variable. Transform equation (1) into
governance has a more significant relationship to economic the GMM method as follows.
growth. While research conducted by Liu et al. (2018)
shows that eastern China has higher economic growth due
to the quality of better governance, whereas good equation (2) is a transformation from equation (1) that has
governance in western China has an impact on rapid used the Generalized Methods of Moments method.
economic growth. Then research conducted by Kim et al.
(2018) found that in countries with abundant natural

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Table 1. Variable Definitions

Variable Definition Source
GDP  The rate of economic growth calculated through Gross Domestic Products
ARIC-ADB
(Economic Growth)  Unit (%)
PV  Perceptions about possible political instability and / or politically motivated violence, including
(political stability and absence terrorism World Bank
of violence)  Unit (%)
CC  Assess the problem of corruption
 Unit (%) World Bank
(Control of Corruption)
 Perceptions of the quality of public services, the quality of civil services and the degree of
GE independence from political pressure, the quality of policy formulation and implementation, and
World Bank
(Government Effectiveness) the credibility of the government's commitment to the policy.
 Unit (%)
 Perceptions of the extent to which agents have trust and comply with community rules, and in
RL particular the quality of enforcement of contracts, property rights, police and courts, as well as
World Bank
(Rule of law) possible crime and violence
 Unit (%)
 Perception of the government's ability to formulate and implement good policies and regulations
qr
that enable and encourage the development of the private sector World Bank
(quality of regulation)
 Unit (%)

4 RESULT AND DISCUSSION between government performance and institutional quality

Government performance accompanied by institutional on economic growth is analyzed in this study. The use of
quality of government will have an influence on economic method Generalized Methods of Moments (GMM) can test
growth. This is because output will increase accompanied the relationship between government performance and
by effective government performance and rapid and institutional quality with economic growth.
effective quality of institutions. Proof of the relationship

Table 2. GMM Estimated Results

Variable Coefficient t-statistics Probability
GDP(-1) 0,547 5,315 0,000*
Political stability and absence of violence 0,639 3,611 0,0571***
Control of Corruption 0,315 3,176 0,024**
Government effectiveness 0,542 3,986 0,032**
Voice and accountability 0,011 2,418 0,0676***
Rule of law 0,124 1,798 0,077***
Quality of regulation 0,673 2,474 0,056***
R-Square 0,874
* significant α=1%, ** significant α=5%, *** significant α=10%

Table 2 is the result of GMM analysis on the relationship is significantly influential. This condition can be seen from
between government performance and institutional quality the probability value of the government's performance in
with economic growth. The results showed that government controlling corruption by 0.024 less than the alpha value (α
performance and institutional quality have a significant = 5%). Government performance in maintaining an increase
relationship to economic growth with different probability in corruption will have an influence on economic growth
levels. On the other hand, economic growth is not only (Salawu, et al, 2018; Shchegolev & Hayat, 2018). The
influenced by government performance and institutional effectiveness of government performance makes it one of
quality, but is influenced by growth in the past period (t-1). the sources of economic growth influence. The
This condition can be seen from the probability of economic effectiveness variable probability of government
growth in the past period (GDPt-1) of 0,000 which is smaller performance is 0.032 less than the alpha value (α = 5%).
than the alpha value of significance (α = 1%). Thus, the The significant correlation between the effectiveness of
current movement of economic growth can be caused by government performance variables with economic growth
economic growth in the past period. On the other hand, the shows that the more effective government performance will
government's performance in maintaining political stability drive economic growth. Ineffective government
and non-violence has a significant positive effect on performance will reflect the management of government
economic growth. This can be seen from the probability objectives not achieved (Mira & Hammadache, 2017;
value of 0.0571 smaller than the alpha value (α = 10%). Yerrabati & Hawkes, 2015). One indicator that reflects
This condition shows that the government's performance in government performance is governance accountability.
political stability and non-violence has an impact on Government accountability probability which shows 0.068
economic growth. One source of increased economic which is smaller than the value of alpha (α = 10%). This
growth is investment by investors. Investors will invest in a shows that the existence of government accountability can
country with a good level of political stability and a little non- affect economic growth. Governments that transparently
violence (Pay, 2016; Zubair & Khan, 2014). The account for government performance can encourage good
government's performance in controlling the growth of economic growth (Habyarimana & Dushimayezu, 2018; Liu,
corruption is one of the efforts to increase economic growth. et al, 2018) Indicators of measuring the quality of
The relationship between economic growth and corruption government institutions through indicators of quality
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