ABSTRACT
The role of governance and quality of institutions in export diversification are analysed in this chapter. The preliminary analysis based on Country Policy and Institutional Assessment (CPIA) score suggests that governance and quality of institutions are pivotal in diversification. Some aspects of governance have been improving for the last decade in sample African countries but the pace of improvement is very slow. Analysis of Asian countries using a CPIA score is not possible due to lack of data.
Subsequently we investigated the role of governance and institutions using World Bank data in a multivariate framework. The quality of institutions encompasses business regulatory environment, efficiency in revenue mobilisation, financial sector rating, fiscal policy rating, macroeconomic management rating, quality of budgetary and financial management rating, and quality of public administration while the governance is represented by control of corruption, government effectiveness, political stability and absence of violence/terrorism, regulatory quality, rule of law, voice, and accountability. The results show that absence of violence/terrorism emerged as a highly significant indicator of governance that influences export diversification. The quality of institutions variables that emerged as significant determinants are fiscal policy rating and macroeconomic management rating. The findings also suggest that export diversification has a circular effect.
