The impact of government effectiveness on trade and financial openness: The generalized quantile panel regression approach

Nzama, Lethiwe; Sithole, Thanda; Kahyaoglu, Sezer Bozkuş Article The impact of government effectiveness on trade and financial openness: The generalized quantile panel regression approach Journal of Risk and Financial Management Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Nzama, Lethiwe; Sithole, Thanda; Kahyaoglu, Sezer Bozkuş (2023) : The impact of government effectiveness on trade and financial openness: The generalized quantile panel regression approach, Journal of Risk and Financial Management, ISSN 1911-8074, MDPI, Basel, Vol. 16, Iss. 1, pp. 1-20, https://doi.org/10.3390/jrfm16010014 This Version is available at: https://hdl.handle.net/10419/275110 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Citation: Nzama, Lethiwe, Thanda Sithole, and Sezer Bozkus Kahyaoglu. 2023. The Impact of Government Effectiveness on Trade and Financial Openness: The Generalized Quantile Panel Regression Approach. Journal of Risk and Financial Management 16: 14. https://doi.org/10.3390/ jrfm16010014 Academic Editors: Yasir Shahab, Peng Wang, Yasir Riaz, Collins Ntim and Daniel Chai Received: 26 October 2022 Revised: 12 December 2022 Accepted: 15 December 2022 Published: 27 December 2022 Copyright: © 2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). Journal of Risk and Financial Management Article The Impact of Government Effectiveness on Trade and Financial Openness: The Generalized Quantile Panel Regression Approach Lethiwe Nzama 1,* , Thanda Sithole 2and Sezer Bozkus Kahyaoglu 1,3 1Department of Commercial Accounting, School of Accounting, College of Business and Economics, University of Johannesburg, Rossmore, Johannesburg 2006, South Africa 2Independent Researcher, Johannesburg 2006, South Africa 3Management Department, Faculty of Economics and Administrative Sciences, Kyrgyz-Turkish Manas University, Bishkek 720038, Kyrgyzstan *Correspondence: [email protected] Abstract: Purpose: This paper aims to investigate the impact of government effectiveness on trade and financial openness in 35 selected countries around the globe. Design/methodology/approach: A quantitative research approach was applied in the study using the generalized quantile panel regression approach to analyze the impact of identified variables in these selected countries. Panel quantile models with high estimation performance are preferred in the presence of excessive deviations and in cases where the normal distribution is invalid. Findings/results: The empirical findings indicate that selected countries with above-average governmental effectiveness, that is, with a well-established state bureaucracy and a historically strong state tradition, will further increase their activities toward international integration through financial and trade openness. Practical implications: This study aims to provide valuable information that governments and regulatory authorities can benefit from in their decision-making processes. Originality/value: In this study, it is preferred to use the trade openness of countries as the share of exports in total world exports and financial openness as the ratio of capital flows to world flows. In this way, these variables will provide new information to analyze the influence of government effectiveness. Implementing the generalized quantile panel regression technique can also be expressed as an innovation in this field of literature. Keywords: governance; government effectiveness; trade openness; financial openness; generalized quantile panel regression 1. Introduction Government effectiveness is critical for economic growth and, ultimately, human development. This is echoed by Alam et al. (2017), who contemplated a panel of 81 low-, middle-, and high-income economies to study the outcomes of government effectiveness on economic growth. Generally, they find a statistically significant relationship between government effectiveness and economic growth, particularly among low- and high-income economies. Similarly, trade and financial openness is generally associated with economic growth through increased trade volumes and financial flows. This is echoed by various studies ranging from but not limited to Asada (2022), Nguyen and Bui (2021), Alam and Sumon (2020), and Cevik et al. (2019) for the trade–growth nexus to Kouadio and Gakpa (2021), Estrada et al. (2015), and Agenor et al. (2018) for the finance–growth nexus. It follows from the above that if government effectiveness and openness (trade and financial) lead to economic growth within a globally integrated economic system, then there must be an association between these variables (government effectiveness, trade, and financial openness), directly or indirectly. This association is investigated in this study from a sample of 35 developed and developing economies using the generalized quantile panel J. Risk Financial Manag. 2023,16, 14. https://doi.org/10.3390/jrfm16010014 https://www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2023,16, 14 2 of 20 regression approach. To the best of our knowledge, studies have yet to investigate the collective impact of trade and financial openness on government effectiveness. As such, this study aims to address that lacuna, particularly given that government effectiveness, trade, and financial openness are all critical for economic growth. In this paper, trade openness is proxied by the share of exports in total world exports, while financial openness is proxied by the ratio of capital flows to world flows. Government effectiveness is borrowed from World Bank’s (2022) Worldwide Governance Indicators. Since 1996, World Bank’s “Worldwide Governance Indicators” (WGI) have been regularly evaluated for 215 countries on the basis of six dimensions of governance. The WGI (World Bank 2022) consists of a combination of six sub-indicators. These sub-indicators are categorized as “Voice and Accountability”, “Political Stability”, “Government Effectiveness”, “Regulatory Quality”, “Rule of Law”, and “Control of Corruption”. Effectively, these governance indicators aim to develop a quantitative measure of governance performance to assist with establishing policy reforms and monitoring mechanisms. Among these, government effectiveness, which is one of the six sub-indicators, constitutes the main subject of our study. Government effectiveness can be evaluated qualitatively depending on the relationship between the administrative efficiency of the states and the bureaucratic structure. According to Fukuyama (2013), the relationship between the quality of governments and bureaucratic autonomy can be analyzed in a mathematical form similar to the Kuznets approach. While the Kuznets approach analyzes the relationship between per capita income and environmental pollution, the effectiveness of governments is examined in the context of the quality of governments and bureaucratic autonomy (Bozkus et al. 2020). However, in his approach, the interaction of the external variables in question with the basic variables of the economic structure is not considered. This study tried to contribute in terms of revealing the effect of trade and financial openness, which depends on the basic economic structure of the selected countries, on the effectiveness of governments, especially on governance. Accordingly, the organization of the work is planned as follows. After the introduction, in the second part, a comprehensive literature review of the concepts that form the basis of the variables used in the empirical work of the study, namely governance, trade openness, financial openness, and government effectiveness, is presented. The third section describes the data and methodology. The reason for using the generalized quantile panel regression model is explained. In the fourth section, descriptive statistics, the estimation process, the results of applied tests, and empirical findings are presented. In the fifth section, there is a discussion of the key findings based on the relevant literature. In the conclusion part, policy recommendations and future research opportunities are made in relation to the empirical findings in order to contribute to the literature. The activities carried out in the analysis are shown at Figure 1schematically as follows. J. Risk Financial Manag. 2023,16, 14 3 of 20 J. Risk Financial Manag. 2023, 16, x FOR PEER REVIEW 3 of 20 Figure 1. Work flow of research. Source: Prepared by the authors. 2. Literature Review Several studies have investigated interlinkages between trade (and financial) openness and economic growth. While other studies have investigated the empirical association of economic growth with government effectiveness. On openness and growth, Alam and Sumon (2020) study the causal relationship of trade openness and economic growth for 15 Asian countries and find the positive impact of trade openness on economic growth. They further confirm bi-directional causal feedback between trade openness and economic growth in the short run. A study by Cevik et al. (2019) looks at the trade openness and economic growth in Turkey and finds evidence of a bi-directional relationship between trade openness and economic growth. They reveal that the economic growth impact of trade openness happens at a shorter horizon (4.3 to 7.5 years), while a feedback loop of economic growth on trade happens at a longer horizon (7.5 to 13 years). Asada (2022) examines the trade-openness–economic growth linkages accounting for human capital development and foreign direct investment in Thailand. This study finds that trade openness is positively associated with economic growth in Thailand. A study by Nguyen and Bui (2021) examines the impact of trade openness on economic growth within the Asean-6 economies. These implement a fixed-effect panel threshold approach and, interestingly, find that below a certain threshold, trade openness plays a critical role in stimulating economic growth. However, beyond a certain threshold, the impact of trade openness on economic growth is positive but lower. On financial openness and economic growth, Kouadio and Gakpa (2021) argue that through increased financial openness comes an opportunity for improved resource allocation, portfolio diversification, and access of domestic firms to foreign funds, which result in higher profitability and growth. Although financial openness-growth results are generally mixed and usually inconclusive due to various measures of financial openness, sample period, country coverage, and chosen empirical methodology (Estrada et al. 2015). Figure 1. Work flow of research. Source: Prepared by the authors. 2. Literature Review Several studies have investigated interlinkages between trade (and financial) openness and economic growth. While other studies have investigated the empirical association of economic growth with government effectiveness. On openness and growth, Alam and Sumon (2020) study the causal relationship of trade openness and economic growth for 15 Asian countries and find the positive impact of trade openness on economic growth. They further confirm bi-directional causal feedback between trade openness and economic growth in the short run. A study by Cevik et al. (2019) looks at the trade openness and economic growth in Turkey and finds evidence of a bi-directional relationship between trade openness and economic growth. They reveal that the economic growth impact of trade openness happens at a shorter horizon (4.3 to 7.5 years), while a feedback loop of economic growth on trade happens at a longer horizon (7.5 to 13 years). Asada (2022) examines the trade-openness–economic growth linkages accounting for human capital development and foreign direct investment in Thailand. This study finds that trade openness is positively associated with economic growth in Thailand. A study by Nguyen and Bui (2021) examines the impact of trade openness on economic growth within the Asean-6 economies. These implement a fixed-effect panel threshold approach and, interestingly, find that below a certain threshold, trade openness plays a critical role in stimulating economic growth. However, beyond a certain threshold, the impact of trade openness on economic growth is positive but lower. On financial openness and economic growth, Kouadio and Gakpa (2021) argue that through increased financial openness comes an opportunity for improved resource allocation, portfolio diversification, and access of domestic firms to foreign funds, which result in higher profitability and growth. Although financial openness-growth results are generally mixed and usually inconclusive due to various measures of financial openness, sample period, country coverage, and chosen empirical methodology (Estrada et al. 2015). J. Risk Financial Manag. 2023,16, 14 4 of 20 Nevertheless, Estrada et al. (2015) find that the actual level of financial openness affects economic growth positively and significantly. This holds for two of the three measures of financial openness that their study use. Agenor et al. (2018) study the combined effects of prudential regulation, financial development, and financial openness on economic growth. Interestingly, Agenor et al. (2018) find that prudential measures targeted at dampening credit growth have a positive effect on economic growth and that financial development and financial openness appear to have a direct positive impact on economic growth. Further, Agenor et al. (2018) reveal that prudential measures generally tend to be less effective in boosting economic growth when the economy is more financially opened (or developed) because openness could allow firms and households to source funds from foreign financial sources. As indicated, there is sufficient literature available on measuring trade and financial openness in multiple countries. However, there is limited literature on the impact of governance on trade openness and financial openness, as most available studies investigated the relationship between trade and financial openness and government size (Liberati 2007). Previous studies indicated a positive relationship between trade openness and the government size of the public sector of eighteen Organization for Economic Cooperation and Development (OECD) countries (Cameron 1978;Liberati 2007). Rodrik (1998) reports similar findings, showing a positive relationship between trade openness and government size in the public sector in developing and developed countries. In Pakistan, a similar study was conducted by Shahbaz et al. (2010), who also explored the impact of trade and financial openness on government size. Like Rodrik (1998) and Liberati (2007), Shahbaz et al. (2010) find a positive relationship between trade openness and the government’s size in Pakistan. Pakistan’s financial openness and government size are aligned inversely (Shahbaz et al. 2010). Ayaydin et al. (2018) investigate trade openness, financial openness, and financial development in the eurozone (EZ) using a dynamic panel data analysis. Their study finds that trade and financial openness are statically significant determinants of financial development. In this respect, financial openness determines financial development and leads to the transformation of government business processes. Since rapid decision making and supervision are required in the field of finance, governments also undergo a transformation in this regard. For this reason, there is an acceptance in the literature that financial openness will increase government effectiveness. Furthermore, Ayaydin et al. (2018) state that the consequences of trade (financial openness) are adversely associated with the degree of financial (trade) openness because economies stand to profit the most from opening their trade ports. This is similar to Liberati’s (2007) suggestion that trade openness opens the countries’ economies. On the African continent, a similar study to Ayaydin et al. (2018) was conducted by Bandura (2021), who investigated the impact of financial openness and trade openness on the financial development of 26 Sub-Saharan African countries over a period from 1982 to 2016. Bandura (2021) finds no significant impact when combining trade and financial openness on financial development within the countries studied, and this result disapproves the hypothesis by Rajan and Zingales (2003). Furthermore, Bandura (2021) recommends that there should be institutional quality for the African region to benefit from international business. Accordingly, it is further recommended to make public reform policies in order to increase institutional quality in developing countries (Abreo et al. 2021). This speaks directly to the critical need for sound government effectiveness to achieve better economic outcomes. Klautzer (2013) investigates the relationship between economic openness and corporate governance practices in emerging nations. Klautzer (2013) examines the premise that economic openness may encourage the adoption of improved corporate governance standards in eleven Asian nations. Klautzer’s (2013) study focuses on the private sector with special attention being given to public listed entities. The study further finds a positive impact of economic openness on corporate governance. This is illustrated by the fact J. Risk Financial Manag. 2023,16, 14 5 of 20 that companies include adopted transparent reporting on corporate governance issues in their annual reports. When there is transparency in reporting, the risk of bias is avoided, resulting in economic openness and legitimacy. As such, it is recommended that corporate governance be improved, as this might improve economic relations and ultimately trade. 2.1. Governance Corporate governance is not only applicable to the private sector but is also important to the public sector. Corporate governance frameworks are also vital in developed economies as well as being significant in emerging ones. Good governance is essential for sustained economic growth, and many foreign assistance projects and domestic policies in developing countries are aimed at enhancing public sector governance (Klautzer 2013). Klautzer (2013) argues further that corporate governance has not received much attention in developing countries. However, in contrast to Klautzer (2013), South Africa, as a developing country, has received much attention regarding legislation and framework to improve corporate governance. For instance, South Africa has four King Codes of Corporate Governance, established to guide how public and private sector organizations can enhance their governance. The King I Report was issued in November 1994 (Institute of Directors (IoD) 1994). The report is consistent with the Cadbury Report from the United Kingdom. However, it advocates for a more inclusive manner of doing business (Institute of Directors (IoD) 1994; van der Merwe 2020). The report highlights corporate reporting, ethics, and compliance, as well as the board of directors, auditors, and stakeholders in promoting good governance in an organization (van der Merwe 2020). The King II Report was issued in 2002 and encourages transparency and accountability amongst people in charge of the money given to them by their shareholders (Institute of Directors (IoD) 2002). In 2009, the King III Report was released, and like the other King reports, it emphasizes the necessity of an inclusive approach to corporate governance (Institute of Directors (IoD) 2009). In contrast to the previous two King reports, which followed the “comply or explain” principle, the King III Report follows the “apply or explain” premise. For the King III Report, integrated reporting is introduced. The King IV Report was issued in 2016 and entirely replaced the King III Report (Institute of Directors (IoD) 2016). This report is released in response to the political, economic, and social issues and their influence on the Sustainable Development Goals (van der Merwe 2020). King IV also considers the public sector and sector supplements intending on guiding the King IV Code and how it should be interpreted and applied to various categories and sectors of organizations (Institute of Directors (IoD) 2016). The King IV Code supplements the focus on municipalities, nonprofit organizations, small and medium enterprises, and state-owned entities (Institute of Directors (IoD) 2016). Thus, it can be argued that proper guidelines are available for organizations in both the public and private sectors to promote good governance, especially in South Africa. In the King IV Code corporate governance approach, three basic areas of a “paradigm shift” (Figure 2) are revealed with an innovative perspective. These are the shifts (1) from financial capitalism to inclusive capitalism; (2) from short-term capital markets to long-term, sustainable capital markets; and (3) from silo reporting to integrated reporting. In general, the Code emphasizes sustainability to improve the quality of the information provided to the public through capital flows and financial reporting standards, beyond increasing the effectiveness of corporate governance. J. Risk Financial Manag. 2023,16, 14 6 of 20 J. Risk Financial Manag. 2023, 16, x FOR PEER REVIEW 6 of 20 Figure 2. The Three Paradigm Shifts in Corporate Governance. Source: Institute of Directors (IoD) (2016). 2.2. Trade and Financial Openness Sanz and Velázquez, as cited in Shahbaz et al. (2010), developed the notion of trade openness through foreign direct investment in twenty-first-century literature. The sum of exports and imports assesses trade openness in gross domestic product (GDP), which may encourage governments to raise public spending to protect their economies from the competitive dangers of international economies (Liberati 2007). Liberati (2007) contends that when countries increase their trade openness intending on increasing their economic exposure, they often also increase their trading risks. Some of these risks include the inability of central governments to raise tax revenues due to an increase in trade openness. As such, this risk may be mitigated by ensuring a higher degree of financial openness, which guarantees a free cross-border flow of capital and financial services. Total capital flows measure financial openness, direct investments, borrowing on international capital markets, and covered interest rate differentials (Liberati 2007). There is an expectation that the effect of trade and financial openness on good governance will be of a positive nature. The main reason is that the trade and financial relations between countries are guaranteed by corporate and legal contracts and by a relationship of trust and decreasing transaction costs. While trade and financial relations are developing, the said contractual protection, in other words, reliability and the decrease in the transaction costs, support the process of good governance of each government, as positive external economies of scale (Jalilian et al. 2007; Chowdhury and Audretsch 2014). In general, it is observed that the interaction emerging in terms of the institutional structure of the cooperating countries shows a tendency toward the legal structure of a developed country depending on the trade and financial relations of a developing country (Andrei 2007; Li and Samsell 2009). In the studies conducted, the handling of trade openness and financial openness is generally taken as the ratio of the country’s total trade volume to the total gross domestic product (GDP). In contrast, the ratio of total capital flows to GDP is defined and monitored as the financial openness ratio. Although these ratios are accepted as a basic indicator for the country’s openness, the balance between imports and exports does not fully show the effect on either the duration of incoming capital flows or on the growth of the economy. Similarly, this situation makes it necessary to be cautious when interpreting its impact on government effectiveness. In this respect, in this study, it is preferred to use the openness of countries as the share of exports in total world exports and the ratio of capital flows in total cash flows in the world. This will provide a new approach in terms of analyzing the effect on possible government effectiveness. As alluded to in the introductory section, trade openness, financial openness, and government effectiveness should hypothetically be associated with the fact that they all empirically have some association with economic growth. As such, this study investigates whether countries with high levels of trade and financial openness exhibit improved government effectiveness. To the best of our knowledge, no study has investigated this possible linkage within the generalized quantile panel regression framework. Figure 2. The Three Paradigm Shifts in Corporate Governance. Source: Institute of Directors (IoD) (2016). 2.2. Trade and Financial Openness Sanz and Velázquez, as cited in Shahbaz et al. (2010), developed the notion of trade openness through foreign direct investment in twenty-first-century literature. The sum of exports and imports assesses trade openness in gross domestic product (GDP), which may encourage governments to raise public spending to protect their economies from the competitive dangers of international economies (Liberati 2007). Liberati (2007) contends that when countries increase their trade openness intending on increasing their economic exposure, they often also increase their trading risks. Some of these risks include the inability of central governments to raise tax revenues due to an increase in trade openness. As such, this risk may be mitigated by ensuring a higher degree of financial openness, which guarantees a free cross-border flow of capital and financial services. Total capital flows measure financial openness, direct investments, borrowing on international capital markets, and covered interest rate differentials (Liberati 2007). There is an expectation that the effect of trade and financial openness on good governance will be of a positive nature. The main reason is that the trade and financial relations between countries are guaranteed by corporate and legal contracts and by a relationship of trust and decreasing transaction costs. While trade and financial relations are developing, the said contractual protection, in other words, reliability and the decrease in the transaction costs, support the process of good governance of each government, as positive external economies of scale (Jalilian et al. 2007;Chowdhury and Audretsch 2014). In general, it is observed that the interaction emerging in terms of the institutional structure of the cooperating countries shows a tendency toward the legal structure of a developed country depending on the trade and financial relations of a developing country (Andrei 2007;Li and Samsell 2009). In the studies conducted, the handling of trade openness and financial openness is generally taken as the ratio of the country’s total trade volume to the total gross domestic product (GDP). In contrast, the ratio of total capital flows to GDP is defined and monitored as the financial openness ratio. Although these ratios are accepted as a basic indicator for the country’s openness, the balance between imports and exports does not fully show the effect on either the duration of incoming capital flows or on the growth of the economy. Similarly, this situation makes it necessary to be cautious when interpreting its impact on government effectiveness. In this respect, in this study, it is preferred to use the openness of countries as the share of exports in total world exports and the ratio of capital flows in total cash flows in the world. This will provide a new approach in terms of analyzing the effect on possible government effectiveness. As alluded to in the introductory section, trade openness, financial openness, and government effectiveness should hypothetically be associated with the fact that they all empirically have some association with economic growth. As such, this study investigates whether countries with high levels of trade and financial openness exhibit improved government effectiveness. To the best of our knowledge, no study has investigated this possible linkage within the generalized quantile panel regression framework. J. Risk Financial Manag. 2023,16, 14 7 of 20 2.3. Government Effectiveness In this study, government effectiveness is chosen to analyze selected countries. Government effectiveness has been the subject of research for a long time in academic literature and has been defined from different perspectives (Moynihan and Pandey 2004;Brewer et al. 2007;Lee and Whitford 2009;Acemoglu et al. 2010;Acemoglu and Robinson 2012; Garcia-Sanchez et al. 2013;Garcia-Sanchez et al. 2016;Montes and Paschoal 2016). The Worldwide Governance Indicators (WGI) (n.d.) and (World Bank 2022) are based on six major categories of governance, namely (1) “Voice and Accountability”, (2) “Political Stability and Absence of Violence/Terrorism”, (3) “Government Effectiveness”, (4) “Regulatory Quality”, (5) “Rule of Law”, and (6) “Control of Corruption” for over 200 countries over of a period of 1996–2021. The WGI were first established by Daniel Kaufmann (Kaufmann et al. 2006). In this respect, within the scope of Worldwide Government Effectiveness, the following indicators are used from the relevant sources (Appendix A): 1. The quality of public services; 2. The quality of the civil services; 3. The degree of the independence from political pressures; 4. The quality of policymaking and high performance in the public services; 5. The positive perceptions of the credibility of government’s loyalty to such policies; 6. The increase in economic growth; 7. The increase in foreign direct investment; 8. The quality of social infrastructure; 9. The increase in public investment; 10. The quality of public procurement systems and reduced corruption. Overall, existing empirical work has demonstrated the importance of trade and financial openness in economic growth, while on the other hand, the importance of government effectiveness on economic growth has also been demonstrated. However, how these variables (trade openness, financial openness, and government effectiveness) interact together as critical variables for growth has not been investigated. So, we argue that if government effectiveness and openness (trade and financial) lead to economic growth within a globally integrated economic system, then there must be a direct or indirect association between these variables. This association is investigated in this study using a sample of 35 developed and developing economies using the generalized quantile panel regression approach. To the best of our knowledge, studies have yet to investigate the collective impact of trade and financial openness on government effectiveness. As such, this study aims to address that lacuna, particularly given that government effectiveness, trade, and financial openness are all critical for economic growth (see Figure 3). J. Risk Financial Manag. 2023, 16, x FOR PEER REVIEW 7 of 20 2.3. Government Effectiveness In this study, government effectiveness is chosen to analyze selected countries. Government effectiveness has been the subject of research for a long time in academic literature and has been defined from different perspectives (Moynihan and Pandey 2004; Brewer et al. 2007; Lee and Whitford 2009; Acemoglu et al. 2010; Acemoglu and Robinson 2012; Garcia-Sanchez et al. 2013; Garcia-Sanchez et al. 2016; Montes and Paschoal 2016). The Worldwide Governance Indicators (WGI) (n.d.) and (World Bank 2022) are based on six major categories of governance, namely (1) “Voice and Accountability”, (2) “Political Stability and Absence of Violence/Terrorism”, (3) “Government Effectiveness”, (4) “Regulatory Quality”, (5) “Rule of Law”, and (6) “Control of Corruption” for over 200 countries over of a period of 1996–2021. The WGI were first established by Daniel Kaufmann (Kaufmann et al. 2006). In this respect, within the scope of Worldwide Government Effectiveness, the following indicators are used from the relevant sources (Appendix A): 1. The quality of public services; 2. The quality of the civil services; 3. The degree of the independence from political pressures; 4. The quality of policymaking and high performance in the public services; 5. The positive perceptions of the credibility of government’s loyalty to such policies; 6. The increase in economic growth; 7. The increase in foreign direct investment; 8. The quality of social infrastructure; 9. The increase in public investment; 10. The quality of public procurement systems and reduced corruption. Overall, existing empirical work has demonstrated the importance of trade and financial openness in economic growth, while on the other hand, the importance of government effectiveness on economic growth has also been demonstrated. However, how these variables (trade openness, financial openness, and government effectiveness) interact together as critical variables for growth has not been investigated. So, we argue that if government effectiveness and openness (trade and financial) lead to economic growth within a globally integrated economic system, then there must be a direct or indirect association between these variables. This association is investigated in this study using a sample of 35 developed and developing economies using the generalized quantile panel regression approach. To the best of our knowledge, studies have yet to investigate the collective impact of trade and financial openness on government effectiveness. As such, this study aims to address that lacuna, particularly given that government effectiveness, trade, and financial openness are all critical for economic growth (see Figure 3). Figure 3. Information Pyramid as a tool for an Improved Government Decision-Making Process. Source: Adapted from Bilbao-Osorio et al. (2014) . Figure 3. Information Pyramid as a tool for an Improved Government Decision-Making Process. Source: Adapted from Bilbao-Osorio et al. (2014). J. Risk Financial Manag. 2023,16, 14 8 of 20 3. Data and Methodology The dataset used in this study was obtained from the official website of the International Monetary Fund (IMF) and the World Bank (WB). The selection criteria for these 35 countries can be summarized as follows: I. The data subject to this study, 35 countries for the period of 2010–2020, were selected regarding the country information that considers the efficiency of the government within the scope of the OECD corporate governance principles and provides guarantees for the implementation of generally accepted standards. II. These 35 countries declare to implement macroprudential policies and are included in the IMF’s Macroprudential Policy Index (IMF 2021). III. These 35 countries are involved in the World Bank’s Global Financial Development Index. Therefore, it is found appropriate in terms of information needed for analysis and data quality (Appendix B). The descriptive statistics of data given in Table 1are estimated with Stata v.17. The Jarque–Bera test statistically reveals that the data do not have a normal distribution feature. The skewness and kurtosis values of the data also support this situation. In particular, the kurtosis value of the trade openness (TO) (9.83) and financial openness (FO) (15.32) variables is well above 3. Although these two variables have a leptokurtic structure, the kurtosis level of government effectiveness (GE) (1.92) is flatter than normal because its value is less than 3. Considering the skewness values of these variables, FO (1.45) and TO (2.55) are positively skewed, and GE ( − 0.33) is negatively skewed. This situation indicates the presence of asymmetric effects on these variables. Table 1. Descriptive Statistics. Variables FO, Financial Openness GE, Government Effectiveness TO, Trade Openness Mean −0.000314 1.112052 2.161378 Median −0.000566 1.272297 1.211419 Maximum 0.711575 2.335300 13.38627 Minimum −0.446742 −0.449776 0.294792 Std. Dev. 0.105957 0.693492 2.544648 Skewness 1.456911 −0.331832 2.552197 Kurtosis 15.32259 1.921664 9.836015 Jarque–Bera 2572.068 * 25.71897 * 1167.608 * Observations 385 385 385 Source: Prepared by the Authors via Stata v.17. (*) Statistically significant at 1% confidence interval. In addition, the Doornik–Hansen normality test (Doornik and Hansen 2008) is applied for three variables, namely, government effectiveness (GE), trade openness (TO), and financial openness (FO). As indicated in Table 2, these variables are not normally distributed. Accordingly, it is suitable to use the generalized quantile panel regression method. In this way, the generalized quantile panel regression reduces the effect of deviations that may arise due to the variation in the data in the periods considered due to the excessive skewness and kurtosis. In other words, this method will produce more effective empirical findings compared to the standard panel data analysis method, as it will reduce the effect of deviations. 3.1. Quantile Regression Koenker and Bassett (1978) propose a method called quantile regression, which is used to estimate the functional relationship between the dependent variable and the independent variable or variables at any quantile value to eliminate the limitations of classical linear regression models. Hence, quantile regression is an econometric technique used when the necessary conditions for linear regression are not fully met. In other words, this is an extension of linear regression analysis, which can be used when outliers are present in the data since its predictions are robust enough against outliers, compared to linear regression (Zietz et al. 2008;Davino et al. 2013). J. Risk Financial Manag. 2023,16, 14 15 of 20 Table A1. Cont. Source of Information The Scope of Information IPD—Institutional Profiles Database Coverage area: public school Coverage area: basic health services Coverage area: drinking water and sanitation Coverage area: electricity grid Coverage area: transport infrastructure Coverage area: maintenance and waste disposal PRS—Political Risk Services International Country Risk Guide Bureaucratic quality WMO—Global Insight Business Conditions and Risk Indicators Infrastructure disruption. This reflects the likelihood of disruption to and/or inadequacy of infrastructure for transport, including due to terrorism/insurgency, strikes, politically motivated shutdowns, natural disasters, infrastructure including (as relevant) roads, railways, airports, ports, and customs checkpoints. State failure. The risk that the state is unable to exclusively ensure law and order and the supply of basic goods such as food, water, infrastructure, and energy is unable to respond to or manage current or likely future emergencies, including natural disasters and financial or economic crises. Policy instability. The risk the government’s broad policy framework shifts over the next year, making the business environment more challenging. This might include more onerous employment or environmental regulation and local content requirements. Import/export barriers, tariffs, or quotas; other protectionist measures; price controls or caps; more “political” control of monetary policy; or simply more direct intervention into the operations and decisions of private companies, etc. Source: World Bank (2022). Appendix B Table A2. Selected Country List. List of Countries 1. Ireland 2. Slovakia 3. Portugal 4. Norway 5. Chile 6. Israel 7. Finland 8. Greece 9. Turkey 10. Australia 11. Brazil 12. Austria 13. Indonesia 14. Czech Republic 15. Sweden 16. Hungary 17. Denmark 18. South Africa 19. Italy 20. Republic of Korea 21. India 22. Canada 23. Belgium 24. Mexico 25. Spain 26. Poland 27. Singapore 28. Switzerland 29. United States 30. China: Mainland 31. Germany 32. The Netherlands 33. France 34. Japan 35. United Kingdom Source: World Bank (2022). J. Risk Financial Manag. 2023,16, 14 16 of 20 Appendix C Table A3. Findings of the reviewed sources. Themes Authors Sample Countries Data and Sample Period Methods Findings Governance Effectiveness and Economic Growth Alam et al. (2017)81 countries Panel data (1996, 1998, and 2000) and (2002–2011) System Generalized Method of Moments Generally, they find a statistically significant relationship between government effectiveness and economic growth, particularly among low- and high-income economies Georgiou (2015) Europe (16 countries) Panel data (2000–2013) Panel EGLS (Cross-section SUR) Governance efficiency has a positive impact on economic growth Yahyaoui et al. (2019) African countries Panel data (1996–2014) Fixed-Effect Model (FE) or the Random- Effects Model (RE) Good governance is a deterministic condition of the positive effect of aid on economic growth Trade Openness and Economic Growth Alam and Sumon (2020) 15 Asian countries Panel data (1990–2017) Panel Cointegration and Causality Approach Positive impact of trade openness on economic growth. Bi-directional causal feedback between trade openness and economic growth in the short run Cevik et al. (2019)Turkey Time-series data (1950–2014) A Rolling Frequency Domain Analysis Evidence of bi-directional relationship between trade openness and economic growth. Economic growth impact of trade openness happens at shorter horizon (4.3 to 7.5 years) while feedback loop of economic growth on trade happens at longer horizon (7.5 to 13 years) Asada (2022) Thailand Time-series data (2000–2017) ARDL Approach Trade openness is positively associated with economic growth in Thailand Nguyen and Bui (2021) Indonesia, Malaysia, Thailand, Singapore, Philippines, and Vietnam Panel data (2004–2019) Fixed-effect Panel Threshold Approach Find that below a certain threshold, trade openness plays a critical role in stimulating economic growth. However, beyond a certain threshold, the impact of trade openness on economic growth is positive but lower J. Risk Financial Manag. 2023,16, 14 17 of 20 Table A3. Cont. Themes Authors Sample Countries Data and Sample Period Methods Findings Keho (2017) Côte d’Ivoire Panel data (1965–2014) Autoregressive Distributed Lag Bounds Test of Cointegration Toda and Yamamoto Granger Causality Tests The results show that trade openness positively affects economic growth in the short and long run. Furthermore, they reveal a positive and strong complementary relationship between trade openness and capital formation in promoting economic growth Financial Openness and Economic Growth Kouadio and Gakpa (2021)Côte d’Ivoire Panel data (1984–2018) Dynamic Ordinary Least Squares (DOLS) and Fully Modified Ordinary Least Squares (FMOLS) Methods Financial openness positively affects total factor productivity in Côte d’Ivoire Estrada et al. (2015)108 countries Panel dataset (1977–2011) Generalized Method of Moments Estimation The actual level of financial openness affects economic growth positively and significantly. This holds for two of the three measures of financial openness that their study use Agenor et al. (2018) 64 advanced and developing economies Panel dataset (1990–2014) Dynamic Fixed-Effect Model Prudential measures targeted at dampening credit growth have a positive effect on economic growth, and financial development and financial openness appear to have a direct positive impact on economic growth Wei (2014) Asia (17 countries in Asia) Panel data (1980–2010) De Facto Financial Openness Measurements After employing both de jure and de facto indicators of financial openness, empirical results indicate that the de facto indicators are associated with the growth of Asian economies, but de jure indicator does not show statistically significant impact on growth across three methodologies Ibrahim and Tanimu (2016)Nigeria Time-series data (1980–2012) Johansen Cointegration Model, Vector Error Correction model (VECM) and Granger Causality Test The result of cointegration reveals that there exists a long-run relationship among the variables used in the model A negative relationship between real GDP and financial openness A positive relationship between real GDP and trade openness J. 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