This research attempts to examine the development effect of governance (through exogenous variables)
applying instrumental variables estimator and two-stage least squares methods building on cross-sectional regression
analysis using data for 64 countries. Governance as measured by governance effectiveness in the model specified in
the paper plays important role for economic outcome. The evidence for a positive causal relationship of governance
and development has been provided in the paper. The results obtained are consistent with the empirical findings of
Kaufmann and Kraay (1999) who found large and highly significant positive effects of governance on per capita
incomes on larger sample.
