Does Governance Quality Matter? A Comparative Investigation of Financial Liberalization and Economic Growth in Developed and Developing Countries

This paper aims to examine the direct and interaction effects of financial liberalization and governance quality on economic growth (EG) from multi‐theoretical perspectives, both in developed and developing countries. In addition to using the Generalized Method of Moments (GMM) for estimation, the study also employs the principal component analysis (PCA) method to construct indices for financial liberalization and governance quality, assessing their influence on EG in 28 countries (10 developed and 18 developing) from 1996 to 2023. The findings indicate that both the financial liberalization index and its interaction with governance quality have a significant positive impact on EG across all the sampled countries. A comparative analysis reveals that financial liberalization and governance quality contribute more to EG in developed countries than in developing countries. The outcomes suggest that regulators and policymakers, especially in developing countries, should place greater emphasis on financial liberalization and governance quality to enhance EG. These countries should develop and implement effective financial liberalization policies while fostering strong governance frameworks to maximize their economic potential. Moreover, this study not only contributes to the existing body of knowledge but also provides valuable insights into whether developed or developing countries benefit more from financial liberalization.