Endnotes

¹Trade is only beneficial if the involved adjustment costs are relatively low; that is, the reallocation of labor and capital from the import-competing sector to the export sector can be achieved at minimal costs. However, if the structure of the economy is relatively rigid, production factors cannot move to the sectors where large welfare gains can be achieved. This may result in a situation where trade does not have a beneficial impact on the allocation of resources within and between sectors.

²See, for example, World Bank (2001), Jutting (2003), and Levine (2005), among others.

³Refer, for example, to the Cotonou Agreement between the African, Caribbean and Pacific Group of States (ACP) and the European Union (EU).

⁴This database has been compiled by Daniel Kaufmann and Massimo Mastruzzi of the World Bank Institute and Aart Kraay of the Development Research Group, the World Bank.

⁵All the infrastructure facilities across countries have been normalized in terms of either population or geographical area for each different time point. This makes them amenable to comparison, irrespective of state size and population.

⁶The infrastructure indicators have been rendered unit- and scale-free before running PCA.

⁷This has been drawn from the author's own Asia Infrastructure Database (AID), a part of which has been used in Kumar and De (2008) and the Economic Research Institute of ASEAN and East Asia (ERIA 2007).

⁸According to EconLit, “world governance” was mentioned 5 times in the 1970s; by the end of 2008, reference to “governance” had increased to 33,177, with ‘economic governance' appearing 192 times, and ‘corporate governance' appearing 9,717 times (Dixit 2009).

⁹ADB, for example, has been implementing the Governance and Anticorruption Action Plan (GACAP), funded by the Governance Cooperation Fund (GCF), for the improvement of governance in selected member countries (ADB 2009).

¹⁰ADB's approach to governance, established as a Core Strategic Area of Intervention under its Long-term Strategic Framework (2001–2015) , recognizes the importance of capacity development and identifies these four key interrelated elements that are considered necessary to sustain efforts and ensure results. Refer, for example, to ADB (1995, 2006a, 2009), and Wescott (2005).

¹¹Refer, for example, to Munnell (1990); Fedderke, Perkins, and Luiz (2006); Aschauer (1989); World Bank (1994); Ghosh and De (2005); Kohsaka (2007); and Batten and Karlsson (1996).

¹²A vast literature exists on the impact of infrastructure on regional integration. Refer, for example, to Brooks and Menon (2008).

¹³See, for example, ADB (2006c)

¹⁴Refer, for example, to the seminal works of Kaufmann, Kraay, and Mastruzzi (2006), and Rose-Ackerman (1975) on the economics of corruption.

¹⁵Specifically, where X^t_ij represents governance indicators of country i for the year t. All indicators are standardized with a mean of 0 and a standard deviation of 1, and range from - 2.5 to +2.5.

¹⁶EAS represents ASEAN+6: Brunei Darussalam, Cambodia, Indonesia, Lao People's Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, Viet Nam, Australia, India, Japan, New Zealand, People's Republic of China, and Republic of Korea.

¹⁷Although Iceland was badly ravaged by the ongoing global economic crisis, it still managed to rank second in best governance.

¹⁸For some time, Somalia was in the limelight due to incidences of sea piracy.

¹⁹I used Lowess plots to explore the relationship between per capita income and governance. These locallyweighted regressions use a function that attaches less weight to points far from the mean. Figures 2 in this paper show the Lowess plot for the default options in Stata 10, which include a bandwidth of 0.8 (this means that in each regression, 80% of the observations are included) and a Tricube Weighting scheme (this means that the observations farther away from the mean get a lower weight). Results are robust to changes in the weighing scheme, including a change to a rectangular weighting scheme (in which all observations get equal weights) and a change in the band width. This pattern is also robust to changes in year.

²⁰This association does not talk about the direction of causality between income per capita and governance.

²¹Refer, for example, to Munnell (1990).

²²Specifically, where PIIij is infrastructure index of the i- th country in j-th time, Wkj is weight of the k-th facility in j-th time, and Xkij is the unit- and scale- free value of the k-th facility for the i-th country in j-th time point. This helps us to derive the index (score) after adding the multiplied values corresponding to each category. As discussed, the weights (Wkj) in this equation were derived using PCA.

²³Unofficial payments to public officials are the percentage of firms expected to make informal payments to public officials to “get things done” with regard to customs, taxes, licenses, regulations, services, and the like. Data is available from the World Bank, Enterprise Surveys (http://www.enterprisesurveys.org). Replacing the PII with the infrastructure index of WEF does not change the result, and instead makes the association more robust.

²⁴In my analysis, I consider the Asia-Pacific members of Asian Development Bank (ADB) as Asia, European members of the EU as Europe, and Latin American members of Inter -American Development Bank as Latin America.

²⁵By following this approach, I obtained the Arellano and Bond difference-GMM estimator. This estimator, which can be viewed as an extension of the Anderson and Hsiao (1982) estimator, produces efficient (and consistent) estimates; the latter estimator fails to take all the potential orthogonality conditions into account.

²⁶In two later papers, however, Arellano and Bover (1995) and Blundell and Bond (1998) revealed a potential weakness of the difference-GMM estimator. They showed that lagged levels can be poor instruments for first-differenced variables, particularly if the variables are persistent. In their modification of the estimator, they suggested the inclusion of lagged levels along lagged differences. In contrast to the original difference- GMM, they termed this the expanded estimator system-GMM.

²⁷Governance refers to the scale of -2.5 to +2.5.

²⁸Calculated based on Gov and Gov*Asia coefficients estimated under the system-GMM in the equation (3), and then added to individual country average governance scores.

²⁹To compute the marginal effects of Gov (or the interaction term) I first calculated the derivate of equation (4) with respect to Gov (and interaction term), setting all the other variables to their average value, and then I tested the hypothesis that the derivate is equal to zero.

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