Legal Transparency, Public-Sector Integrity, Democratic Quality and Technocratic Governance: Implications for Bank Financing of Private Investment

Abstract Bank financing of private investment relies on lenders' trust in transparent and predictably enforced laws, an ethical standard of good governance whose median expert assessment across 119 developing economies barely changed between 2000 and 2024. Previous studies treat good governance as one composite index or examine its dimensions separately, leaving unclear which matters for bank lending and whether the link extends to private investment. This study aims to identify which dimension of good governance, among legal transparency, public-sector integrity, democratic quality and technocratic governance, is associated with bank credit and, through it, with private investment, with Azerbaijan as the focal case. The data cover 2,182 country-years for 107 developing economies in 2001–2024 and combine expert-coded indicators of the Varieties of Democracy project, the World Bank's Worldwide Governance Indicators and World Development Indicators on credit, investment and macroeconomic conditions, and private investment estimates of the International Monetary Fund. Two-way fixed-effects regressions relate annual changes in the ratio of bank credit to gross domestic product to lagged governance indicators, a cluster bootstrap traces the indirect link to investment, and 35 alternative specifications with leave-one-out, lead and measurement-error tests check robustness, computed in Python (pyfixest). A rise of one standard deviation in legal transparency is associated with 0.75 additional percentage points of gross domestic product in the annual change of bank credit to the private sector (p < 0.001); the association holds in all alternative specifications that keep the outcome and a lag of at most one year but is about half as strong in 2020–2024 as in 2001–2019. Together, legal transparency and public-sector integrity are statistically indistinguishable, but only legal transparency holds in first differences; democratic quality loses its association beside them, and technocratic governance and other perception-based indicators show none, yet Azerbaijan has risen above the median in technocratic governance while ranking tenth lowest of 120 developing economies in legal transparency over 2000–2024. In 59 economies with private investment data, each additional percentage point of gross domestic product in the annual credit change is associated with 0.18 percentage points more private investment, and legal transparency relates to investment through credit (0.12 points per standard deviation) rather than directly, while its association with credit is concentrated in upper-middle-income economies such as Azerbaijan. These results can help legislators, judges and banking supervisors in Azerbaijan and other developing economies support bank financing of investment by making laws transparent and their enforcement predictable as part of ethical leadership in public administration, and open research on firm-level lending and the weaker association after 2019.