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Growth Without Governance

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by D. Kaufmann and A. Kraay (Fall 2002) Economia, Volume 3, Number 1

Per capita incomes and the quality of governance are strongly positively correlated across countries. We propose an empirical strategy that allows us to separate this correlation into: i) a strong positive causal effect running from better governance to higher per capita incomes, and ii) a weak and even negative causal effect running in the opposite direction from per capita incomes to governance. The first result confirms existing evidence on the importance of good governance for economic development. The second result is new and suggests the absence of "virtuous circles" in which higher incomes lead to further improvements in governance. This motivates our choice of title, "Growth Without Governance". This finding has important policy and institutional implications.

We document this evidence using a set of worldwide governance indicators covering 175 countries for the period 2000/01. We speculate as to the potential importance of elite influence and state capture in accounting for the surprising negative effects of per capita incomes on governance and suggest priorities for actions to improve governance when such pernicious elite influence shapes public policy.

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