Abstract

The relationship between governance and economic development is one of the most important areas of research in international development. Much of the previous literature has focused on whether better governance leads to higher levels of income. In this paper, we examine the relationship between governance and broader development outcomes, with a specific focus on developing Asia. In our empirical analysis, we use disaggregated measures of governance to capture different dimensions of governance, and to allow for the possibility that different dimensions of governance such as administrative capacity, legal infrastructure, and state accountability can affect development indicators differentially. We find a clear role for governance in affecting most development outcomes except levels of schooling. This is particularly evident for state administrative capacity and legal infrastructure, and less evident for state accountability. However, we find that the benign relationship between governance and development is weaker for Asian countries for several of the development indicators. We also find that the key mechanism by which governance affects development is by increasing the mobilization of domestic resources and by increasing the effectiveness with which these resources are spent on social sectors. Along with the fact that governance quality is lower in Asia than other regions of the world (except sub-Saharan Africa), this suggests that improvements in governance along with the strengthening of the mechanisms by which governance affects social development can deliver clear gains in development outcomes in developing Asia.

Highlights

  • The relationship between governance and economic development is one of the most important areas of research in international development (Grindle 2004)

  • Does better governance lead to improvements in child and maternal mortality and reductions in poverty through its direct effect of increasing levels income, for lower income classes, and, by doing so, allowing poor households to invest more in schooling, nutrition, and health? Or does it occur through the better ability of the state to collect tax revenues to finance social expenditures? Or is the effect of better governance mostly through the higher effectiveness of public goods delivery to the poor? We explore these very different causal mechanisms between governance and development to better understand the specific pathways by which governance can affect development

  • We study the relationship between governance quality and development outcomes with a focus on developing Asia

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Summary

INTRODUCTION

The relationship between governance and economic development is one of the most important areas of research in international development (Grindle 2004). There is scant literature on the relationship between governance and broader development outcomes such as poverty and inequality, human development, years of schooling, gender inequality, infant and maternal mortality, and access to adequate sanitation (the exceptions are Rajkumar and Swaroop [2008] and Hallerod et al [2013]). Whether better governance leads to broader development outcomes over and above improvements in living standards is relevant in the context of developing Asia, where many countries have seen strong economic growth and an impressive expansion in public services in recent decades, but where there is wide variation in governmental performance with regard to service delivery and in broader development outcomes such as infant and maternal mortality, schooling, and access to sanitation (Asian Development Bank 2013). We assess which of these mechanisms may be more important for the developing Asia context

THE RELATIONSHIP BETWEEN GOVERNANCE AND DEVELOPMENT
Measuring Governance
Empirical Strategy
EMPIRICAL ANALYSIS AND RESULTS
Alternate Specifications and Robustness Tests
Testing for Causal Mechanisms
CONCLUSIONS AND POLICY IMPLICATIONS
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