Growth without Governance

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Abstract
Per capita income and the quality of governance are strongly positively correlated across countries. We propose an empirical strategy that allows us to separate this correlation into two components: a strong positive causal effect running from better governance to higher per capita income and a weak and even negative causal effect running in the opposite direction from per capita income 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." We document this evidence using a newly updated set of worldwide governance indicators covering 173 countries for the period 2000-01, and we use the results to interpret the relationship between incomes and governance in Latin America and the Caribbean region. Finally, we speculate as to the potential importance of elite influence and state capture in accounting for the surprising negative effects of per capita income on governance, present evidence on such capture in some Latin American countries, and suggest priorities for actions to improve governance when such pernicious elite influence shapes public policy.

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