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A Corruption / Growth Paradox in South Asia?

A Corruption / Growth Paradox in South Asia?. Aart Kraay DECRG Comments at Core Course on Public Sector Governance and AntiCorruption. Governance & Anticorruption Core Course. The Paradox. Stylized version of paradox:

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A Corruption / Growth Paradox in South Asia?

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  1. A Corruption / Growth Paradox in South Asia? Aart Kraay DECRG Comments at Core Course on Public Sector Governance and AntiCorruption Governance & Anticorruption Core Course

  2. The Paradox • Stylized version of paradox: “[Insert your favourite country here] is one of the most corrupt countries in the world and also one of the world’s fastest growing countries” • Is there really a paradox? • think about countries in South Asia (especially Bangladesh) • think about distinction between long and short run • think about types of institutions that matter • think about isolating causal effects

  3. Is There Really a Governance-Growth Paradox(In the Medium Run At Least?)

  4. Corruption and Growth in Long Run

  5. Is There A Paradox in the Long Run? • To know whether there is a paradox in long-run relationship, we need to: • identify direction of causality • control for other types of institutions that matter • Two types of institutions (following Acemoglu-Johnson (2005), details on South Asia in Fernandes and Kraay (2005)) • “property rights institutions” (PRI): is private property secure from state predation? (Corruption – Settler Mortality) • “contracting institutions” (CI): do institutions support transactions between private parties? (Days to clear cheque)

  6. Sorting Out Causality(...Sort of ... So We Can Have a Picture) Estimated Causal Effect

  7. Sorting Out Causality, Cont’d • First look at “deep” determinants of institutions • Settler Mortality  Property Rights Institutions • India: surprisingly good PRI • Bangladesh, Pakistan: surprisingly weak PRI • British Legal Origins  Contracting Institutions • India, Pakistan: surprisingly weak CI • Bangladesh: surprisingly good CI

  8. Sorting Out Causality, Cont’d • Where do countries in South Asia stand in this causal relationship? ln(GDP/Capita) = 0 + 1PRI + 2CI + e • Typically find PRI matters much more than CI • possibility of “contracting around” bad CI? • Bangladesh, Pakistan have surprisingly large positive residuals: per capita incomes 2-3 times higher than what we would expect given their (lousy) PRI and CI • India has surprisingly large negative residual: per capita income half what we would expect given its (decent) PRI and CI

  9. Governance and Long-Run Growth:Possibly More Interesting Paradoxes in SA • Interesting paradox is in the long-run relationship • short-run relationship is pretty noisy • How did Bangladesh and Pakistan get so rich with bad institutions? • Bangladesh has especially weak PRI which matter most for growth: how does “contracting around” work here? • Are past income gains “fragile” with sobering implications for long-run growth? • Why has India’s good PRI not translated into better growth?

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