In a sizable number of developing countries, the public sector fails to provide many, if not most, critical public goods necessary for economic development. The presence of a well-functioning state is key to encouraging economic growth. Part of this concerns having a public sector that has the capacity to raise revenues and spend them effectively; and that policymakers are incentivized to act in favour of their citizen. This paper discusses recent developments in the literature on state effectiveness. Each section covers the relevant theory with a special focus on the current knowledge about the mechanisms highlighted, potential policy measures, gaps in current research and potential ways to fill these gaps.
The first main part of the paper addresses how to build state capabilities. This requires improving tax compliance and long-run fiscal capacity, thinking carefully not only about how taxpayers are monitored and incentivised to pay taxes. It also requires us to think about the optimal design and management of public sector organisations, including recruitment strategies and the targeting of particular traits. This involves having an effective bureaucratic apparatus that implements policies in an effective manner and without delays, taking decisions at the right level of centralisation and delegating decision-making processes to the right agents.
The second main theme is about politics and policy choice. To implement growth enhancing policies it is necessary to understand how different political institutions translate conflicting societal demands into a single implemented public policy. This requires knowing which policies expand state capabilities, and how to create the political willingness to implement growth-friendly policies, thinking about political accountability and how the conflict of interest between citizens and politicians and bureaucrats is resolved. Moreover, designing and implementing mechanisms for aggregating preferences of different groups in the formulation of policy is also critical, as well as understanding how to prevent conflict and how to rebuild after.
Azulai, M.; Bandiera, O.; Blum, F.; Kleven, H.; La Ferrara, E.; Padró, G.; Tejada, C.M. Evidence paper: State effectiveness, growth and development. International Growth Centre, UK (2014) 106 pp.