The Growth Effect of State Capacity Revisited

Trung Vu

Oxford Bulletin of Economics and Statistics, 2025, vol. 87, issue 3, 499-538

Abstract: I provide new empirical estimates of the effect of state capacity on economic development across countries over the period 1960–2022. Specifically, I construct a comprehensive state capacity index based on six different dimensions of effective state institutions available in the Varieties of Democracy (V‐Dem) dataset. Then, I estimate heterogeneous parameter models under a common factor framework. My empirical strategy explicitly allows the growth effect of state capacity to differ across countries and accounts for unobserved common factors. My preferred estimates indicate that a one‐standard‐deviation increase in the V‐Dem‐based state capacity index predicts a rise in income per person by roughly 6%–7%. The magnitude of such impact equates to less than half of that implied by conventional estimates obtained under highly restrictive assumptions of slope homogeneity and cross‐sectional independence. Furthermore, I provide partial evidence suggesting that worldwide heterogeneity in the economic importance of state capacity is deeply rooted in prehistorically determined population diversity, state history, long‐term relatedness between countries, and interpersonal trust.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/obes.12642

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:obuest:v:87:y:2025:i:3:p:499-538

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0305-9049

Access Statistics for this article

Oxford Bulletin of Economics and Statistics is currently edited by Christopher Adam, Anindya Banerjee, Christopher Bowdler, David Hendry, Adriaan Kalwij, John Knight and Jonathan Temple

More articles in Oxford Bulletin of Economics and Statistics from Department of Economics, University of Oxford Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().