Government Revenues and Economic Growth in Weakly Institutionalised States

The lack of sustained growth in poor countries has often been attributed to 'fiscal weakness'. Empirical evidence suggests that governments often fail to provide crucial public goods. I argue that this failure may be the result of a political instability effect: more resources fuel power struggles among competing elites - and decrease the incumbent regime's time horizon in office. But with a shorter time horizon, it is less attractive to finance growth-promoting institutions whose returns only accrue in the future. The model further predicts the instability effect to be stronger in countries with little capital or in remote places which render technology adoption expensive. Copyright © The Author(s). Journal compilation © Royal Economic Society 2010.