IMF Working Papers

Can high levels of state capacity protect countries from slow growth and deepening output collapses? Using data for 108 developing countries, we classify five-year periods using a two- dimensional state space based on growth regimes and levels of state capacity. We model transitions between them using a finite state Markov chain, and then extend this to take political institutions into account. We find that high state capacity helps to sustain growth and limit output collapses, but these effects are sometimes less striking than the benefits of democracy.