Governance Challenges: Institutional Quality and Trust in Bangladesh

Abstract

The importance of effective political institutions and good governance for development was emphasized by Adam Smith and John Stuart Mill. As noted by North (1990), “the inability of societies to develop effective, low cost enforcement of contracts is the most important source for historical stagnation and contemporary underdevelopment in the Third World.” For example, looking at long-term growth in 40 non-industrialized countries during the period 1850–1950, Reynolds (1983) concluded that political organization and governmental administration appeared to be the most significant variables influencing growth. Following North, economists and social scientists have given serious consideration to the importance of governance for development, which has contributed to a growing literature that broadly suggests that the quality of governance plays a crucial role in economic development (Mauro 1995; Knack and Keefer 1995). Early studies observed that corruption could act as the grease that “turns the wheels of development” (see, e.g., Huntington 1968); however, the opposite view suggests that lower corruption promotes higher income rather than vice versa (see Acemoglu et al. 2001; Kaufmann and Kraay 2002; Rodrik et al. 2002).