State Capacity and the Catch-Up Effect

Despite considerable economic growth and development over decades in large developing economies, there remain substantial intra-country regional disparities. An increasing body of literature suggests that improving aggregate state capacity is critical in delivering efficient and effective development outcomes and last-mile delivery of public services. However, the role of enhancing local state capacity targeting such regional imbalances and activating a catch-up effect, in terms of economic development, is understudied. We examine this in the context of India’s ‘Backward Regions Grant Fund’ (BRGF) policy, an intervention aimed at enhancing the capabilities and effectiveness of local governments and village councils. We use a synthetic difference-in-differences (SDiD) econometric technique to estimate the causal effects of this policy on average luminosity density and growth in total night-time lights. We find that there is a 5–7 per cent increase in the average night-time lights and a 3–4 p.p. growth in total night-time lights. We provide supportive empirical evidence that improved provision of public goods, such as the availability of schools and road infrastructure, and enhanced local state capacity, serve as a potential mechanism causing this effect.