The IMF's October 2026 World Economic Outlook presents a puzzle. While developing Asia remains resilient, Bangladesh faces slowing growth and stubborn inflation. Why has Bangladesh struggled to recover from shocks that other developing economies have weathered more successfully?
The answer may lie less in external shocks than in the institutions that determine how economies respond. These written and unwritten rules of the game, and how they are enforced, shape how markets operate, develop, and adapt to change.
Why shocks linger
The same shock can leave one economy reeling while another recovers quickly. Mobilising resources, adjusting policies, and helping businesses adapt depend on how well institutions function. Where governance is weak, even sound policies encounter delays, inconsistent implementation, and institutional inertia.
Bangladesh entered the turbulence with limited fiscal space, exceptionally low tax revenues, weak financial oversight, and a poor reform record. As external pressures mounted, policy reversals compounded uncertainty, raised adjustment costs, and discouraged investment amid already fragile confidence.
The shocks explain why Bangladesh stumbled, but not why recovery has proved so difficult. Public debate has focused on external pressures and immediate policy failures, while the institutional weaknesses that prolong their effects have received less sustained attention.
For five years, online searches for "governance" barely registered. Interest surged after the 2026 election, when the elected government stepped back from the July Charter despite its endorsement by nearly seventy percent of referendum voters. Yet the surge proved fleeting. Searches fell sharply within weeks, suggesting that even a major dispute over institutional reform struggled to sustain public attention.
The episode illustrates how quickly enthusiasm for institutional reform can fade when political momentum stalls. Yet policy failures do not occur in an institutional vacuum. Weak governance can make adjustment slower, costlier, and less predictable, helping explain why the effects of shocks linger.
What does the evidence say
Governance is widely believed to matter for growth, yet the evidence is mixed. Some economies prosper despite weak institutions, while others struggle despite strong ones. Rather than assume the connection, we can examine the international data.
The World Bank's Worldwide Governance Indicators assess six dimensions: Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. Based on surveys and expert assessments, they capture how public power is exercised, policies implemented, and institutions held accountable. These perception-based scores allow comparisons across countries and over time, offering a window into institutional performance.
Measuring governance recalls the parable of the blind men and the elephant. One mistakes the trunk for a snake, another a leg for a tree, and a third the flank for a wall. Each describes one part, but none grasps the whole.
Governance adds a twist to the parable: its parts are bound by shared expectations about the rules of the game. Weak regulation undermines government effectiveness; ineffective administration invites corruption; corruption erodes the rule of law; and weak accountability allows these failures to persist.
Measuring governance along multiple dimensions is not blind groping; it helps reveal a system whose parts move together. In the World Bank's dataset, the six governance indicators are strongly correlated, with several pairwise correlations exceeding 0.9. This interdependence is both an economic insight and a statistical challenge. When governance dimensions are so closely correlated, it becomes difficult to distinguish their separate contributions to economic performance.
To examine the governance–growth relationship, I combined World Bank governance scores with IMF growth data for 190 economies over 2018-2025. Each indicator was analysed separately, accounting for initial income and the distinct growth patterns of East and Southeast Asia.
The models explain roughly a quarter of the variation in growth across 190 diverse economies. Governance is part of that picture, alongside initial income and regional patterns. Regulatory Quality, Government Effectiveness, and Political Stability show positive, statistically significant associations with growth. The remaining governance indicators also show positive associations, though their estimates are less precise.
The relationship is not linear. Across all six governance dimensions, the fitted patterns resemble an inverted U: growth rises with governance improvements at low scores, but the association weakens at higher levels. This suggests diminishing growth benefits from institutional improvements. Where governance is weak, predictable rules, effective administration, and less corruption can ease major constraints on investment. Where institutions are already strong, further improvements may matter less.
Why regulatory quality stands out
Regulatory Quality emerges as a consistent correlate of growth, but not necessarily the most important governance indicator. The six dimensions are too intertwined to rank their individual contributions confidently. Regulatory Quality may stand out because it reflects the health of the broader governance system—one part of the elephant revealing something about the whole.
The factory floor illustrates why governance matters as a system. Expanding firms need clear regulations and competent officials to administer them. Importing machinery requires predictable customs procedures without demands for bribes. Reliable utilities depend on agencies honouring commitments, while resolving disputes requires courts that enforce contracts. What appears to be a regulatory problem often reflects weaknesses across the governance system. The whole elephant matters.
During 2023-2025, Bangladesh's Regulatory Quality score averaged 39.4, against Vietnam's 51.1, both below the estimated turning point of 69. Our nonlinear model associates this gap with roughly 1.1 percentage points in annual growth. Vietnam, a major export competitor, grew about 2.2 percentage points faster annually over the same period.
Google searches offer a revealing parallel. Interest in "regulatory quality" was negligible for most of the past five years before surging more than fiftyfold in 2026. The contrast is striking: regulatory weaknesses appear persistent, while public attention to them rises sharply only when uncertainty becomes difficult to ignore.
Public attention to reform may fade, but the economic costs of weak governance do not. Unpredictable rules raise the value of waiting, delaying investment and resource reallocation. Firms hesitate not because they resist change, but because uncertainty makes premature commitments costly. If the economic case for better governance is so compelling, why does institutional inertia remain politically attractive?
From evidence to political economy
An old saying holds that good economics makes good politics. The evidence suggests that good governance makes good economics. Why, then, is good governance so often bad politics?
Bangladesh's experience offers a clue. Despite nearly three decades of economic transformation, its Regulatory Quality ranking slipped from the 20th to the 15th percentile, never rising above the 21st. Government Effectiveness barely moved in relative terms, while Rule of Law improved only modestly. If growth alone could deliver better governance, Bangladesh should have advanced much further.
Bangladesh's persistent governance rankings suggest that economic transformation does not automatically transform institutions. Yet countries starting from similar positions have achieved much greater improvements, showing that institutional trajectories are not predetermined.
What makes one institutional trajectory persist while another changes? Political incentives, social norms, and shared stories can make existing arrangements the path of least resistance or create expectations that make reform possible. Appeals to domestic policy autonomy and national sovereignty may reinforce inertia when they defend discretion rather than accountability, but can support change when they strengthen demands for accountable institutions.
The challenge is not to rediscover better economics but to bring politics and governance into closer alignment.