August 18, 2016

Economic Development and Governance

ECONOMISTS agree that governance is one of the critical factors that explain the divergence in performance across developing nations. The differences of views between economists concerning governance are to do first, with the types of state capacities that constitute the critical governance capacities needed for accelerating development and secondly, with the significance of governance related to other factors at early stages of development.
On the first issue, there is an important empirical and theoretical controversy between liberal economists who constitute the mainstream consensus on good governance and statist and heterodox institutional economists who agree that governance is critical for economic development but argue that theory and evidence shows that the governance capacities required for successful development are substantially different from those identified by the good governance analysis.
The economists in favour of good governance argue that the critical state capacities are those that maintain efficient markets and restrict the activities of states to the provision of necessary public goods to minimise rent seeking and government failure. The relative failure of many developing states are explained by the attempts of their states to do too much, resulting in the unleashing of unproductive rent seeking activities and the crowding out of productive market ones. The empirical support for this argument typically comes from cross sectional data on governance in developing countries that shows that in general, countries with better governance defined in these terms performed better (Khan: 2016).
The second area of disagreement concerns the relative importance of governance reforms in accelerating development in countries at low levels of development. This being so, it can be said that although good governance is one of the necessary condition for the economic development of a state but it is not the sole and sufficient condition. There are many other factors which are equally important to promotion of economic development.


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