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June 06, 2018

Economic development versus good governance

A literature review of governance reveals that governance, which is widely defined as the traditions and institutions that determine how authority is exercised in a country, matters to economic development (Kaufmann et al: 2000). Several cross-national empirical studies have found a positive relationship between the quality of institutions and governance structures and economic growth. In this regard, it is worth recalling that economists, development experts and international policy-makers have reached a consensus that good governance is a pre-requisite for sustainable development.
According to their assumptions, if states can ensure efficient markets especially through enforcement of property rights, rule of law, reduction of corruption and commitment not to expropriate, private investors will drive the economic development. This approach implicitly stresses the priority to develop market-enhancing governance, and is nowadays a dominating paradigm supported by international development and financial agencies (North: 1990).
There is no doubt that market is important to foster and enable the economic development, which is likely to be faster if market that mediates allocation of resources becomes more efficient. Economists agree that governance is one of the major factors that explain the divergence in performance across the developing nations. The differences of view among economists when it comes to governance are to do first, with the types of state capacities that make up the significant governance capacities needed to accelerate the growth and secondly, with the importance of governance in relation to other factors in the earlier stages of development. On the first issue, the empirical support for this argument usually comes from cross sectional data on governance in developing countries that generally indicate that countries with better governance performed better (Khan: 2006). In contrast, institutional economists base their argument on case studies of rapid growth, which is associated with governance capacities.
Such being the case, it can be said that although good governance is one of the necessary conditions for economic development of a state, it is not the solitary and sufficient condition because there are many other factors which are equally important to promote economic development.


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