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Governance and Economic Performance: A Survey

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  • Dethier, Jean-Jacques

Abstract

This paper presents a framework for analyzing the determinants and effects of public governance and a survey of recent theoretical and empirical studies pertaining to developing and transition countries. It explains how informational, transactional and political constraints on government activity lead to trade-offs between efficiency and the extraction of rents by private firms, politicians and government agents, thus producing welfare-increasing or welfare-decreasing outcomes. It also discusses how political rules and law both constrain and facilitate economic activity. The common feature of the studies reviewed here is their analytical approach based on incentive theory and institutional economics. Governments are not benevolent dictators maximizing social welfare, but complex governance structures characterized by agency relationships. When agency problems and political and legal institutions are taken into account, it becomes easier to understand how markets and government, acting interdependently, produce social and economic outcomes that are, in many cases, inefficient and/or inequitable. The efficiency of the use of public resources as well as their targeting is seen to depend crucially on institutional features of the state and on incentive schemes in public organizations. Reforms should concentrate not only on defining objectives, instruments and parameters of public policy (regulation, taxation and redistribution), but also on designing processes and incentive schemes in such a way that credible commitment is possible and that agents actually implement policies that maximize social welfare. It is also crucial that reforms effectively prevent rent-seeking and the capture of the state by powerful elites, whose interests are at odds with those of the general public. Section 1 introduces the issues. Section 2 presents the analytical framework and discusses successively basic theoretical concepts (2.1); the interactions between economic, political and legal systems (2.2); the relationships between public institutions and concepts of authority (2.3); the interdependence of government and markets (2.4) and the provision of public goods (2.5). Section 3 discusses four political economy themes: first, the relationship between governance and income distribution (3.1); second, models of rent-seeking (3.2); third, how outcomes are enforced in a democracy (3.3) and, finally, sociopolitical instability (3.4). Section 4 turns to legal systems, first discussing the notion of "economic constitution" (4.1) and then issues of the "cost of rights" and the conflict between fiscal sustainability and the respect for basic rights, taking as an example constitutionally guaranteed entitlements (4.2). Three sub-sections then expand on the theme of efficient legal institutions and their role in development. The issues that are discussed are: whether formal or informal legal systems are more efficient (4.3), the meaning of the rule of law, and private enforcement of laws when there is no rule of law (4.4) and whether legal systems belonging to different 'families' are more efficient (4.5). Section 5 reviews empirical issues in assessing the links between governance and development. First, methodological problems are addressed: data issues, choice of model, and estimation problems (5.1); then cross-country studies on governance are surveyed (5.2) and, finally, empirical research within the context of individual countries is discussed, taking as an example a study on market-preserving federalism in Russia (5.3). Section 6 provides some conclusions, including remarks on a possible research agenda (6.1) and implications for international development policy (6.2).

Suggested Citation

  • Dethier, Jean-Jacques, 1999. "Governance and Economic Performance: A Survey," Discussion Papers 279846, University of Bonn, Center for Development Research (ZEF).
  • Handle: RePEc:ags:ubzefd:279846
    DOI: 10.22004/ag.econ.279846
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    2. Uchimura, Hiroko & Jütting, Johannes P., 2009. "Fiscal Decentralization, Chinese Style: Good for Health Outcomes?," World Development, Elsevier, vol. 37(12), pages 1926-1934, December.
    3. Zhang, Xiaobo, 2006. "Fiscal decentralization and political centralization in China: Implications for growth and inequality," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 713-726, December.
    4. Ding, Haoyuan & Qin, Cong & Shi, Kang, 2018. "Development through electrification: Evidence from rural China," China Economic Review, Elsevier, vol. 50(C), pages 313-328.
    5. Luo, Renfu & Zhang, Linxiu & Huang, Jikun & Rozelle, Scott, 2007. "Elections, fiscal reform and public goods provision in rural China," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 583-611, September.
    6. Dawood MAMMON & Huma RABBANI, 2017. "Effect of welfare and economic performance on good governance outcomes in Pakistan," Journal of Economics Library, KSP Journals, vol. 4(4), pages 451-472, December.
    7. Zhang, Xiaobo & Fan, Shenggen & Zhang, Linxiu & Huang, Jikun, 2004. "Local governance and public goods provision in rural China," Journal of Public Economics, Elsevier, vol. 88(12), pages 2857-2871, December.
    8. Shaheen Naseer, 2019. "Public Spending, Quality of Bureaucracy and Economic Growth: A Theoretical Analysis," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 58(2), pages 203-221.
    9. Abderraouf Mtiraoui, 2020. "Corruption between economic institutional aspect and social aspect through governance [La corruption entre l’aspect institutionnel économique et l’aspect social à travers la gouvernance]," Working Papers hal-02535463, HAL.
    10. Campos, Nauro F., 2000. "Context is everything : measuring institutional change in transition economies," Policy Research Working Paper Series 2269, The World Bank.
    11. Liu, Chengfang & Zhang, Linxiu & Huang, Jikun & Luo, Renfu & Rozelle, Scott, 2009. "Can Good Projects Succeed in Bad Villages? Project Design, Village Governance and Infrastructure Quality in Rural China," 2009 Conference, August 16-22, 2009, Beijing, China 49944, International Association of Agricultural Economists.
    12. Martinez-Vazquez, Jorge & McNab, Robert M., 2003. "Fiscal Decentralization and Economic Growth," World Development, Elsevier, vol. 31(9), pages 1597-1616, September.
    13. Ziang, Xiaobo, 2005. "Fiscal decentralization and political centralization in China: implications for regional inequality," DSGD discussion papers 21, International Food Policy Research Institute (IFPRI).
    14. Uchimura, Hiroko & Jutting, Johannes, 2007. "Fiscal Decentralization, Chinese Style: Good for Health Outcomes?," IDE Discussion Papers 111, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    15. Sudip Ranjan Basu, 2005. "Does Governance Matter?Some Evidence from Indian States," Development and Comp Systems 0509008, University Library of Munich, Germany.

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