Relationship between good governance and economic growth - A contribution to the institutional debate about state failure in developing countries

Numbers of economists of development consider that good governance, defined as the quality management and orientation of development policies has a positive influence on economic performance. The question is what content the literature gives to the concept of governance? According to the World Bank, good governance is evaluated by the implementation capacity of governance principles of a country, providing a framework for market development and economic growth. Several econometric studies (Kauffman et al. (1999, 2005), Knack et al. (1999) tested the relationship between good governance in the sense of ”market-enhancing governance” (stimulus institutions market) and showed a positive relationship between good governance and economic growth. However a good governance policy is allows developing countries to achieve minimum economic growth and political reforms in order to reach a level of development similar to that of industrialized countries? We focus on the definition and the work on the concept of good governance made by the World Bank and criticism formulated by Mushtaq Khan (2002.2004), who reconstructed the notion of governance in a broader sense, taking into account the capacity of states to drive structural change in institutional, political, economic and social fields, in order to ensure longterm economic growth. Is good governance can explain economic performance? Or according to the thesis of Mushtaq Khan (2002, 2004), reforms of economic structures and government capabilities are the first step to improve economic performance of developing countries, and in a second step to allow economic growth to enhance good governance? Following several works of neo-institutionalist economists on the relationship between economic growth and good governance (Kauffman D. and al.1999, 2005, Knack S. and Keefer P. 1997, Hall, R. Jones, C.1999, Clague, C. Keefer P., Knack S. and Olson M., 1997, Barro R., 1996, Rodrick D., 1995, 1997, and 2002) emerged two divergent theories of ”state failure” in developing countries: The first thesis (market Enhancing governance) defended by neo-institutionalist authors consider the state as a sovereign role and welfare state. Economically, the proper functioning of markets is correlated to the proper functioning of institutions through efficient practice of state governance, what is commonly called ”good governance”. Therefore, underdevelopment and low economic growth performance of countries could be explained by a ”state failure” and the components of good governance with the increase in corruption, instability of property rights, market distortions, and lack of democracy. The second thesis (growth Enhancing governance) developed in particular by Mushtaq Khan (1995, 2004, 2005, 2006) and partly by Dany Rodrik (1995,1997,2002), concerns the ability of the state to implement social change and a voluntary policy of economic development: The transition of developing countries towards a capitalist system comparable to that of developed countries, can not operate without the establishment of efficient institutions in relation with distribution of political power in these countries. Conversely, those countries would face a state failure, as a result of a mismatch between institutions and economic policy for development. Our research consists first to present the results of an empirical model that we have done based on a panel of developing countries chosen by region (MENA, Latin America, and Asia) and due to their natural resource endowment. The aim is to check if growth rate may or may not be correlated with good governance indicators as defined by the World Bank. The goal is to lead in a second time an analysis of criticism made by Mushtaq Khan on the definition of governance, the causes of state failure and barriers to economic development. Our contribution is to discuss the concept of good governance and the failure of states that take into account the level of development and governance capacity that is based on a structure and distribution of political power that evolves in time and may or may not be positive for growth. The assumption we make here is that the so-called good governance policies are relevant if countries reach a sound level of economic and social development that enable institutions of good governance to boost growth.