Economic Governance and Institutional Reforms

Abstract

Theoretical and empirical insights There is now wide consensus that good governance must lead to broad-based, inclusive economic growth and social development. It must enable the state, civil society, and the private sector to enhance the wellbeing of a large segment of the population. Economic policies, however sound or benign, cannot disperse their gains widely unless the institutions intermediating these policies are strong, efficient, and effective. The World Bank (1992) defines governance as the manner in which public officials and institutions acquire and exercise the authority to shape public policy and provide public goods and services. Institutions establish formal and informal rules that determine whether the public sector acts in its own interests or on behalf of all citizens. Corruption is one outcome of poor governance: the abuse of public office for private gain. The World Bank's (2012a) Governance and Anticorruption Strategy of 2012 surmises that governance is about what the state can do and how it does it—what the state can do is determined by its capacity, legitimacy, and authority. The Asian Development Bank (1997) considers the essence of governance to be sound development management. The key dimensions of governance in this context are public sector management, accountability, the legal framework for development, and information and transparency. The Overseas Development Institute (2006) identifies historical context, previous regime, sociocultural context, economic system, and international environment as the main determinants of governance and development. The six core principles identified by Hyden, Court, and Mease (2004) that relate to good governance are (i) participation, (ii) fairness, (iii) decency, (iv) accountability, (v) transparency, and (vi) efficiency. Governance assumed importance in the 1980s when developing countries began to feel the adverse effects of the state's extension to functions beyond its capacity. The earlier concept of “modernization” that was propagated in the 1950s and 1960s was synonymous with state-led development. It was argued that, where market institutions and local entrepreneurs were weak, only state-owned enterprises were capable of investing in and expanding the economy.