Governance and Economic Growth Since the 1960s

This article distinguishes between 'market-enhancing' and 'growth-enhancing' governance approaches to achieving development in poor countries.

The good governance agenda, based on liberal economics, is of the first type. It focuses on those aspects of governance (such as property rights, rule of law, reducing corruption and banishing expropriation) that are necessary for ensuring the efficiency of markets. The assumption is that if states can ensure efficient markets, private investment will drive economic development.

Growth enhancing governance stresses a different set of different governance capacities for achieving market and non-market transfers of resources to more productive sectors, managing incentives for achieving rapid technology acquisition and productivity enhancement, and maintaining political stability.

Growth-enhancing governance has some effects that appear to contradict the requirements of market enhancing governance. For instance, growth-enhancing governance can increase the chances of corruption and other forms of rent seeking.

The analysis points to the limitations of the current governance agenda that focuses almost exclusively on market-enhancing governance. This is very difficult to achieve in developing countries where markets are inherently inefficient. Moreover, an exclusive focus on market-enhancing governance can often diminish the capacity of states to enhance growth.