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457 Corruption adversely affects development in many different ways, especially by diverting resources that may be invested productively and by causing uncertainty for investors. Efficient markets are defined as those with low transaction costs, particularly the costs of negotiating and enforcing contracts . If these costs are high, markets are inefficient, and transactions, including investments, become less likely. The economic argument for the good governance agenda can be summarized as follows. Poor economic development performance is blamed on inefficient , high-transaction-cost markets. Inefficient markets are blamed on welfare -reducing government interventions, especially those that cause insecure property rights with uncertain, potentially high-cost implications. Unstable property rights and welfare-reducing interventions are then explained by what rent seekers pay to secure economic advantage. Such payments limit the average person’s ability to establish a connection between government policy and democratic accountability, allowing the abuses to persist. Good governance indicators become necessary conditions for low transaction costs in market economies, and thus, they become preconditions for development. Consequently, good governance proponents advocate ambitious policies to break out of this trap. Unlike the traditional economic reform that focuses on economic liberalization, these approaches require many institutional reforms. However, there is, at best, a weak and moot relationship between the requirements of the good governance agenda and improved economic performance . Other conditions needed to accelerate and sustain economic 18 Good Governance, Anti-Corruption, and Economic Development jomo kwame sundaram I am greatly indebted to Mushtaq Khan, but do not implicate him in any way. 18 0328-0 ch18.qxd 7/15/09 3:54 PM Page 457 458 Jomo Kwame Sundaram growth are not usually identified by the good governance approach. The key question here is whether the requirements for good governance identify the most appropriate conditions and reform priorities to accelerate and sustain economic development. The quality of governance cannot be directly measured; so instead, proxy indicators, often based on subjective judgments and opinions, are utilized. Although many governance indicators are methodologically subjective in nature, they are widely perceived by their users as objective and utilized to draw policy conclusions and recommendations that are rarely justified. Advanced countries score better on all governance indicators compared to both converging and diverging developing countries, suggesting that higher per capita incomes generally improve governance indicators. The data show that richer countries generally have better governance, lower corruption and so on, but the causality is unclear.1 For corruption and other governance indicators to become developmental policy priorities, good governance should clearly enhance economic growth. This presumed relationship between governance indicators and growth rates is weak, and often disappears with the inclusion of other variables such as investment rates.2 Even when corruption and other governance variables improve, Khan shows that overall economic performance can remain weak. Significant differences in economic performance between converging and diverging developing countries are not explained only by good governance indicators. Data for all countries for the 1980s show a weak positive relationship between governance quality and economic growth. Governance indicators were only marginally better for converging compared with diverging developing countries, while both groups were significantly worse than the advanced countries. The large differences in growth rates between converging and diverging developing countries were not associated with significant differences in governance quality in the 1980s or 1990s. Meanwhile, the“median converging developing country” had a marginally poorer governance index compared with the “median diverging developing country.”3 The median corruption indices for both converging and diverging developing countries were similar in the 1980s and 1990s, but both groups scored significantly worse than the advanced countries.4 Meanwhile, although there undoubtedly are significant governance differences between converging and diverging developing countries, the differences in their governance characteristics are not identified by the good governance indicators. Khan shows that converging and diverging developing countries do not contrast significantly in terms of their average governance characteristics, but 18 0328-0 ch18.qxd 7/15/09 3:54 PM Page 458 differ significantly in terms of economic growth performance.5 While good governance advocates claim that diverging countries will develop and thus become advanced countries by implementing good governance reforms, Khan notes that no country has ever first improved its governance characteristics and then increased its growth rate to achieve advanced country status. Once growth has accelerated, the implementation of good governance reforms may be desirable, and such reforms may even be necessary to sustain growth. However, there is no evidence that the full good governance agenda—all the indicators that are identified as...


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