Good Governance and Economic Performance

It is the nature of governance that determines whether people deploy their talents and energy in pursuit of innovation, production, and job creation, or in rent seeking and lobbying for political protection. The contrast is starkest in emerging countries, but differences also exist among the advanced economies.

BERLIN – The debate about emerging countries’ growth prospects is now in full swing. Pessimists stress the feared reversal of private capital flows, owing to the US Federal Reserve’s tapering of its purchases of long-term assets, as well as the difficulties of so-called second- and third-generation structural reforms and the limits to “catch up” growth outside of manufacturing. Optimists argue that the potential for rapid growth remains immense, owing to better macroeconomic fundamentals and the promise of best-practice technology spreading throughout the emerging world.

So who is right?

Recent events point once again to the importance of good governance and responsive political systems, a familiar topic in studies of long-term economic growth. Countries that appeared successful for a long time, such as Turkey or Thailand, suddenly seem to face obstacles related to governance and the ability to forge domestic political compromises. The resulting divisiveness and dysfunction are surely bigger threats than the Fed’s tapering.

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