3. Governance and economic growth: literature review
Many authors recognize the benefits of good governance when it
comes to the developing countries. According to these authors, good public
institutions allow good governance. So the question of the governance is linked
to that of the institutions and the
analysis of the first one necessarily passes by the study of
the question of the capacity of institutions to support the
growth.3
In this direction, a wide literature has already been built to
show the importance of institutions in the determination of long run economic
performances on the theoretical level and on the empirical level as well. On
the one hand, we find the theoretical work of the New Institutional Economics
(NIE) and of the new endogenous theory of growth, and on the other hand, we
find the empirical work in the forms of cross-section study of the growth
through the countries which seek to establish a relation between governance or
quality of institutions and economic growth.
On the theoretical level, the NIE having North as file leader,
shows that effective institutions can make the difference in the success of the
market reforms and even affirms that institutions constitute one of the
determining factors of the economic growth in the long run. North (1990)
defines the institutions as "the rules of the game" which shape the human
behaviors in a company. The institutions have a very significant role in the
company because they determine the fundamental structure of the human
interactions, whether they are political, social or economic.
A State equipped with a legal system and effective property
right is a State which creates a favorable environment to capital accumulation
and growth. While defective institutions create a market for nonproductive
activities such as rent seeking, corruption, and also generate high transaction
costs and of course handicapping economic inefficiencies. So the institutions
act in a direct way on the intensity of the investment and thereby on the
growth. The impacts of the quality of institutions on long run economic
performances are spread by the means of the cost-cutting of transactions,
limitation of the risks and disappearance of rigidities which deteriorate the
markets (Chtourou 2004).
We also point out to the work of the theory of endogenous
growth. Following the insufficiencies of exogenous growth models to explain a
stable growth in the situation of equilibrium, new models of growth emerged
specifying the necessary conditions that
3 Throughout this work, the concepts of gouvernance
and institutions will be employed to say the same thing.
guarantee a long run growth, known as endogenous
growth. The new theory of endogenous growth was developed by several
economists such as Lucas (1988), Romer (1986), McKinnon and Shaw (1973), Barro
(1989), Roubini and Salt-I-Martin (1995)... etc. these works took a better
advantage of the data resulting from the economic sphere to try to justify the
variations of growth between countries.
However, the limits of the estimates that have been carried
out, and in particular the need for adding regional dummies within the models
to manage to explain the variance of observations, suggested the incompleteness
of models which are being limited to the economic indicators to explain the
behavior of the growth.
This reflexion encouraged the economists to turn out to the
institutional variables to try to find a justification for the production gap
that exists between countries and unexplained by the only economic data.
Several political and institutional factors were then presented: the democracy
according to Barro (1996), the respect of the property rights according to
Clague, Keefer and Olson (1996), political instability according to Alesina and
Perotti (1994). Rodrik (1999) supports the idea that good governance would be a
necessary condition for market economies success. Hall and Jones (1999) show
that the differences observed in the intensity of physical capital and in the
education level realized, explain only a small fraction in the differences
noted in the levels of output per worker through countries. So they show that
the differences in the social infrastructure (institutions and governmental
policy) through nations account for the differences noted in capital
accumulation, the level of education carried out and the productivity, which
explain the disparity in the level of income and development of countries.
On the empirical level, one finds a wide empirical literature
enhancing the importance of the governance and the institutions as a
determining factor of growth and development. This literature appears in the
form of cross section studies of the growth across countries which seek to
establish a positive correlation between the quality of governance and the
growth.
The income per capita or the growth rate is regressed on
several governance indicators: narrow indicators such as civil freedoms, rules
of laws, property rights, political stability, and global indicators of
governance. Other variables are used in these regressions however they are not
related to the governance like geographical and historical variables.
Kormendi and Meguire (1985), Scully (1988), Grier and Tullock
(1989), Barro (1996) and Helliwell (1994) and Isham, Kaufman and Pritchett
(1997) all confirm the existence of a positive correlation between the civil
freedoms indicator as an institutional framework measures, and the economic
growth for the majority of countries taken in their sample.
Acemoglu, Johnson and Robinson (2004) showed that the
variation of growth between rich and poor countries is mainly due to the
difference in the guarantee of the property rights in these countries. Rodrik,
Subramanian and Trebbi (2002), in their study, confirm the idea according to
which the guarantee of property rights accelerates the growth.
Barro (1991) and Londregan & Poole (1992) state that
political instability and violence generate a weak growth. Alesina and Perotti
(1996) and Svensson (1998) note a negative effect of political instability on
the investment.
we also find the studies of Kaufmann, Kraay and Mastruzzi
(2004) who use an indicator of the rules and laws to show that good governance
exerts a positive effect on growth. They find a strong and positive correlation
between this indicator and the income level.
Mauro (1995) tests three indices made by the International
Business (IB): index of corruption, index of bureaucratic quality and the index
of political stability. He finds that these three indicators are related
positively and significantly to the growth and the investment. Knack and Keefer
(1995) use two indicators collected in the ICRG and the BERI. They create two
indices, the first for measuring the security of contracts and the second for
the property rights, and they find an expected positive effect of these
indicators on the growth. Easterly and Levine (2002) use the
global index of governance of Kaufmann, Kray, Zoido-Lobation (2002) to show
that the governance affects the growth positively and significantly.
We notice that the empirical literature, throughout narrow
indicators of the governance as well as through the global indicators, actually
shows that the governance has a strong influence on the levels of incomes.
These studies confirm a strong, positive and significant correlation between
good governance and economic performances.
This is why we are going to try, in the following paragraphs,
to validate this report by an empirical analysis using the cross-sections
method.
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