Economic growth and governance

This page forms an introduction to the topic of 'Economic Growth and Governance'. There is strong evidence that better government is important for economic growth and poverty reduction, but building better government is a complex challenge. The resources presented here examine the linkages between economic growth and institutional change for poverty reduction. It is designed as an evolving resource and the GRC Exchange would welcome your comments and contributions.

Page contents

Definition of topic and content

Where is a good place to start?

Enabling the private sector

Definition of topic and content

The benefits of secure property rights for economic growth are now widely recognised. The high correlation between the quality of institutions (formal and informal socio-economic arrangements) and growth is also established. But the causal relationships which underlie these observations are still being debated. Furthermore, the interaction between political and economic institutions is often country-specific which poses a huge challenge when formulating policies. This topic examines which institutional arrangements are most effective for growth and poverty reduction outcomes.

Where is a good place to start?

Institutions are important, and policies must take account of the pre-existing social and institutional structures in different countries. The particularities of country environments mean that 'unorthodox' policies may sometimes produce highly successful results in terms of growth and poverty reduction. These texts explore this issue. Common themes are the need to look for country-specific solutions, and to focus on what is already working before making prescriptions.

Rodrik, D. (ed) 2003, In Search of Prosperity - Analytic Narratives on Economic Growth, Princeton University Press, Princeton.
This collection of case studies offers some interesting insights into which institutions are most important for growth. One of its arguments is that while kick-starting growth doesn't require deep or extensive institutional reform, stronger institutions are required if longer-term growth is to be maintained.
Full document: unavailable online. Available through BLDS document delivery service. Please access full summary and then click on the link for "BLDS Document Delivery Service".

Rodrik, D., 2003, 'Growth Strategies', working draft for eventual publication in the Handbook of Economic Growth
In this paper, Rodrik argues that first-order economic principles, such as protection of property rights and market-based competition, do not map into unique policy packages. Reformers have substantial room for creatively packaging these principles into institutional designs that are sensitive to local opportunities and constraints.
Full document available online

Grindle, M., 2002, Good Enough Governance: Poverty Reduction and Reform in Developing Countries, Kennedy School of Government, Harvard University, Cambridge.
In this paper, Merilee Grindle suggests that one method of prioritising among the increasing number of good governance policies is to focus on the causal link between governance reforms and poverty reduction. On this basis a distinction can be made between reforms that are essential for poverty reduction, and those which are desirable.
Full document available online

Enabling the private sector

Private sector development is an important engine of growth and indigenous businesses, especially SMEs, are important if growth is to be effective at reducing poverty. These publications look at the conditions for successful improvement in the policy and legal environment for such businesses.

White, S. and Chacaltana, J., 2002, 'Enabling Small Enterprise Development Through A Better Business Environment: Donors Experiences in Supporting Reforms in Business Environment', Committee of Donor Agencies for Small Enterprise Development Working Group on Enabling Environment, Technical Document
This report reviews donor practices for encouraging better business environments for SMEs, and identifies the conditions which have led to success in this area of donor policy.
Full document available online

The role of the state

The extent of the state's role in economic development continues to be debated. These texts examine the 'unorthodox' institutional arrangements that facilitated economic development, particularly in the East Asian economies.

Khan, M., 2002, 'State Failure in Developing Countries and Strategies of Institutional Reform', Draft of paper for World Bank ABCDE Conference, Oslo 24-26 June 2002
Governance policies largely assume a 'service delivery' model of the modern state, where the state is concerned with securing the rule of law, public goods, and some welfarist redistribution. Khan doubts that reforms based on implementing such a model can lead to improved growth. The reforms undertaken by 'transformational states', such as those in East Asia, are likely to have a much more positive impact on growth. This suggests the need for a significant shift in the focus of institutional reform.
Full document available online

'Institutions for growth' or 'growth for institutions'?

How should we interpret the strong correlation between good governance and higher income levels? The following texts examine the causal relationships between these two phenomena.

Ha-Joon Chang, 'Institutional Development in Developing Countries in a Historical Perspective - Lessons from Developed Countries in Earlier Times', unpublished paper for DFID (which became a chapter of his book 2002, Kicking Away the Ladder, Anthem, London)
In recent years, many donors have come to believe that well-functioning institutions are a prerequisite for economic development. But is their view supported by history? This paper, presented at a meeting of the European Association of Evolutionary Political Economy, examines the evidence and argues that donors may be making unrealistic demands for improved governance in developing countries.
Full document available online

Rodrik, D., Subramanian, A., Trebbi, F., 2002, 'Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development', CID Working Paper No. 97, Center for International Development, Harvard University
Average income levels in the world’s richest and poorest nations differ by a factor of more than 100. What accounts for these differences, and what can we do to reduce them? This study by Harvard University looks at the effect of geography, integration and institutions on cross-national variations in income. It finds that the quality of institutions has by far the greatest influence but argues that this knowledge offers little guidance to policy-makers.
Full document available online

Kaufmann, D. and Kraay, A., 2003, 'Governance and Growth: Causality which Way? Evidence for the World, in Brief', Governance Working Papers and Articles, World Bank Institute
This brief paper argues that, while good governance may be key to long-term growth, increasing income levels do not automatically lead to improved governance, and may, in fact, threaten governance indicators. On this evidence, governance efforts should focus on mechanisms for continuous monitoring and improvement of institutions.
Full document available online

Carothers, T., 2003, 'Promoting the Rule of Law Abroad. The Problem of Knowledge', Carnegie Endowment Working Papers No. 34, Carnegie Endowment for International Peace
This paper challenges the assumption that rule of law is essential for economic development. The causal relationship between, for instance, rule of law and foreign investment, has not been firmly established. Although this paper presents more criticism of donors than solutions to problems, it raises pertinent issues.
Full document available online

Jütting, J., 2003, 'Institutions and Development: A Critical Review', OECD Development Centre, Technical Paper No. 210.
This lucid paper argues that the causal links between growth and institutions are influenced by their cultural and social setting. The author provides a framework for analysing the impact of institutions and maps out various channels of influence between institutions and development outcomes.
Full document available online

What donors can do

DFID has taken a leading role in examining how donor practices should take account of the complex relationship between economic growth and governance.

Unsworth, S.,2003, 'Better Government for Poverty Reduction: More Effective Partnerships for Change', DFID consultation document, Department for International Development.
This DFID consultation paper proposes that donors should take more time to analyse the particular institutional environments of the countries they operate in, and that their interventions should be designed accordingly. Studying the social, political and historical context will help identify the underlying factors which could promote or inhibit pro-poor change, and the likely impact of particular policy choices on political and social institutions.
Full document available online
(document summary available shortly)

What other resources are available on the GRC Exchange?

Key texts
This resource does not attempt to provide an exhaustive list of documents related to 'economic growth and governance'. The GRC has a number of documents which relate to this topic. Of particular relevance is:

Sonin, K., 2002, 'Why the rich may favor poor protection of property rights', paper presented at the World Bank conference 'Appropriate Institutions for Growth', Washington, September 13, 2002
This World Bank conference paper considers the relationship between inequality and the subversion of institutions, focusing in particular on the protection of property rights. The paper uses a model of endogenous growth to analyse the effects of poor property rights on economic growth.
Full document available online

For a thorough search of the whole GRC Exchange site please refer to the Information Database

Training and events
A searchable database of courses and conferences in each of the governance theme areas is available on the GRC Exchange site.

Use the site search at the top of this page, or within the left navigation if you wish to look for wider resources on economic growth.

Additional information resources

'Appropriate Institutions for Growth', Conference organised by the World Bank's Private Sector Advisory Services Group and the Journal of Comparative Economics, 13 September 2002
This conference looked at how historical evolution and current conditions shaping institutions are central to explaining the differences in economic performance, as well as to the design of economic and political reforms.
Outline of the conference topic: available online
Papers presented at conference: available online

USAID Forum Series on the Role of Institutions in Promoting Economic Growth
This series of Forums brought together some of the major thinkers on institutional reform together with USAID practitioners in order to identify practical applications for USAID's work.

World Bank
The World Bank's 'Legal Institutions of the Market Economy' website deals with a broad range of legal & judicial reforms. It also includes documents and information on legal institutions which facilitate economic growth.

The Private Sector Development initiative of the World Bank places particular emphasis on improving the investment climate in support of poverty reduction.

USAID
Of particular relevance is USAID's work on Economic Growth and Trade. This encompasses projects on Legal and Institutional Reform, Enterprise Development, and Trade and Investment. Their website can be found at http://www.usaid.gov/our_work/economic_growth_and_trade/

The Governance work done by USAID includes work on the institutions necessary for the Rule of Law, and can be found at http://www.usaid.gov/our_work/democracy_and_governance/rol.html

Top of page