Review: Economic Governance Matters

Does Economic Governance Matter?: Governance Institutions and Outcomes edited by Mehmet Ugur and David Sunderland. The answer is an unqualified yes! More questionable is if citizens can shape governance to be more efficient to society as a whole.

It does not require immense imagination to see that technically-feasible economic outcomes may remain socially-unfeasible if the existing definition of property rights is not credible due to the existence of a highly intrusive or excessively weak state; if inadequate trust levels discourage the formation of contracts (Fukuyama, 1996); of if contracts are costly to enforce due to lack of trust in the legitimacy of the economic/political regime or because of poor judicial quality.

Government can induce optimal outcomes from public or private sector organizations through the right mix of incentives and constraints. Unfortunately, governments often persist in supporting inefficient, sub-optimal social structures because government representatives are frequently chosen to serve special interests, rather than the larger society.

Reciprocity, fairness and clear enforcement mechanisms are essential ingredients for efficient institutions. Rule of law, contract enforceability, risk of expropriation, power and accountability, judicial competence, impartiality and trust… as well as bureaucratic efficiency, policy predictability, corporate law/governance and transparency are all key.

How do governance agents influence the behavior of economic agents and can they do so more effectively?

The authors examine specific relationships, such as that between foreign aid and tax revenues, what improvement in investment/GDP ratio can be expected with the adoption of specific levels of governance and how guiding principles can be used to guide full employment.

The book concludes with an examination of regulatory failures based on the short-comings of underlying governance quality that, in turn, increase the risk of government failure.

Does Economic Governance Matter? offers empirical research that extends the range of issues discussed and the hypotheses tested. Unfortunately, it leaves open the question of how those in control of governments will be convinced that efficiency should apply to the larger society, not just the governance mechanisms that support their individual selfish interests. Recommended reading for members of Congress and those who Occupy Wall Street alike.

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