Introduction

Khan (2011) defines governance as how the state and society interact. He mentions that there are two views regarding governance: ‘market-enhancing’ governance (often referred to as a ‘good governance’ agenda) and ‘growth-enhancing’ governance. The good governance agenda is the dominant view and is promoted by the World Bank and other international development institutions. The good governance agenda links poor governance attributes directly to low economic growth. At the heart of the good governance agenda is the argument that Africa’s growth depends on strengthening the institutional structures that underpin efficient markets. As well as low corruption, this includes property rights stability, a transparent and accountable public sector, democratic government, rule of law and competitive, rent free, markets. However, significant questions remain in terms of both the theoretical and empirical evidence behind the idea that these institutions are the most important ones for the improvement of economic development in Africa. This is where the alternate view of ‘growth-enhancing’ governance comes in. In this answer, we will now look at the theory behind good governance, discuss the counter argument to the good governance theory by looking at the evidence on governance in Africa and the problems with that evidence, identifying the features of governance that are problematic for economic development, compare African governance to that of East Asian countries and conclude whether or not the growth prospects of Sub-Saharan Africa are dependent on the adoption of good governance practices based on what we have discussed in this answer.

Good Governance Agenda: Theory

African states were perceives in the 1980s as particularly weak, with high levels of corruption and mismanagement as well as suffering from a lack of democratic accountability and rule of law. The good governance theory is based on two theoretical approaches: New Institutional Economics (NIE) and theories of rent seeking. NIE applies mainstream economic theory to the study of institutions (defined by NIE’s founder as ‘the rules of the game’ – covering formal institutions such as political parties or judicial systems as well as informal institutions such as cultural attitudes towards trust and exchange) and argues that institutions improve economic outcomes to the extent that they lower transaction costs between individuals and groups. Transaction costs are the costs of bargaining, enforcing and monitoring – the activities without which exchange could not take place. The rules that guide these aspects of transacting are established by institutions. NIE argues that the lower the transaction costs, the more transactions will take place and society will achieve greater efficiency and hence better economic performance. The second theory of rents and rent seeking is also vital for the good governance agenda. The concepts of rent and rent seeking are used by economists to think about the impact of the state on the economy, both through its legal activities and through the illegal or ‘grey’ activities of state officials involved in corruption. The good governance agenda assumes that the creation of rents is bad for economic performance because it leads to distorted resource allocation and policies. However, this overlooks the many other useful roles that rents can and do play in an economy. Not all rents are socially or economically damaging, for example subsidies given to firms investing in training staff to use new production techniques, but these potentially beneficial aspects of rents are largely overlooked in the good governance agenda.

The general insight of NIE and rent seeking theories is that governance systems that lower transaction costs and minimise state interventions are better for promoting economic growth because they permit greater market efficiency. These economic theories were translated into a concrete set of proposals on governance and the role of the state in the economy that, in broad terms, involved: minimising state interventions in the economy, strengthening the rule of law, securing the property rights of individuals and businesses and lowering corruption and rent seeking through greater democratic accountability. These ‘good governance’ institutions are the ones most normally associated with rich industrialised countries, but are often absent to varying extents in developing countries. The good governance agenda has had a particularly large impact on the policy agenda in Africa – evident from numerous policy documents the extent to which good governance reforms have been integrated within conditionally placed on loans by the World Bank and the IMF, and the formal acceptance of the good governance agenda by many African leaders.