Sharma - Taiwan Journal of Democracy, Volume 3, No.1: 29-62...

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July 2007 | 29 Taiwan Journal of Democracy , Volume 3, No.1: 29-62 Democracy, Good Governance, and Economic Development Shalendra D. Sharma Abstract The institutional defcit that characterizes so many developing and transitional countries - weak and arbitrary governance, weak protection oF civil liberties, and inadequate regulatory and legal Framework to guarantee property rights, enForce contracts, and reduce the transaction costs - deprive these countries oF needed productive investment and economic growth. Improving the quality oF governance is essential For economic development. What types oF policies and institutions have the most positive and measurable eFFects on improving governance? What kinds oF institutional arrangements are associated with economic growth and poverty reduction? Research shows that democracy in±uences economic growth. Specifcally, secure private property rights that give incentives to individuals to be productive, institutionalization oF the rule oF law, especially constraints against executives, and electoral mechanisms that give citizens the ability to evict the “rascals” are essential to promoting growth. Thus, an obvious corollary is that democratization and decentralization without simultaneous strengthening oF property rights and the rule oF law may not always lead to eFFective democratic governance. How important is good governance For economic growth? Can economic growth be sustained without good governance? The answer is best captured in the oFt-cited aphorism that good governance promotes growth and that growth Further improves governance. Mauro notes “a consensus seems to have emerged that corruption and other aspects oF poor governance and weak institutions have substantial, adverse eFFects on economic growth.” 1 Hall and Jones, who Found large productivity diFFerences across countries, conclude, “our hypothesis is that diFFerences in capital accumulation, productivity, and thereFore output per worker are Fundamentally related to diFFerences in Shalendra D. Sharma is ProFessor oF Politics at the University oF San ²rancisco. He was Visit - ing ProFessor during 2006-2007 in the Department oF Political Science, Leiden University, The Netherlands. <> 1 Paolo Mauro, “The Persistence oF Corruption and Slow Economic Growth,” IMF Staff Papers 51, No. 1 (2004), 1.
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30 | Taiwan Journal of Democracy , Volume 3, No.1 social infrastructure across countries. ... In fact [our] central hypothesis…is that the primary, fundamental determinant of a country’s long-run economic performance is its social infrastructure. By social infrastructure we mean the institutions and government policies that provide the incentives for individuals and Frms in an economy.” 2 There are extensive econometric studies that show strong correlation between long-term economic performance and good governance. In other words, the quality of governance fundamentally determines long-run developmental outcomes. 3
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Sharma - Taiwan Journal of Democracy, Volume 3, No.1: 29-62...

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