State Governance

Good governance by the state entail solving the three problems of the political economy namely full utilisation of human resources, efficient and adaptive allocation of scare resources and using the benefits of economic activities to fund capability enhancements for its citizens to live good lives through value adding employment. Accordingly, state governance of economy entail providing safe and secure environment for investments, implementing incentive-compatible taxation systems conducive to attracting job-creating investments including foreign direct investments (FDI) and using sound fiscal policies to mitigate economic shocks. Good state governance also entail implementation of social plans conducive to long-term economic development based on reducing adverse selection and moral hazard. In addition, the state’s social plan can overcome Arrow’s impossibility theorem by coming up with Pareto-optimal social plan using Sen’s capability approach. The latter provides the widest range of accessible opportunities for anyone including the poor to freely choose to uplift themselves to live good lives. In the case of developing nations, whose priority is reducing huge poverty, it is crucial for the state to use a combination of Sen’s and Banerjee’s approaches to enable the poor to develop capabilities to create wealth on a sustainable basis independent of state handouts. Furthermore, effective social plans for capability enhancement entail collecting periodic micro data before, during and after implementation to provide feedback for fine-tuning to achieve desired outcomes.