Governance and economy : a review

Governments determine how well, or how poorly, markets function. This simple truth explains the current concern with"governance"as the world shifts toward an overwhelming endorsement of markets as the base of economic activity. If governments are assumed to be neutral, and committed to serving the public good, then deviations from optimum economic performance can generally be corrected simply through policy reform, or through improving information systems. To understand economic performance, it is important to factor in the political role of governments. The exercise of power and authority lies at the heart of governance. Governments use their power and authority to establish and maintain the formal and informal framework of institutions that regulate social and economic interaction. This paper attempts to give the current concern with governance an historical dimension, and to locate governance as a technical and intellectual issue within a body of literature that has long addressed these concerns. It examines a limited number of governance dimensions -- accountability (including legitimacy, institutional pluralism and participation), openness and transparency, and predictability (or the rule of law) -- in a selective review of recent social science literature. The paper makes no claim to be exhaustive, but rather to offer an introduction to recent work which is built in part upon the analysis of how politics and economics interact in shaping economic development.