CHAPTER 7 Governance and Economic Growth

One of the compelling lessons that China and India offer to other poor countries is the profound importance for economic growth and poverty reduction of allowing private firms to compete in markets from which they were previously barred and of providing the complementary governments services, such as infrastructure, that promote economic productivity. The governance environment of these two countries points to a second important lesson that has attracted less attention. Although the two countries have succeeded under highly disparate governance environments, and neither offers a high degree of security to entrepreneurial activity, the lesson is a positive one. The evidence presented in this chapter demonstrates that, based on the experience of China and India, poor countries should give a high priority to good governance. Governance is a slippery concept. One common definition focuses on outcomes—the extent to which governments enact and implement policies in the interest of all citizens. Another focuses on political institutions and dynamics that determine these outcomes—the extent to which governments have incentives to adopt and enforce policies in the interests of all citizens. Corruption is the most frequently used indication of weak governance outcomes. The ineffective translation of public resources into public services is another. The vulnerability of property an