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Governance Redux: The Empirical Challenge

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by D. Kaufmann (2004), Chapter in Global Competitiveness Report 2003-2004, World Economic Forum

Building from the 2002/03 contribution to the Global Competitiveness Report ("Governance Crossroads"), this paper argues that governance continues to be at a crossroad, its underperformance being evident in most regions and across many countries. This ('governance policy gap') contrasts with the strides that have been made in many countries in improving the content of macro-economic policies for well over a decade. Firms from emerging economies single out corruption and excessive bureaucracy among the top constraints to their business operations, while excessive bureaucracy and the tax regime are identified as top constraints by the respondent firms from the OECD. Neither inflation nor the exchange rate regime are rated as important constraints. Many countries currently have levels of governance that are insufficient to support their income levels and/or growth path, namely they experience a 'governance deficit', which we suggest it can be quantified.

We also review work analyzing the deeper determinants of governance, and find that in lower income countries the origins of a country's legal system may not matter significantly. Further, we empirically evaluate political dimensions of governance, such as the extent of 'capture' and undue influence by some politically connected powerful firms in shaping the regulations, laws and policies in a country. Unequal influence is closely associated with poor public and financial governance performance. Finally, this firm-level dataset permits the construction of a governance database at the city level, and initial results of an empirical exploration of determinants of city-level governance are presented. A key implication of this chapter refers to the focus on policies aimed at the nexus between corporate strategies and public governance - emphasizing prevention, external accountability and transparency mechanisms - and challenges the value of traditional measures within the public sector (such as passing laws by fiat or creating new Anti-Corruption Commissions).

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