Governance and Economic Performance: A Survey

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Abstract
This paper presents a framework for analyzing the determinants and effects of public governance and a survey of recent theoretical and empirical studies pertaining to developing and transition countries. It explains how informational, transactional and political constraints on government activity lead to trade-offs between efficiency and the extraction of rents by private firms, politicians and government agents, thus producing welfare-increasing or welfare-decreasing outcomes. It also discusses how political rules and law both constrain and facilitate economic activity. The common feature of the studies reviewed here is their analytical approach based on incentive theory and institutional economics. Governments are not benevolent dictators maximizing social welfare, but complex governance structures characterized by agency relationships. When agency problems and political and legal institutions are taken into account, it becomes easier to understand how markets and government, acting interdependently, produce social and economic outcomes that are, in many cases, inefficient and/or inequitable. The efficiency of the use of public resources as well as their targeting is seen to depend crucially on institutional features of the state and on incentive schemes in public organizations. Reforms should concentrate not only on defining objectives, instruments and parameters of public policy (regulation, taxation and redistribution), but also on designing processes and incentive schemes in such a way that credible commitment is possible and that agents actually implement policies that maximize social welfare. It is also crucial that reforms effectively prevent rent-seeking and the capture of the state by powerful elites, whose interests are at odds with those of the general public. Section 1 introduces the issues. Section 2 presents the analytical framework and discusses successively basic theoretical concepts (2.1); the interactions between economic, political and legal sy
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