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DHARMASHASTRA NATIONAL LAW

UNIVERSITY, JABALPUR

(Session 2021-2022)

Topic

NEXUS BETWEEN GOOD GOVERNANCE AND

ECONOMIC GROWTH

Submitted To: Submitted By:

Dr. Isha Wadhwa Sanskrati Jain

[Assistant Professor Section B

Of Economics] BALLB/116/20

Semester -III
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ACKNOWLEDGEMENT
The completion of this project required counselling and assistance from many people and I’m
really thankful towards them for their counselling in my project.

I would like to express my deep gratitude towards my teacher asst. professor Dr. Isha
Wadhwa, who took acute interest in my project and guided me all along. I’m feeling
extremely privileged to have her as my instructor in the project. I owe my deep gratitude to
the vice-chancellor Prof. V. Nagraj for his valuable support throughout the project. This
project helped me in gathering a lot of knowledge and becoming more aware of things related
to my topic.

I would like to extend my gratefulness to my parents and friends for their valuable support
and advice.

I am making this project not only to get marks but also to enhance my knowledge. At the end
I would like thank everyone who helped me and invested their valuable time for this project.

Sanskrati Jain
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TABLE OF CONTENTS

ACKNOWLEDGEMENT.................................................................................2

INTRODUCTION..............................................................................................4

CONCEPT OF GOOD GOVERNANCE.........................................................4

RELATIONSHIP BETWEEN GOOD GOVERNANCE AND ECONOMIC

GROWTH...........................................................................................................7

 Nexus Between Corruption and Economic Growth..............................8

 Nexus Between Political Stability and Economic Growth....................9

 Nexus Between Voice and Accountability and Economic Growth......9

 Nexus Between Other Governance Factors and Economic Growth....9

CONCLUSION &SUGGESTIONS................................................................10

BIBLIOGRAPHY.............................................................................................11
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INTRODUCTION

In this modern world of accelerating globalisation, great change and political uncertainty all
the countries whether it is developed or developing are finding a way of governance which is
better adapted to the times so as to gain maximum advantage in economic competitiveness
and create sustainable and substantial social-political growth. The concept of GOOD
GOVERNANCE came into picture after the cold war and gained widespread attention. The
concept of ‘good governance’ firstly recognised by the World Bank after the East African
eco-political crisis1. The concept of good governance then became international agenda and
fell under the mainstream political system. Then many major donor institutions recognised
the concept of good governance and major institutions like World Bank, ADB, IRIS, etc.
started giving their theories on good governance. Indeed, good governance became
conditional for development assistance from donor agencies.

Meanwhile, good governance specified as one of the seventeen targets of the sustainable
development goals for poverty reduction, sustainable development and growth of economy.
This research paper examined the relationship between the good governance and economic
growth. How good governance can impact economic growth of a country. In this research
paper the author has stated the definition of good governance and the result of the study of
World Bank on the relationship of the good governance and economic growth. The author
has also stated the six indicators (Voice and accountability, Political instability and violence,
Government effectiveness, rule of law, quality control and corruption control) of good
governance provided by the World Bank and then tried to examine the relationship between
each one of them with the economic growth.

CONCEPT OF GOOD GOVERNANCE

‘GOVERNANCE’ is an English word which derives from the Latin and ancient Greek and
originally meant control, guidance and manipulation. From the quiet sometime the word
governance has been confused with the word government and was mainly used to refer to
political and administrative activities related to public affairs. Firstly, let understand what is
the meaning of governance and then we will point out the difference between governance and
government. The word governance usually means the management of society by the people

1
Rachel M. Gisselquist “Good Governance as a Concept, and Why This Matters for Development Policy”
UNU-WIDER Journal 1 (2012)
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or as the exercise of authority to manage a country’s affairs and resources. 2 For the long time
the understanding of governance is pretty basic there is not a standard definition of
governance till 1989. The concept of governance achieved prominence around 1990, after the
end of the cold war. When trying to sum up what was happening in Africa in 1989, the World
Bank used the term ‘‘crisis in governance’’ for the first time. The World Bank was the first
major donor institution which adopted the concept of good governance as a condition for
lending to developing countries. In the beginning when the concept of good governance was
new, the focus was rather apolitical and on the improvement in the quality of public sector
management. But as the time grows the concept of good governance evolved and various
donor institutions recognised it and they include some more aspects or elements to the
concept of good governance as to include the notion of accountability, transparency and
participation. Later one more element included to the concept of good governance in the light
of financial crisis in the later part of the 1990’s and that was a call for the improvement in
corporate governance and stability of international market. The World Bank defines good
governance as the capacity of management and institutional reforms conducted by state
policy, that improve coordination and delivery of effective public services, accountability of
political actors and individual citizens in the driving of development policies. In the year
1995, in a research report titled OUR GLOBAL NEIGHBOURHOOD, the commission
defined good governance as ‘‘governance is the sum of the many ways individuals and
institutions, public and private, manage their common affairs. It is a continuing process
through which conflicting or diverse interests may be accommodated and cooperative action
may be taken. It includes formal institutions and regimes empowered to enforce compliance,
as well as informal arrangements that people and institutions either have agreed to or perceive
to be in their interest”.3 By the above definitions of the good governance, the features of good
governance can be identified as:

First, good governance can be established upon supportive and mutually and cooperative
relationship between the government, society and the private sector.

Second, good governance includes all or some combination of elements like transparency,
participation, transparency of decision making, accountability, predictability and rule of law.

2
UDO E.SIMONIS “DEFINING GOOD GOVERNANCE - THE CONCEPTUAL COMPETITION IS ON”
JOURNAL OF ECONSTOR 2 (2004)
3
See Our Global Neighborhood compiled by Commission on Global Governance. Oxford: Oxford University
Press, 1995, pp. 2–3.
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Third, good governance is normative in conception. The values that provide the underpinning
for governance are the values postulated by the defining actors and institutions.

From the above definitions and understanding of the governance it can be said that
governance means exercising the power to maintain the order and to guide, steer and regulate
citizen activities through the power of different systems and relations so as to maximize the
public interest. In terms of political science, governance refers to the process of political
administration, including the normative foundation of political authority, approaches to
dealing with political affairs and the management of public resources.4

From understanding of governance till now it seems that there is no difference between
‘Governance’ and ‘Government’ but they both are vastly different from each other. We can
distinguish governance and government on the basis of following two points:

First, the fundamental difference between governance and government is that governance
needs authority but, unlike government, this authority does not necessarily come from organs
of government. The body of government is necessarily the public institution in the society
while the body of governance can be civil societies and private and private sector or it can me
cooperation of both. The concept of governance is wider than the government.

Second, the government works in one way management system its power runs top to down all
the time to manage public institutions , making policies and execute them while in
governance it is a multi-way management system it runs by cooperation, participation,
negotiations, establishment of identity and common goals.5

As the concept of good governance grows various major institutions like World Bank, ADB,
UN gave certain indicators to identify how good the governance of a country is. Indicators of
good governance according to the World Bank:

The World Bank made six indicators

-"Voice and accountability”: which measures tendencies of political process, civil liberties,
political rights and independence of the media. The responsibility is that of citizens who
participate in political life through elections, public decisions.

4
https://link.springer.com/article/10.1007/s40647-017-0197-4
5
YU Kepling “Governance and Good Governance: A New Framework for Political Analysis” journal of School
of Government, Peking University 1 (2017)
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- "Political instability and violence": which measures the perception of a possible

destabilization of the political regime through elections or violence.

- "Government effectiveness": which measures the perception of the quality of public service
or public administration. This index assesses the perception of the government's credibility
through the trust given to its administration.

- "Rule of Law": measures the perception of citizens of the rules that structure society and the
degree of compliance with these rules. The indicator measures the perception of the
efficiency and fairness of the judicial system and respect for contracts and agreements tied.

- "Quality control": measures perceptions which are favourable or not for market economy,
including anti-liberal interventionist policies such as price controls, imports and exports, the
banking system. This index allows us to appreciate the business climate for foreign investors,
for example.

- "Control of corruption": measures perceptions of the use of public power in the pursuit of
private gain.

These indicators measure on a scale of 0 to 100. It helps a country to evaluate the level of
governance and then to implement good policies to improve their score and to ensure the
stability of the state.6

RELATIONSHIP BETWEEN GOOD GOVERNANCE AND

ECONOMIC GROWTH
Earlier, we learned about the concept of good governance and indicators of good governance
for the improvement of governance in countries but what are the impacts of good
governance? The good governance can help in achieve goals of poverty reduction,
sustainability, improvement in economic efficiency etc. Our emphasis is on how the good
governance impacts the economic growth of a country. Several econometric studies tested the
relationship between good governance in the sense of "market-enhancing governance"
(stimulus institutions contract): a positive relationship has been obtained between good
governance and economic growth. Then implementation of good governance policies can
promote economic development and ensure convergence towards level of developed

6
Rachid Mira and Ahmed Hammadache “Relationship between good governance and economic growth A
contribution to the institutional debate about state failure in developing countries” journal of CEPN university 5
(2017
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economies. According to some economists like North, Grief, Acemoglu and Robinson the
governance needs some sort of fundamental institutions like unbiased contract enforcement,
well defined property rights, low information gap between buyers and sellers and stable
macroeconomics conditions for economic growth of a country.7

Earlier, the author has stated that the World Bank has made six indicators on which the
efficiency of governance of countries measured. These indicators help in establishing policies
which enhance good governance and reduce the risk of state failure. Daniel Kaufmann and
Kraay studied on this subject. Their econometric studies show, a significantly positive
relationship between income per capita growth rates and improvement of components each
indicator of good governance. More precisely their studies show:

- Better governance has a significant positive effect on per capita income

- An improvement in income leads to better governance

- Other factors affect the increase in income and wealth of countries and are also associated
with better governance.

This argument apprehends a strong positive relationship between better governance and
higher per capita income and a weak, negative correlation between higher per capita income
and enhanced standards of governance (Kaufmann & Kraal, 2002). 8 Under this scenario,
although higher quality governance indicators encourage a higher per capita income, the
higher per capita income does not follow through with improved governance quality.

Now this section discusses about the impact of some of the indicators of good governance on
the economic growth.

Nexus Between Corruption and Economic Growth

Several studies have taken place to find out the relationship between corruption and
economic growth. Several studies show different results like Pere (2005) found insignificant
relationship between corruption and economic growth, Mo (2001) concludes there is a 0.72%
reduction in growth rate, per 1%increase in the level of corruption. It can be argued that

7
Samarasinghe Tharanga “IMPACT OF GOVERNANCE ON ECONOMIC GROWTH” MPRA papers 2
(2018) available at: https://mpra.ub.uni-muenchen.de/89834/
8
Rachid Mira and Ahmed Hammadache “Relationship between good governance and economic growth A
contribution to the institutional debate about state failure in developing countries” journal of CEPN university 6
(2017)
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economic growth rates reduce in a corrupt political regime. It can be said that there is a
negative relationship between corruption and economic growth.9

Nexus Between Political Stability and Economic Growth

Political stability plays an important role in the economic growth of a country. Several
studies show that there is a positive relationship between the political stability and economic
growth. Different political system shows different political stability of a country like single
party system has much more stability than democracy or multi-party system. The economic
miracle of China’s economy can be taken as example as it has single party system unlike
India.10

Nexus Between Voice and Accountability and Economic Growth

The variable of voice and accountability is connected with the political system of a country.
The voice and accountability come from the participation of the citizens in the governance
process which is more in democratic system than an authoritarian system. voice and
accountability are higher in democratic system which gives rise to multi parties and as we
learned earlier that multi-party system create a heightened risk of political instability and then
it hinders economic growth. In authoritarian system the rulers are not quiet engages in the
policy making for the economic growth of a country their decisions are based on their self-
interest. Till now it can be concluded that the relationship between voice and accountability
and economic growth is negative but voice and accountability also helps in curbing
corruption. Earlier we learned that corruption and economic growth has negative relationship
that means if the corruption grows it will hinder the economic growth of a country so it can
be said that voice and accountability help in curbing corruption and helps in economic growth
of a country.11

Nexus Between Other Governance Factors and Economic Growth

In the year 2011 Haggard and Teide cited that The Rule of Law is an important institution
concerning economic growth because it directly links to ensuring personal security, property
rights, unbiased contract enforcements and control of corruption. A government needs to
maintain judicial independence, law and order, control of corruption and maintaining rule of

9
Samarasinghe Tharanga “IMPACT OF GOVERNANCE ON ECONOMIC GROWTH” MPRA papers 6
(2018)
10
Ibid.
11
Ibid.
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law and to avoid the consequences of state failure because state failure can hinder the growth
of economy. The relationship between rule of law and economic growth is positive.

Government effectiveness includes the quality of government service, maintain rule of law,
competent policy making and its ability in implementing desired policy. For the growth of
private sector, the sound policy making is needed, there should be less government
intervention, legitimacy in property rights and contract enforcement in the process of
economic growth. According to the worldwide governance index the position of India is
almost stagnant at a lower position since last 10 years. India lacks in contract enforcement,
registration process of the companies, Property rights and there is high income diversity
among people which tends to hinder its economic growth.12

CONCLUSION & SUGGESTIONS

In this research paper the author states that there is a positive relationship between good
governance and economic growth. But before that author thoroughly understood the concept
of good governance it’s features and some of the hidden aspects of concepts of good
governance. It also threw some light on how the good governance bears the relationship with
various indicators of economic growth.

In terms of its application, the good governance is first of all a general principle and a
prerequisite to any society or country for attaining maximum welfare possible to reach with
an available number of resources. Moreover, for developing countries and even more, for
least developed countries, good governance may help them to attain the maximum reduction
of their current levels of poverty. Good governance helps in reducing the vulnerability of
state failure or economic crisis of the developing countries and least developed countries. In
this research paper the author stated six indicators of good governance and defined the
relationship between them.

There is negative relationship between the corruption and economic growth that means as the
corruption increases the economic growth of a country tends to decreases. The countries
which are facing the problem of extreme corruption can end up losing the entire wealth of the
nation, confidence of its populace etc. A living example is Venezuela. 13

12
https://www.ilimvemedeniyet.com/good-governance-key-factor-for-social-and-economic-development-in-
aceh-a-case-study-in-aceh-province-indonesia.html
13
https://www.tandfonline.com/doi/pdf/10.1080/25765949.2017.12023313
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Political stability bears a positive relationship with economic growth. A more politically
stabilised country is more economically progressive and growing. Political stability provides
the basis for economic stability which is indispensable for economic progress.

Voice and accountability in a country can impact the economic progress in both ways i.e.,
negatively and positively, if the system has higher transparency, it gives rise to multi-party
system which can result in political instability which could affect the economic growth
adversely. On the other hand, if there is lack of accountability and voice in the system then it
might lead to corruption which bears the negative relation with economic progress. So, the
perfect balance is needed here.

So here from the above analysis we can conclude that there are various factors that impact the
economic progress or growth of a nation, either positively or negatively. This makes the
economic growth subject to various factors and vulnerable to the impact of uncertain
situations in society. So, the most advisable for all the societies and nations in this world
whether they are developing or developed, because the economic growth is cynosure of every
economy in the world, is that they should maintain an equilibrium between the components
of good governance and factors of economic growth. This equilibrium in the nation will help
the nation to grow economically as well as will help the nation to adhere to the norms of good
governance and satisfying the populace of the nation. And to some extent we can say that the
good governance policies are relevant if countries reach a sound level of economic and social
development that enable institutions of good governance to boost growth. So, the balance
should be maintained and good governance should be given prominence once the country has
achieved some or little economic growth.
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BIBLIOGRAPHY
Newspaper:

 The Hindu

 Indian Express

 The Wire

 Hindustan Times

 Times of India

Websites visited:

 open.lib.umn.edu

 link.springer.com

 ilimvemedeniyet.com

Research Article:

 Samarasinghe, Tharanga, 2018. "Impact of Governance on Economic

Growth," MPRA Paper 89834, University Library of Munich, Germany.

 Rachid Mira and Ahmed Hammadache “Relationship between good governance and
economic growth A contribution to the institutional debate about state failure in
developing countries” journal of CEPN university 6 (2017)

 YU Kepling “Governance and Good Governance: A New Framework for Political

Analysis” journal of School of Government, Peking University 1 (2017)

 Rachel M. Gisselquist “Good Governance as a Concept, and Why This Matters for
Development Policy” UNU-WIDER Journal 1 (2012)

 Zhang Zhuo & Almalki Sultan Musaad O & Bashir Muhammad & Sher Khan, 0.
"Underlying the Relationship Between Governance and Economic Growth in
Developed Countries," Journal of the Knowledge Economy, Springer;Portland
International Center for Management of Engineering and Technology (PICMET), vol.
0, pages 1-17.