Governance, institutions, growth and poverty reduction: a literature review

Abstract

This paper explores the linkages between governance, institutions, economic growth and poverty reduction, as presented in the academic literature. Abbreviated summary of the findings of this paper: a. Poverty reduction is largely contingent upon the achievement of higher economic growth rates. However, growth on its own is not a sufficient condition for poverty reduction; b. ‘Free-er’ trade pays growth dividends. Higher volumes of international trade, particularly exports, are strongly associated with higher levels of national economic growth. Higher levels of domestic trade are also correlated with higher levels of national economic growth; c. Higher levels of competition in domestic product markets and factor markets drive higher growth rates. Liberalisation of domestic and international capital markets generally has more modest effects on growth; d. Violent, civil conflict is deleterious to growth, but low growth rates and state fragility are both likely to be a consequence of other factors; e. Corruption may be deleterious to growth, but is not always an obstacle to growth or consolidation of the state; f. The optimal type and scale of government intervention (i.e. policy) to address market failures is distinct from the wider debate on the most appropriate institutional set-ups for development; g. There is a strong theoretical basis for the assertion that institutions specifically economic institutions (such as property rights) matter for economic development. The theory has been substantiated by a persuasive, though not definitive empirical literature; h. Democracy is highly valued around the world. Democracies are wealthier, more likely to sustain growth, and less likely to go to war with one another than non-democracies. However, the evidence does not demonstrate that democracy causes higher incomes or is a direct outcome of higher incomes; i. There is no systematic link between a country’s democratic status and its ability to reduce poverty or improve human development. Neither a country’s democratic status, nor the holding of elections will necessarily place effective constraints upon the executive; j. The emergence of, or transition to democracy typically entails violent contestation; k. Political competition, as characterised by stronger, inclusive, issues-based political parties, staffed by competitively-recruited individuals (and including women) is a more effective predictor of executive constraint than a country’s democratic status; l. Civil society may have pro-poor benefits, both through the mechanisms of participation in public spending, and transparency and accountability. However, the degree to which civil society is effective is likely to depend upon the extent to which participation is politically motivated and organized (the more the better), and the context in which it operates: civil society is relatively ineffective at achieving political change in quasi-democratic or semi-authoritarian states; m. Exclusive focus on institutions may underplay wider political, economic and geographical factors that are key for development. In addition, it is clear that different sets of institutions may matter for different countries at different stages of their development. Development practitioners are likely to benefit from consideration of best fit institutional remedies rather than best practice prescriptions