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The authors gratefully acknowledge comments from Jack Boorman, Manuel Guitián, Michael Hadjimichael, Ernesto Hernández–Catá, Jorge Márquez–Ruarte, Abbas Mirakhor, John Odling–Smee, and Emmanuel van der Mensbrugghe. The views expressed in this paper do not necessarily represent those of the International Monetary Fund.
These considerations also apply to markets in property rights of various types, e.g., physical, intellectual, and financial assets.
In analyzing hyperinflation in several countries, Lucas (1986) found that the common feature was that anti–inflationary policies did not succeed until the governments concerned adopted measures that resolved time–consistency problems.
The absence of economic security is probably the single most important impediment to growth in most transition economies, and certainly—several years after reforms began—it remains the primary obstacle in most states of the former Soviet Union. For an excellent discussion of this issue see Chapters 4 and 6 in European Bank for Reconstruction and Development, Transition Report 1995.
This distinction is inspired by Weber’s contrast between patriarchal and bureaucratic domination (Weber, 1978). As in Weber’s work, the distinction is starkly drawn for the purposes of exposition; in the real world, most societies contain some characteristics of the two systems and their actual functioning is likely to soften the distinction even further.
The legal and institutional functioning of a centrally–planned economic system have been recently described in a study of the Soviet economy by IMF et al. (February 1991).
Clearly, in the real world the concept of free entry into markets must take into account the important regulatory role that public institutions should, and do, play e.g, stock market supervisory agencies or oversight agencies in the financial sector. Furthermore, the sanctity of contracts does not preclude changes in public policies (for example, in tax laws) as long as these are carried out within the framework of a rules-based system.
As an illustration, France’s economic transition spanned several centuries of political change: from Colbert’s introduction of a system of government accounts in 1660—a first step towards transparency—through the French Revolution, and to the adoption of a generalized personal income tax in 1905. In some respects, the process is still incomplete.
Under this argument, the co–existence of patriarchal political regimes and market–oriented economic systems is a transitional phase, since development of advanced market mechanisms is over time incompatible with the former, i.e., sustainable long–run growth is not consistent with patrimonial regimes.
The linkage between political (and institutional) reforms and economic performance in Russia and Poland has been interestingly described by Shleifer (1996).
As President Madison said, “if men were angels, no government would be necessary,” cited in The Federalist, 1937.
France, Japan, Sweden and the United States are all market–based capitalist economies, but with varying degrees of internal socio–political flexibility and solidarity reflected in their rules.
As an early exhortation to good behavior by bureaucrats, the Declaration of the Rights of Man and of Citizen”, Article XV stated: “Society has the right to demand accountability from every civil servant of the administration.” (Paris, 1789) The design of “corruption–proof” bureaucracies is in itself a lively analytical field and outside the scope of this paper (Asilis and Juan–Ramon, 1994; Shleifer and Vishny, 1993).
Huntington (1993) emphasizes “the real and important differences among civilizations” and argues forcefully that these differences will increasingly supplant ideological or economic factors as primary reasons for future conflicts.
There are, of course, some economic policy actions that will not directly improve growth performance but could be considered as “good” governance broadly defined, e.g., creation of an adequate social safety net, control over the quality of government expenditures, etc.
This ignores the more common (but misleading) argument about not “wasting the funds of taxpayers in donor countries” by insisting on good governance.