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Governance Notes

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Lecture 5 - Governance "Governance consists of the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them." World Bank

The World Bank's Governance Indicators Voice and accountability - Citizens' participation in selecting their government, freedom of expression, of association and a free media. Political stability and absence of violence- Likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism. Government effectiveness - Quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation and the credibility of the government's commitment to such policies. Regulatory quality - Ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. Rule of law - The extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police and the courts as well as the likelihood of crime and violence. Control of corruption - The extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as 'capture' of the state by elites and private interests.

Good governance causes growth as markets can develop when property rights are secure and corruption deters investment and trade. Also growth causes good governance, richer countries are better able to afford the costs associated with providing a competent government bureaucracy, sound rule of law, and an environment where corruption is not condoned. Principal-Agent Approach to Governance This is a useful theoretical framework. JPAL: governance is a two-part principal-agent problem.

• PART 1; citizens as principals, politicians as agents who enact policies in line with voters' interests. Focus on participation.

• PART 2; politicians as principals, civil servants as agents who implement policies designed by politicians. Focus on corruption. PRINCIPAL-AGENT PROBLEMS Situation in which the agent acts on behalf of another (the principal). Their interest may not be aligned so the problem of the principal is finding ways to align the interests of the agent with his. This may be particularly difficult if there is asymmetric information (the agent has more info) or a moral hazard (the principal cannot perfectly monitor the agents' actions). Governance can be seen as a principal-agent problem due to citizens' control over politicians. Politicians do not promote policies in the citizens' best interest and direct funds to connected firms which is not cost-effective if there is corruption. Politicians have control over civil servants. These are more severe in developing countries so research focuses on improving voter control over politicians and policy and improving incentives for civil servants to do their jobs properly without corruption.

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