Towards a Market Economy: Structures of Governance


WP/97/11-EAAttachment
WP/97/11


Towards a Market Economy: Structures of Governance
by Pierre Dhonte and Ishan Kapur


Sustainable long.run growth requires the creation of a secure economic
environment to encourage investment. Such security results from the assurance
that the return on enterprise and investment will accrue to the entrepreneur
and investor. In this regard, the credibility of government policies, notably
the resolution of time.consistency problems, is critical to reducing
uncertainty and thus establishing a secure environment.


While the need for a secure environment is universal, the extent to which it
is satisfied.as well as the process by which it comes about.varies between
alternative sociopolitical systems. A distinction is made between patrimonial
and rule.of.law systems; the former are characterized by uncertainty resulting
from the ruler.s unfettered discretion, while the latter are based on rules
that seek to establish predictability by limiting this discretion. Creating a
secure economic environment through the transformation of societies from
patrimonial to rules.based regimes is a complex and protracted process
involving profound, far.reaching social change.


Market.based economic systems pre.ordain the rule of law by encouraging free
entry to markets, access to information, and sanctity of contracts. This limits
rent.seeking activities and creates a secure environment. The capacity to
provide credible economic security constitutes an important, though by no means
exclusive, benchmark against which economic governance can be evaluated. The
core of good governance is a rule.of.law system in which the three conditions,
cited above, effectively hold. This benchmark has the advantage of avoiding
potential conflicts which could arise with broader criteria based on different
moral or social values. Thus, policy prescriptions can be reduced to relatively
straightforward choices involving the efficiency of markets with the aim of
establishing a framework (standards, rules, and institutions) of a secure
economic environment.