Towards a Market Economy: Structures of GovernanceWP/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. |