Academic journal article European Journal of Sustainable Development

The Relationship between Governance and Economic Growth during Times of Crisis

Academic journal article European Journal of Sustainable Development

The Relationship between Governance and Economic Growth during Times of Crisis

Article excerpt

1. Introduction

The economic crisis of 2008 has affected all aspects of life, resulting in political instability, personal financial troubles, and a growing number of business bankruptcies. Although these are serious issues, simply developing a government policy that injects an economy with money is not an appropriate means to achieve economic recovery and long-term economic development unless combined with an effective and efficient governing system (Albas sam, 2012a; Aikins, 2009; Davidoff &Zaring, 2008; Reinhart &Rogoff, 2009). According to Aikins (2009), "without appropriate economic policy and regulatory framework, a nation's financial system becomes vulnerable to crisis and jeopardizes the stability of the entire economy" (p. 39).

Economic growth has been connected to government practices and the way governments govern both directly and indirectly (Adams &Mengistu, 2008; Ndulu& O'Connell, 1999; Pradhan&Sanyal, 2011). In addition, governing processes are affected by economic crises (Furubotn& Richter, 2005; Smith, 2007). For decades, international organizations (IOs) such as the International Monetary Fund (IMF), the United Nations, and the World Bank have argued that good governance is a means to an ends like economic growth and human development (Kaufmann &Kraay, 2002; Mehanna, Yazbeck, &Sarieddine, 2010; United Nations, 2000). Scholars and researchers agree that a strong relationship exists between economic growthand governance, yet it is debatable whether good governance practices lead to economic growthor whether economicgrowthleads to good governance (Acemoglu, Johnson, & Robinson, 2001; Arndt & Oman, 2006; Dixit, 2009; Kaufman, Kraay, &Mastruzzi, 2009b; Smith, 2007).

Many research efforts have discussed possible causes of the current crisis, including lack of local regulations to organize financial markets (Bernanke, 2009; Reinhart &Rogoff, 2009), government failure (Albassam, 2012b; Davidoff &Zaring, 2008; Gruenewald, 2010), and international organizations' failure to take action to organize the global market (Cerra&Saxena, 2008; Langmore& Fitzgerald, 2010; Repucci, 2011). However, research on the influence of the current economic crisis on shaping the relationship between governance and economic growth is severely lacking. Besides filling the gap caused by the shortage of research on the subject, developing a clear understanding of the influence of the 2008 economic crisis on the relationship between governance and growth will have important implications for both local and global political and decision-making processes.

In general, governments typically respond to crises with short-term remedial plans, potentially resulting in a harmful long-term economy recovery (Davidoff &Zaring, 2008; Reinhart &Rogoff, 2009). In addition, Davidoff and Zaring (2008) argued that governments focus more on economic growth than on governance development during economic crises. Thus, if the influence of economic crises on the relationship between governance and growth is understood, governments can be encouraged to adopt strategies that will enhance governance quality and economic growth in the long run without sacrificing good governance practices in the short run. Consequently, studying economic growth and its relationship to the governing process will help explain the factors that influence it during times of crisis and the ways in which it might be improved.

For decades, international organizations (IOs)such as the United Nations, the IMF, and the World Bank, have supported good governance practices as a means for human development and economic growth (Mimicopoulos et al., 2007; Santiso, 2001; United Nations, 2007). However, during crises, most countries score low in governance indicators because their governments concentrate more on economic growth than on adopting and improving good governance practices (Davidoff &Zaring, 2008; Kaufman et al. …

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