Academic journal article Journal of Economic Cooperation & Development

Does Governance and Foreign Capital Inflows Affect Economic Development in OIC Countries?

Academic journal article Journal of Economic Cooperation & Development

Does Governance and Foreign Capital Inflows Affect Economic Development in OIC Countries?

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Achieving the desirable level of economic growth and development is the leading objective of every state public policy to enhance social welfare. There are sundry factors which play important role in the determination of aggregate output, where, the crucial role of governance and foreign capital flows cannot be overlooked. As the goal of the "good governance" is to promote the economic and social development of a country and thereby improve living standard and mitigate poverty. In good governance, there is transparency in public action, less or no corruption, security, equitable and fair rule of law as well as stability in macroeconomic indicators. In a study, Frischtack (1994) expounds that undeniably, "good governance" indicates sustained economic growth and development. It implies that as the quality of governance expanding, it leads to abridged endemic corruption and consequently upsurges the rate of economic growth.

According to the World Governance Indicators (WGI) there are six governance indicators such as voice and accountability, political stability and absence of violence/terrorism, government effectiveness, regulatory quality, rule of law and control of corruption, however, this study uses only corruption and inflation as elements of weak governance for empirical examination. As per the World Bank definition "governance is the manner in which power is exercised in the management of a country's economic and social resources for development" (World Bank, 1992: 1). Governance is "the exercise of economic, political and administrative authority to manage a country's affair at all levels. It comprises mechanisms, processes and institutions, through which citizens and groups articulate their interests, exercise their legal rights, meet their obligations and mediate their differences." (UNDP, 1997: 2-3). Corruption is not a new word or phenomenon and exists in every society and country though varies society to society and country to country. Corruption in the forms of bribes, favoritism, nepotism, theft of public resources by public officials (embezzlement), fraud, and extortion are evidently undermine economic growth process. Corruption is "behaviour that deviates from the formal duties of a public role (elective or appointive) because of private regarding (personal, close family, private clique) wealth or status gains"(Nye, 1967:416). Corruption is "behaviour that deviates from the formal rules of conduct governing the actions of someone in a position of public authority because of private-regarding motives such as wealth, power, or status" (Khan, 1996:12). Shleifer and Vishny (1993) notes that especially, weak governance which do not managing their agencies would indication to ultra-high corruption levels. The outcomes of weak governance explicate that in some developing; corruption is very high and very costly to the development.

Governance crises are equally important that is described by pervasive corruption and a weak institutional structure for abridging poverty and nourishing economic growth and development. Prevalent corruption in government may have added to growing poverty in three ways: (i) Corruption create indeterminate policy environment and a restraint to appraising correct project feasibilities. Consequently, it could be likely to retard investment growth and employment. (ii) The handover of some of the private sector's local savings to the corrupt and dishonest politicians and government officials which can be invested could be another factor to reduce the pace of Gross Domestic Product (GDP) growth rate. (iii) In the existence of corruption, financial cost of individual projects enlarged; by this means at the same time reducing GDP growth for investment and it discourage employment opportunities2. It is also endorsed by Ehrlich and Lui (1999) that corruption and per capita income are predicted to be inversely associated across various stages of economic development. …

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