Macroeconomics and Governance

In recent years there has been a resurgence of interest in the impact of institutions on economic growth and development. Governance, both at the economy-wide and firm-specific level, has emerged as one of the central aspects of institutional structure and design. The paper argues that the quality of governance matters to macroeconomic performance because it provides a key foundation for the equitable and efficient allocation of resources, including capital. Better governance tends to be associated with deeper economic and financial development, with the causation running from better governance to higher income rather than the other way round. Better governance also reduces the risk of macroeconomic instability, by containing the types of shocks to which an economy is exposed and by making it easier for private and official decision-makers to deal with negative shocks when they occur. This matters for all economies, be they developing, emerging, transition, or industrialised. This paper sets out some definitions of governance, at both the economy-wide and firm-specific level, and explores what is meant by 'good governance'. It sets out some indicators of governance for selected Asia-Pacific economies. It explores some of the ways that governance can matter for macroeconomic growth, development and stability.