Economics and Governance

Delineating the Fault Lines

Abstract

The study of intervention of State in economic affairs of a society has long occupied the works of noted economists. It again resurged in the form of New Political Economy with a little variation in its context. But, in recent years, the word governance gets prominently mentioned in economics literature in the wake of prescription of good governance for development by multilateral organizations in the late twentieth century. Three-four decades ago when success stories of Asian tigers were discussed, most people attributed success to their governance styles. When Asian Crisis raged in these same tiger economies in the late 1990s, again reference was made to governance failure, besides external factors. When India is compared with China, one of the most important differences cited by most scholars is the difference in their governance complexion and style. Recent and not-so resent researches by multilateral organisations confirm this view. Recognizing importance of governance in matters economic, scholars keep advising governments and people, corporations and boards, councils and authorities what they ought to be doing. This sudden interest in ‘governance’ in economics profession owes to the work and assertion by those who explored the area of transaction cost and information asymmetry as well as by those who developed what is known as new institutional economics. Development practitioners, believing more in grounded theory, also covered this area better by collecting data on people’s experiences  and experiments instead of making assertions of plausible or appealing assumptions in tackling problems of externalities. Surely, word governance did not exactly, nor always, mean the intervention or interference by government. I just intend to develop, in this paper, broadly the fault lines of mainstream economics with respect to governance and try to argue that transaction cost has to be drastically reduced to effectually decentralize governance structures that are being developed in the wake of new ethos and technological possibilities. People constantly keep innovating and improvising technologies and institutions to reduce transaction cost as they keep reducing transformation cost and transportation cost. It is little less appreciated by scholars except deep economic historians.