CHAPTER 7
growth theories as drivers of growth—are only proximate causes of growth. Institutions, along with geography, culture, and trust, are possible fundamental causes of growth that can explain why some countries fail to accumulate these forms of capital while others put them to good use and grow.
The five dimensions of government quality Poorly run governments result in improperly functioning markets, and wellrun governments can make up at least part of any negative effects of big government on growth. Does this happen in Europe? It appears it does. To answer this question, the relationship between government size and the quality of government in Europe and the world are contrasted. The approach of La Porta and others (1999) is adapted to establish whether government size is systematically correlated with quality of government, after considering economic, political, and geographic factors. Five government responsibilities are assessed: regulator of the private sector, facilitator of economic openness, manager of its resources, enabler of voice and accountability, and enabler and provider of public goods. · Establishing well-defined property rights and ensuring a functioning legal system is a core responsibility of government. Since the work of Adam Smith in the eighteenth century, the protection and enforcement of property rights and contracts has been seen as a precondition for the operation of markets and economic specialization. · Openness brings competition and pressures to improve productivity (Doucouliagos and Ulubasoglu 2006; Dreher 2006). It gives countries access to large, fast-growing markets that allow them to diversify and upgrade their products. Openness channels knowledge and technology through production networks, foreign direct investment, and learning from competitors. As chapter 2 discussed, Europe’s growth is also in good measure due to trade. Countries took their export-to-GDP share from 28 percent in 1970 to 54 percent in 2009 in Western Europe, and from 36 percent in 1995 to 49 percent in 2009 in Eastern Europe. · The government can run more or less efficient bureaucracies. With governments commanding around 40–50 percent of GDP, productivity in the public sector, while hard to measure, is a key driver of growth. Managing civil servants well, keeping a cap on the public sector wage bill, and borrowing tools from the private sector to run services efficiently are all important to keep the public sector lean and productive. · Voice and accountability capture important aspects of European countries. Citizens’ voice in society and participation in politics connect them to politicians and policymakers who represent government. Elections and informed voting can make political commitments more credible and produce better outcomes. In addition, better information, thorough public disclosure, citizen-based budget analysis, service benchmarking, and program impact assessments and an active independent media can strengthen voice and accountability (World Bank 2004).
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