This paper proposes an operational interpretation of the concept of economic governance. It argues that the capacity of governments to credibly ensure a secure economic environment provides an important benchmark against which governance can be evaluated. Such an environment-which is essential for sustained growth in a market economy-can be established through a rules-based system which ensures freedom of entry into the market, access to information, and sanctity of contracts. Since creating a secure economic environment involves profound, far-reaching social change, it has historically been a complex and lengthy process in most societies. However, basing policy prescriptions on this benchmark helps avoid possible conflicts between different social and moral values.
This is a Working Paper and the author would welcome any comments on the present text Citations should refer to a Working Paper of the International Monetary Fund, mentioning the author, and the date of issuance. The views expressed are those of the author and do not necessarily represent those of the Fund.
Fund member countries that adopt market-friendly policies often encounter a credibility problem-market-friendly policies are not effective in stimulating private investment as long as there remains a significant risk of policy reversal. The root of this risk lies in the discretionary policy-making authority of governments. Committing to a program with the Fund, and endorsing its conditionality, is one instrument available to governments to overcome this difficulty. The paper develops this interpretation of conditionality and indicates some of its operational implications for Fund programs.
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