VOX  CEPR Policy Portal

Transport infrastructure investment is a cornerstone of growth-promoting strategies around the world. However, investment in new infrastructure is not always conducive to stronger economic performance. This column argues that the lack of positive economic returns may be due to institutional failures mitigating the growth effects of public capital expenditures. In contexts marked by weak and inefficient governments and widespread corruption, different types of road investments yield low or no economic returns.

Lacklustre growth seems to be the new normal almost everywhere in the world except for one area – CEO pay. This column uses data on UK publicly listed firms to examine whether weak governance leads to pay rises for CEOs that are not justified by performance. CEO pay asymmetry – pay responding more to increases in firm performance than to decreases – appears to occur mainly in firms with a low share of institutional owners able to exert external control. CEOs at such firms are also more likely to be paid for ‘luck’, with pay rises rewarding random positive shocks unrelated to performance.

Previous research has shown that the corporate governance practices of firms are constrained by the legal standards of their country of incorporation. This column explores how an active international market for corporate control can substitute for weak institutions in a host country. Using firm-level data from 22 countries, it shows how cross-border M&A activity improves the governance of non-target firms in the same industry, via peer pressure. These findings provide evidence for corporate governance improvements as a novel positive spillover from FDI.

Evaluations of wellbeing complement and encompass established measures of economic progress. This column presents findings on the way governance affects wellbeing. The results indicate that people are more satisfied with their lives in countries with better governance quality. Confidence and trust in public institutions play an important role in this finding. Additional benefits to wellbeing arise when nations are able to better weather economic and other crises.

Investment in infrastructure can bring growth and social benefits. This column highlights the infrastructure opportunities open to depressed economies, stressing that the main obstacles are governance-related. To bring opportunities to life will require an overhaul of infrastructure governance – a root cause of infrastructure projects’ poor productivity.

As Italy’s debt crisis enters the danger zone the question arises: Can Italy ever overcome its decade-old growth slump? This column shows that Italy’s growth fundamentals are all in pretty good shape, except one - good governance. Worldwide Governance Indicators show a dramatic worsening during the Berlusconi governments especially when it comes to the rule of law, government effectiveness, and control of corruption. Progress on improving these might in the end be more important for growth than the reforms the EU demands.

The crisis has revealed deep flaws in the Eurozone’s governance regime. This essay argues that EU leaders should address fundamental questions about the operational principles upon which the euro is based. Key choices for Eurozone leaders are the nature of the economic policy framework, the optimal degree of decentralisation, and the identification of reforms that will ensure the policy regime can deal with all eventualities.

There is some evidence that democracies enjoy better economic growth. How do elections, a core component of democracy, impact economic policy? This says that free and fair elections in developing countries improve economic policy by disciplining governments. But infrequent or uncompetitive elections may actually make things worse.

This column shows that German banks with more competent supervisory board members suffered smaller losses in the subprime crisis. Improving bank governance is therefore desirable – from both the public and private perspectives – and may be more robust than other regulatory tools.