Good governance is crucial to address poverty reduction and strengthening the link demands a balance between state efficiency and accountability. Economic growth, aid efficiency and linking governance with human development will contribute significantly to poverty reduction. This will involve taking account of formal institutions and their underlying power relationships. External actors who promote governance as a means to reduce poverty should be aware of how their actions can affect the political capacities of the poor. They also need to employ a case by case analysis to avoid a normative and formalistic approach.