Download - The Illusory Lure of “Good Governance” and the hard realities of growth in poor countries
the illusory lure of “good governance”
and the hard realities
of growth in poor countries
http://mercury.soas.ac.uk/users/mk17
Mushtaq H. Khan
The Evolution of Governance Policy
The post-war consensus 1945-1970s: Catching up, industrial policy and support for dictatorships: but few countries succeeded
The 1980s: Structural adjustment and the attack on rent seeking: even poorer results, particularly in Africa
The 1990s and beyond: The good governance consensus brings together NGOs, civil society, aid donors and international financial organizations
Key components of ‘good
governance’
Stable property rights / Low expropriation risk
Effective rule of law
Zero or very low corruption
Democratic accountability of government
Effective service delivery capacities
Absence of political violence
Free markets without privileges for any sectors
Aspirations versus Theoretical Models
Many NGOs and developing country citizens support this
agenda because they support the goals of good
governance
But for Bretton Woods institutions and international
donors, these are not just good goals, they are
necessary means for accelerating development
Based on new theoretical models and empirical evidence
that show that achieving good governance is a
precondition for development
The Economic Theory Underpinning GG
The policy support for good governance is based on a
particular reading of New Institutional Economics that
argues
i) Prosperity comes from having efficient markets
ii) Efficient markets require low transaction costs
iii) Good governance reforms lower transaction costs and
are therefore necessary for an efficient market economy
Theoretical linkages in the new consensus
1E conom ic S tagna tion
H igh Transaction C ost M arke ts
C ontes ted /W eak P rope rty R igh ts and W e lfare -R educ ing
In te rven tions
2
R en t-S eeking andC orruption
3
U naccoun tab le G overnm en t
5
4
The New Policy Agenda
E conom ic P rospe rity
M arke t-p rom o ting s tra teg ies
S tab ilize P rope rty R ights th rough
‘R u le o f Law ’ R e form s
A nti-co rrup tion and A n ti-R en t S eek ing
S tra teg ies
D em ocra tiza tion , D ecen tra liza tion and
A ccoun tab ility R e form s
P rom otion o f p ro -poo r serv ice de live ry
The Governance-Growth Debates
The debate on theory and evidence focuses on 3 questions
i) Are these institutions and their proper enforcement desirable goals or are they also necessary preconditions for development?
ii) Even if in theory effective enforcement of these institutions would enhance growth, to what extent are they achievable in the typical developing country?
iii) By focusing on these governance conditions, are we taking our eyes off other more important institutional rules and associated governance capabilities that are both achievable and important for growth?
Cross-Country Evidence
Composite Good Governance Indicators and Per Capita GDP1990/2000
10
100
1000
10000
100000
0 10 20 30 40 50
Average of World Bank Good Governance Indicatorsin 1990 (ranges from 0 to 50)
Lo
gs
of
per
cap
ita
GD
P in
US
$ 20
00
Cross-Country Evidence
Composite Good Governance Indicators and Growth Rates1990-2003
-8
-6
-4
-2
0
2
4
6
8
10
0 10 20 30 40 50Average of World Bank Good Governance indicators
in 1990 (ranges from 0 to 50)
Gro
wth
Ra
te o
f P
er
Ca
pit
a G
DP
19
90
-20
03
Diverging Developing Countries
Cross-Country Evidence
Composite Good Governance Indicators and Growth Rates1990-2003
-8
-6
-4
-2
0
2
4
6
8
10
0 10 20 30 40 50Average of World Bank Good Governance indicators
in 1990 (ranges from 0 to 50)
Gro
wth
Ra
te o
f P
er
Ca
pit
a G
DP
19
90
-20
03
Advanced Countries Diverging Developing Countries
Cross-Country Evidence
Composite Good Governance Indicators and Growth Rates1990-2003
-8
-6
-4
-2
0
2
4
6
8
10
0 10 20 30 40 50Average of World Bank Good Governance Indicators
in 1990 (ranges from 0 to 50)
Gro
wth
Rat
e o
f P
er C
apit
a G
DP
199
0-20
03
Advanced Countries Converging Developing Countries Diverging Developing Countries
Growth-Enhancing Governance versus Good Governance
3. Advanced Capitalist Countries
1. Diverging Developing Countries
Gro
wth
Rat
es
Good Governance Score(Democracy, Corruption,
Stability of Property Rights)
2. Converging Developing Countries
Regression Line
Reforms suggestedby Good Governance
Regression Line
Governance Capabilities that can trigger and sustain growth
Reforms that
sustain growth and
political stability in
successful transformation
societies
Structural Constraints Facing Property Rights in Developing countries
Stabilizing and protecting property rights is costly and assumes that most assets are already productive.
Absence of tacit knowledge about modern production and associated low productivity requires business-government relationships to support ‘learning’
The demand for political redistribution outstrips supply of fiscal resources: political stability requires off-budget resource allocations (patron-client politics)
Stable property rights are absent in ALL developing countries
Achieving stable property rights across the board infeasible in developing countries
Evidence from the transformational states in East Asia and China: Developmental states did not attempt to enforce all property rights equally at early stages of development
Prioritized protection of rights of critical growth sectors/investors and vulnerable groups with appropriate enforcement capabilities
Corrected allocations of assets that could not be corrected by inefficient markets (using land reform, land acquisition, zoning laws, often using informal processes)
Institutions and politics created incentives for primitive accumulators to invest in productive activities
Low grow th deve lopers have ins titu tiona l and po litica l cond itions
that lead to the p ro tec tion o f g row th-reduc ing ren ts
H igh g row th deve lope rs have ins titu tiona l and po litica l capabilities
to c reate grow th -enhanc ing rents and rem ove g row th -reduc ing ren ts
A LL C O U N T R IE S T H E R E F O R E H AV E E X T E N S IV E R E N T S E E K IN G In deve lop ing coun tries the sca le o f the transition and the low leg itim acy o f
ex is ting righ t-ho lde rs m eans illega l rent seek ing (co rruption ) is the no rm
Rents, Rent seeking and Corruption endemic in ALL developing countries
R ents a re increm en ta l incom es c reated by specific ins titu tiona l a rrangem en ts and a re endem ic in A LL m arke t econom ies
R en ts can s igna l e ffic iency and /o r g row th or the reve rse
R ents a re c rea ted and p ro tec ted th rough ren t seeking
The catching up problem
Credibility of withdrawal and effort
If effort is high, investments in learning are viable.
But if the financier lacks the credibility to withdraw effort may be so low that a subsidy is permanently required
Rents and Catching Up
Catching up and the Learning Problem: Effective entrepreneurs and technological capabilities do not exist
Simply offering market opportunities to existing entrepreneurs usually has no effect
Subsidizing infant industries does not work either. Support has to be matched with effective governance capabilities so that entrepreneurs have the opportunity AND the compulsion to learn
The new governance consensus sees no role for assisting catching up. WTO and bilateral trade agreements rule out assistance
Successful countries demonstrate that the development of technological and entrepreneurial capacity happens through temporary rents with matching governance capabilities that ensure that incentives and compulsions for learning are high
Rent seeking/corruption appears as a “malign” process that protects the
inefficient and the socially powerful
Failed Implementation/Permanent Rent Capture
by “Infant” Industries
Rent seeking/corruption appears as “benign” profit-sharing with public
officials (South Korea, China)
Effective Rent-Management/Credible
Exit Strategies
Strategies of rent capture/subsidization in sectors attempting catching up
Successful catching up may co-exist with rent seeking and corruption
Productivity gap preventing moves up the
technology ladder
Democracy is desirable but is based on patron-client politics in LDCs
Democracy in Advanced and Developing Countries
Democracy in advanced countries is characterized by powerful feedbacks between the economy and politics
A broad-based productive (capitalist) sector exists: there are many significant taxpaying productive enterprises
In the system as a whole, economic power and political power are ‘aligned’: if political distribution hurts the viability or limits of tolerance of productive sector, powerful feedbacks begin to correct this
In developing countries, a broad-based productive sector does not exist and the political power of the formal productive sector is low compared to other organizers of political power
Economic and political power are not aligned: Political stability cannot be fully achieved through formal politics (like fiscal redistribution) and informal (patron-client) politics is both normal and necessary
Growth-enhancing governance capabilities
Property Rights Rents and Rent seeking Political Stabilization
for Technology Acquisition
Dynamic Transformation States (possessing governance capabilities for growth)
Slow or Unsustainable Transformations(absence of governance capabilities for growth)
Protection and transfer of rights to unproductive groupsDestruction or loss of rights of productive groups(absence of capabilities to discipline politically powerful)
Fails to maintain systemic stability orresults in damaging property rights or rent outcomes
Protection, creation and transfer of rights to productive groupsDestruction or loss of rights of unproductive groups(ex post flexibility)
Provides sufficient systemic stability andallows productive outcomes in property rights and rents
Business-government relationships allow emerging entrepreneurs to engage in catching-up strategies(effective rent management capabilities)
Political interests and weak institutions protect growth-reducing rents AND fail to protect or manage growth-enhancing rents(state lacks capabilities to prevent rent capture)
Market-led growth strategies are working in some countries but they remain vulnerable
SU S T A I N A BL E C A T C H I N G - U P
ST R A T E G I E S
Strateg ies o f accelerated learn ing and catch ing up effective po litica l capacities o f rent-m anagem ent to ensure rents are tim e-
bound and w ithdrawn from non-perform ers
with Susta inable grow th driven by h igh
rates o f accum ulation sustained productiv ity grow th
and
U N S U ST A I N A BL E C A T C H I N G - U P
ST R A T E G I E S
Strategies of accelerated learn ing and catch ing up effective po litica l
capac ities o f rent-m anagem ent without
G row th in itia lly driven by h igh rates of accum ulation but eventua lly
unsus ta inable
M A R K E T - L E D ST R A T E G I E S
Strategies of in tegrating in to g lobal m arkets using already existing technical com petence
Low grow th in countries w ith low com petitiveness across the board
H igh grow th in countries w ith niches of in ternational com petitiveness but lim ited to a few sectors and typ ica lly
w ith low productiv ity grow th
Research and Policy Agenda
The goals of good governance are desirable in themselves but as a reform agenda for the state it asks limited/wrong questions and gives the wrong answers to these questions
The starting point must be an analysis of how the organization of political power in particular countries has allowed some types of value-enhancing economic transformations but not in others
Incremental Reform has to a) work with existing power structures to identify political and institutional changes that allow better management of property rights in critical areas, more effective political stabilization and more effective technological catching up.
In many cases this will open up national debates and dialogue on b) changing the organization of political power to achieve better developmental prospects. This is a more radical task and can only be undertaken by insiders drawing on an understanding of comparative history and their assessment of domestic political possibilities and their own values