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

The New Policy Agenda

The Governance-Growth Debates
The debate on theory and evidence focuses on 3 questions
Are these institutions and their proper enforcement desirable goals or are they also necessary preconditions for development?
Even if in theory effective enforcement of these institutions would enhance growth, to what extent are they achievable in the typical developing country?
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

Growth-Enhancing Governance versus Good Governance

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

Rents, Rent seeking and Corruption endemic in ALL developing countries

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

Successful catching up may co-exist with rent seeking and corruption

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 groups Destruction or loss of rights of productive groups (absence of capabilities to discipline politically powerful) Fails to maintain systemic stability or results in damaging property rights or rent outcomes Protection, creation and transfer of rights to productive groups Destruction or loss of rights of unproductive groups (ex post flexibility) Provides sufficient systemic stability and allows 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

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

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The Illusory Lure of “Good Governance” and the hard realities of growth in poor countries

by DIIS - Danish Institute for International Studies on Jun 25, 2010

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The Illusory Lure of “Good Governance” and the hard realities of growth in poor countries — Presentation Transcript