« Is ‘Good Governance’ a Good Development Strategy? » (2007)

 « Is ‘Good Governance’ a Good Development Strategy? » Jacques Ould Aoudia with Nicolas Meisel’s collaboration, November, 2007. Published in Document de travail du Trésor et de l’AFD

Abstract : New data, new concepts, new results: This working paper offers tools to rethink the role of “good governance” in development strategies. What is “good governance”? Transparency of public action, control of corruption, free operation of markets, democracy and the rule of law. With macroeconomic stabilisation, “good governance” has imposed itself as a universal imperative in development policies since the 1990s.

Yet, with the help of a new database (the 2006 Institutional Profiles database), we show that there is a correlation between “good governance” and the level of development (per capita GDP), but there is no correlation between it and the speed of development (medium-to-long-term growth). Why? Because it does not touch on the driving forces behind institutional, economic, political and social change. We therefore elaborated new concepts to analyse the reality of governance in developing countries, and tested them with the help of the “Institutional Profiles” database.

In this way, we identified the governance capabilities that developing countries truly need: “good governance” does not emerge as a priority for economic take-off. It becomes one later, along with the opening of the social regulation system when, having experienced sustained and lengthy growth, a country seeks to converge with developed countries. In other, non-converging developing countries, the priority is to build capacities for strategic vision and co-ordination among elites. We therefore propose a wider definition of governance (“governance for development”) and new indicators to measure it.

Keywords: Institutions, Governance, Corruption, Informal, Development, Growth, Social order

JEL: C8, K0, O10, O17, O4, O57, P0, P1.

 

Résumé : Nouvelles données, nouveaux concepts, nouveaux résultats: ce travail offre des outils pour repenser le rôle de la ‘bonne gouvernance’ dans les stratégies de développement. Qu’est-ce que la ‘bonne gouvernance’ ? La transparence de l’action publique, le contrôle de la corruption, le libre fonctionnement des marchés, la démocratie et l’Etat de droit. Avec la stabilisation macro-économique, la ‘bonne gouvernance’ s’est imposée comme impératif universel des politiques de développement depuis les années 1990.

Pourtant, à l’aide d’une nouvelle base de données (Profils Institutionnels 2006), nous montrons que si la ‘bonne gouvernance’ est corrélée au niveau de développement (le PIB par tête), elle n’est pas corrélée à la vitesse de développement (la croissance de moyen-long terme). Pourquoi ? Parce qu’elle ne touche pas aux ressorts du changement institutionnel, économique, politique et social. Nous élaborons donc de nouveaux concepts pour analyser la réalité de la gouvernance dans les pays en développement, et les testons à l’aide de la base de données « Profils Institutionnels ».

Nous identifions ainsi les capacités de gouvernance dont les pays en développement ont vraiment besoin: la ‘bonne gouvernance’ ne ressort pas comme une priorité pour le décollage économique. Elle le devient dans un second temps, ainsi que l’ouverture du système de régulation sociale, lorsque, bénéficiant d’une croissance soutenue et prolongée, un pays cherche à converger avec les pays développés. Dans les autres pays en développement (non-convergents), la priorité réside dans la construction de capacités d’anticipation stratégique et de coordination entre élites. Nous proposons alors une définition élargie de la gouvernance (la ‘gouvernance pour le développement’) et de nouveaux indicateurs pour la mesurer.

Mots clés: Institutions, Gouvernance, Corruption, Informel, Développement, Croissance, Ordre social.

JEL: C8, K0, O10, O17, O4, O57, P0, P1.

Verba volent, scripta manent.[1]

Latin proverb

L’écriture n’est que l’ombre de l’oralité.[2]

Amadou Hampâté Bâ

 

– Are “good governance” reforms effective in achieving take-off for developing economies?

– What governance capacities do developing countries truly need? 

A preliminary response based on the exploitation of the “2006 Institutional Profiles” database and certain theoretical elements.

INTRODUCTION

How an economy achieves long-term growth is still a largely unexplained phenomenon. This is true of the economic take-offs achieved in the past sixty years by a limited number of East Asian countries but also of that of Japan at the end of the 19th century. Going back further in time, we still wonder about the causes that singled out a small part of humanity in the European peninsula from the rest of the world.

As early as the 19th century, economists had identified the role played in growth by the factors of production consisting of capital and labour. The economic models constructed since then partly explain long-term growth by the mobilisation of these factors. But the explanation is only partial: there remains a large unexplained factor, which economists have associated with technological progress and the way in which these factors are combined together.

It is at this point that institutional economics entered the picture, notably during the final quarter of the 20th century, opening up new explanatory paths. If an increase in the quantities of capital and labour has a positive impact on growth, what is it that mobilises (or fails to mobilise) these factors of production? Moreover, mobilising these factors on a massive scale is not sufficient to ensure lasting growth: so, what makes this mobilisation effective over time?

Douglas North has provided an answer to these questions: it is the “rules of the game” in operation in societies, linking all social actors, including the State, that model behaviours and expectations, and contribute (or not) to growth. These rules of the game, this system of incentives, consist of institutions, either formal or informal, and create, in differing degrees and in a wide range of ways, the basic framework allowing an actor to conduct (or not) a transaction with another, to initiate (or not) a project for the long term (an investment, spending on children’s education), acts that are at the heart of the creation of wealth and its extension, economic growth. This framework provides (or does not provide) the fundamental element in the process of wealth creation, the reduction of uncertainty. This lessening of uncertainty is the confidence that individuals have in the fact that rules will be followed by all of society. It is what makes actors’ transactions and anticipations more secure.

The questioning then moves to the factors that engender this confidence between agents and make it possible to reduce uncertainty in economic, social and political relationships. What are these factors? How can they be generated?

In the field of development policies, the international financial institutions have provided a de facto response by proposing an operational tool modelled on the institutions existing in developed countries. This tool is “good governance”: individual rights respected, contracts secured, effective administration, democratic political institutions. This “good governance” is presented as a universal solution to ensure that the confidence needed for economic growth is generated. Developing countries are asked to adopt this tool for themselves, formulated as a set of technical measures, in order that the development process may begin.

 

“Good governance” nevertheless leaves several major questions unanswered

Although included among the development assistance priorities of all the major donors for more than ten years, “good governance” raises serious questions:

  • First, can it be transferred to developing countries? In other words, have “good governance” aid policies improved governance in these countries?
  • Second, is it effective in terms of growth? In other words, have “good governance” reforms actually led to a significant acceleration in long-term growth rates?
  • Finally, is “good governance”, which is indeed a powerful factor in the confidence at work in developed countries, the only way to generate confidence in all countries, regardless of their resources, history and growth dynamics?

These questions lead us to widen the field of our reflection to include the very processes of institutional transition that lead to economic take-off. Such processes are marked by major breaks in the ways in which political, economic and social systems are organised, as well as in individual behaviours. We then sketch out certain theoretical paths for rethinking development in terms of breaks and resistance to change.

To do so, we combine research into new concepts liable to provide a better understanding of the process of development with an empirical approach based on the exploitation of an original database, “Institutional Profiles”, which evaluates the institutional characteristics of eighty-five developing and developed countries. A detailed presentation of the database can be found in Working Document No. 47 (Meisel and Ould Aoudia, 2007) available on the AFD’s website (www.afd.fr) and the CEPII’s website (www.cepii.fr).

Our work is part of a series of critical reflections, notably those of Mushtaq Khan (2004 and 2006) and of North, Wallis, Webb and Weingast (2006 and 2007), concerning the standard analyses applied to developing countries, and proposing a radically different vision of the functioning of societies in general and of developing societies in particular.

At the level of economic theory, all this work, including our own, proceeds from an approach that indissolubly links the functioning of the economic and political systems, irrespective of the level of development. When applied to developing countries, this approach opens up new paths for research, at a time when the predominant development paradigm is being called into question by the success of countries that have not applied it.

 

Definition of the concepts used in this document

 Governance institutions cover, according to the international financial institutions, those institutions that safeguard individual rights, and regulate markets and the functioning of public administration and the political system.

Our approach is to test the relevance of the priority given to “governance for development” policies, using long-term growth as the yardstick. It leads us to distinguish economic growth from development. Development is, basically, a process of institutional change. It is a result of the combined effects of numerous economic, demographic, political and social factors. It involves, by definition, a far-reaching transformation of human groups’ social regulation systems. Institutional change takes place over a timescale that is neither that of the immediate economic situation nor that of long, historical periods. Its scale is that of the medium-to-long term, during which the economic and social breaks characteristic of a capitalist transformation occurred in countries that began their economic take-off during the second half of the 20th century.

We try to elucidate the links between institutional change and growth. For economic growth, we look at GDP growth per capita over the medium-to-long term. Among institutional growth factors, we concentrate our analysis on the institutional factors that are specific to economic take-off (lasting acceleration in the growth of developing countries). This take-off combines productivity gains and improvement in the standard of living over the medium-to-long term. It is during this take-off phase that the most far-reaching institutional breaks are launched (paradigm shift).

We make a distinction between take-off and economic catch-up, the latter concerning countries that have already achieved take-off and have entered a sustained phase of convergence between their levels of income per capita and those of the developed countries.

Finally, we also make a distinction between institutional functions, which are universal and timeless (such as the production of confidence, the preservation of order and security in society, etc.), and institutional arrangements (or institutional forms) that take on different faces depending on the country, its level of development, its history, etc.

 Our work leads to the following main conclusions:

 (1) “Good governance” is indeed a key factor in the establishment of confidence in developed countries by systemically procuring, via compliance with formal rules, a high degree of transaction security. This security, in its turn, procures a decisive advantage in a society’s capacity to produce wealth.

(2) As all societies have done for thousands of years, developing societies operate under a mode of confidence production that is based on personal relationships. Yet, demographic transition and growing urbanisation inevitably cause these societies to enter a process by which social relations are depersonalised. This depersonalisation weakens the traditional factors in the production of confidence in these societies.

(3) Developed societies operate according to a radically different mode of confidence production, as it is based on impersonal rules that apply to all regardless of the intrinsic characteristics of each individual. Thus, institutions are separate from people. This detachment, the fruit of lengthy elaboration of formal rules, systemically ensures high confidence that rules will be followed.

(4) In developing societies, the rule depersonalisation movement does not spontaneously bring about a shift towards the mode of confidence production in effect in developed countries. In this way, there emerges a “grey area” in which the previously predominant confidence production factor no longer functions, whereas that of developed countries is not established.

(5) The recommended “good governance” measures aim to establish the mode of confidence production at work in developed countries. In fact, they amount to dictating that institutions (rules) be formalised and made universally applicable (separate from people).

(6) The transposition of this process of impersonal formalisation of rules in low-income countries does not work. The resistance to the risk of destabilising social orders that it causes is an insurmountable obstacle in the short-to-medium term. Although desirable in itself, it is not applicable in these circumstances. This is why the relationship between “good governance” and growth is so weak and why programmes in support of this “good governance” have so little impact.

(7) Countries in the economic take-off phase have introduced different arrangements for the creation of confidence, in most cases organised around a strategist State which ensures, in a manner specific to each country, the functions of co-ordination of actors and providing a secure basis for their anticipations. These functions are combined in the concept of a “governance focal monopoly”. These countries manage to set off an institutional change involving profound breaks in the modes of regulation of social, economic and political systems.

(8) The countries that have experienced this take-off phase over the medium-to-long term have accumulated sufficient resources and economic experience, including on world markets, to undertake the process of catching up with standards of living in developed countries. Their institutional transformations then involve the acquisition, at their own pace, of the institutional characteristics of developed countries (formalisation and opening up of the existing system of social regulation).

(9) From these results, there emerges a form of institutional progression that is a function of countries’ economic dynamism, with low-growth developing countries moving closer to developing countries that have already begun their economic take-off, and then with these countries moving closer to developed countries (economic catch-up).

(10) In this way, a new and broader concept of governance emerges, namely governance for development, which covers the various institutional arrangements that produce confidence depending on the income level of the country and dynamic of opening to new actors. This opening up of the regulatory system occurs on the economic level (extending the possibilities of market entry to new actors), on the social level (increased role of merit) and on the political level (democracy). We are therefore in a position to define “good institutions” in non-normative fashion: good institutions are those that ensure lasting confidence among agents, and between agents and organisations (the State, firms, etc.).

(11) From this new definition of governance derived directly from its link to growth, we move to its measurement, by proposing a set of governance for development” indicators that cover all the constituent elements in the production of confidence (governance focal monopoly, formalisation of rules) and those that deal with the opening up of the regulatory system.

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[1] “Spoken words fly away, written words remain.”

[2] “The written word is but the shadow of the spoken word.”

 

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