Guest Roast: Good Governance and Development – Which causes which?

By Edvin Arnby Machata

The international development community has for almost two decades focused on improving governance as a strategic priority for aiding economic growth. This article points to the historical record and argues that 1) growth does not require good governance, 2) good governance and representative institutions are products of economic development – not the other way around, and that 3) the configuration of national institutions determine whether a political order will produce developmental outcomes or not.

‘Good governance’ has been a mainstay component in most donor-funded development programmes during the last two decades. What exactly constitutes good governance is empirically problematic, but while implementations vary, demands for good governance generally include provisions to minimize graft and increase respect for human rights.

The concept emerged in the wake of failed macroeconomic development policies as a way to explain why what were then considered the best theories available did not translate into successes on the ground. In the new narrative, laissez-faire capitalism did not lead to development because it was constrained by graft and corruption from government officials.

However, recent research by the French Ministry of Economy, Finance, and Industry suggests that while ‘good governance’ is an important element of healthy developed states, it is not an efficient development strategy on its own. The researchers, Nicolas Meisel and Jacques Ould Aoudia, found a correlation between good governance and GDP per capita, but not between good governance and growth rates. This suggests that while most wealthy countries have good governance, countries that grow fast – and that will join the ranks of other wealthy countries in the foreseeable future – do not. These findings strongly question the assumption that good governance can ‘cause’ economic development.

Yet old assumptions remain. On the World Bank’s “Let’s Talk Development” blog, Francesca Recanatini, a public sector specialist, writes:

[Good governance needs a place on the agenda because]… we can all agree that development objectives cannot be achieved and sustained in the presence of weak institutions and poor governance systems, since the strength of the governance system of a country determines the impact and effect of its policies.”

While this can be interpreted as ‘development won’t happen in the absence of order and a strong authority’, it usually precedes attention to anti-corruption initiatives and efficient service provision, as well as soft, abstract rights such as free speech and formal representation. Indeed, Recanatini continues with praising the potential inclusion of the fluid and subjective measure of “transparency” in the framework that will replace the Millennium Development Goals.

But have a look at China. According to a 2007 study by World Bank researchers Martin Ravallion and Shaohua between 1981 and 2001, China lifted around 500 million people out of poverty, and the trend has continued – in spite of poor governance and high levels of graft and corruption. Transparency has simply not been on the agenda. Indeed, more transparent democratic India is trailing authoritarian China in human and economic development alike (see table below).

Not until now, when China is no longer a low income country but an emerging super power, does Beijing seem to take reforming their governance seriously. This is partly because popular demands for reform today have a significantly broader base than did the movement that culminated in Tiananmen Square a little more than two decades ago.

While it is hard to prove the counterfactual, it is possible that China’s economic performance could have been even better with less corruption – but the reverse is also true. More importantly, the case of China should put ‘transparency’ and many other ‘good governance’ measures and concepts a bit lower on the agenda.

Thankfully, a rivalling concept – ‘developmental governance’ – is emerging, a concept that seeks to judge governments on concrete developmental outcomes. Good governance advocates may critique developmental governance for lowering the bar of what politicians can get away with in terms of graft and undemocratic practices – some may even fear it leading to a greater acceptance of dictatorship.

While this may be true to some extent, autocracies have a better historical record when it comes to development. The two countries that have managed to reach developed country status since the Second World War, Taiwan and South Korea, both saw their economic take-off as autocracies. Neither democratized before the end of the 1980s when they had already industrialized and achieved significant income levels.

A significant problem is that the entire idea of democracy – to constrain state power – reigns in its potential to act like a developmental agent. For instance, with the typical four-year mandate for political offices, short-term, low-turnover investments are more likely to bring re-election than high turnover, long-term investments.

Through challenging the strong emphasis on democracy, developmental governance brings a more historical outlook to the debate. Western democracies were built on fairly well developed economies – not the other way around. They would not have fared well if they had been judged by today’s ‘good’ governance norms when they were industrializing in the 1800s. Indeed, voting rights were usually skewed strongly in favour of the wealthy, and nowhere did women have the vote.

Instead, they gradually became more transparent and accountable as state capacity grew and as citizens became wealthier, more educated, and consequently more able to demand better governance in return for their continued compliance in being taxed.

However, kleptocratic and murderous regimes like those of Rafael Trujillo of the Dominican Republic, the Somosas’ of Nicaragua or Mobutu Sese Seko’s in Zaire to name but three, prove that autocracy does not necessarily provide political leaders with developmental incentives.

Indeed, Mobutu’s very strategy of remaining in power was to not allow significant economic development from which alternative bases of power could emerge, as demonstrated by Guy Gran and Galen Hull’s analysis in their 1979 book “Zaire: The Political Economy of Underdevelopment.” Similarly, the relative economic stagnation by many Latin American countries in the post-war period can partly be explained by corruption.

In contrast, the survival of the military regime in South Korea and the Chinese Kuomintang in Taiwan depended on the development and industrialization of the country. Without it, they would have either been easy targets of North Korea and Communist China respectively, or been completely dependent on the protection of the United States.

The bottom line is: institutions matter. Stefan Lindeman from the London School of Economics discusses in his 2008 working paper that the political system, underpinned by elite bargains, determines the incentives of a regime, and how they go about to maintain their power. Institutions, being sustained by agreements among elite groups in society, provide both constraints and opportunities to act that shapes the path rulers take.

These can be grouped into “closed access orders” and “open access orders” as described by Nobel Prize winning economist Douglass North and his colleges John Wallis & Barry Weingast in their paper “Violence and the Rise of Open-Access Orders” from 2009. While in the former access to rents and economic opportunities are restricted politically and/or through coercion, in the latter, institutions ensure access to economic opportunities for anyone with the relevant resources or skills. 

In the case of Zaire, the optimal way for Mobutu to maintain power and his personal wealth was to undermine development, creating a closed access order. Consequently, this incentivized his opponents, excluded from privilege, to plot his violent overthrow as this was the only viable way to access the country’s economic resources. For most western elites in contrast, the most attractive option is usually to form a civil opposition and wait out the mandate period for another chance, as they can enrich themselves in the private sector meanwhile.

The examples of South Korea and Taiwan show a third way. As their respective industrialization was state driven, they did distribute economic rents by political means (exclusive contracts for factory management) and thus constituted closed access orders. However, as industrialization did provide other economic opportunities that accrued to those who were not granted the top-tier opportunities, most elite groups were incentivized to support the state, and it endured.

While this may seem to provide recipes for successful development, the problem is that institutions do not ‘travel’ well as North argued in his 1994 paper “Economic Performance Through Time”. Because they are products of historical processes, they are dependent on the particular politico-economic and cultural relations of each country, and cannot simply be copied from one context to another. This is the main reason why the modelling of democratic political systems after western ones and expecting them to behave as such per the ‘good’ governance agenda is a mislead approach.

The mixed historical evidence suggests that the political system itself is not what is most important, but incentives that encourages the middle and upper classes to be part of a national developmental programme.

“Good” governance is not a pre-requisite for development: development is a pre-requisite for good governance! Shifting focus towards the concept of developmental governance recognizes this reality and allows for a more feasible and natural process of gradual improvements driven and shaped by citizen-state relationships. For a start, increased focus on results may encourage more effective institution building that is tailored to the political circumstances of each country.

[contact-form to=’iouliafenton@gmail.com’ subject=’Guest Roast: Good Governance and Development”][contact-field label=’Sign up for weekly updates from Development Roast.’ type=’email’ required=’1’/][/contact-form]

Edvin Arnby Machata is the regional editor for West Africa with Global South Development Magazine.

For your reference:

Gran, Guy, and Galen Hull (eds.) (1979) Zaire: The Political Economy of Underdevelopment” New York: Preager.” <http://www.amazon.com/Zaire-The-Political-Economy-Underdevelopment/dp/0275903583>

Lindemann, Stefan (2008) “Do Inclusive Elite Bargains Matter? A Research Framework For Understanding The Causes of Civil War in Sub-Saharan Africa” London: Crisis States Research Centre Working Paper. <http://www.isn.ethz.ch/isn/Digital-Library/Publications/Detail/?ots591=0c54e3b3-1e9c-be1e-2c24-a6a8c7060233&lng=en&id=56590>

Meisel, Nicolas and Aoudia, Jacques Ould (2007) “Is ‘Good Governance’ a Good Development Strategy? DGTPE Working Paper no. 11. www.cepii.com/institutions/11_2007_eng.pdf

North, Douglass (1994) “Economic Performance Through Time,” American Economic Review, vol. 84, no. 3, June. <http://www.jstor.org/stable/2118057>

North, Douglass  C., Wallis, John J., & Weingast, Barry R. (2009) “Violence and the Rise of Open-Access Orders” Journal of Democracy, vol. 20, no. 1. <http://muse.jhu.edu/journals/jod/summary/v020/20.1.north.html>

Ravallion, Martin & Shaohua Chen (2007) “China’s (uneven) progress against poverty”, Journal of Development Economics, vol. 82, no. 1. < http://www.sciencedirect.com/science/article/pii/S0304387805001185> 

Recaratini, Francesca (2013) Putting Governance where it belongs – On the Table. Let’s Talk Development. <http://blogs.worldbank.org/developmenttalk/putting-governance-where-it-belongs-on-the-table>