Are «Good Governance» reforms a priority? Conceptual, measurement, and policy issues

Transcription

1 SOAS & Mo Ibrahim Residential School on Governance in Africa Are «Good Governance» reforms a priority? Conceptual, measurement, and policy issues Nicolas Meisel (meiseln@afd.fr) Research Department - French Development Agency (AFD)

2 Presentation Outline 1. Institutions and Governance: a new key to understanding growth? 2. Presentation of a new Database: Institutional profiles database 3. Empirical Results 4. Interpreting Results

3 1. Institutions and Governance: A new key to understanding growth?

4 DEVELOPMENT POLICIES From Capital to Good Governance Capital (60s-70s) But! Investment was not enough to sustain long term growth Macroeconomic stabilisation (80s) Liberalisation and privatisation (80s-90s) But! A sound macroeconomic environment was not enough Institutions and Governance (since mid-90s) are key for growth BUT! LOTS OF CONFUSION ABOUT WHAT WE ARE TALKING ABOUT

5 DEVELOPMENT ECONOMICS AND GROWTH THEORY From Capital to Governance Standard growth accounting leaves a high part of the phenomenon unexplained (besides capital and labour) = Total factor productivity (up to 1/2 of GDP Growth) New Institutional Economics (North et al.) : The structure of constraints and incentives that govern human behavior is KEY to understanding long-term economic growth It is shaped by institutions (rules of the game), and notably governance institutions Main function of institutions / rules = reduce uncertainty in order to facilitate transactions through 2 channels: Reduce Transaction Costs (up to ½ of GDP) Stabilise expectations (investment)

6 A PARADOX Although institutions and governance may be the least understood growth factors «Good Governance» has been given a prominent place in the development agenda!

7 Governance Indicators Used by investors, aid agencies, academics, journalists WB: Worldwide Governance Indicators (WGI) 1996 by Kaufmann, Kraay, Zoido Lobaton (KKZ); Doing Business 2003 IFC; Country Policy and Institutional Assessment (CPIA) Other indicators: Corruption Perception Index (TI); Economist Intelligence Unit; ICRG; World Economic Forum; Freedom House; etc. WGI: Six indicators: Voice and Accountability (V&A), Rule of Law (RL), Government Effectiveness (GE), Control of Corruption (CC), Political Stability (PS), Regulatory Quality (RQ); 1996 today; >200 countries; based on entreprise, expert and household surveys;

8 Standard «Good Governance» (WGI) Security of PR and transactions, Reliable and transparent functionning of administrations, Control of corruption, Effective regulation of markets, Rule of law and Democracy (Voice and Accountability) A positive connotation But is the priority given to this institutional agenda legitimate?

9 Does «Good Governance» point at key institutional growth factors? What is the available empirical evidence supporting the priority given to «good governance»? Has it enhanced growth performance in developing countries for the last 10 years? What precise institutional factors do support mid/long-run growth? This empirical investigation: What have been the institutional features underlying growth successes?

10 Much Debate Over Method: How do you measure institutions? How to assess Governance? (objectivity / subjectivity, expert panel / population surveys, aggregation issues, ) Empirics and theory: Is there a relationship between Governance and Growth? Operational and political use of Governance Assessments: How to use Governance Assessments? (ODA allocation ) Norms: Why should we accept your criteria?

11 2. PRESENTATION OF INSTITUTIONAL PROFILES DATABASE (IPD)

12 The Difficulty of Measuring Institutions No common and coherent conceptual framework (different from standard macroeconomics: national accounts, budget, balance of payments,...) Economists need to have a look at what other disciplines say How to deal with rampant normativity?

13 1st Survey 2001 (51 countries) 2 nd Survey 2006 (85 countries) New Survey: 2009 (123 countries) Suggestions Welcome

14 Methodological Choices (1) A Broad definition of institutions 1- political institutions 4- free functionning of markets 7- regulations 2- public order, safety 5- coordination, anticipations 8- openness 3- functioning of administration 6- secure transactions 9- social cohesion

15 covering a wide spectrum of institutions Projection of IPD and WBI datasets onto the circle of correlation (PCA) I.P. database indicators WBI governance indicators

16 Methodological Choices (2) Make biases explicit and minimize them (e.g. most respondants are French public servants) Control normativity and subjectivity (as much as possible!) «de facto» rather than «de jure» approach More interested in institutional functions than in formal arrangements For each qualitative item : Does it exist? If no = 0 ; If yes = from 1 (very deficient) to 4 (very efficient) transparency of public action in the economic field If no publication, put 0 if publication, grade from 1=unreliable to 4=totally reliable 0 or grade from 1 to 4 1 Government budget 2 Extra-budgetary funds (if there are no extra-budgetary funds, put 4) 3 Accounts of state-owned enterprises 4 Accounts of public banks 5 Basic economic and financial statistics (national accounts, price indices, foreign trade, money and credit, etc.) 6 Is the IMF consultation under Article IV published? (no=0, yes, partially=2 yes, totally =4)

17 Methodological Choices (3) Aggregation of 356 elementary items into 71 indicators: Each variable is weighted by its std deviation Possibility to create many other indicators (e.g. Capacity indicators à la Sen, openness indicators à la North, ) A database oriented towards Growth and Development.

18 Political Choices Transparency (full data + presentation document) Free access on Support offered to users Open to suggestions (submitted to authors + scientific committee)

19 3. GOVERNANCE AND GROWTH: AN EMPIRICAL INVESTIGATION

20 Empirical Investigation: Methodology An original Statistical Tool: Exploratory Data Analysis (EDA) = refined descriptive statistics Why? multi-criteria analysis let the data speak for themselves. no model linking Institutions and Development

21 Empirical Investigation: Three Steps STEP 1 : What is institutional development? STEP 2 : What is the relationship between growth and governance? STEP 3 : Uncovering the «missing factors», i.e. governance capacities left aside by «good governance» reforms but that might still be important for growth.

22 STEP 1 What is institutional development?

23 Countries projected on the 1st factorial plane of the Principal Component Analysis CUB SYR IRN CHN 7 VNM TUN UZB 5 SGP Importance of the role of the State SAU THA 3 MYS RUS EGY DZA BWA ZWE ETH KWT1 KAZ UKR YEM GAB MOZ BGD MRT GHA PAK MAR CMR SEN CIV BFA MDG VEN IDN MEX UGA KEN LBN KHM MLI NGA GTM BOL PER TCD NER BEN IND TUR JOR DOM -1-3 ROM COL TAI JPN NOR KOR ISR DEU BRA MUS FRA SWE ITA ARG ZAF POL LKA LTU PRT ESP CZE GRC EST BGR CHL PHL HKG CAN HUN GBR NZL USA IRL Degree of depersonalisation / formalisation of social regulation systems -5

24 Axis 1 = 35% of Variance. Interpretation = Look at the variables most correlated with the axis (security of PR, reliable and transparent functionning of administrations and markets, low levels of corruption, effective regulation of markets, democracy, ) = Formalisation of Rules and Depersonalisation of Regulation Systems (on the right) vs informal and interpersonal modes of trust production (on the left) Axis 2 = 10% of variance. Importance of the State.

25 What IFIs have named Good Governance IN FACT depicts nothing else than the functionning of institutions in developed countries = an advanced stage in the depersonalisation and formalisation of rules

26 STEP 2 What is the relationship between «good governance» and growth?

27 «Good Governance» is linked to the LEVEL of income income level BUT Level is not growth and Correlation is not causality 12 y = 0,2665x + 7,9346 R 2 = 0,7126 Level of development (log GDP per capita 2004) SYR MRT TCD KWT TAI SAU PRT KOR MEX 9 LBN MUS RUS VEN GAB POL BWA MYS TUR ARG IRN TUN THA 8 ROM ZAF BRA PER GTM CUB DZA KAZ JOR BGR EGY MAR CHN DOM COL CMR UKR IDN PHL 7 BOL CIV LKA YEM PAK ZWE SEN IND NGA VNM KEN BGD UZB BEN GHA 6 MLI BFA KHM MDG UGA MOZ NER ITA LTU SGP ESP GRC CHL USA JPN FRA HKG NZL ISR CZE HUN EST NOR GBR SWE CAN IRL DEU ETH 'good governance' Degree of depersonalisation / formalisation of rules (values along Axis 1 of the PCA)

28 Good Governance is NOT linked to the GROWTH of income economic performance CHN y = 0,0861x + 1,9816 R 2 = 0,0522 Growth in GDP per capita ( ) IRL VNM KHM TAI DOM KOR EST BWA MOZ LKA LBN IND POL SGP MUS TUN CHL UGA CUB MYS HUN MLI EGY BGD GRC CZE IRN TCD NOR THA GBR PER GHA HKG IDN PRT ESP NZL YEM USA CAN SYR PAK GTM TUR ROM KAZ ARG LTU FRA SWE BEN ETH ISR MEX BRA UZB BFA MRT PHL ITA DEU MAR BOL BGR NGA SEN DZA JOR ZAF JPN CMR COL SAU GAB RUS KWT NER KEN VEN MDG CIV ZWE 'good governance' Degree of depersonalisation / formalisation of rules (values along Axis 1 of the PCA)

29 Governance and Income Growth Growth in GDP per capita ( ) economic performance TCD SYR MRT EGY UZB MLI YEM CMR BFA IRN NGA NER PAK BEN KHM DZA VNM CIV BGD PER MOZ KAZ ETH MAR MDG SAU RUS CHN GHA ZWE UGA BOL SEN GAB VEN LBN IDN DOM TUN GTM MEX KEN THA BWA CUB JOR IND KWT MYS TUR PHL LKA ROM BGR COL TAI MUS ARG BRA ZAF KOR POL PRT GRC LTU ESP ITA CHL SGP CZE USA EST HKG ISR HUN y = 0,0861x + 1,9816 JPN FRA R 2 = 0,0522 NOR NZL CAN SWE IRL GBR 'good governance' DEU Degree of depersonalisation / formalisation of rules (values along Axis 1 of the PCA) How to explain that countries with similarly low levels of governance (measured following standard definition) exhibit such different growth performances?

30 STEP 3 In search for the «missing factors», i.e. governance capacities left aside by «good governance» reforms but that might be important for growth

31 What are the explaining factors? Performance économique (croissance du produit par travailleur) 7% 5% 3% 1% -1% CHN KAZ 2? RUS TAI EST BWA LTU 3 VNM HKG IND SGP THA MYS KHM BGD MUS LKA KOR CZE UKR IDN POL USA NZL MLI BFA CHL DOM PAK ROM HUN ETH TUR ISR NOR TUN UZB MOZ PRT ESP CMR EGY BGR GRC FRA MRT ITA BEN GHA UGA CUB NGA PER JPN YEM BOL COL SEN ZAF TCD IRN MAR PHL MEX GTM ARG? SYR SAU KEN CIV BRA LBN JOR 1NER MDG DZA GAB VEN KWT ZWE performance économique y = 0,0009x + 0,0163 R 2 = 0,061 IRL GBR CAN DEU SWE "bonne gouvernance" -3% Niveau de formalisation des règles (coordonnées de l'axe 1 de l'acp)

32 Discovering the Growth-enabling Governance Capabilities (1) 3 Groups according to their average level of income growth Statistical Tool = Canonical Variate Analysis What institutional factors distinguish the 3 groups?

33 Discovering the Growth-enabling Governance Capabilities (2) Group 1 (Diverging) vs Group 2 (Converging) Coordination and strategic vision. Quality of basic public goods and security of agricultural transactions and PR. Group 2 vs Group 3 (developed) Coordination and strategic vision of actors is not a discriminating factor. The most discriminating variables = good governance agenda = Security of transactions + control of corruption + Administration efficiency + transparency. Group 1 vs Group 3 In fact, almost everything. Yet, it is the standard good governance prescription.

34 Institutional Change: The Standard Prescription economic performance CHN y = 0,0861x + 1,9816 R 2 = 0,0522 IRL Growth in GDP per capita ( ) TCD SYR M RT EGY M LI UZB YEM CM R 2 BFA IRN NGA BEN KHM DZA VNM BGD PER PAK ETH M AR M OZ UGA GHA KAZ LBN IDN BOL SEN DOM TUN GTM M EX BWA CUB THA JOR IND M YS TUR PHL COL LKA BGR CHL ESP EST CZE HKG FRA NZL CAN GAB SAU RUS KWT NER KEN VEN CIVM DG ZWE TAI M US ROM ARG BRA ZAF KOR POL PRT LTU ITA GRC SGP USA ISR HUN JPN NOR 3 SWE GBR 'good governance' DEU Degree of depersonalisation / formalisation of rules (values along Axis 1 of the PCA)

35 Institutional Change: A More Realistic Path? Croissance du PIB par tête / Growth in GDP per cap performance économique / economic performance 2 KHM VNM CHN DOM BWA KOR EST MOZ LKA IND SGP CHL UGA LBN MUS POL TUN CUB MYS HUN 3 MLI BGD GRC EGY IRN TCD CZE NOR THA GBR PER GHA HKG IDN PRT NZL ESP YEM USA CAN DEU SYR KAZ GTM ROM TUR BEN ARG PAK LTU FRA SWE ETH BRA ISR MEX UZBFA ITA MRT MAR BOL PHL DZA BGR NGA SEN CMR JOR JPN COL ZAF SAU GAB RUS NER KEN VEN KWT CIV MDG a more realistic path? ZWE a more realistic path? standard prescription "bonne gouvernance" / "good governance" TAI y = x R 2 = IRL

36 The Need for Specific Governance Capacities economic performance CHN 2 y = x R 2 = IRL Growth in GDP per capita ( ) TCD SYR MRT ECONOMIC KHM TAKE-OFF: Formalisation TAI of and Compliance Strategic Vision of Development, DOM Coordination BWA with KORules EST of Private and Public Actors LKA MOZ IND SGP CHL UGA LBN + Basic Eduction and Healthcare MUS POL TUN CUB MYS MLI EGY UZB CMR BFA IRN NGA BEN DZA VNM +Security of Agricultural Property Rights YEM BGD PER PAK ETH MAR GHA KAZ BOL IDN SEN GTM MEX THA JOR CATCH-UP: Openness of Social Regulation System (economic, social, politic) TUR PHL COL ROM ARG BGR BRA NZL CAN SAU GAB 1 RUS KWT NER KEN VEN CIV MDG ZWE ZAF PRT LTU GRC ESP ITA CZE HKG USA ISR HUN JPN FRA 3 NOR SWE GBR 'good governance' DEU Degree of depersonalisation - Formalisation of rules (values along Axis 1 of the PCA)

37 CONFIRMATION BY COUNTRY CASE STUDIES What Governance Capacities are Needed for Economic Take-Off? (Amsden, Wade, Khan, Evans, ) 1. Strategic Vision (shared by society) 2. Information-sharing and Coordination organisations (adress main market failures + implement the vision) 3. Incentives Systems (carrot) targeted on priority activities (labor intensive; increasing returns; technological absorption; increased value-added; current deficits ) 4. Keep public support temporary and conditional (stick) to achievement of performance objectives (productivity gains, exposure to international competition, )

38 4. INTERPRETING RESULTS: DEVELOPMENT AS INSTITUTIONAL CHANGE

39 What is Institutional Change? A great transformation from predominantly relationshipbased regulation systems to impersonal institutions and formal rules creating trust at systemic (vs idiosyncratic) levels and allowing huge reductions in individual marginal transaction costs (NIE). A shift from a universe of permanent risk diversification (because of very high levels of individual risk) to a universe of profit maximisation (institutions for risk-sharing at a systemic level decrease individual risk and allow longer time horizons) (Polanyi). An asymmetric process: depersonalisation is unavoidable (demographic pressure exogenous to institutions) and undermines relation-based regulation systems. YET building and enforcing impersonal regulation systems is far from automatic (high costs and resistance)

40 GOVERNANCE CULTURES AND TRANSACTION COSTS Marginal Transaction Cost Informal Relationship-based Governance Impersonal Formal Rules-based Governance Where Systemic / Institutional Trust becomes Needed Size of population / markets

41 What is Institutional Change: An Uncertain Process Rules enforcement Relationship-based Social Regulation System - Ascribed relations (Fukuyama) HIGHER UNCERTAINTY Impersonal Social Regulation System - Voluntary relations Size of population / markets Transition highly uncertain due to huge social costs and rational resistance by insiders and societies

42 Insiders Systems People controlling access to key resources: power, information and wealth (Bayart, Haber, Khan, North, Olson...) Public and private-sector elites (national and international) tend to control and protect each other through informal means (mutual capture) A way to restrict and control access to valuable resources Pervasive throughout societies (at all levels)

43 Implications of pervasiveness of Insider systems Resistance of insiders is rational in order to preserve their privileged access to resources Both rigid and fragile, thus create instability Risk of countries being caught in a political economy trap: Entrenchment and mutual capture of corporate and public sector elites Good Governance reforms (i.e. formal rules guaranteeing universal rights) represent a threat to their rents, and therefore tend to be adopted only on paper thus making Governance a political issue, not a technical one calling for more political economy analyses in order to understand these key obstacles to development

44 Discovering the Growth-enabling Governance Capabilities make up for the destabilisation of the social order create cooperation-contingent rents targeting key particular interest groups to align their interests on desirable common goals curb uncertainty, thus reducing transaction costs, stabilizing expectations of actors and lengthening their horizons instrumental to high and sustained rates of investment and growth

45 Conclusion (1) Good Governance is a key factor of trust and economic efficiency BUT Good Governance cannot be transplanted in developing countries: high costs + elites and societies resistance (risks of destabilisation of social orders) Countries that suceeded in their economic take-off used oher specific governance capacities Catching-up countries need to go forward with depersonalisation, formalisation of rules and opening of their social orders Broaden our understanding of governance

46 Conclusion (2) Countries that succeeded in their economic take-off used specific governance capacities; unfortunately absent from standard GG and short term stabilisation packages Contradiction: the typical list of what governments should do in LDCs according to IFIs calls for a minimalist state although implicitly presupposing a very able state Paradox: in LDCs, 30 years of short term stabilisation policies may have led to the erosion of the very institutions needed for long term development.

47 REFERENCES N. Meisel and J. Ould Aoudia (2008), Is Good Governance a Good Development Strategy?, AFD Working Paper No N. Meisel and J. Ould Aoudia (2007), A New Institutional Database: Institutional Profiles 2006, AFD Working Paper No DATABASE Nicolas Meisel : meiseln@afd.fr Jacques Ould Aoudia : jacques.ould-aoudia@dgtpe.fr