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Is Good Governance Key To Eliminating Poverty?

Jomo Kwame Sundaram was UN Assistant Secretary General for Economic Development. Anis Chowdhury held senior positions in the United Nations Secretariat in New York and Bangkok.

KUALA LUMPUR, Malaysia, Jun 2 2016 (IPS) - For over a decade, much of the international development community, led by the OECD and the World Bank, promoted ‘good governance’ as a pre-requisite for economic development and poverty eradication. Good governance became the explanation for the failure of the structural adjustment programmes (SAPs) to deliver economic growth and poverty reduction. The link between good governance and poverty eradication is premised on the presumption that good governance promotes economic growth and development. It was presumed that SAPs were good for growth and the poor.

But the disappointing results of SAPs had to be explained away, and blaming poor or bad governance provided a convenient explanation which did not challenge the economic rationale for the SAPs. Bad governance was also convenient to blame to excuse poor aid effectiveness.

Measuring good governance

The World Bank started ranking countries against well over a hundred good governance indicators. A composite good governance index was introduced based on perceptions of: (a) voice and accountability, (b) political stability and absence of violence, (c) government effectiveness, (d) regulatory quality, (e) rule of law, and (f) control of corruption. Aid was increasingly allocated according to countries’ good governance rankings, ostensibly to improve aid effectiveness.

The index has also been used by the donor community to “name and shame” countries that failed to live up to the standards associated with it and other related indices, e.g. the Corruption Perceptions Index, published annually by Transparency International, that serves as the basis for the influential annual Global Corruption Report.

Critics have pointed out flaws in the World Bank and donor community’s good governance index and agenda. They range from methodological weaknesses to poor evidence linking good governance to economic development and poverty reduction. Good governance indicators are riddled with systematic biases due to changing definitions, selection problems, perception biases, survey design and aggregation problems.

The World Bank’s good governance indicators are ahistorical while its definitions are controversial. Claiming to be ‘context-neutral’, they do not take into account country-specific challenges and conditions, which can be very different — not only among developing countries, but also among developed countries, and between the two.

It is true that most developed (or high-income) countries have stronger institutions or good governance, while most poor (or low-income) countries do not. But it would be wrong to conclude that this observed correlation between good governance and high income means that higher incomes are due to better governance.

Also, a currently high income level does not necessarily imply currently rapid economic growth. Historically, high-income countries improved their governance and strengthened their institutions as they developed. After all, institution building needs money. Poor institutions in poor countries reflect, rather than cause their poverty.

Thus, such analytical conclusions are, at best, partial and hence misleading. The indicators measure initial conditions and the ostensible effects of governance reforms, rather than the direct consequences of governance reforms on growth and poverty rates.

Additionally, methodological and measurement biases often over-estimate the impact of governance and institutions on growth. Methodologically, most cross-country econometric studies suffer from selection bias, as African countries – where institutions are generally weak and growth performance was poor, especially in the 1980s and 1990s – are typically over represented.

Secondly, most cross-country empirical studies use some measures of institutional or governance quality, together with other variables, such as investment, which are more likely to directly affect growth. Such empirical exercises can overestimate the impact of institutions on growth, if institutional or governance quality also affects the efficiency of investment. After all, it is difficult to disentangle the direct effects on growth of institutional quality variables from their indirect effects through their impacts on investment.

Fuzzy analysis

There is also a lack of consensus in the literature on definitions of institutions, how they change, and their likely influence on economic outcomes. Thus, a wide range of indicators – including institutional quality (e.g. enforcement of property rights), political instability (e.g. riots, coups, civil conflicts, wars), characteristics of political regimes (e.g. elections, constitutions, executive powers), ‘social capital’ (e.g. civic activity, organization) and social characteristics (e.g. income, ethnic, religious, cultural and historical differences) – are all used in empirical work, although each has a potentially different impact channel on growth.

Moreover, many institutional indices used in empirical work are ordinal indices, which rank countries and simply associate a number with a ranking without specifying the degree of difference among countries ranked. For example, a country ranked 2 does not necessarily mean that the quality of its institutions is twice as good as the country ranked 4.

To be used correctly, such an index needs to be transformed into a cardinal index, in which the degree of difference matters. There is also no reason to assume that such transformation from an ordinal to a cardinal index will be one-for-one or linear.

The empirical evidence conclusively indicates that countries only improve governance with development, while good governance is not a necessary precondition for development. All developing countries do poorly on good governance indicators compared to developed countries.

Yet, some developing countries perform much better than others in terms of economic development without any empirical impact on good governance indicators. This implies the need to identify the key governance capabilities that help developing countries accelerate economic development, and thus to work to improve governance on a sustainable basis.

In recent years, Bangladesh, China, Ethiopia and Viet Nam have all been growing rapidly despite their poor governance indicators. Such experiences suggest that good governance, as conventionally defined, is hardly ever a prerequisite for getting growth and development going.

Poor countries face a multitude of constraints, and effective growth acceleration interventions should address the most binding of them. Poor governance may well be the binding constraint in some situations, but certainly not in countries growing rapidly despite poor governance. Thus, as a rule, broad good governance reform is neither necessary nor sufficient for growth.

Poor policy guidance

Finally, the link between growth and poverty reduction may also be more complex than presumed, depending on the distributional consequences of the growth process. One foundation of the good governance agenda is “ norms of limited government that protect private property from predation by the state”.

In fact, strengthened property rights have often reduced tax revenues, impeded agrarian reforms and exacerbated inequality. Such good governance reforms may thus deepen poverty, increasing resentment and popular discontent — that may negatively impact on growth itself.

The good governance agenda is particularly demanding on poor countries. In some cases, it may not be possible to make much progress on one dimension without prior or simultaneous progress on others. And if certain institutional and policy reforms matter more for development, these should probably receive priority. Selectively concentrating resources would then be better than spreading limited resources thinly across a whole range of ostensible good governance reforms — as some international development agencies tended to do.

Poverty exists in a broad range of circumstances and has many causes. Poverty may be due to inclusion or exclusion. Attacking poverty’s systemic, structural or root causes requires political commitment and state capacity to accelerate equitable and sustainable economic development.

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