World Bank – 17 June 2008 « Governance and Growth: Shifting paradigms »

1. World Bank – 17 June 2008« Governance and Growth: Shifting paradigms » Institutions and Development New Data, New Results Nicolas Meisel (meiseln@afd.fr) Research Department - French Development Agency (AFD) Jacques Ould Aoudia (Jacques.ould-aoudia@dgtpe.fr) Treasury Directorate - Ministry of the Economy

2. REFERENCESN. Meisel and J. Ould Aoudia (2008), ‘‘Is ‘Good Governance’ a Good Development Strategy?’’, AFD Working Paper No. 58.http://www.afd.fr/jahia/Jahia/home/publications/documentsdetravail/pid/4434N. Meisel and J. Ould Aoudia (2007), ‘‘A New Institutional Database: ‘Institutional Profiles 2006’ ’’, AFD Working Paper No. 46. http://www.afd.fr/jahia/Jahia/lang/en/home/documentsdetravail/pid/3430N. Meisel (2004), Governance Culture and Development: A different Perspective on Corporate Governance, OECD Development Centre Study, Paris. http://www.oecdbookshop.org/oecd/display.asp?CID=&LANG=EN&SF1=DI&ST1=5LMQCR2JCWKG« INSTITUTIONAL PROFILES 2006 » DATABASEhttp://www.cepii.fr/anglaisgraph/bdd/institutions.htmCONTACTSNicolas Meisel : meiseln@afd.frJacques Ould Aoudia : jacques.ould-aoudia@dgtpe.fr

3. An Intense International Debate • What is the relationship between Governance and Growth? • What institutions matter to trigger and sustain growth? • How to measure institutions and governance? No common conceptual framework; many disciplines; measurement difficulties; normative assumptions. • How to use Governance Assessments? What legitimate operational and political uses?

4. Our Approach • What institutional factors do support growth? • Context: « Good Governance » has been given a prominent place in the development agenda. • Empirical investigation: What are the institutional features characterising high-growth experiences? Case studies + Cross Country analysis • Results: • Different governance capacities required depending on the needs of the economy • Interdependence between economics and politics ill-understood • Need for new concepts and further empirical testing

5. Presentation Outline 1. A New Database: Institutional Profiles 2006 2. Empirical Investigation: What Institutions for Growth? 3. Interpreting results: Working Hypotheses

6. A new Database: “Institutional Profiles” • Research departments of French MINEFE & AFD • Surveys: 2001, 2006 (85 countries, 90% of World’s GDP and Population), 2009 (120 countries) • Broad definition of Institutions (polity, administration, regulations, transaction security, social cohesion, public order, coordination and anticipation, openness) • ‘De facto’ rather than ‘de jure’ approach (Doing Business) and Growth oriented • Aggregation of 356 institutional variables into 71 indicators (possibility to build many other indicators)

7. “Institutional Profiles” covers a much wider spectrum of institutions than WBI’s Indicators Projection of the IP and WBI datasets onto the circle of correlation (PCA)

8. Presentation Outline 1. A New Database: Institutional Profiles 2006 2. Empirical Investigation: What Institutions for Growth? 3. Interpreting results: Working Hypotheses

9. Statistical Tools Used • A family of powerful statistical tools: Exploratory Data Analysis (EDA) = refined descriptive statistics (principal component analysis, canonical variate analysis, …) • Why? • multi-criteria analysis • no model linking Institutions to Development  “let the data speak for themselves”

10. Empirical Investigation: Two Steps STEP 1: What is the relationship between growth and governance? STEP 2: Uncovering probable « missing factors » = Governance capacities left aside by the « good governance » agenda but that might still be important for growth.

11. If ‘Good Governance’ is linked to the LEVEL of income… It is NOT linked to income GROWTH (policy-makers’ concern)

12. Governance and Income Growth How to explain that countries with similar levels of « bad governance » exhibit such different growth records? (Khan, Rodrik)

13. 2 3 What are the explaining factors? 1 3 Groups built according to their level of income growth (Khan) Statistical Tool = Canonical Variate Analysis  Which institutional characteristics differentiate the 3 groups?

14. Discovering the Growth-enabling “Governance Capacities” Method: Capturing the most discriminating variables between groups • Group 1 (diverging) vs Group 2 (converging) • Coordination and strategic vision • Quality of basic public goods • Security of agricultural property rights • Group 2 (converging) vs Group 3 (developed) • “Good governance” = Security of transactions & PR + control of corruption + Administration efficiency + transparency • Opennessof social orders (economic, social and political) • Group 1 (diverging) vs Group 3 (developed) • In fact, almost everything opposes the two groups

15. Institutional Change: A more Realistic Path? A more realistic path? A more realistic path? Standard prescription

16. Conclusion: « Good Institutions » depend on the developmental needs of the country

17. Presentation Outline 1. A New Database: Institutional Profiles 2006 2. Empirical Investigation: What Institutions for Growth? 3. Interpreting results: Working Hypotheses

18. What is Institutional Change? • A great transformation from predominantly relationship-based 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)

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

20. Insider Networks • Insiders: people controlling access to power, information and wealth (Bayart, Haber, Khan, North, Olson...) • Insider networks: • 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 (Limited access order, North et alii) • Pervasive throughout societies (at all levels) • Both rigid and fragile, thus creating instability • Risk of countries being caught in a political economy trap: Entrenchment and mutual capture of corporate and public sector elites

21. Implications of insider networks • Resistance of insiders is rational in order to preserve their privileged access to resources • Good Governance reforms (i.e. rules guaranteeing universal rights) represent a threat to their rents, and therefore tend to be adopted only ‘on paper’ • Governance is a political issue, not a technical one • Political economy analysesneeded to understand these key obstacles to development

22. How to escape this political economy trap? • LESSON LEARNT FROM • Country case studies (Amsden, Evans, Haber, Khan, Meisel, Rodrik, Wade…) • Cross country analyses (Institutional Profiles…) = Governance Capacities for Economic Take-Off are Endogenous : • STRATEGIC VISION: mobilise society and curb uncertainty during transition (stabilize expectations; lengthen horizons) • COORDINATION ORGANISATIONS: Make convergence of interests between insiders predominate over conflicts of interestsin orderto implement the vision • PUBLIC INCENTIVES AND DISCIPLINE (carrot & stick): • rents targeted on priority activities & technology absorption • temporary and conditional to achievement of performance objectives (productivity, international competition…) = GOVERNANCE FOCAL POINT

23. How to escape this political economy trap: Strong governance focal points may overcome resistance for a low cost • Make up for the destabilisation of the social order in the institutional transition towards impersonal universal rules systems • A power structure that allows state to grant AND withdraw support • Align individuals’ private returns on social returns

24. Conclusion ‘Good Governance’ cannot be transplanted in developing countries: high costs + elites and societies’ resistance (risks of destabilisation of social orders) Countries that succeeded in their economic take-off used specific governance capacities (governance focal point) Catching-up countries need to go forward with formalisation of rules and opening of their social orders Going ahead: • Country case studies (growth diagnostics); • Modelling the relationship btw institutions and development; • Ideas for Institutional Profiles 2009 survey; • Open to collaboration

25. REFERENCESN. Meisel and J. Ould Aoudia (2008), ‘‘Is ‘Good Governance’ a Good Development Strategy?’’, AFD Working Paper No. 58.http://www.afd.fr/jahia/Jahia/home/publications/documentsdetravail/pid/4434N. Meisel and J. Ould Aoudia (2007), ‘‘A New Institutional Database: ‘Institutional Profiles 2006’ ’’, AFD Working Paper No. 46. http://www.afd.fr/jahia/Jahia/lang/en/home/documentsdetravail/pid/3430N. Meisel (2004), Governance Culture and Development: A different Perspective on Corporate Governance, OECD Development Centre Study, Paris. http://www.oecdbookshop.org/oecd/display.asp?CID=&LANG=EN&SF1=DI&ST1=5LMQCR2JCWKG« INSTITUTIONAL PROFILES 2006 » DATABASEhttp://www.cepii.fr/anglaisgraph/bdd/institutions.htmCONTACTSNicolas Meisel : meiseln@afd.frJacques Ould Aoudia : jacques.ould-aoudia@dgtpe.fr