Governance and Growth

1. Governance and Growth Philip Keefer Development Research GroupThe World Bank Disclaimer: The views expressed here are those of the author and not those of the World Bank, its management or executive board.

2. My version of governance • Degree to which governments are responsive to citizen needs/demands. • Encompasses routinely measured governance outcomes: • Rule of law and the security of property rights • Bureaucratic quality • Corruption • But we could easily add • Regulation/Investment Climate • Education, health, infrastructure quality • Correlation btw. rule of law and Human Development Index=.72

3. Distractions in the governance debate • Are measured governance outcomes important for growth? Theory and evidence are at least as strong as the evidence for other growth determinants. • Are the measures of selected governance outcomes accurate? No alternative to current broad measures of corruption, bureaucratic quality and rule of law/security of property rights.

4. Two more pressing questions • What explains significant outliers with less-than-stellar measured governance (East Asia)? • When does good governance emerge? • Political calculations of leaders underlie answers to both questions. • In autocracies: does the regime stability gained by faster growth offset the lost rents from better governance? • In democracies: do broadly targeted policies (e.g., growth-promoting good governance) offer greater electoral advantage than narrowly targeted policies benefiting a few. . . at similar or higher cost?

5. What do successful autocracies do differently? • Autocrats can’t decree growth – decrees do not provide guarantees to investors. • Autocrats must either • promise investors they will not be expropriated and • promise regime supporters rewards tomorrow if they refrain from expropriation today (=good governance) • . . . and/or offer extraordinary rates of return. • E.g.: Even mSouth Korea/Taiwan/Singapore “state-led” growth required credible promises to investors. Syria/Algeria have trouble making these. Difference?

6. Credible commitment in autocracies • How do autocrats do this? • Personalized (family, etc.) – few benefit. • Third party (warships from investor home countries) • Intra-elite checks and balances (many armed but cooperating coalitions) • Institutionalized ruling parties – most benefit. • Only some benefit from good governance in autocracies (e.g., members of ruling party, foreign investors). • Arrangements can be sufficient for growth, but governance indicators mediocre b/c governance good for a minority only.

7. What to look for in instit’ized ruling parties. Intra-party checks and balances (China now). Sunk investments in intra-party evaluation and promotion (China, Indonesian military, Singapore civil service). Coordination privileges for party members – e.g., to replace non-performing leader (China – segmented info) (Gehlbach and Keefer). Evidence that institutionalized ruling parties expand investor pool: 60 million Communist Party members = 5 percent of Chinese population; 6,000 Saudi royals < 1/4000 of population. Measured governance higher in SA, though. What matters in party institutionalization?

8. Porfirio Díaz (19th-20th century): Mexico grew reasonably fast, but poor “measured” governance. Why? Haber et al: policies raised investor rates of return: monopoly rents (e.g., in banking); crony (personalized) relationships; armies of investor home countries; powerful (armed) governors could protect their own rights. No party institutions. Growth was not sustainable and end result was Mexican Revolution. Fast growth possible in non-institutionalized autocracies – but not sustainable

9. Slow growth, no institutionalization. No clear party structure (like China, Vietnam). No intra-party checks on government leaders. No decentralized military hierarchy (like Indonesia): US sergeant has as much discretion as Egyptian colonel No meritocratic bureaucracy (like Singapore) No militarily strong governors (like Mexico) Why not? Rents (foreign aid/oil)? Measurement problems: KK rule of law index, 1996 = .23. Index = -.47 in (much) faster growing China and Vietnam (3/4 std. deviation worse). Egypt more typical

10. Under Mao, ferocious intra-party conflict. Since Mao, and increasingly: regularized cadre advancement, better information among cadres than before and more regularized succession and intra-party checks. Helps that revolutionary leaders dying off – charisma counts for less, provincial leaders more powerful. Leadership can credibly promise cadres that they will be rewarded for growth. These innovations occurred after top leadership (Deng Xiaoping) decided growth was key to longevity (Keefer). Chinese success and institutionalization

11. Property rights in non-democracies improve as age of political party increases relative to tenure of leader. Party institutionalization (age of parties, “rubber stamp” legislature) less likely when natural resource rents are lower.(Gehlbach and Keefer) Some systematic evidence

12. Governance hard to improve when: Rents too high, no incentive to pursue growth/share power (Middle East/North Africa). If leader is charismatic, risk of overthrow is low, don’t need growth (Mao, Kenyatta, Nyerere, Chávez ??). Generally difficult to create institutionalized ruling parties. Why don’t all autocracies grow fast?

13. Institut’nalized autocracies: rents to ruling party members and information controls essential to regime stability Incompatible with public sector reform, democracy promotion. These may undermine governance. NB: most autocracies don’t have such parties. Focus on rents essential in poor-performing autocracies. Rents discourage institutionalization (and democracy). Aid flows = rents? Monitoring and publicizing rent flows helpful (oil receipts) Lessons for governance reform in autocracies

14. Donors and crony arrangements Support for them possibly harmful in non-institutionalized autocracies (rents increase); Opposition possibly counter-productive in institutionalized autocracies (undermines regime). In any case, donor focus should be on spreading opportunities for cronyism as widely as possible (existing cronies have no problems). Lessons for governance reform in autocracies

15. What about democracies? • Democracy at the center of current debates on governance/security of property rights. • Many governance indicators focus on democracy/voice. • Much scholarly debate implies that democracies fail because they redistribute too much Przeworski, Limongi and Cheibub; Acemoglu and Robinson. • Focus incomplete.

16. Insufficiency of democracy is clear

17. Objective indicators send the same message

18. Not obvious that excessive redistribution associated with poor democratic performance

19. Citizens can’t hold government accountable when they are uninformed. Politicians can’t get credit for improving citizen welfare when citizens cannot distinguish effects of political decisions on their welfare from all other influences. Citizens can’t hold government accountable when promises of political competitors not credible. When challengers can’t credibly promise to pursue different policies than incumbent. Governance agenda in democracies should focus on these (Keefer and Khemani). Political market imperfections better explain why poor democracies struggle

20. Uganda Expenditure Tracking Survey Newspaper circulation reduces corruption (Adsera, Boix, Payne) increases government responsiveness to food shortages (Besley and Burgess on India). Radios increase access to welfare payments (Stromberg on US Great Depression). Current WB research: does info improve public good performance; what kind? Evidence that information makes a difference

21. Gov’ts discourage information in poor democracies

22. What do politicians do when they can’t make credible promises? Target resources to groups of voters who believe them; Seek out “patrons” who can make credible promises to “clients” Leads to moretargeted goods, fewer public goods, more rent-seeking (Keefer and Vlaicu). Explains clientelism. Low political credibility in poor democracies

23. Credibility evidence: Young democracies • Poor democracies disproportionately young 6 years vs. 26 years. • Politicians in young dems. less credible (on average) • In fact: young democracies exhibit “low credibility” policies: • low public good provision, • high targeted goods, • high rent-seeking/corruption. • Only credibility explains this constellation of policy outcomes

24. 2000 elections and public spending in Ghana

25. 2000 elections and governance in Ghana

26. No broadly credible (programmatic) parties NDC/NPP supporters have same market preferences (Afrobarometer). Political campaigns ignore policy differences. Party and party policy stances irrelevant to legislative campaigns. Personal handouts by candidates hugely important. Voters uninformed Afrobarometer 2005: 60% NEVER get news from newspaper vs. 14% in South Africa Afrobarometer 1999: Up to 10 years of education (vast majority), 36 percent could identify Economic Recovery Program (ERP); more than ten years: 66 percent. Political market imperfections explain modesty of Ghana electoral effects on policy

27. Lessons for governance reform in democracies • Traditional public sector reform agenda (e.g., meritocracy) unsustainable when political market imperfections severe (e.g., place a premium on patronage). • More effective donor policy focuses on political market imperfections directly • Information easiest to address, but credibility key. • Information – governance link is the focus of much ongoing Bank research.

28. Lessons for governance reform in democracies • Efforts to increase info directly: • support collection/dissemination of information on policy impacts to disaggregated groups of citizens. • include information components in projects. • monitor information environment (e.g., newspapers, radios, access to gov. information) • address policy barriers to gov’t information • Give priority to reforms that are easy for citizens to monitor – allow faster reputation-building. • Infrastructure before public sector financial mgt. • Link PSM reforms to visible, sectoral reforms.

29. Lessons for governance reform in democracies • Don’t let crises distract from long-run goal of alleviating political market imperfections. • E.g., despite woeful state of voter info, donor focus in Ghana is emphatically infrastr. crisis. • Problem: there are always crises. • Tailor “demand” side interventions to the specifics of political market imperfections. Not info for info’s sake; civil society for civil society’s sake.

30. Implications for quick wins and other strategies • Much discussion of “quick wins” as a way to improve governance. • In the context of growth, where political credibility towards investors is the key governance issue, what “quick wins” improve credibility? • Costly actions by politicians that have a payoff only if investors enter (infrastructure, subsidies for foreign investors = China, Singapore).

31. Donor growth-governance work still needs to be concerned with credibility issues. This is consistent with emphasis in widely-used governance indicators. But need sensitivity to political particulars. In non-democracies, growth can occur when a “large enough” minority enjoys good governance (East Asia). Donor objective: support conditions to achieve “large enough”. In democracies, growth fails when political market imperfections prevent too large a share of voters from holding politicians accountable. Donor objective: mitigate the imperfections. Conclusion

32. These arguments concur with others in pointing to the insufficiency of current governance prescriptions/ diagnostics. Reasoning is different, though. Political market imperfections, not capacity and fiscal restraint, drive outcomes. Both capacity and fiscal resources are policy choices, not constraints. Implies distinct reform strategies. Conclusion-2