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Governance Panacea or Nostrum?. Session 2 National Graduate Institute For Policy Studies IDPTP Spring 2014 John Page. What is Governance?. No agreement on a common definition Researchers and policy makers tend to define it to support their priors
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GovernancePanacea or Nostrum? Session 2National Graduate Institute For Policy Studies IDPTP Spring 2014 John Page
What is Governance? • No agreement on a common definition • Researchers and policy makers tend to define it to support their priors • But there is an intuitive sense that it is important for economic activity and maybe growth (think Somalia vs. Switzerland) • So, is it a: • Panacea: a solution or remedy for all difficulties or diseases • Nostrum: a medicine of secret composition recommended by its preparer but usually without scientific proof of its effectiveness
What is Governance? • As defined by the World Bank (Kaufman) Governance is the exercise of authority through traditions and institutions for the common good • Three key elements : • the process of selecting, monitoring, and replacing governments • the capacity to formulate and implement sound policies and to deliver public services • the respect of citizens and the state for the institutions that govern economic and social interactions • Although there are crucial links between them corruption and governance are distinct • Corruption is the abuse of public office for private gain.
Measuring GovernanceSix Characteristics • How governments are selected, monitored and replaced: • “Voice and Accountability” – • the extent to which citizens of a country are able to participate in the selection of governments • independence of the media • “Political Stability” • the likelihood that the government in power will be destabilized or overthrown • the ability of all citizens to select and replace those in power
Measuring GovernanceSix Characteristics • The ability to formulate and implement sound policies: • “Government Effectiveness” • the quality of public service provision, the quality of the bureaucracy, the competence of civil servants, and the independence of the civil service from political pressures • the credibility of the government’s commitment to policies • “Regulatory Quality” • the incidence of market-unfriendly policies such as price controls or inadequate bank supervision • the burdens imposed by excessive regulation in areas such as foreign trade and business development
Measuring GovernanceSix Characteristics • Respect of citizens and the state for the institutions • “Rule of Law” • the extent to which agents have confidence in and abide by the rules of society • the incidence of both violent and non-violent crime, the effectiveness and predictability of the judiciary, and the enforceability of contracts • “Control of Corruption” • perceptions of corruption (defined as the exercise of public power for private gain) • the frequency of “additional payments to get things done” the extent of “grand corruption” in the political arena
Data on Governance • World Bank draws on 194 measures from 17 different sources of subjective governance data constructed by 15 different organizations • Sources include international organizations, political and business risk rating agencies, think tanks, and nongovernmental organizations • Dara reflect subjective perceptions regarding the quality of governance • For some issues (corruption) objective data is extremely difficult to obtain • Perceptions are often as important as objective differences in institutions: the confidence of residents of a country in institutions is required
Data on Governance • Three types of sources • polls of experts • surveys of business people • surveys citizens • Each group has plusses and minuses (what?) • The ratings are particularly prone to two types of bias: • countries with good economic outcomes may be more likely to receive favorable ratings • country rankings by other organizations are frequently an input into the rating process
Measuring GovernanceAggregate Indicators • Assume that within each cluster the indicators measure the same governance concept • For example the Economist Intelligence Unit and Freedom House indicators on “rule of law” measure the same thing • Combine the related indicators into an aggregate governance indicator for each cluster. • Some advantages • aggregate indicators span a much larger set of countries than any individual source • aggregate indicators can provide more precise measures of governance than individual indicators • it is possible to construct quantitative measures of the precision of both the aggregate governance estimates for each country and their components
Some Pitfalls • The six dimensions of governance are not very precisely measured • measured standard deviations are large relative to the units in which governance is measured • The size of confidence intervals varies across countries, as different countries appear in different numbers of sources with different variances. • Many of the small differences in estimates of governance across countries are not likely to be statistically significant • The same is true for changes over time
The dimensions of governance are not very precisely measured
Despite Noise Governance Measures Vary Dramatically Across Regions
Governance as a Panacea • Per capita incomes and the quality of governance are strongly positively correlated across countries • This correlation can in principle reflect some combination of : • (a) causal effects running from better governance to higher per capita incomes, • (b) reverse causation or feedback from higher per capita incomes to better governance, • (c) omitted variables which improve both governance and per capita incomes.
Per capita incomes and governance are positively correlated across countries
Per capita incomes and governance are positively correlated across countries
Per capita incomes and governance are positively correlated across countries
Governance as a Panacea • Some literature has identified large causal effects running from governance to per capita incomes, using “deep” historical determinants of institutional quality as instruments. (Acemoglu, Johnson and Robinson, 2001); Easterly and Levine, 2002) • Colonial origins • Settler mortality • Natural resources
Governance as a Panacea • Kauffman and Kraay (2002) find: • a strong positive causal effect running from better governance to higher per capita incomes • a weak and negative causal effect running in the opposite direction from per capita incomes to governance • They conclude: • improvements in institutional quality or governance are unlikely to occur merely as a consequence of economic development • we should not expect to see “virtuous circles” from higher incomes to better institutions which in turn support higher incomes in the very long run
Governance as a Nostrum • Jeff Sachs (for one) is not convinced (2004): • Many parts of Africa are well governed even though stuck in poverty • Governance is a problem, but Africa’s development challenges run much deeper • Nor is Steve Radelet (2004): • poorer countries have systematically poorer governance measures than richer countries • good governance itself requires resources. • Both try a different approach
Governance as a Nostrum • Regress the World Bank governance indicators on PC income • standardizing the measurement of governance by level of income • Rank countries according to the residuals from that regression • Good governance = 1 standard error above Poor governance = 1 standard error below
Governance as a Nostrum • Using this approach • Many African countries are well governed (for their level of income) • Africa’s governance, on average, is no worse than elsewhere • The “Africa dummy” is insignificant • Both conclude governance may be part of the Africa growth story, but it is not the whole story. • And Sachs, not surprisingly, wonders if the focus on poor governance is diverting attention from deeper causes of poverty.
Weighing the Arguments • Good governance is not a magic bullet • Some well governed countries by the above definitions have failed to grow and some poorly governed countries have prospered • And there is some evidence that governance improvements have failed to keep pace with rising incomes • But the variations across countries and regions are too large to ignore • Greater economic success is broadly associated with better governance indicators • Failed states are clearly associated with bad governance and poor economic performance • There is evidence that investors take governance (indicators) into account in making decisions about FDI • Governance in resource rich economies may be especially important
Improving Governance • The cross-country evidence is not very informative for policy-makers on how to formulate and implement specific strategies to improve governance • Governance does not seem to be improving over time • Policy actions are needed by • Developing country governments • Donors • Rich countries
Improving GovernancePolicy Actions at the Country Level • Transplants of OECD “templates” of internal accountability of government to emerging economies has not met with the best results • Inspectorates general, supreme audit authorities, etc. • Creating new public agencies to address governance challenges (such as new anti-corruption agencies or commissions) have often failed • The challenge is to encourage the focus to shift toward external accountability mechanisms
Improving GovernancePolicy Actions at the Country Level • Detailed country diagnostic surveys have begun to provide insights and help to identify specific priorities • “Unbundle” governance and corruption into more detailed and specific dimensions. • There can be wide variation in quality across institutions even within a particular country
Improving GovernancePolicy Actions at the Country Level • Accountability, and feedback mechanisms • feedback from public-service users (scorecards) • diagnostics based on survey reports from public officials • tools to track public expenditures (Uganda) • transparency mechanisms (including innovations related to e*governance) • Statistics collected on access and quality of public services and corruption can be used to prioritize reforms • Checks and balances on the public sector • strengthening the oversight role of parliaments • external standards and codes
Improving GovernanceDonor Governance Initiatives • Access to Information • improve access to government data on budgets, procurement, and contracts • promote better public financial management through open budgets • support disclosure of government contracts and the use of eProcurement • Citizen Participation • use mobile technology, such as m-participatory budgeting andm-scorecards • build coalitions of stakeholders to monitor government contracts, including those involving extractive industries • support the capacity of citizen groups involved in government oversight
Improving GovernancePolicy Actions at the Global Level • OECD anti-bribery convention • the only legally binding instrument to focus globally on the supply of bribes to foreign public officials • all Convention countries must make foreign bribery of public officials a criminal offence • they are also required to deny the tax deductibility for such bribes • Anti-bribery convention membership • In 2012 there were 40 Parties to the Convention the 34 OECD members, plus Argentina, Brazil, Bulgaria, Colombia Russia and South Africa • members account for nearly 80 percent of world exports • members account for nearly 90 percent of global outward flows of foreign direct investment • Anti-bribery convention results • 298 companies and individuals have faced criminal sanctions for the bribery of foreign public officials in international business deals • 66 individuals have gone to jail • 300 investigations are ongoing
Conclusions • Governance matters • But perhaps not as much as its advocates would claim • Country-level initiatives to improve governance appear to work better when they focus on incentives, scrutiny and accountability • Global initiatives, while still in their infancy hold some promise