Governance Panacea or Nostrum?

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

Sources of Data on Governance

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

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

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

Governance Does Not Seem to be Improving

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

Governance Panacea or Nostrum?