Domestic Resource Mobilization and the Challenge of Governance

Domestic Resource Mobilization and the Challenge of Governance Prof. Mushtaq H. Khan Department of Economics SOAS, University of London

Resource Mobilization and Governance • Governance is rightly identified as an important constraint on resource mobilization in developing countries • Domestic resource mobilization is constrained by institutional weaknesses and political weaknesses and these are governance problems • However the response to these challenges is often posed as one of improving ‘good governance’ and fighting corruption • Problematic confusion between the broad good governance agenda and the specific governance, institutional and political tasks that developing countries have to address

Good governance as an end rather than as means • Good governance is a set of desirable institutional conditions that we do find in more advanced countries • Stable property rights • Relatively low corruption (but high legal rent seeking) • Governments accountable to voters • Strong rule of law • These are desirable goals in their own right, but in theory the achievement of these conditions would also help resource mobilization and market-driven growth • Good governance works by improving overall market and political ‘transaction efficiency’ • If good governance conditions can be achieved savers will feel confident to save, investors to invest, and both will be served by accountable governments providing public goods

But are these feasible reform objectives? • Good governance has strong abstract theoretical support and its propositions are theoretically plausible • The reform programme is politically attractive and its goals are supported by many constituencies in developing countries as ends in themselves • But just because something is desirable and in theory would improve performance does not mean that it is immediately achievable • The problem is that achieving good governance conditions is very expensive and advanced countries achieved these conditions slowly over a long period

The ‘cost’ of good governance • Stabilizing property rights requires not just a commitment from government but the expenditure of real money on enforcement, arbitration, protection and conflict resolution • Fighting corruption involves having • significant legal sources of finance for running politics, • a budget large enough that all or most of the redistributive demands in society can be met through the budget, and • regulatory and enforcement structures for converting illegal rent seeking into legal rent seeking • The political accountability of parties to a broad electorate and not just to powerful clients requires (amongst many other things) the feasibility of maintaining political stability through budgetary redistribution

Good governance is still desirable but….. • This does not mean that improvements in good governance are not achievable in most developing countries • Improvements are both possible and desirable • The question is whether the feasible improvement along this path can be significant enough to make a significant impact on transaction efficiency within a policy period • If the feasible improvement in ‘good governance’ is small, then we have to look for other governance reforms to achieve improvements in resource mobilization and the efficiency of investment allocation • The historical evidence from case studies shows that this is exactly what successful developers did

Governance and Growth

What are the critical governance goals? • Successful resource mobilization and sustained growth in developing countries depends on identifying specific market and government failures that are immediate constraints • A viable strategy should identify governance reforms that are targeted, narrowly defined, and plausibly achievable in a policy cycle • These will differ from country to country because their initial conditions and dominant market failures are different, as are their institutional and political capacities to address these • Narrowly defined governance goals that address specific market failures should be identified in national development strategies

Examples of market failures affecting resource mobilization • Absence of risk-sharing institutions prevents investment in many potentially profitable sectors in developing countries • In theory good governance would solve the problem by allowing efficient stock markets to mobilize resources from venture capitalists for investment in risky sectors • In reality if we rely on this route we will have to wait for a long time to see any significant effects • The alternative is to explore arrangements where government, banks and business associations work to set up a small number of financial instruments to address this problem, perhaps with joint monitoring and a commitment for enforcement that is credible because it is limited to specific instruments

Focus on specific constraints • General good governance reforms can dissipate effort and can amount to lost opportunities for effective reform • The historical experience of state-citizen relationships in advanced countries suggests that accountability is most likely to develop if governments pledge specific service delivery targets for key taxpaying constituencies • The Paris Declaration on ownership gives developing countries the space to define their own strategies to develop accountability through taxation and service delivery • Anti-corruption strategies should similarly focus on a few narrowly defined areas where corruption affects the implementation of critical national strategies

Pragmatic governance strategies • Success can be replicated and scaled up but a big failure can cause demoralization for years to come • Governance priorities should be narrowly defined and feasible • They should be linked to specific targets and priorities identified in national development strategies • It is better to be too conservative and start with very modest programmes • General lip service to good governance or even worse a prioritization of ambitious good governance programmes are unlikely to make an impact on resource mobilization

Domestic Resource Mobilization and the Challenge of Governance