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Friday, May 16, 2008

''Governance Writ Small''

Dani Rodrik argues that development strategies emphasizing good governance instead of specifically targeting binding constraints on growth are unlikely to be effective:

Getting Governance Right Is Good for Economic Growth, by Dani Rodrik, Project Syndicate: Economists used to tell governments to fix their policies. Now they tell them to fix their institutions. Their new reform agenda covers a long list of objectives, including reducing corruption, improving the rule of law, increasing the accountability and effectiveness of public institutions, and enhancing the access and voice of citizens.

Real and sustainable change is supposedly possible only by transforming the ''rules of the game'' - the manner in which governments operate and relate to the private sector.

Good governance is, of course, essential..., the intrinsic importance of the rule of law, transparency, voice, accountability, or effective government is obvious. We might even say that good governance is development itself.

Unfortunately, much of the discussion surrounding governance reforms fails to make a distinction between governance-as-an-end and governance-as-a means. The result is muddled thinking and inappropriate strategies for reform.

Economists and aid agencies would be more useful if they turned their attention to what one might call ''governance writ small.''

This requires moving away from the broad governance agenda and focusing on reforms of specific institutions in order to target binding constraints on growth.

Poor countries suffer from a multitude of growth constraints, and effective reforms address the most binding among them.

Poor governance may, in general, be the binding constraint in Zimbabwe and a few other countries, but it was not in China, Vietnam, or Cambodia - countries that are growing rapidly despite poor governance - and it most surely is not in Ethiopia, South Africa, El Salvador, Mexico, or Brazil.

As a rule, broad governance reform is neither necessary nor sufficient for growth. ... As desirable as the rule of law and similar reforms may be in the long run and for development in general, they rarely deserve priority as part of a growth strategy.

Governance writ small focuses instead on those institutional arrangements that can best relax the constraints on growth.

Suppose, for example, that we identify macroeconomic instability as the binding constraint in a particular economy.

In a previous era, an economic adviser might have recommended specific fiscal and monetary policies - a reduction in fiscal expenditures or a ceiling on credit - geared at restoring macroeconomic balances.

Today, that adviser would supplement these recommendations with others that are much more institutional in nature and fundamentally about governance.

So he or she might advocate making the central bank independent in order to reduce political meddling, and changing the framework for managing fiscal policy - setting up fiscal rules, for example, or allowing only an up-or-down legislative vote on budget proposals.

Macroeconomic policy is an area in which economists have done a lot of thinking about institutional prerequisites. The same is true in a few other areas, such as education policy and telecom regulation.

But in other areas, such as trade, employment, or industrial policies, prevailing thinking is either naive or non-existent.

That is a pity, because economists' understanding of the substantive issues, professional obsession with incentives, and attention to unanticipated consequences give them a natural advantage in designing institutional arrangements to further the objectives in question while minimizing behavioral distortions. ...

What works in one setting is unlikely to work in another. While import liberalization works fine for integrating with the world economy when import-competing interests are not powerful and the currency is unlikely to become overvalued, export subsidies or special economic zones will work far better in other circumstances. Similarly, central bank independence may be a great idea when monetary instability is the binding constraint, but it will backfire where the real challenge is poor competitiveness.

Unfortunately, the type of institutional reform promoted by, among others, the World Bank, IMF, and the World Trade Organization is biased toward a best-practice model, which presumes that a set of universally appropriate institutional arrangements can be determined...

But best-practice institutions are, by definition, non-contextual and cannot take local complications into account. ...

Good governance is good in and of itself. It can also be good for growth when it is targeted at binding constraints.

Too much focus on broad issues, such as rule of law and accountability, runs the risk that policymakers will end up tilting at windmills while overlooking the particular governance challenges most closely linked to economic growth.

    Posted by on Friday, May 16, 2008 at 01:17 AM in Development, Economics | Permalink  TrackBack (0)  Comments (5)

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