What should a World Bank economist know about governance and growth? That was the intriguing question with which Brian Levy entrapped me into writing a short note on governance. (To my credit, I was not the only one so gullible: he managed to rope in Daron Acemoglu, Francis Fukuyama, Doug North as well.) These notes will be put together and presented at the World Bank's "PREM week" in the middle of April--a gathering of the Bank's staff in the Poverty Reduction and Economic Management grouping.
Well, boiling my views on this down to a short note has proved a lot harder than I had anticipated. I will eventually post the result online, but for now let me just mention a key point. I think a lot of the confusion that surrounds discussion on governance issues stems from an insufficient distinction between governance-as-an-end and governance-as-a-means.
Good governance, by which I mean transparency, accountability, rule of law, and bureaucratic competence and effectiveness, is clearly desirable as an objective in itself. We might even say that good governance is what development is all about. Add in economic growth and material prosperity, and we have all that we could possibly want out of development. Fine and good. The problem here is that I doubt economists--whether in or outside the World Bank--have much to say on how to achieve governance-as-an-end. (Whether legal scholars or political scientists have a better handle on this is another question.)
On the other hand, we often also refer to governance in an instrumental sense: better governance, we say, should enhance investment and entrepreneurship--and through these, stimulate economic growth.
Except that we actually do not know that it does. All the evidence we have on the relationship between good governance and growth is about the long-term: there is virtually no evidence that improved governance stimulates growth over the time horizons that policy makers care about. And the experience of countries such as China, Vietnam, and Cambodia--all cases of high growth with very poor governance according to standard criteria--should make us skeptical that there is such a relationship.
So how can economists contribute? I suggest that they can be useful if they focus on what I call “governance in the small.” Where economists have comparative advantage is in designing institutional arrangements for specific policy reforms targeted at binding growth constraints--whether in trade, monetary policy, or education. This agenda differs quite a bit from the broad-brush governance agenda on which discussion tends to focus.
From a growth standpoint, the risk is that the governance agenda takes an independent life of its own, and that it becomes divorced from the particular governance challenges that are most closely linked to stimulating and sustaining economic growth.