And does it matter? Here are the opening paragraphs of my contribution to a panel discussion on governance tomorrow at the World Bank:
A deep insight that has emerged out of the disappointments of the Washington Consensus is that successful policy reform is at its core governance reform. Reforms in the areas of, say, trade or fiscal policy require much more than just cuts in tariffs and a balancing of the budget. If you want to achieve lasting change and have a real impact on the behavior of those agents that determine the success of reform, you must change the “rules of the game”—the manner in which trade policy is made or fiscal policy is conducted. This insight, assisted and reinforced by the academic literature on institutions and growth, has in turn produced a new development agenda focusing on a broad list of governance reforms. These reforms target a lengthy list of objectives, including reducing corruption, improving the rule of law, increasing the accountability and effectiveness of public institutions, and enhancing access and voice of the citizenry. The agenda is neatly captured and quantified by the Kaufmann-Kraay Governance Indicators data set.
Much of this is for the good. In particular, the tilt towards governance has the virtue that it helps shift the focus of reforms towards objectives that are desirable end-goals in and of themselves. The items on the original Washington Consensus agenda were all of instrumental value at best. Playing around with tariff and tax schedules and with the composition of public expenditure is worthwhile only to the extent that it achieves other objectives we really care about: increased growth, reduced poverty, improved equity. By contrast, it would be hard to take issue with the intrinsic importance of improved governance along its various dimensions: rule of law, transparency, voice, accountability, effective government. We might even say good governance is development itself. Combine it with material well-being, and we attain the Nirvana of advanced societies.
So good governance is both an end and a means. It is a key goal of development, broadly construed, and it is also an instrument for achieving better policymaking and improved economic outcomes. Any sensible discussion of governance must be clear about the distinction. And it must clarify in which of these two senses governance is “the problem” we are trying to fix.
I make the following points below. First, economists have very little useful to contribute to governance-as-an-end. Second, while they have more to say about governance-as-a-means, what they do say is often not what they should say. Where economists can be useful is in designing institutional arrangements for specific policy reforms targeted at relaxing binding growth constraints--what one might call “governance in the small.” This agenda differs quite a bit from the broad governance agenda on which much ink is being spilt. And third, there are sometimes tradeoffs between governance-as-an-end and governance-as-a-means which policymakers and advisors need to be conscious of.
You can read the piece in its entirety here.