What should the World Bank know and think about governance?

You can read the four short essays on this question produced by Daron Acemoglu, Frank Fukuyama, Doug North, and myself here.  There is much convergence of views in these essays, but also some disagreements. Daron and I disagree in particular on two issues: whether industrial policy makes sense or not (me: yes, Daron: no) and whether institutional reform should adopt a best-practice approach or not (me: no, Daron: yes).  I take Doug North's views on the latter question to be much closer to mine than to Daron's--or at least they appeared to be so in the discussion following the presentations. 

Comments

[wjd123]

"The hallmark of an “advanced” developed society is a government
that exhibits the attributes of good governance—transparency,
effectiveness, rule of law, lack of corruption, voice and participation.
From Adam Smith on down, economists have recognized the importance of these attributes. But they have had much less to say about how to achieve them—and for good reason. These are at their core social, political, and legal arrangements which markets—and economic analysis—typically presuppose. They are deeply embedded in the history,traditions, and politics of a society...."--Dani Rodrik

Are economist being too presumptuous, since changes in economic policy can lead to changes in the political policy? Political policy when faced with economic change isn't just about the creation of institutions but the preservation of institutions.

If free trade with country B ends up weakening the power of unions and strengthening the power of corporations in country A, this can lead to changes in country A's political institutions for the better or worse. So how can the economics of free trade--the permanent removal of tariffs--be separated from the politics of institutions? And if it can't, wouldn't the best way of seeing that a economic gain doesn't end up a political loss be the establishment of international governments like the EU rather than economic organizations like the World Bank?

Harmonizing political rights--the right to vote, the right of labor to associate--before free trade is extended to another country, and seeing that the countries that you do extend free trade to are able to enforce the rules and regulations of the international government they are subject to, helps to insure that progress in the economic sphere isn't made at the expense of progress in the political sphere. It's not just a matter of finding what economic practices work best for country B but seeing that those practices don't end up undermining the political practices of country A.

When it comes to free trade, without international government the means and ends toward economic and political goals become unduly tangled.

[Nicholas Shaxson]

You say: "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." The problem here is illustrated by your use of the words "by contrast." Remember the old arguments about "no taxation without representation." As a fairly recent book (http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=9780521888158) puts it: "Taxation is the new frontier for those concerned with state-building in developing countries. The political importance of taxation extends beyond the raising of revenue. We argue in this book that taxation may play the central role in building and sustaining the power of states, and shaping their ties to society. The state-building role of taxation can be seen in two principal areas: the rise of a social contract based on bargaining around tax, and the institution-building stimulus provided by the revenue imperative. Progress in the first area may foster representative democracy. Progress in the second area strengthens state capacity. Both have the potential to bolster the legitimacy of the state and enhance accountability between the state and its citizens." It's just that policy-makers, particularly those favourable to "Washington Consensus" arguments, tend to focus on the revenue (and "efficiency" sides as being the only aspects of tax worth discussing. You seem to be following their lead.

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