Is "good governance" an end or a means?

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.

Comments

[Per Kurowski]

On the issue of bilateral investments treaties and the use of arbitration under foreign jurisdictions Rodrik falls into much simplified criticism, sounding almost as your friendly neighborhood activist, advising us that this strategy is probably not good for governance-as-an-end. In his conclusion I feel that Rodrik is, using his terminology, is only considering second or third best realities.

Rodrik argues that the above would create “an unhealthy distinction between domestic and foreign investors”, as if those differences do not exist anyhow; and that “the outsourcing may even delay the establishment of a healthy judiciary”, when it could just as easily help it along.

Of course the existence of local justice is important, but so is the existence of strong international systems that can settle disputes, since no matter how you look at them in the long run it is always the weaker who will benefit the most from having access to well functioning international justice…since the strong is strong even without it.

Let us not confuse the tremendous, shocking and hurting disappointments that many development countries might have had with the international grievance mechanism with the fact that many or most of the contractual obligations brought up to arbitration were drawn up without properly considering the implications of it. Instead of throwing away the international grievance mechanism, help the countries instead to learn from their experiences and so they will consider the real implications of it the next time they sign up a contract with a foreign investor. Much the contrary from what Rodrik holds, if our governments learn that they won’t get away that easy, they will also learn little by little (that’s the rhythm of development) to negotiate better and more seriously… and from this it is very clear that the local investors are the one who stands most to benefit, long term.

[Per Kurowski]

We have of course in many ways gone overboard in our fixation on good government; and created a lot of confusion having, as Dani Rodrik so rightly says, so often confused governance-as-an-end with governance-as-a-means; and we have tried to impose many oversimplified good governance for dummies practices; and we have even created a niche in experts in anti-corruption, which to me has always sounded like a particularly refined version of corruption; and we all know that in good governance no one has really the right of throwing the first stone, but, no matter all our faults and mistakes, please let us not give to bad governance the benefit of the doubt… and which by the way I am sure that Dani Rodrik does not do.

[robertdfeinman]

An excellent step in the direction of getting economists out of the business of making social policy.

The issue of governance is actually quite simple. Good governance requires functioning democratic institutions. If these exist all the attributes mentioned (transparency, lack of corruption ,etc) follow automatically. Of course true democracy also implies strong limits on wealth inequality. If money rules instead votes then democracy can't function. However the wealthy are not about to give up their privilege without a fight. This is the implementation issue where reforms always stumble.

Right now we have highly imperfect political democracies in a number of advanced societies. These range from totally fake ones like in Zimbabwe to broken ones like the US.

But, even if the political system was made more democratic we have no indications that democratic governance would apply elsewhere. Corporations are autocracies as are most religious and educational institutions. Non-profits are not subject to even nominal control as most have self perpetuating boards.

Even if more institutions were to become more democratic the inter-generational problem would still exist. There is no motivation (aside from some vague feelings of altruism) for people to take actions which cost them now in favor of future generations. Arguments about sustainability thus have little effect on current policies or attitudes.

The next step in the humbling of economists is for them to realize that who owns the means of production is of no real importance. A well governed state-owned asset can outperform a poorly governed private one and vice versa. One only needs to see the current demands that the Fed bail out the private financial firms to see how fast ideology gets tossed aside when money is at stake.

If the Fed (SEC, etc) couldn't be trusted to regulate markets why is OK for them to fix things?

The real issues remains (as always) too many people chasing too few resources and "growth" being promoted as the way to solve these problems.

When standing in a pit the first rule to getting out is to stop digging. In this case this means finding a replacement for the consumerist/capitalist model while simultaneously improving the lot of those most in need. I see no solutions being proposed by economists inside or outside the Washington Consensus.

[jose carlos]

yes, institutions matter; but no, KK-World Bank perception-based indicators data does not help as much as claimed. a good critique: The Journal of Politics, Vol. 69, No. 2, May 2007, pp. 563–569.

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Very good piece on governance, I see strands of Amartya Sen in your analysis.

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