Governance for Economic Growth

King Solomon -the wise and rich by Giovanni Demin (1789-1859)

For the past 8 years Dani Kaufman has been publishing his Governance Matters papers in which  assessment of the level of governance in countries across the world is performed. Last year he followed up with pointing out a group of 8 (ggg-8) which apparently could teach other countries around the world how governance should be done. When the financial crisis struck Dani Rodrik used the opportunity to attack Kaufmann, who he finds, puts too much weight on governance when it comes to economic growth:

“After all, no-one can deny that the United States, for all its financial follies, is a rich country.  It turns out that it is possible to be corrupt in a fundamental way and still be rich. My own view is that there was never a strong theoretical or empirical argument for relying on governance reform, as conventionally understood, as an engine of higher growth.  The case for governance reform is that it is a good thing to do in and of itself.  But don’t confuse it for a growth strategy.”

For Rodrik, who has also recently come out as a skeptic to democracy’s effectiveness in promoting growth, the active measures and policies a government implements is more important, more resembling industrial policy. In response to Rodrik the Governance Matters blog of the World Bank say that

“It is true though that the debate about the causal relation between governance and growth is open and far from reaching final conclusions -and even when evidence suggests its existence, the transmission mechanisms from good governance to growth remain unclear. This makes more relevant the analysis and diagnosis of what aspects of governance matter the most for growth -under local and more specific circumstances.   There is an agreement that the times of cookie-cutter approaches for the governance reform agenda are over.  Instead, a country-oriented approach provides the best chances to effectively link the governance reform agenda to a country’s growth strategy.”

At least one agrees that governance must be looked and evaluated at at an aggregate, national level, but there are major flaws with the way Kaufmann tries to measure governance and its effects. By subjectively setting a standard for what ‘good governance’ encompasses, one assumes that what is good governance for one country would also constitute good governance for another. This is clearly wrong. Even though Norway scores close to top on the list on most measures, adopting Norwegian style institutions would not necessarily work very well in most other countries.

For good governance, I would argue, there is no gold standard, every country has to design its system to fit its context. Moreover, one needs to take history into account and basing a governance system on what is already there. Rather than searching for Platonic ideals we should seek effective governance systems that work – very much in line with the Neo-Schumpeterian or Evolutionary approach.

Lastly, governance should be evaluated in terms of effect or result and not process. I would say China constitutes excellent governance, how would it be possible to achieve above 10 percent growth almost  every year for the last 30 years if not? This is not to argue China is an ideal democracy or that it is treating all of it citizens very fairly, but in terms of improving the life’s of its citizens it has been truly successful. By evaluating policies on the basis on results we also ensure that the debate becomes a lot less biased and ideological.