HITHER THOU SHALT COME, BUT NO FURTHER: a reply to comments

All forms of corruption and distributional conflicts are morally objectionable. In fact, it is the role of the citizenry to fight these ugly faces of society as best as they can. Our disagreement emerges when strategies aimed at these ugly faces come with the steep price of a reduced state capacity – the one essential that addresses, in the long run, the sources of corruption and distributional conflicts particularly and development generally. It is within this ‘long run’ context that good governance is correlated with development. However, whether good governance as envisioned within the economic orthodoxy is a necessary condition for development is a different matter altogether.

Theoretically, the good governance agenda is consistent with a market led development paradigm – it advocates a minimal government as the ultimate solution to various forms of corruption and distributional conflicts. The question of growth and development is solved with market supremacy, where the most efficient contracts are awarded, competition is free and fair and the most qualified is rewarded with employment. This is the standard story of the neo-liberal good governance agenda. As desirable as this vision is, it is only likely in a developed capitalist society where income and employment are generated primarily in a dynamic private sector. The latter is hardly evident in poor states!

Empirically, the evidence is clear and contradicts the hypothesis that neo-liberal ‘good governance’ leads to, or is a necessary condition for, development. It is our view that the confusion emerges from a jejune interpretation of the historical development of capitalism and an overdose of Western ideology.

In our previous post, we explained how all forms of society, white or black, rich or poor are all beset with various and changing forms of corruption and distributional conflicts. We identified the state’s capacity as the fundamental difference between emerging states and stagnant ones. The neo-liberal good governance agenda seeks to ultimately strip the poor state of its ability to effectively transform its society and adequately address issues of corruption and distributional conflicts. This is one of our main contentions.

We need anti-corruption strategies that would not reduce the state’s capacity to structurally transform its society. Our most basic contention is that these strategies as envisioned by Western thinkers cannot simply be imposed here!  Otherwise, we shoot ourselves in the foot and superficially address corruption and distributional conflicts. We are not in conflict with Prof. Tarron Khemraj’s white paper. The vision of national unity and a private sector led development is the ultimate goal that we seek. Our proposition is that at a certain stage of development the role of the state is very crucial in creating the conditions for developmental takeoff. Therefore, building the state’s capacity rather than reducing it, is the only wise developmental option available to us. The testimony of history is on our side in this regard.

Simply proposing Western political and economic policies are not only ineffective in achieving this vision, but takes away the hammers and nails of nation building and puts us light years behind regional competitors, better yet global competitors. Trying to forge a developmental state while imposing the rich world’s governance structure is not only theoretically infeasible, but practically impossible and dismantles our tool box of development. This is mainly because keen attention is not being placed on stages of material growth and development. We are guilty of trying to transplant into countries such as Guyana, governance institutions, policies, and paradigms that were largely non-existent in the west when they were are our stage of development.

Rodrik (2005) presents a taxonomy of the differences in institutional structures between the Standard good governance ideal and the East Asian pattern. Note the marked differences between the two. East Asian countries, as is evident, developed materially without the standard ‘good governance’ institutions promoted by the West. We are by no means excusing government for mal practices when measured against the Western benchmarks, rather we’re merely explaining how and why even without achieving those benchmarks other countries have managed to develop materially. Of course, we all prefer a consensus-based and grass root supported development agenda, but whether the policies, being currently promoted, which aim at achieving these can be effectively implemented is highly doubtful. But this does not mean that calls for greater accountability and transparency are not necessary and worthwhile – governments always need to be reminded and, paradoxically, watched.

Institutional Domain Standard Ideal East Asian pattern
Property rights Private, enforced by the rule of law Private, but govt authority occasionallyOverrides the law (esp. in Korea).
Corporate governance Shareholder (outsider) control, protection of shareholder’s rights Insider control
Business-government relations Arms’ length, rule based Close interactions
Industrial organization Decentralization, competitive markets, with tough anti-trust enforcement Horizontal and vertical integration inproduction (chaebol); government mandated“cartels”
Financial system Deregulated, securities based, with free entry. Prudential supervision throughRegulatory oversight. Bank based, restricted entry, heavilycontrolled by government, directedLending, weak formal regulation.
Labor markets Decentralized, de-institutionalized,“flexible” labor markets Lifetime employment in core enterprises(Japan)
International capital flows “prudently” free Restricted (until the 1990s)
Public ownership None in productive sectors Plenty in upstream industries.

Source: Rodrik (2005)

Figures 1 and 2 below captures the correlation between good governance and growth rates for advanced, diverging and converging countries. The IRIS property rights index is a composite measure of five indices:

  1. Corruption in government
  2. Rule of Law
  3. Bureaucratic quality
  4. Repudiation of government contracts
  5. Expropriation risk

These indices are then aggregated into a single property rights index that ranges from 0 (the poorest conditions for market efficiency) to 50 (the best conditions). Annual data are available from 1984 for most countries. The data is gathered through country risks assessments based on the responses of relevant constituencies and expert opinion.

Note how both converging and diverging states have roughly the same governance characteristics that are well below those of advanced countries. Interestingly, countries within the green circle or the converging countries have better growth rates than the diverging states and in some cases even advanced countries. The clear positive relationship in figure 1 confirms that good governance is correlated with development. Interestingly, this positive relationship breaks down in figure two. What accounts for the differences in growth rates for converging and diverging countries, or countries within the green and red circles? Is it that diverging countries have more corruption, less enforcement of the rule of law and more expropriation risk? This couldn’t be, since similar issues plague converging states. And this is the fundamental thrust of our argument.

Khan (2008) argues that the fundamental difference between converging and diverging states is growth enhancing governance capabilities – we call it ‘state capacity’. By that we mean the state’s capacity to choose from among competing development policies and models and its ability to effectively implement those policies that are necessary and sufficient for structural transformation. This we argue lies at the core of whether or not a country develops or remains stagnated, even within the constraints of corruption, racism and other distributional problems. Issues of corruption that leads to sub-optimal public works and corruption in general will be discussed at length in future posts.

image1

Source: Khan (2008) Figure 1: Aggregate Property rights and growth 1980-90

image2

Source: Khan (2008) Figure 2: Aggregate Property rights and growth 1990-2003

REFERENCES

Khan, M. (2008). “Governance and Development: The Perspective of Growth-Enhancing Governance.” In:Diversity and Complementarity in Development Aid: East Asian Lessons for African Growth. Tokyo: GRIPS Development Forum/National Graduate Institute for Policy Studies, pp. 107-152

Rodrik, D.  (2005). “Growth Strategies,” in P. Aghion and S. Durlauf, eds., Handbook of Economic Growth, vol. 1 A, North-Holland,.

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2 Responses to HITHER THOU SHALT COME, BUT NO FURTHER: a reply to comments

  1. Pingback: CORRUPTION, INTERESTS AND THE LOGIC OF POLITICAL SURVIVAL |

  2. Pingback: Material Development is Possible Even with Corruption |

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