HITHER THOU SHALT COME BUT NO FURTHER: An Update

In our previous post “Hither Thou Shalt Come But No Further: a reply to comments” we provided evidence that dismissed the deception that ‘good governance’ as envisioned by the Washington consensus is a prerequisite for growth and development. That analysis had utilized the IRIS property rights index for the periods 1980-1990 and 1990-2003, this data is available for most countries using the World Bank database.

This update utilizes a second data set that has become extremely popular for testing the importance of good governance for material advancement. Kaufmann’s team aggregates a large number of indices into six broad governance indicators:

  1. Voice and accountability: measuring political, civil and human rights
  2. Political instability and Violence: measuring the likelihood of violent threats to, or changes in, government, including terrorism
  3. Government Effectiveness: measuring the competence of the bureaucracy and the quality of public service delivery
  4. Rule of Law: measuring the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence
  5. Control of Corruption: measuring the exercise of public power for private gain, including both petty and grand corruption and state capture
  6. Regulatory Burden: measuring the incidence of market – unfriendly policies.

Similar to our earlier post, all countries listed on the World Bank database are divided into three categories. Advanced countries are rich states using the World Bank’s classification with the exception of Kuwait and the UAE which are considered developing countries. This is primarily because they have undergone little structural change in the direction of industrial development although they have high per capita incomes. The group of developing countries is further divided into converging and diverging states with per capita growth rates higher and lower than the median advanced country rates respectively.

Based on the standard good governance story, we expect that countries with high growth rates and levels of development to score high on these six indices of good governance. The six graphs below corresponds to each index and confirms the fact that advanced countries indeed have better governance indicators when compared to diverging and converging states. However, although converging and diverging states have different growth rates by definition, both groups of countries are plagued by poor governance indicators. This finding confirms our earlier claim using the Knack IRIS property rights index.

The important lesson to learn here is to distinguish between causality and correlation. We all agree that with material and non-material development societies manage to improve their governance structure and style to the betterment of all. But this does not mean that better governance caused material advancement, on the contrary, it is a correlate of development. Those that are hell bent on believing this mistruth must adequately explain the marked difference in economic performance between the converging and diverging states. The governance issues are essentially the same but yet converging countries experience on average, higher growth rates than advanced countries, a performance that is yet to be met by diverging countries. Certainly, this could simply be a coincidence, but the extraordinary similarity in economic agenda and pattern of strategic state intervention by the converging and now developed states offer a different opinion.

FIGURE 1

Voice and Accountability index 1990-2003

Voice and Accountability index 1990-2003

FIGURE 2

Political stability and violence index 1990-2003

Political stability and violence index 1990-2003

FIGURE 3

Government effectiveness index 1990-2003

Government effectiveness index 1990-2003

FIGURE 4

Regulatory quality index 1990-2003

Regulatory quality index 1990-2003

FIGURE 5

Rule of law index 1990-2003

Rule of law index 1990-2003

FIGURE 6

Control of corruption index 1990-2003 (All graphs were sourced from Khan 2009)

Control of corruption index 1990-2003 (All graphs were sourced from Khan 2009)

Why is it that the mainstream can claim that good governance is statistically significant for long run development? The six indices presented in this essay are all weakly positively sloped, but even if these established a strong positive relationship between governance and development, the truth lies in the details. This positive relationship is simply exaggerated within the mainstream view because they fail to differentiate between converging and diverging countries in the World Bank data base. This failure hides the empirical fact that both converging and diverging countries have similar governance characteristics but marked differences in economic performance. When diverging and converging countries are bundled into one group (developing countries) it’s difficult to see this undeniable truth.

Surely the claim that one index is not sufficient to debunk the good governance agenda losses weight since we employ here an alternate measure but yet our findings confirm the results of the IRIS property rights index. But we move beyond this and find support for our results in an analysis of African countries by Sachs et al (2004). This study explains that since we expect higher performing countries to have relatively better governance indicators, the latter should not be used to explain higher incomes. Instead they argue that deviations from the country’s governance indicator (using the Kaufmann-World Bank Index) from the predicted value of the indicator given a country’s per capita income at the beginning of the period is a better way to explain higher incomes. Thus, we would expect countries that had better governance indicators than expected for their per capita income to have superior economic performance than countries that had governance scores below the average for their per capita incomes. No surprise to Cariban’s Reason, the study concludes that good governance has no effect on the growth performance of African countries!

A COLONIAL TALE

Acemoglu et al (2001, 2002 and 2004) contend that strong institutions, which includes good governance and the strong protection of property rights are the fundamental cause of long run growth. They sought to prove their case by highlighting the colonial origins of comparative economic performance between the rich world today and the remaining poor. The argument goes like this: in colonies where mortality rates were low (primarily because white colonists were immune to the diseases) colonists settled and occupied these territories. Additionally, they erected stable property rights, rule of law and generally good governance institutions that significantly reduced the costs and obstacles of doing business. Conversely, in territories where mortality rates were high, the settlement of white colonists proved detrimental. Naturally, few settled in these high mortality territories and utilized them primarily for the extraction of natural resources with the aid of slaves and indentured labor. The absence of good governance in these high mortality colonies is the principal reason why strong and consistent economic growth eluded them as opposed to low mortality territories.

AN ALTERNATE TALE

The colonial tale is fascinating but misleading at best. Essentially it is premised on European settlement and the effective enforcement of inclusive institutions and rights. Two points are crucial to make here:

  1. The colonial tale completely ignores the fact that European settlement represents an influx of relatively advanced human capital. They already knew how to organize production, distribution and exchange, equally important is the fact that they came with technology that was new to the new world. The development literature minces no words about the importance of technology and human capital to the development process. Certainly skills, reverse engineering and technological adaptation played immeasurable roles in the rise of the South East Asians and the now developed western countries.
  2. How do the slave trade and the slaughter of the indigenous peoples fit into the effective enforcement of inclusive institutions and rights? The fact is that they do not! Moreover, political and economic institutions were hardly accommodating to women and labor generally. Welfare programs in all its variations were non-existent and ever present was violent labor struggles. The slaughter of the indigenous peoples is critical because it sought to destroy the pre-existing governance structures and rights that did not serve the interests of the new settlers. According to the colonial tale the white settlers had better governance than the indigenous peoples and all that is required for development is the eradication of these ‘poor governance structures and rights.’ It is clear that the colonial method of genocide to destroy these ‘poor rights’ cannot and should not be employed again. The state is the institution of all institutions as Ha Joon Chang puts it, yet the catalytic role of the state in the development process of these new territories seem to be absent within the analysis of the colonial tale.

It is developmental governance (more on this in future posts) which is strikingly different from good governance as understood within liberal terms that matters most for material advancement. The latter overtime births evolving forms of good governance. These various forms of good governance are ends in themselves and not means to development. This must be remembered and clearly understood when we make policies, otherwise, we miss the moving target of development and a chance to solve distributional conflicts, corruption and other sources of human injustices.

References

Acemoglu, Daron, Simon Johnson and James A. Robinson 2001. The Colonial Origins of Comparative Development: An Empirical Investigation, American Economic Review 91 (5): 1369-401.

Acemoglu, Daron, Simon Johnson and James A. Robinson 2002. Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution The Quarterly Journal of Economics 117 (4): 1231-94.

Acemoglu, Daron, Simon Johnson and James A. Robinson 2004. Institutions as the Fundamental Cause of Long Run Growth. Working Paper No. 10481. National Bureau of Economic Research: Cambridge Massachusetts.

Kauffman, Daniel, Aart Kraay and Pablo Zoido-Lobaton 1999. Governance Matters. World Bank Policy Working Paper No. 2196. World Bank: Washington.

Khan, Mushtaq 2009. Is ‘Good Governance’ an Appropriate Model for Governance Reforms? The Relevance of East Asia for Developing Countries. In: Springborg, Robert, (ed.), Development Models in Muslim Contexts: Chinese, ‘Islamic’ and Neo-Liberal Alternatives. Edinburgh University Press, pp. 195-230.

Sachs, J.D, McArthur, J.W, Schmidt-Traub, G, Kruk, M, Bahadur, C, Faye, M and McCord, G 2004. Ending Africa’s Poverty Trap. Brookings Papers on Economic Activity pp. 117-240.

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