THE QUALITY OF GOVERNANCE AND ECONOMIC DEVELOPMENT: CONCEPTUAL AND THEORETICAL ISSUES.
INTRODUCTION
Following the failure of the World Bank and IMF-initiated
stabilization and Structural Adjustment Programmes to restore the
market-friendly nature of those developing and transitional economies and
foster sustained economic growth and development in such countries, there has been
a renewed agitation since the early 1990s for better and efficient government participation
in order to support and supplement market efficiency. In fact, nowadays,
institutional organizations and the academic community are advocating for
better institutional arrangements, including both markets and the government,
as a key to sustained growth and development. ( Basu, 2005).
2.0 CONCEPTUAL AND THEORETICAL ISSUES
2.1 Good
Governance
The term governance embraces the way and manner a nation is
being governed. In other words, governance describes the way a nation employs
its power in handling the institutional environment, thus affecting the
accumulation of economic growth factors
Good governance is made up of several features. It is
participatory, consensus-oriented, accountable, transparent, responsive,
effective, efficient, equitable, and inclusive and follows the rule of law.
Also, good governance demands fair legal frameworks that are enforced impartially
by an independent judiciary and its decisions and enforcement are transparent
or carried out in a manner that follows established rules and regulation. Since
accountability cannot be enforced without transparency and the rule of law,
accountability is equally a basic ingredient of good governance. Not only
governmental institutions, but also private sector and civil society
organizations must be to the public and to their institutional stakeholders
(Putnam 1993)
2.2 Institutions
and Good Governance
The nexus between good institutions and governance has long
been argued in economic literature. According to North (2005), good
institutions beget good governance according to North (2005), good institutions
beget good governance. He argued that institutions matter for both the long and
short term because they constitute the incentive structure of a society and
helps provide the underlying determinants of economic performance. Many recent
cross-country studies have corroborated this assertion with arguable evidence
that economic growth is positively related to the institutional quality in a
given country. By better institutional quality, they mean effective judiciary
or legislative mechanisms, rule of law political transparency/stability, civil
liberties and right freedom of media, etc. (See Kaufmann, et al, 2002; Knack
1997).
Thus, quality institutions set the framework of rules and
incentive that affect how people, organisations, and firms utilise resources in
political and economic decision-making, or how they play the game (Sharma,
2007).
North further argued that when incentives encourage
individuals to be productive, economic activity and growth takes place. But
when they encourage unproductive or predatory behaviour economies stagnate.
2.3. Governance and Theoretical Growth
Models
Until lately, the issue of
governance as a critical factor in economic growth was neglected in standard
growth models, even though it merely existed in descriptive studies of economic
growth, particularly in the domain of economic history.
For instance, although the Solow model of growth assumes the
existence of security of property right/s, it is however deficient from the
stand point of governance in that it does not take into account any short
comings in the quality of governance, assuming that they do not exist. In a
similar vein, although the so-called neoclassical models of growth are still
current in economies and although they have explained a great deal in the
mechanism of growth, they still do not give a functional explanation of the
quality of governance. (Acemoglu .et al; 2004).
2.4 Growth-Enhancing Versus
Market-Enhancing Governance.
Essentially, Economists agree that
governance is one of the critical factors explaining the divergence in
performance across developing nations. However, differences abound between them
owing to the different economic approaches to governance.
Starting from the 1950s to 1980,
the dominant view within development institutions was broadly sympathetic to
growth enhancing approach to development. The consensus was that market
failures were serious and state intervention was urgently required to
accelerate technology acquisition. This led to a broad degree of support for
strategies of import-substituting industrialization, indicative planning and
licensing the use and allocation of scarce resources like land and foreign
exchange.
However, little attention was
given to the governance capabilities that states needed to have to implement
these strategies and implement these strategies and overcome the moral hazard
problems of assisting some sector and firms. Because of this, in most
developing countries, the results, while the majority of them were enmeshed in
unsustainable fiscal deficits and debt, accompanied by abysmal low growth rate.
This development led many to moot for reform of these strategies.
At this same time, growing support
for market enhancing policies and the market enhancing approach to governance
emerged. The emerging consensus explained the poor performance of these
countries in terms of their state trying to do what was unachievable and
ignoring what was essential.
In all, the diversity of
experience across countries tends to reinforce the fact that the strategy that
is most likely to be effectively implemented in a country depends partly on the
internal power structure that can determine if a particular strategy is likely
to be effectively enforced
2.5 GOVERNANCE AND ECONOMIC DEVELOPMENT: A REVIEW OF SOME EMPERICAL
EVIDENCE
Until very lately, it was conceived as practically impossible it
econometrically conform the hypothesis that quality of governance affects
economic growth because institutions were unquantifiable. However, since the
quality of governance has at the theoretical and political levels become an
increasingly acknowledged determinant of the magnitude and rate of growth of
GDP, empirical researches have focused on the various dimensions of governance.
In a study, Kaufmann et al (2002) aggregated different dimensions of
government on the basis of six aggregate indicators corresponding to six basic
governance concept, and then examined the association between each of the six
aggregate governance indicators and 3 development outcomes. Their findings
showed that improvements in governance have very large pay off in terms of
development outcome.
Chong and Caldron (2000) showed that improving institutional quality
positively affects the economic growth, reduce incidence of poverty, and income
inequality. In other studies, knack and Keefer (1997) showed that countries,
in which institutions protect property rights, ensure trust and civic
co-operation, have grown faster and achieved high rates of investment-GDP
ratio. Ross (1997) showed that countries, which have more development
institutions, in terms of legal and regulatory framework, are also endowed with
better-development, financial intermediaries, and hence grow faster.
The above studies point out that with cross-country analysis, the quality of
governance matters for effectively prompting economic growth and development.
Alongside, a handful of objections to econometric research into the quality of
governance and economic growth has emerged, though many of such objects relate
to the data utilized, while many others stress on the following drawbacks.
·
The problem of multicollinearity
·
The connection between governance and growth may
not always be linear and yet in the models this is always assumed.
·
As for comparism with “similar” countries, the
criteria cannot be only per capital GDP, but certain other factors, such as
dependence on trade, geographical position, cultural and historical
inheritance, amongst others.
·
The assumption that the same regression models
work for rich and poor countries is on the whole inaccurate
In spite of these numerous
drawbacks, we are of the opinion that, it would be unwise to hurriedly reject
econometrics in the investigation of economic growth, for it provides new
solutions year after, the data are improved, and in addition, econometrics
draws attention to potentially interesting relations of the variables, which
then need to be interpreted.
4.0 CONCLUDING REMARKS
Over the past few decades, the
wave of democracy and free market has swept across the world, requiring
countries to increasingly cope with the demands of economic development and
greater demand for a more equitable distribution of the fruits of development.
However, the ability of countries to respond effectively to these challenges
depends largely on each countries institution endowments. Building and
strengthening these institutional endowments is a precondition for good
governance, because sustained econometric development is impossible without
good governance.
In this regard, many researchers’ investigations
have been carried out with a view to corroborating this correlation between
good governance and economic development across countries. Many of such
empirical investigations have, however, produced mixed results, partly because
the countries share different social-economic, political and cultural environment.
As such, a cross-country regression is a rather weak attempt to show the
institution and economic performance relationship. Only a detailed country level study would
shed better light on this key matter, especially with regard to choices of
public places.
Consequently, we are of the opinion
that, it would be desirable to supplement econometric studies with the analysis
of individual economies and additional researches by political and social
scientists and institutional economists who may be interested in this area.
Until that is achieved, it is not desirable to conclude that institutions cause growth and development,
rather it is better to say that they facilitate it.
S. O Igbinedion is a lecturer at the department of Economics and Statistics.
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