Governance and Economy - Documents & Reports - World Bank

54 Pages·2001·2.73 MB·English

by  World Bank Group

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WPS 815
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DiDi An exploration of the links between development and gover-
blic blic nanlcc- - that is, between development and accountabilitv (in-
PuPu cluding institutional pluralism and participation), openness (in-
Cliding problenms such as corruption that result at least partly
from lack of openness): and predictability, or the rule of law.
Policy ResesrchW orking Papersd isscmu2ateLhef indngs of work in progress and ercourdgeLtheexchangofe i dcasa mong i3ank tal.d -d
allcUsersi ntcrretd i deve.opmentissues These papers, distrinbucdb y the Resear(h Advisory SLaff,c arry thc names of the authors, recfc.,:.
onimth eirvicws, andshould bc used and cied accordingly TheBndings,interpretatons,ard conclusionsarcthcautlhors own Thcy shou!d
not be attnbuted to the World Bank, its Board of Dirveto s, irs management, or any of its member countnes
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PolicyR esearch
Policya nd Revelw
WPS 815
This paper is a product of the Policy and Review Dcpartmcnt. Copics arc availablc free from the World Bank, 1818
I t Street NW, Washington DC 20(433. Pleasc contact Zeny Krarizer, rooni N9-05 1, extension 37494 (48 pages).
!)ccember 1991.
Brautigam reviewed the literature on political science, growth may require the development of political
development management, and institutioniale conom- representation. With rencxxed interest in open political
ics to give Bank staff a clearcr understanding of the systems, we can expect a new generation of research
links betwecn development and governance - or these variables.
specifically accountability,( including institutional * Donors who wish to makc "governance" the
pluralism and participation); openness (including temporary trend of the 1 990(sm ust understand that, as
problems such as corruption that result at least partly Zafar Ahmed put it, "One cannot miakea tree grow
from lack of openness); and predictability, or the rule faster by pulling it from outside: it has to grow from
of law. its roots." It takes generations, perhaps centuries, to
She found some support for a positive link build effective bureaucracies. It tak-esn ot only skills
between economic performnancea nd these variables of but volition, which comes from effective social
governance (although some correlations appear pressurc on the state. Donors must ask how best to
stronger than others). Among her findings and nurturc a social desire for accountability and the rule
conclusions: of law.
* Arbitrarv law enforcement and failure to uphold * Effective property rights and accountability
the constiution - the law -- lead to unpredictability, result from a long-term dialogue between govern-
instability, and a poor climate for growth. Well- n ents and their private sector, not between govern-
specificd property rights and enforceabic contracts are menusa nd donors. In Europe, public accountability
cleiarly economic development issues and should be developed throLIgha state-socicty struggle about the
recognized as such. The contcnt and distribution of collection and use ol tax revenues. In many of the
property rights critically affect how broad-based world's developing coLilutriest,a x revenucs are
developmcnt will be. disproportionately low as a proportion of GNP, even
LL ack of accountability - combined with opaque with low levels of per capita GNP. -thus, much of the
and highly discretionary regulatory proccdures - can dialogue about accountabilitv shifts to one between
provide great opportunities for economic corruption states and donors. This process ol assistance could
and waste. The suppression of political openings may inadvcrtently undercut the historical process of rulers
ultimatcly affect stability, disrupting production and first becoming accountlheC to elites for the use of
commerce. The failure to encourage grassroots their tax revenucs.
participation reveals itself in comparatively o Donors must becomc aware of the possible
unsustainable projects. effecctso f large sums of external assistance. They
- Research trying to correlate economic perfor- must push thc new concern for "local ownership"
mancc with governanice variables inevitably involves towvarda deep commimint to dcx elol) economic
a short lime frame. The recent economic performance policies together, cven if thc process is slow and
of Chilc, Taiwan, and South Korea occurred with frustrating. This shouldie ncourage thc development of
littc political openness, and their market systenis accountabilit)ya s a matter primarily betxxccng overn-
seemcedt o work without pluralistic political systems. ments and citizens. Onl) over time c.an socictics push
But in the past few years all three have made their governments to deliver thc accountability',
significant transitions toward more open, competitive, openness, and predictabilit\ that sustainable develop-
partici patory political systems, which suggests that mncntr equires.
.sIolaining (as opposed to establishinig) market-based
The PolicyR cscarch WVorkingP aper Scries disserninates thef indings of work un(derw ax in OhHc ank. An ohijectisc' ot the scries
is to get these findings out quickly, even if prcsentations are less than fully pollshed The findmlio".i n(trpretations. an(i
.onclusions in thcsc papers do not necessarily represent official Rank policy.
Produced by the Policy Rescarch Dissemination Cenicr
GOVERNANCEA ND ECONOMY: A REVIEW
Contents
PREFACE. ................................................ i
I. INTRODUCTION ......................................... 1
A. Governance and Economy. ............................. .1
B. Backgroundo f the Concept of Governance ................... 3
C. Historical Perspectives: Evolutiono f Governance
in Western Europe ................................ 6
II. GOVERNANCEI N THE LITERATURE: ACCOUNTABILITY,O PENNESS
AND THE RULE OF LAW ................................ 10
A. Three Approaches: Political Science, InstitutionalE conomics,
and DevelopmentM anagement ........................ 10
B. Accountability ................................... 12
C. Opennessa nd Transparency ........................... 21
D. Predictabilitya nd the Rule of Law ....................... 25
HI. DOES GOVERNANCEM ATTER? GOVERNANCE
AND ECONOMIC PERFORMANCE. ......................... 30
A. Accountabilitya nd EconomicP erformance .................. 31
B. Participation,I nstitutionalP luralism,
and EconomicP erformance .......................... 32
C. Openness, Transparency,a nd EconomicP erformance .... ........ 35
D. Predictability,T he Rule of Law, and Economic Performance ... .... 37
IV. CONCLUSION ........ .... .......................3 9
REFERENCES ............ 43
PREFACE
This paper wac commissionedb y the Policy and Review Department Cotfh e World Bank to
familiarizeB ank staff with conceptsu nderlyingd iscussiono f "governance"a s a developmenti ssue. The
terms of reference requested a reviewo f the politicais cience, developmentm anagement,a nd institutional
economicsl iterature which bears directly upon the issues of governance -- specifically accountability
(includingi nstitutionalp luralism and participation);o penness (includingp roblems resulting in part from
lack of openness, e.g. corruption);a nd predictabilityo r the rule of law.
Many people have read variousv ersions of this paper, or participatedi n discussionso f its subject
matter, and offered extensivec ommentsa nd suggestions. I would like to thank in particular, Coralie
Byrant and Sarwar Lateef, who made the preparation of this paper an exercise botn intellectually
stimulatinga nd enjoyable. Others who contributedt o refining the ideas and their presentationi nclude
Miguel Schloss, Leslie Snyder, Kate McCollom, Lisa Pachter, Salvatore Schiavo-Campo,L adipo
Adamolekun, Pierre Landell-Mills,D avid Beckmann,V aleriana Kallab, Andres Rigo, Geoffrey Lamb,
Samuel Paul, Randall Harriss, Francisco Sagasti, and Dunstan Wai.
1. INTRODUCTION
A. Gsovernancea nd Economy
Governments determine how well, or how poorly, markets function. This simple truth explains the
current concern with "governance"a s the world shifts toward an overwhelmninegn dorsemento f markets
as the base of economic activity. If governmentsa re assumed to be neutral, and committedt o serving
the public good, then deviationsf rom optimume conomicp erformancec an generallyb e correcteds imply
through policy reform, or through improvingi nformations ystems. And yet, as Douglass North argues,
economicp erformancei s not easily explainedb y the logic of economict heory alone. Governmentsa re
not neutral. Their rationality is more frequentlyp oliticalt han economic. "The contrast," North says,
"between the logical implicationso f neoclassical theory and the performance of economies( however
defined and measured) is startling." (1990:11).
To understand economic performance, it is important to factor in the political role of
governments. As Susan Strange notes, "Markets cannot play a dominant role in the way in which a
political economy functionsu nless allowedt o do so by whoever wieldsp ower and possesses authority."
(1988:23). The exercise of power and authorityl ies at the heart of governance. Governmentsu se their
power and authority to establish and maintain the formal and informal framework of institutionst hat
regulate social and econc - interaction. Governmentsc reate the rule of law necessary to underpin
accountability,t ransparenv,, and predictabilityi n interactions. Governments in interactionw ith their
--
citizens -- determine many of the preconditionsf or a thriving, or a declining, domestic economy.
This paper attempts to give the current concern with governancea historical dimension, and to
locate governancea s a technicala nd intellectuali ssue within a body of literaturet hat has long addressed
these concerns. It examines a limited number of governanced imensions -- accountability( including
legitimacy, institutionalp luralism and participation),o penness and transparency, and predictability( or
the rule of law) -- in a selective review of recent social science literature. The paper makes no claim
to be exhaustive, but rather to offer an introduction to recent work which is built in part upon the
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analysis of how politics and economicsi nteract in shaping economicd evelopment. It explores why and
how accountability,o pennessa nd predictabilitym atter, and how the differentw ays in whichg overnments
use their power and authority create enablingo r disablinge conomice nvironments.
The issue of governancer ose to the forefront of developmenta gendas at the close of the 1980s,
following nearly a decade of concern with macroeconomicp olicy reform. In Africa, calls by citizens
and leaders for greater openness and accountabilityw ere joined by internationald onors. The World
Bank's 1989 Long-Term PerspectiveS tudy (LTPS) -- Sub-SaharanA frica: From Crisis to Sustainable
Growth--highlighteda deep concern with governance as a development issue: "Underlyingt he litany
of Africa's developmentp roblems is a crisis of governance" (p. 60). Addressing political issues as
openly as it did, the LTPS created a stir ifi the de-velopmencto mmunity. The LTPS linked governance
to issues of leadershipa uthoritya nd legitimary. It addressedt he absence of balance of power, the lack
of official accountability,t he control of information,a nd a failure to respect the rule of law. The LTPS
spoke in favor of "independencef or the judiciary, scrupulous respect for the law and human rights at
every level of government,t ransparenta ccountabilityo f public monies, ancAin dependentp ublic auditors
responsible to a representative legislature, not to an executive" (p. 192).
Althought he calls for change have been loudest in Africa, other regions have undergoned ramatic
shifts in governance. In Latin America, the rapid transitionsf rom authoritariant o democraticr egimes
over the past decade offered a different reason for attentiont o governance. Newly elected legislatures
moved to transform old legal regimes, to reinforce new structures making government accountablet o
citizens, and to strengthen their own capacity to analyze, evaluate, and initiate policies.
Governance issues surfaced in Asia over the past decade as well, most prominently in China,
where a decade that opened with a dramatict ransitiont o economicl iberalizationc losed with the forceful
suppression of calls for political change -- in Tiananmen Square. In the Soviet Union, glasnost
(openness) in the Soviet Union focused new attention on openness as a critical element in governance.
In both the Soviet Union and Eastern Europe, political openness encouraged citizen's demands for
accountability,a nd the move toward a market economyu nderscoredt he need to establishl egal guidelines
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and well-defined property rights in order to secure private investment. These events combined to
prompt related chunagesin the assistance offered by many bilateral and multilateral donors -- most
noticeably, the establishment of the European Bank for Reconstructiona nd Development xEBRD),
mandatedt o reinforce changes in Eastern Europe through support for multi-partyg overnments and for
other political dimensionso f development.
Although governments exercise their power and authority in different ways. they all affect
economic activity. Many donors have tried to draw a distinction between what Carol Lancaster (1990)
has termed social or economic governance, and political governance, although the line is difficult to
positionw ith any assurance. This paper focuses on those aspects of governance( in additiont o skill and
capacity)t hat appear to affect economicp erformance: accountability,o pennesso r transparency,a nd the
rule of law. These variables affect economic performancet hrough their impact on fiscal integrity, on
predictability,a nd on the creation of an environmentc onducivet o productivei nvestment.
In keeping with the limited focus on these three aspects of governar"e, this review does not
directly address the relationship between development performance and the form of government.
Although empirical research exists on hypothesized relationships between regime type (democracy,
dictatoiship, etc.) and growth and development, the evidence to date is mixed. Indeed, one of the
puzzles that guides much of the inquiry of political scientists, in particular, continues to be "how it is
that many nondemocraticg overnmentss eem to be as stronglym otivatedt o guard the welfare of citizens
as democraticg overnments" (Lindblom 1977:x).
B. Backgroundo f the Concept of Governance
Governance itself is a neutral concept, meaningt he "exerciseo f authority; control," or, more broadly,
"government." As a synonym for government, governance can be further defined as "the political
directiona nd control exercisedo ver the actions of the members, citizens, or inhabitantso f communities,
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societies, and states."' Recent empirical studies of governancer ange from analyses of Norway's wage
policy and Britain's managemento f its health service (Rose 1980), to East Africa's rural development
prograrns (Hyden 1983).
Work in the area of governance is often interdisciplinary, cutting across the boundaries of
economics,p olitical science, philosophy, sociology, and management. Governanceh as been analyzed
both normatively (how should governments behave?) and positively (how do governments behave?).
This distinction has ancient roots, as philosophersh ave long debated the moral versus the utilitarian
foundationso f the nation-statea nd its system of governance2. As long ago as 495 B.C., Confucius, an
experiencedb ureaucrat forced into exile by Chinese politicali ntrigue, argued that a well-ordereds ociety
required government based on superior morality rather than on superior power. Later Chinese
philosophersc ounteredt hat "good" governancea bove all required centralized,a bsolute authority3. Plato
(advisort o the ruler DionysiusI I of Syracuse)a nd his pupil Aristotle grappled with questionso f political
reform, the rule of law, the nature of authority, and the principlesw hich ought to determine the shape
of the ideal state, and its relation to production and other economicq uestions.
Modem analyses of governance date from the 17th century Germanic tradition of
politikwissenschaft (political science) and the 18th century innovations of the European Age of
'RandomH ouse CollegeD ictionary, rev. ed. New York: RanidomH ouse, 1984, p. 571.
2In Asia, theories of governancec an be traced to Confucious' philosophyo f the moral institutions
underlying social order, in particular, the "rectificationo f names". A well-ordereds ociety, he argued,
dependedo n the fulfillmento f duties and responsibilitiesin herent in social roles: ruler, minister, father,
and son, for example. If the ruler fulfilledt he "way of the ruler," he would have legitimacy;f or society
to prosper, all must fulfill their roles. Thus a son must be filial, a fathe; aternal, and a ruler must offer
moral leadershipt o the nation. Social order depended on everyone fufilling his or her social role, on
the "rectificationo f names." The heaviestr esponsibilityf ell on the leader: if he fulfilledh is duty, then
the chain of rectificationa nd social order would be in place; if not, social chaos would result.
'Mo Tzu's (c. 470-c.381 B.C.) influentialc ritique of Confuciusu sed a utilitarian argument: states
are established to end disorder, and thus the eentralized authority of the ruler must be absolute.
"Accordingt o the Mohists, the state exists because it is useful. But accordingt o the Confucianists,i t
exists because it ought to exist." Mencius later elaborated the idea of two kinds of govermmental
authority: wang, or the sage-king, and pa, or the warrior-king. One bases its power in morality, the
other in force. ContemporaryC hinese thought continuest his distinction. "a democraticg overnmenti s
a rang government,b ecause it representsa free associationo f people, while a Fascist govermmenits that
of a p because it reigns through terror and physical force. (Fung 1948: 73-75).
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Enlightenmen4t. Shifts from religioust o secular issues, transitionsf rom feudalism,a rising concern for
individualr ights, and the expansiono f the self-regulatingm ark as an increasinglyi mportant medium
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of exchanger aised questionsa bcui.t he relationshipo f political authorityt o individuala nd group welfare.
The foundation for many who grapple today with questions of the evolution of governance and of
society's relationshipw ith politicala uthorityw as laid by writers such as John Locke, in his concern with
structures tc prevent the abuse of authority; Jean-JacquesR ousseau, and his idea of a social contract
between rulers and citizens; and Thomas Hobbes, who wrote about the propensity of people to engage
in conflict and to seek power, and ultimately, to submit themselvest o the coercive rule of the absolutist
state, the Leviathan.
Max Weber's analysis of modern, rational-legal states, published in the 19t'1 century, still
underlies many Western ideas of governance. Weber pointed to the "processo f rationalization",a rguing
that modern states differ from primitive states in their reliance on hierarchy, in the base of the
leadership'sl egitimacy, and in their monopolyo f the use of legitimatef orce. Modern states, he argued,
are based on norms of universalism rather than particularism. They rely on detached and routine
decision-makingr ather than on ad hoc procedures. Modern bureaucraciesa re, in principle, structured
with managementh ierarchies, have clear rules for advancement,a nd maintain informations ystemst hat
assure continuity and predictibility,a lthough as Anthony Downs (1967) pointed out, many fail to live
up to this ideal.
Weber addressed the development of governance in modern states from his perspective on
Western Europe. Nearly a century later, Gunnar Myrdal in his Asian Drama: An Inquiry into the
Poverty of Nations (1968) introduced the idea of "soft states" versus "hard states" in an influential
addition to the increasing body of "modernization"l iterature, which focused on the problems of state-
building in developing countries. The hard state sets priorities and carries them out. Norms and
practices keep bureaucratsa nd politicianss eparate. The soft state finds officials regularlyc ircumventing
laws and regulations. Civil servants and politicianss ecretly collude to thwart po!icy implementation,
40n the Germanic tradition, see Dunn 1986: 161, note 12.
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and corruption riddles the system. The hard state is a state in control of its regulations and policies.
Its civil ser-ice operates by Weberianr ational bureaucraticp rinciples. Contrc', capability,a nd volition
separate soft states from hard states.'
How does "good governance" develop? Relations between rulers and ruled differ in avery
cvuntry. History, custom, law, society, and political economy affect the way in which the ruled in a
country hold rulers to account for their performance, the relative openness of a socio-politicals ystem
or an economy, and the degree of predictabilityi n governmentd ecision-makinga nd interactionw ith the
public. The developmento f accountability,o penness, and the rule of law in Western Europe offers a
useful perspectiveo n the evolutiono f governance.
C. Historical Perspectives: Evolution of Governance in Western Europe
The concept of governmental accountability in much of Western Europe and the establishment of
transparencya nd an impersonalr ule cf law developeds lowly -- as . esult of evolving relationsb etween
rulers and elites. Althought hese relationsw ere stimulatedb y ideas of personalf reedom and govermnent
responsibilityr ooted in the 18th century Enlightenment,t hey had much earlier roots. In Britain, for
example, the Magna Charta, sealed in 1215, signaled the first formal attempt by social elites to elicit
accountabilityf rom their monarch.
Early European states resembled many of todav's developing countries. Caught between
cumbersome taxation systems and their need for revenues, monarchs borrowed heavily and operated
under chronic deficits: financial crises brought Spain to bankruptcy five times between 1575 and 1647
(Eggertsson 1990: 342). The need to raise revenues to pursue state activities (wars, in particular)
'Later writers ammended Myrdal's work by adding analyses of the history of governanceu nder
colonial rule and of the influenceo f colonial institutionso n the developmento f accountabilityi n post-
colonial states. Amartya Sen (1991) suggestst hat a "soft" state is in fact a state that responds to public
demands: "That need be no bad thing" (p. 425).
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