Getting Governance Right
by Dani Rodrik
CAMBRIDGE Economists used to tell governments to
fix their policies. Now they tell them to fix their institutions. Their new
reform agenda covers a long list of objectives, including reducing corruption,
improving the rule of law, increasing the accountability and effectiveness of
public institutions, and enhancing the access and voice of citizens. Real and
sustainable change is supposedly possible only by transforming the rules of
the game the manner in which governments operate and relate to the private
sector.
Good governance
is, of course, essential insofar as it provides households with greater clarity
and investors with greater assurance that they can secure a return on their
efforts. Placing emphasis on governance also has the apparent virtue of helping
to shift the focus of reform toward inherently desirable objectives.
Traditional recommendations like free trade,
competitive exchange rates, and sound fiscal policy are worthwhile only to the
extent that they achieve other desirable objectives, such as faster economic
growth, lower poverty, and improved equity.
By contrast, the
intrinsic importance of the rule of law, transparency, voice, accountability,
or effective government is obvious. We might even say that good governance is
development itself.
Unfortunately,
much of the discussion surrounding governance reforms fails to make a
distinction between governance-as-an-end and governance-as-a means. The result
is muddled thinking and inappropriate strategies for reform.
Economists and
aid agencies would be more useful if they turned their attention to what one
might call governance writ small. This requires moving away from the broad
governance agenda and focusing on reforms of specific institutions in order to
target binding constraints on growth.
Poor countries
suffer from a multitude of growth constraints, and effective reforms address
the most binding among them. Poor governance may, in general, be the binding
constraint in Zimbabweand a few other countries, but it was not
in China, Vietnam, or Cambodia countries that are growing rapidly
despite poor governance and it most surely is not in Ethiopia, South Africa,
El Salvador, Mexico, or Brazil.
As a rule, broad
governance reform is neither necessary nor sufficient for growth. It is not
necessary, because what really works in practice is removing successive binding
constraints, whether they are supply incentives in agriculture, infrastructure
bottlenecks, or high credit costs. It is not sufficient, because sustaining the
fruits of governance reform without accompanying growth is difficult. As
desirable as the rule of law and similar reforms may be in the long run and for
development in general, they rarely deserve priority as part of a growth
strategy.
Governance writ
small focuses instead on those institutional arrangements that can best relax
the constraints on growth. Suppose, for example, that we identify macroeconomic
instability as the binding constraint in a particular economy. In a previous
era, an economic adviser might have recommended specific fiscal and monetary
policies a reduction in fiscal expenditures or a ceiling on credit geared
at restoring macroeconomic balances.
Today, that
adviser would supplement these recommendations with others that are much more
institutional in nature and fundamentally about governance. So he or she might
advocate making the central bank independent in order to reduce political
meddling, and changing the framework for managing fiscal policy setting up
fiscal rules, for example, or allowing only an up-or-down legislative vote on
budget proposals.
Macroeconomic
policy is an area in which economists have done a lot of thinking about
institutional prerequisites. The same is true in a few other areas, such as
education policy and telecom regulation.
But in other
areas, such as trade, employment, or industrial policies, prevailing thinking
is either naïve or non-existent. That is a pity, because economists
understanding of the substantive issues, professional obsession with
incentives, and attention to unanticipated consequences give them a natural
advantage in designing institutional arrangements to further the objectives in
question while minimizing behavioral distortions.
Designing
appropriate institutional arrangements also requires both local knowledge and
creativity. What works in one setting is unlikely to work in another.
While import
liberalization works fine for integrating with the world economy when
import-competing interests are not powerful and the currency is unlikely to
become overvalued, export subsidies or special economic zones will work far
better in other circumstances. Similarly, central bank independence may be a
great idea when monetary instability is the binding constraint, but it will
backfire where the real challenge is poor competitiveness.
Unfortunately,
the type of institutional reform promoted by, among others, the World Bank,
IMF, and the World Trade Organization is biased toward a best-practice model,
which presumes that a set of universally appropriate institutional arrangements
can be determined and views convergence towards them as being inherently
desirable. But best-practice institutions are, by definition, non-contextual
and cannot take local complications into account. Insofar as they narrow rather
than expand the menu of available institutional choices, they serve the cause
of good governance badly.
Good governance
is good in and of itself. It can also be good for growth when it is targeted at
binding constraints. Too much focus on broad issues, such as rule of law and
accountability, runs the risk that policymakers will end up tilting at
windmills while overlooking the particular governance challenges most closely
linked to economic growth.
**
Dani Rodrik, Professor of Political Economy at Harvard Universitys John F.
Kennedy School of Government, is the first recipient of the Social Science
Research Councils Albert O. Hirschman Prize. His latest book is One Economics,
Many Recipes: Globalization, Institutions, and Economic Growth.
Copyright:
Project Syndicate, 2008.http://www.project-syndicate.org/commentary/rodrik19
[Non-text portions of this message have been removed]
------------------------------------
***************************************************************************
Berdikusi dg Santun & Elegan, dg Semangat Persahabatan. Menuju Indonesia yg
Lebih Baik, in Commonality & Shared Destiny.
http://groups.yahoo.com/group/ppiindia
***************************************************************************
__________________________________________________________________________
Mohon Perhatian:
1. Harap tdk. memposting/reply yg menyinggung SARA (kecuali sbg otokritik)
2. Pesan yg akan direply harap dihapus, kecuali yg akan dikomentari.
3. Reading only, http://ppi-india.blogspot.com
4. Satu email perhari: [EMAIL PROTECTED]
5. No-email/web only: [EMAIL PROTECTED]
6. kembali menerima email: [EMAIL PROTECTED]
Yahoo! Groups Links
<*> To visit your group on the web, go to:
http://groups.yahoo.com/group/ppiindia/
<*> Your email settings:
Individual Email | Traditional
<*> To change settings online go to:
http://groups.yahoo.com/group/ppiindia/join
(Yahoo! ID required)
<*> To change settings via email:
mailto:[EMAIL PROTECTED]
mailto:[EMAIL PROTECTED]
<*> To unsubscribe from this group, send an email to:
[EMAIL PROTECTED]
<*> Your use of Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/
