Governance as an Economic Issue

1
Governance as an Economic Issue

• W.R StentLa Trobe University19 May 2005

2
A Slogan

• The human economy ... is embedded and enmeshed
  in institutions, economic and non-economic. The
  inclusion of the non-economic is vital. For
  religion or government may be as important for
  the structure and functioning of the economy as
  monetary institutions or the availability of
  tools and machines themselves that lighten the
  toil of labor
• - Karl Polanyi

3
A new term Governance

• Prior to the mid-1990s, the term governance
  rarely occurred in the development literature but
  it is now ubiquitous.
• The term occurs 75 times in Australias
  International Development Cooperation Budget
  2005-2006 (Up from 72 times in the previous
  year.)

4
UNDP definition of governance

• the exercise of economic, political and
  administrative authority to manage a country's
  affairs at all levels. It comprises the
  mechanisms, processes and institutions through
  which citizens and groups articulate their
  interests, exercise their legal rights, meet
  their obligations and mediate their differences

5
(No Transcript)
6
A World Bank Issue

• In 2001, the World Bank acknowledged that
• poverty trends in most IDA countries have been
  disappointing and
• More needs to be done to enhance the quality of
  governance and to build institutional capacity in
  specific country contexts

7
An Australian Issue

• Instability and poor governance directly
  threaten the prospects for growth, prosperity and
  development for countries in our region, with the
  potential to undermine Australias security
• - Alexander Downer

8
A Costly Issue

• Australian support for governance programs
  increased from 15 per cent of total Australian
  ODA in 1999-2000 to 36 per cent in the 2005-2006
  ODA Budget of 2.491 billion.
• In 2005-2006, an estimated 885 million will be
  expended on activities directly relating to
  governance and a further 292 million on related
  issues.

9
Australian ODA by Sector, 2005-2006
10
Australian ODA by Sector, 2005-2006
11
Australian ODA in governance 2005-2006
12
World Bank Working definition of governance

• Governance is the process and institutions by
  which authority in a country is exercised
• the process by which governments are selected,
  held accountable, monitored, and replaced
• the capacity of government to manage resources
  and provide services efficiently, and to
  formulate and implement sound policies and
  regulations and,
• the respect for the institutions that govern
  economic and social interactions among them.

13
World Bank Study
14
Quantifying Governance

• Each of the 3 main components of the definition
  are further divided into 2 sub-components that
  can be measured and analyzed
• Democratic Voice and (External)
  AccountabilityPolitical Instability,
  Violence/Crime Terror
• Regulatory BurdenGovernment Effectiveness
• CorruptionRule of Law

15
Sources of Governance Data

• Data on governance from 37 different sources
  constructed by 31 different organizations.
• Data sources include cross-country surveys of
  firms, commercial risk-rating agencies,
  think-tanks, government agencies, international
  organizations, etc.)
• Over 300 proxies for various dimensions of
  governance.
• Through Unobserved Components Method, mapping
  these measures into six clusters, corresponding
  to the definition of governance, for five
  periods 1996, 1998, 2000, 2002, 2004 covering
  209 countries.

16
Sources of Governance Data (contd)

• Cross-Country Surveys of Firms Global
  Competitiveness Survey, World Business
  Environment Survey, World Competitiveness
  Yearbook, BEEPS
• Cross-Country Surveys of Individuals Gallup
  International, Latinobarometro, Afrobarometer
• Expert Assessments from Commercial Risk Rating
  Agencies DRI, PRS, EIU, World Markets Online,
• Expert Assessments from NGOs, Think Tanks
  Reporters Without Borders, Heritage Foundation,
  Freedom House, Amnesty International
• Expert Assessments from Governments,
  Multilaterals World Bank CPIA, EBRD, State Dept.
  Human Rights Report

17
Inputs for WB Governance Indicators 2002

• Publisher Publication Source
  Country Coverage
• Wefas DRI/McGraw-Hill Country Risk Review
  Poll 117developed and developing
• Business Env. Risk Intelligence BERI Survey
  50/115 developed and developing
• Columbia University Columbia U. State Failure
  Poll 84 developed and developing
• World Bank Country Policy Institution
• Assessment Poll 136 developing
• Gallup International Voice of the People
  Survey 47 developed and developing
• Business Env. Risk Intelligence BERI Survey
  50/115 developed and developing
• EBRD Transition Report Poll 27 transition
  economies
• Economist Intelligence Unit Country Indicators
  Poll 115 developed and developing
• Freedom House Freedom in the World Poll 192
  developed and developing
• Freedom House Nations in Transit Poll 27
  transition economies
• World Economic Forum/CID Global Competitiveness
  Survey 80 developed and developing
• Heritage Foundation Economic Freedom Index
  Poll 156 developed and developing
• Latino-barometro LBO Survey 17 developing
• Political Risk Services International Ctry
  Guide Poll 140 developed and developing
• Reporters Without Borders Reporters sans
  frontieres Survey 138 developed and developing

18
(No Transcript)
19
Changes in Government Effectiveness
20
Changes in Governance over time
21
(No Transcript)
22
(No Transcript)
23
(No Transcript)
24
(No Transcript)
25
(No Transcript)
26
(No Transcript)
27
(No Transcript)
28
Governance and incomes are correlated.

• Is there a causal relationship?
• Does growth lead to good governance?
• Or is it the other way round?
• Is there a virtuous circle?

29
An Economic Issue?

• Economics is the science which studies human
  behaviour as a relationship between ends and
  scarce means which have alternative uses
• Economics is the study of the production,
  distribution and exchange of wealth within
  society

30
Oil in the engine

• Corruption might raise economic growth
• speed money enable individuals to avoid
  bureaucratic delay (ie bypass red-tape)
• Government employees who are allowed to levy
  bribes work harder (regardless of red tape)
• Regulation creates economic rent bribery can
  reallocate it through the market.

31
Sand in the gears

• Corruption might slow economic growth
• speed money increases bureaucratic delay
  (permits are not given until a bribe is received)
• Talented people are re-allocated to rent-seeking
  positions
• Overseas investment is discouraged.

32
World Bank Study

• A strong causal effect running from governance to
  per capita incomes.
• Feedback from incomes to governance is, if
  anything, negative.

33
Finding

• It is not possible to find evidence of positive
  feedback from per capita incomes to better
  governance outcomes, unless rather impossible
  assumptions are made.

34
Conclusions

• Improvements in institutional quality or
  governance are unlikely to occur merely as a
  consequence of economic development.
• As long as established elites within a country
  reap private benefits from the status quo of poor
  institutions, there is little reason to expect
  that higher incomes will lead to demands for
  better governance.
• We should not expect to see virtuous circles
  from higher incomes to better institutions which
  in turn support higher incomes in the very long
  run.

35
Policy Implications

• Small interventions to improve institutional
  quality are unlikely to be enough to make a major
  difference in the long run.
• the urgency of steps to improve governance in
  countries where it is weak.

36
Two aspects of Governance

• Capacity
• The state has appropriately skilled personnel,
  sufficient financial resources, and adequate
  supporting processes, such as a working budget
  system.
• Accountability (Integrity)
• The state is responsible to citizens for
  delivering public goods and services and its
  stewards (politicians, policymakers, bureaucrats,
  judges) are prepared to explain and face the
  consequences of failures occurring within their
  jurisdiction.

37
Capacity

• Is basically a technical requirement.It
  involves the technical efficiency with which
  politicians, bureaucrats and others perform their
  tasks.
• Is relatively simple to improve.It requires
  only the expenditure of funds to equip those who
  need them with the appropriate skills.

38
Accountability

• Is complex and difficult to meet. It requires
  the establishment of processes that are both
  transparent and effective. It usually involves
  changing much of the culture within which both
  politicians and bureaucrats operate.

39
Australian ODA to Governance, 2005-06
40
Public Financial Accountability The Theory
Parliament (Public Accounts Committee)
Accountability Relationship
Reports
Public
Auditor General
Executive
Examines
41
Public Financial Accountability The PNG
Constitution

• Clause 118. Permanent Parliamentary
  Committees.The Public Accounts Committee is
  established in accordance with Subdivision
  VIII.1.C (the Public Accounts Committee)
• 213. Establishment of the office of
  Auditor-General.(1) An office of
  Auditor-General is hereby established.(2) The
  Auditor-General shall be appointed by the Head of
  State, acting with, and in accordance with, the
  advice of the National Executive Council given
  after receiving reports from the Public Services
  Commission and the Public Accounts Committee.

42
Public Financial Accountability The PNG
Constitution

• Clause119. Chairmen and Deputy Chairmen.
• There shall be a Chairman and a Deputy Chairman
  of each Permanent parliamentary Committee.
• In principle, either the Chairman or the Deputy
  Chairman of each Permanent Parliamentary
  Committee should be a member of the Parliament
  who is recognized by the Parliament as being
  generally committed to support the Government in
  the Parliament, and the other should be a member
  of the principal party or group, or coalition of
  parties or groups, that is recognized by the
  Parliament as being not so committed.
• In the event of the absence or non-availability
  to act of the Chairman,the Deputy Chairman has
  all the rights, privileges, powers, functions,
  duties and responsibilities of the Chairman.

43
Deputy Chairman Sasa Zibe
44
A need for change

• Recent events provide prima facie evidence that
  the independence and integrity of the PNG PAC are
  under attack.
• Given the parlous state of parliamentary
  democracy in PNG there would seem little
  likelihood that Parliament will take action to
  protect what should be seen as its pre-eminent
  permanent committee.

45
Changing the culture

• The most effective way of redressing the present
  situation would seem to be to educate the general
  public in the role and responsibilities of the
  PAC.
• This is the role of civil society.

46
Australian ODA to governance 2005-2006
47
Australian ODA to PNG, 2005-2006
48
Some positive Australian action

• Australia, through the Community Development
  Scheme is developing strategic partnerships with
  local organisations and supporting them to
  represent, and meet, the needs of society in a
  transparent and accountable way.
• The Partnership Program with seven major churches
  in PNG will operate until 2009 at a cost of up
  to 25 million.
• Their Australian sister churches will provide the
  PNG churches with targeted funds to improve
  governance, expand essential health and education
  services, and strengthen their organisational
  capacity.

49
A Slogan

• The human economy ... is embedded and enmeshed
  in institutions, economic and non-economic. The
  inclusion of the non-economic is vital. For
  religion or government may be as important for
  the structure and functioning of the economy as
  monetary institutions or the availability of
  tools and machines themselves that lighten the
  toil of labor
• - Karl Polanyi