Is ‘Good Governance’ a Good Development
Strategy?[1],
titled a paper published by the French Trésor (finance ministry) and Agence
francaise de développement a decade ago. The answer was that there is a
correlation between “good governance” and the level of development (per capita
GDP), but there is no correlation with the speed of development
(medium-to-long-term growth). Why? Popular governance indicators promoted by
the CwA (the G20 Compact with Africa) do not touch on the driving forces behind institutional, economic,
political and social change. Instead, the authors argue,
based on the 2006 Institutional Profiles database, that the priority for
low-income countries is to build capacities for strategic vision and
co-ordination among elites. Simultaneously, Besley & Kudamatsu (2007), have
shown that autocracies produce either better sustained growth outcomes (e.g.,
Singapore, which serves as a reference for Chinas policy elites) or worse
(e.g., Zimbabwe) than democracies. This depends on the accountability of their
performance to a “selectorate” able to remove poor performers from office. However,
the ability of autocracies to maintain a merit-driven selectorate is
questionable, given the predominance of patronage factors[2].
Governance measures associated with and derived
from modern social market economies would have offered insufficient predictive
help in foretelling the winners and losers in economic development of recent
decades. Outstanding performances in terms of years gained in life expectancy
at birth, points progressed in the UN Human Development index, or deletion of
extreme mass poverty have been recorded in authoritarian development states
such as China, Rwanda or Singapore. These indicators of sustained
transformation do not play an important role in the Compact with Africa. Still, the German government has been quite specific on its use of
governance indicators: “To measure the level of good governance in the partner
countries, the German government relies in particular on internationally
recognized indices such as the Bertelsmann
Transformation Index, Transparency
International's Corruption Perception Index and the World Bank's Doing Business Index.”[3].
All these indicators of governance and
institutional strength are composite (or “aggregate”) perceptions-based
indicators. Such indicators aggregate often large amounts of information from
diverse sources and reduce it to a single number – a single governance score –
per country, per year, to facilitate comparisons. The aggregated information
consists of people’s perceptions of the quality of governance, or some aspect
of governance (e.g., the rule of law, control of corruption), in different
countries. Most of the people whose perceptions are used are diplomats or
business managers, and some live outside the countries they are rating.
Table 1: CwA Countries Fact Sheet
Notes:
a) GNI/capita, Atlas method (current US$); EoDB = Ease of Doing Business; CPIA
= Country Policy and Institutional Assessment; Risk of Debt Distress = recent
IMF/World Bank assessments.
· The Bertelsmann Stiftung’s Transformation Index (BTI) measures annually
quality of democracy, market economy, and political management using data from
129 developing and transitional countries (2018), with scores running from 1
(low) to 10 (Western model reached). The 2018 average governance score was
4.80; this is considerably lower than the average 2018 BTI score of 5.26 for the unweighed mean of the twelve Compact countries (see
Table 1). According to the website, the BTI “aggregates the results of of
transformation processes and political management into two indices: Status
Index and Management Index. The Status Index, with its two analytic dimensions
of political and economic transformation, identifies where each of the
countries stand on their path toward democracy under the rule of law and a
social market economy. Focusing on the quality of governance, the Management
Index assesses the acumen with which decision-makers steer political processes”[4].
Local difficulties of policy
implementation are hereby taken into account. A look at the status index
reveals the Western model of democracy and of a fully-fledged market economy as
the benchmark for the BTI. The BTI, among many other issues, measures how of
national elites to respond to global challenges with economic policies that
ensure stability and social inclusion. Social inclusion by two indicators, the
level of socioeconomic development (reducing poverty and inequality), and the
extensiveness of social safety nets (government policies to compensate for
social risks and alleviate handicaps)[5].
However, the BTI scores reflect an
extremely broad and ambitious agenda under the general heading of governance. The
laundry list approach assumes that all developing and emerging countries suffer
from the same problems, and that all of these problems are equally important.
As emphasized by many growth experts, an unweighted check-off of selected
governance elements leads to an undifferentiated reform program that fails to
target an economy´s most severe growth bottlenecks[6].
· The Transparency International Corruption Perception Index (CPI),
according to its website, “scores countries on how corrupt their public sectors
are seen to be”. Determined by annual expert assessments and opinion surveys,
the CPI defines corruption as "the misuse of public power for private
benefit"[7].
The corruption index currently ranks 180 countries by their perceived levels of
public sector corruption according to currently 13 sources, uses a scale of 0
to 100, where 0 is highly corrupt and 100 is very clean. More than two-thirds
of countries score below 50 on this year’s CPI, with an average score of just
43. With an average 2018 CPI score of
39.25, the twelve African CwA partners were perceived a slightly more corrupt
than the world average (Table x). CPI source data capture various aspects of
corruption, such as bribery, diversion of public funds, nepotistic appointments
in civil service or state capture by narrow vested interests. Importantly, it
does not capture citizen perceptions or experience of corruptio tax fraud,
illicit financial flows, enablers of corruption (lawyers, accountants,
financial advisors etc.), money-laundering and private sector corruption.[8]
13 data sources were used to construct the Corruption Perceptions Index (CPI) 2018,
such as the AfDB (that co-manages the CwA), Bertelsmann (with two indices),
Economist Intelligence Unit, Freedom House, the World Bank Country Policy and
Institutional Assessment (CPIA) or the World Economic Forum Executive Opinion
Survey[9].
As, importantly, trade unions (via the ILO) nor Asian or Latin American sources
are absent, the CPI reflects largely business and Western opinions while it
discriminates against voice by labour and the ´South´.
A key feature of the CPI is the
inclusion of an estimated “confidence interval” together with the point score
for each country covered by the indicator. Thus, differences between countries’
point scores whose confidence intervals overlap should be considered
statistically insignificant[10].
The different sources of information used to calculate the point scores do in
fact tend to correlate with each other. The imprecision of scores is at odds
with the CwA´s use of countries’ governance scores as if they were accurate to
a degree they are not.
· The World Bank´s ´Ease of Doing Business´ (EoDB) index[11]
measures the degree to which the regulatory environment is conducive to the
starting and operation of a local firm. The Doing Business Indicators were
published for the first time in 2004 and are provided from 2003 onwards on a
yearly basis by the International Finance Corporation, the private-finance arm
of the World Bank Group (IFC). Doing Business 2019 measures for 190 economies the
processes for business incorporation, getting a building permit, obtaining an
electricity connection, transferring property, getting access to credit,
protecting minority investors, paying taxes, engaging in international trade,
enforcing contracts and resolving insolvency. The index runs from 0 to 100
(perfect). The ease of doing business score benchmarks economies with respect
to regulatory best practice, showing the absolute distance to the best
regulatory performance on each Doing Business indicator. When compared across years, the ease of doing
business score shows how much the regulatory environment for local
entrepreneurs in an economy has changed over time in absolute terms. Doing
Business collects and publishes data on labour market regulation with a focus
on the flexibility of employment regulation as well as several aspects of job
quality. However, labour market issues (such as the ease to fire workers) have
meanwhile been discontinued from EoDB rankings.
The EoDB index has been subject to
heavy criticism since a while (Arndt and Oman, 2006)[12].
Early 2018, the World Bank’s chief economist at the time, Paul Romer, told the
Wall Street Journal he had lost faith in the integrity of the Doing Business
index, suggesting it was being politically manipulated—particularly to
embarrass Chile’s socialist president Michelle Bachelet. He then announced his
resignation. Chile was not a single ´accident´. EoDB methodology changes pushed
dozens of other countries up and down as well, as shown by CGD author Justin Sandefur and colleague[13].
India’s rise in the Doing Business rankings celebrated by India’s Prime
Minister Narendra Modi (“the largest democracy on earth is also the fastest
growing major economy”) turned out to be mostly an artefact of methodological
changes (as did India´s faked numbers of growth). The CGD authors concluded: “changes
over time in the Doing Business rankings are not particularly meaningful. They
largely reflect changes in methodology and sample—which the World Bank makes
every year, without correcting earlier numbers—not changes in reality on the
ground.” Sandfur recommends that the World Bank “Should Ditch the "Doing
Business" Rankings”[14].
Beside the governance
indicators presented above (Bertelsmann BTI, Transparency International CPI,
and Doing Business of the IFC), the quality of institutions matters crucially
in the design of the CwA. As mentioned before, Schuknecht et al (2018)
explicitely refer to the influential book “Why Nations Fail” by Acemoglu &
Robinson (2012)[15]. The
core thesis of the book is: The design of political institutions has a decisive
influence on the design of economic institutions. These in turn influence the
level of technological progress, which in turn is a decisive factor for
economic growth. Many economists find that monocausal (and anecdotal) explanation
unsatisfactory. The most prominent rejection has come by Jeffrey Sachs[16]
who points to the complex nature of development: “most of the economic leaps
that laggard countries have made can be credited not to domestic technological
innovations but to flows of technology from abroad, which in turn have been financed
by export receipts from natural resources and low-wage industries. What‟s more,
authoritarian political institutions, such as China‟s, can sometimes speed,
rather than impede, technological inflows. China has proved itself highly
effective at building large and complex infrastructure that complements
industrial capital, and this infrastructure has attracted foreign privatesector
capital and technology”. Many other prominent social scientists have criticised
Why Nations Fail, often for its
monocausality, confusion of causes and effects, or lack of statistics-based
evidence[17].
Table 2: Institutional Strength & Debt Sustainability
Source: IMF (2018), The Debt Sustainability Framework
for Low-Income Countries.
Note: Given that concessionality
is an important element in financing LICs, the debt concept used in the
template focuses on the present value (PV) of debt.
A crucial indicator to measure the quality of a
country´s institutions is the World Bank's Country
Policy and Institutional Assessment (CPIA). The index measures the
institutional strength of a country, with 1=low, and 6=high. It scores
countries against a set of 16 criteria grouped in four clusters: economic
management, structural policies, policies for social inclusion and equity, and
public sector management and institutions. Until mid 2018, IMF and World Bank
have been relying exclusively on the CPIA to classify low-income countries’
debt-carrying capacity in their joint Debt Sustainability Framework for
low-income countries (DSF). While other economic variables have been added
since then, the CPIA is still relied on to provide a composite indicator of
institutional strength measured by the World Bank to assess a country’s
debt-carrying capacity. The CPIA assessment of institutional strength
translates into into one of three debt-carrying capacity categories (strong,
medium, and weak), as indicated in Table x. Corresponding to these categories,
the framework establishes three indicative thresholds and a benchmark for each
of five debt burden indicators (assessed in terms of GDP, exports, and
revenues) On the basis of these thresholds and benchmark, the debt
sustainability analyses include an assessment of the risk of external and
overall debt distress based on four categories: low risk (when there are no
breaches of thresholds); moderate risk (when thresholds are breached in risk
scenarios); high risk (when thresholds are breached in the baseline scenario);
and in debt distress (when a distress event, like arrears or a restructuring,
has occurred or is considered imminent). The IMF assessment of debt
sustainability provides an important signal to private portfolio investors and
creditors, domestic and foreign. Consequently, CPIA scores importantly determine
the investability of CwA countries.
[1] Jacques Ould Aoudia & Nicolas
Meisel (2007), “Is ‘Good Governance’ a Good Development Strategy?”, Document de
travail du Trésor et de l’AFD, Paris, November.
[2] Timothy Besley & Masayuki
Kudamatsu (2007), “What Can We Learn from Successful Autocracies?”, Vox, July.
[3]
Deutscher Bundestag (2018), Drucksache 19/6066, 28. 11. 2018, op.cit.
[5] Hauke Hartmann & Daniel
Schraad-Tischler (2012), “Social Exclusion and Political Change”, Americas Quarterly, Vol.13, Issue 2,
Spring. For criticism of legitimacy and paradigm of the BTI, see Jörn Hagenloch
(2005), “Die neue Weltordnung aus Gütersloh”, Telepolis, 23. November.
[6] On the political agenda(s) of
Bertelsmann Stiftung and its collusion with the media company Bertelsmann SE
& Co., see Matthew Karnitschig (2019), “How Bertelsmann mixes business,
philanthropy and Continental politics”, Politico.
[8] Transparency International, Corruption
Perceptions Index 2018: Frequently Asked Questions.
[9] Transparency International, Corruption
Perceptions Index 2018: Full Source Description.
[10] Charles P. Oman and Christiane
Arndt (2010), Measuring Governance,
OECD Development Centre Policy Brief No. 39, Paris.
[12] Christiane Arndt and Charles P. Oman
(2006), Uses and Abuses of Governance
Indicators, OECD Development Centre Policy Studies, Paris.
[13] Justin Sandefur & Divyanshi
Wadhwa (2018), „A Change in World Bank Methodology (Not Reform) Explains
India’s Rise in Doing Business Rankings”, Center for Global Development, Washington
DC, February.
[14] Justin Sandefur & Divyanshi
Wadhwa (2018), „Chart of the Week #3: Why the World Bank Should Ditch the ´Doing
Business´ Rankings—in One Embarrassing Chart”, Center for Global Development,
Washington DC, January.
[15] Daron Acemoglu & James Robinson
(2012), Why Nations Fail: The Origins of
Power, Prosperity, and Poverty, New York.
[16] Jeffrey D. Sachs (2012), “Government,
Geography, and Growth: The True Drivers of Economic Development”, Foreign Affairs, September.
