Link to PDF Text of note entitled,"A New Reform Agenda for Nigeria."
 
 

Regarding Governance

R. Myers comments on World Bank Governance and Anti-Corruption web site and on Dani Kaufmann's paper "Government Matters."  The web site is at: http://www.worldbank.org/wbi/governance/index.htm . (This feedback can be seen on: http://www.worldbank.org/wbi/governance/feedback_received.htm).

First Comment: Author: Dr. Robert Myers (rmyers1@erols.com) Date: 13 Mar 2002

        The explicit premise of the World Bank Governance and Anti-Corruption web site is that improved political, as distinct from corporate governance, will cause or "push" faster economic development. Implicit is another premise, based on the first, that IFIs (the World Bank, etc.) can and will design aid operations that will improve political governance. I think the first issue, regarding causality is either trivial or irrelevant. I deal with the irrelevancy issue below, but it is trivial if what is being said is that countries with rapid economic growth must by definition have good political governance. More likely is that "good" political governance cannot be defined independently of rapid economic growth. In fact, a plausible premise is that the causality runs the other way around. Faster economic development and better corporate governance cause better political governance. Many political scientists might contend that faster economic growth and larger tax bases are key ingredients for better political governance. Unfortunately, I suspect this opposite causality is no more defensible than the causality suggested in the paper/web site. Most likely and most logical is that there is no direction of causality: that the two occur together, inexplicably. It is the near certainty of this that causes me to say that the relationship between political governance and economic growth has no practical or operational relevance. IFIs should apply the principle of Ockham's Razor and directly stimulate faster private sector economic development as a way of improving corporate and political governance and reducing government corruption. In fact, it is possible that IFI lending worsens political governance by sustaining corrupt, predatory governments through extraordinary financing. A plausible, operationally relevant scenario is that faster growth in fragmented, competing private sector activity will cause faster, more evenly distributed economic growth, and be accompanied by better corporate and political governance. If this is true, IFIs should give only small grants to private entrepreneurs to stimulate both economic growth and better governments that are solely dependent on domestic sources of financing. Alexander Hamilton was correct: governments dependent on domestic financing have an enhanced stake in their citizens, who in turn have an enhanced stake in them.

Second Comment: Author: Dr. Robert Myers (rmyers1@erols.com) Date: 26 Jul 2002

        In an earlier comment regarding "Governance Matters" I lament that the Kaufmann, et al work is important, but needs refinement. The simple relationship they posit (improved governance causes faster economic growth) is neither valid nor operationally useful. The direction of causality is suspect and "governance" is not precisely enough defined to provide guidance regarding how to improve it. Telescoping too many (300) governance indicators into 6 poorly delineated, "reduced form" variables suggests that virtually any and all "political reform" will cause faster economic growth. Additionally, treating political and corporate governance together can cause ham-handed government interventions into corporate governance, an inherently private sector responsibility, thus destroying positive private producer incentives. Kaufmann, et al could well give more consideration to governance involving INDUCING (through incentives), rather than DIRECTING (e.g., though laws) improved developmental behavior.
        This is essentially a "freedom" issue. It is addressed in some recent literature that generally differentiates between political and economic freedom and focuses mainly on economic freedom as being most important for development. Economic freedom is explicitly defined mainly through references to the "Economic Freedom of the World: 2002 Annual Report" (http://www.freetheworld.com/) which spells out its essence. Economic freedom is primarily an amalgam of freedom of entry (for investors) and the freedom to compete for jobs or employment (for workers). Craft Union people refer to this amalgam as the "FREEDOM OF CALLING" (the freedom to pursue one's calling). This clearly rises as competitive private investment and the demand for labor rise. As to the importance of economic versus political freedom the authors Frey and Stutzer suggest ("What Can Economists Learn from Happiness Research?" June, 2002 JEL, p. 424) that people in relatively low income-low education countries get more happiness from more economic freedom, while those in relatively high income/education countries get more happiness from more political freedom. In the same June, 2002, JEL (pp. 510–519) James Robinson reviews J. I. Herbst's book, ("States and Power in Africa"), making two significant observations. First, the type of economic development (e.g., slavery-based, extractive-based, etc.) affects the type of political governance (e.g., repressive or democratic). Second the "international state system" and "foreign development assistance" (together constituting something that might be called "political globalization") have had perverse effects on African political/economic development. In yet another paper (Simeon Djankov, et al, "The Regulation of Entry," World Bank Policy Research Working Paper 2661 of 8/2001: http://econ.worldbank.org/files/2379_wps2661.pdf) there is a behaviorally significant consideration of the freedom of calling. This paper calculates investor entry costs, among other things as percentages of per capita GDP, across countries. Not surprisingly, countries with relatively high costs of entry (restricted freedom of calling) tend to be relatively poorer economic performers. These results are not highly robust using traditional economic performance indicators but would likely be more robust using happiness indicators.