World Bank – 17 June 2008 « Governance and Growth: Shifting paradigms »

World Bank – 17 June 2008« Governance and Growth: Shifting paradigms »

Institutions and Development New Data, New Results

Nicolas Meisel ([email protected]) Research Department - French Development Agency (AFD)

Jacques Ould Aoudia ([email protected]) Treasury Directorate - Ministry of the Economy

mailto:[email protected]


REFERENCES

N. Meisel and J. Ould Aoudia (2008), ‘‘Is ‘Good Governance’ a Good Development Strategy?’’, AFD Working Paper No. 58.

http://www.afd.fr/jahia/Jahia/home/publications/documentsdetravail/pid/4434

N. Meisel and J. Ould Aoudia (2007), ‘‘A New Institutional Database: ‘Institutional Profiles 2006’ ’’, AFD Working Paper No. 46.

http://www.afd.fr/jahia/Jahia/lang/en/home/documentsdetravail/pid/3430

N. Meisel (2004), Governance Culture and Development: A different Perspective on Corporate Governance, OECD Development Centre Study, Paris.

http://www.oecdbookshop.org/oecd/display.asp?CID=&LANG=EN&SF1=DI&ST1=5LMQCR2JCWKG

« INSTITUTIONAL PROFILES 2006 » DATABASE http://www.cepii.fr/anglaisgraph/bdd/institutions.htm

CONTACTSNicolas Meisel : [email protected]

Jacques Ould Aoudia : [email protected]




http://www.cepii.fr/anglaisgraph/bdd/institutions.htm



An Intense International Debate

• What is the relationship between Governance and Growth?

• What institutions matter to trigger and sustain growth?

• How to measure institutions and governance? No common conceptual framework; many disciplines; measurement difficulties; normative assumptions.

• How to use Governance Assessments? What legitimate operational and political uses?

Our Approach What institutional factors do support growth?

Context: « Good Governance » has been given a prominent place in the development agenda.

Empirical investigation: What are the institutional features characterising high-growth experiences? Case studies + Cross Country analysis

Results: • Different governance capacities required depending on

the needs of the economy• Interdependence between economics and politics ill-

understood • Need for new concepts and further empirical testing

Presentation Outline

3. Interpreting results: Working Hypotheses

2. Empirical Investigation: What Institutions for Growth?

1. A New Database: Institutional Profiles 2006

A new Database: “Institutional Profiles”

• Research departments of French MINEFE & AFD

• Surveys: 2001, 2006 (85 countries, 90% of World’s GDP and Population), 2009 (120 countries)

• Broad definition of Institutions (polity, administration, regulations, transaction security, social cohesion, public order, coordination and anticipation, openness)

• ‘De facto’ rather than ‘de jure’ approach (Doing Business) and Growth oriented

• Aggregation of 356 institutional variables into 71 indicators (possibility to build many other indicators)

“Institutional Profiles” covers a much wider spectrum of institutions than WBI’s Indicators

Projection of the IP and WBI datasets onto the circle of correlation (PCA)

I.P. Database indicators WBI Governance indicators

Statistical Tools Used

• A family of powerful statistical tools: Exploratory Data Analysis (EDA) = refined descriptive statistics (principal component analysis, canonical variate analysis, …)

• Why? – multi-criteria analysis – no model linking Institutions to

Development “let the data speak for themselves”

Empirical Investigation: Two Steps

STEP 1: What is the relationship between growth and governance?

STEP 2: Uncovering probable « missing factors »

= Governance capacities left aside by the « good governance » agenda but that might still be important for growth.

If ‘Good Governance’ is linked to the LEVEL of income…

ZWE

ZAF

YEMVNM

VEN

UZB

USA

UKR

UGA

TURTUN THA

TCD

TAI

SYR

SWESGP

SEN

SAU

RUS

ROM

PRT

POL

PHL

PER

PAK

NZL

NOR

NGA

NER

MYS

MUS

MRT

MOZMLI

MEX

MDG

MAR

LTU

LKA

LBN

KWT

KOR

KHM

KEN

KAZ

JPN

JOR

ITA

ISR

IRN

IRL

IND

IDN

HUN

HKG

GTM

GRC

GHA

GBR

GAB

FRA

ETH

EST

ESP

EGY

DZA

DOM

DEU

CZE

CUB

COL

CMRCIV

CHN

CHL

CAN

BWA

BRA

BOL

BGR

BGD

BFA

BEN

ARG

y = 0,2665x + 7,9346

R2 = 0,7126

4

5

6

7

8

9

10

11

12

-9 -4 1 6 11

Degree of depersonalisation / formalisation of rules (values along Axis 1 of the PCA)

Leve

l of d

evel

opm

ent (

log

GD

P p

er c

apita

200

4)

'good governance'

income level

ZWE

ZAF

YEM

VNM

VEN

UZB

USA

UGA

TUR

TUN

THATCD

TAI

SYR

SWE

SGP

SEN

SAU

RUS

ROM

PRT

POL

PHL

PER

PAK

NZL

NOR

NGA

NER

MYS

MUS

MRT

MOZ

MLI

MEX

MDG

MAR

LTU

LKALBN

KWT

KOR

KHM

KEN

KAZ

JPNJOR

ITAISR

IRN

IRL

IND

IDN

HUN

HKG

GTM

GRC

GHAGBR

GAB

FRAETH

EST

ESP

EGY

DZA

DOM

DEU

CZE

CUB

COLCMR

CIV

CHN

CHL

CAN

BWA

BRA

BOL BGR

BGD

BFABEN

ARG

y = 0,0861x + 1,9816

R2 = 0,0522

-3

-1

2

4

6

8

10

-9 -7 -5 -3 -1 2 4 6 8 10 12

'good governance'

economic performance


Gro

wth

in G

DP

per

cap

ita

(199

0-20

04)

It is NOT linked to income GROWTH

(policy-makers’ concern)

How to explain that countries with similar levels of « bad governance » exhibit such different growth records? (Khan, Rodrik)

ZWE

ZAF

YEM

VNM

VEN

UZB

USA

UGA

TUR

TUN

THATCD

TAI

SYR

SWE

SGP

SEN

SAU

RUS

ROM

PRT

POL

PHL

PER

PAK

NZL

NOR

NGA

NER

MYS

MUS

MRT

MOZ

MLI

MEX

MDG

MAR

LTU

LKALBN

KWT

KOR

KHM

KEN

KAZ

JPNJOR

ITAISR

IRN

IRL

IND

IDN

HUN

HKG

GTM

GRC

GHAGBR

GAB

FRAETH

EST

ESP

EGY

DZA

DOM

DEU

CZE

CUB

COLCMR

CIV

CHN

CHL

CAN

BWA

BRA

BOL BGR

BGD

BFABEN

ARG

y = 0,0861x + 1,9816

R2 = 0,0522

-3

-1

2

4

6

8

10

-9 -7 -5 -3 -1 2 4 6 8 10 12

'good governance'



Gro

wth

in G

DP

per

cap

ita

(19

90-2

004)Governance

and Income Growth

What are the explaining factors?

ZWE

ZAFYEM

VNM

VEN

UZB

USAUKR

UGA

TURTUN

THA

TCD

TAI

SYR

SWE

SGP

SEN

SAU

RUS

ROM

PRT

POL

PHL

PER

PAK

NZL

NOR

NGA

NER

MYS

MUS

MRT

MOZ

MLI

MEX

MDG

MAR

LTU

LKA

LBN

KWT

KORKHM

KEN

KAZ

JPN

JOR

ITA

ISR

IRN

IRL

IND

IDN

HUN

HKG

GTM

GRC

GHA

GBR

GAB

FRA

ETH

EST

ESP

EGY

DZA

DOM

DEU

CZE

CUB

COL

CMR

CIV

CHN

CHL

CAN

BWA

BRA

BOL

BGR

BGD

BFA

BEN

ARG

y = 0,0009x + 0,0163

R2 = 0,061

-3%

-1%

1%

3%

5%

7%

-9 -4 1 6 11

Niveau de formalisation des règles (coordonnées de l'axe 1 de l'ACP)

"bonne gouvernance"

Per

form

ance

éco

no

miq

ue

(cro

issa

nce

du

pro

du

it p

ar t

rava

illeu

r)

per

form

ance

éco

no

miq

ue

2

3 Groups built according to their level of income growth (Khan)

Statistical Tool = Canonical Variate Analysis

Which institutional characteristics differentiate the 3 groups?

1

3

Discovering the Growth-enabling “Governance Capacities”

Method: Capturing the most discriminating variables between groups

• Group 1 (diverging) vs Group 2 (converging) – Coordination and strategic vision– Quality of basic public goods – Security of agricultural property rights

• Group 2 (converging) vs Group 3 (developed) – “Good governance” = Security of transactions & PR + control

of corruption + Administration efficiency + transparency– Openness of social orders (economic, social and political)

• Group 1 (diverging) vs Group 3 (developed)– In fact, almost everything opposes the two groups

Institutional Change: A more Realistic Path?

ARGBEN

BFA

BGD

BGRBOL

BRA

BWA

CAN

CHL

CHN

CIV

CMR COL

CUB

CZE

DEU

DOM

DZA

EGY

ESP

EST

ETH FRA

GAB

GBRGHA

GRC

GTM

HKG

HUN

IDN

IND

IRL

IRN

ISRITA

J OR J PN

KAZ

KEN

KHM

KOR

KWT

LBN

LKA

LTU

MAR

MDG

MEX

MLI

MOZ

MRT

MUS

MYS

NER

NGA

NOR

NZL

PAK

PER

PHL

POL

PRT

ROM

RUS

SAU

SEN

SGP

SWE

SYR

TAI

TCD THA

TUN

TUR

UGA

USA

UZB

VEN

VNM

YEM

ZAF

ZWE

y = 0.0861x + 1.9816R2 = 0.0522

-3

-1

2

4

6

8

1 0

-9 -7 -5 -3 -1 2 4 6 8 1 0 1 2

1

2

3

"bonne gouvernance" / "good governance"

performance économique /


Cro

iss

an

ce

du

PIB

pa

r tê

te /

Gro

wth

in G

DP

pe

r c

ap

A more realistic path?

A m

ore

rea

listi

c p

ath

?

Standard prescription

Conclusion: « Good Institutions » depend on the developmental needs of the country

ARGBEN

BFA

BGD

BGRBOL

BRA

BWA

CAN

CHL

CHN

CIV

CMR COL

CUB

CZE

DEU

DOM

DZA

EGY

ESP

EST

ETHFRA

GAB

GBRGHA

GRC

GTM

HKG

HUN

IDN

IND

IRL

IRN

ISRITA

J OR J PN

KAZ

KEN

KHM

KOR

KWT

LBN

LKA

LTU

MAR

MDG

MEX

MLI

MOZ

MRT

MUS

MYS

NER

NGA

NOR

NZL

PAK

PER

PHL

POL

PRT

ROM

RUS

SAU

SEN

SGP

SWE

SYR

TAI

TCD THA

TUN

TUR

UGA

USA

UZB

VEN

VNM

YEM

ZAF

ZWE

y = 0.0861x + 1.9816R2 = 0.0522

-3

-1

2

4

6

8

1 0

-9 -7 -5 -3 -1 2 4 6 8 1 0 1 2

1

2

3

'good governance'


Gro

wth

in

GD

P p

er c

apit

a (1

990-

2004

)

Degree of depersonalisation - Formalisation of rules (values along Axis 1 of the PCA)

ECONOMIC TAKE-OFF: Strategic Vision of Development, Co-

ordination of Private and Public Actors+ Basic Eduction and Healthcare

+Security of Agricultural Property Rights

CATCH-UP:Openness of Social Regulation

System (economic, social, politic)Formalisation of and Compliance

with Rules

What is Institutional Change?

• A great transformation from predominantly relationship-based regulation systems to impersonal institutions and formal rules creating trust at systemic (vs idiosyncratic) levels and allowing huge reductions in individual marginal transaction costs (NIE).

• A shift from a universe of permanent risk diversification (because of very high levels of individual risk) to a universe of profit maximisation (institutions for risk-sharing at a systemic level decrease individual risk and allow longer time horizons) (Polanyi).

• An asymmetric process: depersonalisation is unavoidable (demographic pressure exogenous to institutions) and undermines relation-based regulation systems. YET building and enforcing impersonal regulation systems is far from automatic (high costs and resistance)

What is Institutional Change: An Uncertain ProcessRules enforcement

Size of population / markets

Relationship-based Social Regulation System - Ascribed relations(Fukuyama)

Impersonal Social Regulation System - Voluntary relations

Transition highly uncertain due to huge social costs and rational resistance by insiders and societies

HIGHER UNCERTAINTY

• Insiders: people controlling access to power, information and wealth (Bayart, Haber, Khan, North, Olson...)

• Insider networks: – Public and private-sector elites (national and

international) tend to control and protect each other through informal means (mutual capture)

– A way to restrict and control access to valuable resources (Limited access order, North et alii)

– Pervasive throughout societies (at all levels)– Both rigid and fragile, thus creating instability– Risk of countries being caught in a political economy

trap: Entrenchment and mutual capture of corporate and public sector elites

Insider Networks

• Resistance of insiders is rational in order to preserve their privileged access to resources

• Good Governance reforms (i.e. rules guaranteeing universal rights) represent a threat to their rents, and therefore tend to be adopted only ‘on paper’

• Governance is a political issue, not a technical one

• Political economy analyses needed to understand these key obstacles to development

Implications of insider networks

How to escape this political economy trap?

• LESSON LEARNT FROM– Country case studies (Amsden, Evans, Haber, Khan, Meisel, Rodrik,

Wade…) – Cross country analyses (Institutional Profiles…)

= Governance Capacities for Economic Take-Off are Endogenous :

• STRATEGIC VISION: mobilise society and curb uncertainty during transition (stabilize expectations; lengthen horizons)

• COORDINATION ORGANISATIONS: Make convergence of interests between insiders predominate over conflicts of interests in order to implement the vision

• PUBLIC INCENTIVES AND DISCIPLINE (carrot & stick): – rents targeted on priority activities & technology absorption – temporary and conditional to achievement of performance

objectives (productivity, international competition…)

= GOVERNANCE FOCAL POINT

How to escape this political economy trap: Strong governance focal points may overcome resistance for a low cost

Make up for the destabilisation of the social order in the institutional transition towards impersonal universal rules systems

A power structure that allows state to grant AND withdraw support

Align individuals’ private returns on social returns

Conclusion‘Good Governance’ cannot be transplanted in developing

countries: high costs + elites and societies’ resistance (risks of destabilisation of social orders)

Countries that succeeded in their economic take-off used specific governance capacities (governance focal point)

Catching-up countries need to go forward with formalisation of rules and opening of their social orders

Going ahead: Country case studies (growth diagnostics); Modelling the relationship btw institutions and development; Ideas for Institutional Profiles 2009 survey; Open to collaboration

REFERENCES

N. Meisel and J. Ould Aoudia (2008), ‘‘Is ‘Good Governance’ a Good Development Strategy?’’, AFD Working Paper No. 58.


N. Meisel and J. Ould Aoudia (2007), ‘‘A New Institutional Database: ‘Institutional Profiles 2006’ ’’, AFD Working Paper No. 46.


N. Meisel (2004), Governance Culture and Development: A different Perspective on Corporate Governance, OECD Development Centre Study, Paris.


« INSTITUTIONAL PROFILES 2006 » DATABASE http://www.cepii.fr/anglaisgraph/bdd/institutions.htm

CONTACTSNicolas Meisel : [email protected]

Jacques Ould Aoudia : [email protected]




http://www.cepii.fr/anglaisgraph/bdd/institutions.htm



World Bank – 17 June 2008 « Governance and Growth: Shifting paradigms »

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Transcript of World Bank – 17 June 2008 « Governance and Growth: Shifting paradigms »