What is the relationship between governance and economic growth?

This article was originally published on The World Bank’s People, Spaces, Deliberation blog.

Should I play it safe and join a governance team or risk being a lone voice in a sea of economists and private sector staff? This was my dilemma as a DFID Governance Adviser returning to the UK after a stint in East Africa. I gambled and joined the growth specialists in DFID’s newly created Economic Development arm.  A year in, I now think differently about the relationship between growth and governance.

Eradicating poverty will not be possible without high and sustained growth that generates productive jobs and brings benefits across society. Historically, this has included boosting productivity within existing sectors as well as rebalancing economies towards more productive sectors (e.g. from agriculture to manufacturing). Such structural change or economic transformation has lifted millions from poverty.

Economic transformation can have a strong disruptive effect on political governance – giving rise, for example, to interest groups that push for accountable leaders and effective institutions. As countries get richer, more effective institutions also become more affordable. Over time, economic transformation can therefore advance core governance objectives.

But this is easier said than done. Economic development is an inherently political process that challenges vested interests. Often the surest ways for elites to hold onto power and profit aren’t in step with measures to spur investment, create jobs and foster growth. Shrewd power politics can be bad economics.

With this in mind, in my new role I’ve been part of a major exercise with DFID country offices to identify the best opportunities for inclusive economic growth. Unlike standard ‘growth diagnostics’, we have explicitly incorporated politics into our approach. The resulting country studies powerfully illustrate the close relationship between growth and governance challenges – in everything from extractives, to infrastructure or energy. Consider the following excerpts (with the countries anonymised):

• The fundamental obstacles to promoting inclusive economic growth are primarily political in nature and not due to a lack of technical expertise or knowledge about what needs to be done.
• Dependence on primary commodities provides scope for elites to enrich themselves without needing to implement reforms that improve the long-term productive capacity of the economy.
• Patronage politics distorts the economy and diverts public investment away from more productive sectors. Inertia is politically safer than reform. There’s an acute lack of trust between government and the private sector.
• Politically-connected economic elites have increasingly established monopolies e.g. in the fuel, transport, food and construction sectors forcing out or intimidating smaller players.

Implications for donors

Bringing power and politics into growth diagnostics didn’t just expose the extent of the challenges. It also identified tangible opportunities and helped avoid technically attractive measures that aren’t viable. This involved going into the nitty gritty of particular sectors and constraints to find openings that build on things as they are, rather than how donors might like them to be.

Not only can the integration of politics improve donors’ growth work; a better understanding of growth and economic transformation can improve governance work. Donors sometimes imply that growth will automatically follow if poor countries develop a set package of institutions (such as secure property rights, rule of law, anti-corruption measures, free media, democratic elections etc.). These are important concerns, but it isn’t so simple. There’s a risk of focusing on ideal governance destinations rather than learning from recent history of how countries have developed (and considering how future paths may differ).  As Dani Rodrik argues:

Few, if any countries have grown rapidly because of across-the-board institutional reforms… Rapid growth is feasible in institutional environments that look quite distorted, and policy remedies can look quite unorthodox by the standards of the conventional rulebook… The bottom line is that successful growth promoting reforms are pragmatic and opportunistic.

Donors need to reflect this in how we work. In Nigeria, for example, I saw how DFID’s work on the oil and gas sector shunned technical reform blueprints in favour of locally-led initiatives. The programme brings together diverse players as and when they share incentives and appetite for reform – whether among government, the private sector or civil society. For example, the programme took a calculated approach to who it could work with in the Nigerian Government, avoiding the notorious state oil corporation and finding pockets of reformers elsewhere. This work has influenced major legislation; tackled illegal gas flaring; and helped recoup public funds worth many multiples of the programme’s total cost.

As a governance adviser, I’m familiar with thinking about the state or civil society. I’m less accustomed to probing why firms hold back from making the kind of investment that could build local productive capabilities. How often do governance staff in-country talk to local firms, entrepreneurs or investors that have walked away?  This is as much about understanding the politics of informal ‘deals’ as about promoting formal rules. We also need a better understanding of how to spur economic development in severely fragile states – not least to avoid worsening conflict dynamics.

Governance work remains important in its own right. And many staple governance programmes (on public financial management, taxation, etc.) contribute to economic development. But the governance agenda could focus more on economic transformation; on how it links to political change; and on the practical implications for governance work. This has little to do with ‘good governance’ prescriptions and everything to do with the context-specific political economy. Often this will be as much about using governance and political skills as spending money on governance-specific programmes.  It needs to be a two-way street though. As Lant Pritchett told DFID governance advisers, ‘economists are coming your way’. Let’s make sure that we meet in the middle.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Dr Duncan Green is Head of Research at Oxfam GB and a Visiting Fellow at the Institute for Development Studies.

Image: Residents are seen in the Villa 31 slum, which censuses showcurrently house some 40,000 people in the heart of Buenos Aires, REUTERS/Enrique Marcarian.