Friday, March 18, 2016

The State Power and Its Restraints, by Yongmei Zhou

The Sustainable Development Goals recognize the need to build peaceful, just and inclusive societies with effective rule of law and transparent, effective and accountable institutions. These goals are not only important in their own right but are also relevant for the achievement of economic and social development goals. Given how distant this vision may seem to people living in countries facing civil conflict, high inequality and stagnant growth, two questions are worth asking: 1) given a governance context, sometimes highly imperfect, what does it take to make development progress; and 2) what can drive successful governance reforms. These are the questions taken on by the World Development Report 2017 on Governance and the Law (the WDR).
The WDR takes a functional approach and examines the quality of governance in relation to the development goals that societies place priority to -- security, growth, and equity. This is in contrast to the normative approach, which examines the quality of governance of a country in relation to that of a normative standard that is only met by highly industrialized country – competent bureaucracy, state monopoly of violence, democratic accountability, and rule of law. The normative approach tends to use the “gap” as the justification for policy attention and resource allocation and runs the risk of generating comprehensive but ineffective reform programs.

With a functional approach, the WDR zeroes in on the ability of the state to make credible commitment and promote cooperation and coordination for achieving growth, equity and security. Past experience shows that poor countries can make a lot of development progress with highly imperfect institutions. For example, among the fast-growing developing countries, many continue to confront the problem of corruption in the executive, legislative and the judiciary (see figure below).

This creates a major intellectual and policy question: how did rapid development happen despite the lack of strong rule of law and other checks and balance institutions? Governments of more successful developing countries use diverse institutional approaches to establish credible and pro-development policies. For example, the South Korea government relied on close cooperation with business conglomerations (the chaebol) to increase investment in strategic industries and used the export market as the discipline for efficiency. In China, subnational governments are given a lot more autonomy and very strong incentive (through the party cadre management system) for economic growth. To formally signal its business-friendly stance (in contrast with its communist past), the government adopted the “Three Represents” principle to allow businessmen into the Communist Party and amended the Constitution to protect private ownership.

Aside from growth-enhancing policies, countries with more long-term growth success have been able to avoid reversals caused by violent conflict or lengthy adjustment to negative shocks. Liberia’s 1989-97 civil war, for example, reduced GDP per capita by 85% and Liberia is only now recovering to the pre-war level. To understand the variations across countries in security, growth and equity outcomes, we need to deepen our understanding of the sources of rents, how rents are distributed, what bargains are struck, how political settlements are sustained, and how violence is controlled and conflict is managed.

While imperfect institutions do not necessarily prevent growth, here is the tough news: to join the High-income Countries (HICs) club requires significant institutional building. Arguably the most difficult task is to “put power of the state into a cage.” Comparing those upper-middle income countries that transitioned to the High-income category with those that seem to be “stuck” in the upper-middle income category, the average level of corruption was much less in the former group when they were still in the upper-middle income category. This is the case for a variety of corruption indicators. The question then is what institutional reforms successfully curbed corruption among the faster-growing countries as they converged towards advanced economies and how these reforms were implemented.

Part of the central goal of the WDR is to understand the historical drivers for institutional reforms that establish and grow checks and balance institutions. For the countries aspiring to avoid the middle-income trap (or more precisely the upper-middle-income trap), “putting the state power into a cage” is necessary but does not come naturally to those in power. As a result of international diffusion, most countries have established these oversight institutions but their effectiveness varies widely and can be limited for a long time. We need to understand how successful reform coalitions were constructed and how the oversight institutions grew competency, legitimacy and influence over time.