The Sunday Times Economic Analysis

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Columns - The Sunday Times Economic Analysis

Good governance vital for economic developmentBy the Economist

Good governance is a precondition for economic development. The quality of governance plays a vital role

in the economic development of countries. The need for good governance is widely recognised in todays

discourses on development. The exhortation for good governance to achieve economic development is

widespread. Last week we quoted President Obama who said that what Africa required was not strong

men but s trong institutions and good governance. President Obama who underscored the importance of

good governance to achieve economic development in African countries would no doubt prescribe the

same for other countries as well.

Even among those who agree that there is a relationship between good governance and economic

development, the nexus is not at all clear. Although it is s aid that governance is a sine non qua for

economic development of developing countries, the precise connection is unclear. It has become a key

issue in the current election though the focus is narrow and only on some particular aspects of it,

especially corruption. Current economic thinking is that good governance pervades nearly every aspect of

administration.

The IMF has spelled out the

relationship between goodgovernance and economic

development in its declaration

Partnership for Sustainable Global

Growth that was adopted by the IMFs

Interim Com mittee in September,

1996. It identified "promoting good

governance in all its aspects,

including ensuring the rule of law,

improving the efficiency and

accountability of the public sector, and

tackling corruption" as an essential

element of a framework within which

economies can prosper.

However as the IMF is primarily

concerned with macroeconomic

stability, external viability, and orderly

economic growth in member

countries, it has limited its

involvement in governance to only

economic aspects of governance. It is

nevertheless adm itted that good governance is one that encompasses a whole range of social, political

and economic activities and cannot be confined to economic as pects alone. Economic performance is

influenced and som etimes determined by political and adm inistrative governance. Mindful of this

limitation, this column too focuses m ainly on governance that is directly related to economic policy and

their implementation.

The IMF has s pelled out good governance in economic m anagement as improving the management of

public resources through reforms covering public s ector institutions (e.g., the treasury, central bank,

public enterprises, civil s ervice, and the official statistics function), including adm inistrative procedures

(e.g., expenditure control, budget management, and revenue collection); and supporting the development

and m aintenance of a transparent and stable economic and regulatory environment conducive to efficient

private sector activities (e.g., price systems, exchange and trade regimes, and banking s ystems and their

related regulations). The broad spectrum of economic activities that are affected by governance is clear

from this statement.

The management of the public finances is one clear area where governance is of param ount importance.

Fiscal consolidation or bringing down the budget deficit to reasonable levels is vital for the country to avoidinflation, find resources for developmental needs and social welfare expenditure on a priority basis. Fiscal

discipline that brings down the fiscal deficit to lower levels than at pres ent is vital to attain higher levels of

economic growth. Bringing down the fiscal deficit requires good governance. On the expenditure side it is

vital that wasteful expenditure is cut down. The item s of wasteful expenditure are s o numerous that it is

not necessary to pinpoint them here. Unles s there is prudence in public expenditure and accountability in

government expenses, government expenditure would exceed the revenue collected for the year, as is the

case now.

There have been m any instances where large sum s of m oney have been spent on needed development

ventures but their costs are much higher owing to the contracts being given to those who have paid

bribes. Ultimately it is not only that such projects are more costly, but there is a tendency for their

construction to be substandard or even defective. Consequently these become costly to maintain later on.

This has happened in the pas t. This is only one illustration of the connection between poor governance

and high expenditure.

On the revenue side there is a woeful inadequacy in tax collection. There are many reasons for this.

Among them are the lack of proper surveillance of tax payers and the granting of all sorts of exemptions .

Recent evidence of vast amounts of taxes being not paid due to bribery is a clear instance of bad

governance. Interference in the administration of the taxes is another form of bad governance that robs the

treasury of revenue.

Apart from the publ ic finances , there are other important areas of economic activity that is affected by poor

governance. Foreign investment is one of them. Foreign investors are often discouraged by officials who

demand bribes to permit foreign investment in various vital sectors where foreign investment is needed.

When foreign investors perceive a high degree of corruption, they realize the higher transactions costs

and tedium and shy away from the countries of poor governance. In fact bribery and corruption have been

key reasons why som e countries, such as Singapore, have attracted investment, while others have failed

to attract adequate investments.

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One of the mos t important areas that needed good governance in the country is fair legal frameworks that

are enforced impartially. The enforcement of the rule of law and protection of property rights and

fundamental rights of citizens have an important bearing on economic development, apart from their

intrinsic value in a decent and civilized society. Protection of human rights, particularly those of minorities

and impartial enforcement of laws require an independent judiciary and an impartial and incorruptible

police force. These are areas that must be implemented to attract higher investment flows.

Two ways in which good governance is expressed today are transparency and accountability. Both of

these values are woefully lacking in the polity and society. Transparency means that decisions are taken

and enforced in an open manner that follows rules and regulations. For this to be realized information

must be freely available and access ible to those who would be affected by such decisions. An important

facet of transparency is that enough information is provided in eas ily understandable forms and public

media. Accountability cannot be enforced without transparency and the rule of law.

It would be quite wrong to think that good governance is the responsibility solely of governments.Accountability is a key requirem ent of good governance at all levels of econom ic activity. Not only

governmental institutions but private and civil society organizations must be accountable to the public and

to their institutional stakeholders. An organization or an institution should be accountable to those who

will be affected by its decisions or actions.

Good governance will be an important determinant of the pace and character of economic development in

the next decade. The establishment of the rule of law, protection of property rights, safeguarding of human

and fundamental rights, the im plementation of justice, the eradication of waste, prudence in public

expenditure and minim izing of bribery and corruption are among the facets of good governance that must

prevail for the economy to grow to its full potential. Without good governance economic growth would be

stifled.

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