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
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]
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
Presentation Outline
3. Interpreting results: Working Hypotheses
2. Empirical Investigation: What Institutions for Growth?
1. A New Database: Institutional Profiles 2006
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
Degree of depersonalisation / formalisation of rules (values along Axis 1 of the PCA)
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'
economic performance
Degree of depersonalisation / formalisation of rules (values along Axis 1 of the PCA)
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 /
economic performance
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'
economic performance
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
Presentation Outline
3. Interpreting results: Working Hypotheses
2. Empirical Investigation: What Institutions for Growth?
1. A New Database: Institutional Profiles 2006
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.
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]