Economic development in developing countries

Good governance reform has been the subject of debate among scholars and the international community regarding its efficacy in promoting economic development and enhancing growth. This theory has been strongly defended by international agents such as the World Bank and UNDP, as being pivotal to the development process in developing countries.

This essay will begin by providing a glance at the Washington Consensus policies and discuss the theory and discussion surrounding good governance. It will then argue that, while this theory is not flawed in its presentation of the important aspects which help the process of development, it has failed to take into consideration the diversity and differences among developing countries, thus rendering these policies totally inefficient in some contexts.

The Washington Consensus was designed to address perceived inefficiencies in developing countries and has traditionally been associated with neoliberal policies. The following ten key policy reforms exemplify the Washington Consensus as driven by the IMF¹:

• Fiscal discipline
• Public expenditure reform
• Tax reform
• Financial liberalisation (including liberalisation of interest rates)
• A competitive exchange rate
• Trade liberalisation
• Liberalisation of FDI
• Privatisation
• Deregulation
• Creation of clear property rights

These market-oriented policies were widely adopted by developing countries, especially in Latin America. However, as argued by Rodrik, they have ‘reaped so little growth benefit out of it’². The outcome, in terms of growth, employment, and poverty reduction, has been disappointing and it has driven countries into critical financial situations.

In this context, good governance reform assumes an important place as it advocates the reform of the state apparatus as the key to development. The lack of transparent and democratic institutions holds back economic development and creates the perfect ground for corruption which increases social inequality and poverty³. As Khan elaborates, ‘Governance reforms refer to strengthening state capabilities to enforce institutional rules that are important for economic and social development’⁴. Moreover, these capabilities would not only facilitate the achievement of the development goals but they would be ‘preconditions for development because they ensure markets will be efficient and less subject to market failures’⁵.

The UN Secretary-General, Kofi Annan, maintains that, ‘[G]ood Governance is perhaps the single most important factor in eradicating poverty and promoting development&rsquo⁶.; The UNDP says that governance is:

…the exercise of economic, political and administrative authority to manage a country’s affairs at all levels. It comprises mechanisms, processes and institutions through which citizens and groups articulate their interests, exercise their legal rights, meet their obligations and mediate their differences⁷.

Ceteris paribus, it is rational to assume that optimal economic policies and growth models will be homogenous across developing nations. However, the reality is that the circumstances in which developing countries find themselves differ significantly both from each other and from the neoliberal paradigm. Developing countries may exhibit diversity in, amongst others, the following characteristics: philosophical bases, institutional development, working rules, size and nature of transaction costs, social, human and physical capital formation, natural resource endowments, openness to trade, size of the domestic market, levels of per capita income (and wealth) and degrees of inequality in income (and wealth). Furthermore, even if a homogenous approach to economic policy did result in uniform development outcomes across countries, such policies may still not satisfy the preferences of economic agents in these countries, since inter-societal preferences may be heterogeneous; for example, it may be that lower, but more equitable growth, is preferred in some countries but not others⁸.

In addition, as Chang argues,
…institutions have typically taken decades, if not generations, to develop. In this context, the currently popular demand that developing countries should adopt ‘world standard’ institutions right away, or at least within the next 5 to 10 years, or face punishments for not doing so, seems to be at odds with the historical experiences of the NDCs that are making these very demands⁹.

Furthermore, as stated by Khan, ‘the expectation that implementing good governance reforms in developing countries will drive growth is unlikely to be met’¹⁰. Those countries present ‘structural and fiscal constraints that prevent the achievement of significant improvements in the good governance capabilities in poor countries’¹¹. In support of this, Bendana argues that, ‘in essence, a faulty notion of “good governance” is taking us away from the goals because it entails placing the state and society at the service of the market, with the presumption that economic growth alone will lead to development’¹².

Another issue that the good governance reforms aim to address in developing countries are the problems with rent, rent-seeking and corruption. These problems are directly related to the state’s ability to protect property rights and employ the rule of law.

As supported by Khan and Jomos, ‘corruption is usually defined as the transgression of formal rules governing the allocation of public resources by officials in response to offers of financial gain or political support’¹³, ‘rent is used to describe incomes which are above normal in some sense’¹⁴ and, rent-seeking is the ‘activities which seek to create, maintain or change the rights and institutions on which particular rents are based’¹⁵.

Before we move on, it is important to have a look into the security problem of developing countries. First, it affects development. As Mark Duffield puts it, ‘development is ultimately impossible without stability, and at the same time, security is not sustainable without development’¹⁶. Second, it shows that corruption is closely related to the process of state formation in developing countries. Therefore, in order to be effective, policies must take these facts into consideration.

In the West, threats tend to come from outside the country’s borders, whereas for Third World states, from inside its borders¹⁷. One of the reasons could be the ‘different trajectories and contexts of state formation’¹⁸ that have taken place in Third World countries. Here, the ‘external environment, rather than being a source of threat, becomes a source of opportunities for elites lacking domestic legitimacy to gain support against internal security threats’¹⁹. Furthermore, international support for the leaders of developing countries means they have control of- and access to capital; it represents access to international financial resources²⁰ and ‘local power holders use the relative weakness of state structures (and possibly their own growing strength) to establish relations of their own with wielders of international capital’²¹.

The end of the Cold War put an end to the external support given to Third World states by the superpowers, and the regimes that were in place started being confronted by strongmen with whom they could not compete or control²². As Reno argues, ‘such conflicts, which often lead to state collapse’²³, are the strategy adopted by the ‘strongmen to control markets, both internally and externally, and convert that control into political authority’²⁴.

The state plays a key role in the good governance agenda as it is responsible for implementing and delivering the capabilities (e.g. government accountability, protecting stable property rights, enforcing the rule of law and implementing anti-corruption policies)²⁵ brought about by good governance. However, as shown above, in many developing countries this ‘state’ does not even exist.

Subsequently, those capabilities are the necessary conditions to avoid market failure (inefficient allocation of goods and services in a market). The argument is that an efficient market drives development and, therefore, failure will constrain it. As Mauro states, ‘corruption lowers private investment, thereby reducing economic growth’, and, more importantly, the instability generated by market failure will create the perfect ground for corruption and rent-seeking.²⁶

Corruption is major problem in developing countries and the poorest people are the most affected. Since its ‘benefits’ are shared by a few people rather than the majority²⁷, poverty reduction is unlikely to happen.

In contrast, while rent-seeking in developing countries is endemic and likely to be damaging to growth, in Asia, especially during the period of high-growth, rent and rent-seeking were widespread and played a key role in the process of development²⁸. As Khan explains, ‘while many rents are harmful for developing countries, others are essential for both efficiency and growth; as a result, …rent-seeking can be growth promoting or growth-retarding’²⁹. The growth pursuits of those countries are without parallel. Thailand, for instance, despite being the most corrupt country, has shown good economic performance. South Korea, even with relatively inefficient institutions³⁰, has had incredible economic development and has adopted strategies contrary to the orthodox development advice provided by the IMF. The government played an active role and, in response to the Asian crisis that began in 1997, the South Korean government took an extremely active role, recapitalising the country’s two largest banks and helping to restructure many of the economy’s financially distressed companies. This action ran against IMF guidance, but is arguably one of the reasons behind South Korea’s relatively quick recovery³¹.

Conversely, corruption is not limited to developing countries; it is also a problem in developed countries³². As Robert Neild espouses, ‘Rich countries and their agencies…commonly have been and are accomplices in corruption abroad, encouraging it by their actions rather than impeding it…’³³

In recent years, for instance, fraud has been committed by multinational companies such as Enron and Arthur Anderson. More recently, the financial crisis, has deeply affected the world economy. These irregular actions aggravate the situation in developing countries, as their illegal practices can undermine development and exacerbate inequality and poverty and transfer money that could be used to address education (a component for transformation) and other social problems into the hands of the rich³⁴.

In addition, Shah argues that Western governments and financial institutions such as the IMF and the World Bank, through their policies, are creating even more opportunities for corruption, in both the North and the South³⁵. Shah adds that, ‘empirical evidence, much of it from the World Bank itself, suggests that, far from reducing corruption, such policies, and the manner in which they have been implemented, have, in some circumstances, increased it’³⁶.

Conclusion
The good governance reforms can bring benefits to the process of economic development in developing countries. However, the ‘package of generalisations’ is unlikely to have any significant effect because those countries’ historical, social and economic processes are different. Strategies for poverty reduction and economic development should be to develop policies that will be more likely to succeed if the various countries are assessed individually. There needs to be an understanding, through their historical processes, of what has not worked. Doing this will avoid the wasting of resources, which, over time, could drive the country into deeper difficulties Undoubtedly, good governance helps in this process, but is not the solution to the problem.

Generalisations are unlikely to be effective; each country is unique, and conditions will differ among them. To be effective, it is necessary to ‘identify the determinants of these differences’ and make use of the good aspects of them. It also illustrates the importance of tailoring institutional design and policy formation to the country’s geographical, cultural and economic context.

¹John Williamson, ‘Did the Washington Consensus Fail?’ Speech for Center of Strategic & International Studies, http://www.iie.com/publications/papers/paper.cfm?researchid=488 accessed on 20.03.2010.
²Dani Rodrik, ‘Growth Strategies’, John F. Kennedy School of Government, Harvard University Working Paper, June.
³Mushtaq Khan, ‘State Failure in Developing Countries and Institutional Reform Strategies’, in Tungodden, B., Stern, N. and Kolstad, I. (eds), Toward Pro-Poor Policies: Aid Institutions and Globalization, Proceedings of Annual World Bank Conference on Development Economics, Oxford: Oxford University Press and World Bank.
⁴Mushtaq Khan, ‘Governance, Growth and Poverty Reduction’, DESA Working Paper No. ST/ESA/2009/DWP. April. p, 115.
⁵Ibid. p, 115
⁶Kofi Annan, ‘Governance, Development and the 2005 Agenda’, Meeting Report, ODI. Accessed on 21.03.2010.
⁷‘Governance for Sustainable Human Development’, UNDP Policy Paper, UNDP 1997, p 2-3. cited at Good Governance and Its Relationship to Democracy and Economic Development. P.,4.
⁸Joseph Stiglitz, ‘Globalisation and its Discontents, London: Penguin Books Ltd (2002)
⁹Chang, H-J. ‘Kicking Away the Ladder’, Anthem Press: London, ch. 3, pp. 69–123, 152
¹⁰Mushtaq Khan, ‘Governance, Growth and Poverty Reduction’, DESA Working Paper No. ST/ESA/2009/DWP. April. p, 116.
¹¹Ibid. p, 116
¹²Alejandro Bendana, ‘Good Governance and the MDGs’, Focus on the Global South, October 12, 2004.
¹³Khan & Jomo, “Rents, Rent-Seeking and Economic Development”, Cambridge University Press: Cambridge Chs. 1 and 2. p, 5
¹⁴Ibid. p, 5
¹⁵Ibid. p, 5.
¹⁶Mark Duffield, ‘Global Governance and the New Wars: The Merging of Development and Security’Zed Books, London & New York 2001. p.16
¹⁷Alexander Wendt & Michael Barnett, ‘Dependent State Formation and Third World Militarisation’, Review of International Studies 19:4 (1993), 321-47.
¹⁸Ibid. p, 321.
¹⁹Ibid. p, 321.
²⁰Anna Leander, ‘Wars and the Un-making of States: Taking Tilly Seriously in the Contemporary World’, in Contemporary Security Analysis and Copenhagen Peace Research, eds. Stefano Guzzini & Dietrich Jung (Routledge, 2004).
²¹Ibid. p, 7.
²²Mohammed Ayoob, ‘Humanitarian Intervention and State Sovereignty’, International Journal of Human Rights 6:1 (2002), 81-102. p, 97.
²³Willian Reno, Humanitarian Emergencies and Warlord Economies in Liberia and Sierra Leone, Working paper No. 140 (UNU World Institute for Development Economics Research, 1997), p.2. Quoted from Ibid. p, 97.
²⁴Ibid. p, 97.
²⁵Khan & Jomo, ‘Rents, Rent-Seeking and Economic Development’, Cambridge University Press: Cambridge Chs. 1 and 2.
²⁶Mushtaq Kan, ‘Governance, Growth and Poverty Reduction’, DESA Working Paper No. ST/ESA/2009/DWP. April.
²⁷Ibid.
²⁸Khan & Jomo, ‘Rents, Rent-Seeking and Economic Development’, Cambridge University Press: Cambridge Chs. 1 and 2.
²⁹Ibid. p, 188
³⁰Ibid.
³¹Joseph Stiglitz, ‘Globalisation and its Discontents, London: Penguin Books Ltd. (2002)
³²Khan & Jomo, ‘Rents, Rent-Seeking and Economic Development’, Cambridge University Press: Cambridge Chs. 1 and 2
³³Anup Shah, “Corruption”, Global Issues. http://globalissues.org/article/590/corruption. Accessed in 21.03.2010.
³⁴Susan Hawley, Exporting Corruption; Privatization, Multinational and Bribery, The Corner House, June 2000. Cited in Anup Shah, “Corruption”, Global Issues. http://globalissues.org/article/590/corruption. Accessed in 21.03.2010
³⁵Anup Shah, “Corruption”, Global Issues. http://globalissues.org/article/590/corruption. Accessed in 21.03.2010<
³⁶Ibid. p, 6.