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 today’s 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 strong 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 said 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 good governance and economic development in its declaration Partnership for Sustainable Global Growth that was adopted by the IMF’s Interim Committee 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 admitted that good governance is one that encompasses a whole range of social, political and economic activities and cannot be confined to economic aspects alone. Economic performance is influenced and sometimes determined by political and administrative governance. Mindful of this limitation, this column too focuses mainly on governance that is directly related to economic policy and their implementation.
The IMF has spelled out good governance in economic management as “ improving the management of public resources through reforms covering public sector institutions (e.g., the treasury, central bank, public enterprises, civil service, and the official statistics function), including administrative procedures (e.g., expenditure control, budget management, and revenue collection); and supporting the development and maintenance 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 systems 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 paramount importance. Fiscal consolidation or bringing down the budget deficit to reasonable levels is vital for the country to avoid inflation, 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 present 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 items of wasteful expenditure are so numerous that it is not necessary to pinpoint them here. Unless 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 many instances where large sums of money 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 past. 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 public 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 some countries, such as Singapore, have attracted investment, while others have failed to attract adequate investments.
One of the most 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 accessible to those who would be affected by such decisions. An important facet of transparency is that enough information is provided in easily 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 requirement of good governance at all levels of economic 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 implementation of justice, the eradication of waste, prudence in public expenditure and minimizing 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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