Is the Good Governance path a dead end?

Is the “markets plus good governance” formula indeed the enlightened way to economic Nirvana that its adherents say it is?

Warning: I am following Paul Krugman’s tradition of labeling some of my posts ‘a bit wonkish’. Some of the succeeding material might be a bit taxing, but for those who persevere, the results can be quite rewarding.

The Fork in the Road

During his first state of the nation address, President Noynoy Aquino or PNoy told us that the country faced a fork in the road. On the one hand was the destructive path of evil tread by the Inglorious Beast, on the other was the righteous path of good governance that he the Benign One would lead us down.

Nearly one year on and it seems the righteous path is headed nowhere with allegations of BFFism floating around, corruption and smuggling continuing unabated, and a government that cannot seem to spend its own lean budget in a timely manner.

Despite these setbacks, the Palace continues to put up a brave face. PNoy after all has become the new poster boy for Washington’s policy consensus having been endowed with a grant by the US Milennium Challenge Corporation to pursue its Milennium Development Goals to halve poverty.

This follows the Philippines belated exit from the IMF emergency loan program. The ADB for its part turned on the tap by partly financing the expansion of the Conditional Cash Transfers program, the government’s flagship project for ending poverty. Meanwhile private investments were being sought to fund the government’s public infrastructure program.

The present seems to echo the 1950s and 60s when the country was held in such high esteem by international donors during the last “big push” towards development. We can of course see what that era of donor dependency produced when it culiminated with Ferdinand Marcos’s debt driven boom and crash of the 1970s and 80s.

The Righteous Path

The 1990s saw the rise of economic fundamentalism among policy circles the world over. The precepts of this view bordered on religious zeal. The high priests and prophets of this pseudo-religion proclaimed that there was but one model, the Market.

All those on the path to the Promised Land had to be guided by the Invisible Hand of the Market. Thou shalt have no other models before me was the first commandment. The Philippines under the yolk of the IMF had to follow these strictures. We soon found that the Market could be very exacting and vengeful. Many of the vulnerable, “uncompetitive” and at risk sectors would fall by the way-side and suffer from its discipline.

Despite all the pain that followed from swallowing this bitter pill, the economy did not grow sufficiently fast enough to deliver our people from the clutches of poverty. Why our leaders cried, has the Market abandoned us? We found more and more of our countrymen being led into exile, into servitude abroad. Where have we fallen short? they asked.

Then from on high came the answer.

In the 2000’s, a new covenant was sealed. We were now told that we needed an intercessor to mediate on our behalf. That Intercessor was called Institutions. For the magic of the Market to come into our lives, we needed to repent of our evil ways and follow the path of Good Governance. To convince us, the apostles of the new covenant showed us this sign (click to zoom):

From the pages of the IMF’s journal Finance and Development, Kaufmann and Kraay sought to demonstrate that good governance is the path through which all nations need to pass to get to economic salvation. It shows by implication that countries which have adopted Western standards of governance flourish economically, and countries that have shunned them tend to have floundered.

Indeed though it sounds tautological the very simple and coherent nature of this message, a message that puts it all on our ability to be born again to a re-awakened sense of right and wrong, has enamored most of our elders in the political and business community. Even Mrs Arroyo claimed to tread on this path, but she had stumbled along the way. In 2010, Mr Aquino pledged to bring us back on it.

We would soon be joining the rich club with his slogans like Kung walang corrupt, walang mahirap (no corruption, no poverty) and Daang matuwid (the Righteous Path). PNoy was singing from the same hymn book of the new Washington Consensus (Markets + Institutions = Economic Nirvana).

The real Fork in the Road

The development experts, who had once written us off, welcomed us back in the fold like a Prodigal Son. In his first year in office, PNoy relaxed on spending thinking that we had already been saved and that through the grace of the Market we would soon be rolling in the clouds along with our richer ASEAN neighbors who had already passed on to the other side.

Such a seductive world view, with everything tidily falling into place–that is until you consider the Inconvenient Truth from the real world. It turns out that things don’t necessarily follow according to the message. Take a look at this contradicting sign courtesy of Mushtaq Khan from the UNCTAD’s Discussion Papers (the UNCTAD being the IMF’s poorer cousin).

It draws on a similar data set that Kaufmann and Kraay used covering indicators of good governance and economic well-being from the 1990s predominantly. We find that countries can actually be grouped into three: the rich ones (circled in the upper right-hand corner), the poor ones (circled in the bottom left-hand corner), and the ‘convergence club’ countries (circled in the upper left-hand corner).

From the chart we can see that the members of the converging economies (on the upper left-hand corner) advanced economically first before improving institutionally. In fact the convergence club performed on average just as poorly on the corruption scale as the diverging economies (on the lower left-hand corner).

(Update: Although the regression line is upward sloping, indicating a positive correlation between anti-corruption and economic growth, an analysis of the three clusters of countries comprised of rich, poor and convergence club members reveals the direction of causality to flow from growth to control of corruption, not the other way around)

Indeed if we examine the economic histories of the convergence club members, we will find that they did not adhere strictly to the ‘righteous path’ of Markets plus Institutions. Japan, Korea and China developed not by relying on the Invisible Hand of the Market alone, but by wielding the Visible Boot of the State to coordinate, reward and punish industry players in accordance with their rational industrial policies.

Instead of relying on impersonal contracts under the Market framework, they used informal contracting under different guises, the keiretsus, chaebols and guanxi, to create secure property and contract rights to protect investors in strategic sectors within their economies. These institutions did not come from Western capitalism but were home grown. Indeed the alternative of implementing Western-style rule of law throughout the system would have been beyond their reach at the time they were emerging.

Chalmers Johnson who documented the rise of industrial policy in Japan by studying MITI the lead agency of its industrialization, wrote that

(a) part of the MITI perspective is impatience with the Anglo-American doctrine of economic competition. After the war MITI had to reconcile itself to the occupation-fostered market system in Japan, but it has always been hostile to American-style price competition and anti-trust legislation. Sahashi likes to quote Schumpeter to the effect that the competition that really counts in the capitalist system is not measured by profit margins but by the development of new commodities, new technologies, new sources of supply, and new types of organizations.

What this points to is the fact that rather than the fork in the road being a choice between the Righteous Path of good governance versus bad governance, the decision we are faced with is whether we continue down the same old road of the (new) Washington Consensus or change course and move more towards the BeST Consensus (Beijing, Seoul and Tokyo Consensus) bearing in mind that no other country has successfully traveled down the path of the former into the promised land.

A wake-up call

So is the good governance path a dead end? If we are to look at economic history, the answer seems to be a resounding YES. Unfortunately, the tribe of PNoy seems to have fallen head over heels for it. They will not accept any deviation from this course. The eunuchs and high priests surrounding him are all advising their leader to stick to their teachings.

Who can blame them? The gospel they have accepted is a truly seductive one. It does not require us doing our homework, building home grown institutions consistent with channeling resources into more producitive activities. It fits with our fatalistic, religious upbringing to rely on someone or something external to deliver us from evil.

The results of the alternative path trodden by the convergence club are evident for anyone to see. Singapore, Malaysia, Thailand and even Indonesia are heading down that road. The Philippines needs to wake-up to this reality. It needs to gain “a re-awakened sense” alright, not of right and wrong, but of self-empowerment and self-determination. That is the very essence of people power after all.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • J_ag

    Is good governance alone the effect of cause of economic development…

    or was it self determination and the the idea of self interest of individuals/communities/state that led to the demand for good governance.

    Even the PRC left the command model and pushed the self interest model…

    There never was free markets. It was always states acting for their interest…

    We should not be afraid of people striving for wealth and power.

    The government policy of bread and circus will now be changed to bread, condoms, pills and circus without bothering about the idea of economic policies for pushing the self interests of the many.

    • You run the risk of creating mixed metaphors by using the term self-interest in this context, J_AG. The notion of everyone pursuing their self-interest (concern for personal benefit) leading to the maximum public good is the basis of Adam Smith’s Invisible Hand.

      I used self-determination, which is big enough to include a concern for the many that constitute communities and the state, purposefully to avoid the confusion.

  • Bert

    “Is the Good Governance path a dead end?”

    Easy.

    From the point of view of the obstructionists, the pessimists, the negativists, and the oppositionists who are praying for the present government to fail the answer to the question is, dyaraaaaaan…..YES!.

    • Actually from the opposition’s point of view, the good governance path is their road back to power, because the failure of reformers will revive their chances. Here’s a quote from Khan’s paper:

      “Our analysis of the drivers of political corruption is consistent with the persistent evidence of political corruption in all developing countries. It is also consistent with the persistent failure of reforming anti-corruption governments in developing countries. Even when elected on massive popular mandates and even when they have just replaced very corrupt governments, reforming governments appear to succumb to corruption with depressing regularity within relatively short periods of time.
      This evidence suggests that strong structural drivers are at work and that these are powerful enough to eventually overcome the intentions of even committed and honest individuals at the highest levels of government.
      These experiences should tell us that transparency and accountability reforms on their own are not likely to resolve this problem given the financial constraints of achieving political stability through transparent fiscal transfers.” (emphasis added)

      • Bert

        As our friend Ding Gagelonia (may he rest in peace) would say, “Tumbok mo, Doy”, :).

        Now, Doy, we are in agreement on this, finally, that the oppositionists are praying for the failure of Noynoy’s government, for, as you said, it’s their only road back to power. So, as I said, their answer to your question “Is the Good Governance path a dead end?” is definitely ‘YES’. See?

        As to the presumption that Noynoy’s government will fail because of the path he has taken which is good governance is never the road to a successful government, well, I think that the oppositionists should be well warned and be prepared to eat the dust.

        After all, praying for failure, as in all prayers, is not always granted. God or no God.

      • Bert

        Now, Doy, as to the oppositionist’s thinking and praying that President Noynoy will willfully and voluntarily change his mind and change his course from good governance to bad governance then I think all of us will lose, huhuhuhu, hikbi.

        • Bert

          When that time comes, Doy, then we can surely and rightly say that the road to Good Governance is dead.

      • There’s nothing wrong with tackling good governance per se except in the sense framed by the New Washington Consensus.

        Creating a developmental state by creating certain capacities in the bureaucracy that is both professional and effective would be the smarter way. This is the East Asian model which is worlds apart from pursuing the pure Markets + Institutions Formula.

        • In fact the danger with the present approach of the govt is that people become disillusioned and dissatisfied with it which then causes the reform process to collapse upon its own demands.

  • GabbyD

    you claim: “From the chart we can see that the members of the converging economies (on the upper left-hand corner) advanced economically FIRST [EMPHASIS MINE] before improving institutionally.”

    again, i’d push back against this. specifically, the word “first”. you dont know, from this graph, what the TIMING IS.

    all this graph tells you is this: of the countries with relatively poorer corruption index scores, the VARIATION in the growth rates is BIGGER than those with relatively BETTER corruption scores. variation means, really fast growth [convergence] and slow growth[divergence.

    this just tells you that corruption isnt clearly the key factor IF you want to grow really fast.

    • That’s why to determine the direction of causality, we turned to economic history.

      • GabbyD

        if you want to argue from history, then you cannot use the phrase “FROM THE CHART…” simply because that chart doesnt say what you claim it says.

        • If you read the article, the use of the words are justified. History is secondary confirmation.

          • GabbyD

            by the article, you mean the unctad paper? actually, that paper shies away from your stronger interpretation.

          • The bottom of page six reads, “just as with the overall governance indicator in the 1990s the slight difference between converging and diverging developing countries disappears completely.”

            Which means converging countries first improved economically, before they achieved good governance.

          • GabbyD

            seriously? are you kidding me?

            anyone who would look at his paper, would find that he writes that there is NO SIGNIFICANT difference.

            as in, nakasulat doon. \

            again, just to be clear to anyone who is interested in the truth — the graph (merely?) says that corruption and growth for non developed countreis isnt a factor.

            i put a question mark there because this conclusion is actually quite a finding — there is no need to exaggerate it.

          • CORRECT. That proves my point.

            No significant difference in the average control of corruption scores of converging and diverging countries. That means the more economically advanced countries in the convergence club back in the 1990s did not get to where they were by controlling corruption first.

            Now if they had significantly higher scores on the anti-corruption scale that would have supported the good governance argument. But they didn’t, so the conclusion drawn here is the correct one.

          • GabbyD

            cusp, we were talking about the “timing”, the word first.

            if all you said was the measure of corruption used, and growth is uncorrelated once developed countries are taken out, then that would be fine.

            another way of putting it was what i said at the start — more corruption means MORE VARIANCE in economic outcomes.

          • That’s not exactly what the paper does. It’s more of a cluster analysis to tease out the direction of causality in the correlation. But anyway, we are quibbling over these technical details.

            I am happy to accept your argument about the variability of the outcome, because there is evidence for that elsewhere.

          • GabbyD

            thats the weird thing about this thread. we shouldnt be having it!

            coz the facts are crystal clear.

            1), you said “correct” to the fact that the unctad paper doesnt say there is a significant relationship. the author of the graph agrees with you.

            the opposite of no significant relationship is NOT no relationship. high variance means high noise. the author of the unctad paper is careful to stress this. we should too.

            2) related to 1), the word “first” is also something significant. again the variance is crucial here too.

            the author says that there is no difference between relationship in the 80s and the 90s. also, in these decades, the time average is taken.

            so there is no sense where the term “first” makes sense because all the time variation disappears! the only time variation remaining is that of 80s vs 90s, — of which again — there is nothing there. the “cluster analysis” you refer to says theres nothing there.

            now had there been a strong difference between the two decades, THEN you could talk about what one did “first”.

            3) the author also is quick to add that corruption and good governance are related, but not the same.

          • we should just agree to disagree on this point.

  • GabbyD

    ” PNoy relaxed on spending” –> again, this is the first quarter we are talking about. how about some perspective?

    • He relaxed spending in the sense that his budget was but 1.9% larger than the previous one. That means it shrank in real terms, ie grew much slower than the rest of the economy.

  • GabbyD

    “We would soon be joining the rich club with his slogans like Kung walang corrupt, walang mahirap (no corruption, no poverty) and Daang matuwid (the Righteous Path). PNoy was singing from the same hymn book of the new Washington Consensus (Markets + Institutions = Economic Nirvana).”

    i would dispute the last equation. there is nothing in walang corrupt walang mahirap that points to “markets + institutions”, specifically the markets part.

    he advocates targetted govt interventions. dont tell me the CCTransfer isnt a large program that lets markets alone.

    • CCT was a low lying fruit that was made possible by phasing out the rice subsidy program. The tax and spend priorities of the administration shows that PNoy believes in “small government”.

      • GabbyD

        ” The tax and spend priorities of the administration shows that PNoy believes in “small government”.”

        what do you mean? there are several big ticket initiatives here. the CCT and the education push among others.

        plus a 1.9% larger budget may be smaller govt — the CORRECT stat is TotalExpenditure/GNP. what this number is i dont know.

        • Our government is only 20% of our economy. To have good governance, property rights and rule of law, the Western way, it needs to be at least 30-40%.

          That’s why I said, “small government.” It’s not even small from the Western view point, it is minuscule. Some poor countries go up to 25%. Brazil’s is close to 40%.

        • UP nn grad

          The education-push is shallow and primarily media-media for now; new school construction — whazzat? Hiring new teachers? Werr-zzatt? Additional government expenditures from K12? Huh???

          Now, CCT… additional money is flowing into economy. Background: CCT is foreign-pushed and has stipulations, primarily that Noynoy can’t re-allocate the money to a new highway in tarlac even if he wanted to.

          Now the Samar Highway… that’s new money. Millenium Challenge corporation-USA.

      • GabbyD

        oh, if GNP grows by 5%, then the shrinking of the Exp/GDP ratio will fall by an extremely small amount. certainly NOT small govt.

        • It was already at dangerously low levels to begin with. The tax take was nearing 12% of GDP, while expenditures was at 16%. If that is not small, I don’t know what is.