Economics of Poor Governance

Ideas about “structural reforms” get copy-pasted from one development report to another, and for a good reason. These recommendations—basically about improving the economy’s fundamentals—indeed matters. But guess who’s supposed to implement them? Governments! And the quality of reforms depend on the quality of governments that implement them. What’s happening to government?

QoG Dataset
QoG Dataset (which aggregates other sources)

So, why is that?

The rule of law, which government is supposed to provide, is crucial for economic development:

QoG Dataset
QoG Dataset

But the rule of law implies incorruptible public officials:

QoG Dataset
QoG Dataset

Which is not the case when a country lacks specific institutions:

QoG Dataset
QoG Dataset

However, these institutions undermine narrow political power and, therefore, unlikely to emerge:

QoG Dataset
QoG Dataset

In brief, we ask corrupted officials to stop being corrupted and limit their power. Actually, it does make sense because development economists also address honest officials, who are more numerous and try to change things. It may work. Ruling parties in non-democracies attempt to improve governance without giving much power away to the press or opposition. They initiate genuine openness reforms, let citizens request information, complain, sue the government—unless it becomes political.

Still, the quality of government stagnates around the world. Partly, it happens because dark forces hiding in ruling parties defend their interests. Hey, that’s the problem we’ve started from! Not surprisingly. The literature says about the benefits of good governance, but its recommendations follow from the relationships found in developed countries, which already have uncorrupted governments to enforce the rule of law and the rest. Demanding Switzerland-style governance from corrupted governments looks like a hopeless idea. Not only the dark force resists, we also have few reliable solutions in mind—solutions that would be feasible given all peculiarities of political institutions in developing countries.

What sort of knowledge is to look for? Perhaps, of two types:

  1. How to improve governance when the dark force resists? Honest judiciary, transparent elections, and able police create conditions for economic development. Well done. Now we want to know more about paths to these conditions. Much work has been done before in law and political studies. But as an ignorant economist, I see much space for improvements. Economists got their invisible hands on these subjects just recently and noticed the scarcity of (a) formal models, (b) suitable data. These are nice things to have. Theories escaping these two pieces leave us in the Middle Ages, which is not nice.
  2. How to run an economy with dark forces? Given its history, economic theory paid more attention to well-governed nations, not to those with problems. For one example, corruption creates information asymmetries of the type that economists haven’t paid much attention to. Take a firm that has political connections and can generate profits above the market average. Can it gain access to capital? No. For this, it must credibly disclose its superiority to banks, which is impossible because the advantage comes from informal political connections. One way or another, capital finds these opportunities, but imperfections remain, so the equilibrium level of investments is lower than the economy and technology allow. So, the problem has implications that have not been studied as deeply as the economics of good governance.

These issues arise in development economics; it’s impossible to ignore them. But the field is small compared to the rest of econ-worlds:

Screen Shot 2014-11-25 at 8.55.44 PM

Economics of poor governance awaits intellectual reinforcement from other fields. Wellbeing of 6 bn people is at stake.

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