Governance and Growth: Growth-Enhancing Governance Capabilities

1. Governance and Growth: Growth-Enhancing Governance Capabilities Mushtaq H. Khan, Department of Economics, SOAS Governance for Growth Workshop, Russell Hotel July 2-3 2007

2. Governance for growth If good governance is not immediately achievable, neither is the achievement of low transaction cost markets Critical governance capabilities are then likely to be related not only to regulating imperfect markets but vitally also with providing second-best responses to market failures Attempts to correct market failures in developing countries have often failed because the institutions through which market failures were addressed could not be effectively enforced: appropriate governance capabilities were missing

3. My disagreement with many heterodox economists (like Chang) is that neither institutions nor the broader governance capabilities of particular East Asian countries with respect to those institutions are replicable Indeed, this is underlined by the fact that there are significant institutional differences in the ways in which market failures were addressed in different East Asian countries, reflecting differences in initial conditions and specific governance capabilities However, we do know quite a bit about the general types of problems that successful Asian countries ‘solved’ using very different institutional rules, consistent with their different governance capabilities of enforcement Institutions and governance capabilities from East Asia cannot be replicated

4. Nor can we simply proceed in ‘pragmatic’ ways The successful developers are also misleading as role models because the pragmatic steps they took were compatible with their internal political conditions and could be easily implemented In contrast, very similar institutional rules were often pragmatically introduced in other developing countries and could not be effectively enforced In most poorly performing developers, there are high political costs of enforcing particular rules, and/or costly political and institutional reorganization is required. Developing countries therefore need a more structured way of thinking through institutional choices and governance capabilities

5. Governance for growth • A number of critical areas of business-government relationships in case studies of Asian success stories (but this is not necessarily a complete list): • The identification and protection of critical property rights rather than all property rights • The management of non-market asset and resource transfers to critical activities • The acceleration of technology acquisition and learning through different types of rent-management strategies • And overlapping with all of them, the organization of patron-client politics in ways that enabled effective enforcement of critical rules

6. Property rights and non-market transfers

7. Market failures and the productivity gap

8. Economic Initial Conditions: Political stabilization using off-budget Low Productivity Economy resources and/or patron-client networks (Fiscal base inadequate for achieving political stability through generalized allocations) Patron-client networks, political stabilization and spillovers for growth

9. Institutional rules and governance capabilities in selected countries: 1960-2000

10. Institutional rules and governance capabilities in selected countries: 1960-2000

11. An example from the Bangladesh garment industry The emergence and growth of this low technology manufacturing industry was based on a fortuitous set of temporary rents created by MFA The initial temporary rents were allocated through the BGMEA and the first generation entrepreneurs emerged through that process Today employs around 2 million people, largest export earner but faces serious constraints in moving up value chain, and achieve scale economies Main constraint in achieving scale economies is in acquiring contiguous land sites: entrepreneurs use political factions to acquire land But constraints in moving up the value chain involve failures in credit markets: a new set of temporary rents are required

12. Political organization, governance strategies and growth