Dean & Director IBA

Dr. Farrukh Iqbal address delivered at Seminar organized by NAB in Governor House, Karachi

Governance and Development: Some Observations based on experience at the World Bank Farrukh Iqbal, Dean and Director, Institute of Business Administration, Pakistan

A Puzzling Observation

My first two assignments as an economist at the World Bank during the 1980s were in Korea and the Philippines. During the course of my work, I was puzzled by the observation that similar policies in the two countries had very different development outcomes in terms of economic growth rates. Korea had a national development bank that had successfully financed many important new industries such as shipbuilding, steelmaking and automotive. In the Philippines a similar bank had run into severe financial losses as non-performing loans piled up. Korea had successfully nurtured industries through protective trade policies. In the Philippines, infant industries had remained infants. Korea had built a very efficient public sector steel company called POSCO. There was no example of a successful public sector manufacturing company in the Philippines despite subsidies and protection.

As I discussed this with my economist colleagues in other parts of the World Bank, I realized that the observation was shared by most of them and covered more countries than just the pair that I had experience with. Most of us felt that our empirical models lacked information on an important variable, governance, that intermediated between policies and outcomes. Countries like Korea had governance mechanisms which allowed them to implement policies more or less in alignment with expectations and thus they achieved the expected good outcomes as well. They could indulge in activist industrial policies because their governance mechanisms prevented the private sector from deviating from the intent of the policies. On the other hand, the private sector was able to take all the rent available from subsidies and protection in weak governance countries without producing the desired results in terms of jobs, efficiency and growth. To put it another way, the governance mechanisms that effectively constrained Korea's crony capitalists were simply not present in countries like the Philippines.

A New Research Program on Governance

While most practitioners felt that governance was one of the critical factors that explained the puzzle just described, they did not have good empirical data to back up their hunch. Why was such data missing? At the World Bank such data was missing because it was felt that governance matters were political and therefore beyond the scope of the Bank's mandate. The World Bank's legal department had noted several times in the past that Bank reports could not comment on such things as corruption and voice and accountability because the Bank's charter prohibited staff from dealing with political issues. Meanwhile, many NGOs were, of course, talking about precisely such matters as being major impediments to growth and equality. In 1995, James Wolfensohn became President of the World Bank. He took two steps that changed the Bank's approach. First, he argued that corruption and voice and accountability were economic issues and not just political ones. He allowed Bank staff to collect data, carry out analyses and prepare report on these issues with a view to highlighting their link with economic development. Second, he built links with many international NGOs, especially with those in the area of governance.

Within a few years, a major new research program relating to governance had sprung up. A team at the World Bank, led by Dani Kaufman, collected huge amounts of data from a variety of enterprise, citizen and expert surveys from all over the world and published them in a database entitled Worldwide Governance Indicators. These indicators were divided into six areas: Voice and Accountability; Political Stability and Absence of Violence; Government Effectiveness; Regulatory Quality; Rule of Law and Control of Corruption. Between 1996 and 2016, more than 200 countries were covered and a substantial time series database had been assembled from as many as 30 different individual sources.

Side by side with this data gathering effort, research studying the link between governance and development began to proliferate. These studies confirmed that different aspects of governance had a statistically significant role in economic growth. Concepts like institutional quality began to dominate the discourse of development economics and practice. The studies also confirmed that governance was not an immutable condition. The quality of governance in a country could be improved over time through specific actions of leaders and citizens. At the same time, it could also be weakened over time.

Implications for Pakistan

Governance data for Pakistan show that the country scores in the bottom quartile of the international distribution for most years on all six indicators. So there's a tough climb ahead for us. But such data also show that the quality of governance has improved in some years and deteriorated in others. These findings should empower institutions like NAB and all the NGOs that work on development and governance issues in Pakistan. They show that progress is possible as long as concerned individuals and groups maintain pressure for improving governance. The effects of such actions in the past can be detected in the data collected for the past two decades and can be shown to be correlated with growth. So what NAB does is important for us. Furthermore, the data show a broadly improving trend across all indicators in the last five years or so. This is highly encouraging.

Concluding Irony

What happened to the Worldwide Governance Indicators enterprise at the World Bank is ironic. This enterprise was nurtured at the Bank for many years but there was so much resistance among certain countries in the Bank's Board that it was eventually shifted elsewhere to the Brookings Institution. While the data continue to be collected and reported and analyzed, World Bank documents can no longer refer to these as official World Bank data.

Farrukh Iqbal
Dean and Director
Institute of Business Administration, Pakistan