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