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Domestic Resource Mobilization and the Challenge of Governance
Prof. Mushtaq H. Khan
Department of Economics
SOAS, University of London
Resource Mobilization and Governance
Governance is rightly identified as an important constraint on resource mobilization in developing countries
Domestic resource mobilization is constrained by institutional weaknesses and political weaknesses and these are governance problems
However the response to these challenges is often posed as one of improving ‘good governance’ and fighting corruption
Problematic confusion between the broad good governance agenda and the specific governance, institutional and political tasks that developing countries have to address
Good governance as an end rather than as means
Good governance is a set of desirable institutional conditions that we do find in more advanced countries Stable property rights Relatively low corruption (but high legal rent seeking) Governments accountable to voters Strong rule of law
These are desirable goals in their own right, but in theory the achievement of these conditions would also help resource mobilization and market-driven growth
Good governance works by improving overall market and political ‘transaction efficiency’
If good governance conditions can be achieved savers will feel confident to save, investors to invest, and both will be served by accountable governments providing public goods
But are these feasible reform objectives?
Good governance has strong abstract theoretical support and its propositions are theoretically plausible
The reform programme is politically attractive and its goals are supported by many constituencies in developing countries as ends in themselves
But just because something is desirable and in theory would improve performance does not mean that it is immediately achievable
The problem is that achieving good governance conditions is very expensive and advanced countries achieved these conditions slowly over a long period
The ‘cost’ of good governance
Stabilizing property rights requires not just a commitment from government but the expenditure of real money on enforcement, arbitration, protection and conflict resolution
Fighting corruption involves having significant legal sources of finance for running politics, a budget large enough that all or most of the redistributive demands in
society can be met through the budget, and regulatory and enforcement structures for converting illegal rent seeking
into legal rent seeking
The political accountability of parties to a broad electorate and not just to powerful clients requires (amongst many other things) the feasibility of maintaining political stability through budgetary redistribution
Good governance is still desirable but…..
This does not mean that improvements in good governance are not achievable in most developing countries
Improvements are both possible and desirable
The question is whether the feasible improvement along this path can be significant enough to make a significant impact on transaction efficiency within a policy period
If the feasible improvement in ‘good governance’ is small, then we have to look for other governance reforms to achieve improvements in resource mobilization and the efficiency of investment allocation
The historical evidence from case studies shows that this is exactly what successful developers did
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth(using Knack- IRIS data) 1990-2003
-8
-6
-4
-2
0
2
4
6
8
10
0 10 20 30 40 50IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Gro
wth
Rat
e of
Per
Cap
ita G
DP
199
0-20
03
Diverging Developing Countries
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth(using Knack- IRIS data) 1990-2003
-8
-6
-4
-2
0
2
4
6
8
10
0 10 20 30 40 50IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Gro
wth
Rat
e of
Per
Cap
ita G
DP
199
0-20
03
Advanced Countries Diverging Developing Countries
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth(using Knack- IRIS data) 1990-2003
-8
-6
-4
-2
0
2
4
6
8
10
0 10 20 30 40 50IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Gro
wth
Rat
e of
Per
Cap
ita G
DP
199
0-20
03
Advanced Countries Converging Developing Countries Diverging Developing Countries
What are the critical governance goals?
Successful resource mobilization and sustained growth in developing countries depends on identifying specific market and government failures that are immediate constraints
A viable strategy should identify governance reforms that are targeted, narrowly defined, and plausibly achievable in a policy cycle
These will differ from country to country because their initial conditions and dominant market failures are different, as are their institutional and political capacities to address these
Narrowly defined governance goals that address specific market failures should be identified in national development strategies
Examples of market failures affecting resource mobilization
Absence of risk-sharing institutions prevents investment in many potentially profitable sectors in developing countries
In theory good governance would solve the problem by allowing efficient stock markets to mobilize resources from venture capitalists for investment in risky sectors
In reality if we rely on this route we will have to wait for a long time to see any significant effects
The alternative is to explore arrangements where government, banks and business associations work to set up a small number of financial instruments to address this problem, perhaps with joint monitoring and a commitment for enforcement that is credible because it is limited to specific instruments
Focus on specific constraints
General good governance reforms can dissipate effort and can amount to lost opportunities for effective reform
The historical experience of state-citizen relationships in advanced countries suggests that accountability is most likely to develop if governments pledge specific service delivery targets for key taxpaying constituencies
The Paris Declaration on ownership gives developing countries the space to define their own strategies to develop accountability through taxation and service delivery
Anti-corruption strategies should similarly focus on a few narrowly defined areas where corruption affects the implementation of critical national strategies
Pragmatic governance strategies
Success can be replicated and scaled up but a big failure can cause demoralization for years to come
Governance priorities should be narrowly defined and feasible
They should be linked to specific targets and priorities identified in national development strategies
It is better to be too conservative and start with very modest programmes
General lip service to good governance or even worse a prioritization of ambitious good governance programmes are unlikely to make an impact on resource mobilization