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Domestic Resource Mobilization and the Challenge of Governance
Prof. Mushtaq Husain Khan
Department of Economics
SOAS, University of London
ESCWA-Ministry of Foreign Affairs Qatar-DESA Preparatory Meeting Doha 29-30th April 2008
Resource Mobilization and Governance
Domestic resource mobilization through savings, taxation and financial markets is closely connected to the productivity of investment and both depend on the effectiveness of institutions
Governance has therefore rightly been identified as an important constraint on resource mobilization in developing countries
However the response to these challenges is often posed as one of improving broadly defined conditions described by ‘good governance’ and the ‘investment climate’
Problematic confusion between the broad good governance agenda and the specific governance, institutional and political tasks that different developing countries have to address
Diverse resource mobilization issues in ESCWA countries
Importance of specific responses particularly important given diversity of countries in this region
i) Some countries like Egypt and Yemen are typical developing countries
ii) Many are oil (and gas) economies like Saudi Arabia, Qatar, Bahrain, UAE but some are also making transitions out of oil dependence
iii) Some are significantly dependent on foreign aid/capital/remittance inflows like Jordan, Lebanon and the Occupied Palestinian Territories
iv) Region includes war ravaged and occupied economies like Iraq and the Occupied Palestinian Territories
Clearly there should be differences in the priority accorded to resource mobilization and investment as well as reform priorities in different areas
Developing countries need to insist on the space to devise their own governance reform priorities without getting trapped in the conventional good governance debate
Summary features of ESCWA Countries
Oil and hydrocarbon-rich economies display high but very variable savings rates as we would expect, and they suffer from a domestic resource absorption problem, with relatively low investment rates
Qatar and the UAE (particularly Dubai) are emerging as new models of increasing domestic investment through strategies of becoming global service and financial hubs
Institutional and governance reforms in these countries need to focus on how to sustain this transition and make these investments productive
Bahrain Kuwait Oman
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
1990 4.4 37.4 16.4 1990 na 4.5 17.6 1990 -0.1 32.0 12.31995 3.9 26.1 14.6 1995 4.9 25.1 14.8 1995 5.0 23.5 15.02000 5.3 35.3 10.3 2000 4.7 37.0 10.7 2000 5.4 39.8 11.92005 6.9 na na 2005 8.5 57.0 19.7 2005 na na na
Qatar Saudi Arabia UAE
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
1990 na na na 1990 8.3 24.1 15.1 1990 17.5 45.6 20.51995 na 36.1 35.1 1995 0.2 29.5 19.8 1995 7.9 35.6 29.72000 na 65.1 20.2 2000 4.9 37.5 18.7 2000 5.0 41.2 23.22005 6.1 70.3 35.5 2005 6.6 50.5 16.2 2005 8.5 42.4 24.4
Summary features of ESCWA Countries Egypt Syria Yemen
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
1990 5.7 16.1 28.8 1990 7.6 16.9 16.5 1990 na 8.8 14.61995 4.5 15.0 20.1 1995 5.8 20.3 27.2 1995 11.6 14.6 21.92000 5.4 12.9 19.6 2000 2.7 24.1 17.3 2000 4.4 25.2 19.52005 4.5 15.7 18.0 2005 4.7 na na 2005 4.6 na
Jordan Lebanon Iraq
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
Growth Rate
Savings Rate (%
GDP)
Investment Rate (% GDP)
1990 1.0 1.0 31.9 1990 26.5 -64.1 17.8 1990 na na na1995 6.2 8.4 29.6 1995 6.5 -15.1 36.5 1995 na na na2000 4.2 -5.6 21.1 2000 1.7 -2.8 20.1 2000 -4.3 na na2005 7.2 -17.9 23.7 2005 1.0 -4.8 20.7 2005 na na na
Egypt, Syria and Yemen are more like typical developing countries, finding it difficult to raise savings and investment rates consistently above 20%. Priorities here are similar to typical developing countries
Jordan and Lebanon are more dependent on foreign inflows (aid, FDI, remittances) for financing both domestic consumption and investment. Priorities here are to improve the productivity of investment
Iraq and the Palestinian Occupied Territories are war ravaged and occupied territories, with internal economies seriously disrupted by occupation and conflict
Why good governance dominates the reform agenda
Good governance is a set of desirable institutional conditions that are found in more advanced countries Stable property rights Relatively low corruption (but high legal rent seeking) Governments accountable to voters 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 investment efficiency
In theory 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 resources will be directed to areas with the highest returns
The good governance agenda
E conom ic P rospe rity
E ffic ien t M arke ts and pove rty reduc tion
S tab le P rope rty R igh tsA nd E ffic ien t D e livery
o f pub lic goods
L im ited R ent-S eeking
A nd C orrup tion
A ccountab ility and E ffec tive D em ocracy
Problem Areas not in question Surveys of business opinion confirm these areas
as important constraints to investment and domestic resource mobilization in developing countries
Civil society in developing countries often supports the enforcement of these rules on the grounds that many are highly desirable goals in themselves
Fiduciary responsibility of donor agencies and foreign investors has driven concerns about corruption and the diversion of resources: focus on PFM, anti-corruption strategies, and transparency and accountability reforms
The market-enhancing governance agenda
In theory, these governance reforms could assist resource mobilization and investment efficiency:
Low transaction cost markets, would allow scarce investible resources to be raised as savings and efficiently allocated as investment
Security of savers and investors from expropriation risk and a good rule of law would enable contracts for long term investment and risk-sharing which are essential for financing technology acquisition and learning
Accountable and non-corrupt governments could provide political stability and predictability of policy
But good governance is not easy to achieve
Stabilizing property rights requires not just a commitment from government but the emergence of highly productive owners and sectors who can pay for their own protection.
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 desirable but…..
This does not mean that improvements in good governance are not achievable at all in 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
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
Corruption and Growth
Corruption and Growth 1990-2003(using Knack's IRIS data)
-8
-6
-4
-2
0
2
4
6
8
10
-1 0 1 2 3 4 5 6 7
IRIS Corruption Index 1990(ranges from 0 to 6)
Gro
wth
Rat
e of
Per
Cap
ita G
DP
199
0-20
03
Advanced Countries Converging Developing Countries Other Developing Countries
Rule of Law and Growth
Governance and Growth 1990-2003 using World Bank Rule of Law Index(World Bank/Kaufmann et. al. data)
-8
-6
-4
-2
0
2
4
6
8
10
-2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5
Rule of Law Index 1996
Gro
wth
Rat
e o
f P
er C
apit
a G
DP
199
0-20
03
Advanced Countries Diverging Developing Countries Converging Developing Countries
Voice and Accountability and Growth
Governance and Growth 1990-2003 using World Bank Voice and Accountability Index(World Bank/Kaufmann data)
-8
-6
-4
-2
0
2
4
6
8
10
-2 -1.5 -1 -0.5 0 0.5 1 1.5 2
Voice and Accountability Index 1996
Gro
wth
Rat
e o
f P
er C
apit
a G
DP
199
0-20
03
Advanced Countries Diverging Developing Countries Converging Developing Countries
Political Instability and Growth
Governance and Growth 1990-2003 using World Bank Political Instability and Violence Index(World Bank/Kaufmann et. al. data)
-8
-6
-4
-2
0
2
4
6
8
10
-3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2
Political Instability and Violence Index 1996
Gro
wth
Rat
e o
f P
er C
apit
a G
DP
199
0-20
03
Advanced Countries Diverging Developing Countries Converging Developing Countries
State Capabilities and Reform PrioritiesG
row
th R
ate
s
Governance Characteristics(Democracy, Corruption,
Stability of Property Rights)Source: Khan (2004)
1. Diverging Developing Countries
2. Converging Developing Countries
3. Advanced CapitalistCountries
Regression LineReforms that transform Poorly
Performing States into Developmental States
Reforms that improve
governance in
successfultransformation
economies
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
The 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, and in fact stock markets play a limited role even in advanced countries
The alternative is to explore arrangements where government, banks and business associations work to set up a small number of financial instruments to address resource mobilization and investment in risky sectors, with a focus on developing specific governance capabilities for monitoring and regulating specific instruments
Pragmatic governance strategies
General lip service to unachievable good governance reforms can dissipate effort and can amount to lost opportunities for effective reform
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
a commitment to ambitious good governance programmes are unlikely to make an impact on resource mobilization