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These are noble goals since they make available a bigger volume of material goods and services to people on average if one ignores the disparity among different segments in society in the sharing of that high material prosperity.
The presence of disparities tarnishes the quality of growth. Issues relating to them were discussed in a previous ‘My View’ in this series titled ‘Sri Lanka’s Growth Paradox: When poverty yields, income gap holds stubbornly’ (available at: http://www.ft.lk/2014/05/12/sri-lankas-growth-paradox-when-poverty-yields-income-gap-holds-stubbornly/).
Another neglected area by economic policy makers in the developing world in their obsessive pursuit of economic growth is the contribution of good governance to improve the quality of life of people in society.
Good governance promotes quality of life
According to recent evidence, good governance delivers a double bonus to a society. First, it helps a society to sustain its economic growth. Then, it contributes to improve the quality of life of people. In view of this significant contribution of good governance, economic policy makers are advised to first pay attention to good governance requirements before they seek after material growth targets.
Governance promotes PCI but PCI doesn’t improve governance
In a paper presented to the 5th Economia Panel Meeting at Harvard University in April 2002, under the title ‘Growth without Governance’ World Bank economists Daniel Kaufmann and Aart Kraay have argued that the quality of governance has a very strong positive impact on per capita income across countries.
Using a set of Worldwide Governance Indicators or WGIs, a good governance template prepared by them for the World Bank, in 175 countries for the period 2001/2, the two economists have also found two other important relationships. The first is relating to the theme of their paper that good governance contributes immensely to a sustainable high growth in PCI in countries. The second is that the growth in PCI does not contribute to improve the quality of governance in the same tempo.
Their finding was that growth in PCI has either a weak or a negative impact on the improvement of the quality of governance if good governance had been absent in society initially. In other words, good governance certainly leads to economic growth but economic growth does not necessarily bring in quality governance in society.
Misgovernance has impeded African growth
In a Working Paper released by the Department of Economics and Finance of the Middle Tennessee State University in USA in December 2010, Bichaka Fayissa and Christian Nsiah have found that in African countries, the gaps in economic growth between the richer and the poorer countries have been mainly due to the differences in the quality of governance in the respective countries. For their empirical study covering 28 African countries, the two economists have used the same WGIs relating to the relevant countries between 1995 and 2005.
Jeffrey Sachs: Governance not necessary for growth
Thus, the general consensus among economists is that good governance is a pre-requisite for sustaining economic growth and improving the quality of life of people. However, there are a few economists like Columbia University’s Jeffrey Sachs who believe that emphasis on good governance for sustaining economic growth has been a misguided policy drive. In an article written to the magazine Foreign Affairs in October, 2012 (available at: http://www.foreignaffairs.com/articles/138016/jeffrey-d-sachs/government-geography-and-growth ), Sachs has countered the argument by Daron Acemoglu and James Robinson in their book ‘Why Nations Fail’ that superior political institutions protect property rights and through such protections, incentivise the process of invention and the diffusion – distribution of such knowledge among prospective entrepreneurs – helping the countries to sustain economic growth.
"Apart from the chapter on free media, the latest TI Sri Lanka Report on Governance is a serious indictment against the Government in power about the sad deterioration of the state of the country’s governance. The importance of the report is that it has analysed events which will enable the country’s authorities to adopt suitable rectifying measures.
With regard to Voice and Accountability, Sri Lanka’s position in 2012 is at negative 0.60, a fast deterioration from 2002 where she was at negative 0.15. Similarly, in percentile ranking, Sri Lanka has fallen from 42 in 2002 to 30 in 2012. It indicates that Sri Lankans have lost freedom to participate freely in selecting their government, freedom of expression, freedom of association and media freedom"
Sachs has argued that what is more important is diffusion, and therefore without getting involved in inventions, if a country can cause diffusion to happen, that country can ensure continued economic growth as has been shown by many authoritarian countries in East Asia. His reference was to countries like South Korea, Taiwan and Singapore. Yet, in all these countries, people dissatisfied with the quality of life delivered by the authoritarian governments have agitated for democratic institutions which the authorities have delivered to them eventually. Thus, these countries were able to sustain economic growth. However, the other authoritarian countries were not so fortunate and had to go through bloody revolutions which have taken them back for many centuries. These issues were discussed in a previous ‘My View’ under the title ‘Authoritarian Regimes for Economic Prosperity? Not even a little bit will work in the long run’ (available at:http://www.ft.lk/2013/03/18/authoritarian-regime-for-economic-prosperity-not-even-a-little-bit-will-work-in-the-long-run/).
Six governance dimensions
How does governance promote economic growth, or in a different way, misgovernance impede growth? The six governance dimensions which the World Bank has included in its WGIs provide the answer to this question. The six are the following:
1.Voice and Accountability: capturing perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.
2.Political Stability and Absence of Violence and Terrorism: capturing perceptions of the likelihood that the Government will be destabilised or overthrown by unconstitutional or violent means, including politically motivated violence and terrorism.
3.Government Effectiveness: capturing perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the Government’s commitment to such policies.
4.Regulatory Quality: capturing perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.
5.Rule of law: capturing perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.
6.Control of corruption: capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests.
Governance therefore makes people feel that they are included in the running of the affairs of society. This inclusiveness is an important policy goal of modern societies so that people will become the designers, executers and judges of their own destinies. They collectively ensure the property rights – right to life, physical and financial wealth and human intellect. When the above mentioned dimensions, at least as a minimum, are present in society, people have the ability to benefit from their own labour and efforts. It gives incentives for them to develop their human and physical capital, invent new things and use such inventions in market based productions. The continued market production ensures sustainable growth.
Economic cost of misgovernance
Misgovernance reduces the quality of life of people in society. For instance, suppose that the government is ineffective, public service is inefficient and corrupt and the system works under the pressure of politicians, elite power groups and extreme ethnic, religious or racialist social sects. Then, the law enforcement agencies, namely, the police and courts of law, will become dead ducks. As a result, people have no mechanism to get redress when they have been harmed simply by other members of society. They have to live in eternal fear for their life, property and wealth.
In society, per capita income may have increased to record levels. But what use of that income if it can be robbed by those who can claim impunity from the system? Property can be robbed by other fellow citizens, those supported by politicians in power or governments themselves. This last type of robbery had been a common situation even in the past. That was why the Buddha had to advise his lay followers, according to Pattakamma Sutta canonised in Anguttara Nikaya, to protect the wealth earned through one’s labour from, among others, the greedy kings. This is similar to the expropriation of private property by modern governments whatever the justification attributed to such expropriations. It is the observance of the rule of law, control of corruption, independent and impartial law enforcement agencies and effective government that will protect the property rights of people.
Sri Lanka Governance Report 2012/3
The Sri Lanka chapter of the global watchdog of corruption and governance, Germany-based Transparency International or TI, has recently published Sri Lanka Governance Report 2012/13 authored by a number of Sri Lankan scholars. The report has covered several areas that had tarnished the country’s governance scorecard in that period. They have been the increasing burden of public debt, impeachment of 43rd Chief Justice, illegal dispossession of lands, sports and corruption and the suppression of free media. These chapters have been preceded by an overview of the governance record of the country in the recent past and followed by an analysis of the different governance-assessment indicators relating to the country. Except for the chapter on the free media, all other chapters have argued that the governance record of the country has deteriorated significantly during the last 10 years. The chapter on free media has convincingly argued that the free media had been suppressed by successive governments since independence, but it has been surprisingly silent about its scorecard in the last 10 years. It has indeed partly blamed the media, their ownership structure and irresponsible reporting by the journalists to the poor state of the free media in the country.
Apart from the chapter on free media, the latest TI Sri Lanka Report on Governance is a serious indictment against the Government in power about the sad deterioration of the state of the country’s governance. The importance of the report is that it has analysed events which will enable the country’s authorities to adopt suitable rectifying measures.
World Bank Worldwide Governance Indicators
The World Bank in its Worldwide Governance Indicators or WGIs has produced numerical values for the six governance dimensions presented above. The latest WGI for 2012 covers 215 economies and is based on 32 individual data sources produced by a variety of institutes, think-tanks, NGOs, international organisations, and private sector firms (available at: http://info.worldbank.org/governance/wgi/index.aspx#home ). The economists who have been involved in the production of WGIs are Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi. According to the methodology used by the World Bank (available at: http://info.worldbank.org/governance/wgi/index.aspx#doc ), the aggregate values for the six dimensions have been arrived at by averaging the data from respective sources and following a three step process that has used the statistical tool known as Unobserved Component Model or UCM, suggested by the British Econometrician Andrew Harvey in 1989, then a Professor at the London School of Economics and later at Cambridge University.
How to read WGIs?
WGIs for the six governance dimensions are reported by the World Bank in two different ways. First, as a numerical number ranging from -2.5 to +2.5 where a movement down from zero indicates greater degree of misgovernance and movement up from zero, improvement in governance. The value received by a country in respect of each dimension is comparable with other countries to gauge where it stands. Second, the dimensions are recorded as a percentile ranging from zero to 100. If a country is ranked at percentile 30, it means that there are 70% of economies out of 215 above it with better governance and 30% of economies below it with misgovernance.
Sri Lanka in the negative range in WGIs
WGIs of all the six dimensions for Sri Lanka for 2012 are a sad state. The individual numerical numbers are all in the negative range some moving from positive in 2002 to negative in 2012. With regard to percentile placement, Sri Lanka is placed on average at 42 meaning that 58% of the countries are above Sri Lanka with better governance and 42% of countries are below it. However, with respect to individual dimensions, its position is far worse.
With regard to Voice and Accountability, Sri Lanka’s position in 2012 is at negative 0.60, a fast deterioration from 2002 where she was at negative 0.15. Similarly, in percentile ranking, Sri Lanka has fallen from 42 in 2002 to 30 in 2012. It indicates that Sri Lankans have lost freedom to participate freely in selecting their government, freedom of expression, freedom of association and media freedom. This is a serious situation where the quality of life is concerned needing immediate attention of all those who govern the country.
In the governance dimension on political stability and absence of violence/terrorism, there is a slight improvement from the 2002 levels, but still at negative levels. Accordingly, the country’s score has improved slightly from negative 0.85 in 2002 to negative 0.71 in 2012 and in the percentile ranking from 22 to 23. The improvement has been due to the defeat of terrorism conclusively in 2009 but the score has not improved significantly because of the politically instigated violence and perceived instability of the Government.
The Government’s effectiveness too has fallen significantly from negative 0.06 in 2002 to negative 0.24 in 2012. The percentile ranking too has fallen from 55 to 46 between the two years. This is a serious situation since this dimension captures the quality of public services, political pressure on civil service, quality of policy making and the credibility of the Government in committing itself to implement such policies. A quality government is needed for a country to attain a sustainable high economic growth as has been highlighted by Lee Kuan Yew, the Singaporean leader behind its miracle, in the second part of his autobiography, From Third World to First (pp 288-9).
The regulatory quality has deteriorated from positive 0.18 in 2002 to negative 0.12 in 2012 causing Sri Lanka’s percentile ranking also to deteriorate from 59 to 48. This dimension captures the ability of the government to “formulate and implement sound policies and regulations that permit and promote private sector development” The deterioration indicates that the government has failed to implement inclusive private sector promotion policies and it is a serious concern since it is the private sector which occupies the major growth segment of the country.
The observance of the rule of law has been the worst decline recorded in Sri Lanka according to WGIs. Accordingly, it has in fact fallen from a positive level at 0.32 in 2002 to negative 0.11 in 2012. Consequently, the percentile ranking too has fallen from 61 to 52 between the two years. This dimension captures, among others, the citizens’ perception of the quality of protection of property rights, enforcement of contracts, police forces, court system and the likelihood of crime and violence. Rule of law is an important prerequisite for any country to sustain its economic growth and improve the quality of life of people.
The control of corruption has been unchanged at negative 0.24 between 2002 and 2012 though in 2007, there had been a slight improvement to negative 0.10. The country’s percentile ranking in this dimension has slightly improved from 49 to 52 but it has lost its improved position in 2007 at 57. This dimension has a wide connotation. It shows that Sri Lanka has failed to stop the use of public power by politicians and bureaucrats for private gains and elite groups to capture the government for their private benefits. A government captured by such elite groups has no way for reforms to rectify burning social, political and economic issues.
Are perceptions unreliable?
The failure of governance in Sri Lanka is attributable to those in power on one side and the watch-dogs in the civil society on the other. When these global indices are released, they are often dismissed by those in power as propaganda conspiracies staged by outsiders with vested interest. The civil society too does not create a platform to have an open debate over them and the media too fails to generate sufficient public interest in them. Thus, misgovernance continues to persist. The country’s impartial spectator, the Central Bank of Sri Lanka, in a Box Article in its Annual Report for 2013 (p 69-70) has questioned the reliability of the perceptions used in these global indices before qualifying that they are “reasonably well established” in a global context. It appears that the bank has not been happy about the low score which Sri Lanka has earned in these global indicators.
One should learn from Narendra Modi who successfully fought the Indian elections recently with the political slogan “Maximum Governance and Minimum Government”. Modi had capitalised on Indian governance scorecard which had been as bad as that of Sri Lanka. Indian authorities too had blamed the wrong perceptions used for producing the damning indicators. But the election results have shown that the Indian voters had not bought that claim.
(W.A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected])
