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Key Text Governance and Growth: Causality Which Way? Evidence for the World, In Brief

Author: D Kaufmann and A Kraay
Date: 2003
Size: 8 pages (47.2 KB)

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Summary

Countries in which per capita incomes are high also tend to have a better quality of governance. But how should this relationship be interpreted? This article for the World Bank Institute argues that while institutional quality has a powerful impact on growth, higher incomes do not lead to better governance. Improving governance therefore requires ongoing action.

Different measures of governance are plotted against real per capita gross domestic product (GDP) for up to 170 countries, demonstrating a strong positive correlation. The indicators illustrated in this article are control of corruption, the rule of law and voice and accountability. It is essential, however, to look behind them to understand the relationship between incomes and governance. Does better governance lead to higher incomes? Do higher incomes result in improvements to governance? Are there are other factors influencing the link? Based on a methodology proposed in a related paper, the authors argue that higher incomes do not have a positive impact on governance. Therefore, continuous policy efforts are required to improve governance.

Recent research has outlined how the income inequality between rich and poor countries can be explained partly by historical differences in institutional quality. Conversely, conventional wisdom holds that when a country becomes richer, its quality of governance rises because it can better afford the associated costs. The paper casts doubt on this second assertion, arguing that:

Evidence compiled by the authors shows that the effect of incomes on governance is, if anything, negative.
Given this negative feedback, a strategy of waiting for governance improvements to come automatically as countries get richer is unlikely to succeed.
It is also unlikely that, as better governance raises incomes, this in turn will produce further governance improvements.
One plausible explanation is the phenomenon of ‘state capture’. When elites exert a strong and illicit influence over institutions, they may benefit from poor governance and resist demands for change, even as incomes rise.

These findings point to the importance of sustained interventions to improve governance in countries where it is lacking. Leaders, policy makers and civil society must work hard and continuously towards this goal. For countries that must deal with ‘state capture’, specific recommendations are that:

Efforts to improve governance should shift from a narrow emphasis on laws, rules and administrative procedures to a broader agenda including political accountability, transparency and an independent media.
Civil society should be given the means to monitor government and other institutional developments.
Effective mechanisms must be established through which the voices of citizens and users of public services can be heard.
As evidence from country surveys suggests, participatory mechanisms and transparency play an important role in improving governance, and should be given priority in the next phase of governance programmes.

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Source: Kaufmann, D. and Kraay, A. 2003, 'Governance and Growth: Causality which Way? Evidence for the World, in Brief', WBI Governance Working Papers and Articles, World Bank Institute, Washington D.C.
Author: Aart Kraay , akraay@worldbank.org
The World Bank, http://www.worldbank.org/