Thursday December 02, 2021

On governance

March 12, 2020

In the increasingly competitive world of today, good governance is not only critical for survival but also holds the key to social and economic development.

Cross-country experience in recent years has shown that no nation can progress without establishing fair practice in the way it governs itself. The quality of governance is crucial not only for ensuring better management of public-sector resources but also for maintaining private-sector confidence and thereby laying the basis for sustained growth.

Apart from domestic imperatives, globalisation has added a new dimension to the whole issue of governance. The prevailing world order puts increasing pressure on states to improve their internal governance. International economic integration poses a serious challenge to weak, poorly governed states, while it opens new vistas of development for effective, well-governed ones.

With the emergence of a global economy, domestic economies have become more vulnerable to external price shocks and volatile capital flows. The ability of states to tax capital has also become limited and economic policies pursued by governments are now subject to closer scrutiny of the world market. International agreements, particularly those concerning trade and investment as well as economic assistance programmes with multilateral institutions, also bind sovereign states in arrangements that limit policy choices and options. This is how globalisation constrains arbitrary state action and demands a greater adherence to internationally accepted norms.

On the other hand, globalisation presents enormous opportunities of economic progress for countries that have succeeded in putting their economies on a sound footing and developed the capability to reap the benefits of global integration. Being left out of the global economy amounts to accepting a wide variation in living standards as compared to countries that embrace it.

The term ‘governance’ usually connotes overall conditions in a country. But here it has been applied in a more specific sense as related to the major functions and responsibilities of the government. The concept has political as well as economic dimensions.

In the political sense, governance may be defined as the will and ability of the government to protect and promote the fundamental rights and liberties of the people. In its economic aspects, the definition adopted by the World Bank’s 1992 report ‘Governance and Development’ is fairly comprehensive: “the manner in which power is exercised in the management of a country’s economic and social resources for development”.

The World Bank has identified three distinct aspects of governance: the form of political regime; the process by which authority is exercised; and the capacity of governments to design, formulate and implement policies and discharge functions. The political and economic aspects of governance overlap but do serve as useful categories for analysis.

Good governance obviously connotes governance’s normative aspects. The crucial determinants of good governance are rule of law; effective institutions for formulation of public policy and delivery of services; transparent decision-making processes; and mechanisms for accountability of political and official elements of government.

There is by now considerable agreement on the key elements of good governance based on the principles of liberal democracy and market economy. Divergent views, however, have been expressed depending on varying degrees of emphasis on certain aspects of governance.

The World Bank considers a predictable and transparent framework of rules and institutions for the conduct of private and public business as indispensable to sustainable development. Good governance in their view is epitomised by predictable, open, and enlightened policy making (that is, transparent processes); a bureaucracy imbued with a professional ethos; an executive arm of government accountable for its actions; and a strong civil society participating in public affairs; and all behaving under the rule of law (‘Governance and Development’, World Bank, 1992).

The IMF considers “promoting good governance in all its aspects, including ensuring rule of law, improving the efficiency and accountability of the public sector, and tackling corruption” as an essential element of a framework within which economies can prosper (‘Partnership for Sustainable Global Growth’, IMF, 1996). Good governance is characterised by transparency, accountability, efficiency and fairness (‘Good Governance’, IMF, 1997). The OECD accepts the World Bank definition but emphasises participatory development, human rights and democratisation as essential elements of good governance.

Multilateral institutions and bilateral donors have become very sensitive to the development effectiveness of aid. Faced with declining domestic support for aid in view of fading cold-war compulsions and a greater realisation that resources diverted to developing countries have not resulted in matching outcomes in terms of social and economic development due to weak management and corruption, donors are now placing greater reliance on governance as a criterion of aid.

The consultative group meetings of donors and governments chaired by the World Bank since 1990 have taken up governance as a key issue in considering aid packages to developing countries. They have called upon governments to establish rule of law, evolve legal systems conducive to private sector growth, put in place transparent financial management systems, ensure the freedom of the media and the independence of the judiciary, and protect the legal rights of women, children, and labour. There is a renewed emphasis on accountability and transparency in government actions and operations.

The crucial importance of good governance as a sine qua non of economic development has been brought out by the experience of East Asian countries. Between 1965 and 1990, East Asia as a region registered the highest growth in the world and combined it with social equity and high living standards for the populace. Most of the research studies on East Asia conclude that the single most important factor in this economic miracle was the fact that these countries were able to put in place sound and sustainable institutional frameworks.

A research study compiled by the World Bank staff in 1993, ‘The East Asian Miracle: Economic Growth and Public Policy’, identified four major elements in the governance structures of these countries that enabled them to achieve rapid and sustained growth. These were: the establishment of honest, competent and well-paid bureaucracies recruited on merit; the deployment of economic technocrats for formulation and implementation of economic policy; development of legal and regulatory systems; and institution of formal and informal mechanisms of dialogue and partnership between the public and private sectors.

The author is a former cabinet secretary.