Institutions, Governance and Economic Development Focus on the Developing Countries Case

As macroeconomic stabilisation and structural adjustment policies haven’t been particularly successful, it becomes increasingly necessary to consider extra economic parameters’ role in the growth process. In this context, the governance (with all that it recovers as balance powers, rational management of resources, transparency of rules, involvement of civil society, etc.) has become indistinguishably tied to the development analysis of the developing countries. Closely related to that of institutions, this notion of governance is a polysemous one. But in spite of its polysemy, the concept of governance is currently the core question of contradictory debates about the use made by the international financial organizations of the idea of “good governance”. The purpose of this paper is to assimilate and contrast the necessity of “good governance” as a prerequisite for growth and development for developing countries and to study the possibilities of economic convergence at the international level (i.e. the catching up problematic of the industrialized countries by developing ones) based on the influence of socio-political variables on local governance.

Keywords: Growth; Development; Governance; Institutions; Conditional Convergence; Developing Countries.

JEL Codes:  E02, O11, 055, 043

Introduction

For thirty years, following a rather tenacious weakness of economic activity in the developed world (Europe and Japan especially) and with the difficulties for a sustainable recovery of economic growth, economists have revived the important role of institutions in economic dynamics. Whereas previously the mainstream models (those of R. Harrod/E. Domar and R. Solow) would leave no room for the concept of institutions, this concept has become during the last decades one of the focal concerns for many analyses and reflections.

At another level, significantly different results of the development policies in developing countries have prompted many economists to ask the question why some countries (minority) are engaged in a catching-up process, becoming NIEs (Newly Industrialized Countries), while others (definitely more numerous) stagnate, their development process displayed many deadlocks and malfunctions. In trying to answer this question, one of the avenues that they have privileged consists of studying closely the interactions between political structures and economic performances, that is to say they address the issue from the governance perspective.

To scrutinize the role of institutions and governance in growth and development, we adopt a three-part plan:

The first part will be devoted to definitions of the main concepts. The definition will be fairly comprehensive with respect to the concepts of “institutions” and “governance” (which are central here) and more succinct for the related concepts of “partnership”, “regulation & co-regulation”, and “participatory democracy”.

In a second part, we will look at how is apprehended, in economic theory, the relationship between institutions and growth in general (developed countries, countries in transition and developing countries). 

In a third part, focusing the reflection on developing countries, we will expound the broad lines of the development approach in terms of “governance”, a much elaborated approach not only in the programs of international organizations but also in the analysis of many independent theorists (i.e. who have no professional relation with these organisations).

1.      Institutions, Governance and Related Notions: Definitions

1.1.   Institutions

In the ordinary meaning, the “institutions” are organizations that establish the rules of behaviour in different fields of social life, and ensure they are effectively implemented. ARCEP (Electronic and Postal Communications Regulatory Authority) and CSA (Superior Audiovisual Council) are two examples among others in France; the WTO (World Trade Organization) is another type of institutions on the international level; etc. This ordinary meaning, however, is not the only one, and not even the one that is favoured by the institutionalist theory.

In the institutionalists’ meaning, and particularly in the meaning of Thorstein Veblen (2007), institutions are “prevailing habits of thought, common approaches to the particular relations and particular functions of the individual and the society”. In other words, the institutions define the customs, practices, rules of behaviour, legal principles, etc., on which is based the collective life.

This approach is the one that holds several movements of economic analysis: the new institutionalism of course, but also the school of Regulation, the school of Conventions, etc. For all authors who claim to belong to these thought movements, institutions cover the standards, the procedures, the conventions, etc., official or non-official, explicit or implicit, codified or tacit, which underline the behavior of all economic players. As apprehended, the role of institutions is particularly important to understand the actual functioning of the markets (commodity, capital and labor markets). As on the other hand, these same institutions allow the understanding of the persistence, in an era of globalization, of huge socio-economic differences between nations, to the extent that they significantly influence public policies of different States. The influence of institutions on economic growth and development allowed it to occupy a significant importance for several governments and international organizations, such as the World Bank and the International Monetary Fund which popularized the notion (Stein, 2008). 

Over the last three decades, the revitalization of the institutionalism in social sciences was accompanied by a proliferation of researches offering an analysis of the contemporary economic dynamics based on the role of institutions. Among these, two deserve a special indication:

-         Institutions, Institutional Change and Economic Performance of Douglas North (Nobel Prize in economics in 1993), published in 1990 by Cambridge University Press. This book shows clearly how the performance of economic organizations is heavily dependent on institutional developments.

-         Varieties of Capitalism: the Institutional Foundations of Comparative Advantage, by Peter Hall and David Soskice, published in 2001 by Oxford University Press. This book shows how do the various relationships between enterprises and their environment (administrations, educational and scientific institutions, social partners, etc.) provide particular configuration to the capitalism of each country.

Recently, the influence of institutions on economic development has been the subject of many debates, especially when it concerns institutions that maximize market freedom and protect private property rights (Ostrom, 2007), also known as “better” institutions or Global Standard Institutions (GSIs), found in Anglo-American countries. According to Chang (2011), GSIs are institutions that inherently favor the rich over the poor, capital over labor, and finance capital over industrial capital. This drives us to wonder about the real role of these institutions in the development of poor countries, especially when international organizations such as the World Bank, the IMF, the WTO (World Trade Organization), the OECD (Organization for Economic Cooperation and Development), the World Economic Forum and other influential financial and economic organizations, dominated by developed countries, ultimately oblige developing countries to improve governance by adopting GSIs,  in order to obtain aids and loans (Kapur & Webber, 2000).

1.2.   Governance

The notion of governance appeared, for the first time, in the early 1980s in the speeches of American specialists in business management. Through this notion, they intended to reflect the shift, in industrialized societies, to a new phase of capitalism: the passage from a managerial to a patrimonial model. “Corporate governance” is the term used to define an emerging trend within large firms represented by a new balance of power, in the direction of empowering shareholders to intervene in the decision-making, at the expense of the managers. Over the years, and especially since the end of the 1980s, with the rise of New Institutional Economics, the scope of the concept of governance has been gradually extended. However, it is from the late 1990s that institutions have become the focus in the debate on economic development with the rise of the idea that poor-quality institutions stand behind economic problems in developing countries. Even though, there is still no common consensus around a single definition of governance or institutional quality.

On the one hand, governance has been applied to different organizations than companies: universities, hospitals, social services, various public authorities, etc. For all these organizations, the aim is to implement what is called “good governance”, which is a mode of rational resource management, based on a control of the decision-making process and a thorough understanding of the motivations of the different players who have, to varying degrees, small amount of power. In sum, the question for any organization, be it private or public, is to know how to manage, regulate and reform (when necessary) complex systems and procedures. In the specific case of the public sector, the problem introduced by the concept of governance, and very debated nowadays, is whether one must generalize (or not) the norms of the New Public Management, which means applying to public administrations a management mode inspired from the model of management of private enterprises.

On the other hand, the scope of the notion of governance has gone beyond the industrialized economies to reach the developing countries. In developing countries, the need for “good governance” has been introduced – or otherwise imposed - by international financial institutions, in particular the World Bank (Word Bank, 1992; 1999). Starting from the basic consideration that[...]  the projects of development that they finance fail, in many cases, because of the bureaucratic obstacles and the weight of clientelism, and also due to the frequent diversions of external aid, the World Bank, the IMF and other international financial organizations have conditioned, since the early 1990s, their new aid packages to the implementation of the rules of “good governance”. In practical terms, the “good governance”, such as the World Bank and the IMF call for in developing countries, covers six dimensions (voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and, finally, control of corruption) for managing development projects in transparency, both in the conception of these projects and their evaluation at different stages of their implementation (see Kaufmann & al., 2010).

Departing from the World Bank and the IMF’s definition of “good governance”, the last is a liberally-minded orientation (the disengagement of the State for the benefit of the private sector, restrictions on public spending, strong international economic openness with as only concern the external balance, etc.) that is far from achieving unanimous support among theoreticians and practitioners of development, and which has often been identified as an excuse for adopting liberal policies promoted by the so-called “Washington Consensus”. The question is then whether the “good governance” is a precondition for growth and development and whether this applies for poor countries, the same as for rich countries. In this context, the positive causal relationship between, on the first hand, “good governance” and, on the other hand, growth or development has been studied by several researchers: Kaufmann, Aart, & Mastruzzi (2008); Kim & Jachko-Chavéz (2009); Kwame & al., (2012); etc. Particularly, Professor Kim Huynh P. re-examined the conventional insight that a positive relationship exists between governance and growth by using nonparametric methods and the World Bank’s governance measures. Kurtz, Marcus and Schrank (Kurtz & al., 2007) critically assessed the work of Kaufmann, Kraay and Mastruzzi on the positive causal relationship between “good governance” and growth. For these authors, growth and development improve governance, rather than vice versa. Furthermore, Sundaram and Chowdhury (2012) have concluded in their research, published by the United Nations, that “while good governance is a worthy goal, it is not a prerequisite for economic growth or development”. This fact was previously elaborated by Khan (2010) who considers that good governance is not a necessary precondition for development. 

In the same vein, the empirical evidence shows that governance has improved in countries only with development, which opens the debate again over the necessity of World Bank’s six standards, GSIs, IPRs (Intellectual property rights), etc., and whether these rights and standards should still be considered as indicators of “good governance”, especially when no theories of economic development support the claims of good governance promoters. On the other flip, as international donors base the financial aid they grant to poor countries on the right implementation of “good governance”, how would it be possible for these countries to converge economically and catch-up the rich countries? To answer this question, we refer to Meisel and Ould-Aoudia (2007) who argue that the root of the problem resides in “good governance” proponents who presume a binary world in which all countries have the same set of institutional characteristics. Whereas, according to the same authors, poor countries score badly due to corruption, lack of democracy, state failure, market failure, etc., which prevent them from catching up with the wealthy countries.

Briefly speaking, if “good governance” is a prerequisite to growth and development, improving scores on governance indicators is thus supposed to enable poor countries to catch-up.

1.3.    Partnership

The concept of partnership has been applied in France, starting from the late 1980s, to describe the new contractual relations that, through decentralization, are being put in place between the State, local authorities and public enterprises (State/Region, State/Enterprise contracts...). It is also used to translate the new relationships being established between the companies themselves: in the context of the intensification of the competition due to globalization, companies are invited to develop joint cooperation programs, particularly R&D (Research and Development) programs. It is relevant to note that inter-enterprise collaboration does not replace the existing relations of competition, it is simply added to them; this is why these new partnerships are sometimes translated by the neologism of "coopetition" (a contraction of the words cooperation and competition).

Furthermore, and perhaps more significantly, the concept of partnership refers to the increasingly established collaborations between the public and the private sectors, known as Private Public Partnership (PPP). The last has been considered as a driver of economic growth and development for several developing countries. The best example to give is the steady growth of the Indian economy due to collaboration between the corporate world and the public sector in several domains: new technologies and software, Mumbai airport…  It is worth noting that this partnership found its way to success due to the democratic regime that governs this country.

From this perspective, partnership and governance have to be interpreted [...]in close conjunction with one another. Unlike the classical concept of government, governance entails the abolition or, at least, the gradual weakening of the border between the two spheres, public and private. Moreover, good governance requires “building effective partnerships of institutions and networks to tackle emerging global, national and local issues” (UN, 2000). This partnership, based on interaction between public and private spheres, civil society organizations and stakeholders, is an essential ingredient for “good governance”. In the same context, seven guidelines for building a successful partnership for good governance were provided by the UN (2000) as follows:

• Widening the scope of participation to include all relevant stakeholders;

• Finding commonalities and comparing perspectives;

• Linking stakeholders proactively to maximize outcomes and economies of scale;

• Building capacity of all stakeholders and in their inter-relationships;

• Developing mutually-supportive policies, processes and operations; and

• Establishing moving targets of success and measures of approaching success and building on successes.

To sum it up, the concept of “good governance” being based on the participation of all members of the society in decision making, it fosters effective relationships and partnership of institutions and networks independently from their nature, whether being private or public. The implications of PPPs on the economy have been translated into economic growth and development, especially in presence of a democratic regime of governance that stimulates the participation of the society in decision making.

1.4.  Regulation and Co-Regulation

Due to the technological and institutional changes, the economic system is becoming increasingly complex. Because of this increasing complexity, each player in the economy (businesses, financial institutions, educational institutions, research centers, trade unions, public administrations, NGOs and associations, etc.) finds himself hemmed in strong links with other actors. These links, sometimes, tremendously influence his dynamism and even his survival. How are concretely organized these links, and how are negotiated the partnerships and the necessary compromises between the stakeholders of a project? This is the main problem that raises the approach in terms of regulation. At the sectorial level, various regulatory bodies have been established, be it in finance or in telecommunications with, for instance in France, the AMF (Financial Markets Authority) and the ARCEP (Electronic and Post Communications Regulatory Authority). The analysis of the concrete functioning of these institutions shows that the enforcement of a regulation is easier when different stakeholders of the concerned sector (companies, public authorities, associations, etc.) are engaged in its elaboration. That is why the concept of co-regulation emerged recently in the economic literature, and tends increasingly to prevail over the more conventional concept of regulation.

1.5. Participatory Democracy

Participatory democracy reflects an increasingly strong aspiration among citizens and civil society players for a direct involvement in the development and implementation of public policies at all levels of social life (on local, national and international levels with for example the so-called “Alter-globalization movement”). This concept, often associated with the idea of grass-roots’ governance is, from a theoretical perspective, often opposite to that of representative democracy which, as one knows, excludes the direct citizen participation for the benefit of elected delegates who have democratic legitimacy to represent the people (see Baogang, H., 2012). However, in effect, it is now obvious that, at local level, participatory and representative democracies are not necessarily incompatible. This is shown by many examples of neighbourhood boards and other local civic initiatives in Europe, as well as abroad, for instance in Porto Alegre (Brazil) where, according to the information issued from the different World Social Forum meetings that took place there, the actors of civil society intervene actively in municipal management.

1.5.   Authority

If the present trends are in favour of good governance, partnership, co-regulation and participatory democracy, therefore what does mean nowadays authority? In other words, what is the content of this notion? In modern societies (meaning democratic ones), the authority is embodied by institutions led by officials or representatives whose power is undisputed as legitimized by the procedures by which it has been granted: either the election by the base or the appointment by the hierarchy according to clear rules and criteria. The fact is that this pattern is today in the process of being disrupted. Due to the effects of political and social transformations of the last fifty years (universal schooling, skilling of the workforce, the growing complexity and sophistication of employment, empowerment of women, etc.), subordinates accept less and less the role of simple executors of leaders’ decisions in which they do not participate. Therefore, the notion of authority is evolving to less strictly hierarchical content and is relying more and more on consultation and involvement of all concerned stakeholders in the process of decision-making and the implementation of what has been decided.

2.  The Role of Institutions in Economic Growth

To frame the reflection on a general level and to cut long story short, the two main approaches of economic growth are: the "naturalistic" approach and the "institutionalist" approach. As for the supporters of the first approach, the geographical conditions are determinants in the explanation of economic growth (in its weakness as well as in its strength); for those of the second approach, the central role is the one played by institutional factors.

Empirical studies on long historical periods appear to be in favour of the institutionalist approach, but our ambition here is not to close definitely this debate. The most important thing for us is to establish: firstly, that there are “good” and “bad” institutions; and secondly, only effective institutions foster socio-economic progress, while the ineffective ones restrict, or even prevent it. How different economic theories grasp the role of institutions in the dynamics of growth? To respond, we will successively review the institutionalist theory itself, the endogenous growth theories, the regulation theory and the public choice theory.

2.1.    The Role of the Institutions According to Institutionalist Economists

Besides D. North, P. hall and D. Soskice, already cited, one can mention the works of:  Coase R. (1998); Loasby B. J. (1999); Rutherford M. (1996); Samuels W. J. (1988) and Williamson O. (2005, 2010, 2014, 2015). For these institutionalist economists, the accumulation of capital (human and/or  technological) is not the key factor that determines economic growth in the long term, but rather the social institutions (as defined above as conventions, standards and procedures) which govern the relationships between stakeholders. This is so, because these conventions, standards and procedures - result of social evolution - play a crucial role in the level of the costs of production and transaction (i.e. costs of the contracts' negotiation, the search for the relevant price...) and, consequently, in the profitability of the economic activities and the motivations of various stakeholders to achieve it.

In other words, institutions, by laying down the ground rules of the economic life, have a significant impact in terms of incentives of the economic players (individual, SMEs, large firms, etc.) to engage fully in activities that are at the core of the economic growth: production, investment, training, research, innovation, etc. For example, depending on whether the social promotion, in a particular country, is on the basis of competence and merit or, on the contrary, on the basis of birth and/or clan affiliation (in other words on the basis of nepotism or favouritism), individuals won’t be motivated, to the same extent, to invest in their education, nor to undertake, innovate and take risks, etc. As explained by D. North (1990), if the institutions of a country are such that the enrichment goes mainly through piracy, pirates associations would multiply in this country.

From this angle, and in consideration to the institutionalist perspective, it is important to stress the importance of the legislative and judicial dimension in the economic dynamics. Indeed, because of the scarcity of some resources, conflicts of interest frequently arise between individuals and groups of individuals, not to mention conflicts between wider and more or less structured human communities (classes, nations...). In the absence of commonly accepted rules of law, these conflicts are settled by pure physical violence (private or collective), which, by the destruction it causes (on both material and human levels), and especially by the climate of uncertainty that it establishes, is harmful to the economic growth. Hence, the importance of an institutionalized system of laws and legal rules to create or restore a minimum level of order and certainty, without which, it is not possible to have a sustainable process of production and wealth creation.

Finally, to further highlight the role of institutions in understanding the processes of growth, it is important to clarify that the institutional evolution of the societies is a relatively slow process. Ineffective institutions, or even harmful ones from an economic point of view, could be resistant to reform and change. Indeed, once embedded in practices, conventions, norms and standards can be difficult to convert, not only due to the psycho-social pressures that impede any social change, but because of the interests for some actors to maintain the institutional status quo. The corollary is obviously a low rhythm of growth, in all cases not as high as potentially possible; the economy would then grow below the optimum. In order to find the optimal growth path, the institutional reform, conceived as a construction of new rules of the game (allowing greater transparency, stability and trust), becomes essential. The study of the main determinants of growth, development and economic convergence of poor countries lead us to conclude that differences in prosperity across countries are due to differences in economic institutions. In the same vein, Acemoglu & Robinson (2010) believe that the main determinants of cross-country gaps in income per capita are differences in their economic institutions. For these authors, “…understanding underdevelopment implies understanding why different countries get stuck in political equilibria that result in bad economic institutions. Solving the problem of development requires a radical reform of these institutions”. As a final point, since economic convergence of poor countries goes through the functioning of its institutions, to catch-up, we suggest that these countries undertake a deep revision of their sociopolitical structure in order to craft the suitable reform that empowers institutions and facilitates their functioning.

2.2.   The Role of the Institutions According to the Theories of Endogenous Growth

For theorists of endogenous growth (Aghion Ph. and Howitt P., 2009 and 1998; Lucas R., 1988; Romer P., 1986), the main sources of growth are: accumulation of knowledge and human capital, learning by doing (i.e. learning through experience), technological innovations, infrastructures of training, research and development, communication, etc. All these elements play a key role in the economic dynamics, because they generate the so-called “positive externalities”, which consist in beneficial effects, if not for the society as a whole, at least for many actors of the economic life.

However, it is not in the logic of the market to pay the producers of these positive externalities (particularly knowledge externalities). In fact, innovators get nothing, as a market return (or counterpart), for their discoveries. To copyright, they must protect their inventions by patents, which requires an institutional logic of property protection, instead of that of market (commonly called logic of “Laisser-Faire”). Furthermore, to encourage innovation, the State may adopt any of the following incentives: tax mechanisms in favour of innovators, help the construction of infrastructures and the establishment of legal instruments which support research & development within businesses (private as well as public), etc.

In the same way, but in the opposite direction, it is not anymore in the market logic to penalize the producers of negative externalities such as pollution. Polluters pay nothing, in market value, in compensation for the harm they cause to the environment. From this position also, the intervention of the public authorities is necessary: for instance, in developed countries, on behalf of the ecological imperative and, therefore, the collective interest in the long term, the State implements anti-pollution standards (subsidies, pollution permits, regulations, etc.), emission performance standards (congestion charge, vehicle excise duty, etc.) and imposes taxes on offending companies (Landfill tax, environmental tax, etc.). These taxes on pollution, that natural environment defenders wish to extend to all countries, are not an effect of the free-play of market laws but of the intervention of political authority, the State, which is a matter of institutional regulation control. However, even in light of PPP (Polluter Pays Principal), adopted by all OCDE countries, there is no widespread of the public action, which is meant at shaped the distribution of property rights for scarce environmental resources.

All in all, for the theorists of the endogenous growth (at least for some of them), public intervention is needed to reduce the negative externalities and to stimulate the positive ones. The market being inoperative to achieve a social optimum, the action of the State is necessary to change the institutional environment in favour of economic growth and social welfare. In a certain way, this analysis confirms the core thesis of the institutionalist theorists who support the idea that institutions, by influencing the main factors of growth and the behaviours of economic players, play a central role in the dynamics of economic growth.

2.3.   The Role of the Institutions According to the Regulation Theorists

The School of Regulation – M. Aglietta and L. Berrebi (2007); R. Boyer (2004), – has developed in France, from the end of the 1970s, an original analysis of the dynamics of the modern economy, structured around three central concepts: “regime of accumulation”, “mode of regulation” and “institutional forms”. Among these concepts, the third (institutional forms) is of great interest for us because it highlights the importance of the relationship between institutions and economic growth. Through their analyses, the regulation theorists have identified five basic institutional forms:

-       The monetary regime (or monetary constraint regime), the currency being considered as a fundamental form of social relations;

-       The wage relation (or the configuration of the relation between capital and labor), the wage relation being envisaged as the ways in which workers are attracted and retained by the firm;

-       The competition form, which shows how “are organized the relations between a set of fractioned centers of capital accumulation”;

-       The State form (i.e. the form of State intervention in the economic field);

-       The form of the integration into the international regime (or mode of relationships between the nation-state and the rest of the world).

Applying this analytical framework to the period of exceptional prosperity that the Western world has known after World War II, regulation theorists have developed the notion of a Fordism mode of growth, in which institutions play an important role, so important that the regulation approach is often described, quite rightly, as “historical and institutional approach”.

This Fordism mode of growth is characterized by a set of virtuous patterns achieved through the action of specific institutions. For example, at the level of the workers’ remuneration, the indexation of wages on labor productivity, ensured through the institutional framework of what is called officially “collective agreements”, allows a fair distribution of the productivity improvements between capital and labor. This fair distribution, by promoting a regular increase of the purchasing power of the middle and popular classes, induces a steady growth of consumer demand and investment (including estate investment by households), with the positive effects it has in terms of further expansion of production, etc.

2.4.   The Role of the Institutions According to the Theory of “Public Choice”

The theory of Public Choice has mainly been developed in the United States in the 1960s and 1970s, particularly with the works of Anthony Dows (1957), James Buchanan and Gordon Tullock (1962), Mancur Olson (1971), James Buchanan (1984a; 1984b), etc. It can be defined as an economic analysis of the failures of the State based on the gap between "what Governments can do and what Governments are doing" (Buchanan, 1984a). In other words, it highlights the failures of governments and public institutions in certain aspects, when they are subject to assessment according to an ideal standard of efficiency and fairness. The same criticism can be directed to the so-called “homo-politicus”, i.e. anyone with a role in the decision-making (let us say the politician, candidate or already elected, the official, the elector...) whose effort is oriented towards the maximization of his (or her) own interest that may be very different with the one of the collectivity.

Given these characteristics, the theory of Public Choice uses the tools and models of economics that it applies to politics, public economy and decision-making authorities (Governments, public institutions...), with the aim to provide an explanation or an understanding for the complex institutional interactions within the system of decision-making. Of course, the underlying question concerns the effects of the institutional action on economic growth. For it, if the key decision-makers act solely for their specific interests, economic growth will be very uneven.

Methodological individualism, which means the approach that takes into account the behaviour of players, their motivations, etc., is significantly privileged. Each individual is determined by his utility expressed by a set of preferences. The matter is then to put together the individuals who have different preferences. At the economic level, this problem can be addressed easily: an individual who prefers bananas to apples will be able to exchange his apples for bananas. At the political level, the exchange is much more complex and was the subject of extensive and varied researches: economic theory of Democracy (Downs, 1957); theory of Bureaucracy (Tullock, 1965); theory of Clubs (Buchanan, 1965); theory of Justice (Rawls, 1971), etc. The theory of Public Choice comes consequently in several research topics which focus on: the electoral system; the role of pressure groups; the public finance (Buchanan & Musgrave, 2000)…

The first theme refers to the questions of the legitimacy of the government and elected representatives: why do some individuals have an authority over some others? The analyses in terms of bureaucracy and pressure groups highlight the interactions between public interests and private interests: is there a common public interest for all. Or can one accept the (liberal) proposal according to which the public interest is simply the sum of the private interests? This issue is essential to determine the growth strategy that institutions should favour. The problem is then to define the actions that can improve or, contrary, worsen the overall situation of the society. Public Choice theory proves the impossibility to apply the Pareto optimality, and emphasizes the role of pressure groups whose actions are particularly visible in the tax policy, trade policy, in the financing of development projects, etc., and generally hamper the growth and the well-being of overall society.

Georges Stigler (1971) exposes the problem by analyzing the regulation as “a traded service between (on one hand) policy makers and public sector employees (providers) and (on the other hand) executives (requesters). Providers seek to maximize their chance of re-election or to acquire future positions in the industries under their supervision. The requesters wish on their side to protect themselves from competition, particularly the foreign. This approach is known as the theory of the capture of the regulation, because "the regulator" becomes an agent entirely at the service of the interests of the enterprises”.

In “The Calculus of Consent” (1962), J. Buchanan and G. Tulloch give some elements of response on what could be the “good society policy”, in other words the foundation on which good governance should be based. First of all, "it is essential to understand that what is desirable for a person or all persons is different from what is desirable for an institutional structure". The approach in terms of public choice is oriented towards the institutional organization of social activity, and has a clear relationship with what the philosophers from the Age of Enlightenment called for. According to a widely accepted principle, one considers it crucial to take into account a set of ethical and moral criteria in public choices. On the other hand, institutions must stand above the single market reality based on the pursuit of self-interest. In other words, they must avoid conflicts of interest by placing collective interest at the center of their actions and by eliminating the possibility for individuals or specific groups to impose external costs on all members of the society. Human nature being what it is, Buchanan (1984b) proposes to constitutionally restrict the power of the rulers in order to avoid the short-term vision of policy makers (the main objective of an elected official is to ensure his own re-election). It would look at establishing limits within which the political authorities and rulers could act, and regulations which would prevent elected officials to prevail their personal interests. This issue is particularly important in monetary and fiscal policies. Therefore, Buchanan (1984b) proposes a constitutional limit to the increase of the tax rate, of the public expenditure and the size of government, the need for a balanced budget must never be forgotten.

This is how the institutionalist theories and those of endogenous growth, regulation and public choice analyze the relationship between institutions and growth. Nevertheless, from the economic standpoint, the experience shows that only a certain kind of institutions plays a positive role. The questions are then: what are good and bad institutions? And how can one distinguish between the two categories?

To briefly answer these questions, one can say that, from an economic standpoint, good institutions are those which fulfil the following functions or criteria:

- On the legal level, they ensure the respect of the property rights of each individual, regardless of his social class, which has theoretically the effect of stimulating the entrepreneurship spirit and, therefore, the participation of the individual or groups of individuals to the economic life.

- On the political level, they frame the exercise of power by the elites and the persons in authority, with the aim to prevent them from abusing their prerogatives in order to distort the rules of the game and, thereby, to monopolize, in unmerited way, the fruit of others' efforts (by corruption, embezzlement, nepotism, etc.).

- On the social level, they promote a fair and rational income distribution, with the goal of avoiding the double pitfall of a high concentration of wealth in the hands of a minority and an excessive assistance of persons and groups in difficulties, the result generally being a better mobilization of resources and a greater participation of everyone in the collective effort.

- On the cultural and human level, they promote equality of opportunities for different members of the community, regardless of their family or social background, the beneficial effect here being generally to encourage individuals to engage actively in their training (intellectual and professional) and in that of their children.

Ultimately, are poor-countries poor because of their bad institutions? Experience and observations demonstrate that broad institutional specificities of countries have influenced their growth and development. Hence, to understand the reason why poor-countries are poor, one should study the functioning of their institutions, more specifically the political structure of these countries and the mode of governance (democratic, participatory, or autocratic) that shape the work of institutions. Although there is no evidence that democracy is associated with growth and development (like in Spain after 1980, Botswana in the 1960s, Mauritius in the 1970s), as it is the case of the dictatorial development in China, there is no similar evidence that autocratic regimes are associated with growth, as it is the case for several sub-Saharan African and Latin American countries. 

Eventually, if dysfunctional institutions are associated with a lack of growth and development, would institutional reforms help to solve such a problem? According to Acemoglu & Robinson, (2010), “Making or imposing specific institutional reforms may have little impact on the general structure of economic institutions or performance if they leave untouched the underlying political equilibrium”. Acemoglu and Robinson illustrated their point of view with three examples: 1/ the example of autocratic rapid growth of China since 1978 and; 2/ the democratic growth in Great Britain in the 19th century; and 3/ the example of Botswana in the 1960s. For these authors, growth in China occurred because the political equilibrium changed towards providing more power to institutions which wanted to create reform. On the other hand, growth in Britain in the 19th century was due to the empowerment of institutional change through the expansion of democratic rights and the growing investment in education. As for Botswana (a small African Sub-Saharan country), it witnessed the fastest rate of economic growth in the world for more than three decades due to its economic and political institutions (Parsons & Robinson, 2006).

In sum, institutional reform in poor countries, as well as in rich countries, requires political dynamics that empower institutional change, this empowerment might take different forms (more liberty and independence, expansion of democratic rights, investment in education, etc.), based on the political equilibrium that prevails in these countries, and is likely to contribute strongly to the successful convergence of poor countries if accompanied with “good governance”. This issue arises with particular acuity in a large number of developing countries, due to the behaviour of a large part of their elites in power.

3.  Good  Governance and Development in the Developing Countries

In comparison with the traditional neoclassical approaches, the endogenous growth theories, in rehabilitating the economic role of the State, represent undoubtedly an important progress. However, these theories present some limitations of which the most important is the exclusion of extra-economic parameters of growth, in particular the political parameters. In other words, the great absent in these new growth theories (and in all of the neoclassical inspiration theories) is the socio-political environment in which economic players operate: exercise of power, management of social conflicts, political balances of power, etc.

Nevertheless, the awareness of this limit, although it occurred a little late, is now real. Indeed, for approximately three decades, we have been witnessing a genuine rediscovery of the socio-political phenomena by economists, especially the Neo-classics (Marxists and, to a lesser extent, Keynesians have always integrated power relations and social contradictions in their analyses of the economic dynamics in capitalism). The increase, since early 1990s, of works on growth incorporating the impact of political and social variables (F. Limongi and A. Przeworski, 1993; A. Alesina and R. Perroti, 1994; R. J. Barro, 1996; A. Varoudakis, 1996) confirms a return to the political economy as defined by the founders of the classical school. However, this rediscovery of the political and social dimensions of the growth process is not limited to the academic and theoretical analyses. The international financial institutions, for their own reasons, have greatly contributed to the inclusion of the political and social aspects in the analysis of the economic growth. Because of the failures that have often sanctioned their structural adjustment programs in the developing countries, the World Bank and the IMF got to review their approach and to allocate a greater attention to both the terms of implementation of their stabilization plans and, above all, to the social and political consequences of these plans.

This framework (theoretical and practical at the same time) is the one in which these two international institutions have developed, to the use of the developing countries, a new “Political Economy of Reform” which has, as a central axis, the “good governance” defined simply as a set of effective principles of government, as well as, “the manner in which public authority is implemented, with the goal of achieving a rational management of social and economic resources of a country” (World Bank, 1992).

Although the liberal orientation of the policies advocated by the World Bank and the IMF is questionable, this notion of good governance is very relevant and useful in the perspective of a renewed approach to the economic development of the developing countries. Consequently, it is necessary to expound, in broad terms, the content of this notion. Beforehand, however, one must clarify this idea of rediscovery of the political and social dimensions, in the recent analyses of growth and development.

3.1.  Importance of the Socio-Political Dimension in Recent researches and Hypothesis of “Conditional Convergence”.

One of the central issues raised by the model of R. Solow (and widely debated in the community of economists of growth and development) is the catching up of the industrialized countries of the North by developing countries of the South. Among the supporters of the Solow model, some have argued the assumption of a “conditional convergence”, which means that the catching up is not at all automatic, but subject to social and political conditions for its effective realization.

In other terms, the question is the following one: the catch-up of rich countries by poor ones is not, today, fundamentally thwarted by the bad governance that characterizes the second group of countries, rather than by obstacles that would lie within the economic process itself? In this context, bad governance means primarily:

–      Corrupt practices, predation and favouritism;

–      The lack of appropriate regulation of social, ethnic and religious rivalries;

–      The abuse of human rights (including the right to property);

–      The shortcomings in the fight against poverty and inequality; etc. 

If that is the case (i.e. if the obstacles lie primarily at the socio-political level), the process of convergence becomes possible, if not probable, through the establishment of a better-quality governance model in the poor or developing countries, a model that provides appropriate answers to the above-raised issues. In any case, this is the perspective outlined by the proponents of Solow model, improved and enriched.

This assumption of a catch-up conditioned by the implementation of good governance in developing countries has been deepened in various economists’ works. In these works, the authors aim to identify closely the weight and impact of socio-political variables in the dynamics of growth and development. Among these works, the following ones deserve a special attention:

–     Alesina and Perroti (1994), who do not confirm the popular belief of a positive influence of political democracy on economic development (meaning that: an authoritarian regime can do worse or better than a democratic regime), but highlight clearly the negative impact of political instability on the process of economic growth;

–     Barro (1996), who, on the basis of a fine empirical study of the relations between democracy and development, establishes a non-linear relationship between the two, relationship which can be summarized by a simple proposal: if little or no democracy at all is detrimental to the economic development, in poor countries like anywhere the brutal transition to democracy appears to be detrimental too, due to the disorders that often occur during the democracy learning period, which may be more or less long;

–     Clague, Knack, Keefer and Olson (1996), who emphasize the positive role played by the respect of property rights in economic development, let the political system be democratic, authoritarian or even dictatorial;

–     Finally, Varoudakis (1996), who through a close study of the relationship between the practices of government and the economic development, clearly shows how the practices of predation at the top of the State (theft or looting of public property) thwart or even completely block the economic growth.

Ultimately, through these different works, the central proposal that emerges, explicitly or implicitly, is as follows: if developing countries adopt good-quality systems of governance of their public affairs (i.e. based on transparency, the respect for civil liberties and property rights, etc.), accompanied with socio-political reforms and institutional empowerment, there is no doubt that their pace of development will be accelerated to the point that the convergence hypothesis and, therefore, the process of catching up the economically developed countries becomes not only possible, but probable in the long run.

3.2.   A Calling into Question of the International Economic Organizations

As a result of the difficulties encountered during the implementation of The IMF’s stabilization plans and of the World Bank’s structural adjustment plans, critics of the two institutions have been numerous and very stern during the last decades. These critics issued both from outside and inside of these institutions, as evidenced by the work of Joseph Stiglitz (Globalization and its discontents, 2002) and the one, less known, of William Easterly (The Elusive Quest for Growth, 2001), two economists who have worked long at the World Bank.

3.2.1.     The Critique of the “Washington Consensus”

From 1995, Paul Krugman, as an academic intervening from the outside, denounced, the “Washington Consensus”, an ideological corpus developed in the early 1990s by the Economist John Williamson, which gathers, around the IMF and the World Bank, most of the Finance ministers of the industrialized countries, the main investment funds, the large banks and various think-tanks. Stated as absolute truth, the central argument of this corpus is that developing countries cannot prosper economically without fulfilling two conditions: to integrate into the world economy by liberalizing their international exchanges; and implement a sound monetary and fiscal policy, which means avoiding any expansionary economic policy, equivalent to a monetary expansion and/or to worsening of the deficit of public finances.

Although clearly free-trader, P. Krugman (Nobel Prize in 2008 and initiator of the New Theory of international trade) does not consider the full integration into the world economy as a sine qua none condition for the economic takeoff. Regarding the economic policy, he is inspired by Keynesian analysis and precludes the reasoning according to which monetary and financial stability would be the source of prosperity (Krugman, 1999). This is evidenced, at his point of view, by the experience of Argentina that, having respected scrupulously, during the 1990s, the recommendations of the IMF (up to linking tightly its currency to the U.S. dollar), has not escaped a major crisis in the early 2000s, and ended almost ruined economically by this crisis.

P. Krugman is not alone in criticizing the measures recommended by the mainstream economic thought. Dani Rodrik (2012) has also highlighted their limits. According to his analysis, the G7 (Group of seven most industrialized countries) ended up imposing its own development standards, which have been adopted by major international economic organizations. However, these standards do not always fit to the conditions of developing countries. For example, compliance with the standards set by the WTO for integration within it requires greater amount of financial means than the annual budget of many poor countries of the South. On this basis, Rodrik calls into question the positive effects of the international free trade on growth and development in these countries. Therefore, although they do not share the same analysis on free trade (Krugman believes in the virtues of free trade, whereas Rodrik does not), Krugman and Rodrik have in common a critical position towards what is called the “unique thought”, summarized in the Washington Consensus.

3.2.2.      WTO, an Inadequate Vision of Free Trade

Krugman is a supporter of free trade. “I understand the principle of comparative advantages and I support free trade”, he wrote in “Is Free Trade Passé?” (article issued in 1987). According to him, if only one doctrine would be accepted by all economists, it would be that one. Thus, it is not wrong to say that, in general, participation in international trade is beneficial to the different countries. However, the problem lies in the way in which free trade is apprehended. J.M. Siroën (2000), in  « Existe-t-il une théorie hétérodoxe du libre échange ? » (“Is there a heterodox theory of free trade?”), exposes the differences between the vision of academic economists and the one of international institutions such as the WTO and the IMF. If both visions share, on the one hand, the same belief in the superiority of free trade, they diverge, on the other hand, in the analysis of the accurate source of the gains obtained, thanks to the international exchanges.

While the international organizations (WTO, IMF...) consider that the gains of free trade are on the side of exports, for the academic theory (or, at least, the part of the economic theory initiated in the 19th century by D. Ricardo and continued nowadays by some neo-Keynesians like P. Krugman and J. Stiglitz), the advantages of international trade for the partners are mainly on the side of imports. Thus, J. M. Siroën (2000) summarizes the approach of academic economists of international trade by the following theorem. “In a territory where the supply of factors is given and fully used, openness to the international exchange improves the income if it results in an increase in imports”. This approach is in line with the classical Ricardian analysis whereby each country must specialize in the production of goods for which it has a comparative advantage. In this framework, this country can benefit of its significant productivity in the production of the good for which its comparative advantage is indisputable in order to buy more of other goods it does not produce.

On the other hand, the dominant approach today (the one of the WTO and the IMF) can then be formulated in such terms. “In a territory where the supply of production factors is elastic with respect to their demand, the opening to international exchange improves the economic situation if it results in an increase in exports” (Siroën, 2000). Obviously with such a formulation, it is easier to “promote” free trade between nations. This difference may, a priori, seem thin, if the analyze remains at the theoretical level. But the problem appears when one considers the economic policy recommendations inspired by these two visions. Indeed, when the matter concerns economic policy recommendations, a big gap exists between the two approaches: whereas the second approach advocates reciprocity of trade opening, in the first one (the Ricardian vision), reciprocity is not a prerequisite, for it is always in the interest of a country to open, regardless of what the other countries can do.

Moreover, during the debates on the strategic trade policy in the United States to which he took part (in the 1990s), Krugman defended the point of view that even if free trade has lost its aura (notably in favour of the industrial policy in Europe and the protectionism in Southeast Asia), it remains the best of applicable policies. On this basis, he has reservations on the multilateral trade agreements which, because of their protection clauses (subsidies, safeguard clauses, "anti-dumping measures", etc.), cannot lead to something else than a reduction in the short term of the overall well-being of the countries involved.

We could continue the presentation of analysis criticizing international organizations, but those two arguments seem sufficient to recognize the limitations of their approach to economic development, based mainly on the integration in international trade. Certainly, one can recognize for such an approach some advantages in terms of extension of markets, decrease of costs of production thanks to the rise in the scale of production and productivity gains. However, these benefits do not occur for faintly-competitive developing countries, and, in all cases, not under the conditions established by the WTO, nor on the basis of the policies it advocates.

Finally, for poor countries, good governance is not necessarily the one advocated in the framework of the “Single thought” of major international institutions. As a matter of fact, the World Bank determined a positive correlation between the composite index of “good governance” and economic growth using general indicators that, regretfully, do not consider the particularities and challenges of different countries, what worsened the divergence between the expectations from “good governance” and its real impacts on economic performance. As a proof, it is sufficient to note the difficulties encountered by most countries of the South having applied the recommendations of the IMF or the World Bank. Consequently, we can assume that the vision of the development reduced to its economic dimension, promoted by the international organizations, is not sustainable in the long run as it focuses on governance reforms, that are difficult for developing countries to implement, rather than focusing on economic policy reforms that would facilitate the work of institutions, meet the expectations of donors and, at the same time, assure minimum level of satisfaction for local population. Based on what proceeded, it became urgent to determine whether “good governance” should be still considered a criterion of good institutional performance and a condition for international aid. If so, what should be then a real “good governance” to the use of developing countries?

Departing from the fact that international donors care for the economic prosperity and development of poor countries, they should not impose governance reforms that overwhelm these countries or hinder their development plans. Going back to the question about the new definition of “good governance”, we suggest that poor countries should select, from the list of reforms imposed by donors, those that directly advance their development, bearing in mind that development will subsequently enhance governance, instead of wasting their resources, time and efforts on applying potential inadequate, ineffective  and sometimes unnecessary reforms that may delay the development process and consequently obstruct  local governance.

3.3. Good Governance, a Means for Renewing the Approaches and Practices of Development in the South

The criticisms of the traditional development conceptions have undeniably produced their effects in the sense that, henceforth, the purely economic approach is abandoned by the two major international organizations (World Bank and IMF), in favour of a greater attention to the social and political effects of their macroeconomic stabilization programs and structural adjustment plans, as well as to the institutional contexts of their implementation. In short, for the IMF as well as for the World Bank, “good governance” is now the watchword of combating poverty, as it is, more broadly, the key response to be given to the challenge of development in the context of globalization.

Concretely what does this evolution mean? As seen above, at the basic level, “good governance” is associated with a set of management principles of public affairs among which, in first place, the respect for human rights, the fight against corruption, and a total transparency in the projects realization and their assessment. Likewise, the implementation of these principles has become one of the major conditions to access international financial aids.

However, this first aspect is not the only one. Following the authors who have deepened the analysis of this concept - and whose works have inspired in large measure the World Bank and the IMF- we can say that “good governance” comes consequently through three central issues that focus on how are designed and carried out the policies of development and on how are handled the affairs of the State at the various levels of the administrative organization (J. Isham, D. Kaufmann, L. H. Pritchett, 1997):

–  The first question concerns the nature of public policy: Which public policies should be implemented in priority, in order to foster and accelerate strongly the mechanisms of economic growth?

–   The second deals with the modes of decision-making and of the implementation of the measures, once the decisions are taken: how decisions concerning the economic policy and the structural reforms are made and applied specifically at each level of implementation?

–  The third issue concerns the assessment of the effectiveness of public policy choices: to what extent the decisions taken and effectively implemented enable to achieve the specific objectives targeted and, beyond, to what extent are they efficient to boost the process of development of the concerned country?

It is in the light of the responses to these three questions that the World Bank, the IMF, and other financial institutions (international and regional) appreciate now the quality of governance that characterizes a country. Depending whether this quality is considered good or bad, new loans are granted or not to the applicant countries.

What about this new approach of development that is based on governance and real attention accorded to the role of the socio-political dimension in economic processes? It is clear that the problematics in terms of governance goes towards a better coverage of the specificities of different countries, whether institutional, cultural and, of course, socio-political. And, from this point of view, it is undeniably a step forward in the understanding of development processes (even if, some theoreticians and experts in development don’t share the liberal credo of the international financial institutions). That being clear, we may raise two reservations against this approach: the first at the methodological level, the second at the practical level, and concerns the legitimacy of the international organisations' power.

At the methodological level, the criticism focuses on the process of integrating into economic reasoning (and, even, in econometric models) the parameters which cannot be easily measured or quantified. Indeed, to statistically evaluate the impact on economic growth of various socio-political variables is a very complicated task, if not highly problematical. Of course, even if insufficient, taking into account in the economic analysis of the influence of extra-economic variables allows a vision of development as a global dynamics and, therefore, a better control of processes involved. Nevertheless, the limit of such a way of doing is that the economist (and with him the boss of the IMF or the World Bank he advises) is unable to genuinely deal with socio-political, cultural and institutional data... as separate variables from economic ones (both in their nature and in their action). Because of that, this approach is often challenged by specialists of other social disciplines who accuse it for being too faithful to the economic logic which, by focusing on quantity at the expense of quality, often miss the essential in the understanding of social and societal developments.

From this point of view, the great challenge facing today the economists’ community of growth and development is the following: how to integrate, in the theories and models of growth and development, the specific role of variables, as diverse as, the political institutions, the cultural and symbolic traditions, the social and ethnic antagonisms, etc.? And, consequently, how to clearly distinguish between the variables which contribute positively to the dynamics of growth and development and those which, on the contrary, hinder or even block it?

Concerning the practical level, the debate deals with the legitimacy of the new prerogatives vested in the international financial institutions in matters of assessment of the quality of governance in different countries. As it has been said, with the new conditionality, the loans are granted or not, to a country, depending on the assessment that the World Bank and the IMF do about the efforts of that country in the area of governance (i.e. public expenditures, respect for democratic freedoms, political stability, transparency, fighting corruption...).  However, what is the legitimacy of such an extension, to the political field, of the prerogatives of the Bretton Woods institutions?

Without doubt, the governance-based approach in loans granting has the advantage of adapting the financial assistance programs to the economic and socio-political contexts of the concerned country. Thus, for black Africa, the World Bank has made commendable efforts, since about twenty years, to better coordinate the development projects with the institutional, political and socio-cultural specificities of the countries in which it operates (mobilization of ethnic and religious solidarity, valorisation of cultural heritage, rehabilitation of traditional skills).

However, the limit of this approach is that it expands excessively the power of intervention of the international financial organizations. These organizations do not anymore hesitate to make judgements on sensitive points of the mode of public affairs management in many developing nations: system of government, constitutional texts, importance of the public sector, prudential rules in bank funding, etc. However, assuming that these international organizations have the necessary technical skills to make authorized assessments on various economic issues (what remains to be checked), they certainly lack the political legitimacy to interfere intimately in the internal political functioning of the nations.

Conclusion

Eighty one years after the publication of “The General Theory of Employment, Interest and Money” (Keynes, 1936), and despite recent developments in the world economy, the State seems to find again a central place in the issues of growth and development. Nevertheless, some safeguards that have been highlighted, particularly by the theory of public choice, are essential to the implementation of "good governance" and consequently to the catch-up of the northern industrialized countries by the southern developing countries. Institutional issues are all as important as economic issues. Experience demonstrates that main institutional characteristics of countries influence their growth and development, while the dysfunction of these institutions is often associated with economic stagnation. Therefore, to understand the successful convergence of some poor countries and the failure of others to catch-up, one should study the institutional functioning of these countries, more specifically their political structures and their modes of governance.

Although, there is no evidence that democracy is associated with growth and development, the convergence of poor countries is quite possible if they demonstrate an ability to overcome their socio-political problems and to implement “good governance”. The examples that demonstrate this fact are less and less exceptional. Departing from the fact that institutional reform requires a political transformation that empowers institutional change, the remaining questions are: 1/whether the ruling classes of the developing countries (that are until now poorly governed) will accept to implement these essential changes or, on the contrary, will they continue to focus on their private interests at the expense of the general interest and 2/ whether international institutions will accept partial implementation of reforms that could better help the advancement of development of poor countries based on their own priorities, not on the priorities imposed on them. Only time will provide the response to this crucial issue.

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