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Financial Crisis as the Kiss of Death to the Governance Agenda?
By Kaufmann | May 27, 2009 1 Comment »
In a recent blog entry, Dani Rodrik compliments the overall work of Simon Johnson and of mine. Then he specifically finds fault with our argument regarding the link between corruption and the current crisis in the US, and goes on to claim that: ‘…the financial crisis has killed the governance reform agenda’…
Rodrik has kind accolades for Simon and I, and among others he states that I ’…led the World Bank’s work on governance and has done probably more than any other living soul to bring governance issues to the top of the policy agenda in the developing world’. Then he mentions that I have argued ’that the financial crisis in the U.S. was the by-product of capture and corruption…’, and he continues: ‘Now I am a fan of Simon’s and Dani’s work, and I count them both among my friends. They may well be right about their diagnosis of the origins of the crisis. But an implication of their recent arguments is that we need to significantly downplay the role of improved governance as a causal mechanism for economic growth. After all, no-one can deny that the United States, for all its financial follies, is a rich country. It turns out that it is possible to be corrupt in a fundamental way and still be rich… The case for governance reform is that it is a good thing to do in and of itself. But don’t confuse it for a growth strategy.’
Let me return the compliment to my friend Rodrik: I greatly admire his academic work and his intellect, among other virtues. Yet even brilliant people can on ocassion be mistaken. The fact that there may have been corruption in the US in no way undermines the case for good governance being a powerful driver of development.
I have been writing and researching about governance, corruption and state capture for well over a dozen years. And for some years I have tried to show empirically that rather than being a model for the world, there is some corruption and capture in the US. [Incidentally, you are invited to join a special Webinar about to take place on capture and the US financial crisis, here].
to Yet let us keep perspective. Indeed, in the US there is more corruption, in the traditional sense (bribery, embezzlement, etc.) than in many other rich industrialized countries. There are about 15-20 countries that rate better than the US, notably the Nordics, other countries in northern Europe, New Zealand and Singapore. Among the rich, and considering that it is a superpower, the US does not shine on this dimension.
But then there are over 180 countries that rate below the US on corruption control. To attract media attention it is at times convenient to exaggerate the extent and prevalence of overall corruption in the US, but the fact is that bribery and embezzlement, while it exists, is far from endemic in the US.
It is also well known that a century ago there were high levels of corruption in the US, which over time came down significantly. This is consistent with a positive link between governance generally, and corruption in particular, and growth — in the long term.
Indeed, the causal link from good governance to higher incomes is robust in the longer term (what we have labeled as ‘the 300% dividend of good governance’. By contrast, it is misleading to claim that a short term mishap in governance automatically or immediately brings about a significant drop in income.
Now, in one very particular dimension of govenance the US has exhibited serious weaknesses over the past decade or so, namely with respect to the extent of ‘legal corruption’ and ‘capture’ by private potentates. The US performance has been poor compared with any industrialized nation in this dimension. Even in this dimesion, there are many countries that rate below the US, particularly the non-rich world. And the slippage of the US in this dimension has been costly–witness the economic crisis. The current crisis may in fact be one of those episodes where misgovernance and economic downturn are linked to each other, even in the short term.
And fundamentally, we need to keep in mind that the very significant long term dividend of good governance is particularly applicable to developing and emerging economies: it is a ‘development dividend’.
Dani Rodrik provocatively titled his blog posting ‘how the financial crisis has killed the governance reform agenda’. Hopefully he doesn’t turn out to be right for the wrong reasons: a byproduct of the current crisis is that it has become a useful excuse to turn a blind eye on major pending longer term reforms to improve governance and corruption control in many corners of the world. That would be short-sighted, with dire consequences in the longer term.
Topics: Corruption, Measurement Frontiers, Regulation & Security, Rule of Law, capture, financial crisis | | 1 Comment
May 27th, 2009 at 5:02 pm
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