Myth #2: Only Rich Countries can afford Good Governance & Rule of Law? — on The Economist’s ‘Order in the Jungle’
By Kaufmann | March 13, 2008 3 Comments »
“Order in the Jungle” is the title in this week’s essay in The Economist on Rule of Law and Economics (access here). Does Rule of Law really matters? — that is one essential question addressed in that essay, which draws from noted work by Sen, North, Fukuyama, Carrothers, Sunstein, Rodrik and Subramanian, Daniels and Trebilcock, and Shleifer et al, as well as some research efforts I have carried out with Kraay, Hellman, Mastruzzi, Zoido, Isham and Pritchett.
Stepping back for a minute: Superstition or Science? Many lengthy reports, often glossily produced by respectable organizations, showcase simple correlations between two variables, depicted in colourful graphs, with its explanatory text frequently over-interpreting these correlations to suit the authors’ (or organization’s) priors, rather than figuring out what the causality direction (if any) actually is between both observed variables. It has been said that correlation is merely superstition, while empirically-proven causality is science… The Economist article attempts to probe deeper, beyond superstition. The chart in the Economist article summarizes the results of some 3 studies (it didn’t show the AER article by Acemoglu, Johnson and Robinson), all pointing to strong causality, rather than merely showing country dots correlating rule of law and incomes.
A superficial plotgram chart correlating incomes and rule of law can be mistakenly interpreted to suggest that Rule of Law is a ‘luxury good’: countries become better governed because they are wealthy and can afford it. Some may even go further and fall prey to the paternalistic assertion that many public servants extract bribes because they are poor. Poverty then becomes the excuse to obtain a special country ‘discount’ from the true extent of misrule of law or corruption. Yet claiming poverty as an extenuating circumstance to justify a special dispensation makes sense only if the direction of causality were to run mostly from higher incomes to governance improvements, and not viceversa. That is a ‘myth’. Let us briefly look at this.
Observing development in action, we see that some emerging economies, well before they become rich, can exhibit good governance and rule of law, as in the case of the Baltic states and some other former socialist countries that are now belong to the new Europe, such as Slovenia and Slovakia, as well as Botswana in Africa, and Chile, Costa Rica and Uruguay in Latin America, for instance. Conversely, vast income windfalls, say from oil, have yet to be converted into improved governance in many countries, such as Nigeria, Venezuela, Russia, Angola and Turkmenistan (in contrast with how copper and diamond proceeds have been managed in Chile and Botswana, respectively). Similarly, some (but not all) recipients of large amounts of aid have wasted it.
Thus, obtaining higher incomes do not automatically guarantee better governance. One can speculate why. One strand from our research alluded to in the Economist article suggests that there are countries where there is state capture (of the laws, policies and institutions of the state) by potent vested interests, that results in the spoils of income growth being captured by the elite, rather than benefitting the population at large. The recent cases of Kenya, or of some former soviet countries as well as some low-income, resource-rich economies afflicted by the ‘curse of oil’, illustrate. Where there is high level capture, generous aid or natural resource riches may result in higher national income, but that income increase does not get translated into improved governance or sustained and shared growth.
In fact, the actual direction of causality essentially runs the other way around: improved governance and rule of law is conducive to higher incomes. That is the basis of the estimated ’300% development dividend’ of good governance, inferred from the research by different authors summarized in the Economist, which disentangles both directions of causality. In addition to the ‘development dividend’ graph based on cross-country work, that article also refers to our ’micro’-level research, showing that countries with better civil liberties tend to be more successful in implementing (World Bank-funded) investment projects.
Of course, the causal link between governance and incomes is found to be particularly robust in the long run. There are other important determinants of development as well, and in the short term some countries have managed to have growth spurts without paying enough attention to good governance and rule of law. But such growth is unlikely to be shared, or to last very long. Rule of Law, broadly understood, may not be the supreme pre-requisite for growth and development, but it does matter. Aplenty.