From Good Governance to Developmental Governance – How Policies, Institutions and Politics Matter

Abstract

The present global financial and economic crisis offers an opportunity to rethink the relative roles of state and market as well as of globalisation and national development strategies in the political economy of development. It has become more difficult to argue that globalisation has rendered national development strategies and in particular industrial policies superfluous. The crisis also calls for a rethinking of the prevailing standard recipes for development and of the ‘institutional therapy’ that has been driven by the international development establishment. The article seeks to identify and outline a heterodox view on how policies, institutions and politics matter for latecomer development, and does that by juxtaposing it with the orthodox view. The central argument of the article is that the orthodox view has serious weaknesses, and that a heterodox approach – developmental governance – is the most promising path for future research on governance and economic transformation.

Keywords:

• governance
• industrial policy
• institutions
• politics
• economic transfor-mation
• development

Notes

¹There is no agreement on how to define institutions and governance inside or across the orthodox/heterodox divide. We apply a comprehensive notion of what constitutes an institution, including formal rules and informal norms, customs, conventions and routines that structure – and more particularly coordinate and mediate – relations between individuals and social groups in the various units of polity, society and economy. Hence, institutions are not just related to the rules of the game but also to the organisational aspects of the play of the game, and institutions simultaneously constrain, shape and enable human action. Governance refers to the mechanisms, processes and institutions through which decisions are made and political authority is exercised, and encompasses the capability to formulate and implement policies. Finally, the notion of developmental governance in the title of the article then refers to a situation in which both the institutional arrangements and the political processes are aimed at economic growth and transformation as a means of catching-up with the advanced capitalist countries.

²A listing of such studies can be found in e.g. Aron (2000, pp. 107–113, Table 1), Jütting (2003, pp. 16–18, Table 2), Grindle (2007, p. 558) and Casson et al. (2010).

³It should be emphasised that the critical comments all relate to the instrumental and not the intrinsic aspects of the good governance agenda.

⁴The researchers behind the World Government Indicators have opposed both the methodological and empirical critique of ‘governoskeptics’ (see e.g. Kaufmann and Kraay, 2008; Kaufmann et al., 2007a; 2007b; 2007c).

⁵Moreover, even if sustained, it may lead to institutional mono-cropping, which is less adaptable to a changing world and the expected ‘development dividend’ may not come into being (Chang, 2002, pp. 11, 135; Evans, 2004).

⁶‘Getting policies right’ is not a notion the World Bank uses. Actually, the mandate of the organisation does not allow it to engage in politics but it is accepted that the Bank works with the political economy context of reforms. Therefore, the term political economy analysis is normally used. Under this heading, one finds not just orthodox frameworks both also heterodox ones (see e.g. Fritz et al., 2009; World Bank, 2008).

⁷Hence, the sharp division between the good governance phase and the good politics phase should be taken with a pinch of salt.

⁸Concerning the latter, Kaufmann (2003) and Acemoglu and Robinson (2008) move somewhat further by putting emphasis on the distribution of power between the political leadership and powerful corporate elites and the alliances between them. Elite bargains or ‘founding’ political settlements are also central in the country-specific and evolutionary political economy analysis suggested by Levy (2010a; 2010b) and Levy and Fukuyama (2010). Besides theorising the political order of divergent development trajectories, there is a strong emphasis on avoiding a priori prescription and on working with the country's grain. ‘Recognition of the limits of policy reform led to a focus on institutional reforms to foster good governance. But now that we recognize the limits of institutional reform, no further doubling seems to be in the cards’ (Levy, 2010b, p. 34).

⁹Thus, the article deals only with processes economic development/late industrialisation. On heterodox thinking about the relationship between local-level governance, local public service provision and poverty alleviation, see e.g. Booth (2011) and Grindle (2004).

¹⁰We have elaborated on these two rationales as well as the strategic industrial policy more generally in an earlier article in Forum for Development Studies; so this section is kept fairly short (Lauridsen, 2010, pp. 13–18).

¹¹Macro-economic policy and growth policy are closely interlinked and they are linked to social policies. The latter as well as the links between macro-economic and growth policies are not taken up in this article. On the importance of macro-economic and exchange rate policies in heterodox thinking, see e.g. Ocampo (2004–2005, 300ff), UN (2006, chapter 4), UNCTAD (2009, chapter 2) and UN (2010, pp. 25–36).

¹²The diversification described here is away from primary production (agriculture) but agricultural policy and agrarian transformation are also important parts of this process but not dealt with in this paper. On the important role of agricultural policies and rapid agricultural productivity growth in economic transformation, see e.g. UNCTAD (2009, chapter 3) and UN (2010, pp. 27–29).

¹³On the binding constraints and related growth diagnostic, see Rodrik (2007, chapter 2).

¹⁴As mentioned previously, context-specificity and binding-constraint thinking have now also become a part of the new pragmatic ‘Washington Pluralism’. However, (strategic) industrial policy is generally not accepted. Thus, the World Bank in its central ‘Inclusive Growth’ document explicitly writes that: ‘Encouraging broad-based and inclusive growth does not imply a return to government-sponsored industrial policies, but instead puts the emphasis on policies that remove constraints to growth and create a level playing field for investment’ (World Bank, 2009, p. 1). The World Bank's chief economist, Justin Lin, is more positive towards industrial policy, suggesting that the state has a crucial role in supporting technological advance, in promoting industrial diversification and upgrading and in providing the necessary hard/tangible and soft/intangible infrastructure, but state intervention has to be of a dynamic comparative-advantage-following kind (Lin, 2010; Lin and Chang, 2009).

¹⁵It should be noticed that it is not always easy to distinguish them from policies. The introduction of tax deduction for innovation activities is a policy while a new intellectual property right regime is an institution, but in relation to other interventions that distinction is less clear.

¹⁶For a quantitative analysis on growth spurts and their determinants, see Hausmann et al. (2005). For a presentation of ‘just enough’ governance as a growth trajectory with Bangladesh as a typical case, see Levy and Fukuyama (2010, 23ff).

¹⁷The shift from ‘best practice’ to ‘best fit’ is not particular to national-level economic transformation studies. Thus, local anchoring of problem-solving and working with existing institutional arrangements appear also to give better results in local public goods provision (see e.g. Booth, 2011).

¹⁸Here it makes more sense to talk about effective institutions being pro-capitalist rather than pro-market or market sustaining (Kohli, 2004).

¹⁹The latter is obvious in relation to the rise of the developmental states in East Asia where e.g. trade liberalisation in general and a US policy of favourable access to manufactured import from South Korea and Taiwan in particular suited an expanding export-oriented industry in these countries. For a short presentation of the facilitating international (and national) conditions of the East-Asian developmental states during the two periods, see Stubbs (2009, pp. 6–7, 10–13).

²⁰‘The challenge is to specify the constraints that make it difficult for politicians to maintain power simply through clientelist connections, and the incentives pushing them to undertake the difficult task of building institutions for economic change’ (Doner, 2009, p. 89).

²¹Thus, Johnson (1999) described the developmental orientation of the East-Asian political elites as essentially the political and nationalist objectives of a late developer who gave priority to nationalism and social mobilisation, and he even considered the developmental state as a kind of quasi-revolutionary regime. In contrast, Doner (2009, pp. 284–5) argues that one only needs to go beyond structural pressures and take such factors into account in the cases where we have moderate levels of vulnerability.

²²Confer the previous discussion in the section on institutions matter.

²³For examples from Sub-Saharan Africa, see e.g. Bräutigam et al. (2002). Cases from Asia complicate the matter. In Malaysia, the ethnic divides between the Malay political elite and the Chinese business elite did not block the formation of a growth coalition in relation to diversification and deepening but the divide has complicated effective implementation of industrial upgrading initiatives. In Taiwan, the KMT state tried to limit the power of the Taiwanese business sector. During the 1970s and early 1980s, it guided diversification and deepening through state-driven networking with selected business groups, while industrial upgrading (during the years 1986–2000) took place under new types of more robust state–business interaction embedded in a conservative alliance between KMT state and big business (Lauridsen, 2008, chapter 17).

²⁴The development goal we deal with is increasing living conditions through industrial diversification, deepening and upgrading. If we expand the palette beyond the scope of this article to include social welfare, poverty alleviation, environmental protection, political participation and democratic deepening, there will of course be further good arguments for formation of broad-based socio-political coalitions.

²⁵We can allude to the nature to these challenges of the developmental governance research agenda by formulating four questions: First, to what extent is it possible to move the research agenda forward at the national level compared to studying it at the sectoral or the sub-national level? Second, to what extent and how can developmental governance be extended to include redistribution of income, social welfare and poverty alleviation? What are the prospects of more encompassing developmental coalitions with broader social and political purposes? Third, and also related, to what extent, under what conditions, and how is it possible to combine developmental governance and democratisation? Fourth, how can the heterodox approach take the combined forces of globalisation into account? What is the policy space for developmental strategies during a period where the ideological climate is still mostly anti-developmental and where constraining international regulations are present inside WTO as well as increasingly in regional- and bilateral trade and investment agreements?