Institute of Development Studies

Is Good Governance Good for Growth?

21 July 2009

The United Nations Conference on Trade and Development (UNCTAD) recently launched their Least Developed Countries report, which calls for a new Developmental State to press forward development in the poorest countries. This high profile acknowledgement of the importance of governance for growth and development is very welcome. But it also begs important questions. As the report acknowledges, some countries have constructed an effective ‘developmental state’ but without implementing the traditional donor package of ‘good governance’. If they have managed to achieve this, then what are the actual governance arrangements that they used to encourage investment and growth in their economies?

This is precisely the question addressed by a major research project on Public Action and Private Investment led by IDS Professor Hubert Schmitz as part of the Centre for the Future State Development Research Centre. IDS researchers are working with partners from Indonesia, Egypt, China, Brazil and Pakistan to map out how leaders at both the national and local levels have put together effective coalitions of interest between the public and private sector in order to reduce the risks and uncertainty faced by private investors. This in turn has led to substantial increases in investment. But these coalitions are often far from transparent and depend critically on allegiances based around ethnicity, party membership, and educational background. It is key to understand why some systems of checks and balances create constructive coalitions that lead to investment and growth, whilst others degenerate into corruption and cronyism.

The UNCTAD report also acknowledges that the relationship between governance and economic growth is far from clear. Not only have some seemingly poorly governed countries performed well, but other countries which have implemented a range of ‘good governance’ reforms have seen little return in terms of investment and growth. One of the reasons that research has struggled to show that good governance causes growth, is that most analysis has focused on cross-country comparisons. Unfortunately, the differences between countries, in their legal systems, politics, culture, geography and history, are so large that it is impossible to know whether the differences in their economic performance arise from these unmeasured differences in context or genuinely from differences in the quality of governance.

A new Ausaid-funded IDS research project led by Dr Neil McCulloch attempts to solve this problem by looking at the relationship between governance and growth at the sub-national level in Indonesia. ‘Exploring this issue is much easier within a single country, because the political and legal system is the same for all districts in the country’ said Dr. McCulloch. ‘We are exploiting an extraordinary new dataset which measures the quality of different aspects of economic governance for 243 Indonesian districts’. The Asia Foundation have produced a video, including an interview with Dr McCulloch, which explains how the dataset was constructed and can be used.

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Image: Villagers look on as their votes are counted openly in front of a panel of election monitors, Chris Stowers/Panos

Related Projects

• Measuring the Impact of Better Local Governance in Indonesia - This study addresses the extent to which the quality of economic governance at the district level enhances the economic performance of Indonesia's decentralised districts. (2009 - 2009)
• Centre for the Future State - The Centre's mission is to harness the ideas and the research skills of applied social science researchers, in both developing and developed countries, to assist policymakers and citizens to find ways of increasing the effectiveness, accountability and responsiveness of public authority in poorer countries, and thus contribute to reducing poverty. (2000 - 2010)