The puzzle of good governance

By Satish Mishra

JAKARTA (JP): The considerable literature on the role of institutions in development suggests that we are far from being able to define an ideal universal institutional structure or incentive which helps define "good governance."

Finding the right mix of rules and institutional changes that might suit a given society at a particular stage of their development is perhaps the most critical challenge. Working out the feasibility approximating a preferred set of institutions in any particular setting is another.

Given that both market and political institutions have developed in advanced market economies over decades, even centuries, it is not immediately apparent that good institutional structures, like good production technologies, might be adopted at will. Is lateness in institutional reform an asset or a liability?

Works such as that by Landes on technological dissemination, and of Huntington on the changing patterns of identity and social organization all suggest that establishing a structure of good governance might not be as easy as it seems.

As Landes notes, "Good government is not there for the wanting, or even for the knowing. It is not an act of will or fiat. It will not come about because someone appoints good counselors, even good economists."

He adds that it takes time to create an effective bureaucracy and "to establish a commitment to a larger national identity and purpose."

European countries took centuries to do this, Landes writes: "New nations have tried to establish a whole panoply of institutions in a matter of years or decades." It is no accident, he says, "that the success stories of East Asia are of relatively homogeneous societies with a strong sense of historical and cultural identity".

Institutional reform is therefore riddled with uncertainties and pitfalls. There is no clean slate. There are no ideal models. There might even be active resistance to what is perceived as the imposition of external cultural values and norms on an economically weak trading partner.

Good governance and institutional reform by their nature go beyond the competence of economists and technocrats. Often the "right" answer is rooted not in the technical solution to an allocation or a transaction cost problem, but in consensus building.

This involves not being right, but making sure that the community as a whole arrives at a shared common view of what constitutes acceptable standards or ethics or probity.

What does all this imply for policy? First, there is a need to recognize the limitations of governance related reform both in terms of scale and timing. Second, one should avoid straining the analytical link between specific institutional arrangements and economic performance.

Certain types of institutions, such as democracy, can act as both an ends as well as an instrument. One does not need to find a fool-proof link between democracy and economic growth to be able to support the creation of a democratic political system.

Third, attention needs to be paid to the sequencing problems in institutional reform. Where interdependence of institutions requires simultaneous changes in several bodies, an effective state will still be needed to prevent coordination failure and solve free-rider problems.

Thus even when the end point of institutional reform is to promote private-public partnerships the state might still emerge as a key facilitator of this reform.

Fourth, one should avoid overloading the governance agenda by setting manageable priorities. In crisis situations this implies focusing on those aspects of institutional reform where the correlation with a given economic output is the strongest. Corruption is one clear candidate.

Promoting and building consensus on an equitable sharing of the costs of economic crisis and reform is another. Fifth, given the fuzziness of the terrain, it is important to lower expectations of immediate gains from governance reform on the one hand and refrain from setting strong governance conditionalities on the other.

Both these approaches are likely to be counterproductive by setting up political resistance to institutional reform. This will make the future task of searching for an appropriate structure of governance even more difficult than it already is.

The writer is the chief economist of the United Nations Support Facility for Indonesian Recovery (UNSFIR). The views reflected in this article are strictly personal and should not be attributed to UNSFIR or any of the UN organizations.