Good Governance and Economic Performance

BERLIN – The debate about emerging countries’ growth prospects is now in full swing. Pessimists stress the feared reversal of private capital flows, owing to the US Federal Reserve’s tapering of its purchases of long-term assets, as well as the difficulties of so-called second- and third-generation structural reforms and the limits to catch up growth outside of manufacturing. Optimists argue that the potential for rapid growth remains immense, owing to better macroeconomic fundamentals and the promise of best-practice technology spreading throughout the emerging world.

So who is right?

Recent events point once again to the importance of good governance and responsive political systems, a familiar topic in studies of long-term economic growth. Countries that appeared successful for a long time, such as Turkey or Thailand, suddenly seem to face obstacles related to governance and the ability to forge domestic political compromises. The resulting divisiveness and dysfunction are surely bigger threats than the Fed’s tapering.

It is the nature of governance that determines whether people deploy their talents and energy in pursuit of innovation, production, and job creation, or in rent seeking and lobbying for political protection. And here the contrast between Egypt and Tunisia may turn out to be an object lesson in what makes the difference between success and failure.

In Egypt, the old regime under Hosni Mubarak, having failed to democratize, collapsed in the face of massive protest. A low-turnout election gave a plurality of the popular vote to the Muslim Brotherhood, which came to power alone and proceeded to ignore good governance and alienate all except its most fervent followers.

The Brotherhood’s approach to governance also explains the mess it made of the economy. Instead of trying to build non-partisan and competent regulatory institutions, all positions were stacked with political followers. Unfortunately, the military intervention last July gave rise to yet another regime that seems unable to build durable institutions that could foster political reconciliation and deliver inclusive growth.

Tunisia may give us an example of the opposite scenario: a real constitutional compromise supported by an overwhelming majority (reflected in a 200-16 vote in the National Constituent Assembly). If that compromise holds, stability will take hold, markets will function, Tunisia will attract investment, and tourism will thrive again.

At the heart of the difference between the two cases is a vision of governance that makes such compromise possible. Such a vision presupposes an assurance that a winner-take-all system will not be established, as well as broad agreement that regulatory institutions should be reasonably non-partisan and staffed with competent professionals.