Good Governance and Economic Performance

China’s long-lasting success is sometimes given as a counterexample to the importance of good governance for economic performance. The Chinese example certainly calls into question a strong correlation between multi-party democracy and economic growth.

Democracy is of course something valuable in itself and can be desired independently of its effect on economic growth. But, in the context of economic performance, it is important to emphasize that there is a huge difference between dictatorial regimes, where a single individual monopolizes all power – à la Mubarak or Syrian President Bashar al-Assad – and China, where there has been competition and contestability within a large communist party. And it is the party, operating as a fairly inclusive and meritocratic institution, not an autocratic leader, that has governed in the post-Mao period.

Lack of reasonably independent regulation and competent public administration – or, worse, one-person dictatorships – lead inexorably to economic waste and inefficiency, and eventually to political turmoil. This is true even in cases like Venezuela, where large oil revenues masked the underlying weakness for a while. In the complex global economy of the twenty-first century, sustained good economic performance requires a panoply of well-functioning institutions that do not fall within a single leader’s purview.

For example, successful economies require a reasonably independent central bank, and competent bank supervision that does not get dragged into short term politics. They also need regulatory agencies in sectors such as telecommunications and energy that can pursue policies in accordance with broad goals established by the political process, but with appointees selected according to nonpartisan criteria who then exercise their authority in a way that fosters competition open to all.

When credit decisions, public procurement, construction contracts, and price determination reflect only short-term and purely political goals, good economic performance becomes impossible – even in countries with large natural-resource endowments. In countries with little or no such endowments – where innovation, competitive efficiency, and a focus on production rather than rents is all the more important – the lack of good governance will lead to failure more rapidly.

All of this implies that analyzing the determinants of economic success is a subject not just for economists. Why do some societies achieve the compromises needed to sustain an independent judiciary and a modern regulatory framework – both necessary for an efficient modern economy – while others perpetuate a partisan, winner-take-all approach to governance that weakens public policy and erodes private-sector confidence?

The contrast is starkest in emerging countries, but differences also exist among the advanced economies. Perhaps Germany’s ability to reach sociopolitical compromise – again demonstrated by the formation of a right-left coalition after the 2013 elections – has been more fundamental to its recent economic success than the details of the fiscal and structural policies it has pursued to achieve it.

Kemal Derviº, former Minister of Economic Affairs of Turkey and former Administrator for the United Nations Development Program (UNDP), is Vice President of the Brookings Institution.

Copyright: Project Syndicate, 2014.