Friday, 27 April 2012

Governments, Governance and Elections 2

I chose the theme of this set of blogs under the Governance plank because it has received so  much attention in recent years, not least in development circles with everyone from the UN talking about “democratic governance”, the World Bank with its large data set that covers a range of political, economic and transparency indicators through to the herd of donors from the EU to bilateral government donors committing funds for all manner of financial support under the guise of governance-enhancement.

Moreover, a considerable amount of the EU’s Budget Support initiatives - ie dollops of Euros that can be hundreds of millions of Euros - are predicated on sound macroeconomic and public finances – or governance in the fiscal sphere, to ensure that these aid transfers are not simply siphoned off for new jets or simply wired to an offshore zone by the recipient country’s leaders.

One of the fascinating aspects as an economist-cum-policy advisor has been to see how this focus on governance has actually affected outcomes in emerging economies. Put simply, does it actually have any impact?

An army of evaluators will come out with positives as regards process, transfer of knowhow and value-for-money where hard money is transferred. But the bottom line is that well-meaning advice and fingure wagging only goes so far. At the end of the day there is no substitute for domestic ownership.

Example: the Arab spring. This had nothing to do with external support or advice. The EU’s had initiatives such as the Euro-Med Partnership and now the External Neighbourhood Policy Framework in place. But frankly the EU and the West generally was caught out by the timing and speed of the contagion across the MENA region, and which is sadly now engulfed in Syria. External initiatives are now trying to catch-up by offering assistance through aid and debt-finance via IFIs including oddly the EBRD that initially started with a mandate for the transition countries in the CEE region.

The dismantling of decades-old regimes in Libya, Egypt and Tunisia coupled with modest changes in Morocco and Jordan suggest a political structural adjustment and hopefully improved political and economic governance. On the other hand, the transition toward Arab-style democracy will take time and have a specificity in the same way Asian or Latin American democracy developed, but endowed with Arab history, culture and religious values.

Whether this transition is smooth or temporarily reversible remains to be seen. But outside support will have temporary and marginal effects – be they dollops of cash from GCC countries, pledges from hard-pressed countries in the EU or the US, or well-intentioned technical assistance. 

So does outside support work anywhere? Yes, where there is a buy-in. Or put another way, where there is incentive-compatibility or demand from the recipient country. The EU Accession Process is one such success story (although some might argue about Bulgaria and Romania) and possibly where financing through Budget Support has targeted Low Income Countries.

The Accession Process was a major success in terms of the transformational effects on the formerly planned economies that underwent radical changes from economic management to the roles of the executive, judiciary and all aspects of governance. Yes external ratings and qualitative appraisals confirmed this, but the real drive was a genuine wish by these countries to meet the challenges of compliance with the EU Acquis in order to become full members of the EU. And in turn the external assistance had bite or credibility, often with solid pre-conditions as well as followup support to deepen the reforms.

Counter-examples exist as one moves east towards the CIS where a similar approach has not been credible due to lack of genuine demand by the beneficiary governments or their electorates coupled with a lack of clear goal such as EU Accession. One even wonders the relevance for sometimes highly dubious support for resource-rich countries in the 'stans when EU tax-payers are toughing it.

For the Low Income Countries I believe there is evidence that support works. In fact I authored a report for the EC in 2011 that reviewed counter-cyclical budgetary support to 20-odd LICs in Africa, Caribbean and Pacific Regions that received targeted budget support in 2009-10. Such funding worked to alleviate pressure on vulnerable countries by helping to act as safety nets for what would otherwise have been devastating cuts in budget lines for social protection and education and by leveraging funding from the IMF, the World Bank and regional development banks. But alas, it had nought to do with governance!

So all doom and gloom? Not at all. I draw key lessons:
  1. Governance is determined domestically and cannot be foisted on governments or peoples.
  2. What the Arab spring and similar movements elsewhere – eg Russia in the run up to the presidential election – shows is that the real catalyst for change is actually the rapid rise of information flow and ideas that empowers people. The fall in the marginal cost of acquiring and dissemination information is the currency of the early part of this century and will be the key driver for changes in political opinion and therefore governments and governance.
  3.  For the MENA countries the challenge is how to navigate the political changes and attend the basic demands of citizens and families everywhere: stable food prices (big issue for low income families and which will only rise given the secular rise in food prices in the coming few years), job creation (again a big issue for these countries with high youth unemployment) and access to jobs based on merit rather than party or clan loyalty.
  4. New political leaderships will mean uncertainty will continue to see high country risks although on the upside all of the countries in north Africa except perhaps Libya retain reasonably good administrative systems that will help to mitigate some of the volatility.
  5. Channels and modality of external assistance are well developed but remain tied to supply-side preferences from the donors. This is natural in terms of ensuring value-for-money for donor governments and their taxpayers and is unlikely to change. Focus on sound fiscal management and budget programming is an area which should continue to receive focus as this is often the most important tool for sectoral policy reforms.

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