Transcript targeted, narrowly defined, and plausibly achievable

Domestic Resource
Mobilization and the
Challenge of Governance
Prof. Mushtaq Husain Khan
Department of Economics
SOAS, University of London
ESCWA-Ministry of Foreign Affairs Qatar-DESA
Preparatory Meeting Doha 29-30th April 2008
Resource Mobilization and Governance

Domestic resource mobilization through savings, taxation and
financial markets is closely connected to the productivity of
investment and both depend on the effectiveness of institutions

Governance has therefore rightly been identified as an
important constraint on resource mobilization in developing
countries

However the response to these challenges is often posed as
one of improving broadly defined conditions described by ‘good
governance’ and the ‘investment climate’

Problematic confusion between the broad good governance
agenda and the specific governance, institutional and political
tasks that different developing countries have to address
Diverse resource mobilization issues in ESCWA countries

Importance of specific responses particularly important given diversity of
countries in this region

i) Some countries like Egypt and Yemen are typical developing countries

ii) Many are oil (and gas) economies like Saudi Arabia, Qatar, Bahrain, UAE
but some are also making transitions out of oil dependence

iii) Some are significantly dependent on foreign aid/capital/remittance inflows
like Jordan, Lebanon and the Occupied Palestinian Territories

iv) Region includes war ravaged and occupied economies like Iraq and the
Occupied Palestinian Territories

Clearly there should be differences in the priority accorded to resource
mobilization and investment as well as reform priorities in different areas

Developing countries need to insist on the space to devise their own
governance reform priorities without getting trapped in the conventional
good governance debate
Summary features of ESCWA Countries
Growth
Rate
1990
1995
2000
2005
4.4
3.9
5.3
6.9
Growth
Rate
1990
1995
2000
2005
na
na
na
6.1
Bahrain
Savings
Rate (%
GDP)
37.4
26.1
35.3
na
Qatar
Savings
Rate (%
GDP)
na
36.1
65.1
70.3
Investment
Rate (%
GDP)
16.4
14.6
10.3
na
Investment
Rate (%
GDP)
na
35.1
20.2
35.5
Growth
Rate
1990
1995
2000
2005
1990
1995
2000
2005
na
4.9
4.7
8.5
Kuwait
Savings
Rate (%
GDP)
4.5
25.1
37.0
57.0
Investment
Rate (%
GDP)
17.6
14.8
10.7
19.7
Saudi Arabia
Savings Investment
Growth
Rate (%
Rate (%
Rate
GDP)
GDP)
8.3
24.1
15.1
0.2
29.5
19.8
4.9
37.5
18.7
6.6
50.5
16.2
Growth
Rate
1990
1995
2000
2005
-0.1
5.0
5.4
na
Growth
Rate
1990
1995
2000
2005
17.5
7.9
5.0
8.5
Oman
Savings
Rate (%
GDP)
32.0
23.5
39.8
na
Investment
Rate (%
GDP)
12.3
15.0
11.9
na
UAE
Savings
Rate (%
GDP)
45.6
35.6
41.2
42.4
Investment
Rate (%
GDP)
20.5
29.7
23.2
24.4
Oil and hydrocarbon-rich economies display high but very variable savings rates as we
would expect, and they suffer from a domestic resource absorption problem, with
relatively low investment rates
Qatar and the UAE (particularly Dubai) are emerging as new models of increasing
domestic investment through strategies of becoming global service and financial hubs
Institutional and governance reforms in these countries need to focus on how to sustain
this transition and make these investments productive
Summary features of ESCWA Countries
Growth
Rate
1990
1995
2000
2005
5.7
4.5
5.4
4.5
Growth
Rate
1990
1995
2000
2005
1.0
6.2
4.2
7.2
Egypt
Savings
Rate (%
GDP)
16.1
15.0
12.9
15.7
Jordan
Savings
Rate (%
GDP)
1.0
8.4
-5.6
-17.9
Syria
Savings
Rate (%
GDP)
16.9
20.3
24.1
na
Investment
Rate (%
GDP)
28.8
20.1
19.6
18.0
1990
1995
2000
2005
Investment
Rate (%
GDP)
31.9
29.6
21.1
23.7
Lebanon
Savings Investment
Growth
Rate (%
Rate (%
Rate
GDP)
GDP)
1990 26.5
-64.1
17.8
1995 6.5
-15.1
36.5
2000 1.7
-2.8
20.1
2005 1.0
-4.8
20.7
Growth
Rate
7.6
5.8
2.7
4.7
Investment
Rate (%
GDP)
16.5
27.2
17.3
na
Growth
Rate
1990
1995
2000
2005
na
11.6
4.4
4.6
Growth
Rate
1990
1995
2000
2005
na
na
-4.3
na
Yemen
Savings
Rate (%
GDP)
8.8
14.6
25.2
na
Iraq
Savings
Rate (%
GDP)
na
na
na
na
Investment
Rate (%
GDP)
14.6
21.9
19.5
Investment
Rate (%
GDP)
na
na
na
na
Egypt, Syria and Yemen are more like typical developing countries, finding it difficult to
raise savings and investment rates consistently above 20%. Priorities here are similar to
typical developing countries
Jordan and Lebanon are more dependent on foreign inflows (aid, FDI, remittances) for
financing both domestic consumption and investment. Priorities here are to improve the
productivity of investment
Iraq and the Palestinian Occupied Territories are war ravaged and occupied territories,
with internal economies seriously disrupted by occupation and conflict
Why good governance dominates the reform agenda

Good governance is a set of desirable institutional conditions
that are found in more advanced countries




Stable property rights
Relatively low corruption (but high legal rent seeking)
Governments accountable to voters
Rule of law

These are desirable goals in their own right, but in theory the
achievement of these conditions would also help resource
mobilization and investment efficiency

In theory good governance works by improving overall market
and political ‘transaction efficiency’

If good governance conditions can be achieved savers will feel
confident to save, investors to invest, and resources will be
directed to areas with the highest returns
The good governance agenda
Limited RentSeeking
And Corruption
Stable Property Rights
And Efficient Delivery
of public goods
Accountability and
Effective Democracy
Efficient Markets and
poverty reduction
Economic
Prosperity
Problem Areas not in question

Surveys of business opinion confirm these areas
as important constraints to investment and
domestic resource mobilization in developing
countries

Civil society in developing countries often
supports the enforcement of these rules on the
grounds that many are highly desirable goals in
themselves

Fiduciary responsibility of donor agencies and
foreign investors has driven concerns about
corruption and the diversion of resources: focus
on PFM, anti-corruption strategies, and
transparency and accountability reforms
The market-enhancing governance agenda

In theory, these governance reforms could assist resource
mobilization and investment efficiency:

Low transaction cost markets, would allow scarce
investible resources to be raised as savings and efficiently
allocated as investment

Security of savers and investors from expropriation risk
and a good rule of law would enable contracts for long
term investment and risk-sharing which are essential for
financing technology acquisition and learning

Accountable and non-corrupt governments could provide
political stability and predictability of policy
But good governance is not easy to achieve

Stabilizing property rights requires not just a commitment from
government but the emergence of highly productive owners and
sectors who can pay for their own protection.

Fighting corruption involves having




significant legal sources of finance for running politics,
a budget large enough that all or most of the redistributive demands in
society can be met through the budget, and
regulatory and enforcement structures for converting illegal rent seeking
into legal rent seeking
The political accountability of parties to a broad electorate and
not just to powerful clients requires (amongst many other
things) the feasibility of maintaining political stability through
budgetary redistribution
Good governance is desirable but…..

This does not mean that improvements in good governance are
not achievable at all in developing countries

Improvements are both possible and desirable

The question is whether the feasible improvement along this
path can be significant enough to make a significant impact on
transaction efficiency within a policy period

If the feasible improvement in ‘good governance’ is small, then
we have to look for other governance reforms to achieve
improvements in resource mobilization and the efficiency of
investment allocation

The historical evidence from case studies shows that this is
exactly what successful developers did
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth
(using Knack- IRIS data) 1990-2003
Growth Rate of Per Capita GDP 1990-2003
10
8
6
4
2
0
-2
-4
-6
-8
0
10
20
30
Diverging Developing Countries
40
50
IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth
(using Knack- IRIS data) 1990-2003
Growth Rate of Per Capita GDP 1990-2003
10
8
6
4
2
0
-2
-4
-6
-8
0
10
20
Advanced Countries
30
Diverging Developing Countries
40
50
IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth
(using Knack- IRIS data) 1990-2003
Growth Rate of Per Capita GDP 1990-2003
10
8
6
4
2
0
-2
-4
-6
-8
0
10
Advanced Countries
20
30
Converging Developing Countries
40
50
IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Diverging Developing Countries
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth
(using Knack- IRIS data) 1990-2003
Growth Rate of Per Capita GDP 1990-2003
10
8
6
4
2
0
-2
-4
-6
-8
0
10
Advanced Countries
20
30
Converging Developing Countries
40
50
IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Diverging Developing Countries
Corruption and Growth
Corruption and Growth 1990-2003
(using Knack's IRIS data)
Growth Rate of Per Capita GDP 1990-2003
10
8
6
4
2
0
-2
-4
-6
-8
-1
0
1
2
3
4
5
6
IRIS Corruption Index 1990
(ranges from 0 to 6)
Advanced Countries
Converging Developing Countries
Other Developing Countries
7
Rule of Law and Growth
Governance and Grow th 1990-2003 using World Bank Rule of Law Index
(World Bank/Kaufmann et. al. data)
10
Growth Rate of Per Capita GDP 1990-2003
8
6
4
2
0
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
-2
-4
-6
-8
Rule of Law Index 1996
Advanced Countries
Diverging Developing Countries
Converging Developing Countries
2.5
Voice and Accountability and Growth
Governance and Grow th 1990-2003 using World Bank Voice and Accountability Index
(World Bank/Kaufmann data)
10
Growth Rate of Per Capita GDP 1990-2003
8
6
4
2
0
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
-2
-4
-6
-8
Voice and Accountability Index 1996
Advanced Countries
Diverging Developing Countries
Converging Developing Countries
Political Instability and Growth
Governance and Grow th 1990-2003 using World Bank Political Instability and Violence Index
(World Bank/Kaufmann et. al. data)
10
Growth Rate of Per Capita GDP 1990-2003
8
6
4
2
0
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
-2
-4
-6
-8
Political Instability and Violence Index 1996
Advanced Countries
Diverging Developing Countries
Converging Developing Countries
Growth Rates
State Capabilities and Reform Priorities
2. Converging Developing Countries
Reforms that transform Poorly
Performing States into
Developmental States
Re
go form
su vern s th
tra cces ance at im
ec nsfo sful in pro
o n rm
ve
om ati
ies on
L
ssion
e
r
g
Re
ine
3. Advanced Capitalist
Countries
1. Diverging Developing Countries
Reforms suggested
by Good Governance
and related frameworks
(but very little historical evidence of this trajectory)
Governance Characteristics
(Democracy, Corruption,
Stability of Property Rights)
Source: Khan (2004)
What are the critical governance goals?

Successful resource mobilization and sustained growth in
developing countries depends on identifying specific market
and government failures that are immediate constraints

A viable strategy should identify governance reforms that are
targeted, narrowly defined, and plausibly achievable in a policy
cycle

These will differ from country to country because their initial
conditions and dominant market failures are different, as are
their institutional and political capacities to address these

Narrowly defined governance goals that address specific
market failures should be identified in national development
strategies
Examples of market failures affecting resource mobilization

The absence of risk-sharing institutions prevents investment in
many potentially profitable sectors in developing countries

In theory good governance would solve the problem by allowing
efficient stock markets to mobilize resources from venture
capitalists for investment in risky sectors

In reality if we rely on this route we will have to wait for a long
time to see any significant effects, and in fact stock markets
play a limited role even in advanced countries

The alternative is to explore arrangements where government,
banks and business associations work to set up a small number
of financial instruments to address resource mobilization and
investment in risky sectors, with a focus on developing specific
governance capabilities for monitoring and regulating specific
instruments
Pragmatic governance strategies

General lip service to unachievable good governance reforms
can dissipate effort and can amount to lost opportunities for
effective reform

Governance priorities should be narrowly defined and feasible

They should be linked to specific targets and priorities identified
in national development strategies

It is better to be too conservative and start with very modest
programmes

a commitment to ambitious good governance programmes are
unlikely to make an impact on resource mobilization