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Policyand Reveiw
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December1991
WPS815
Governanceand Economy
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A Review
DeborahBrautigam
An exploration of the links between development and governanlcc-- that is, between development and accountabilitv (including institutional pluralism and participation), openness (inCliding problenms such as corruption that result at least partly
from lack of openness): and predictability, or the rule of law.
3
of idcasamong i ank tal.d -d
Policy ResesrchWorking Papersdisscmu2ateLhefindngs of work inprogress and ercourdgeLtheexchange
allcUsersintcrretd i deve.opmentissues These papers, distrinbucdby the Resear(h Advisory SLaff,carry thc names of the authors, recfc.,:.
theirvicws, andshould bc usedand cied accordingly TheBndings,interpretatons,ard conclusionsarcthcautlhors own Thcy shou!d
onim
not be attnbuted to the World Bank, its Board of Dirveto s, irs management, or any of its member countnes
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PolicyResearch
Policyand Revelw
WPS 815
This paper is a product of the Policy and Review Dcpartmcnt. Copics arc availablc free from the World Bank, 1818
I t Street NW, Washington DC 20(433.Pleasc contact Zeny Krarizer, rooni N9-05 1, extension 37494 (48 pages).
!)ccember 1991.
Brautigam reviewed the literature on political science,
development management, and institutionialeconomics to give Bank staff a clearcr understanding of the
links betwecn development and governance specifically accountability,(including institutional
pluralism and participation); openness (including
problems such as corruption that result at least partly
from lack of openness); and predictability, or the rule
of law.
She found some support for a positive link
between economic performnanceand these variables of
governance (although some correlations appear
stronger than others). Among her findings and
conclusions:
* Arbitrarv law enforcement and failure to uphold
the constiution - the law -- lead to unpredictability,
instability, and a poor climate for growth. Wellspecificd property rights and enforceabic contracts are
cleiarlyeconomic development issues and should be
recognized as such. The contcnt and distribution of
property rights critically affect how broad-based
developmcnt will be.
Lack of accountability - combined with opaque
L
and highly discretionary regulatory proccdures - can
provide great opportunities for economic corruption
and waste. The suppression of political openings may
growth may require the development of political
representation. With rencxxed interest in open political
systems, we can expect a new generation of research
or these variables.
* Donors who wish to makc "governance" the
temporary trend of the 1990(smust understand that, as
Zafar Ahmed put it, "One cannot miakea tree grow
faster by pulling it from outside: it has to grow from
its roots." It takes generations, perhaps centuries, to
build effective bureaucracies. It tak-esnot only skills
but volition, which comes from effective social
pressurc on the state. Donors must ask how best to
nurturc a social desire for accountability and the rule
of law.
* Effective property rights and accountability
result from a long-term dialogue between governn ents and their private sector, not between governmenusand donors. In Europe, public accountability
developed throLIgha state-socicty struggle about the
collection and use ol tax revenues. In many of the
world's developing coLilutries,tax revenucs are
disproportionately low as a proportion of GNP, even
with low levels of per capita GNP. -thus, much of the
dialogue about accountabilitv shifts to one between
states and donors. This process ol assistance could
inadvcrtently undercut the historical process of rulers
ultimatcly affect stability, disrupting production and
first becoming accountlheC to elites for the use of
commerce. The failure to encourage grassroots
participation reveals itself in comparatively
unsustainable projects.
- Research trying to correlate economic performancc with governanicevariables inevitably involves
a short lime frame. The recent economic performance
of Chilc, Taiwan, and South Korea occurred with
littc political openness, and their market systenis
seemcedto work without pluralistic political systems.
But in the past few years all three have made
significant transitions toward more open, competitive,
participatory political systems, which suggests that
.sIolaining (as opposed to establishinig)market-based
their tax revenucs.
o Donors must becomc aware of the possible
effecctsof large sums of external assistance. They
must push thc new concern for "local ownership"
towvarda deep commimint to dcx elol) economic
policies together, cven if thc process is slow and
frustrating. This shouldiencourage thc development of
accountabilit)yas a matter primarily betxxccngovernments and citizens. Onl) over time c.an socictics push
their governments to deliver thc accountability',
openness, and predictabilit\ that sustainable developmncntrequires.
The PolicyRcscarch WVorkingPaper Scries disserninates thefindings of work un(derwax in OhcHank. An ohijectis'c ot the scries
is to get these findings out quickly, even if prcsentations are less than fully pollshed The findmlio".in(trpretations. an(i
.onclusionsin thcsc papers do not necessarily represent official Rank policy.
Produced by the Policy Rescarch Dissemination Cenicr
GOVERNANCEAND ECONOMY: A REVIEW
Contents
PREFACE.................................................
i
I. INTRODUCTION .........................................
1
A. Governanceand Economy..............................
B. Backgroundof the Conceptof Governance...................
C. Historical Perspectives: Evolutionof Governance
in Western Europe ................................
II. GOVERNANCEIN THE LITERATURE: ACCOUNTABILITY,OPENNESS
AND THE RULE OF LAW ................................
A. Three Approaches: Political Science, InstitutionalEconomics,
and DevelopmentManagement ........................
B. Accountability ...................................
C. Opennessand Transparency ...........................
D. Predictabilityand the Rule of Law .......................
HI. DOES GOVERNANCEMATTER? GOVERNANCE
AND ECONOMICPERFORMANCE..........................
A. Accountabilityand EconomicPerformance ..................
B. Participation,InstitutionalPluralism,
and EconomicPerformance ..........................
........
C. Openness,Transparency,and EconomicPerformance ....
....
D. Predictability,The Rule of Law, and EconomicPerformance ...
IV. CONCLUSION ........
REFERENCES ............
....
.1
3
6
10
10
12
21
25
30
31
32
35
37
.......................39
43
PREFACE
This paper wac commissionedby the Policy and Review Department Cofthe World Bank to
familiarizeBank staff with conceptsunderlyingdiscussionof "governance"as a developmentissue. The
termsof reference requesteda reviewof the politicaiscience, developmentmanagement,and institutional
economicsliterature which bears directly upon the issues of governance -- specifically accountability
(includinginstitutionalpluralism and participation);openness(includingproblemsresultingin part from
lack of openness, e.g. corruption);and predictabilityor the rule of law.
Many peoplehave read variousversionsof this paper, or participatedin discussionsof its subject
matter, and offered extensivecommentsand suggestions. I would like to thank in particular, Coralie
Byrant and Sarwar Lateef, who made the preparation of this paper an exercise botn intellectually
stimulatingand enjoyable. Others who contributedto refiningthe ideas and their presentationinclude
Miguel Schloss, Leslie Snyder, Kate McCollom, Lisa Pachter, Salvatore Schiavo-Campo,Ladipo
Adamolekun,Pierre Landell-Mills,David Beckmann,ValerianaKallab, AndresRigo, Geoffrey Lamb,
Samuel Paul, Randall Harriss, Francisco Sagasti, and Dunstan Wai.
1. INTRODUCTION
A. Gsovernanceand Economy
Governmentsdetermine how well, or how poorly, markets function. This simple truth explains the
current concern with "governance"as the world shifts toward an overwhelmning
endorsementof markets
as the base of economicactivity. If governmentsare assumed to be neutral, and committedto serving
the public good, then deviationsfrom optimumeconomicperformancecan generallybe correctedsimply
through policy reform, or through improvinginformationsystems. And yet, as DouglassNorth argues,
economicperformanceis not easily explainedby the logic of economictheory alone. Governmentsare
not neutral. Their rationality is more frequentlypoliticalthan economic. "The contrast," North says,
"between the logical implicationsof neoclassicaltheory and the performance of economies(however
defined and measured) is startling." (1990:11).
To understand economic performance, it is important to factor in the political role of
governments. As Susan Strange notes, "Markets cannot play a dominant role in the way in which a
political economyfunctionsunless allowedto do so by whoever wieldspower and possessesauthority."
(1988:23). The exercise of power and authoritylies at the heart of governance. Governmentsuse their
power and authority to establish and maintain the formal and informal frameworkof institutionsthat
regulate social and econc -
interaction. Governmentscreate the rule of law necessary to underpin
accountability,transparenv,, and predictabilityin interactions. Governments-- in interactionwith their
citizens-- determine many of the preconditionsfor a thriving, or a declining,domestic economy.
This paper attemptsto give the current concernwith governancea historicaldimension, and to
locategovernanceas a technicaland intellectualissue withina body of literaturethat has long addressed
these concerns. It examines a limited number of governancedimensions-- accountability(including
legitimacy,institutionalpluralism and participation),opennessand transparency, and predictability(or
the rule of law) -- in a selective review of recent social science literature. The paper makes no claim
to be exhaustive, but rather to offer an introductionto recent work which is built in part upon the
1
analysisof how politics and economicsinteract in shaping economicdevelopment. It exploreswhy and
how accountability,opennessand predictabilitymatter, and how the differentways in whichgovernments
use their power and authority create enablingor disablingeconomicenvironments.
The issue of governancerose to the forefront of developmentagendasat the close of the 1980s,
followingnearly a decade of concern with macroeconomicpolicy reform. In Africa, calls by citizens
and leaders for greater opennessand accountabilitywere joined by internationaldonors. The World
Bank's 1989 Long-Term PerspectiveStudy (LTPS) -- Sub-SaharanAfrica: From Crisis to Sustainable
Growth--highlighteda deep concern with governance as a developmentissue: "Underlyingthe litany
of Africa's developmentproblems is a crisis of governance" (p. 60). Addressing political issues as
openlyas it did, the LTPS createda stir ifi the de-velopmentcommunity. The LTPS linked governance
to issues of leadershipauthorityand legitimary. It addressedthe absenceof balanceof power, the lack
of officialaccountability,the controlof information,and a failure to respectthe rule of law. The LTPS
spoke in favor of "independencefor the judiciary, scrupulousrespect for the law and human rights at
independentpublic auditors
every level of government,transparentaccountabilityof public monies, ancA
responsible to a representative legislature, not to an executive" (p. 192).
Althoughthe callsfor changehavebeen loudestin Africa, otherregions haveundergonedramatic
shifts in governance. In Latin America, the rapid transitionsfrom authoritarianto democraticregimes
over the past decade offered a different reason for attentionto governance. Newly electedlegislatures
moved to transform old legal regimes, to reinforce new structures making government accountableto
citizens, and to strengthentheir own capacityto analyze, evaluate, and initiate policies.
Governanceissues surfaced in Asia over the past decade as well, most prominentlyin China,
where a decade that openedwith a dramatictransitionto economicliberalizationclosedwith the forceful
suppression of calls for political change -- in Tiananmen Square. In the Soviet Union, glasnost
(openness)in the Soviet Union focused new attentionon opennessas a critical element in governance.
In both the Soviet Union and Eastern Europe, political openness encouraged citizen's demands for
accountability,and the movetoward a market economyunderscoredthe needto establishlegal guidelines
2
and well-definedproperty rights in order to secure private investment. These events combined to
prompt related chunagesin the assistance offered by many bilateral and multilateral donors -- most
noticeably, the establishmentof the European Bank for Reconstructionand DevelopmentxEBRD),
mandatedto reinforce changes in Eastern Europe through support for multi-partygovernmentsand for
other political dimensionsof development.
Although governments exercise their power and authority in different ways. they all affect
economicactivity. Many donorshave tried to draw a distinctionbetweenwhat Carol Lancaster(1990)
has termed social or economicgovernance, and political governance, although the line is difficult to
positionwith any assurance. This paper focuseson those aspectsof governance(in additionto skill and
capacity)that appearto affect economicperformance: accountability,opennessor transparency,and the
rule of law. These variables affect economicperformancethrough their impact on fiscal integrity, on
predictability,and on the creationof an environmentconduciveto productiveinvestment.
In keeping with the limited focus on these three aspects of governar"e, this review does not
directly address the relationship between development performance and the form of government.
Although empirical research exists on hypothesized relationships between regime type (democracy,
dictatoiship, etc.) and growth and development,the evidenceto date is mixed. Indeed, one of the
puzzles that guides much of the inquiryof political scientists, in particular, continuesto be "how it is
that manynondemocraticgovernmentsseem to be as stronglymotivatedto guard the welfare of citizens
as democraticgovernments"(Lindblom 1977:x).
B. Backgroundof the Concept of Governance
Governanceitself is a neutral concept, meaningthe "exerciseof authority; control," or, more broadly,
"government." As a synonym for government, governance can be further defined as "the political
directionand controlexercisedover the actionsof the members,citizens, or inhabitantsof communities,
3
societies, and states."' Recent empirical studies of governancerange from analysesof Norway's wage
policy and Britain's managementof its health service (Rose 1980), to East Africa's rural development
prograrns (Hyden 1983).
Work in the area of governance is often interdisciplinary,cutting across the boundaries of
economics,political science, philosophy, sociology,and management. Governancehas been analyzed
both normatively(how should governmentsbehave?) and positively (how do governmentsbehave?).
This distinctionhas ancient roots, as philosophershave long debated the moral versus the utilitarian
2 As long ago as 495 B.C., Confucius, an
foundationsof the nation-stateand its system of governance.
experiencedbureaucratforcedinto exile by Chinesepoliticalintrigue, arguedthat a well-orderedsociety
required government based on superior morality rather than on superior power.
Later Chinese
3 Plato
philosopherscounteredthat "good" governanceaboveall requiredcentralized,absoluteauthority.
(advisorto the ruler DionysiusII of Syracuse)and his pupilAristotlegrappledwith questionsof political
reform, the rule of law, the nature of authority, and the principleswhich ought to determinethe shape
of the ideal state, and its relation to productionand other economicquestions.
Modem analyses of governance date from the 17th century Germanic tradition of
politikwissenschaft (political science) and the 18th century innovations of the European Age of
'RandomHouse CollegeDictionary,rev. ed. New York: RanidomHouse, 1984, p. 571.
2In Asia, theories of governancecan be traced to Confucious' philosophyof the moral institutions
underlyingsocial order, in particular, the "rectificationof names". A well-orderedsociety, he argued,
dependedon the fulfillmentof duties and responsibilitiesinherent in social roles: ruler, minister, father,
and son, for example. If the ruler fulfilledthe "wayof the ruler," he wouldhave legitimacy;for society
to prosper, all must fulfill their roles. Thus a son must be filial, a fathe; aternal, and a ruler must offer
moral leadershipto the nation. Social order dependedon everyonefufilling his or her social role, on
the "rectificationof names." The heaviestresponsibilityfell on the leader: if he fulfilledhis duty, then
the chain of rectificationand social order would be in place; if not, social chaos would result.
'Mo Tzu's (c. 470-c.381 B.C.) influentialcritiqueof Confuciusused a utilitarianargument: states
are established to end disorder, and thus the eentralized authority of the ruler must be absolute.
"Accordingto the Mohists, the state exists becauseit is useful. But accordingto the Confucianists,it
exists because it ought to exist." Mencius later elaborated the idea of two kinds of govermmental
authority: wang, or the sage-king, and pa, or the warrior-king. One bases its power in morality, the
other in force. ContemporaryChinesethoughtcontinuesthis distinction. "a democraticgovernmentis
a rang government,becauseit representsa free associationof people, whilea Fascist govermmentis that
of a p because it reigns through terror and physicalforce. (Fung 1948: 73-75).
4
4 Shifts from religiousto
Enlightenment.
secular issues,transitionsfrom feudalism,a rising concern for
individualrights, and the expansionof the self-regulatingmark 't as an increasinglyimportantmedium
of exchangeraised questionsabcui.the relationshipof political authorityto individualand group welfare.
The foundation for many who grapple today with questions of the evolution of governance and of
society's relationshipwith politicalauthoritywas laid by writers such as John Locke, in his concernwith
structures tc prevent the abuse of authority; Jean-JacquesRousseau, and his idea of a social contract
between rulers and citizens; and Thomas Hobbes, who wrote about the propensityof people to engage
in conflictand to seek power, and ultimately,to submitthemselvesto the coerciverule of the absolutist
state, the Leviathan.
Max Weber's analysis of modern, rational-legalstates, published in the 19t'1 century, still
underliesmanyWestern ideasof governance. Weberpointedto the "processof rationalization",arguing
that modern states differ from primitive states in their reliance on hierarchy, in the base of the
leadership'slegitimacy,and in their monopolyof the use of legitimateforce. Modernstates, he argued,
are based on norms of universalism rather than particularism. They rely on detached and routine
decision-makingrather than on ad hoc procedures. Modern bureaucraciesare, in principle, structured
with managementhierarchies,have clear rules for advancement,and maintaininformationsystemsthat
assure continuityand predictibility,although as AnthonyDowns (1967) pointed out, many fail to live
up to this ideal.
Weber addressed the development of governance in modern states from his perspective on
Western Europe. Nearly a century later, Gunnar Myrdal in his Asian Drama: An Inquiry into the
Poverty of Nations (1968) introduced the idea of "soft states" versus "hard states" in an influential
addition to the increasing body of "modernization"literature, which focused on the problems of statebuilding in developing countries. The hard state sets priorities and carries them out. Norms and
practices keepbureaucratsand politiciansseparate. The soft state finds officials regularlycircumventing
laws and regulations. Civil servants and politicianssecretly collude to thwart po!icy implementation,
4 0n
the Germanic tradition, see Dunn 1986: 161, note 12.
S
and corruption riddles the system. The hard state is a state in control of its regulations and policies.
Its civil ser-ice operates by Weberianrationalbureaucraticprinciples. Contrc', capability,and volition
separate soft states from hard states.'
How does "good governance" develop? Relations between rulers and ruled differ in avery
cvuntry. History, custom, law, society, and political economy affect the way in which the ruled in a
countryhold rulers to account for their performance, the relative opennessof a socio-politicalsystem
or an economy, and the degree of predictabilityin governmentdecision-makingand interactionwith the
public. The developmentof accountability,openness, and the rule of law in Western Europe offers a
useful perspectiveon the evolutionof governance.
C. Historical Perspectives: Evolution of Governance in Western Europe
The concept of governmental accountabilityin much of Western Europe and the establishmentof
transparencyand an impersonalrule cf law developedslowly -- as . esultof evolvingrelationsbetween
rulers and elites. Althoughthese relationswere stimulatedby ideasof personalfreedom and govermnent
responsibilityrooted in the 18th century Enlightenment,they had much earlier roots. In Britain, for
example, the Magna Charta, sealed in 1215, signaledthe first formal attempt by social elites to elicit
accountabilityfrom their monarch.
Early European states resembled many of todav's developing countries. Caught between
cumbersome taxation systems and their need for revenues, monarchs borrowed heavily and operated
under chronicdeficits: financial crises brought Spain to bankruptcyfive times between 1575and 1647
(Eggertsson 1990: 342). The need to raise revenues to pursue state activities (wars, in particular)
'Later writers ammendedMyrdal's work by adding analyses of the history of governanceunder
colonialrule and of the influenceof colonialinstitutionson the developmentof accountabilityin postcolonial states. AmartyaSen (1991) suggeststhat a "soft" state is in fact a state that respondsto public
demands: "That need be no bad thing" (p. 425).
6
brought monarchs into repeated struggles with the barons and dukes on whom they relied to extract
surpluses from the peasantry.
Historically,accountabilityin Europewas wrestea from personalruie of royaltyby the pressure
of domestic elites: "The admissionof the right of parliament to legislate, to enquire into abuses, and
to share in the guidanct , nat:onalpolicy was practicallypurchasedby the moneygianted to Edward
I and Edward H."' Taxation evolved from a unilateral act by the crown to a right that involved
reciprocity. The evolutionwas slow. Only in !782 was it possible in Britain for Parliamentto clearly
separate the crown's personalaccount from general governmentaccounts (Theobald 1990).
Concernedabouttheir lack of controlover revenues,other Europeanelites demandedinstitutions
like Britain's Parliamentwhich would evenmuallybring the monarch's budget out of the householdand
into national accounts. In France, this led to the establishmentof the Estates General; In Spain, the
Cortes. French elites based their supportfor the Revolutionof 1789on the argumentthat royal financial
discretion must be limited, that the public should be able to debate and influenceeconomicpolicy, and
that public institutionsare needed to carry out these objectives.7 The evolution of legal systems and
institutionsnecessaryfor market economies-- protectingprivate property rights against the law of the
commons, and enforcingimpersonal, contract-basedtransactions- paralleledthese developments.
Only later did the establ;shmentof popularorganizations-- trade unions and other independent
associations-- lead to pressure for more completerepresentationand political participation,extending
accountabilityfrom elites to the people at large. This evolutiontoward greater opennesswas no. rapid.
European institutionsbased on the principlethat the bureaucracyshould serve the public rather than a
narrow group of elites only emerged in the 19th century. Britishpublic servants only began to receive
salaries in 1816 (Thwbald 1990: 27), and the principle of merit rather than "spoils" as the primary
'Stubbs 1896: 599 in North 1990- 114.
'Hilton L. Root and Daniel E. Ingberman "Tying the King's Hands: Credible Commitmentsand
RoyalFiscal PolicyDuring the Old Regime." Workingpaper. Philadelphia:Universityof Pennsylvania,
1987, p. 26, cited in Eggertsson, p. 348.
7
'ehicle for recruitmentand promotionin the Europeanpublic servicesevolvedonly in the past hundred
years (Hyden 1983: 58). Both movements enhanced predictability and accountability in European
governments.
The brief sketcL above illustratesbroadly how institutionssupportingpredictabilit!, openness,
and accountabilitydeveloped in Western Europe. In other parts of the world, these institutionsare
likely to have developed in alternativeways. The colonialperiod, for example, affected institutional
aevelopment in a number of countries. In many cases, Western European institutional forms were
transferred directly to developingareas during periods of colonialrule. Brought in as part of a system
based on rule 'iy powerful external actors, the colonial civil service was never directly accountableto
those whom they auled. Even when legislativeassemblieswere introduced as part of the "tutelagein
parliamentarydemocracy," they were filled in the first instancewith colonialcivil servants. In the postcolonialperiod, these public institutions,superimposedon political and economicsystems in which they
had no roots, continued to lack accountability. In many cases, government bureaucraciesfailed to
continue as impartial, autonomousinstitutions, but were captured by "clan pressures," politicizedas
"booty," (Hyden 1983: 60) -- and, in short, revertedto the kinds of patrimonialstates commonin early
Europe. "L'etat c'est moi" rings all too true in many post-colonialnations today.
Furthermore, the European colonial practices and experiences were very different if one
compares, for example, the Spanish conquest of South America with British rule in India, or with
French rule in Africa. The Spanish colonialperiod took place much earlier, penetrated society more
deeply, and resulted in different institutionalpatterns. The British in India imposedan additionallayer
on a civilizationwith a preexistingsystem of national institutionsand a centralizedbureaucracy. The
French, along with other colonialists,created a complex overlay of governmentbureaucraciesand a
centralizedstate apparatusin Africa, imposingcentral leadershipover many groupsthat had developed
institutionsfor communalgovernance,or even imperialgovernance,but not governanceat the national
level of a modern state.
8
ThWtragedy of mismanagementand corruption in many modern nations can often be related to
this colonialimpositionof statesand bureaucraticinstitutions,rather than their natural evolutionthrough
8 Peter Ekeh (1975) points to the
a process of citizen demandsfor accountabilityand ruler adjustments.
reputation-or honesty among local ethnic associationsin Africa and contrasts this with corruption in
local governments. Associationsbased on a moral economy of reciprocity, responsibility and duty
contrast sharply with imposedgovernmentstructures, a "profane amoral world based on instrumental
relationshipspremised on the accumulationof rights rather than duties" (Theobald 1990: 9).
Developingaccountabilityin state-societyinteractionsthus involvesmore than simply adopting
standardoperating proceduresand other tools of rational-legalbureaucracies. In the first place, many
of these institutionsare difficilt to transfer. Bureaucracies,courts, the military, etc., must be rooted
in a local culture before they can reach a level of complexityand efficiency which enables them to
support effective state action (Badie and Birnbaum 1983: 35). But even more fundamentally, this
institutionalevolutiontakestime. As Douglass North (1990) points out: "The single most important
point about institutionalchange, which must be grasped if we are to begin to get a handleon the subject,
is that institutionalchange is overwhelminglyincremental"(p. 89).
8 Lonsdale1986, Hyden
1983. With this in mind, donors should thinktwice aboutthe implicithope
that externally imposed re-form and reorganization of bureaucracies will somehow lead to their
rationalization.
9
II. GOVERNANCEIN THE LITERATURE:
ACCOUNTABILITY,OPENNESS,AND THE RULE OF I AW
A. Three Approaches: PoliticalScience, InstitutionalEconomics,and DevelopmentManagement
A common theme linking these three bodies of literature is their concern about the framework for
decision-makingin the allocationof scarce resources. Politicalscientistsstudy the processes,principles,
and structure of goverarr it and of political institutions: bureaucracies, political parties, popular
participation, economicregulations, procedures for controllingconflict and for regulating succession
(Huntington 1968:1). They analyze both concrete and theoretical issues of power, authority, and
legitimacyin the context of the struggles to resolve conflicts over issues of values, the distributionof
scarce resources and assets, and the allocationof productionsurpluses that often shape the interaction
of rulers and ruled. As Laswell put it in 1936, political scientistsstudy "who gets what, when, how?"
Institutionaleconomics commandsa broad scope of inquiry, nothing less than "the nature of
political and economic institutions and how they change" (North 1989: vii). An interdisciplinary
marriageof ecooromicswith other socialsciencesand history, institutionaleconomicsattemptsto extend
neoclassicalprice theory by tracing the evolutionof the institutions-- norms, rules, values, and patterns
of behavior-- that affect the performanceof economicand political systems.
Often historical in approach, an important branch of institutional economics addresses
contemporary"principal-agent"problems: the dilemmasfaced by the state in its reliance on agents to
carry out revenuecollectionand servicedelivery.9 Neoclassicaleconomicsassumesfull informationand
'The "agency problem" results "(w)hen the informationset available to one party to a contract
involvingtwo parties is not identicalto that availableto the other party, (and) one of the parties may
be able to engage in opportunisticbehaviorso as to increasethat party s benefits at the expenseof the
other's" (Nubli and Nugent 1989: 1337). Agency theory is useful in explainingoutcomes involving
contract negotiationand monitoring under conditionsof imperfect informationwhere the principal is
unable to control the behavior of the agent. For more on agency theory, see M. K. Nabli and J. B.
Nugent, "NIE and Development",WorldDevelopmentvol. 17, no. 9, September1989; Pranab Bardhan,
10
neglects the costs of market transactions, includingcontractenforcement. It ignores propertyrights, or
assumes that they are fully defined. By contrast, institutional economics emphasizes that "when
transaction costs are positive, the distributionof political power within a country and the institutional
structureof its rule-makinginstitutionsare criticalfactors in economicdevelopment"(Eggertsson 1990:
248).
Developmentmanagementexploresthe operationalside of governance: improvingefficiencyin
the allocationof resourcesand expandingparticipationin allocationdecisions. Developmentmanagement
writing generally emphasizesthe empirical, focusing on projects, programs, and policies within the
context of public and private sector decision making and resource allocation. As a multidisciplinary
field, developmentmanagementdraws on economics,management,and organizationtheory, as well as
on sociology and political science." Developmentmanagement writers frequently interpret more
theoreticalwork in the social sciences to offer guidance to practitioners. For example, a reading of
Weber's ideas on the norms of professionalismthat underlie predictabilityin the "rational-legalstate"
might enrich a discussion of public management training. In addition, development management
highlightsthe practical input of practitioners, and it has been influencedby networks of management
institutionsin the developingworld, e.g., the Central American ManagementInstitute (INCAE),IIMA
(IndianInstituteof Management,Ahmedabad),and NIMD (EgyptianNationalInstitute for Management
Development).
In general, analystsfrom all three schools argue that contemporarygovernanceproblemscannot
be understood outside of their political and historical context -- the context that gives political
"The New InstitutionalEconomicsand DevelopmentTheory: A Brief CrizicalAssessment," in World
Development,vol. 17, no. 9, September 1989; RichardJ. Arnott, and Joseph E. Stiglitz, "The Basic
Analyticsof Moral Hazard,: ScandinavianJournal of Economicsvol. 90, no. 3 1988; and KathleenM.
Eisenhardt, "AgencyTheory: An Assessmentand Review," Academyof ManagementReviewvol. 14,
no. 1 January 1989.
'"Muchof this field has gained its strongest intellectualdevelopmentthrough leadinginstitutionsand
writers in India, notablythe Indian Instituteof Managementin Ahmedabad. See, in particular, Sharma
1978; Bhaduriand Rahman 1982; Chatterjee and Gokhale 1974.
11
"mismanagement"its underlying logic and that creates the environmentin which economic activity
operates."
B. Accountability
Althoughthe meanings and practices of accountabilityfollow changesin societies, "it is found where
rulers readily delegate authority, where subordinatesconfidentlyexercise their discretion, where the
abuse of power is given its proper name and is properly punished under a rule of law which stands
above political faction" (Lonsdale 1986: 128, 135). The literature defines accountabilityin several
ways: political accountability,public accountabilityand legal accountability."2
Political accountabilityis "the relative ability of divided peoplesto organise in order to choose
a ruler or government,to remindking or president of their promises, and to get rid of them if they fail
or refuse to abide by their mandate" (Lonsdale 1986: 130). This involves,inter alia, institutionalized
methods by which citizens can review government activities, question government ministers, review
public expenditures,and remove officials who abuse the public trust.
Public accountabilityconcerns the methods and practices whereby users of government and
public services, and those within governmentbureaucracies, ensure adequatelevels of public service.
Oversight problems, or "principle-agent"dilemmas, abound in the provision of public services, and
governmentshave adoptedmethodsrangingfrom ombudsmento privatizationin order to promote public
accountability,the practiceof which involvesboth answeringup the chain of commandto superiorsand
outward .o the public.
"Though we have here surveyed only a limited subset of available, recent writing, the lessonsof
this review point clearly to the need to review the roots of recent literature in the classics of social
science for insights into governancein developingcountriestoday. As Dunn notes, "There are no very
explicit modern theorists of good government(as opposedto good organisation)." (Dunn 1986: 161,
note 12).
'2S. Paul (1990) uses a similar frameworkof democratic, professional,and legal accountability.
12
Legal accountabilitymeans that citizensand groups can hold public agencies and civil servants
legally responsible for their actions. Civil suits against the state are possible; a penal code regulates
both public and private behavior; and laws are enforcedthrough adequatelyfunded institutionsthat are
independent of the political system. Political corruption occasions real risks and penalties, and
individualsand groups that uncover abusesor demand accountabilityare legallyprotected.
Accountabilitythus has several related components: (1) the existence of constitutional or
legislatedprotectionof the public interestthrougha code that regulatesboth public and private behavior;
(2) the enforcementof such laws through specificinstitutionsthat receiveadequatebudgetaryallocations
and are independentof the political system; and (3) a set of social expectationsshared by rulers and
ruled that provides the underpinningsof enforcementand compliance.
1. Legitimacy,Leadership, and Accountability
Jean-JacquesRousseau's 18th century idea of a social contract between rulers and ruled described a
bargain with mutual responsibilities,but it also implied-- much as the Chinese philosopherMencius
argued'3
-
that failure of the ruler to live up to his side of the bargain removedhis mandate. Thus the
failure of accountabilitycan lead to the loss of legitimacy. Even though legitimacycannotbe directly
addressed by institutions such as the World Bank, it is fundamentalto many analysts' conceptionof
governance and accountability,and the rule of law. To be legitimate is to be "in accordance with
established rules, principles, or standards; lawful, legal."'4
Seymour Martin Lipset (1960) defined
legitimacy as "the capacity of the system to create and maintain the belief that existing political
'3 Mencius (c. 371-c. 289 B.C.) elaboratedthe Confucian idea of governance by arguing that the
people had the right to overthrow a leader who lacked the necessarymoral qualities: such an act was
not regicide; since the ruler did not live up to the responsibilitiesinherent in his title, he was not really
a ruler.
"Random House CollegeDictionary, rev. ed. New York: RandomHouse, 1984.
13
institutionsand procedures are the most appropriateones for the society" (p. 77). The effectivenessof
a government is based in part on its level of legitimacy;greater efficiencycomes from the promotion
of voluntarycompliancewith laws and regulationsrather than from reliance on coercion, threats, fear,
and personal loyalties. Citizens respect the proceduresand institutionsof legitimategovernmentseven
if they may not respect particularactors.
Traditional systems, according to Max Weber, base governmental legitimacy on sacred and
inviolablenorms, and deeply held beliefs about appropriateleadership, often with religious sanction.
While constitutionallegitimacydepends on formal law to support accountability,traditional legitimacy
depends on social pressures as much as on codified rules. Richard Joseph (1990) suggests that "In
additionto the establishmentof ombudsmen,leadershipcodes, special tribunalsand other well-triedbut
often unsuccessfulinitiatives,"countries should "explore customaryways of compellingaccountability
that enabled chiefs, villageheads and councilsto govern their communitieswhilebeingheld accountable
for their actions" (p. 203).
More modern systemsbase their legitimacyon either charismatic-revolutionaryor constitutional
grounds. Charismatic-revolutionarylegitimacyrelies on appealsto ideologyand emotion. Constitutional
legitimacyis derived from adherence to the rule of law and to valued, institutionalizedproceduresthat
are considered morally proper and that generally include orderly, predictable transfers of power.
Constitutionalpolitical systems build legitimacythrough institutionsthat allow for citizen participation
in politics. "It is the parliamentarysystem of governmentthat is legitimate, and governrmentofficials,
electedthrough the institutionsof this systemof government,acquire their authorityfrom the legitimacy
of the system" (Dawisha 1986).
In many parts of the world, with various political cultures and traditions of governance, the
legitimacyof political systems rests on the person of the ruler. Centralizedauthority in manyareas, for
example, is based on both traditions of hierarchy and strong personal leadership. Legitimacy is
frequentlypromoted and reinforcedthrough the use of ideology, imagesand cultural symbols, and ties
14
to historicalleaders. Legitimacyacquired in this manner is easily uprootedand may ultimatelyrest on
only lightly sheathed force. Yet many local observers argue, as does Adeed Dawisha (1986), "in the
final analysis, only genuine participation in the political process can provide a government with
unshakableand permanentlegitimacy"(p. 527).
2. Accountability,the State, and Civil Society
The existence of constitutions and formal law alone cannot explain the presence or abs!nce of
accountability. Some political scientistsargue that political accountabilitydepends "almost entirelyon
the ability of civil society to curb the hegemonyof the state" (Chabal 1986: 13), while others point to
the East Asian experienceas a demonstrationthat in order to be accountableto society at large for the
country's economicperformance, the "hard" state may insulate itself from particular interests in civil
society - for example, rent-seekers,special interest groups, even labor (Haggard 1990).'5
The relationship between states, their societies, and the development of accountability is
controversial. Many contend that problems of accountabilityare rooted in an "all powerful state"
(World Bank 1989: 61). In his analysisof "strong societiesand weak states" Joel Migdal(1988) argues
that states with low accountabilityand legitimacyare engaged in a strugglefor survival; they are weak
states. Weak states have not effectivelycentralizedand institutionalizedtheir authority. The struggle
to do so leads to the politicizationof the bureaucracy and a lack of effectiveness, accountability,and
control. Whenbureaucratsand leaders attemptto consolidatethe rule of law, their officesare in danger
of capture by particularisticinterests.
'5 MichaelBratton's very thoughtfularticle "Beyondthe State: Civil Societyand AssociationalLife
in Africa,"(World Politics April 1989)discussesclassicalconceptionsof civil society from Hegel (who
introduced the term), to Gramsci who saw civil society as the "ideologicalinstruments (churches,
schools,trade unions)"of the state, and de Tocqueville,who saw civil societyas "the ultimateguarantee
that the state will be unable to arrogate to itself any more power than an active citizenry is willing to
grant" (pp. 416418).
15
Migdal criticizes the tendencyof academicsand donors to simplifybureaucraticreform failures
as a productof "slothfulness,lack of will, and absenceof commitment."He points out that bureaucrats
face a "calculus of pressures" that explainsapparent laziness and lack of commitment. If this is the
case, then "successfor public policies neither waits around the corner in a 'new breed' of implementor,
nor will it be found in an exclusivefocuson new managementtechniques." Attemptsto promote reform
must grapple with the "politicsof administrationin weak states," which "lies at the heart of problems
with policy implementation"(p. 242).
One result of this state-society struggle is the fear by government officials of independent
economic power. When the state is the primary route to accumulation,rent-seeking becomes an
important basis for wealth, keeping control of financial resources ultimately with the state, but
efficientproduction. As Jean-FrangoisBayart (1986) argues: "Where there is a greater
hamnstringing
distancebetweenaccumulationand power,there developautonomousindigenousbusinessclassesseparate
from the bureaucracy . .. and capable of strengthening civil society" (p. 115-116). Separating the state
from private sectoraccumulationprovidesthe basisfor buildinga separateeconomicarena and ultimately
creates the constituencythat enforcesgovernmentaccountability. Some argue that greater participation,
plus a healthy sector of independentlocal organizations(institutionalpluralism) can also be important
channelsfor structuring accountability.
3. Accountability,Participation, and InstitutionalPluralism
Politicalscientistsuse participationas an umbrellaconceptembracingactivitiesconnectedto the exercise
of voice to affect governmentdecisions. Participationcan occur at a variety of levels -- on the national
or regional level, at the local level; it can link citizensto decision making at projects and in villages,
16
6 The absenceof participationaffectslegitimacyand may ultimately call stability into
or in parliament."
question.'7
Institutionalpluralismrefers to a diversityof organizations,a "market"of institutionsin addition
to the state: nongovernmentalorganizations(NOOs),businessassociations,unions, youth and women's
groups, and other intermediateorganizations. Many describethese institutionsas the vital structuresof
a civil societycomposedof autonomousintermediateorganizations(Bratton 1989; de Tocqueville1966).
Although these organizationsmay not have an explicitlypolitical role, ,
. ism has long represented
the idea of empowermentfor groups of people vis a vis the government. This leads many to regard
official tolerance for institutional pluralism as a vital precondition for effective power sharing and
representationand for the institutionalizationof accountability: "Becauseit raises questions about the
control of power and its purposes, accountabilitymust also be concerniedwith political organisation.
For if power is not to some extent shared there can be no effective base from which it may be
controlled,nor any protectedright to discuss its pur?oses" (Lonsdale1986: 128).
Whether electoralor not, participationcreates channelsby which people influencetheir leaders.
Nigerian political scientist Claude Ake (1990) criticizesthe "delinkingof leaders from their followers,
which, among other things, has led to a dissociationof public policy from social needs and a lack of
accountabilityand self-correctivemechanismsfor public policy" (p. 15). Ake argues convincinglyfor
'6 Lindblom's(1977) hierarchy of political participationdemonstratesthe variety of acts included in
the exercise of voice. Some are clearly electoral, but others are linked to a broader vision of
participationas citizen action. In Lindblom's hierarchy, electoral participationincludes regular voting
in national and local elections,a-.tivelyworkingfor a party or candidatesduring an election, attending
political meetingsor rallies, giving moneyto a party or candidateduring an election, or membershipin
a political club or organization. Communityparticipationinvolvesactivity in organizationsinvolvedin
communityproblems, working with others to try and solve some communityproblems, contactinga
governmentofficial (state or local) about some issue or problem; and forming a group or organization
to attempt to solve some communityproblem.
'7 Diamond,Linz, and Lipset (1990) argue that one cause of the simmeringrebellion in Senegal's
isolatedsouthern Casamanceregion is local resistanceto the promulgationsof a highly centralizedand
unresponsive state that lacked effective local channels for popular influence on policy. Botswana
provides a contrast; there, locally elected councils have "substantial power . . . over community
developmentand services," and "oppositionparty controlof some local councilshas mitigatedsomewhat
the effect of continuingone-party dominanceat the center and so enhancedcommitmentto the system"
(p.
30).
17
a definitionof participationthat involvesnot simply reacting to policies and programs, but of shaping
them: "One is not just exercising a right of assentingor dissentingfrom outputs or options that are
already predeterminedby processesover which one has no control whatsoever" (p. 16).
A plurality of institutions outside of the government offers opportunities for informal
representation, enabling people to "reach up" to governments. Yet although effective government
provides opportunitiesfor its citizensto make knowntheir views, political scientistslike Patrick Chabal
(1986) argue that there exists "no causal link betweenthe mechanismsof formal representationand the
effectivenessof government"(p. 14). Can the developmentof commurity-basedpopularorganizations
reinforce accountabilityby constraininggovernmentagencyabuses? RobinTheobald (1990) argues that
basing structures of accountabilityin local communityorganizations risks their overpowermentby
nationalneeds (p. 155). However, analysisof the Asian niewlyindustrializedcountries (NICs) suggests
that their authoritariannationalgovernmentswere tempered by member-controlled,local organizations
that channeledrural concernsto the stace(Korten 1990). Developmentmanagementanalystsarguethat
effectiveinteractionbetweenlocal groupsand governmentdependson formal instrumentsof power held
by communitygroups: "to the extznt that they contribute to salaries, or influencepromotions, or
determinework priorities, local communitiesor groups can compel field staffs to be more responsive
and Esman 1984: 148).
to their concerns" (UTphoff
The developmentmanagementliterature documentsthe importantrole local participationplays
in increasingthe effectivenessof project and programdecisions,not simplythrough accountability,but
in increasingthe appropriatenessof project investments. A number of evaluationsand studies by the
World Bank and other development agencies support the view that popular participationenhances
sustainability,particularlyfor family planning,local irrigation,agriculturalextension, urban upgrading,
and communitywater supply (see, amongothers, Bryant and White 1984; World Bank 1985; Midgley
et al 1986). Developmentmanagementresearcher Louise White (1989) has outlined steps to enhance
project and program accountability that substitute for hierarchical control:
"mobilizing local
organizations to hold managers and staff accountable; setting up procedures so that proposals by
18
beneficiariesare part of the ongoing informationsystem in the agency; meeting in work groups where
staff have access to externalprofessionals;institutingprocess documentationso that all can learn from
the actual steps taken; and relying on pilot projects and experimentsto test out new ideas" (p. 179180).
Corporatism, a "system of interest representation"that provides for the state's organizationof
"hierarchicallyordered and functionallydifferentiated" interests, such as business, women, peasants,
8
workers, presents an alternativemethodby which somegovernmentsstructure, and limit, participation.'
Those not representedby these institutionsare left outsideof the structuresof power. This process of
incorporation often proceeds against the will of the incorporated groups, although the European
experiencewith corporatismsuggeststhat "peak associationswith a secure place in the political process
and clear access to decision making can guaranteemutual restraint and efficient decision making in a
democraticsetting" CTheobald1990: 85, 263). Latin Americanstates experimentedperhaps more than
others with controlled participationand limited accountabilitythrough corporatist structures that gave
specific interest groups a formal role in governmentdecisionprocesses. Many of these states are now
experimentingwith decentralization,in the hope that this will enhance governmentalaccountabilityto
society at large.
'8 For a review of the literature on corporatism, see Philippe C. Schmitter, "Still the Century of
Corporatism?"Reviewof Politics36, 1, 1974;DougChalmers,"Corporatismand ComparativePolities,"
in Howard J. Wiarda, ed., New Directions in ComparativePolitics (Boulder:Westview Press, 1985);
for the European experience,see Leo Panitch, 1980, "Recentlheorizations of Corporatism:Reflections
on a GrowthIndustry,"BritishJournal of Sociology31, 2; for Latin America, see HowardWiarda, 1981
Corporatismand National Developmentin Latin America (Boulder:WestviewPress); and volumesby
Alfred Stepan, Peter Evans, GuillermoO'Donnell. For Africa, see in particular the various essays in
the volumeedited by Julius Nyang'oro and TimothyShaw,Corporatismin Africa: ComparativeAnalysis
and Practice (Boulder:WestviewPress, 1989).and the subsequentarticle by Nyang'oro, "The State of
Politics in Africa: The CorporatistFactor," Studies in ComparativeInternationalDevelopment(Spring
1989); and Timothy Shaw, 1982, "Beyond Neo-Colonialism:Varieties of Corporatism in Africa,"
Journal of Modem African Studies 20, 2.
19
4. Conclusion: Accountabilityand Foreign Aid
Accountabilitydepends in part on "appropriateand effectiveaccountingsystems within or outside the
government,on people who are trained and motivatedto manage and operate these systemsand on the
availabilityof hardwareand other ancillarysystems, such as workingtelephonelinks, necessaryfor the
collection and disseminationof data and the processing of information"(Corkery 1990: 10). Foreign
aid has an important role in assisting the development of these technical supports for greater
accountability. But the historicaldiscussionof accountabilitydevelopedearlier suggeststhat foreignaid
may also have contributedindirectlyto problems of accountabilitycurrently facing many nations.
First, foreign aid in manyparts of the world reduced the need for nationalgovernmentsto raise
taxes locally in order to fund their governmentalprograms. When aid transfers make up the bulk of
governmentbudgets, governmentsface less domestic pressure to be accountable, becausethey do not
often need to negotiatewith their citizensover taxation. When government revenuesand spending are
dependenton direct taxationof citizens,pressure builds to be accountablefor the use of those revenues.
Second, in many developing areas, extensive amountsof outside aid enabled the solidification
of government's position as the primary source of capital accumulation. Without internationalaid
transfers, governmentslacking extensivenatural resources may have been forced to seek more revenue
from other sources, thus giving them a greater interest in providing a conducive environmentfor
productive activities. The private sector, on the other hand, respondedto the natural incentivestructure
that resulted: they soughtrents rather than engagingin risky productionventures; they exported capital
rather than investing it locally.
Thus, foreign aid may hamper the state-societydialogue and may have distorted development
choices in the many nationsthat remain heavily dependenton these outside funds. While foreign aid
was originally designed to fill critical savings and skills shortages, in the process it inadvertently
contributedto criticalpolitical shortages. Lack of accountabilityhas beenan inevitableand perhaps quite
20
natural result. This strongly suggeststhat those who channel funds to foreign governmentsmust find
ways in which to stimulateand support the process by which accountabilitybecomesa matter primarily
betweengovernmentsand citizens, and not only one between governmentsand donors.
C. Opennessand Transparency
The developmentof accountability,whether international,national, or local, requires an underpinning
of informationand a system that is open to the discoveryand correctionof abuses of power. Openness
has several meanings, but they all refer to low levels of government conirols on the flows of
commodities, ideas, information, and participation. The Soviet struggles to institutionalizeglasnost
focused international attention on openness as a governance concept. While perestroika referred to
economicrestructuringand greater reliance on the market to allocate goods, glasnost came to mean a
relaxing of controlson informationflows, on expressionand association,and on political participation.
Economic openness refers to competitiveeconomies with limited restrie~tions,a liberal trade
regime, and a variety of cross border transactions. In an open economy, goods and resources are
allocated primarily by market forces. Entry into the economy is not restricted by government fiat or
by other artificial barriers. Unimpededflows of financial and economicinformationare fundamental
to the effectiveworking of the market, and they underpin economicopenness.
Political opennessrefers to political competitiveness,tolerancefor diversity, and policy making
ultimatelydependent on expressionsof citizen preference, such as the vote (Dahl 1971: 3). Included
in political openness are contestableleadership and institutionalizedprocedures for political transitions
(generallythrough fair elections). Accessto informationand freedomof expressionare fundamentalto
the responsible exercise of voice; a wide range of government information is accessible through
publishedgazettes and other public records, and confidentialclassificationsare strictly limited.
21
Politicalopennessincludesthe institutionilizationof channelsof communicav)n betweencitizens
and officials, as opposed to personalized channels, which empower special interests and provide
opportunitiesfor corruption. Opennessin this sense correlates with expanded options for specialized
interest groups, mass media, and other non-governmentalinstitutions that provide checks on public
officials and enhance accountability. The informationrevolution created a new dimension to cross
border informationflows, expandingthe options for "openness"beyond the press and the media, to
personalcomputers, fax machinestape recorders, and videos (Annis 1990).
Transparent decision-makingprocesses and the availabilityof informationconstituteimportant
dimensionsof openness. Governmentscan promote transparencyeven when the system is not open in
the economic or political sense, although experience suggests that the high degree of governmental
discretionin commandeconomiesmay impedetransparency. Transparentsystemshave clear procedures
for public decision making; they publish budget information, including military expenditures, and
minimize "caisses noires" and other hidden budget categories. Subsidies are clearly stipulated;
appointing,promoting,and dismissingpersonneldone accordingto stated,objectivecriteria. Information
availabilitycan range from requirementssuch as the publishingof audited accountsthat add confidence
to capital markets, to the disclosureof procurementprocedures and the release of complete national
budgets.
Distinguishingthese separate aspects of openness is necessary in order to relate "openness"to
econo..iicperformance, discussedbelow. Many aspectsof opennesscan be traced to capacityproblems,
rather than to consciousdecisionsto restrict access. Fundingfor compilingeconomicstatistics may be
absent; auditors may not be available; those available may not be well trained.
Mechanismsthat
impede informationflowsmay not signaldeliberateclosure,yet these can affect performance. One kind
of opennessmay be present and others missing: closed polities but extensive foreign investmentand
sophisticatedmarket informationsystems characterizesome of the Asian NICs. While committedto a
degree of economicliberalization,some of these countrieswere not willingto allow wide public access
to sensitive financialdata. Nor were they willing to embracegreater tolerance for divergent political
22
perspectives. In short, economicopennessdoes not readily translate into political openness. Yet, as
touched on above, recent experiencein the Asian N[Cs (Korea, Taiwan) provides some evidencethat
sustainingopen economiesin the long term appears to require political openness, at least guaranteesof
certain politicalfreedomssuch as speech,associationand the media, as spelledout in the UnitedNations
UniversalDeclarationof Human Rights (1983).'9
Albert Hirschman(1970) notes that systems that punish wavering loyalty lower the quality of
informationthat reachesthe leadership,and close themselvesto importantfeedbackthat would improve
accountability. Closure also multipliesopportunities for corruption. Theobald's (1990) thoughtful
review of corruption in less developedcountries defines corruption as "the illegal use of public office
for private gain." Theobaldnotes a numberof ways in which societieshave reduced their tolerancefor
corruption, although scandalscontinue to plague rich and poor countries alike. Theobald shows how
the developmentof civil society as a balanceto the state eventuallyreshapedgovernmentbehavior. In
Europe, for example, the synergisticdevelopmentof the private and non-governmentalsectors, a free
press, citizen groups, and the growth of social expectationsthat the governmentmust be accountableto
the peopleredefinedacceptablebehaviorby publicofficialsand inducedpressureto increasetransparency
and lower corruption.
Theobaldtraces the gradual discontinuationin Europeof behaviors now consideredcorrupt but
once consideredquite normal. In part, this evolutioncame aboutthrouglhthe developmentof alternative
economicbases outside both the aristocracyand the government,as well as through the developmentof
a rational-legalbureaucracybased on predictability. Such a historicalview can offer some consolation
to those who view endemicgovernmentalcorruption in many societiestoday.
'9 See, for example, Article 19, which states: "Everyonehas the right to freedcm of opinion and
expression;this right includesfreedom to hold opinions without interferenceand to seek, receive and
impart informationand ideas through any media and regardlessof frontiers;" and Article 20: "Everyone
has the right to freedom of peacefulassemblyand association."
23
Privatization, or the reduction of government controls and regulations and the sale of public
enterprises to the private sector, has potential to increase transparencyand reduce corruption abuses.
White (1989) cautionsthat privatizationmay not enhanceaccountabilityor efficiencyif the service is a
monopoly, is not purchased, or it oversightand regulationare not in place.
Lack of transparency is clearly not the only factor involved in corruption. Weber noted that
regular salaries are one distinguishingcharacteristicof rationalbureaucracies,as they provide for more
effectivegovernment control over off-icials. Chrnic fiscal crises, and problemswith regular payment
of salaries, distance officials from that government control while also providing strong incentivesto
supplementincomefrom corruption. Dimiiinishing
corruptionis relatednot only to civil sern-:e reform,
but very fundamentallyto issues of the distributionand nature of power and to those of accountability.
As Lonsdale (1986) puts it, "Effective power can scarcely avoid submitting itself to some test of
accountability"(p. 128). Without accountability,corruptionand power frequently coexist. As Lord
Acton noted in another contex.: "Power tends to corrupt, and absolute power corrupts absolutely."
In a related argument, Larry Diamond (1988) contends that in some countries, bureaucratic
employmentbecame a major avenue of wealth through political corruption, distorting entrepreneurial
incentives,and putting an "economicpremium on political power." A vicious circle can result, based
on a scarcity of productive economicoptions and exacerbatedby a restrictivestate which controlledthe
economy. Echoing Hyden,Diamondstressesthat only with the developmentof market-basedproduction
opportunities would entrepreneurshave alternativebases of wealth; only then, might the emergenceof
an entrepreneurial class force the attachment of "real risks and penalties . . . to the pursuit of wealth
through political corruption" (pp. 384, 403).
24
D. Predictability and the Rule of Law
"A market," commentsJeremy Paltiel (1989), "is not just an economicmechanism;it is a legal regime"
(p. 266). The developmentof a rule of law establishesthe standards of accountabilityagainst which
both public and private sector actionsare measured. It regulatesthe market systemthrough establishing
exclusive property rights, the sanctity of contract, and common standards -- all of which underpin
mirket exchanges(Cerny 1990: 206). It providesthe conditionsunder which opennessand transparency
become the norm in public-privatetransactions.
Discussions of the rule of law and governance are among the oldest existing philosophical
debates. More than two thousandyears ago, Confucianthinkingstressed moral institutionsas the basis
of government,but the rival Legalist school argued that governmentsshould be based on a fixed code
of law. The Legalistsviewed law as an impartial instrument,developedby leaders, and necessarynot
so muchfor controllingleaders as for controllingboth the people and office holders.'
This distinction
betweennormative and instrumentalistviews of law finds reflection in Western legal theory as well.2 '
The "rule of law" may be defined as "the subordinationof the behavior of state officials to
rational, predictable, and publicly recognized procedures" (Paltiel 1989: 266). It is an essential
preconditionfor accountability,and predictability. A rule of law impliesstandardoperatingprocedures,
clearly promulgatedand indiscriminantlyapplied rules, non-personalizeddecision making with modest
levels of discretion, and regularizedproceduresfor establishingand implementingpolicies. In systems
with high predictability,lines of authorityare clear and capriciousnessat a minimum. The civil service
2'For the ChineseLegalists, even servicedelivery accountabilityrests on this instrumentalistvision
of law: once an individualis given an office, "the functionspertainingto this office have already been
defined by law . . . the ruler need not, and should not, bother about the methodsused to carry out his
work, so long as the work itself is done and well done. If it is well done, the ruler rewards him; if not,
he punishes him . . . if the ruler is strict in his rewards and punishments, incompetent people will no
longer dare to take office even if it is offered to them. Thus all incompetentsare eliminated" (Feng
1948: 161).
2"See John Rawls, A Theory of Justice (Cambridge,MA: The BelknapPress of Harvard University
Press, 1971), for example, for a discussionof contendingapproachesto the law.
25
is insulatedfrom politicsrather than penetratedby it; when politicalleadershipchanges,the civil service
acts as a stabilizingsource of continuity. But no system of law, whetherconstitutionalin origin or not,
can persist over time unless the laws themselvesrepresentthe crystalizationof society's values and are
seen as legitimate.
This crystalizationis a topic of researchfor manypolitical scientistsas well, who are concerned
with political stability as a function of regularized patterns of interaction, and the successful
institutionalizationof rules, norms, and procedures. Samuel Huntingtonset the terms for the modern
discussionof post-Weberianrationalizationin PoliticalOrder in ChangingSocieties(1968) in which he
arguedthat socialand economicchangebreeds instabilitywhen it destroystraditionalinstitutionswithout
creating "new bases of political association and new political institutions combining legitimacy and
effectiveness." Huntingtonpointed out that:
political institutionshave moral as well as structural dimensions. A society with weak
political institutionslacks the abilityto curb the excessesof personaland parochialdesires
. . . Morality requires trust; trust involves predictability; and predictability requires
regularizedand institutionalizedpatternsof behavior. Withoutstrongpoliticalinstitutions,
society lacks the means to define and to realize its common interests (pp. 12, 5, 24).
Developmentmanagementand public administrationtheoristsfocus muchof their field of inquiry
on the practical aspect of these questions: how can institutionalevolutionbe accelerated? They argue
that while change occurs slowly, institutions are social creations, and hence can be modified by
purposive action. The learning process that underliesdirected institutionaland organizationalchange
occurs most efficiently when an organization can "embrace error" and promote conscious social
adaptation(Korten 1980).2
'For a review of the material in this field, see Coralie Bryant and Louise G. White, Managing
Developmentin the Third World (Boulder,CO: WestviewPress, 1982).
26
The work of Douglass North and other institutionaleconomistsexploresthe origins of the legal
and political institutionsthat createpredictabilitythrough definingclear property rights. Property rights
are rarely defined by economists, yet their importanceis never doubted. The definition problem is
serious, however. Barzel definespropertyrights of individualsover assets as "the rights, or the powers,
to consume,obtain income from, and alienatethose assets" (p. 2). By this definition,one's "property"
includesone's labor.'
The structure and enforcementof ownership rights determines economicincentives and their
stability and predictability. How do these rights evolve? States interact with their societies over the
definition(and redefinition)of property rights, the provisionof public goods such as infrastructure,and
the establishmentof standard weights and measures -- all of which lower transactioncosts ("the costs
associatedwith the transfer, capture, and protectionof rights" Barzel 1989: 2). As economiesdevelop,
legal institutions and property rights evolve to support transactions that increase in complexity and
impersonality. Mercantilisteconomies,with highly liquid investments,differ from industrial and postindustrial economies, which require institutions that provide secure and impartial enforcement of
property rights through contracts. Economic developmentdepends critically on these state actions,
although states will define property rights in different ways dependingon the "distributionof political
power withina country and the institutionalstructureof its rule-makinginstitutions"(Eggertsson1990:
247-248).
The rule of law is also essential in another respect -- to protect the rights of citizens in their
efforts to force accountabilityfrom governments. In Latin America, "crucial individualand collective
rights were made effectivebefore the convocationof competitiveelections,the organizationof effective
interest representation,and the submissionof executiveauthorityto popular accountability"(O'Donnell
and Schmitter 1986). Yet the relation of political rights to governance is not necessarily direct.
Historically, in the long term, political rights and personalor human rights appear to be necessaryto
'Barzel, in fact, argues that "the distinctionsometimesmade between property rights and human
rights is spurious. Human rights are simply part of people's property rights. Human rights may be
difficultto protect or exchange, but so are rights to manyother assets' (p. 2).
27
underpin market systems. Free movementof goods, freedom to establish businesses, security from
arbitrary expropriations -- property rights -- are all related to the protection of personal liberties.
The establishmentof appropriatelegal systemstakes time, particularlywhen they must support
rapid econemictransition,from commandto market systems,or from a pre-capitalistto a fully capitalist
economy. Governancereforms in Eastern Europemay learn from China's strugglesto establishthe rule
of law. Before December 1978, "laws -- administrative, criminal, civil, or commercial -- were largely
nonexistent"(Paltiel 1989:260). The post-Maointroductionof new lawsfailed to establishpredictability
in enforcement, or to draw clear distinctions between ad hoc administrative decrees and formal
legislation. Party control substitutedfor the rule of law: Chinese Premier Hua Guofeng admitted in
1980that "there are no systematicand practicableadministrativerules which define limits of power and
responsibilitiesand lay down administrativeprocedure" (Paltiel 1989: 261)." Legal reforms in the past
decade have contributedto stronger protectionof physicaland intellectualproperty in China, and they
have supported the surge of domestic investmentsthere.
Paltiel (1989) argues that in some countries, where law and property rights are weak,
entrepreneurs seek to enhance security and reduce their risks through finding governmentalpatrons to
protect their business activities. This clientelism,he suggests, becomes "the functionalsubstitutefor
property rights" (p. 257). Weak property rights exacerbate a situation of personalizedbureaucratic
relations, undermining"contract, law, and property,therebyreducingcalculabiltyand addingan element
of political risk to every business transaction" (p. 267). Ultimately, the strengtheningof clientelism
"subvertsthe impersonaloperation of predictablerational-legalnorms within the state. Instead of the
abstractionsof hierarchyand market, humanrelationsbecomethe essentialmatrix of economicbehavior"
(p. 272).
Entrepreneurs spend their energies seeking special exemptions and bargaining with
bureaucrats, insteadof upgradingproductivityand efficiency.
Establishingthe rule of law is a process involvingeffectivecommunicationof the content of the
laws. It involvespredictableand legally enforceablemethodsfor changingthe content of the laws, so
28
that ad hoc decrees do not continuallychange the legal and regulatory environment,rendering both
people and their property insecure. It also involvesthe effective enforcementof law through adequate
budgets, salaries, staff, and workableinstitutions. Governmentsmay enact and promulgatelaws, but
this hardly guarantees their enforcement. Larry Diamond (1989) comments that constitutional
establishmentof codes of conductand monitoringtribunalsto addresspublic corruptionmay be thwarted
without enablinglegislationand an independentbudget (pp. 384-385).
Some institutionaleconomistsargue that institutionalizingthe rule of law may necessitatecertain
kinds of government structures: "In modern nations, [credible commitmentsby the state to stable
propertyrights] seem to require an effectiveseparationof powers" (Eggertsson1990:348). Historically,
many Europeanpolitical scientistsand jurists have argued for the central importanceof an independent
judiciary in ensuring the rule of law.
Finally, the rule of law is closely intertwinedwith legitimacy,whetherbased on traditional law
(patrimonial legitimacy) or modern law (rational-legal legitimacy). In many post-colonial areas,
European legal systems were imposedthrough conquestor implementedadjacentto indigenouslegal
systems. In Europe these systemsgrew out of traditional norms and experience,but they were not so
rooted in the former colonies. They lacked the legitimacyof tradition. In many parts of the developing
world, the legal framework acts to support the interests of elites and to suppress the economicand
political participationof the poor. As Rhoda Howard (1985) points out: "The key to legitimacywill
be, however, not the indigenous nature of the law, but whether it is perceived to be fair and
nonarbitrary. The criteria of fairness will dependnot upon the law itself, but upon public consciousness
of how [rulingclass elites] accrue politicaland economicprivilege,and the publicperceptionof whether
or not such privilege is, in its turn, legitimate" (p. 347).
29
111. DOES GOVERNANCE MATIER?
GOVERNANCE AND ECONOMIC PERFORMANCE
Empirical work on the relationshipbetween governance and economicperformance reveals a mixed
record. There does, however, appear to be evidencethat (1) the impactof governmenton economic
performance is more substantial than some economictheory acknowledges,and (2) failure to meet
minimalperformancelevels can cause both the public and investors to withdraw confidence.
The possibility that political interventionsare determinant in the "black box" within which
economicpoliciesare made now enjoys a growingconsensus. For example,economistL. G. Reynolds'
analysis of economicgrowth from 1850to 1950 in forty developingcountries suggestedthat "political
organizationand the administrationof government"constituted"the single most importantexplanatory
variable" (Reynolds 1983: 976).
Governancemay well be the independentvariabledetermining"who gets what, when, and how."
Yet empiricalresearch relatingspecific aspectsof governanceto economicperformanceis quite scarce.
Most of the political science literature reverses the dependentand independentvariables, examiningthe
impact of economicconditionson the developmentof democratic institutions. Those who do address
the issue of government and economic performance tend to examine regime-types (authoritarian,
patrimonial, democratic, etc.) rather than the narrower elements we are concerned with here
(accountability,openness, predictability). Their conclusionssupport the practical view that in its earlier
stages, economic growth is correlated with adherence so known policies: good fiscal management,
skillfuluse of governmentinstrumentsto managi,the market, competitiveenterprise systemsthat reward
performance, broad-basededucation,and support for the rule of law. These policies show up in both
authoritarianand democraticregimes.
30
A. Accountabilityand EconomicPerformance
The relationshipof accountabilityto economicperformance is contingentupon numerous intervening
variables; there is no clear evidence that accountability "guarantees social justice and economic
development"(Lonsdale 1986: 128; Dunn 1986: 173).
The Asian NICs (Korea, Taiwan, Singapore)provide a useful foil for this discussion. Although
for most of their modernhistory these nationshave been nondemocratic,their governmentsdrew much
of their legitimacyfrom deeply held social norms, based on their responsibilityfor the performanceof
the national economy and their position as small neighbors of larger and potentially threatening
24 The powerful capacityof these governmentsto select and implementtheir chosen policies,
countries.
together with the integrityof the government bureaucracy, explains much of their economicsuccess,
which in turn enhanceslegitimacy. They are accountableto their people for economicperformance.
The skill of the NIC governmentsis self-evident. Yet skill levels are also a functionof political
decisions. Governmentsdecide where to allocate scarce resources: to education, or to parastatal
subsidies, for example. They create the conditions under which skills can be effectively use-J In
addition, a number of the developingworld's most skilled public servantshave left their countries, not
only for financialreasons, but also to escape the frustration of corruption, rent-seeking,and patronage
politics.
Although legitimacyis not spelled out as a governancevariable in this review, its absence can
affect economicperformance. Regimesthat lack legitimateauthority tend to rely on militaryor police
force and the suppressionof civil liberties to retain their control. Research by Diamond, Linz, and
Lipset (1989) remindsus that governmentsstarting with low legitimacyoften must allocate substantial
4TheChinese political philosopher Mencius argued more than two thousand years ago that
governments based on "wang" must take the lead in building the economicbase for supporting their
people. The ultimate symbol of the failure of governmentsto protect the people came from faminethe symbolicsignal of Heaven's withdrawalof the mandatefrom the ruler, and the end of a dynasty.
31
militaryand police resources simplyto controlsociety and monitorsocial activity. In circular fashion,
concentratingon coercion and control, rather then consensus,may affect developmenteffectiveness,
loweringeconomicperformance, and making legitimacyeven more difficultto establish (p. 10).
Governancebased on personal loyalties, patron-clientties, appeals to particular ethnic groups,
or throughthe "purchase"of allegianceoffers only limitedlegitimacy. Regimeswith low legitimacyare
more subjectto the frequent use of force, for citizensare apt to challengethe governmentthrough riots,
demonstrations,and strikes (Avery 1988: 113). Their military budgets may absorb a large portion of
the nation's scarce resources -- and often for use against their own people. The absence of legitimacy
occasionsinstabilityand eventuallymay lead to violent overthrowof the government. In systems with
high legitimacy, citizens may be more willing to save, to defer gratification,and to accept unpopular
governmentdecisions in the belief that the governmentis acting in their interests.
B. Participation,InstitutionalPluralism,and EconomicPerformance
Are participationand institutionalpluralismrelated to economicperformance? Some evidencesuggests
a correlation between popular participationand broad-basedgrowth. Morris and Adelman's (1989)
extensivestudy of nineteenthcenturydevelopmentexamined35 institutionaland economicvariablesfor
23 countries,comparingpaths of developmentfrom 1850-1914.Empowermentand participationfigured
strongly in the second of their two generalizablefindings:"Progressiveagricultureis necessary(but not
sufficient)to sustainedindustrialization;increasedpoliticalpower to nonelitegroups is essential(but not
sufficient)to governmentpolicies that spread growth widely" (p. 1428).
Huntington and Nelson (1976) introduced some complications into these findings in their
argument that effective land reform, one of the key components to later economic equality, is best
introducedunder "noncompetitiveand nondemocraticgovernments,"i.e., those with low participation.
32
When medium-sizedlandowners are able to use legislativemeans to obstruct reforms, "land reform
becomesdifficult or impossible"(p. 76).2
As mentioned above, developmentmanagementresearchers draw a strong correlation between
participationin the design and implementationof developmentprojects and the sustainabilityof project
benefits (Bryant and White 1984; Uphoff and Esman 1984; Cernea 1985; Salmen 1987; World Bank
1985). Economic performance on the micro-level can be strengthened by citizen participation,
particularly by grassroots organizations able to influence project design decisions and affect the
managementof project activities. Some evidenceexists as well that economicpolicy reforms may be
more sustainable when governments consult with major societal groups during planning and
implementationof adjustment(Nelson 1989, 1990; White 1989).
But interest group influencehas its dangers, as well as its potentialbenefits. Trade associations
and other lobbying groups can influence the design and enforcement of economic policy in both
productive and non-productiveways. Rationalchoice economistMancur Olson (1981)has argued that
pressure by economic interest groups in advanced industrializednations led to policy decisionsthat
lowered economicperformance. Olson argues that the problemsof collectiveaction - free riders, the
need for selective incentives, the near impossibility of organizing mass groups (the poor, the
unemployed, consumers) to bargain for their common interests, in contrast to the relative ease with
which somegroups (smaller, better established,or with specificpurposes)org,anizeto push their interests
-
make it unlikely that any society will achieve equity or efficiency through comprehensivegroup
bargaining. It is more likely that small groups will exercise "lobbying and cartelistic power" for
redistributionon behalf of their special interests-- to push societyaway from equityand efficiency;i.e.,
it is easier to bargain over a slice of the pie than to join forces to make the pie bigger. These
distributive coalitions (labor unions, special interest lobbies, industry cartels, collusive firms, etc.)
maintainbarriers to entry and exit, establishmonopolyrents, and create rigiditiesthat lower the ability
"Interestingly, for the Chinese philosopher Mencius, the economic basis of kingly (J)
governmentrested on equal land distribution[Fung, p. 75]. Unequaldistributionled to unequalgrowth,
which might eventuallylead to peasant uprisingsthat couldbring down a dynasty.
33
of the economy to "adapt to change and generationnew innovations"(p. 62). As these distributive
coalitions increase in number, Olson argues, regulations increase in complexity, government
bureaucraciesexpand, and growth slows.
In this vein, manyof those who study the Asian NICs argue that the autonomyof the state from
social groups enabled it to conduct economicpolicy free from distributivepressures. As mentioned
earlier, Stephan Haggard (1990) argues that low formal participation-- limits on party representation,
interest group formatioi.,and labor organization-- allowed political space for these Asian governments
to move rapidly in devising, adjusting, and implementinggrowth-orientedpolicies withoutsignificant
societalpressures. Each of the Asian NICs he examinedwas marked by "tightly controlled" channels
of representation, and economic policymakingprocesses "relatively insulated from direct political
pressuresand compromises" (p. 262).
The case of the authoritarian but developmentalNICs raises important questions about the
fundamentalnature of accountabilityand its relationshipto pluralist systems based on representation.
Most political scientists educated in the Western European tradition link accountabilitydirectly to
electoral representation, even though the literature does not support clear causality. If rulers are
ultimatelyaccountableto their people fer the performance of the economy, as Mencius believed, then
a measure of accountability existed even in the non-pluralist authoritarian states that lacked
reprcsentation,but had fairly honest rulers, low corruption, and equitable income distribution. Given
the eventsof the past few years in Korea and Taiwan, however, acquiescencein a nonrepresentativebut
prosperous system may be only temporary. Sooner or later, people seem to demand the right to
participatein society's major decisions.
34
C. Openness, Transparency,and EconomicPerformance
Although economic openness has been correlated with economic efficiency since the days of Adam
Smith, other aspectsof opennessare less clearly empiricallyrelated to development. With the possible
exceptionof Japan with its contestablepolitical system and respect for civil liberties, the industrialized
countries of Asia achieved their remarkable economic performance with carefuliy circumscribed
economic openness, and very little political openness. These countries are distinguished by strong
commitmentto education, and a "rigorously educatedelite" (Johnson 1987: 152). Ir. addition, they
frequently created a politically insulated bureaucratic elite, with planning concentrated in semiautonomousinstitutesand councils. And in the early stages, they generallymanifestedneither political
openness, nor conventionalseparationof powers.
Politicalopenness, in the sense of democraticprocessesand electoralrepresentation,has received
considerableattention in the literature. However, as mentionedabove, the choice of the dependentand
independentvariables does not alway provide much evidenceon the economicperformance effect of
open polities. Tatu Vanhanen's (1990) speculation about the relationship between representative
governmentsand economicpe.formance hypothesizesthat market-basedeconomies provide economic
bases for the political activities of interest groups, leading to pressures for the expansionof political
rights (p. 172). However, Vanhanen's empiricalwork suggeststhat in the long term, effectivepolitical
participationand "popularaccountability"are correlatednot simplywith marketsystems, but on an equal
distributionof economicpower resources (wealth and assets), and on education(pp. 191, 195).
In other senses, such as transparency, openness is often relevant to the performance of an
economy, or at least its absence opens a system to abuse without counterbalancingcontrols. Some
specific examplesexist in the literatureof the economiccost of a lack of transparencyin the form of a
highly Jiscretionary bureaucracy. High levels of executivediscretion can "weakenauditing, oversight
and planning"leadingto "increasinguncertainty,loss of confidence,a declinein productiveinvesiment,
capital flight, and finally, open political opposition" (Haggard 1990: 128). Yet, paradoxically, high
35
levelsof discretion are not alwayscorrelatedwith poor growth. Manycountrieswith superior economic
performance exercise a high degree of discretion, rewardingperformance, channelingextra resources
toward high efficiencyactivities,and even "negotiatingall investmentson a case-by-casebasis" (Haggard
and Cheng 1987: 116).
We have argued above that lack of transparencycan promote corruption, with its own impact
on economicperformance. Some have argued that corruptionprovides economicbenefits; in effect, in
countries with uneven adherenceto formal rules of law, corruption can increase predictabilitythrough
lowering risks, offering a form of insurance, and softening the distortionsof quotas and licenses by
creating a de facto market for their allocation.' Yet corruption clearly wastes national resources,
underminingstabilityand adniinistrativecapacity, and postponingthe evolutionof bureaucraciesbased
on universalisticcriteria. But perhaps the most serious consequenceof corruption is that it erodes the
confidence of citizens in government -- it undermines legitimacy. As that happens, gover!-.nents
encounter even greater problems acquiringstrength to enact policies and to implementthem.
Corruptionobviouslyaffectsthe abilityof the state to husbandand allocate scarce resources, but
there is some evidenceto show that problemsof corruptioneventuallyrecede as alternativeavenuesto
wealth occupy the attention of entrepreneurs and a&affective and kinship ties are replaced by more
impersonalrelationships.
"Nathaniel Leff suggeststhat in the lengthyperiod before both externaland internalpressurespush
the developmentof bureaucracies with Weberian, universalistic norms, corruption can "lubricate
administrativerigidities," cutting through restrictive business regulations and eliminating red tape.
Theobaldnotes this in his admissionthat corruption "assists capital formation;it fosters entrepreneurial
abilities; allows business interests to penetrate the bureaucracy and, lastly, pernits the logic of the
market to insinuateitself into transactionsfrom which public controls attemptto exclude it" (Theobald,
p. 116). For one of the latest contributionsto this debate, see M. S. Alam, "SomeEconomicCosts of
Corruptionin LDCs", Journal of DevelopmentStudies, vol. 27, October 1990, pp. 89-97.
36
D. Predictability,the Rule of Law, and Economic Performance
Adam Smith commentedin 1755on the importanceof the rule of law for economicprosperity: "Little
else is required to carry a state to the hig;iest degree of opulence from the lowest barbarianism, but
peace, easy taxes, and a tolerable administrationof justice; all the rest being brought about by the
natural course of things."
Economicpolicies always encounteruncertainties. These uncertaintiesare worsened,however,
when there is great capriciousnessor instability surroundingeither the way policies are made or by
whom they are made. Predictability is essential for long-term capital investment. Market-based
economiesdepend on legal regimes composedof property rights and the sanctity of contracts. A legal
system and governmentadministrationin harmonywith the market enhancepredictability,calculability,
and efficiency. This relationshipreduces transactioncosts and makespossible the interactiveeconomic
managementneeded for economicperformance.
A major vehicle for this predictability, as argued above, is well-definedand protected legal
rights, particularlyproperty rights. Accordingto North and Thomas (1973): "Economicgrowth will
occur if property rights make it worthwhile to undertake socially productive activity" (p. 8).
Institutionaleconomicstheoristsargue that economiesneed incentivesto operate close to the technical
productionfrontier; incentivesdependon the structureof property rights, which is determinedprimarily
by the state. Secure property rights enhance stability and predictability;they shape the "structural
frontier" of an economy(Eggertsson 1990: 326-327). Yet again, empirical evidence is hard to come
by. Even political stabilityis no clear predictor of growth, althoughMackie (1987) argues that it may
be a necessary condition (p. 2 P3).
'From a paper written by Adam Smithin 1755, quoted in Edward Canan, "Editor's Introduction"
to Adam Smith. An Inquiry into the Nature and Causes of the Wealth of Nations (London:Methuen,
1950), p. xxxv, and cited by Bates, 1989, p. 3
37
Nevertheless,predictabilitycounts. When propertyrights are incomplete,easily abrogated, or
unstable, economies suffer. Acts of the predatory state alter investmentin profoundly costly ways,
affectingchoice of technologyand inputs, production processes,and social discount rates. The nature
of investment, and sometimes its very presence or absence, depend on investors' reading of the
likelihoodof appropriationthrough decree or through suddenlyadjusted "taxation". Yet reforming a
political system also has Losts: the costs of change itself, and those of maintainingnew systems.
A basis exists for including human rights and their relationshipto economicperformance in
discussionsof the rule of law and the aevelopmentof stableproperty rights that will support long term
growth with equity (Barzel 1989). For example, legal discriminationagainst women can lead to
distorted labor markets and lower economic performance. The specification, protection, and
enforcement of property rights (including property rights over one's own person) is a task for
governments. And yet Dunn (1985)concludesthat, "The presenceor absenceof effectivelyguaranteed
civil and political libertiesdoes not in itselfensure the prevalenceof good or bad government"(p. 169).
Economic performance is a matter not simply of growth, but of growth with equity. This
discussionof the developmentimpactof oredictabilityand the rule of law would be incompletewithout
a warning on the problem of unequally distributed property rights (Lindblom 1977; North 1990).
Governmentsplay a significantrole in determiningboth the structure of laws and their enforcement.
Dependingon the motivationof government actors, the instituti3nalbase of property rights may be
politicallyderived and dependenton clientelistor patrimonialties. Thus, the rule of liw may operate
smoothlyand still suppress broad-basedgrowth. As Perrow (1986) warns, in a related vein, "Beware
of efficiencyargumentsthat do not ask: efficiencyfor whom, and at what cost to others?" (p. 278).
38
IV. CONCLUSION
It has been difficultin this review to draw a correlationbetweengovernanceand economicperformance
with any degree of precision. In part, this is due to the dearth of research focused on the specific
variables under discussion in this review: accountability(including participation and institutional
pluralism); openness and transparency; and the rule of law. In keeping with the intellectual and
professionalinterestsof many who work and practice in this area, researchtends to focus more on the
relationshipof regime type to growth, or stability to growth. In addition, political questions by their
nature tend to promote value-basedassumptions, i.e., that institutionalpluralism, participation,and the
rule of law are "good" in and of themselves,leaving the scope of inquiryfocused on the meansto these
ends. Organizationssuch as the World Bank, mandatedto promote economicdevelopmentas an end,
have bypassedmost of these issues in sponsoredresearch programs.
Nevertheless,this reviewdoes providesome support for a positivelinkbetweenthesegovernance
variables and economicperformance. Some correlationsappear stronger than others. Arbitrary law
enforcement and failure to uphwi the constitution -- the law -- lead to unpredictability, instability, and
a poor climate for growth. Thus, well-specifiedproperty rights and enforceablecontracts--therule of
law -- are clearly economicdevelopmentissuesand should be recognizedas such, with the caution that
the contentof property rights, and their distribution,criticallyaffect how broad-baseddevelopmentwill
be. The failure of accountability,combinedwith opaqueand highlydiscretionaryregulatoryprocedures,
can provide greater opportunitiesfor economiccorruptionand waste. Suppressionof political openings
may ultimately affect stability, disrupting production and commerce, while the failure to encourage
grassroots participation at the micro-level shows up in projects that are often comparativelyless
sustainable.
This review also points out that research attempting to correlate economic performance to
governance variables must necessarily use a relatively short time frame.
The recent economic
performanceof Chile, Taiwan, and South Korea took place with very low levels of political openness,
39
and their market economicsystemsseemed to work in the absenceof pluralisticpolitical systems. In
the past few years, however, all three have made significanttransitionstoward more open, competitive,
and participatorypolitical systems, suggestingthat sustaining as opposed to establishingmarket based
growth may require the developmentof political representation.>2With the renewed interest in open
political systemsas a corrollary to open economicsystems, we can expect a new generationof research
on these variables.
This review providesother importantlessonsfor those interestedin the technical aspectsof better
governance. Improvinggovernance is a complexand long-termendeavor, but as Zafar Ahmed (1990)
argues, "One cannot make a tree grow faster by pulling it from outside; it has to grow from its roots"
(p. 1). It takes generationsand perhaps centuriesto build effectivebureaucracies;the issueis not simply
skills but volition -- and much of that volition comes from effectivesocial pressure on the state. This
needs to be understood by donors who may wish to make "governance"the temporary trend of the
1990s. As Callaghy (1989) argues, "In much of the current policy work on the developmentof state
capacity in Third World countries . . . there is a strong voluntarist or architectonic streak that argues
that state capacity can be 'built' as part of a policy imperative. The historical record belies this
assumption" (p. 117).
The question for donors should be:
how can the process by which
accountabilityand the rule of law become the norm in a society best be nurtured?
Institutionaleconomistsexaminethe very long-term conditionsunder which the institutionsthat
underpinboth market and state actians are formed. They also can help explain why different policies,
such as those suggestedin structural reformpackages,lead to such different and seeminglyunpredictable
results: although outwardlythe new rules may seem the same in two countries, the institutionsthat
underpineconomicresponses- local enforcement,behavioralnorms, organizationalforms and interests,
Cheng, "Democratizingthe Quasi-LeninistRegime in Taiwan," MVorId
"See, for example,TLAI-jen
GuillermoO'Donnell and Philippe C. Schmitter, Transitionsftom
and
Politi 41, no. 4, July 1989;
AuthoritarianRule: Tenative ConclusionsaboutUncertainDemocracies(Baltimore,MD: Johns Hopkins
UniversityPress, 1988).
40
and property rights -- all differ, and changesin institutions,particularly in informal institutions,occur
very slowly.
Politicalscientistsfocus on the reiationshipbetweenstate and society in understandingwhy states
act the way they do. Many concludethat strengtheningthe private sector, includingvoluntaryagencies,
entrepreneursand private associations,will over time prove more effectivethan short-term reforms and
foreign aid in forcingaccountabilityfrom governments. The developmentmanagementliteraturebrings
together perspectivesfrom organizationaltheory, from political science and economics, and from other
social sciencesto offer practical assistancein buildinga domestic consensusfor sustainablereform, for
improving performance, for constructing effective vehicles for participation, and for instituting
mechanisms of budgetary review, information circulation, and other practical ways to enhance
accountability,openness, and predictability.
This review provides the elements of a framework',or viewing relations between politics and
economicsover the long term. It indicatesthat models and plans will work differentlyin each country,
dependingon its institutionalbase. More research needs to be done on country-specificinstitutional
evolution - in particular, on the structure and pattern of enforcementof property rights - in order to
understandmore precisely the likely results of policy and price changes.
This reviewalso indicatesthat effectivepropertyrights and accountabilitywill result from a longterm dialogue between governments and their private sector, rather than between governments and
donors. The historical discussion in particularunderlined the potential for danger in a preponderant
donor role. In Europe, public accountabilitydeveloped through a state-society struggle over the
collectionof tax revenuesand their use. In many of the world's least developedcountriestax revenues
are disproportionatelylow as a percentageof GNP, even given low levels of per capita GNP. Foreign
aid in many of these countries makes up a towering proportionof national revenues. This naturally
tends to shift muchof the dialogueover accountabilityto one betweenstates and donors. In that sense,
41
the very process of assistancecan inadvertentlyundercutthe historical process of rulers first becoming
accountableto elites for the use of their tax revenues.
Donors need to be aware of such potential effects of large sums of external assistance. They
must make concertedefforts to foster internaldebate, dialogue, and negotiationon decisionsto allocate
foreign assistance-- efforts that push the new concern for "local ownership"toward a deep commitment
to work together to developeconomicpolicies, even if such a process is slow and involvesfrustrations.
This shouldencouragethe developmentof accountabilityas a matter primarilybetweengovernmentsand
citizens, and not only one between governmentsand donors. For in the final analysis, the quality of
governanceis a reflection of the quality of the relations between a state and its society, and only over
time can societiespush their governmentsto deliver the accountability,opennessand predictabilitythat
sustainabledevelopmentrequires.
42
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