Race to the Next Income Frontier
Chapter

Chapter 14. Governance, Institutions, and Emergence

Author(s):
Ali Mansoor, Salifou Issoufou, and Daouda Sembene
Published Date:
April 2018
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Author(s)
Daouda Sembene

Introduction

“Economic emergence” has become a buzzword in low-income countries. An increasing number of low-income countries are aiming to achieve emergence within varying time frames. While the precise meaning of emergence has remained unclear, and understandings vary from country to country, it is commonly understood to require, at a minimum, sustained strong growth, improved human development indicators, and ultimately graduation to upper-middle-income status.

Existing literature shows no major controversy about ways of improving economic performance. However, the mechanisms for sustaining strong performance are far from obvious. The economic literature has long reached a consensus that strong institutions matter for economic performance, sound policymaking, and good governance. Since Douglas North’s influential paper was published in 1990, significant theoretical and empirical evidence has demonstrated how institutions that secure property rights improve their economic performance by reducing transaction and production costs.

Similarly, the robustness of the effect of institutions on productivity and growth has been scrutinized before receiving wide empirical support. Findings by Acemoglu, Aghion, and Zilibotti (2006) suggest that differences from one country to another in income per capita and productivity are largely explained by the countries’ institutional choices. A corollary of this is that establishing the wrong kind of institutions could undermine governance frameworks in countries where those institutions create rent-seeking opportunities.1

Determining how to sustain strong economic performance to pave the road toward emergence is a research challenge that still begs for additional conclusive evidence. Presumably, sustaining long-term economic performance requires resolving macroeconomic imbalances and removing structural bottlenecks through sound policymaking and timely reform implementation. In turn, good policymaking and a successful reform drive call for strong and reliable institutions and governance mechanisms. It remains unclear, however, what specific aspects of governance and what institutional features could help secure desirable economic outcomes.

To address these issues, this chapter reviews some aspects of governance and institutional characteristics displayed by middle-income countries and selected emerging market economies during the recent prolonged era of strong growth. Looking for hints as to how countries in sub-Saharan Africa could successfully embark on the road to emergence, it then examines how these governance and institutional features compare with those prevailing in Senegal.

The chapter does not assume the existence of a single, universal form of good governance that is indispensable for emergence. Good governance reflects choices made by society in any given sociopolitical setting. Different societies may have different opinions and tolerance levels for the way authority should be exercised. Consequently, it would be misguided to focus on “good governance and institutions” in developing countries by seeking to replicate best practices already adopted by rich countries. Similarly, it would probably be a mistake to assume that a single institutional recipe, one that discounts country-specific circumstances, is conducive to emergence.

While there are limitations to the lessons that can be learned from current emerging markets’ governance and institutional frameworks, the chapter builds on the premise that there are several features of governance that are deemed desirable on the basis of common social norms and values. Replicating these features could help—but would not guarantee—countries in achieving economic emergence.

How Better Governance and Institutional Development Could Support Emergence

Institutions can be seen as useful devices for exercising public governance. As described by Furubotn and Richter (2005), well-functioning institutions can reduce uncertainty and lower coordination costs by simplifying decision making and by promoting cooperation among stakeholders. In the economic literature, institutions define the rules of the game, because they provide the incentive structures in human exchange in political, social, and economic arenas. For the game to be viable, the rules need to be regarded by the players as fair. For fairness to be attained, institutions must be transparent and equitable, particularly those that provide checks and balances. Indeed, the potential for institutions to support effective public governance may be limited in countries with impotent legislative branches in the face of dominant executive branches. In this latter type of situation, a deficit of trust is likely to arise among the electorate, which could undermine the ability of elected officials to reap the benefits of sound institutions.

The “applicability-to-all” feature underscores the importance of such institutions as the rule of law. The establishment of the rule of law has the potential to build a sense of inclusion and accountability for government officials, particularly when they are elected through a transparent electoral process. In a nutshell, good governance should be exercised on the basis of sound institutions (rules) if it is to stand a chance of gaining the support of various segments of the population and help achieve emergence objectives. Strong institutions underpin positive macroeconomic outcomes. A paper by Satyanath and Subramanian (2007) provides strong evidence that validates Hirschman’s (1985) claim that the roots of inflation and related nominal pathologies lie deep in a country’s political structure and in institutions governing social and political conflict.

Other desirable aspects of governance relate to the participation of civil society and nongovernmental actors in public governance and the absence of political violence. The idea that political stability is a necessary condition for economic emergence is broadly acknowledged. However, the effectiveness of inclusive governance remains an open question.

Key to the exercise of proemergence governance is an effective and honest administration capable of delivering the government’s vision by implementing coherent public policies and sound regulation. A plan cannot be coherent, coordinated, and effectively completed if public administration lacks a minimum of discipline, organization, and implementation capacity. For instance, an emergence strategy can hardly be developed and implemented successfully by a dysfunctional government suffering from broken communications between line and sectoral ministries.

According to North and Thomas (1973), the quality of institutions can explain the differences in observed levels of growth. Their work has been built upon by Acemoglu and Robinson (2012), who explain that economic institutions are integral to the structure of markets. Their work, which offers a framework for considering why economic institutions vary across countries, finds these four patterns:

  • Situations in which there is a form of separation of powers are more likely to engender an environment protecting property rights.

  • Economic institutions protecting the rights of a broad cross-section of the public will arise when a broad group contains the political power.

  • Good economic institutions are likely to arise when only limited rents can be extracted.

  • Good institutions are likely to be adopted only when they do not threaten the power of incumbents.

Governance and Institutions to Sustain Strong Policymaking and Reforms: The Case of Sub-Saharan Africa

Against the backdrop of unsound policymaking and weak reform in the run-up to the Heavily Indebted Poor Countries (HIPC) Initiative, sub-Saharan Africa’s recent improved policy performance seems to be cause for celebration. Coupled with recent strong growth performance, these policy achievements have led many observers to celebrate despite risking the accusation of “premature exuberance.” However, the marked improvement in policy implementation must not be taken for granted so long as more decisive steps are not being taken to institutionalize supporting frameworks.

Pursuing Sound Policymaking

In recent publications, the IMF identified improved macroeconomic management alongside favorable commodity prices and strong public investment among the key factors that underpinned sub-Saharan Africa’s robust growth performance through the Great Recession (IMF 2013a, 2013b). Until recently, sub-Saharan Africa averaged 5 percent real GDP growth for more than a decade. This strong performance was expected to continue, until this outlook was overshadowed by uncertainty emanating from a global downturn (IMF 2015).

Determining how to sustain strong growth in sub-Saharan Africa has been the object of much recent focus. However, the question of whether and how the region can sustain good policy performance has rarely appeared in policy debates. This may be due to many observers’ claims that good policy performance in sub-Saharan African countries is here to stay. This strong performance has followed a well-established trend that in some cases can be traced back to the 1990s. Calls for good governance from African people and the development community are now more pressing than ever, which presumably makes potential setbacks even less likely.

Nonetheless, one cannot help but notice some risks of policy reversal, especially given the context in which the recent achievements were made. For instance, large public investment programs were supported, to some extent, by high commodity prices in resource-rich countries, renewed investor interest in frontier markets, and the emergence of new creditors. Under these circumstances, a sharp deterioration in external conditions, including turnaround in investor sentiment and unfavorable price developments in commodity markets, could stir concerns over the sustainability of sound policymaking in the region.

Policymakers in sub-Saharan Africa deserve considerable credit for their countries’ policy achievement: the sound policies and reforms that were implemented in the region provided firm support to strong growth. The previously mentioned IMF publication on the region’s outlook suggests that six non-resource-rich sub-Saharan African countries—Burkina Faso, Ethiopia, Mozambique, Rwanda, Tanzania, and Uganda—experienced the highest growth rates during the period 1995–2000, partly reflecting improved macroeconomic policymaking.

In this light, it bodes well for sub-Saharan Africa’s future if, along with sound structural reforms, institutional frameworks that can facilitate similar macroeconomic policy achievements are strengthened and replicated across the region, taking into account country-specific circumstances.

Fiscal Policy

On the fiscal front, it has been argued that greater use of rules-based fiscal policy could prove useful. This argument rests on the recent evidence that many African countries with successful fiscal policy have demonstrated an ability to exercise fiscal restraint and implement flexible countercyclical policies. Setting and enforcing credible fiscal rules could help countries in the region increase their chances for securing similar outcomes, notably by embedding a medium-term perspective into their fiscal policy frameworks. The critical importance of sound institutions for fiscal discipline is widely documented in the literature, and clearly the increased recourse to fiscal rules is a testimony to their perceived usefulness. According to a recent IMF study, the number of countries around the world with national and/or supranational fiscal rules skyrocketed from 7 in 1990 to 80 in 2009; out of those 80, 26 were low-income countries (IMF 2009). That said, the effectiveness of fiscal rules ultimately hinges on the efficient functioning of strong institutions. The adoption of rules would do little to improve fiscal discipline and economic performance if those rules were not fully enforced, in particular where public financial management frameworks are concerned. While many sub-Saharan African countries have adopted national and/or supranational rules, a few of them have credible enforcement mechanisms in place.

The tax exemptions that are typical of a lack of governance and institutions facilitate tax dodges and evasion, create microeconomic distortions, provide fertile ground for corruption, and establish a vicious circle wherein the tax base is eroded, which ultimately leads decision makers to increase taxes so as to avoid fiscal deficits. This leads to the creation of volatile fiscal positions. Over time, efforts to introduce fiscal rules as part of broader and stronger legal frameworks such as fiscal responsibility laws could generate large payoffs for countries in the region.

Monetary Policy

With regard to monetary policy, ample scope exists for countries in the region to consider policy frameworks that helped a number of their neighbors secure macroeconomic stabilization and support growth performance. In this endeavor, useful lessons can be drawn from the experience of some Eastern African countries that embarked on a successful inflation reduction process in the past few years after introducing key institutional changes in their monetary policy frameworks. Their focus has been on liberalizing monetary policy, particularly by adopting indirect market-based regulatory instruments. Most notably, a seemingly winning strategy adopted by some of these countries—including Kenya, Tanzania, and Uganda—consisted in moving away from monetary targeting. Other options include sharing monetary and fiscal policy decisions and training and sensitizing citizens to the effects of public policy measures.

Based on the experience of Uganda, some frontier markets could find it useful to explore alternative monetary policy frameworks such as inflation targeting. The adoption of an inflation targeting “lite” framework in Uganda helped it reduce core inflation from more than 30 percent in October 2011 to less than 5 percent one year later. In other countries experiencing fiscal dominance with more limited implementation capacity, priority measures should consist of building capacities and making further inroads toward more independent monetary policy. In addition, a number of other structural distortions also continue to undermine monetary transmission in many African countries, including inactive interbank markets, shallow financial markets, and weak financial integration. Remedying these shortcomings is a prerequisite for increasing the effectiveness of monetary policy.

Finally, the importance of macroeconomic policy coordination and convergence among African countries cannot be overstated. In this connection, existing regional economic communities, such as the Economic Community of West African States (ECOWAS), the Southern African Development Community (SADC), and the Common Market for Eastern and Southern Africa (COMESA), could play useful roles in facilitating sound policymaking by instituting necessary institutional reforms and promoting best practices among their respective member countries. However, to fulfill such expectations these regional bodies would need to strengthen their own capacity to shape and enforce sound policies.

Strengthening the Reform Drive in Sub-Saharan Africa

To understand how best to strengthen sub-Saharan African governments’ ability to carry out efficient and effective reforms, first it is important to identify the factors that are preventing reform and explore ways to overcome them. These include (but are not limited to) capacity constraints and political economy considerations.

Capacity constraints are bottlenecks that hinder timely implementation of reforms, and they are often conveniently cited in sub-Saharan Africa as an excuse for not advancing a specific reform agenda. These constraints impede reform by undermining sound policy formulation, implementation, and coordination. By causing weakness in monitoring frameworks, they can also aggravate delays in implementing reform agendas.

Political economy considerations relate to rent-seeking activities that impede reform implementation in sub-Saharan Africa. Indeed, all countries have influential elites who can successfully exert pressure on national authorities to advance self-serving agendas or stall others endangering their interests. In the region, factors slowing down reforms include the lack of political incentives for senior government officials to reform, along with political pressures from special-interest groups, including unions and student associations, many of which are politicized. When such groups employ either well-organized political pressure or threats to public order, they have the potential to reverse specific reforms that they perceive to be working against their interests. The relative power of dominant interest groups varies from one country to another. The nature of countries’ political institutions, resource endowments, and national histories determines whether their most influential elites are politicians, religious leaders, business leaders, or military officers, or some combination of these.

The literature on the effects of competing interest groups finds that clientelism can undermine the quality of policymaking and block the conditions for economic transformation and accompanying improvement in social conditions and governance. The Africa Power and Politics Programme and others (2012) argue that because of the prevalence of competitive clientelism, sub-Saharan African countries with democratic politics make more moderate progress toward economic transformation than other countries in the region that have centralized rent management regimes, even though the latter are thought to be less respectful of civil and political rights.

Although clientelism may be key to understanding reform incentives, it is unclear if the argument that clientelism blocks all attempts at reform can withstand further scrutiny. Indeed, there is a body of evidence that suggests improvement in the quality of democratic institutions has a deterrent effect on clientelism and other forms of bad governance. Using a variant of theories on the political business cycle, Chauvet and Collier (2009) examine whether chances of reform are affected by electoral competition. They find that when conducted legitimately, elections exert a positive impact on economic policies and governance in developing countries, because fair elections create the conditions for greater accountability. Therefore, some degree of competition, if incorporated into fair elections, can prove beneficial.

The evidence presented suggests that the effects of democracy can hardly be fully captured without taking into account the transparency of electoral processes. Democratic elections can be effective in shaping sound policies only if they represent a credible threat to the reelection prospects of incumbents, and for that to happen, they need to be reflective of voters’ choices, not of electoral fraud.

How Governance in Sub-Saharan Countries Compares with That in Other Countries and Regions

This section compares governance indicators of sub-Saharan African countries with countries belonging to corresponding income groups and from other regions. It builds on the World Bank’s Worldwide Governance Indicators, which cover six key dimensions: regulatory quality, rule of law, control of corruption, voice and accountability, political stability and absence of violence/terrorism, and government effectiveness.2

Figures 14.1 and 14.2 compare the World Governance Indicators ratings of sub-Saharan African countries with those of low- and middle-income countries over the 2004–14 period. The figures show the percentile rank of the selected countries on each of the six governance indicators. This represents the percentage of countries worldwide that rate below these countries, so higher values indicate better governance ratings. The black line illustrates the statistically likely range of the governance indicator.3

Figure 14.1.Worldwide Governance Indicators for Sub-Saharan Africa and Low-Income Countries, 2004, 2009, and 2014

Source: World Bank, Worldwide Governance Indicators, 2015 update.

Note: Percentile rank indicates the percentage of countries worldwide that rate below the selected country or region. Higher values indicate better governance ratings.

Figure 14.2.Worldwide Governance Indicators for Sub-Saharan Africa and Middle-Income Countries, 2004, 2009, and 2014

Source: World Bank, Worldwide Governance Indicators, 2015 update.

Note: Percentile rank indicates the percentage of countries worldwide that rate below the selected country or region. Higher values indicate better governance ratings.

For all six World Governance Indicators measures, Figure 14.1 shows that sub-Saharan African countries’ ratings compare favorably with the low-income countries’ ratings during the period. At the same time, sub-Saharan African countries appear to rate below at least 70 percent of countries worldwide on most governance indicators, while this figure is about 80 percent for low-income countries.

Sub-Saharan African countries seem to have markedly deteriorated over the 2004–14 period on two indicators: government effectiveness and political stability and absence of violence/terrorism. Encouragingly, one area of modest improvement during the same decade is the rule of law. On indicators related to regulatory quality and to voice and accountability and the control of corruption, sub-Saharan African countries’ ranking remained stable during the decade, showing no signs of deterioration.

Overall, the rankings of sub-Saharan African countries and low-income countries appear to have followed similar trends in regard to five of the six governance indicators. Only on voice and accountability have they followed different trends, with a slight improvement occurring among the low-income countries but no change occurring in sub-Saharan Africa.

Comparisons with the rankings of upper- and lower-middle-income countries are shown in Figure 14.2. For all six World Governance Indicators measures, upper-middle-income countries systematically rated much better than sub-Saharan African countries during the period. Sub-Saharan African rankings are closer to, but still remain below, those of lower-middle-income countries.

While lower-middle-income countries significantly improved their rankings on most indicators—control of corruption, regulatory quality, voice and accountability, and government effectiveness—the rankings for upper-middle-income countries remained broadly unchanged. To check whether this trend signals stronger performance of sub-Saharan African countries belonging to the lower-middle-income-country group, Figure 14.3 reports the evolution of sub-Saharan African countries’ governance ratings. These span the period 2004–14 and range from approximatively −2.5 to 2.5, with higher values corresponding to better outcomes. The figure confirms that lower-middle-income countries in sub-Saharan Africa have indeed recorded better ratings on all aspects of governance other than those related to security and government effectiveness.4 By contrast, sub-Saharan African low-income countries have registered mixed performance by enjoying slight improvements in aspects of governance related to regulatory quality, voice and accountability, and the rule of law, while suffering from deteriorating ratings in regard to security, corruption, and government effectiveness.

Figure 14.3.Sub-Saharan Africa: Evolution of Worldwide Governance Indicators by Income Grouping, 2004, 2009, and 2014

Source: World Bank, Worldwide Governance Indicators, 2015 update.

The key lesson emanating from Figure 14.3 is that the level of per capita income is positively correlated with the quality of governance in sub-Saharan Africa. The best performers in terms of governance ratings are upper-middle-income countries, followed by lower-middle-income countries, which, in turn, outperform low-income countries. This reinforces the importance of country authorities’ securing good governance practices in order to maximize chances for achieving emergence objectives in a timely fashion.

Plotting the ratings by region, Figure 14.4 shows that sub-Saharan Africa has rated more poorly than other regions on all governance indicators except voice and accountability and political stability and absence of violence/terrorism. Concerning these last two indicators, Middle East and North African countries and South Asian countries, respectively, lagged behind. Under these circumstances, the fact that the proportion of countries in sub-Saharan Africa that have achieved economic emergence is much smaller than the proportion in other regions is not surprising. Nor is it surprising that human development indicators are far worse in sub-Saharan African countries than anywhere else around the world. Their dreams of emergence will not be fulfilled unless these countries implement the conditions for a supportive governance framework.

Figure 14.4.Evolution of Worldwide Governance Indicators by Region, 2004, 2009, and 2014

Source: World Bank, Worldwide Governance Indicators, 2015 update.

Figure 14.5 shows that Senegal, on average, has rated better than sub-Saharan African countries on all selected aspects of governance over the 2004–14 period. In particular, the country appears to enjoy a strong lead in terms of control of corruption as well as voice and accountability. However, Senegal’s ratings have not improved much since 2004 for either of the latter two indicators nor for those related to regulatory quality and the rule of law. In fact, on all indicators, Senegal’s ratings significantly worsened around 2009. Although Senegal quickly caught up for many indicators afterwards, it rated relatively worse in 2014 than it did a decade before in terms of government effectiveness and political stability and absence of violence/terrorism.

Overall, Senegal underperformed upper-middle-income countries in these two aspects of governance and to a lesser extent in the area of regulatory quality. Achieving emergence will thus require that the country make significant progress in all aspects of governance, particularly on these fronts.

Figure 14.5.Evolution of Worldwide Governance Indicators, Senegal, Sub-Saharan Africa, and Upper-Middle-Income Countries, 2004, 2009, and 2014

Source: World Bank, Worldwide Governance Indicators, 2015 update.

Note: Percentile rank indicates the percentage of countries worldwide that rate below the selected country or region. Higher values indicate better governance ratings. The black line illustrates the statistically likely range for the governance indicator.

Figure 14.6 suggests that Senegal still has a long way to go to align its governance practices with standards of good governance in advanced economies, as proxied by the World Bank’s World Governance Indicators. Indeed, the country lags significantly behind member countries of the Organisation for Economic Co-operation and Development (OECD) on all selected governance indicators. In light of the strong correlation between the quality of governance and economic outcomes, strengthening the existing governance framework will be critical for the Senegalese government to achieve and sustain the high levels of economic growth envisaged under its Plan Sénégal Émergent.

Figure 14.6.Evolution of Worldwide Governance Indicators, Senegal versus High-Income OECD Countries, 2004, 2009, and 2014

Source: World Bank, Worldwide Governance Indicators, 2015 update.

Note: Percentile rank indicates the percentage of countries worldwide that rate below the selected country or region. Higher values indicate better governance ratings. The black line illustrates the statistically likely range for the governance indicator. OECD = Organisation for Economic Co-operation and Development.

Developing a Proemergence Governance Framework: Key Lessons for Senegal

Key lessons can be drawn from the findings presented in the chapter up to this point. First, there is an urgent need for the Senegalese government to make progress in areas in which it lags behind its middle-income-country peers. Most notably, this will require Senegal to strengthen its capacity to design and implement sound policies and regulations, with a view to promoting the private sector and entrepreneur-led economic growth. While the quality of policy formulation is usually strong, much remains to be done to improve the quality of implementation.

BOX 14.1Reform Implementation: International Experience

Leigh and Mansoor (2016) discuss the East Asian experience. Among the noteworthy points they raise is that Korean President Park Geun-hye launched the “March from Low Income to Advanced Economy” by firing 10 percent of the top civil servants and sending the rest to retraining courses to focus on management and commitment. In all the countries in the region, planning and finance have been tightly integrated; in Singapore the planning function has always been in the Ministry of Finance. In addition, taking public commitments and asking agencies to report on these to the public on a regular basis has been helpful for maintaining focus.

A clear and simple goal can also help focus coordination across government. In Korea, it was the target of exporting “a billion dollars’ worth” of goods and services. More recently, South Africa adapted the Malaysian experience with Operation Phakiza.1 In Mauritius, the Program Based Budget was introduced to focus the attention of line ministries on the link between financial resources and the quality of public services. To encourage long-term thinking in setting the Program Based Budget targets, ministries were encouraged to think about the level of service delivery they would like to achieve in a decade and the human, material, and financial resources required to reach these. In turn, this would inform budget submissions and allow arbitration during budget formulation that could consider trade-offs in terms of outcomes rather than inputs.

Senegal would be well-advised to explore ways to adapt these experiences to its specific circumstances. This is an imperative given the country’s relatively low ratings with respect to government effectiveness, which suggest that ample scope exists for improving “perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.” Progress on this front will require credible policies and accountability of government officials, increased transparency, and improved predictability of decision making. Clearly, untimely decision making and inaction often generate considerable costs that may greatly exceed those associated with the reforms at stake.

The author of this box is Ali Mansoor.

1See http://www.operationphakisa.gov.za/Pages/Home.aspx.

Senegal could also further strengthen its governance by learning from other peers besides its middle-income country peers, including OECD members. Indeed, many countries have adhered to internationally recognized standards of public governance that are evidenced to correlate positively with economic performance. Senegal could benefit from complying with such standards in its quest for emergence.

Reform of governance is demonstrably difficult, but the experiences of countries that have moved up the income ladder share some political economy features that may prove instructive. Strong and competent civil services make a state harder to capture (Cyprus, Korea, Taiwan Province of China). A clear road map for reforms and economic policies is also critical. A social contract between governments and those they govern needs to be nurtured and, ultimately, widely accepted. All of these elements should be considered necessary but not sufficient to transition to high-income status.

Finally, Senegal still faces significant policy challenges in ensuring sustained improvements in economic governance needed to remain on its path toward emergence. These include its continued efforts to combat corruption, safeguarding the quality of public expenditure, promoting fiscal stability and predictability, and guaranteeing emphasis on the quality of and creating official statistics for timely assessments of the social and economic climate.

It is noteworthy that improving Senegal’s governance framework will require building coalitions and synergies between the authorities and all stakeholders, including those with potentially opposing interests, to advance needed reforms. Such an undertaking is especially critical at this time, when perceptions of Senegal continue to include fears of political instability or politically motivated violence despite the country’s established tradition of peaceful and democratic elections.

Conclusion

This chapter reviews the evolution of several aspects of governance in low-income countries and middle-income countries. The empirical evidence suggests that upper-middle-income countries have higher governance ratings than lower-middle-income countries, which, in turn, outperform low-income countries. Sub-Saharan African countries have broadly performed better than low-income countries, and in selected aspects of governance, they have continued to lag behind middle-income countries. Similarly, sub-Saharan Africa rates more poorly than other regions on most governance indicators.

The analysis also supports the theory that per capita income and human development correlate positively with the quality of governance, particularly in sub-Saharan Africa. This underscores the importance for country authorities of continuing efforts to improve, with a view to promoting economic and social development and ultimately achieving emergence objectives.

The options available to Senegal for improving the quality of governance discussed in the chapter include the following:

  • Strengthen the reform drive. At the highest levels of government, promote teams that are encouraging innovative thinking, best-practice working styles, self-evaluation, and human capital development. Conduct independent reviews of governance practice to provide assessments of the quality of governance, and focus attention on poorly performing areas.

  • Train government employees. Ensure that all public sector employees are familiar with the concept of governance and encourage the creation of working groups to monitor and improve governance at the local level.

  • Garner political support for reform. While many policymakers in sub-Saharan Africa have endeavored in recent decades to strengthen their countries’ governance frameworks, either by choice or under pressure from domestic and external stakeholders, tangible outcomes are unlikely to materialize unless the required political support and ownership is secured. While a number of initiatives have been developed to secure improvements in governance frameworks, notably by the African Union and the New Partnership for Africa’s Development, political buy-in will need to be unambiguously demonstrated to maximize the likelihood of successful implementation.

  • Redesign reform agendas. Reform agendas should be geared toward securing a number of desirable features of a proemergence governance and institutional framework, including the ability to (1) improve the credibility of policies and accountability of government officials, (2) ensure transparency through compliance with internationally recognized standards, and (3) enhance the predictability of decision making.

  • Review mechanisms for popular participation. Clientelism can stifle good governance. Therefore, institutions should be adequately scrutinized to determine the impact of informal governance systems, to ensure that the formal governance systems are promoted, and to ensure that their features are made readily observable through the obvious functioning of the rule of law.

  • Improve performance on the Worldwide Governance Indicators. Aside from the benefits associated with good governance, demonstrated commitment to reducing corruption, violence, and government ineffectiveness, and improving the quality of institutions are likely to be widely supported and contribute to efforts to garner political support for reform.

Annex 14.1 About the Worldwide Governance Indicators

The Worldwide Governance Indicators (available at http://www.govindicators.org) are a set of six aggregate governance indicators for more than 200 countries and territories over the period 1996–2014.

The indicators are a research data set summarizing the views on the quality of governance provided by a large number of enterprises and by citizen and expert survey respondents in advanced economies and developing countries. These data are gathered from a number of survey institutes, think tanks, nongovernmental organizations, international organizations, and private sector firms.

The World Governance Indicators are composite governance indicators based on more than 30 underlying data sources. They report on the following six broad dimensions of governance for 215 countries over the period 1996–2014:

  • Voice and accountability captures perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.

  • Political stability and absence of violence/terrorism measures perceptions of the likelihood of political instability and/or politically motivated violence, including terrorism.

  • Government effectiveness captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.

  • Regulatory quality captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

  • Rule of law captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.

  • Control of corruption captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests.

The indicators are reported both in their standard normal units, ranging from −2.5 to 2.5, and in percentile rank terms from 0 to 100, with higher values corresponding to better outcomes.

Annex 14.2 Country Lists

In Figure 14.5, the selected low-income countries are Benin, Burkina Faso, Burundi, the Central African Republic, Chad, Comoros, the Democratic Republic of the Congo, Eritrea, Ethiopia, The Gambia, Guinea, Guinea-Bissau, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, Sierra Leone, Somalia, Tanzania, Togo, Uganda, and Zimbabwe.

The lower-middle-income countries are Cabo Verde, Cameroon, Republic of Congo, Côte d’Ivoire, Ghana, Kenya, Lesotho, Mauritania, Nigeria, São Tomé and Príncipe, Senegal, Sudan, Swaziland, and Zambia.

The upper-middle-income countries are Angola, Botswana, Gabon, Mauritius, Namibia, and South Africa.

Annex 14.3 Macro-Critical, Focused, and Participatory Structural Reforms for an Emerging Market Economy

Governance and Institutions Required for Successful Economic Emergence

Generalities

The countries that have experienced emergence, especially the last of the BRICS (Brazil, Russia, India, China, South Africa), share one major feature, namely, their ability to let their models evolve by adopting governance principles that have enabled them to defuse potential conflict.5 In fact, they have managed to have peace prevail, thereby boosting both output and their brand image. This approach embodies the more values-oriented version of emergence, which coexists alongside the methods favored by rationalists.

All of these countries have promoted investment, seeking both to hold on to domestic investments (and prevent local entrepreneurs from offshoring their savings or balking at establishing factories at home) and to capture a sizable share of foreign direct investment.

By shrewdly opening up to foreign markets, these countries have succeeded in accessing new technology and new production techniques, thereby strengthening the capacity of their workers and entrepreneurs. In addition to the establishment of economic programs backed by diverse schools of thought, governance and the quality of institutions have played a key role in the process of expediting growth accompanied by reforms that have revamped the macroeconomic framework.

It seems, according to Acemoglu, Aghion, and Zilibotti (2006), that the impressive performances of Asian countries in the 1950s and the 1970s was a result of a policy they opted for that should likewise be pursued by all countries lagging behind in terms of technological breakthroughs. Such countries should pay more heed to institutions capable of facilitating capital accumulation and imitation. Acemoglu, Aghion, and Zilibotti’s research points out that differences in income per capita and productivity from one country to another are largely explained by the countries’ choice of appropriate institutions. As they see it, the quality of institutions, apart from its inherent virtues, is such that it will promote technical progress. More specifically, education and research are growth factors in all countries, irrespective of their level of technological development.

The Challenges and Choices Involved in Good Governance for Economic Emergence

On its path toward economic emergence, and despite persistent hurdles, the Senegalese government has in the past few years striven to improve economic policies. Indeed, the country’s new leaders appear to have grasped the pressing need to focus on the quality of institutions, which all too often has been the missing link in public policies. In that context, which is in line with provisions of the West African Economic and Monetary Union (WAEMU), the African Union, and the Bretton Woods institutions, it is worth underscoring the notable progress made with expediting growth, which has enabled the country to insert itself into the global economy. That option seems particularly apt given that a series of assessments have suggested the need for the country to migrate toward quality and abandon the numerous misadventures that have long constituted hurdles to economic emergence.

It seems useful to lay out the stakes associated with governance backed by credible institutions in order to arrive at an accurate assessment of the scope of those policies for the Plan Sénégal Émergent.

First, the quest for institutional stability and national cohesion is paramount if the political elites’ societal projects are to come to fruition. The need to mobilize citizens in support of an ideal requires transparency on the part of the authorities, a participatory approach, and sound practices. Numerous international and civil society organizations extol the virtues of dialogue, consensus building, and conflict prevention in the quest for national cohesion, which is a prerequisite for sustainable economic development. Since the early 1990s, following advances in telecommunications, a democratic model has made headway the world over and given rise to fresh aspirations in Africa, best understood as a demand by citizens to be more involved in the management of public affairs and to be governed in accordance with the rules and standards in force in modern democracies. A survey conducted on five continents suggested that citizens, as the real players in development, are much more disposed to “roll up their sleeves” when they are well informed and involved in governments’ decisions. Conversely, when not well informed and well involved, they become indifferent and may even obstruct social progress.

Second, at the financial level, the so-called third-generation crisis models point to financial fragility as the core explanation for the turbulence experienced by emerging market economies in the 1990s. They see transparent reporting and surveillance of banks and financial markets as key factors for preventing crises. More broadly, they suggest that good governance is essential to ensure stable financing for the economies of developing countries. Nonobservance of corporate governance principles contributed markedly to exacerbation of the crisis in Asia in 1997. The general public pays a heavy price for a fragile financial system caused by lack of governance, which also prevents continuity in the allocation of resources.

Third, by their very nature (involving participation, transparency, accountability, effectiveness, efficiency, and the primacy of the rule of law and justice), good governance and economic development are intertwined. Institutions have a strong and significant impact on the growth of per capita GDP, perhaps partly because they can boost the viability of actions undertaken by the authorities (Edison 2003). Good governance maximizes existing resources and facilitates growth. According to the United Nations Development Programme (UNDP), without transparent and accountable institutions, and without equity, development would not be sustainable.6 Deficient economic governance, opaque fiscal procedures, corruption, and the quest for rent are all detrimental to investment and therefore detract from efficiency and growth. Likewise, a lack of governance reflected in arbitrary decisions and irresponsibility on the part of government authorities has a dampening effect on economic outcomes. Good governance is a catalyst of well-being, a driving principle capable of reconciling economic effectiveness and equity, the state, and citizens and of establishing democracy as the nucleus for the participation of individuals. In short, common sense suggests that economic agents pursuing good governance can perform better than others.

Fourth, as regards promoting investment, lack of governance, because it encourages corruption, acts like a tax on enterprises, raises costs, and reduces the incentive to invest, which leads to a decline in gross fixed capital formation. It creates extra expenses related to transaction costs and illegal exchanges. Finally, predictability presupposes orderly continuity in government institutions and the political framework, which only good governance can guarantee. The tax exemptions that are typical of a lack of governance facilitate tax dodges and evasion, create microeconomic distortions, provide fertile ground for corruption, and establish a vicious circle whereby the tax base is eroded, which always ultimately leads decision makers to increase taxes so as to avoid fiscal deficits. In their 1998 study of the impact of institutional uncertainty on investment in 60 countries, including 12 in Africa, Brunetti and Werder identified four sets of uncertainty indicators, all of which relate to governance: governmental instability, political violence, political uncertainty, and law enforcement uncertainty.

Fifth, governance is a powerful vehicle for combating poverty and inequality. For example, in examining the causes of famines, researchers have reached the conclusion that they are generally the result not of a lack of food, but rather of people’s inability to gain access to the food resources that in fact are often there. Admittedly, that inability stems in part from lack of income, but it is also brought about by a lack of rights and democracy. Of all the famines the world has known, none has occurred in a country endowed with a democracy backed by individual freedoms, an independent press, and a genuinely functional opposition. In examining the growth of income for the poorest income earners, researchers find that sound public administration is progressive, in addition to being associated with higher rates of income growth for both poor population groups and the population as a whole. Corruption robs the state of revenue, causes waste in public spending, and diminishes the government’s chances of tackling poverty reduction challenges. The World Bank finds a broad and statistically significant link between lack of governance and the poverty rate (Diarra and Plane 2012).7

Institutions

The importance of institutions in economic development has been shown by Kaufmann, Kraay, and Zoido-Lobaton (2002), using a synthetic indicator of good governance that encompasses the observance of human and democratic rights, political stability and the absence of political violence, government effectiveness, the simplicity and swiftness of administrative procedures, respect for the rule of law, and efforts to combat corruption. For its part, the IMF (2005) has shown a strong correlation between the quality of institutions and increases in per capita income. According to that finding, sub-Saharan Africa would have increased its per capita income by two-and-a-half times if its institutions were of the same average quality as institutions in the world as a whole. The same studies have established that institutions exert a significant impact on economic growth by fostering the sustainability of sound practices. Likewise, quality institutions help reduce volatility of growth and thereby make it easier for a particular country to achieve its economic and social goals.

The Legal Environment and Economic Progress

The legal environment for business encompasses a fairly vast field that includes, notably, corporate law, transportation law, laws governing the sale of merchandise, compulsory liquidation law, security interest law, debt recovery law, competition law, arbitration law, financial information (reporting and audit), and the legal status of merchants and of entities carrying on a business activity. Labor law is likewise a discipline inseparable from business law. The judicial environment has to do with the administration of justice—specifically, the human and technical resources employed within that system.

This environment is often fraught with business insecurity and instability. Indeed, (domestic and foreign) investors and the business community in Senegal often complain of shortcomings in the business environment. Essentially, those hurdles stem from the legal and judicial uncertainties with which companies have to contend.

The legal uncertainty is linked above all to

  • The outdatedness of current law, which is no longer applicable to the economic base.

  • Instability regarding the permanence of applicable rules.

  • Uncertainty within judicial bodies, and hence the enormous difficulty of knowing what laws are applicable in a particular case.

The judicial uncertainty, which has multiple roots, results especially from

  • The lack of specialized training in business law (especially financial litigation) for judges and officers of the court.

  • The lack of a continuous training system for court personnel.

  • Ethical issues in the judiciary.

  • The lack of a disciplined framework in regard to information in the area of legal sciences.

  • Widespread problems in the judiciary with working tools and judges’ salaries.

Thus, priorities for economic transactors appear to include the importance of ensuring that contracts are enforceable or, failing that, that commercial disputes are settled by arbitration or the courts in an equitable and transparent fashion.

Thus, a corrupt judicial system or corrupt law enforcement clearly acts as a disincentive for investors. Foreign investors will create joint enterprises with domestic entrepreneurs only if they regard the judicial system as professional, independent, and largely immune to corruption.

The legal and judicial environment can therefore do much to

  • Enhance conditions for free competition among companies and businesses.

  • Provide enterprises and investors with legal and judicial security, by facilitating transparency in the enforcement of laws and regulations.

  • Restore trust among business executives and investors.

Here, it is worth highlighting the steps that have been taken in the subregion to improve the legal and judicial environment for business. The Organization for the Harmonization of Business Law in Africa (OHADA) Treaty, signed by 16 Franc Zone states in September 1995, marks a major step forward in terms of legal certainty. Indeed, the specific bodies it established (the Common Court of Justice and Arbitration, the Regional School of Magistracy, and the Permanent Secretariat) all point to the member states’ determination to create a favorable environment for the private sector.

From that perspective and with a view to completing the framework of rules governing activities devoted to the production of goods and services, a draft Community Investment Code is currently being prepared for the WAEMU zone to provide investors with greater “visibility.”

Senegal’s Opting for International Standards of Governance

In light of the above, Senegal has adopted virtually all economic and political governance standards in order to lay the foundations for the conflict prevention, stability, and lasting peace needed for sustained economic growth.

As regards public administration, like a number of other African countries following implementation of economic programs backed by the Bretton Woods institutions, Senegal has embarked on a fiscal adjustment process that lays increasing store by transparency. Thus, decision makers are striving to implement IMF and WAEMU fiscal transparency policies. Successful fiscal management has enabled some African states to raise funds in financial markets and significantly improve their rate of economic growth.

In the financial sector, the government has signed on to international financial standards set by the Financial Stability Forum, in which some African institutions participate. The financial sector reforms have included the establishment of a prudential standards framework and the restructuring of banking systems. The focus has been on liberalizing monetary policy, particularly by adopting indirect market-based regulatory instruments. Similarly, prudential and supervisory provisions have been strengthened and harmonized in line with international standards in order to ensure greater stability. Most central banks have become more independent and have achieved encouraging results in their efforts to curb inflation. In line with international practices, almost all banks of issue now have oversight bodies to supervise credit institutions.

With respect to efforts to counter money laundering, the fact that some countries have adopted international standards and codes reflects a growing concern with that issue in Africa. Thus, within the Franc Zone, in 2002 the three issuance zones adopted legal frameworks for fighting money laundering and the financing of terrorism. The set of provisions adopted is based extensively on the international standards currently in force, especially those of the Financial Action Task Force, to combat money laundering.

Legal and judicial security concerns are paramount. It is becoming increasingly vital for investors to be able to have a sound grasp of the legal and judicial environment and, in fact, the rules in force in Senegal are becoming increasingly consistent with international standards. Thanks to the enforcement of those rules, efforts are underway to strengthen judicial systems, particularly by providing training for judges. As part of the integration process, the countries in the Franc Zone have harmonized their business law, thanks to the establishment of OHADA, which represents a major advance in terms of the improvement of the business environment.

Governance and Economic Policy: The Current State of Affairs in Senegal

The improvement of public policies in Senegal is a major achievement, despite ongoing qualms in some areas. The country seems to have grasped the pressing need to focus on the quality of institutions, an area that has often been neglected in policies in Africa.

From that perspective, the Plan Sénégal Émergent envisages, at precisely the right time, forging the kind of “development-oriented” state (état «dével-oppementiste») that is increasingly advocated by economic bodies in the African Union. By this means, the idea is to promote economic growth and strengthen human capacities. Such an authority would create new institutions and build formal and informal support networks between citizens and government bodies and exploit new opportunities for profitable activities. Through the ethical behavior of its leaders, the development-oriented state acquires the strengths it needs to mobilize the lifeblood of the nation around the task of forging a prosperous country.

With that as a basis, the standard instruments and tools that put the state at the center of the economic process constitute an invaluable method of ensuring transparency in government and generating consensus, thereby helping to boost the credibility of the authorities in markets and to elicit the support of other economic agents for the economic development programs. In short, Senegal has opted to

  • Eschew administrative price regulation in favor of market mechanisms.

  • Ease exchange controls.

  • Liberalize trade and investment.

  • Rationalize tax regimes (a new tax code, the Code Général des Impôts, or CGI).

  • Shorten (with a one-stop shop) the time it takes to form a company.

As regards the establishment of governance mechanisms, numerous business governance instruments have been introduced, on a participatory basis, involving the state, civil society, academia and think tanks, and technical and financial partners. These instruments include the government procurement code, the Office of the State Inspector General, the Audit Office, the new law governing public-private partnerships, an investment code governing the establishment of new production units, and so on.

At the same time, the country has signed on to the World Trade Organization’s “national treatment” principles, the IMF’s Monetary and Financial Policies Code, and WAEMU’s budgetary convergence program. Senegal has also adopted a series of measures relating to legal security for business through avoidance of doubletaxation agreements.

In business practices, no distinction is made between nationals and foreigners, and there are no restrictions on employing expatriates. For their part, property right guarantees and protections are solidly anchored in practice, as is the state’s commitment to safeguarding the right to transfer capital and profits.

However, it is worth stressing that the adoption and implementation of structural adjustment programs in the 1980s led to a weaker role of the state in economic development in Africa in general, and in Senegal in particular (NUCEA 2011) and to reconsideration of the outlook for growth and the consolidation of a development dynamic across the continent.

The Challenges That Senegal Faces

In light of the above theoretical considerations and Senegal’s progress with respect to good governance, it might be useful now to highlight some of the challenges it faces on its path toward emergence. From a strictly economic standpoint, the main challenges are to

  • Continue efforts to combat corruption.

  • Broaden the basis for decision making in regard to the electoral process.

  • Put a stop to the endless tinkering with commercial contracts involving the state.

  • Safeguard the quality of public expenditure by establishing a mechanism to ensure that there is an economic and social return on the budget.

  • Promote fiscal stability and predictability.

  • Share economic—especially fiscal and monetary—policy decisions aimed at training and sensitizing citizens regarding public policy measures.

  • Guarantee emphasis on the quality and availability of economic and financial information: a competitive economy is viable only if all have access to economic information, and, in a liberalization context, official statistics are essential if the authorities are to be able to generate the kinds of timely assessments of the macroeconomic situation that investors require in order to make strategic choices.

ANNEX BOX 14.3.1The APRM: An Innovative Mechanism to Promote Governance

The African Peer Review Mechanism (APRM) is a mechanism pertaining to the New Partnership for Africa’s Development (NEPAD), created by the Conference of Heads of State and Government of the African Union. According to its basic documents, the main objective of this innovative mechanism is to foster the adoption of policies, standards, and practices that lead to political stability, high economic growth, sustainable development, and accelerated subregional and continental economic integration through experience sharing and reinforcement of successful and best practices, including identifying deficiencies and assessment of requirements for capacity building. It sees itself as a self-assessment tool instituted in 2003 to which member states of the African Union accede on a voluntary basis. Its core goal is to promote more effective governance in the 53 member states that ratified the APRM Memorandum of Understanding arising out of the Durban Declaration of the African Union of July 2012. Since it was launched in 2003, the APRM has been embraced by some 30 member countries and could extend to all countries on the continent.

The challenges facing the APRM have to do with a qualitative shift in development policies in Africa geared to consolidating governance as an economic growth and poverty reduction tool. In that connection, economic policies in African countries have improved considerably, despite some ongoing social and political tensions. Thanks to a genuine awakening and the emergence of a new manager class, leaders have grasped the imperative need to emphasize the quality of institutions, a consideration that their previous policies neglected. Numerous countries are welcoming the efforts of the African Union and underscore the APRM’s potential impact for expediting growth and inserting the continent in the global economy. Indeed, country assessments should induce countries to migrate toward quality and abandon the multiple vagaries that have so long been obstacles to economic emergence. For the African Union, therefore, it is a question of continuing to contribute, via meetings, to the dissemination of sound practices, so as to raise awareness among states and their partners of the challenges and stakes involved in economic governance geared to sustainable growth.

The APRM, which puts the state at the heart of the economic development process, constitutes a precious tool for ensuring that government actions are rooted in transparency and a catalyst for reaching consensus, which could strengthen the authorities’ credibility in markets and induce other economic agents to abide by economic development policies. African economists have arrived at a consensus that the role of the state in the economic development process was weakened by the implementation of structural adjustment policies in the 1980s. That state of affairs implies that a change of paradigm is needed, involving the construction of a modern state capable of discharging its essential functions, especially the provision of externalities facilitating economic policies. Organizationally, the APRM is built around three poles that ensure that it is operational:

  • The APRM Forum, the APRM’s highest decision-making body, made up of the heads of state and government of the member countries. It meets twice a year.

  • The APRM Panel of Eminent Persons, appointed by the forum, to oversee the review process independently and to ensure its integrity. It is also responsible for considering review reports and making recommendations to the forum. It meets at least six times a year.

  • The APRM Secretariat, based in Midrand, South Africa. The secretariat provides secretarial, technical, coordinating, and administrative support services for the APRM. It also keeps a database on the political, economic, and social situation in the member states, suggests performance indicators, and analyzes outcomes in each country.

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See Annex 14.1 for definitions of each of these indicators, as well as background on their formulation.

In other words, a bar of length 80 percent means that 80 percent of the countries rate worse and an estimated 20 percent rate better than the country of choice.

The selected sub-Saharan African countries include 25 low-income countries, 14 lower-middleincome countries, and 6 upper-middle-income countries, as classified by the World Bank. See Annex 14.2 for the country lists.

The author of this annex is Abdoulaye Ly. The views expressed in this annex are those of Mr. Ly only and do not necessarily reflect those of Mr. Sembene, the author of Chapter 14.

The UNDP believes that “democratic governance is key to achieving the MDGs [Millennium Development Goals], as it provides the enabling environment for the achievement of the MDGs and, in particular, the eradication of poverty. The crucial importance of democratic governance in the developing world was underscored at the 2000 Millennium Summit, at which world leaders agreed to ‘spare no effort to promote democracy and strengthen the state of democracy, as well as respect for all human rights and fundamental freedoms, including the right to development” (UNDP, National Program of Good Governance for Senegal).

According to a 2012 statement by World Bank Managing Director Sri Mulyani Indrawati, “Without improving governance, it will not be possible to lift the remaining 1.2 billion people on less than US $1.25 a day from poverty, or to achieve growth that benefits everyone.”

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