Chapter

II THE CHANGING ROLE OF THE STATE, GOVERNANCE AND NEW CAPACITY REQUIREMENTS

Editor(s):
Michel Dessart, and Roland Ubogu
Published Date:
October 2001
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Tidjane Thiam

Minister of Planning and Development, Côte d’Ivoire

I would like to start with what we identify as the five main missions of the government of today. The first mission, which was cited by Prime Minister Duncan this morning, is to provide peace and political stability. The second mission is to promote democracy through coalition building, decentralization and dialogue with civil society. The third mission is to foster sound economic management. The fourth mission is to enforce economic democracy and the fifth mission is to carry out good governance.

If these missions could be attained, they should together lead to private investment, be it domestic or foreign, which will foster sustainable and equitable growth. So what do we mean by democracy through coalition building?

We believe that we have to create an environment in which all segments of society work together by building partnership and coalitions. We also have to help better organize civil society. This is a very important issue in Africa because civil society has through its structure the right to demand transparency and accountability. Within a well functioning civil society, it is very difficult not to have good governance. The civil society must put in place checks and balances because governments are not virtuous by nature.

Sound Economic Management

I will not like to define sound economic management in an audience like this, but of course it means a balanced budget, not deficits. I would like to stress the issue of the quality of public expenditure because a lot of discussions focus on the level of public expenditures. They have to be well targeted and they have to be well delivered, meaning at the lowest cost possible, which of course excludes corruption. It also emphasizes provision of public goods and investment in education and health, and also, of course, poverty alleviation.

Democracy

Democracy implies equal rights for all players, and that can be applied to the economy. It is the government’s responsibility to provide a level playing field and this is also very important in the African context. We need to have well functioning markets with no entry or exit barriers, as many of our economies are very small in size, which is conducive to oligopolies and cartels. The issue of having a real and well functioning market for our economic activities is a real challenge for many African governments.

We have to provide the critical inputs at a competitive cost and put in place an effective and efficient regulatory system with special emphasis on the financial sector. We also have to protect economic rights and provide economic opportunities. By that, I mean, for instance, proper trade policy and negotiation with the WTO. These are things which only the governments can do and should do, in addition to providing basic infrastructure. I think everybody today agrees on the importance of democracy. This is a concept of governance which is not imposed on us from the outside world but something that we need to establish in order to get any meaningful development. That means transparency and accountability for the public as well as the private sectors.

I think most people engage in corrupt practices even though they know that it is wrong to do so. It is not only an ethical issue, but also a technical one, as effective systems are needed to prevent and curb corruption. You need controls and sanctions. Without controls and sanctions, you will have corruption and that’s true in any place, so prevention is important, communication is important, and systematic enforcement of laws is important.

Capacity Building

If within the context of the key challenges facing government, we have to try to define a capacity building agenda, government should know what it should do, what it should not do, say it and then do what it says. I think every term in this sentence is important. To know what you should do means that you have the capacity for analysis. Knowing what you should not do is sometimes equally as important as knowing what you should do. And then you should say it and then do what you say. I often say that if our governments did what they say, we would probably be very developed by now. Finally, we have to report on the results of what we have done. This is the accountability aspect of what the government is expected to do.

Let me draw your attention to the required basic capacities for government action seen from the point of view of a government. These are capacities to design policies, acquire good analytical skills, and identify and define what the problem is. Often we work and we don’t really know what the problem is that we are trying to solve. We also need good implementation skills that would enhance proper monitoring and evaluation of results, and a feed back mechanism to improve the design of policies.

I think that these are the core of capacity building for government action. One example is non-tariff barriers. We talk about replacing non-tariff barriers with tariff barriers. This can only be effective if tariffs actually exist. If you have borders through which anything can go without paying anything, you cannot implement successfully this type of reform, and I think that in many cases the most important constraint to reform in Africa is that type of nonexistent capacity. Capacity to design policies, implement them, and monitor the results is fundamental. The acquisition of these capacities is key if we want to have ownership of our policies. I think that we all agree that ownership is key to a successful implementation of reform. You cannot own policies that you did not design.

Examples of the new capacities should include regulation, good governance, and partnership building.

1. Regulation

We need a capacity to define a good regulatory framework, especially when we liberalize the various sectors of the economy. We should not only have good frameworks on paper, but the capacity to enforce them so that we go from doing to making sure that things are done. This is the fundamental change in government’s role. If we look at the energy sector in Côte d’Ivoire, which we are just restructuring, we found that the profiles of the people we need are completely different, and the level of salary that we must pay is also completely different. These are key challenges that we have to address every day, but without a capacity to regulate many reforms we will fail. We need to be able to define a regulatory framework and then enforce it.

2. Good Governance

Let me stress three elements that are relevant to good governance.

  • First, prevention of corruption. While I would agree that meritocracy is a good way to prevent corruption, I would also insist on proper human resources management in the public sector. This is because our human resources management must be aligned with what we want to achieve, so that we recruit people with the relevant profile. We must then pay and reward them adequately. I think that unless and until we manage to change the way human resources are managed in the public sector, we will have a lot of governance issues.

  • Second, education and communication. We need to be able to communicate and convince people of the validity of what we are doing. Often in Africa, the potential beneficiaries of whatever projects or policies we implement are loosely organized and not very vocal, while the potential losers are very organized, very vocal and financially strong. If we look at education, we talk about developing primary or basic education. In this instance, we may need to shift resources from spending on higher education. When we do that, we run into a lot of trouble with teachers and students. They are opinion-leaders, they are vocal, they are well organized, and they are unionized. The challenge facing government to effect changes is the ability to explain in a convincing manner to the public what it wants to do so as to have the support that is necessary to implement the reforms.

  • Third, enforcement. This entails the existence or establishment of good institutions. We also need watchdogs to help the government do what it wants to do. There should be monitoring tools and procedures. I insist on both tools and procedures because if there are no procedures, the tools will not be used. Often, we do have the tools, but we don’t have the procedures, so we don’t have the key to ensuring sustainability and replicability.

In addition, we must be able to set targets for ourselves because we can only achieve what we define as a target. Then, we need to give account, and finally live by example. The success of some of the East Asian countries is that their leaders led by example. Some time ago, we met the Prime Minister of Singapore and we asked him what was the secret of his success. He gave a very simple answer. He said “You have to live by example and the example has to come from the top. You have to say what you’re going to do and you have to do it” I think it is very simple, it’s very true, and it’s very important.

3. Partnership Building

Partnership building is an essential capacity for government action. A dialogue with civil society and the private sector is crucial. I think that the government has to move away from the colonial tradition, an approach where we give orders, to an approach where we negotiate and build consensus. The civil society should be well organized so that it continually demands transparency and accountability. The government on its own should promote community-based development.

To conclude, I would say that there is a new definition of the role of the state, where good governance is at the core of the new paradigm. And governments must align their capacities with this new definition. In particular, we must do a better job in policy design, implementation and monitoring, good governance and partnership building.

Henock Kifle

Director, African Development Institute, African Development Bank

In my presentation, I would like to proceed as follows:

  • Review the changing role, and the thinking on the role, of the state in development and, in particular, the African state in development.

  • Derive what the appropriate role of the African state should be from the current growth consensus that seemed to have emerged based on the growth conditions of an African development strategy.

  • Seek to determine the various capacity requirements for the African state—both the institutional and human capacities that would enable it to fulfill its role.

  • Put forward a few questions for discussions, a few thorny problems and issues which are rather difficult to find solutions for.

Let me start with a general caveat: when we talk about development of the African state, we should always be aware that there is of course no such thing as the African state. African states vary considerably in their capacity and the role they play in the economy. This may be a level of abstraction that perhaps many of you may not be comfortable with, but at the same time is necessary to allow us to talk about the African condition.

Let me first briefly comment on the evolution and the thinking of the role of the state in a developing economy. Those of us who went to school in the 1960s and 1970s quite well remember the type of planning and development models that were taught. At that time, the basic thinking - the development model - was that the markets did not work, that underdeveloped economies were characterized by severe market failures, and that for any development to take place, the state had to play a predominant role. Most of us who have worked in government bureaucracies and have worked with different planning models in the past, tried to come up with various objective functions for the state and to determine how the state should maximize different policy objectives, and so on. But it should also be remembered that development thinking of the past went very well with the challenges that African countries were facing in the immediate postindependence period. That was in fact the whole issue of nation building. At that time, most African leaders, given that their domestic markets were extremely thin, small and in the hands of foreigners, thought the state had to intervene to bring about a major structural change and rapid economic growth.

In the initial decade or so after independence, with rates of growth between 5% and 8% in many African countries, that paradigm appeared to have worked very well. However, as we all know, that came to a rather sudden stop in the mid 1970s and the early 1980s, when many African countries and other developing countries began to face serious external shocks from the oil prices, the global recession of the early 1980s, and the enormous hike in interest rates. The consequence of these was the need, which began to be felt by nearly all countries, for serious stabilization and structural adjustment programmes.

It is interesting to note in retrospect that, when these programmes were initially adopted, they were rather seen as short-term measures to help countries emerge from the severe crisis. But as time went on and countries continued with the reform programmes, a host of theoretical justifications for the adjustment programmes were built to the point that, in the middle of the 1990s, when the World Bank reviewed the whole adjustment process in Africa, many writers argued that the reform programmes initiated by many countries in the mid-1990s with the support of the International Monetary Fund and the World Bank, reflected a new paradigm. The thinking was that there was indeed a major paradigm shift, which attempted to reduce the state’s role in production and in regulating private economic activity. The writers went further and argued that the state had to support only four basic essential functions: investing in human resources, providing a comprehensive framework for public enterprises, opening markets for international trade, and ensuring stable macroeconomic management. The arguments that were put forward regarding the new role of the state were anchored very much in the writings of Adam Smith and others. These arguments were for what could be called the “minimalist state”. Furthermore, a host of other arguments were made to indicate that government intervention would lead to all types of distortions, such as market failures and unproductive processing activities.

In the last few years, there seems to have been some sort of shift again, away from perhaps a complete rejection of the developmental role of the state towards a rehabilitational one. Many writers have argued that the East Asian miracle that we always talk about could not have happened without the pro-active role of the East Asian states. In our case, we need to question whether the reduced role of the state and, in particular, the abandonment of all forms of planning and industrial policy, would lead to rapid development. The World Bank in its 1997 Report has argued for the importance of an ethical state. I quote from it: “An ethical state is vital for the provision of the goods and services and the institutions that allow markets to flourish, and people to lead healthier and happier lives”.

It appears that, in the current development literature, there is a move towards a more pragmatic approach to the role of the state, instead of the stringent and almost ideological type of attack on the state that we have observed a few years back.

On the issue of consensus on development strategies for Africa, I would argue that a broad consensus has emerged in the last few years. Here again, it is important to emphasize that even though we talk about a broad African development strategy, strategies have to be adapted to each country’s conditions. As most of you are aware, there are basic elements of what would appear to be a consensus about African development strategies today. There is now a common view that the fundamental structures of the African economies should be market-based, with the private sector playing a leading role in the development and growth process. In other words, the allocation of resources should be market-determined, private property rights should be respected and protected, and the incentive structure facing economic actors should be as distortion free as possible. Moreover, the important role of macroeconomic stability and greater predictability of the economic environment is being stressed again. Furthermore, there is now a general agreement on the need for improving systems of governance, not only for growth in itself, but also for sustained economic growth. Finally, as Mr. Camdessus said in his message to us this morning, there is now almost a consensus that the focus of development strategy should be on poverty alleviation and on issues of diversifying production structures and exports.

These are rather well known elements of a development strategy that I think is broadly accepted as the base of African development strategy. What roles for the State emerge from this development strategy of the African economy? I think there are certain basic state functions and basic economic functions which come out.

The maintenance of law and order is obviously an essential condition. In the case of Africa, of course, we have seen collapsed states, in Somalia, Liberia and Sierra Leone, where basic economic activity has come to a halt. Even strong states, such as South Africa, had difficulty in maintaining basic law and order in a place like Johannesburg, and this had a severe impact on economic prospects in the sub-region. As for the economic functions of the state, it appears that, despite the changing role of the state in the economy, there are still a number of important functions which the state has to undertake if development is to take place.

First, each country has to have a strategic view of the evolution of its economy. It has to have a vision of how to cope with the challenges posed by the trend of globalization. Among African states, it would be very difficult to find many that do have such a strategic view of their economies within the broad context of globalization.

Second, governments need to come up with supporting institutions for a market economy. This means ensuring protection of property rights, promoting application of standards, enforcing competition policy, as well as financial market regulation. States are also expected to promote good governance, poverty alleviation, public-private partnership, transformation of production structures, and development of exports, and so on. Furthermore, a most recent argument is that some elements of public industrial policy would still be required if countries are to transform their economic structures.

In short, we are beginning to see a consensus that African development strategies are being redefined by a host of functions that are still to be assigned to the state. The essential issue is then to know how the state is going to develop the various capacity requirements for the new role that has been assigned to it.

First, the states need to improve their public administration and their systems for maintaining law and order. It is however not very clear how this can be done given the various constraints that states face today. At the same time, the states need to strengthen their core economic institutions as well as their capacities for strategic planning. In particular, they have to improve their management of public revenues and expenditures, make central banks and monetary policy more independent, and reduce poverty through various sector strategies and programmes in the key sectors, like agriculture. More generally, the capacities of the state have to be strengthened and improved in order for the African states to deliver in terms of the new development strategies that must be adopted. The enumeration of the new or redefined functions of the state indicates that a large number of functions still have to be fulfilled by the state. The major challenge facing African societies is to change the very nature of the state to enable it to carry out those functions and to build up its capacities to further develop those functions.

Finally, one of the basic issues for discussion is “Can the state reform itself?” We have to understand that these reforms have to be carried out under very difficult conditions, among which I would like to recall the following: most African states have had to face severe fiscal constraints in their attempt to maintain prudent macroeconomic policies; there has been a declining trend in Official Development Aid (ODA); and technical assistance programmes on which we have relied in the past, have been ineffective in building up domestic capacity.

There are a few implications I would like to draw in conclusion:

  • Further democratilization of the state is essential if any functions of the state are to be carried out;

  • The state has to substantially improve its revenue generating capacities if it is to fulfill its basic functions, but this may not always be possible under current political conditions;

  • Major reorganization and restructuring of the government’s bureaucracy is essential if the state is to succeed. This is an undertaking in which only a few countries have succeeded, as it generally raises broad opposition;

  • Targeted external assistance could play a major role in terms of reducing the fiscal constraints faced by the state through promoting local ownership. This would imply a complete change in the donorrecipient relationship, which would result in a new partnership for Africa.

George T. Abed

Senior Adviser, Fiscal Affairs Department, International Monetary Fund

The “reform of the state” is a subject of much discussion and debate among economists. However, both the substance and the outlines of this debate have not remained fixed. They have ebbed and flowed with changes in objective conditions and with the evolution in economic and political ideas. Thus economists and policymakers continue to debate about what the state should or should not do. While there is no unanimity on this issue, some consensus, at least among economists, could perhaps be discerned in recent years.

I will not seek to add to the volumes written nor to the controversies aroused on this, often highly charged subject. In my presentation, I will address “reform of the state” issues through the prism of the economic role of the state, its institutions, policies, and performance. Of course, the manner in which the state defines its role and the way in which it organizes itself to carry out this role, opens up a whole field of enquiry and expands the subject enormously. To keep the subject matter manageable, I will focus mainly on the fiscal role of the state, and will therefore address the issue of fiscal transparency as a prerequisite for good governance. I will not deal with the issue of capacity building as several speakers, in later sessions today and more tomorrow, will address this issue in greater depth.

The economic role of the state

It is important to keep in mind that, although “the state” is sometimes referred to as if it comprises the totality of society, the state in fact is an element, a cornerstone if you will, in a larger and more complex edifice we call society. From this characterization derives the concept of the state as a partner in the larger enterprise of social change, along with the private sector and civil society. Of course the state is not only a partner. Having been designated by the citizenry as its agent to carry out certain functions which can only be carried out collectively (or “socially”), the state also takes on a particular set of responsibilities. In this capacity, the state needs to be subject to special rules governing its conduct, including how and when its powers may or may not be used to enforce the will of its “principals” (the citizenry) and, more generally, promote the public good.

To address the economic role of the state, I will explore the following questions:

  • What are the economic functions of the state?

  • How should a modern state carry out these functions?

  • What are the prerequisites for the effective discharge of these functions? And finally,

  • How does the behavior of the state affect overall economic performance?

On the economic functions of the state, I find it difficult to add to the rich intellectual heritage that has been built on the seminal contributions of political economists—Adam Smith, John Stuart Mill, and others, over the past two centuries. At the risk of oversimplification, one can view the economic role of the state as having evolved in response to objective, historical circumstances. It can also be said to have developed in line with the more subjective views that have characterized the intellectual tradition in the field of economics over this period.

According to philosophers and writers on political economy in the late 18th and through much of the 19th centuries, the state’s economic role was seen as a limited one, restricted to compensating for externalities and for possible distortions arising from the nonfunctioning of markets, and for the provision of public goods. In due course, and as societies developed into more complex, industrial economies giving rise to dislocations and disparities, states began to invoke distributional concerns, thus adding the functions needed to care for the poor, the sick, and the disadvantaged. This began to be reflected in policies seeking to transfer resources, through tax and expenditure decisions, from those who have to those who do not. In the modern era, which may be dated from the First World War, the state began to take on a wider range of functions, including the building of modern and economically powerful societies (e.g., in Europe, the Soviet Union, and later across the developing world).

In recent years, as the model of the “all powerful, modernizing state” either was shown to have failed or to require drastic revisions, there has been a notable shift back to a more modest role for the state. While continuing to recognize the special role of the state in promoting stability and social progress, the new consensus sees no need for the state to own or control resources to achieve its objectives. The new role would have the state seek to provide the policy and institutional environment for achieving economic stability and sustainable growth. This meant that in addition to certain core functions to be retained by the state, the state would also serve as a regulator and facilitator of market activity. More recently, and in the more industrialized, high income countries, the role of the state has also been linked to the promotion of the ideals of a “just society,” and hence the heightened concern with human rights, universal justice, and the welfare of future generations.

Clearly, if one views the role of the state as growing in scope to encompass new or expanded mandates, the question of the size of the state becomes a relevant consideration. Indeed, the question of the size of the state, and, more specifically, the importance (or non importance) of size to economic performance, is one that has been discussed rather widely and with strong conviction by some. This has been especially the case in recent years, in the wake of the collapse of the Soviet Union and the almost inevitable, ensuing shrinkage of the state in the transition economies.

To put the question more directly, does the size of the state matter? Is “big” always “bad?” For those who advocate a reduced state role, is downsizing the state equivalent to reform of the state? Without going into great detail, one can say the following on the question of size.

In the transition economies, i.e., the former Soviet Union and the Eastern European countries, the state was clearly the dominant factor in the economy until 1989, accounting for between 60 and 85 percent of GDP. However, with the collapse of the command system, the taxing capacity of governments declined drastically and the state was unable to provide all the services and functions it had provided before. Therefore downsizing in the case of the transition economies has been, inescapably, a key element of reform.

But does this conclusion apply to the industrial countries? Here the situation is different. There are clearly some countries with high per capita income but with small-sized governments. This is the case, for example, in the Far East such as in Hong Kong, Taiwan, and Korea, where the size of the state (as measured by total government spending) is in the range of 15-21 percent of GDP. But we also have some advanced countries, like Denmark, Sweden, and France, where the size of government is in the range of 45-60 percent of GDP. These countries differ in size and exhibit wide variations in the quality of state institutions, policies, and performance. Although one perhaps can make the case that beyond a certain level, the size of the state begins to yield diminishing social benefits, it is ultimately difficult to draw definitive conclusions about the relationship between the size of the state and the quality of its performance.

However, to give context to the discussion of the size of the public sector, we need to keep in mind at least three considerations. One is the taxing capacity of the state. Can the particular country raise, efficiently and equitably, enough revenue to sustain a given level of spending? Two, the social/cultural context as an important determinant of the size of government. It is clear that in the Scandinavian countries, it is the people themselves who voted for large government. This may reflect the countries’ history and culture, where the citizens have long entrusted the government with a wide range of functions which, in, say, the Anglo-Saxon tradition, would be left to the private sector. And finally, the appropriate size of government must also somehow be related to the composition of government spending, i.e., not only how much money the government is spending but also for what purposes it raises and disposes its financial resources.

As indicated earlier, the emerging consensus is that governments are best advised to focus their resource allocations on establishing and enforcing the rule of law, on investing in basic social services and in institutional and physical infrastructure, and on protecting the vulnerable. We may ask, how much does the cost of these functions add up to? Does it add up to 20 percent or 45 percent of GDP? It is very difficult to say. But clearly, the wider the mandate of government and the more effectively the government executes its designated functions, the more likely that larger government will be tolerated. How large should that be? As I indicated earlier, it all depends on a number of factors: taxing capacity, social/cultural factors, and the quality of spending, and perhaps others.

What about the role of the state in Africa? To help put the African states in some perspective, let me refer to a few figures. First, government spending in Africa is, on average, about 26 percent of GDP. This ratio is similar to that of developing regions in general, but it is actually higher than in Asia and Latin America.

In terms of the composition of spending, sub-Saharan African countries’ expenditures on education and health have been rising slowly, but progress has lagged other developing regions, with the exception of the Middle East. Education spending is on average, about 4 percent of GDP, while spending on health is lower than in other regions, being only 1.8 percent. However, if we go beyond the numbers and look at the distributional incidence of government expenditure, we find that contrary to the notion that government spending helps redistribute benefits from the rich to the poor, this has not been the case in the sub-Saharan African countries. Government intervention through government spending has in fact been regressive. Sub-Saharan Africa is the only region where the bottom quintile of the population has had a smaller share of public spending than the top quintile, even for primary education. The top quintile in sub-Saharan Africa receives a larger share of public expenditure on health and education than does the bottom quintile. Another troubling aspect of government spending in Africa is that military spending is higher in sub-Saharan Africa than in virtually all other regions, with the exception (again) of the Middle East (which seems to be addicted to military spending). Average military spending in sub-Saharan Africa is 2.3 percent of GDP while in other regions it is between 1.2 and 1.6 percent of GDP.

Thus in the case of sub-Saharan Africa, the question of the reform of the state raises issues related not so much to the size of government, but more critically to the quality of government, as reflected in its spending priorities and the extent to which these do or do not respond to the needs and aspirations of ordinary African citizens.

The question of governance

Once a government has settled on a size corresponding to a set of agreed functions (broad or narrow in scope as the case may be), the question arises as to how such a government should carry out these functions, a question which evokes the issue of governance. In this regard, I will not go into great detail, I will simply try to provide some perspective.

First, let me clarify what is meant by the term “governance.” The World Bank in 1992 defined governance as “the manner in which power is exercised in the management of a country’s economic and social resources for development.” Subsequently, this definition was found somewhat narrow as it ignored the role of civil society and the importance of political institutions and civil liberties. The OECD highlights three critical features of governance: “the form of the political regime; the process by which authority is exercised in the management of the country’s economic and social resources; and the capacity of government to formulate and implement policies and discharge government functions.” Doubtless, other definitions exist. The important point is that “governance” has to do with the manner in which responsibility is discharged, whether such a responsibility has been acquired through election, appointment or delegation in the public domain (the standard view of governance) or in the realm of commerce (hence “corporate governance”). Thus, good governance denotes a condition whereby such a responsibility is discharged in an effective, transparent, and accountable manner while poor governance is associated with maladministration in the discharge of a public responsibility.

When we speak of the basic requirements for an effective operation of state institutions, we usually envisage the following. There should be constitutional principles, based on values of a more enduring nature, to help organize the primary functions of the state (e.g., the concept of separation of power is such an organizing principle). There should be limits on the powers of government, at least vis-a-vis the individual or the groups within society, because, as many philosophers before us have emphasized, governments are inherently coercive. And although coercion by the state is often for the common good (e.g., law enforcement), it can exceed the desirable limits and turn into repression. The public sector should be subject to oversight and be accountable to an elected body (bodies) empowered by popular will. The private sector should operate according to widely accepted rules that are transparent and enforced by accountable institutions and policies. Competition should ensure that market forces provide the ultimate discipline on the behavior of business entities.

Just as the private sector would be expected to operate according to market principles to ensure efficiency, the operation of the public sector should also be subject to rules to help ensure efficiency in the use of the public’s money as well as accountability, in order to continue to earn the public’s trust. These rules and regulations would apply to the conduct of public officials as well as to the performance of public institutions.

A few words first on efficiency in government. Although government operations cannot be subject to the discipline of market forces, some features of the market can, nonetheless, be incorporated into a wide range of government operations. Thus, for example, public sector reforms could incorporate pay incentive systems (e.g., related to the performance of civil servants) and could promote greater internal competition among public agencies or state enterprises. Other examples may include: sound procurement policies to reduce cost to government and enhance transparency and combat corruption; outsourcing of selected government services by competitive bidding; and greater use of fees and charges as a market-based mechanism for rationing certain government services. Where market-based solutions are impossible or unfeasible (e.g., because of the nature of the service), a solution may be the establishment of appropriate oversight by legislative or, in some cases, citizens committees, or the institution of internal and external audits and quality assurance systems and procedures.

Beyond efficiency, governments are of course held up to standards of accountability, a key ingredient of good governance. I will address this issue more fully in a moment, but I wish to draw attention, in this regard, to reforms that have recently been introduced in certain countries, notably the United Kingdom, New Zealand, and Australia. These in essence are intended to give greater autonomy to agency heads and, in exchange, hold them responsible for the results. In some cases, government departments have been transformed into executive agencies with an executive head who enters into a contract with the government to meet certain objectives. The agency head is then held accountable for policy outcomes and is rewarded or penalized accordingly.

Clearly such reforms are quite radical, and one has to be careful not to suggest their introduction when other checks and balances and essential safeguards are not yet in place. Nonetheless, the general approach—clarity of objectives and goals, greater transparency of policymaking and of operations, accountability of officials and agencies for outcomes, and measures to promote public awareness—all are essential ingredients of any system intended to enhance the effectiveness of government.

Government and economic performance

The link between the conduct of government on the one hand and the performance of the economy on the other reflects complex and ever-changing relationships. There are, however, some constants in this relationship. Let me focus on two.

The first is what has been termed good policy fundamentals, the set of macroeconomic and structural policies that have been found, all else remaining equal, to enhance a country’s chances of achieving better economic performance. These policies aim at achieving macroeconomic stability while undertaking structural reforms in government operations and in markets to promote the efficiency of markets and underpin sustainable growth. They commonly include the use of a nominal anchor to guide monetary stability; fiscal rectitude to foster macroeconomic stability; dismantling price restraints that foster distortions in prices and costs; liberalizing trade and investment; providing for a sound regulatory environment (especially for the financial sector); and directing government spending to investment in human capital and social/institutional infrastructure.

We have already noted that in terms of government spending, the record of the sub-Saharan African countries does not measure up well against this “ideal.” However, to illustrate the importance of good policies, let me cite an example from Africa. I refer here to the CFA franc devaluation of January 1994 and its impact on the economic performance of francophone Africa in the subsequent period. Until 1994, the exchange rate in the CFA franc zone had been fixed for many years, and had led to repression of wages, suppression of export growth, and a number of distortions that became more and more severe with the passage of time. Then in January 1994 the CFA franc was devalued by 100 percent, and the results have been most encouraging. In the three years prior to the devaluation, the average annual growth rate in the francophone countries of sub-Saharan Africa was about 0.8 percent in real terms, only a fraction of the population growth for the period. This meant that the population had been getting poorer. In the four years after the devaluation, 1995-98, the annual real rate of growth jumped to an average of nearly 4.8 percent. Of course, one cannot attribute the entire increase in the growth rate to the devaluation, but one can say that the removal of a major source of price distortions must have been instrumental in bringing about a strong supply response, especially in traditional production and in exports, with a clear positive impact on employment and growth in subsequent years.

Another example of a good structural reform policy is the recent focus on the rationalization of the tax system in African countries. A number of countries in Africa have introduced a VAT as a key element in a broader reform of the tax system. The VAT thus replaced the old transactions tax which was distortionary, had cascading features, and was generally inefficient. The introduction of the VAT alone helped raise budget revenue in the reforming countries in three years by 1 percent to 3 percent of GDP, bringing about an amelioration of the fiscal deficit in some cases and underpinning macroeconomic stability. In short, good policies do count and policy fundamentals are important.

The other critical element in the link between the quality of government and economic performance, is the presence of effective, modern institutions to oversee the implementation of good practices of transparency and accountability. In this context, let me focus on the fiscal role of government and highlight the characteristics of what might be considered sound fiscal institutions and good practices. It is important to keep in mind that, beyond the fiscal domain, the full range of institutions in a modern state would include those responsible for the monetary, trade, and real sectors as well as others outside the economic domain, such as those of the political and judicial systems and civil society.

As you are aware, the IMF has, for many years, encouraged member countries to improve their fiscal management systems through its technical assistance programs as well as through its surveillance and use of Fund resources activities. In response to the concerns of the international community, basic requirements of fiscal transparency were formalized in the Code of Good Practices on Fiscal TransparencyDeclaration on Principles, which was endorsed by the Interim Committee in April 1998. The Code provides an extended and operational definition of what constitutes fiscal transparency. It is based on four general principles: (1) roles and responsibilities of and within the government should be well defined; (2) governments should make a commitment to make comprehensive, reliable and timely information available to the public; (3) the processes of budget preparation, execution, and reporting should be open and clear; and (4) fiscal information should be subject to independent scrutiny and assurance of integrity. Under these general principles, nine more specific principles are given, and under these, a total of 31 areas of good practice are identified.

To help ensure that these principles and practices are put into effect, government institutions should be organized around these basic principles. Such institutions would naturally include a modern ministry of finance operating according to a basic financial law and organized into separate departments (e.g., a tax collection agency, separate offices for budget preparation and treasury operations, and internal audit and control, etc.), a budget process that includes open hearings before and final approval by the legislature, an autonomous external audit agency reporting to the legislature and so on.

Implementation of the fiscal transparency code is being promoted on a voluntary basis and these tools are intended to facilitate an initial selfassessment by countries. A number of countries would require some technical assistance to complete a self assessment, and the IMF has provided this in a number of cases. So far, it has been found that much of the more traditional forms of technical assistance provided by the IMF (and indeed by other agencies) can be readily shaped to provide advice on improving fiscal transparency and strengthening institutional capacity in member governments.

Finally, I feel obliged to say a few words on the importance of growth and poverty reduction in developing countries, and especially in Africa. In this regard, it is important to keep in mind that what I have proposed so far, concerning the role of government in the modern economy and the prerequisites for the effective discharge of this role in terms of policies and institutions, can at best only secure the necessary but not the sufficient conditions for achieving sustainable growth and poverty reduction over the long term. To achieve high and sustainable rates of growth, developing countries, and especially the countries of sub-Saharan Africa, need to mobilize their resources in a concerted effort aimed at achieving a quantum improvement in the quality of life of their citizenry.

To do so, countries must of course undertake specific measures to reduce poverty directly by, for example, targeted social safety nets, improving access to basic health and educational services, and public employment programs. However, such programs can only go so far in the presence of a general improvement in the economic and social environment. This can only come about through more fundamental economic reforms to secure macroeconomic stability and, above all, to foster high rates of economic growth. Average growth rates must rise sufficiently above those of population so as to achieve discernible improvements in per capita income and, even more importantly, attain durable reductions in the severity and incidence of poverty in the continent.

Indeed, according to studies which have examined the relationship between growth and poverty reduction, for a country with an annual population growth rate of 3 percent, it takes an annual economic growth rate of nearly 6 percent to reduce the poverty rate by 1 percentage point. Furthermore, due to reasons of political economy having to do with the poor quality of government in many developing countries, there is no assurance that the benefits of the incremental per capita growth will necessarily accrue to the poor. Indeed, I may venture to state that a considerable portion of the benefits of any growth achieved by a typical developing country is likely to be appropriated by the rich, the powerful, and the connected, leaving only a fraction, if at all, to accrue to the poor and to the disenfranchised. Furthermore, the smaller the rates of growth, the greater the tenacity of the rich and the powerful in holding onto their share at the expense of that of the weak and the marginalized. Of course, governments could be reformed so as to serve as more effective instruments for income redistribution and for economic justice; and efforts should of course not slacken in this regard. But as we all know, this is a long and arduous process. In the meantime, it is critical that growth rates in Africa exceed current levels by a considerable margin and that they be sustained over a long period of time. Otherwise, poverty in Africa is not likely to recede—indeed it could be destined to rise.

The link between growth and poverty reduction brings us back to the questions we raised earlier concerning the reform of the state and the essential requirements for enabling the state to carry out its role in improving the country’s economic performance. Such a link evokes not only the question of good governance and sound policies and institutions, but also the absolute urgency of a commitment by the political leadership to the pursuit of high rates of sustainable growth, both to improve living conditions for the population at large and, of equal importance, to help achieve lasting reductions in poverty.

Vinod Thomas

Director, World Bank Institute

A great deal of the topic has been covered and what I want to focus on in a few moments is two or three questions that might be connected with what has been said. The first question is what kind of development are we talking about? I hope, and I’m sure that we will have a lot of discussions on that later, because economics as a profession has used economic growth as synonymous for development. Is that a fair characterization? The second question is, because growth rates of countries over the last four decades have been really improving, and some of the developing countries at least have kept up with the industrial countries in terms of growth, are growth rates a good proxy for development as a whole? Because of convenience, we have used especially the term economic growth as identical to development. Let us look at some measures of human development.

Generally, we find the comforting picture that where we have had improvements in growth rates, social and human development have gone hand in hand, but only up to a point, and behind the numbers, there are a lot of anomalies, a lot of cases where growth has improved without improvement in social development. Therefore, we need to focus our attention also on social and human development aside from looking at growth rates alone.

Available data show a more worrisome story, which is the relationship between growth rates and the sustainability of the environment. Here the relationship is negative, and you have a lot of countries where growth has taken place and the natural environment within which growth takes place has gotten worse. Is that important? Well, it is crucial for the next generation if not for this one. The sustainability of any growth rate depends not only on human resources but also on natural resources. Consequently, focusing our attention on growth rates alone as an index of economic development is not enough.

With regard to the issue of poverty reduction, it is noticeable that the percentage of people living in poverty has declined in the developing world as a whole, except in sub-Saharan Africa. Despite the percentage decline, the number of people living in poverty has actually increased. Why is that? Well, the distribution of income has worsened and the population in the world has increased, thus the absolute numbers show a deteriorating picture with respect to poverty. Fundamentally, this has to be one of the issues we need to discuss today: the fact that the number of people in abject poverty has been rising and not falling, even though in most cases the percentage of people living in poverty has declined. This implies that we need to examine the distribution of income in addition to growth rates. Our attention is also drawn to the issue of population growth and the quality of life of the people on this planet. So that’s the back drop. The question then is, is growth a sufficient condition for the attainment of everything else that we worry about? I would say that growth is necessary from the social development point of view. Economic growth is necessary only up to a point, but is far from sufficient for achieving social development, and hence our analysis must go beyond growth rates.

The second part of my presentation has to do with what is likely to happen during the next quarter of the century. There are a number of positive features that we talked about this morning, but also some worrisome signals from the global environment. We need to ask the question “How are countries performing, particularly in sub-Sahara African, with respect to taking advantage of changes in the world economy?” The knowledge revolution and globalization offer the possibility for moving faster than in the past. At the same time, a lot of people worry that the same factors are a recipe for disasters, particularly for small countries and those left behind already. The gap is likely to get worse in the near future.

Another issue is governability. Given the situation on governance, do the new developments in the world environment offer greater possibilities for progress, or do they make them worse? On the first question of knowledge and technology revolution, what we should focus our attention on is the role of education. There is a bit of good news, and I think Mr. Abed’s presentation touched on it. It has to do with the share of education in total expenditure. The share of education in government expenditure has actually increased, but we know that that is only part of the story. The distribution of the expenditure and the quality of educational services do matter a lot. The same applies to the role of and share of the private sector in educational services delivery.

There is another very important part of education that is crucial, that is the distribution of educational services. Available data show unequal distribution of educational services within countries, among the high and low income groups, and also among countries. If you take India or Mali, for example, you have extremely unequal distribution of education. Is that a big problem? It is a huge problem. If abilities of people have nothing to do with income, abilities are distributed as they are and make education more accessible to the rich than to the poor, the lost opportunities will be huge. Consequently, the biggest item on the agenda if we want to make quick progress—so contrary to the thinking that education takes a long time and that returns on its investment are gradual—we have to address right now the highly skewed distribution of education. This has to be one of the first things that we have to do if we are to take advantage of the potentials for countries to catch up quickly.

To conclude this second part of my presentation, I would like to reiterate that we take advantage of the opportunities before us, by investing in education and improving governance. We need also to improve on the distribution of education and do something to abate the degree of corruption. Although it is not surprising that many resources were lost due to corruption, what seems striking is that investment rates are highly related to the degree of corruption.

When we add issues and actions like these to a country’s development agenda, what emerges is how do we deal with them. We may first discuss the question of growth, and the quality of which is related to the level of investment and its distribution among the sectors. It is afterwards that we get concerned about improving the rate of growth. This will be followed by the issue of governance and distribution of educational opportunities. This agenda is quite interesting and relevant, but the attainment of the goals is dependent on a country’s capacity to deal with the multitude of problems. And as we know, this capacity is very limited in many developing countries. This takes us to the question of the way in which we look at the world we live in. It is not only the government’s responsibility in dealing with this complex agenda. There should be many players—the private sector, the civil society, and partners inside and outside the government. This is the so-called Comprehensive Development Framework (CDF) outline, which embraces all the sectors that matter and the various players in the picture. This framework focuses on two attributes.

  • For a complex agenda to work, obviously government by itself cannot deal with all the issues. It requires partnerships, and the question is what is the extent of the partnership any country can draw upon?

  • When there are a multitude of partners, the question then is whether they have a common vision that unifies them.

If these two elements exist, then the possibility of taking on a more complex agenda becomes simpler. Basically, this is the idea that, I think, everybody should embrace. However, how to proceed from one position to another is a different issue that depends on whether the people have a vision and, moreover, a common vision. The question then is where are the people in fashioning a common vision. Are they high or low in having a common vision for the country? We can ask the same question in terms of partnership. Are we high or low on the issue of forming partnership in the process of development? A number of countries are doing these exercises, and we had some very interesting discussions on Côte d’Ivoire, Ghana, Uganda, and Ethiopia, and it would be interesting to see how people in these countries come together as a team to arrive at a common vision. In terms of partnership and implementation of the vision, most countries have a long way to go. In some cases, there are partners willing to work together to attain economic growth, but they don’t have a common vision. This may be a useful way to look at the possibility of achieving growth and ownership of policies and ideas. Consequently, for any developing country to be able to achieve growth, it must put emphasis on capacity building, otherwise a country’s own ability to take the lead in policy formulation and conceptualization of ideas may not be forthcoming. The comforting thought is that, if we could work in partnership with government, then part of the burden will be carried and shared by the civil society and other partners around the country and around the world.

When we look at the past four decades, we observe that much has been achieved, but also that there are serious gaps. I would say that growth rates still have a long way to go, but many countries are making progress. The quality of that growth deserves attention and that is one of the key elements we should pursue. What is the quality of investment, the distribution of investment, and the quality of growth? Because that indirectly feeds into the sustainability of the pace of growth itself, I would argue that the nature of our investment is really part of the growth process.

Moreover, interactions are critical when we look at the multitude of sectors. We all agree that they are important. But the more we look at them, the more we become aware that improvements in education require not just educational investment, but also improvements in the health of the children or the building of a bridge that allows children to go from one village to another. Thus, we are all struck with the different types of the interactions. However, we are also in awe of the complexity of the agenda. Our focus should be on capitalizing on complementarity by pulling together what would actually allow different players to be more selective in decision making and in carrying out their different activities. This of course would have to be done at a country level rather than at the sub-aggregate level. The leadership of the country has a responsibility in bringing the partners together, and scaling up the effort becomes crucial with capacity building at the heart of it all.

Comments from the Floor

  • The typical African state does not have the capacity for self-reformation. There is therefore the need for external stimuli and influence. In this wise, the key stakeholders in the countries’ development, i.e. the multilateral development institutions, the organised private sector, socio-economic research organisations, and other stakeholders should meet to press for the changes required by good governance.

  • The ultimate promotion of good governance will come about if there is a move towards a democratic form of governance where stakeholders have a greater participation in the formulation and dissemination of public and government policies.

  • The question of the optimum size of government in contemporary Africa is important. However, the changing roles of government and strategies to develop capacities are even more important and should be emphazised.

  • Corruption and corruptibility can be minimised through adequate remuneration and incentives, openness in contract awards, freedom of speech and protection of the press, and by making corruption risky through deterrent administrative and legal penalties.

  • Despite the fact that, in the developing countries, the average civil servant receives 5 times the average per capita income, compared to only 1.5 times for his/her counterpart in industrialised countries, public sector remuneration in absolute terms is very low in developing countries. This has to be improved to stem brain drain and further deterioration in human capacity.

  • Owing to the increasing prevalence of poverty in Africa even in the face of improved GDP performance, a critical examination of current growth policies, and how they can be changed to address poverty problems, is to be carried out urgently.

  • To make a dent in the high level of poverty afflicting the majority of Africans, economic growth rates have to increase significantly and remain close to double digits for a long time. Concurrently, strategies and programmes should be put in place that will directly empower the poor, stimulate micro and medium-scale enterprises, and create employment.

  • In Africa, the present distribution of public resources for health and education is skewed in favour of the highest quartile of the society. To alleviate poverty and reduce inequality, there is the need to redistribute the national income to favour the bottom quartile.

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