Better governance key to sustained growth in emerging economies

By Anthony Williams
@ebrdtony


Governance dividend” requires strong leadership

Emerging nations stand to reap significant economic and social benefits from improvements in governance, the EBRD says in a new report that warns that any “governance dividend” could be elusive without resolve, leadership and vision.

In its Transition Report 2019-20: Better Governance, Better Economies, the EBRD says that countries in the EBRD regions have made significant progress since the 1990s, with improvements in the rule of law, the effectiveness of government and the quality of public services and regulatory systems.

Many EBRD economies have outperformed comparable emerging markets. Yet the pace of improvement has slowed in recent years and the governance gap relative to advanced economies remains large.

In a foreword to the report, EBRD Chief Economist Beata Javorcik says, “There is a significant economic and social dividend to be reaped from improvements in governance at country, region and firm level. Securing that dividend will require resolve, vision and leadership on the part of national governments, regional leaders, managers and entrepreneurs alike.”

The report makes clear that governance failure comes at a price. Lack of good governance causes unpredictability that discourages investment. It leads to lower competitiveness linked to the cost of corruption, and an uneven playing field that favours those with links to ruling elites and disadvantages others.

The increased inequality that stems from inadequate governance has given rise to a “general sense of injustice and disillusionment with politics”, the report says. Such dissatisfaction is also a cause of emigration.

While governance failings have a tangible negative impact, the report also focuses on the quantifiable positive effects of governance improvements.

If citizens in a country such as Albania believe that their government is willing and able to tackle corruption this belief has the same impact on reducing their intentions to emigrate as a US$ 400 a month pay rise.

The EBRD report says exceptions to the general slowdown in governance improvements include Georgia and Estonia, which have closed the “governance gap” with the G7 by nearly 70 per cent, and around 90 per cent, respectively.

While improving the quality of institutions at country level is “notoriously difficult”, the report draws on experience from countries that have made progress in this area.

Key examples include driving through civil service reforms, simplifying complex regulations, leveraging digital technology, protecting press freedom and deepening international cooperation in the fight against corruption.

The report refers specifically to the introduction of the Ukraine Reform Architecture (URA) with the support of the EBRD and the European Union, which has helped implement reform at all levels of government,

The URA’s unique strength is that that it draws on locally recruited reformers embedded in ministries and public agencies, underscoring the importance of tailoring capacity-building interventions to a country’s own needs.

The report also makes clear that weaknesses of governance have to be addressed at all levels of society, including in regional government, within firms and in areas of specific challenge such as climate change.

At the firm level, the report makes clear that international integration improves levels of corporate governance, saying foreign-owned firms and firms engaged in international trade tend to be better managed. Professional managers prove to be better than family managers.

However, companies sometimes fail to make environmental investments because these are not deemed a sufficient priority in the short term even if they add value in the longer term.

The report recommends measures to stimulate “green investment” by firms, including broadening the availability of credit to encourage green investment. It also proposes the introduction of environmental standards and regulations to compel firms to produce in more energy-efficient ways.