Vulnerabilities in Market-led Growth Strategies and Challenges for Governance.
This paper is the first in a series of four papers developing an alternative approach to growth-enhancing governance in poor countries. Its argument follows an earlier paper where we argued that ‘market-enhancing’ governance, also referred to as ‘good governance’ is not strongly correlated if at all with growth in poor countries (even though many of the goals of good governance are desirable in their own right).
The core argument is that ‘growth-enhancing governance’ refers to governance capabilities for correcting significant market failures that poor countries face when they try to catch up with advanced countries. For a long time, this debate has been dominated by a discussion of the North East Asian NICs like South Korea and Taiwan, which clearly had very strong growth-enhancing capabilities. Since most developing countries clearly do not have these capabilities, the conclusion was that this was an interesting but not very relevant discussion for poor countries.
Our argument is that while the grand capabilities of the North East Asian countries are indeed unviable policy goals for most developing countries, there is no alternative to developing specific, carefully selected growth-enhancing governance capabilities on a country-by-country basis. To establish the importance of this approach, we select five ‘second tier’ growth economies: Thailand, the states of Maharashtra and West Bengal in India, Bangladesh and Tanzania, which are all frequently described as market-led growth stories. The assumption is that growth in these economies took off without much state assistance, and in fact in some cases directly as a result of abandoning interventionist policies. We argue that this view is only partially true and can even be misleading. We show that even in these second tier countries, business-government relationships, accidental rents and rent creation and the presence of appropriate governance capabilities for managing these rents were critical for explaining the development of critical capabilities and for sustaining the growth that happened, the sectors that grew, and indeed the vulnerabilities of these economies. All these economies have vulnerable growth processes precisely because the range of sectors and technologies that could benefit from growth-enhancing governance capabilities is typically limited. Moreover, in many cases, the understanding of the growth process is inadequate, and many of the domestic stakeholders can be unaware of the unintended consequences of many of these arrangements.
This paper sets the background for a detailed analytical examination of specific aspects of growth-enhancing governance in these countries in subsequent papers.