What is governance?

• Governance refers to how a country is run and whether the exercise of authority manages scarce resources well improving economic outcomes and the quality of life for a country's people.
• High levels of corruption and bureaucratic delays can harm growth by inhibiting inward investment
• Corruption makes it likely that domestic businesses will invest overseas rather than at home.
• According to the United Nations, “Corruption undermines human development and democracy. It reduces access to public services by diverting public resources for private gain."

Corruption

• Keeping track of election promises
• Low transparency of where tax revenues come from
• How is state money spent and on whom?

Impact

• Is the government delivering key public services?
• How is this money spent? Does it deliver good outcomes per $ spent?
• Is spending effective in promoting long run growth?

Fairness

• Can people trust government and institutions?
• How free of corruption is the government?
• Is the distribution of spending equitable?

Governments need a stable and effective legal framework to collect taxes to pay for public services. In India for example, there are 15 times more phone subscribers than taxpayers. If a legal system cannot protect private property rights then there will be less research and development & innovation.

Conflicts – there have been an estimated 150 conflicts since 1945 with 28 million deaths (this is twice the toll of WW1). Conflicts have huge collateral damage effects – for example, Angola has lost 80% of its farmland because of landmines. Most conflicts are intra-state i.e. civil war and reconstruction can take decades and many countries remain aid-dependent. About 1.5 billion people live in countries suffering repeated waves of political and criminal violence.

A recent example of the cost of conflict comes from the Ivory Coast. After a disputed presidential election in late 2010 violence erupted and the country descended into a four-month civil war that killed an estimated 3000 and displaced around a million people. The war could only be ended by a French intervention in April 2011. Since then, a new government under President Ouattara has struggled to re-establish security but raids against army and policy installations still threaten stability.

Explain how high rates of corruption can damage economic growth and development

High levels of corruption damage growth & development:

1. They inhibit direct foreign investment into an economy
2. It leads to allocative inefficiency / diverting public resources for private gain
3. Contributes to persistent income & wealth inequality and reduced progress in cutting rates of extreme poverty
4. Causes a loss of trust - a breakdown of social capital
5. Leads to substantially poorer human development outcomes because governments are not collecting in enough tax revenues

Conflict has had terrible consequences; over one third of economies in Africa have suffered some kind of warfare from Rwanda, Sierra Leone, Eritrea, Uganda, and Somalia.

That said encouraging progress has been made in building democratic institutions in many African countries.

Economic growth can collapse and go into reverse when states fail – there are numerous reasons why chronic government failure can hamper growth and development:

• Failures to protect property rights and provide sufficient incentives for new businesses to flourish
• Forced labour, caste labour and other forms of discrimination – all of which waste scarce human resources not least limiting the roles that women can play in labour markets and – over the long term - holding back innovation and technological progress (two key drivers of growth)
• Power elites controlling an economy - using their power to create monopolies that keep consumer prices high and blocking socially useful new technologies
• Stateless areas - large parts of the world are still dominated by stateless societies where the rule of law barely exists
• Public goods - chronic failures to provide basic and effective public services such as education, health and transport. Many of the world's least developed countries have not built effective tax systems and so their revenue base is inadequate for much needed capital investment and the annual revenues required to provide public health and education programmes

For survey evidence on perceptions of corruption worldwide, the annual report from Transparency International is recommended reading.

Can countries grow their way out of corruption. Here is some academic research evidence from Vietnam