Good governance matters: Part 1

The quality of government and governance matters like never before. It is the foundation stone of the institutional framework around which our economies operate, and the liberal democratic model which has done so much to generate prosperity over the last 70 years is very much in the firing line. Scarcely a day goes by without a reminder of how failure to execute good governance undermines the institutions necessary for the generation of prosperity. In the first of two posts, I will take a look at the bigger picture and why good governance matters for the economy before looking more closely at events in the UK where a series of government missteps threaten to pose major economic damage.

Different types of mismanagement but all have the same result

There have been numerous examples in recent years of the consequences of government failure. We need cast our minds back only a few weeks to the huge explosion which destroyed the port of Beirut. This was attributable to a government which in 2014 confiscated a large quantity of ammonium nitrate and failed to store it properly. Clearly the safety of the people was not high on its list of objectives and the episode demonstrates what can happen if governments pursue their own interests rather than those they are paid to represent. In the wake of this disaster, many people now see Lebanon as a failed state.

There are many slower-burning examples of what can happen when a prolonged period of mismanagement results in decay which can be covered up for a long time but eventually results in an inevitable collapse. An example of such a process is evident in Venezuela following the catastrophic failure of governance under the Chávez and Maduro presidencies. Another example is the policy paralysis and corruption in South Africa following years of misrule by President Zuma who mismanaged the economy to such a degree that it has registered an economic and social collapse comparable with wartime. Neighbouring Zimbabwe provides another example, where the Mugabe government ran the economy into the ground many years ago.

All these cases have one feature in common: The government in question used the resources of the state to personally enrich its members whilst ignoring the interests of the people they were put in office to serve. Government failure can also occur through the pursuit of ideological objectives, such as nationalist politics or a religious agenda, which also result in the erosion of the institutional framework. We see this in a number of countries where, as FT columnist Gideon Rachman put it the likes of India and Turkey are pursuing policies that “seek to fuse religion, the nation and the leader.”  For example, Narendra Modi has long campaigned in India on the basis of Hindu nationalism whilst in Turkey, Recep Erdogan’s government has moved away from the secularism of the country’s founding father, Kemal Atatürk. China and Russia have eschewed the religious element but both are engaged in a process of fusing the nation and the leader. We thus see Chinese nationalism expressed in the form of the “great rejuvenation” whilst the recent claims by Vladimir Putin that Russia has developed a COVID-19 vaccine reflect his efforts to score propaganda victories reminiscent of the Soviet Union.

The west is not immune to mismanagement and the US and UK have fallen prey to a nationalist/populist agenda which threatens to impose significant long-term damage to the institutional framework. Words barely do justice to the ineptitude of Donald Trump with Barack Obama criticising him for turning the presidency into “one more reality show that he can use to get the attention he craves.” The United States is the biggest economy and most technically sophisticated nation in the world, and is home to a great number of very smart people. Yet the government is headed by a man who cannot engage in intellectual debate and appears to have nothing positive to offer the electorate. Trump got by in 2016 on the back of the slogan “make America great again” by dog-whistling to an angry electorate that felt it had been left behind. The polls do not suggest he can pull the same trick in 2020 although we should not rule him out just yet.

Why government matters

Most of us in our day-to-day lives do not notice governmental ineptitude until it becomes a critical systemic problem. We are too busy just trying to get by. But the institutions which underpin our economy are often taken for granted and we only notice them if they are no longer there. Take, for example, access to the legal system. Article 7 of the Universal Declaration of Human Rights (UDHR) states: "All are equal before the law and are entitled without any discrimination to equal protection of the law.” But if access to the legal system is prohibitively expensive, as it is for many in poorer countries, they are unable to enjoy that equal protection. Restricting access in this way means that the legal process becomes the preserve of the well-off and entrenches inequality of opportunity. This does not just happen in emerging economies. In the UK, the government took the decision to restrict access to Legal Aid in 2012 which has reduced access for many lower-paid workers and resulted in many charities having to step in to help out those with problems related to housing and access to social benefits.

There is then an issue of the judiciary’s honesty and independence. In many emerging markets, the integrity of the judiciary is questionable. But even in the US, where honesty is not in question, successive US presidents have packed the Supreme Court with nominees reflecting their own ideological bent, thereby ensuring that their political philosophy can echo long after they have left office. This ideological stance matters because it shapes the way people behave which then impacts on the operation of the economy.

Restricting equality of opportunity, either indirectly by hindering access to the legal system or directly via other forms of discrimination, soon translates into inequalities in wealth and income. This has far wider reaching economic consequences. The economic literature suggests that high levels of income inequality have adverse consequences for health, particularly for those lower down the income scale. There are also impacts on educational achievement which is vital in delivering the skills relevant for modern, service oriented economies. Segregating children on the basis of parental income tends to perpetuate educational underachievement for poorer families since the evidence suggests children’s school success depends at least partly on the interests and aspirations of their peers.  

These examples clearly demonstrate the history of post-industrial revolution economies whereby they become richer when equality of opportunity is enhanced, thus generating positive externalities for the economy as a whole. It is thus no surprise that poorly governed economies, in which the government is focused on maximising its own interests at the expense of the electorate, tend to be economically poor. Western economies are not immune. Although Donald Trump has not been in office long enough to do real damage to the US institutional framework, his actions have damaged the US’s standing on the world stage. At least the damage caused by Trump may partially be reversed if he is voted out of office after four years. But in the UK, where the government imposed a permanent shift in the institutional framework on the basis of a dubious referendum, the economic and political damage will be longer lasting. That will be the subject of my next post.