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Markets and Good Government by Robert Archer
Table of Content OVERVIEW
What is "Good Government"? The phrase "good governance" (good government) first attracted widespread political attention following two speeches, by President Mitterand to African leaders at the Conference de Baule in May 1990, and by Douglas Hurd in June of the same year. These made clear that new political conditions would be attached to the allocation of aid, especially in Africa. The essential features of the new approach were subsequently explored in a number of policy statements by donor governments and multilateral lenders. The core ideas can be summarised as follows:
A competitive market economy. Competitive markets (free enterprise) offer the most efficient forms of economic production human beings have found. State enterprise, by contrast, is inefficient. Governments should therefore make it their objective to return trading and productive activity to private hands (privatisation) and make sure that government policies assist private producers to operate efficiently (in conditions that maintain competition).
A well-managed State Markets and political systems must be managed. This is the job of governments. Some of the signs of a well-managed State are: good long-term planning (macro-economic policy); financial control (low, balanced budgets); efficient institutions; an excellent education system (vital for long-term development); a good health service (ditto); just laws that protect citizens from abuse in economic and political affairs (human rights); and a judicial system that will uphold the law without bias (rule of law).
A democratic civil society. Even when well-designed, open political and economic systems will be distorted or taken over by interest groups (monopolies, oligarchies etc) unless they are held accountable. As voters and consumers, it is the role of citizens in open societies to maintain the quality of their institutions by holding them to account (accountability). Some of the signs of health in open societies are: a vigorous voluntary sector; a free press; functioning democratic processes; changes of government by free election; entrenched rights (human rights). In summary, the Good Government approach claims that sustainable prosperity is generated by an organic relationship between the market economy, the State, and civil society. A wealth-producing economy and a well-run government will sustain the vigour of civil society; a well-run government and a vigorous civil society will give impetus to economic growth; a strong efficient economy and a well-organised civil society are likely to produce efficient government. It suggests there are virtuous circles, flowing from the state to the economy via civil society and from the economy to civil society via the State.
Origins The sudden crystallisation of the new orthodoxy was no doubt due to events at the end of the 1980s. Western governments had fought the Cold War in the name of "liberty", for personal freedom and against state oppression. The collapse of East European communism meant that freedom - and also personal choice, democracy and human rights (ideas often conflated with freedom) - would be important code words in the 1990s. At the same time, the end of the Cold War challenged Western politicians to find new ideas to replace the negative agenda of that conflict. They needed to declare for what "the West" would stand in the world, beyond credit cards and consumer malls. As boom gave way to depression in the early 1990s, and nationalisms of various colours re-emerged across eastern Europe, these questions became more pressing. The challenge to Western economies was as great. The political triumph of capitalism was followed almost at once by the collapse of Europe's communist economies. Western economies were pressed to provide the capital and know-how to refloat them. Initial euphoria on both sides of the Berlin Wall dispersed as it became clear that transforming the countries of east and central Europe into modern market economies would be complex and expensive. Moreover, the demands of transformation coincided with a downturn in western economies. Reform on such a scale had never been attempted; the political risks of failure were enormous. Here too, therefore, Western governments needed a package of tried ideas. They found what they needed in the experience of stabilisation and structural adjustment policies in the Third World during the 1980s. These policies had been developed to deal with two, often associated, forms of economic catastrophe: unsustainable debt; and steep economic decline. The problem of debt was particularly severe in Latin America after 1982. The problem of steep economic decline occurred especially in Sub-Saharan Africa.1 Both kinds of event were accompanied by a range of effects, among which the following were frequent: hyper-inflation; chronic balance of payments deficits; currency crises; rapid growth of public sector employment relative to tax revenue; corruption and deterioration of public administration; increase in state regulation of the economy; a relative decline in international competitiveness. These crises were considered difficult to resolve because it was thought that governments lacked the political authority or will, as well as the economic resources, to take the radical, unpopular measures required. To deal with this difficulty, the OECD donors therefore insisted that the governments of countries suffering from severe debt or decline should impose reforms designed by the International Monetary Fund and World Bank.2 Immediate action was taken to reduce inflation, stabilise the currency, and reduce budget and balance of payments deficits (stabilisation). At a second stage, steps were taken to achieve long-term economic viability, based upon development of the private market and higher rates of economic growth (structural adjustment). Characteristically, adjustment involved shrinking the public sector, privatising publicly-owned enterprises, reducing regulation of foreign and local enteprises, ending consumer subsidies (including subsidies on food and basic needs) and promoting the production of goods for export. The first structural adjustment programmes were applied ruthlessly. They generated steep declines in national income, high increases in unemployment, crippled public services, and did particular damage to vulnerable groups of people. Faced by this evidence, from 1988 onwards the World Bank recommended that increasing sums should be spent on maintaining the public services essential to long-term development (notably education and health) and on protecting vulnerable groups from exceptional suffering. This was the model for economic reform that was presented to the Eastern European economies after 1989. One might say that the "good governance" approach (or "Washington Consensus") melds together an economic reform kit tested on the Third World with political ideas promoted in Eastern Europe during the Cold War. Many in the Third World say that the new official orthodoxy has simply dressed up the brutal economic reforms applied in Africa and Latin America during the early 1980s in the political rhetoric of post Cold War triumphalism.
Strengths This dismisses the policy too lightly, however. In many respects it is new and is intellectually persuasive. First of all, its adoption marks the demise of undiluted neo-liberalism in virtually all States outside Eastern Europe. The new orthodoxy continues to emphasise economic production through private competitive markets. But it affirms that the market has limits - it does not do well some of the things that are essential to economic progress. Secondly, government is no longer perceived as an irresponsible consumer of public resources, to be reduced in size and function as a matter of principle. In fact, government once again becomes central to economic development - as manager, planner, and provider of four services that are fundamental to long-term prosperity: public education, public health, economic infrastructure, and the rule of law. Finally, the "good government" approach promotes certain political factors, especially democracy, the rule of law, and human rights, on the grounds that markets and governments will only remain efficient if they are held to account by voters and consumers - the public. "Civil society" is the third major partner in "good government" because the theory holds that an innovative economy and effective government both depend upon having a skilled, informed electorate that can exercise judgement and choice. This is why education is given such importance. It is believed that the skills and education of the electorate determine the quality of both market economies and modern democracies in industrialised and developing countries alike. The new approach is powerful because governments can apply it with equal consistency to political and to economic reform, and to deal with policy problems in the East, in the South, and in the North. Though it may be said that the approach is not applied in equal measure in Eastern Europe, Sub-Saharan Africa and the industrialised countries, the political language is nevertheless strikingly similar - the language of fiscal discipline, free markets and consumer choice. Moreover it can be applied to international relations. The World Bank is as committed to free trade as it is to competitive national markets. It also considers that growth in economic efficiency combined with growth in international trade is the best path towards economic prosperity for both the industrial and poorer countries. Though there is far less emphasis on the "democracy" of international organisations, the World Bank is also consistent in supporting transparent and orderly international relations in the same way that it supports "the rule of law" within states. Finally it integrates where neo-liberalism deconstructed. The theory says (at least implies) that the functions of and responsibilities of producers (the economy), politicians and officials (the government), and independent citizens (civil society) are intimately related. Where neo-liberal thinking sought to remove government from the range of economic activities, and tended to deny the importance of "social factors", the new approach not only sees the social, political and economic dimensions as part of a whole but is far more interested in seeing how they can positively co-operate and complement one another than in comparing their relative importance. In having an organic, non-mechanical approach, it is inherently more tolerant, more humane and more sophisticated than its neo-liberal predecessors.
Its market heart Nevertheless, the model remains market-driven, wedded to the neo-liberal principle of efficiency through competition. It is consumer-led. It says customers and voters should be sovereign - that governments should rise and fall by popular judgement on their performance (democracy) and that companies and economies should live and die by market competition. Even cultural values must prove themselves in the market-place of ideas. The presumption that political and economic directions should be determined by numerous aggregated individual choices has implications at many levels and is a factor in numerous tendencies observable in the industrial economies. For example, the way in which presentation of information has taken precedence over substance is a political consequence of the fact that consumer and voter choices are primarily influenced by the information they possess about the products or policies they select. Central responsibility for decisions tends to weaken because decisions are held to reflect the preferences of numerous individuals who are required to take account only of their own interests. Political leadership is dissociated from moral and ethical considerations to the degree that political leaders can more easily represent themselves as the servants of public preference. The approach tends to emphasise "countable facts" in judging performance and is relatively uninterested in less accessible values. Having embedded "good government" principles in their policies, OECD governments are now seeking to implement them by encouraging their adoption across the world. This is a controversial process. In the domain of economic policy, Structural Adjustment Programmes are sharply contested by many governments because they undermine naional sovereignty, and even more by NGOs which believe they are designed inappropriately. OECD governments have also placed heavy emphasis on mechanisms of accountability: more and better evaluation, financial reporting, social and environmental audits etc. The governments of poor countries fret at these donor demands for greater efficiency, because of the extra strain on resources they impose - and also because they may indeed inhibit corruption and identify bad practise. The imposition of conditions on aid excites particular controversy. OECD governments have made it clear that their aid allocations will be influenced by the degree to which governments respect democratic and human rights principles. Many governments are critical of this trend, because it may be used to mask falling aid levels - and also because it threatens the interests of authoritarian regimes.3 NGOs that strongly support human rights remain deeply concerned that aid sanctions lend themselves to political manipulation - and may penalise the very poor. The issue of aid conditionality is examined in the final section of this paper.
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