Why do some countries take off while others stall? Good governance is a key determinant. But how does a society achieve good governance? Through robust, inclusive institutions. But, continuing the Socratic dialogue, how do you achieve solid institutions? We believe the following points are particularly crucial.
Formal and informal institutions matter
In a fundamental sense, institutions are the rules of the game guiding social interactions, including their enforcement arrangements.
These rules can be articulated formally as laws, even enshrined in a country’s constitution. But there are also informal rules guiding social behaviour embedded in a society’s beliefs, conventions, norms, history and culture.
Formal rules are essentially aspirational standards of social conduct a society expects to uphold. However, even the world’s most elegantly written constitutions and laws are nothing but words on paper if they are not implemented in both word and spirit.
It is striking that despite the presence of all the formal arrangements of enforcement, the same laws work in one place but not in others. And that is principally because implementation also depends largely on the informal institutions which govern social behaviour.
Human behavioural factors matter
Institutions are the rules of the game. But how well the game is played ultimately depends on how individuals in societies interact. Economist Adam Smith famously stated that the pursuit of self-interest by individual citizens would benefit society, as if guided by an “invisible hand” of the market.
However, one of the key underlying assumptions in that thinking is that an individual is always perfectly rational and omniscient, and possesses unbounded willpower. Most of us are not blessed with these extraordinary qualities. Rather, we make decisions based on bounded rationality, bounded willpower and bounded self-interest.
Ignoring psychological and social influences on human behaviour helps in dealing with complex, macro policy issues, but provides an incomplete analysis, which often leads to misleading policy prescriptions and inappropriate institutional designs. Making space for human behavioural insights leads to better policy design and institutional practices.
Three fellow travellers
A society’s well-being is shaped and influenced by what we call the three fellow travellers, namely the state, the markets and the community.
The state must ensure security and justice for everyone, and must have legal authority and resources to do so, or else the result would be social chaos. Giving the state unlimited power, however, runs the risk of it becoming a feared despot.
A society needs well-functioning, competitive markets to enable it to efficiently produce, buy and sell, and consume goods and services. However, free markets are far from perfect. Just as the Leviathan of the state has to be shackled, the behemoth of monopolistic enterprises has to be tamed as well.
Of course, there are limits to how well and how much the markets and the state can balance each other. This is where our third traveller, the community, comes in to complete the triad.
Getting a community to take charge of its own development is not easy. One major impediment to achieving this is the asymmetry of power in most societies. Strengthening communities requires devolving political power to them through a process of decentralisation, adopting the principle of subsidiarity in a process aptly described as inclusive localism.
For an effective, prosperous, caring and just society to emerge, not only must each of the three institutions work well individually, but they must also do so while walking in tandem.
Historical experiences of several countries, divided by geography, politics, history and culture, point to some broad lessons.
The end of feudalism in Denmark and the UK, and land reforms in Japan and Korea, empowered the common citizen in each country to gradually demand and obtain the right of voice. Botswana’s traditional kgotla system of extensive community consultation served the country remarkably well in its post-colonial transition. Independent Uruguay expanded the space for peoples’ voice in the country by accommodating a third national political party into its traditional two-party milieu.
Looking into the future, the combined effect of several global mega trends will inevitably lead to higher demand for good governance. These trends include growing (near universal) youth education, increasing gender empowerment, higher numbers of middle- and upper-middle-income earners, the growing economic power of emerging economies, and increasing urbanisation.
Such trends, singly and in combination, will, we believe, create significant pressures for good governance around the world.
Time, history, culture, leadership and, yes, luck all have a role to play in the journey towards achieving good governance, while momentum and speed will vary from country to country. Given each country’s distinct political and social milieu and historical experiences, each will have to find its own way. There is no silver bullet. But enhanced human agency and an empowered citizenry will be key.
Rajat M Nag is a distinguished fellow of the Emerging Markets Forum, and a former managing director general of the Asian Development Bank. Harinder S Kohli is a founding director and chief executive of Emerging Markets Forum, and a former director at the World Bank.
