Economic Society and Governance in 16 Developing Countries

Working and discussion papers
June 2003
Goran Hyden, Julius Court and Kenneth Mease

Economic society refers to state-market relations, issues that have increasing prominence in an era of liberalization, democratization and globalization. As part of a project to undertake comprehensive governance assessments, we focus here on the nature of the rules (formal and informal) that affect economic society. Is there respect for property rights? Are regulations applied equally? Can business licenses be obtained without corrupt transactions? Is there consultation between the public and private sectors? Are global rules taken into account in developing policy? The way states intervene to shape or reshape these rules tend to be noted by the business community and also society more generally. Such issues are important for legitimacy as well as for policy outcomes related to national development.

This paper presents the findings on the economic society arena in 16 developing countries. Three observations stand out. The first is that governance in the economic society arena can make a difference regardless of existing level of economic development and cultural orientation. The top scorers in this arena are countries with widely different backgrounds. The second point is that ex-socialist countries seem to encounter greater difficulties in this arena than those countries, which have had already for some time an exposure to a market economy. Their transition to a market economy is relatively recent and it must be acknowledged that it takes time. The third point is that most countries have made progress, including those with problems. Economic reform is paying off, even if it may be more slowly than many international advisors would like. Even if globalization and liberalization have had positive impacts on these countries, most of them continue to battle with issues that affect the business climate, in particular, and governance of the regime, in general.

There are a number of implications for researchers and practitioners. For researchers, we believe the priority is for further investigation on how informal property rights may serve as the basis for formalization and the development of a legalized property rights system. For practitioners, a key issue is to go beyond the current tendency to focus primarily on issues of efficiency in this arena and to also focus on issues of legitimacy. The findings, illustrated most topically by Russia and Argentina, highlight the damage that can be caused by an unregulated unleashing of the private sector. Our study suggests that a more comprehensive strategy of improving both state and market institutions as well as linkages between them may be a more sustainable strategy to pursue. In a similar way, more attention needs to be paid to the social implications of the new economic rules that globalization is bringing to each national economy. Although the existing liberal orthodoxy continues to be the driving force behind much of the improved governance in this arena, it needs to be sufficiently tempered so that the gains to date are not reversed by a backlash caused by hubris.