Unit 4 Macro: Growth Constraints - Conflict and Poor 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 and making it likely that domestic businesses will invest overseas rather than at home.

Accountability

1. Keeping track of election promises
2. Transparency of where tax revenues come from
3. How is state money spent and on whom?

Effectiveness

1. Is the government delivering key public services?
2. How is this money spent? Does it deliver good outcomes per $ spent?
3. Is spending effective in promoting long run development?

Fairness

1. Can people trust government and institutions?
2. How free of corruption is the government?
3. Is the distribution of spending equitable?

Governments need a stable and effective legal framework to collect taxes to pay for public services. In India, 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 - Angola has lost 80% of its farmland because of landmines. Most conflicts are intra-state i.e. civil war and reconstruction can take decades. For example Rwanda has an ambitious development and growth plan but their economy remains highly aid-dependent. About 1.5 billion people live in countries suffering repeated waves of political and criminal violence.

Corruption has long been a barrier to sustained growth and development in Africa. 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:

1. Failures to protect property rights and provide sufficient incentives for new businesses to flourish
2. 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
3. Power elites controlling an economy - using their power to create monopolies and blocking new technologie
4. Stateless areas - large parts of the world are still dominated by stateless societies where the rule of law barely exists
5. 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
6. Conflicts – there have been many conflicts over natural resources e.g. in Sierra Leone