Good governance good for growth

Trade rule transparency, political stability are needed for progress

Weak governance structures, particularly across developing Asia, are creating bumps along the road to fast economic growth.

While there has been some progress, both in public and corporate governance, this progress has been spotty. Over the past couple of decades, there have been visible slides in the quality of governance across Asia, often linked to one crisis or another. The quality of governance dropped in 1997 during the Asian financial crisis and again in 2008 during the global financial crisis.

This is counterintuitive. A number of studies suggest better governance can lead to faster economic growth and more trade. Advanced economies in Asia have better prospects than most of the world's economies but, according to the Asian Development Bank (ADB). weak governance curtails a positive economic outlook by scaring away investment and limiting trade.

Good governance is not easy to define but includes elements such as political stability, the absence of violence, corruption controls, a voice and accountability.

By most measures, the progress in governance across developing Asia has lagged behind economic growth by a long way.

"One area of reform that we believe Asian policymakers have to pay more attention to is the area of governance," says Changyong Rhee, chief economist of ADB.

On one hand, most countries in the region have been rapidly closing the economic gap that exists between them and the most advanced economies in the world. On the other, they have been much slower at closing a similar governance gap.

In the early 1990s, the average per capita incomes across developing Asia amounted to about 5 percent of incomes across members of the Organization for Economic Cooperation and Development (OECD). a rich-country club. Incomes in developing Asia are now about 18 percent of those in the OECD. In other words, Asia is catching up.

The same cannot necessarily be said of governance.

ADB says most indicators on the International Country Risk Guide - a monthly collection of detailed data provided by the PRS Group, a US risk rating agency - have shown only "modest gains" in the last two decades. In fact, through the 1997-1998 Asian financial crisis, efforts to control and limit corruption dropped visibly.

Developing Asia also trails countries at similar levels of development. The 2011 World Governance Index indicators suggest Latin American countries with similar GDP per capita levels typically perform better in terms of government effectiveness, political stability, quality of regulations, rule of law and voice and accountability.

Better governance matters because, as empirical studies show, better governance creates the conditions for faster growth, higher investment and faster poverty reduction.

This is particularly true for areas such as government effectiveness, rule of law, regulatory quality and corruption control. These are all areas in which East Asian countries are relatively stronger at than South Asian countries - which are, in turn, stronger at accountability and voice.

The quality of governance matters for business and affects their willingness to invest and trade with a particular country. A case in point, says Michael Ducker, president and international chief operating officer at FedEx Express, is the quality of rules and enforcement of rules and regulations related to customs.

This is not necessarily linked to low tariffs or costs but rather to ensuring that the costs are fair to everybody and known.

A recent study by eBay in the United States suggested that 94 percent of their SME customers now export to at least five countries. All these businesses are likely to trade with countries that have efficient and predictable logistics chains, adds Ducker.

In a 2010 study, the New Delhi think tank Research and Information System for Developing Countries noted that trade in Asia "is very much contingent upon governance and institutional quality". Countries with better governance enjoy better trade.

And improved governance at the national level has a broader impact. Better national governance leads to better regional governance and this, in turn, leads to more regional trade, noted Prabir De, the author of the study. Improved governance lowers both the risks and costs associated with trade.

On the other hand, ignoring governance weakness can significantly reduce the positive impact of free trade agreements (FTAs). which are proliferating across the region.

All this is not to say that the situation is not improving. The Asia Corporate Governance Association (ACGA). which carries out periodical surveys on the quality of governance across the region, found in a September 2012 survey that there had been systemic changes in corporate governance in the region since the previous survey in 2010.

Seven of the 11 markets that ACGA tracks saw improved scores, but in three of these countries the scores were slightly lower than in 2007, having dropped significantly after the global financial crisis.

According to ACGA, Singapore and Hong Kong have the best corporate governance in the region. Singapore, Thailand, Malaysia, India and the Philippines have improved. Indonesia has slipped and remains at the bottom of the rankings.

Across the region, the political and regulatory environment tends to change quite quickly, depending on the government priorities of the moment, said ACGA.

Only Singapore and Malaysia have improved consistently in this category in the past half decade while other markets have to contend with overly cautious reform or competing policy objectives.

In the end, improving governance can be both difficult and slow, says ADB's Rhee.

Across much of Asia the quality of governance is typically measured against the quality of public services, he said. Governments can choose to create tools for the improvement of governance in public services such as more public feedback, scorecards or technological tools.

"We really believe that Asia needs to improve governance but a tailored approach is necessary," says Rhee.

For many in Asian countries, says Rhee, "governance reform is an important (part) of the agenda".

Progress is visible in places. There have been very public anti-corruption campaigns in China and the Philippines, where the new president announced a governance reform and has been successful at attracting foreign capital and trade as a result. Indonesia has enshrined governance reform as part of its plan to return to fast growth.

"But saying it is much less difficult than doing it. Implementation and enforcement are key," adds Rhee. "The road is very challenging but we believe it is an area where the payoff can be very large."