Domestic Resource
Mobilization and the
Challenge of Governance
Prof. Mushtaq H. Khan
Department of Economics
SOAS, University of London
Resource Mobilization and Governance

Governance is rightly identified as an important constraint on
resource mobilization in developing countries

Domestic resource mobilization is constrained by institutional
weaknesses and political weaknesses and these are
governance problems

However the response to these challenges is often posed as
one of improving ‘good governance’ and fighting corruption

Problematic confusion between the broad good governance
agenda and the specific governance, institutional and political
tasks that developing countries have to address
Good governance as an end rather than as means

Good governance is a set of desirable institutional conditions
that we do find in more advanced countries




Stable property rights
Relatively low corruption (but high legal rent seeking)
Governments accountable to voters
Strong rule of law

These are desirable goals in their own right, but in theory the
achievement of these conditions would also help resource
mobilization and market-driven growth

Good governance works by improving overall market and
political ‘transaction efficiency’

If good governance conditions can be achieved savers will feel
confident to save, investors to invest, and both will be served by
accountable governments providing public goods
But are these feasible reform objectives?

Good governance has strong abstract theoretical support and
its propositions are theoretically plausible

The reform programme is politically attractive and its goals are
supported by many constituencies in developing countries as
ends in themselves

But just because something is desirable and in theory would
improve performance does not mean that it is immediately
achievable

The problem is that achieving good governance conditions is
very expensive and advanced countries achieved these
conditions slowly over a long period
The ‘cost’ of good governance

Stabilizing property rights requires not just a commitment from
government but the expenditure of real money on enforcement,
arbitration, protection and conflict resolution

Fighting corruption involves having
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
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significant legal sources of finance for running politics,
a budget large enough that all or most of the redistributive demands in
society can be met through the budget, and
regulatory and enforcement structures for converting illegal rent seeking
into legal rent seeking
The political accountability of parties to a broad electorate and
not just to powerful clients requires (amongst many other
things) the feasibility of maintaining political stability through
budgetary redistribution
Good governance is still desirable but…..

This does not mean that improvements in good governance are
not achievable in most developing countries

Improvements are both possible and desirable

The question is whether the feasible improvement along this
path can be significant enough to make a significant impact on
transaction efficiency within a policy period

If the feasible improvement in ‘good governance’ is small, then
we have to look for other governance reforms to achieve
improvements in resource mobilization and the efficiency of
investment allocation

The historical evidence from case studies shows that this is
exactly what successful developers did
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth
(using Knack- IRIS data) 1990-2003
Growth Rate of Per Capita GDP 1990-2003
10
8
6
4
2
0
-2
-4
-6
-8
0
10
20
30
Diverging Developing Countries
40
50
IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth
(using Knack- IRIS data) 1990-2003
Growth Rate of Per Capita GDP 1990-2003
10
8
6
4
2
0
-2
-4
-6
-8
0
10
20
Advanced Countries
30
Diverging Developing Countries
40
50
IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Governance and Growth
Market-Enhancing Governance: Composite Property Rights Index and Growth
(using Knack- IRIS data) 1990-2003
Growth Rate of Per Capita GDP 1990-2003
10
8
6
4
2
0
-2
-4
-6
-8
0
10
Advanced Countries
20
30
Converging Developing Countries
40
50
IRIS 'Property Rights' Index 1990
(ranges from 0 to 50)
Diverging Developing Countries
What are the critical governance goals?

Successful resource mobilization and sustained growth in
developing countries depends on identifying specific market
and government failures that are immediate constraints

A viable strategy should identify governance reforms that are
targeted, narrowly defined, and plausibly achievable in a policy
cycle

These will differ from country to country because their initial
conditions and dominant market failures are different, as are
their institutional and political capacities to address these

Narrowly defined governance goals that address specific
market failures should be identified in national development
strategies
Examples of market failures affecting resource mobilization

Absence of risk-sharing institutions prevents investment in
many potentially profitable sectors in developing countries

In theory good governance would solve the problem by allowing
efficient stock markets to mobilize resources from venture
capitalists for investment in risky sectors

In reality if we rely on this route we will have to wait for a long
time to see any significant effects

The alternative is to explore arrangements where government,
banks and business associations work to set up a small number
of financial instruments to address this problem, perhaps with
joint monitoring and a commitment for enforcement that is
credible because it is limited to specific instruments
Focus on specific constraints

General good governance reforms can dissipate effort and can
amount to lost opportunities for effective reform

The historical experience of state-citizen relationships in
advanced countries suggests that accountability is most likely
to develop if governments pledge specific service delivery
targets for key taxpaying constituencies

The Paris Declaration on ownership gives developing countries
the space to define their own strategies to develop
accountability through taxation and service delivery

Anti-corruption strategies should similarly focus on a few
narrowly defined areas where corruption affects the
implementation of critical national strategies
Pragmatic governance strategies

Success can be replicated and scaled up but a big failure can
cause demoralization for years to come

Governance priorities should be narrowly defined and feasible

They should be linked to specific targets and priorities identified
in national development strategies

It is better to be too conservative and start with very modest
programmes

General lip service to good governance or even worse a
prioritization of ambitious good governance programmes are
unlikely to make an impact on resource mobilization