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Cambridge don challenges conventional wisdom on "Good" Policies and Institutions

You could write a history of development economics by looking at the succession of catch-phrases that have captured the reigning orthodoxies of the day. If you did, there is little doubt that the current chapter would be entitled "Good Governance." For the past ten years, the international policy-advice establishment centred on the World Bank and the International Monetary Fund has promoted the notion that no economic strategy can succeed as long as poor countries are governed by ineffective and corrupt bureaucracies, managing inadequate and outmoded institutions.

If good governance - and its corollary, good institutions - are the centrepieces of the current development orthodoxy, Dr. Ha-Joon Chang must be counted as its heretic-in-chief. For the past two years, this Cambridge economics professor has led an iconoclastic push against the received wisdom. "Good governance," Dr. Chang says, "should be seen as one of the effects of development rather than as one of the causes."

Dr. Chang turns to history to make his point. Sketching the evolution of a variety of institutions in the developed countries, he shows that many of the structures now seen as necessary pre-conditions for development were late-comers to the scene and took decades to develop.

Take central banks, for instance. These days, no development economist worth his salt questions the notion that a strong, politically independent central bank is a key pre-requisite for economic development. Yet, in his controversial 2002 book, Kicking Away the Ladder, Dr. Chang shows that today's developed countries saw breakneck economic growth decades before modern Central Banks came on the scene. Switzerland only instituted its Central Bank in 1907, Italy in 1893. In many other cases, embryonic Central Banks took decades to develop into today's strong, independent institutions. The German Central Bank only acquired its monopoly on issuing currency in 1905, and the US Federal Reserve did so only in 1929 - a full century after the US began to industrialize. Whatever the benefits of a strong, independent central bank, it cannot be seen as a pre-requisite of economic development.

Similarly, Dr. Chang shows that such mainstays of "good governance" thinking as modern financial sector regulation, competition policies, universal suffrage, child labour laws, intellectual property rights regimes, bankruptcy laws, income tax regimes, unemployment insurance and many others lagged decades behind the main surges in economic growth in the now developed countries. None of today's developed countries, Dr. Chang reminds us, had acquired the kinds of institutions now seen as central to development at the time of their major economic expansion. Instead, such institutions grew slowly, over decades or even centuries, as a response to economic development.

The point is not merely academic. The institutional changes that today's developed countries took decades to achieve are being foisted on today's poor countries at breakneck speed. Adopting such institutions quickly can entail huge costs for countries hardly able to afford them. The 1995 TRIPs agreement, for instance, forced every member country to establish full-fledged domestic systems to enforce intellectual property rights protection, including patents offices, courts, enforcement staff, the works. The cost of setting up such a system has been estimated at $150 million for each country - a very substantial sum for poor economies. Rather than going to build schools, roads or health facilities, these resources were used to set up governance institutions of dubious relevance to the world's poorest countries.

Aid donors in the developed world continue to press the world's poorest countries to adopt the institutions of "good governance"; Dr. Chang continues to dissent. "I am a realist," he says, "I do not expect that this will all change overnight just because one economist - or even 1,000 economists - suddenly show up and say 'hey, you're getting this wrong!'"

"But I do feel strongly," he adds, "that people should know that the advice that the developing countries are getting is in no way supported by the history of how the developed countries got that way."

by Francisco Toro, MERIT/UNU-INTECH PhD Programme