BUSINESS FOCUS; Why Governance Matters

Article excerpt


Economists recognize the crucial role of good governance in economic growth. The literature reveals that significant improvements in governance can triple a countryas income per capita in the long run and decrease mortality and illiteracy. Countries with good governance encourage their citizens to participate in productive rather than diversionary activities (bribery, thievery, piracy). Large increases in productivity, in turn, lead to high growth rates.

The World Bank defines governance as the traditions and institutions by which authority in a country is exercised for the common good. It includes the process by which leaders are selected and monitored, the governmentas ability to manage resources and implement policies, and the stateas and citizensa respect for institutions. Good governance leads to higher production by ensuring that laws are properly enforced, public office is not used for personal gain, and businesses are unhampered by complex regulation.

Since 1996 the World Bank has provided measures of governance for countries worldwide. The aggregate governance indicators are updated every other year by economists Daniel Kaufmann, Art Kraay, and Massimo Mastruzzi through their paper entitled "Governance Matters". The database covers six dimensions of governance: voice and accountability; political stability and the absence of major violence and terror; government effectiveness; regulatory quality; rule of law; and control of corruption. The indicators range from -2.5 to +2.5, with higher values reflecting better governance. This article takes a look at the results of the recently released 2004 indicators for the Philippines and compares these with the regional averages for East Asia.

Voice and accountability refers to the extent to which citizens are able to participate in the selection of those who will govern them. It takes into account factors such as civil liberties and political and human rights. The Philippinesa scored 0.02 in this area in 2004, down from 2002as 0.17. We are not far off though from the regional average of 0.02; however this figure is a considerable improvement from 2002as -0.02.

Political stability and the absence of violence indicate perceptions of the governmentas tendency to be overthrown through extra-legal means. The Philippine rating decreased to 1.01 in 2004 from -0.61 in 2002. The average score for East Asia in this category is 0.23, higher than its rating of 0.19 two years ago.

Government effectiveness signals the quality of public service and the bureaucracy, credibility of government policy, the competence of civil servants, and their independence from political pressure. The Philippines once again performed badly in this area, rating -0.23, a little lower than its score of -0.07 in 2002. The regional average is -0.15, a deterioration from 2002as -0.07.

Regulatory quality reflects the state of market regulation. …