Governance development in emerging nations. How does India fare?

This paper explores the concept that growth in many emerging countries, are struggling now as they failed to build up institutions which support further sustainable growth. This is one main aspect by which India can hope to outscore its rivals if proper steps are taken especially in implementation of reforms and development schemes and in control of corruption.

The World Governance Indicators (WGI) report ranks various countries on their performance on the governance indicators. The WGI ranks the countries on 6 parameters;

• Voice and Accountability,
• Political Stability and absence of violence and terrorism,
• Government Effectiveness,
• Regulatory Quality,
• Rule of law
• Control of Corruption.

The broad findings of the WGI makes an interesting if not surprising reading. The main observations are:

1. The world has not significantly improved on governance over the last 10 years!! The last 10 years has seen a period of high growth, a financial crisis and a stagnation and hence this comment spreads across various economic conditions.
2. The most developed countries are not the best governed e.g. amongst G-8 countries Russia and Italy are not amongst the top ranked countries on many parameters. Some developing economies like Slovenia, Czech Republic, Chile, etc. are well governed countries.
3. Nordic countries, which score very high on social indicators, are amongst the best governed.
4. Sustained commitment to governance is required to build up a good governance ranking.
5. Importantly, any shifts in governance standards in developed industrialized countries can have severe repercussions as was seen during the financial crisis in 2008 in USA. Between 2008 and 2009, the USA score on control of corruption went down by 10% and its ranking slipped by 5 points on this score.

In the last 10 years we have seen many shifts happening in the global economy. In the mid 2000`s, it was the period of the sizzling developing countries especially the BRICS (Brazil, Russia, India, China and South Africa) and other commodity exporting countries like Australia, Malaysia, etc. The developed countries were doing well but all the economic news were full of the turbo charged growth of countries like China and India and it was common to see in all financial and economic newspapers of prediction of future growth rates of these countries and how soon will these countries catch up with the developed world.

As we speak now, the predictions have not come true exactly. The BRICS nation’s growth stories have got stalled. The USA has again become the prime mover of the global economy. It is growing at a steady pace and after many years is looking to increase its interest rates. The shale gas revolution has given a big boost to the US economy with many manufacturing activities shifting back to the USA. Germany`s economy remains robust with its manufacturing business aided by low energy prices and similarly Britain too is showing signs of recovery. Thus we look to be going back to the mid 80`s when these developed countries ruled the roost.

Many reasons can be assigned to the stagnation faced by the star economies of 2000`s especially India and China. One of the questions to be asked is whether these economies have invested enough in building up the enablers for sustained growth like the developed economies. On some of the indicators like education and infrastructure, probably yes but what about institutional strength which is a key building block and an enabler for sustained development? Governance indicators reflect the performance of the nations on institutional development. 

Comparison of India and China

In the recent past, with all kinds of issues in China many comparisons have been drawn between India and China which shows how India is better placed than China. As reported in many places India`s forex reserves are comfortable, GDP growth rate is at 7%+, a stable democracy with a pro- business government and enough room to cut rates to stimulate the economy, etc.  which gives it an edge in the immediate future. What kind of progress have India and China made on governance indicators over the past 10 years? 

The WGI rankings show that China outscores India in 4 out of 6 parameters with India ahead in Voice and Accountability and Rule of Law.

India being a democracy with more democratic rights for people as compared to one party rule in China which suppresses any rebellion and people`s rights, it’s obvious India will score far more than China in Voice and Accountability aspect.

 In political stability China being a one party dictatorial rule, even though very opaque, with no opposing parties scores higher. Secondly, India is a federal system with many powers devolved to the states, multiple political parties and with militant problems in many areas faces the threat of political stability even though it has a had a democratically elected governments at all times except in emergency time. The Chinese government, right from Deng Xiaoping, even though socialist in name was capitalist in thoughts. In pursuit of economic growth, the Chinese government has been very effective in implementing growth oriented policies like building of infrastructure, export zones, etc. At the same time successive Indian governments, even though focussed on growth, have got bogged down at many times, some due to democratic system issues and many due to inaction (like the UPA-2 government) and hence China scores more than India in Government Effectiveness.

 For similar reasons on regulatory quality, which is a reflection of a government`s ability to implement its policies for private sector development, China has been able to outpace India with the gap getting wider between 2009-13 during the ineffective days of the UPA-2 government.  

 Legal implementation and legal rights to businesses have always been a problem in China for all multinational firms. China adopted a legal system just before it opened up in 80`s but the effectiveness of the legal system has always been suppressed and bypassed by politicians and firms with strong political connections. Protection of Intellectual Property Rights, especially in technology, has always been a sore point with western firms operating in China. As compared to that India has had a very good legal system with effective control with the biggest advantage being that the Indian legal system, being adopted from the British system, is compatible with all western legal requirements. The Indian courts have not shied away from taking strong positions either in political or key business issue (like the 2G scam ruling) acting as an effective control on the legislature and thus India scores very highly against China on Rule of Law.

 Both India and China suffer from rampant corruption which is deep rooted. Due to lack of proper institutional strength China has faced massive issues on the corruption front with the opaque governmental processes leading to many issues on corruption. However with many corruption issues getting highlighted in both India and China, owing to media and people pressure, measures have been taken to control corruption. After the 2G scam in India and the Aam Aadmi movement, the present government has taken steps to reduce corruption especially at government level. Similarly in China, the Xi Jinping government and the previous government has been cracking down massively on corruption. The UPA-2 government time was mired in scams and thus India has lost ground to China since the late 2000`s to China on the corruption control front.

How do BRICS countries fare against the developed countries?

Being emerging nations one would expect that the average rankings of the BRICS nations should show an ever improving trend. On the contrary the BRICS average governance rankings have remained almost the same and on the contrary on the 2 important parameters of regulatory quality and control of corruption, the rankings show a downward trend which shows that these countries are still weak on the governance front. India too shows a downward trend on these 2 parameters with China showing improvement on the rule of law and corruption control front.

India scores well above the BRICS average on voice and accountability and in rule of law. India is ranked lower than the BRICS average on political stability, regulatory quality and control of corruption.

Let’s see how India and China fare against the other BRICS countries and the perennial stars G-8 countries (without Russia and hence referred to as G-7 in this paper). The stark observation is that the G-7 countries are way ahead of the BRICS countries on all parameters. The developed nations have built up sustainable institutions and frameworks which acts as a check as well as a good platform to sustain and remain continuously on the growth path. In fact the G-7 rankings have been pulled down to a significant extent by Italy, which given its issues with its unstable governments and deep rooted corruption, has always been low on the governance rankings.

Amongst the BRICS countries, apart from India and China, Russia and Brazil have seen a major collapse in their economies, after the oil crash, as well as due to various misgoverns deeds. In Russia, Vladimir Putin has destroyed and made redundant various institutions in order to further his grip on the country. He has also isolated Russia with the Ukraine issue and the oil crash has severely dented Russia`s finances. Similarly, severe corruption cases in Brazil, like the Petrobras scam, have dented the governance institutions in the country and again the oil crash has only aggravated the issue. South Africa, despite a stable political government, is still grappling with issues related to the black minority and violence in the rural front and hence many governance institutions are still weak.

Imperatives for India

India`s democracy with high degree of freedom of speech and a good legal system are the major positives. The weak governance skills, corruption scandals and poor implementation are the major negatives for India.

What should the Indian government do?

• At present India has got a strong government at the centre with a vision for implementing reforms. Given the federal framework in India, the states play an important role and in the last budget the government has devolved more power to the states. Hence it very important for the Indian government to ensure that the various channels for implementation of schemes be charged up at the state level.
• The bureaucracy has a major role to play in implementation and hence needs to be charged up and protected for effective implementation of development projects.
• The Indian government has been cracking on corruption and black money holders as stated earlier. The government should be ruthless in tackling corruption.
• India has got very good governance institution as compared to many other countries like the judiciary, financial regulators like the RBI, SEBI, etc. The integrity of these institutions shouldn’t be compromised. The actions of the RBI, in face of turmoil in the financial markets, have been exemplary as compared to the other central banks.

The actions of the Indian government over the past one year on governance, especially on implementation, has yielded some results with the latest World Competitiveness Rankings pushing India up by 16 notches.

So Mr. Modi, implementation and corruption reduction which you have been emphasising about needs to be ruthlessly followed up for India to move up to the annals of the developed nations!