Governance Unbundled

• Author: Shikha Jha and Juzhong Zhuang
• Position: Principal Economist and is Deputy Chief Economist of the Asian Development Bank's Economics and Research Department. This article is largely based on Part 2 of ADB (2013).

GOOD governance—which requires transparency, accountability, rule of law, and effective and legitimate institutions—is believed to be an important piece of economic development, while poor governance can hobble growth in an otherwise vibrant system.

But the rapid economic growth that helped developing Asia narrow the income gap with advanced economies and lift millions out of poverty occurred despite a governance scorecard that—according to standard criteria—has been poor and variable.

What explains this apparent contradiction? To figure out the role of governance in Asia’s prosperity, we draw on a rich body of research and find that there is more to the question than good versus bad governance. Different elements may come into play at different stages of a country’s development. And not all aspects of governance carry equal weight at a particular point in time. Governance reform priorities need to take into account cultural and institutional realities, by focusing on areas that address the biggest hurdles to a country’s growth and development.

The Asian tigers

Asia’s economic advance is well known. Following Japan’s rapid recovery from World War II and expanding economic influence regionally, the economies of Hong Kong SAR, Korea, Singapore, and Taiwan Province of China became what is termed “newly industrialized”—they rose from poverty to high-income status within a generation. Then market reforms in China opened the way for its sustained rapid economic growth. In the past decade, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam emerged as Asia’s newest tigers.

These changes have transformed the global economic landscape. Over the past three decades, developing Asia’s per capita GDP in purchasing-power-parity (PPP) terms increased by a factor of 14—from $497 in 1980 to $6,844 in 2012, growing on average by 8.5 percent a year. Except for a dip during the 1997–98 Asian financial crisis, economic growth has largely been consistent, even after the recent global financial crisis. Developing Asia now accounts for about one-third of global GDP in PPP terms.

With higher growth, the region has made significant progress in reducing poverty (ADB, 2013). Between 1990 and 2010, some 700 million people were lifted out of extreme poverty. Among nonincome indicators of poverty, primary education for both girls (89 percent) and boys (91 percent) is now nearly universal; child mortality declined by half between 1990 and 2011; and more than 85 percent of households have access to safe drinking water today, up from about 75 percent in 1990.

But these remarkable achievements are not matched by similar progress on governance.

Measuring governance

The concept of governance is broad—but nearly always includes voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption.

Various sets of indicators use widely different approaches to quantify aspects of governance, but all tell a consistent story of persistent weak governance in Asia.

One set of indicators—produced by the International Country Risk Guide (ICRG) since 1980—suggests...