Economic Governance: Using GDP growth as a governance indicator

I am moving away from debt now, but still on the subject of governance and the question: What would good governance indicators look like?

As readers will know, I take the basic definition of governance as 'the exercise of authority by government on behalf of citizens.'

Digging into the definition, I ask why citizens give governments authority. My answer is: To produce outputs and outcomes that require some kind of collective engagement.

I think these outputs and outcomes are the things we should be looking at as governance indicators. They are not measures of governance, but they are indicators (something observed or calculated that is used to show the presence or state of a condition or trend). The outputs or outcomes tell us if governance arrangements seem on track or off track, and can be used to guide discussions of needed reforms, etc. I resist saying that weak outputs or outcomes tell us that governance is good or bad. These are value-laden words that I find misplaced in any discussion of governance.

I think we need to look at outputs and outcomes in different fields of governmental engagement, and stop pretending we can create single measures across whole-of-government structures. Governance indicators developed at the country level assume that governance challenges are the same in different domains where governments operate. This is an amazingly simplified assumption. Governments operate in the health, education, road safety, economic management, sanitation, energy, and national defense fields to name just a few. In all of these fields the outputs and outcomes governments are authorized to help produce are different, conditions affecting production are different, traditions and rules of the game are different, and indicators should be different too.

In my own thinking, there are five major 'fields' where I think governance indicators should be developed for all countries—assuming that governments have some role to play in producing outputs and outcomes in these fields, in all countries and at all times. These are broad fields (that break into sub-fields) and are focused on (i) Economic management; (ii) Safety and security, (iii) Infrastructure provision; (iv) Social service provision;(v) Societal participation and engagement.

I think economic management is one of the crucial fields where governments engage, with other agents in the international, private, nonprofit etc. sectors to produce key outputs and outcomes citizens care about. These include stable financial sectors, controlled inflation, jobs, etc. GDP growth is one key indicator of whether government is using its authority effectively in this area.

This is a simple indicator that measures growth in economic activity in a country from year-to-year and indicates (shows the state of) governance (the exercise of authority by government on behalf of citizens). Where GDP growth is low it suggests that governments face a challenge in the way they exercise their authority: they need to do something different if they are to exercise it effectively and contribute to producing the outputs or outcomes citizens care about (jobs, etc.).

It is a measure that needs to be contextualized, however, as the authority governments are given is linked to expectations and to contextual opportunities and constraints. I'm playing with two approaches to contextualize these indicators. First, I measure how much a country's GDP growth over the most recent three year period (09-11) differs from the average growth rate evidenced in the previous ten years (which shows what was possible in the context and sets some idea about the expectations citizens might have…what they authorize government to do). Brazil scores about a quarter of a point higher in recent growth stats than the prior decade avrage, for instance. Second, I measure how much a country's GDP growth over the most recent three year period (09-11) differs from the average growth rate in countries with similar per capita GDP levels in the same period (09-11). This shows something about what is possible in the global economy, which could also influence citizens' expectations and gives a comparative benchmark. Brazil scores about three quarters of a point higher in recent growth stats than other comparable countries, for instance.

The map below shows GDP growth data in this manner (taken from the World Bank), and there are three kinds of economic governance situations that emerge:

• The countries in green and scoring 3 are those where recent GDP growth is above both the country's own ten year average and the recent average in comparable income countries. Countries in this category include most of Latin America, Turkey, Mongolia, and India. The data tells me that these governments are probably not facing huge pressure in respect of the way they 'exercise their authority in economic management'—at least in respect of general GDP growth. Governance in these countries is not necessarily 'good' but it is—in the short period under consideration—producing the goods. It has been given authority to play a role in the economic management arena of the country and short term results of the 'exercise of authority' are quite convincing (at least measured in terms of GDP growth).
• Governments in the orange countries ad scoring 2 (like Nepal, Kenya and the Central African Republic) face a bit more of an economic governance challenge. They have higher GDP growth rates now than they recorded on average in the past ten years but they still lag average growth rates in countries with comparable income levels. Citizens are likely feeling that the economy is better managed in these countries (most of which are emerging from some kind of fragility) but they are still relatively low growth contexts compared with others.
• Governments in the yellow countries and scoring 1 (like Australia, Sweden, Mauritius, China, and Mozambique) face a different economic governance challenge. They have GDP growth rates that are higher than other comparative countries but lower than the averages in the prior ten years. Many of these countries are the ones that have been able to withstand the world's post 2008 economic slowdown and this may be the message their governments use to explain the slowdown.
• Governments in the red countries and scoring 0 (a large group including the USA, Canada, South Africa, Angola, Pakistan, and Mali) are facing serious economic governance challenges. Their GDP growth rates are lower than the average of the prior decade and the average in comparable countries. Many of these governments will also argue that the slowdown is a result of the 2008 crisis but they may face some tough questions about why other countries slowed down by less after 2008. Governance in these countries is not necessarily 'bad' but is not—in the short period under consideration—producing the goods. It has been given authority to play a role in the economic management arena of the country and short-term results of the 'exercise of authority' are not convincing (at least measured in terms of GDP growth).

 

I am going to propose that this is one way of looking at governance in the economic management domain. Other variables need to be considered when putting this entire picture together, however, showing if growth is translating into jobs for instance, if prices are under control, and if economic participation is improving. Would love any thoughts you have on this as it is my 'thought exercise'.