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financial crisis. Overall, trade and investment lead countries to have stronger ties amongst each other and thus contributing to a peaceful and stable world. Domestic or foreign investment, either through the purchase of stocks, shares, real estate etc. and the issue of bonds are secure ways in which a country can save and reap future benefits. Investment is a key pillar of successful economic growth and development in developing countries — partly because the very essence of economic development is the rapid and efficient transfer and cross-border adoption of “best practices” (Klein, Aaron, Hadjimichael, 2001).
In summary, trade removes the constraints placed on growth by the domestic market (Keane, 2011). Trade has a multiplier effect on a country’s economy. Meyn (2008)
summarizes the benefits of trade openness by stating,
An open trade regime is a prerequisite for economic growth because it increases domestic competition, attracts investment, promotes diffusion of technology, stimulates co-operation and learning processes and leads to economies of scale (p. 517).
3.2 Good governance and economic growth
We can all agree that in every country’s upcoming government election, all running slates throw their ideas and enthusiasm of growing and uplifting a country’s economy. There is no doubt that every country’s economy is being steered by their respective leaders and government officials in office (Jones & Olken, 2005). Through monetary and fiscal policies, a country’s government is responsible of ensuring that they provide facilities for their
citizens. Citizens anticipate that their elected officials will keep their campaign promises, but in many countries, this is not the case. To this, the following questions arise: How does the quality of governance influence economic growth? and How are our leaders failing us? This section tries to answer those questions by elaborating in the ways in which bad governance inhibits the continuous growth and prosperity of a country.
The WB (2007) defines governance as:
The traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies;
and the respect of citizens and the state for the institutions that govern economic and social interactions among them (p. 6).
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How can a country ensure that they have good governance? The answer is simple, by good leaders that are interested in bringing about good results to the general population. This sounds very straightforward, however; it has many obstacles.
The selectorate theory, as proposed by Bueno de Mesquita et al. (2003) in their book, The Logic of Political Survival, provides an elaborate explanation and argument on the effects of poor governance which then lead some countries to experience successful
economic growth and why others do not. This theory engulfs all the previous arguments and supplements it by adding that regardless of government type, there still exists corruption and that the general population is the looser. The selectorate theory states that two factors, namely the selectorate (S) and the winning coalition (W) are key components that have direct effect on the governing of a country. Bueno de Mesquita et al. (2003) define the selectorate (S) as “the set of people whose endowment include the qualities and characteristics
institutionally required to choose a government’s leadership and necessary for gaining access to private benefits doled out by government’s leadership” and the winning coalition (W) as “a subset of the selectorate of sufficient size such that the subsets’ support endows the
leadership with political power over the remainder of the selectorate as we all as over the disenfranchised members of society.”
From taxing and spending decisions to leadership turnover and from social welfare to institutional change, these two actors, together with leaders, directly influence a country’s development (Bueno de Mesquita et al., 2003).
Bueno de Mesquita et al. (2003) contend that a leader, with the aid of their winning coalition will do anything to retain power. With the incumbent leader in power, the winning coalition is greatly reaping higher gains compared to the general population. As a result, and in order to continue reaping the gains for a longer time, it is imperative for the winning coalition to ensure their leader remains in office. To this, Bueno de Mesquita et al. (2003) argue that the winning coalition will do anything within their reach. Consequently, the winning coalition will continue to push and influence their leader to pursue three set of decisions. Bueno de Mesquita et al. (2003) posit:
First, they (incumbent political leaders) choose a tax rate that generates government revenue and that influences how hard people work. Second, they spend he revenue raised in a manner designed to keep incumbents in office, particularly by sustaining
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support among members of their winning coalition. Finally, they provide various mixes of public and private goods (p.8).
With these policies, even if the incumbent leader and government are making
decisions with little benefits to the general population, the selectorate is influenced to re-elect the incumbent leader to office. The cycle continues: the winning coalition and leaders are both winners, while the general population pay the price.
With their leader in office, the winning coalition will encourage corruption and leaders will endorse corruption as a reward for their loyal support. The selectorate theory suggests three ways this endorsement takes place: firstly, by providing private goods to winning, coalition. Secondly, by granting the right to winning coalition to expropriate
resources for themselves, and lastly, through kleptocracy. Kleptocracy affects the revenues an expenditure of a country in various ways. These revenues can be used for the growth and development of a country’s social welfare programs and poverty reduction strategies. Figure 3 (p. 47), Core Predictions of the Selectorate Theory summarizes the selectorate model.
In terms of the system of government and regime types, Bueno de Mesquita et al.
(2003) state that in autocratic regimes, a small winning coalition will exist and thus leaders will rely on the usage of private goods to satisfy them. In democratic regimes, on the other hand, with a larger winning coalition, leaders use public goods to satisfy themselves.
In summary, the selectorate theory does blame the form of government together with the selectorate and winning coalition in each country for electing and maintaining a leader that thinks only for the betterment of the winning coalition rather than the betterment of the entire country. The political institutions together with our leaders make inadequate decisions for the welfare of the country, which then leads to the disparities in economic growth patterns in some countries.
Acemoglu & Robinson (2013) provide a similar argument to the selectorate theory.
They posit that the ignorance of our leaders impedes economic growth: “world inequality exists because our rulers do not know how to make poor countries rich (p.63).” The authors state that some economists blame colonizers for the struggles developing countries are faced with. However, they argue that during the colonization period, these countries or areas did
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Figure 3. Core Predictions of the Selectorate Theory
Source: From The Logic of Political Survival (p. 130), by B. Bueno de Mesquita, A. Simth, R. Siverson and J. Morrow, 2005, Cambridge Massachusetts: MIT Press. Copyright 2003 by Massachusetts Institute of Technology.
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experience significant development. After their independence, however, because of
ignorance, per se, on behalf of their country’s leaders, they discontinued the implementation of such strategies, both old and new, which colonizer had in place. The most suitable example of this is the huge disparities amongst neighbouring countries of Mexico and United States.
Scholars Drury, Krieckhaus, & Lusztig (2011) went a little further in analysing the corruption amongst regime type (democratic versus non-democratic) and how they influence economic growth. The results did show substantial support for corruption hindering economic growth in non-democratic regime. Drury et. al (2011) further elaborated on the results by pointing out that corruption in democracies do exist but that it is complex and thus have a minimum and indirect effect on economic growth unlike in non-democratic regime. They further stated that in democratic regimes citizens could mitigate corruption during electoral processes in which they can hold politicians accountable, thus reducing the negative effects.
This is contrary to what citizens can do in non-democratic regimes.
In summary, a few steps must take place in order to ensure good governance. The first step is ensuring the rule of law and/or constitution to prevail in order for citizens to have the freedom to choose their own government through free and fair elections. Ensuring free and fair elections will guarantee the citizens to choose the people they believe is best fit to run the country’s affairs. However, even after having free and fair elections, leaders should not lose the trust of its people, should be transparent at all cost and should try to be as effective as possible. Leaders, when in office should maintain voice an accountability at all times, as this would ensure the continuous mutual trust and support between the government and its people.
This also includes the involvement of the media and NGOs. The continuous mutual trust and support between government and civil society with not only contribute to political stability and absence of violence, but also lead to the curbing of corruption and kleptocracy. With the curbing of corruption and kleptocracy, leaders would then focus on adequate fiscal and monetary policies that induce economic growth. Roquez-Diaz and Escot (2018):
Some of the indirect channels include for instance, improvements in the quality of institutions and macroeconomic policy, institutional development for control of rules, and provisions about property rights, rules of origin, foreign investment direct, and others, because the lack or excess of these measured and trade-related policies, facilitate trade and determine transaction costs (p. 661).
For developing and under developing countries’ ability to escape poverty inequality, leaders/governments need to concentrate on the politics and political process (Acemoglu &
Robinson, 2013). That is, implement policies that deter poverty, not those that contribute to
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poverty and benefit the elites. Good trade policies can promote growth in the longer run. The failure of a country’s leaders inhibits the continuous growth and prosperity of a country.