All around the world in matters of governance, decentralization is the rage. Even apart from the widely debated issues of subsidiarity and devolution in the European Union and states’ rights in the United States, decentralization has been at the center stage of policy experiments in the last two decades in a large number of developing and transition economies in Latin America, Africa and Asia. The World Bank, for example, has embraced it as one of the major governance reforms on its agenda (for example, World Bank, 2000; Burki, Perry and Dillinger, 1999). Take also the examples of the two largest countries of the world, China and India. Decentralization has been regarded as the major institutional framework for the phenomenal industrial growth in the last two decades in China, taking place largely in the nonstate nonprivate sector. India ushered in a landmark constitutional reform in favor of decentralization around the same time it launched a major program of economic reform in the early 1990s. On account of its many failures, the centralized state everywhere has lost a great deal of legitimacy, and decentralization is widely believed to promise a range of benee ts. It is often suggested as a way of reducing the role of the state in general, by fragmenting central authority and introducing more intergovernmental competition and checks and balances. It is viewed as a way to make government more responsive and efe cient. Technological changes have also made it somewhat easier than before to provide public services (like electricity and water supply) relatively efe ciently in smaller market areas, and the lower levels of government have now a greater ability to handle certain tasks. In a world of rampant ethnic cone icts and separatist movements, decentralization is also regarded as a way of diffusing social and political tensions and ensuring local cultural and political autonomy. These potential benee ts of decentralization have attracted a very diverse range

https://pubs.aeaweb.org/doi/pdfplus/10.1257/089533002320951037

Decentralization of Governance and Development

We analyze the likelihood of government bailouts of 450 politically connected firms from 35 countries during 1997‐2002. Politically connected firms are significantly more likely to be bailed out than similar nonconnected firms. Additionally, politically connected firms are disproportionately more likely to be bailed out when the International Monetary Fund or the World Bank provides financial assistance to the firm’s home government. Further, among bailed-out firms, those that are politically connected exhibit significantly worse financial performance than their nonconnected peers at the time of and following the bailout. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress.

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Political Connections and Corporate Bailouts

The good governance agenda is unrealistically long and growing longer over time. Among the multitude of governance reforms that “must be done” to encourage development and reduce poverty, there is little guidance about what's essential and what's not, what should come first and what should follow, what can be achieved in the short term and what can only be achieved over the longer term, what is feasible and what is not. If more attention is given to sorting out these questions, “good enough governance” may become a more realistic goal for many countries faced with the goal of reducing poverty. Working toward good enough governance means accepting a more nuanced understanding of the evolution of institutions and government capabilities; being explicit about trade-offs and priorities in a world in which all good things cannot be pursued at once; learning about what's working rather than focusing solely on governance gaps; taking the role of government in poverty alleviation seriously; and grounding action in the contextual realities of each country.

Good Enough Governance: Poverty Reduction and Reform in Developing Countries

In a decade of transition, fear of a leviathan state is giving way to increased focus on oligarchs who "capture the state." In the capture economy, the policy and legal environment is shaped to the captor firm`s huge advantage, at the expense of the rest of the enterprise sector. This has major implications for policy. The main challenge of the transition has been to redefine how the state interacts with firms, but little attention has been paid to the flip side of the relationship: how firms influence the state-especially how they exert influence on and collude with public officials to extract advantages. Some firms in transition economies have been able to shape the rules of the game to their own advantage, at considerable social cost, creating what Hellman, Jones, and Kaufmann call a "capture economy" in many countries. In the capture economy, public officials and politicians privately sell underprovided public goods and a range of rent-generating advantages "a la carte" to individual firms. The authors empirically investigate the dynamics of the capture economy on the basis of new firm-level data from the 1999 Business Environment and Enterprise Performance Survey (BEEPS), which permits the unbundling of corruption into meaningful and measurable components. They contrast state capture (firms shaping and affecting formulation of the rules of the game through private payments to public officials and politicians) with influence (doing the same without recourse to payments) and with administrative corruption ("petty" forms of bribery in connection with the implementation of laws, rules, and regulations). They develop economywide measures for these phenomena, which are then subject to empirical measurement utilizing the BEEPS data. State capture, influence, and administrative corruption are all shown to have distinct causes and consequences. Large incumbent firms with formal ties to the state tend to inherit influence as a legacy of the past and tend to enjoy more secure property and contractual rights and higher growth rates. To compete against these influential incumbents, new entrants turn to state capture as a strategic choice-not as a substitute for innovation but to compensate for weaknesses in the legal and regulatory framework. When the state underprovides the public goods needed for entry and competition, "captor" firms purchase directly from the state such private benefits as secure property rights and removal of obstacles to improved performance-but only in a capture economy. Consistent with empirical findings in previous research on petty corruption, administrative corruption-unlike both capture and influence-is not associated with specific benefits for the firm. The focus of reform should be shifted toward channeling firms' strategies in the direction of more legitimate forms of influence, involving societal "voice," transparency reform, political accountability, and economic competition. Where state capture has distorted reform to create (or preserve) monopolistic structures supported by powerful political interests, the challenge is particularly daunting. This paper - a product of the Governance, Regulation, and Finance Division, World Bank Institute; the Public Sector Group, Europe and Central Asia Region; and the Office of the Chief Economist, European Bank of Reconstruction and Development - is part of an empirical project on governance in transition. For an electronic version of this paper and related research papers and governance data, visit www.worldbank/wbi/governance/. The authors may be contacted at jhellman@worldbank.org or dkaufmann@worldbank.org.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID240555_code001012560.pdf?abstractid=240555&mirid=1&type=2

"Seize the State, Seize the Day" : State Capture, Corruption, and Influence in Transition

The economics of growth has come a long way since it regained center stage for economists in the mid-1980s. Here for the first time is a series of country studies guided by that research. The thirteen essays, by leading economists, shed light on some of the most important growth puzzles of our time. How did China grow so rapidly despite the absence of full-fledged private property rights? What happened in India after the early 1980s to more than double its growth rate? How did Botswana and Mauritius avoid the problems that other countries in sub--Saharan Africa succumbed to? How did Indonesia manage to grow over three decades despite weak institutions and distorted microeconomic policies and why did it suffer such a collapse after 1997?

	What emerges from this collective effort is a deeper understanding of the centrality of institutions. Economies that have performed well over the long term owe their success not to geography or trade, but to institutions that have generated market-oriented incentives, protected property rights, and enabled stability. However, these narratives warn against a cookie-cutter approach to institution building.

	The contributors are Daron Acemoglu, Maite Careaga, Gregory Clark, J. Bradford DeLong, Georges de Menil, William Easterly, Ricardo Hausmann, Simon Johnson, Daniel Kaufmann, Massimo Mastruzzi, Ian W. McLean, Lant Pritchett, Yingyi Qian, James A. Robinson, Devesh Roy, Arvind Subramanian, Alan M. Taylor, Jonathan Temple, Barry R. Weingast, Susan Wolcott, and Diego Zavaleta.

In Search of Prosperity: Analytic Narratives on Economic Growth

This report examines the precise nature of the required institutional reforms needed to achieve higher sustained rates of growth and to make a dent in poverty reduction and provides a framework for their design and implementation. The more modest objective is to examine how the concepts of the new institutional economics are useful for analyzing and designing institutions and to evaluate how political economy concepts can be used to develop strategies for implementing institutional reforms. Employing some of these concepts, the report demonstrates that sound institutional reform can be technically and politically viable in the following key sectors: banking; capital markets and legal institutions; educational institutions; judicial reforms; and public administration.

Beyond the Washington Consensus : institutions matter

The study focuses on decentralization, referring to the process of returning the political, fiscal, and administrative powers, to sub-national units of government. It examines the decentralization transformation of government structures in Latin America, which, since 1983, has largely transferred power, resources, and, responsibilities, to the local level. Eight cases are reviewed, within a framework for sub-national government, revising the functions, structures, and revenues assigned, and, the strategies to synchronize the elements of reform. The macroeconomic threat is addressed through hard budget constraints, analyzing the outcomes of major decentralized states in Latin America, as well as the subtle risk, that empowered local governments may use their political power to undermine national interests, in benefit of individual constituencies. Furthermore, the accountability of authority is examined, revising what is at stake with the decentralization of education, health care, and, infrastructure, under new municipal powers. It is further suggested, that successful decentralization is dependent on consistent political culture, thus, broad sets of rules affecting political behavior are analyzed, particularly on electoral systems and political parties.

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Beyond the center - decentralizing the State

As the world's economy marches toward globalization, people are debating globalization's effect on the poor in developing countries. Will the developing countries be left behind? How can they be helped? What does globalization have to offer them? Since most of the countries in the Latin America and Caribbean region are considered developing countries, the issue of these effects is especially pertinent and it formed the focus of the discussions at this conference. This publication presents some of the papers submitted at this annual conference, the fifth one focusing on developing economies in the region. The 1999 Proceedings talks about decentralization and the need to bring government closer to the people in a rapidly changing global economic environment. For developing countries to realize the power of globalization, they need to concentrate on the power of decentralization, that is, getting their citizens involved in their own development and defining their own future. The aim of these discussions and this publication is to impart the knowledge needed to turn globalization into an asset rather than a liability. To accomplish this goal, the publication focuses on three subject areas: a framework for fiscal federalism; sectoral issues; and local financing and management capacity. This publication will be of interest to academics, policymakers, and decentralization experts.

Decentralization and accountability of the public sector

* Birth: August 14, 1947 * Political Development: Continuing Search for Stability * Economic Development: Continuing Postponement of Structural Change * Social Development: Missed Opportunities * Governance, Corruption, and Development: Some Major Obstacles to Growth and Modernization * Foreign Relations: Searching for a New Identity * An Uncertain Future

Pakistan ; Fifty Years of Nationhood

Part 1 The backdrop: insiders and outsiders the search for a new constituency rise to power. Part 2 The regime in power, 1971-7: restructuring institutions redirecting economic development - management by the PPP left economic decision-making without constraints, 1974-7. Part 3 The fall from power: preparing for elections in 1977 the 1977 elections. Part 4 The Bhutto legacy.

Shahid Javed Burki

Papers

Beyond the Washington Consensus : institutions matter

Beyond the center - decentralizing the State

Decentralization and accountability of the public sector

Pakistan ; Fifty Years of Nationhood

Pakistan under Bhutto, 1971-1977