Can Aid Work in an Environment of
Bad Governance?

Kenichi Ohashi*
January 2022

Abstract
Poor governance is widely recognized as an important impediment to economic growth in mostdeveloping countries. Yet, development partners have not been able to devise an effective strategy
to help those countries solve it. In the meantime, traditional aid, which focuses on helping therecipient countries bridge the gaps in physical and human capital and the weaknesses ininstitutions, has continued on a large scale. This study argues that a different approach is called
for. Using the varied experiences of East Asian economies, the study first validates the theory that
identifies the character of the political economy system as the main determinant of a country’s
ability to achieve sustained growth. The study then elaborates that, in an environment of poor
governance, the traditional way of justifying the value of individual projects is misguided; nomatter how useful the projects may appear, fungibility of aid makes it inadequate to take such a“micro” view. The strategic goal of aid needs to shift from filling the resource gaps to assistingdeveloping countries in overcoming the elite-controlled political economy system andestablishing a more inclusive system. The study contends that by understanding the internal
dynamics that are driving the country toward the critical transition, and by supporting suchtendencies, development partners can deliver much more meaningful aid. Drawing on the author’s
experiences in Nepal, Ethiopia, and Myanmar, the study illustrates how this approach has been
applied in practice.

Keywords: governance, corruption, political economy, inclusive system, aid strategy.

Senior Economic Advisor to the Presidency of the Republic of Kenya from 2014 to March 2021, andformer Country Director, the World Bank (kenohashi2@gmail.com). He commonly goes by Ken Ohashi.
*

Acknowledgement
This report is based primarily on my experience at the World Bank (1979 to 2011), in particular working in
Nepal and Ethiopia as country director, as well as on my JICA-funded assignments to provide policy advice
in Myanmar and Kenya more recently. The author benefited immensely from extensive interactions overfour decades with a wide range of people in those countries, both within and without the governments, andwith many colleagues at the World Bank, JICA, and other development partner organizations.

11. Introduction
In this report, “aid,” as opposed to the broader “development cooperation,” is used toemphasize the financial dimension of assistance that development partners provide to developing
countries, for this is the area that is often most problematic in an environment of bad governance.
“Governance” refers to “the formal and informal arrangements that determine how publicdecisions are made and how public actions are carried out,” as defined by the Organisation for
Economic Co-operation and Development (OECD).1 The OECD further notes that the principal
elements of good governance are accountability, transparency, efficiency, effectiveness,
responsiveness, and rule of law.

1.1 A “micro” vs. “macro” view of aid in a poor governance situation
Most practitioners of development cooperation come to recognize, sooner or later, that“governance” is the basic problem in most developing countries. Corruption is rampant,politicians are rarely interested in the wellbeing of the nation, and many business people are readyto bribe anyone who can give them favors. The situation often feels hopeless. Yet, the need forassistance to such countries appears obvious. Many people live in abject poverty. Access to goodeducation and healthcare, safe drinking water and sanitation, and other elements of decent life is
woefully inadequate. Job opportunities are scarce. Farmers are trapped in subsistence agriculture.
As a result, even where more money is unlikely to be addressing the core problem of poor
governance, many development partners have tended to rationalize their programs by narrowly
focusing on what a specific project is expected to achieve within the confines of that intervention,
or taking a “micro view.”
It is not difficult to construct a narrative that specific projects are useful regardless of thelarger context that is afflicted with poor governance. If one is working on a program to train

See the overview section of the OECD’s policy framework for investment.
http://www.oecd.org/investment/toolkit/policyareas/publicgovernance/
12primary school teachers in better pedagogy, or constructing a new water system to provide safe
drinking water in a village, who could question the value of such programs? However, if the whole
economy continues to perform badly and fails to give everyone a fair chance and improve theoverall quality of life, this justification for development aid seems unsatisfactory. Worse yet, as
explained further in section 2, this approach may even be perpetuating the oppressive politicalstatus quo.
Therefore, we should not lose a “macro view” of the situation, i.e., what impact a specificproject may have on the overall development process of the country. Many development partners
have emphasized governance as a priority agenda. They have typically provided technicalassistance to improve governance-related legislation, create new institutions (like anti-corruption
agencies), and modernize institutional processes and procedures (e.g., introduction of better
public financial management (PFM) system). 2 These are important building blocks of good
governance. However, where the elite class has captured the political and administrative systems
thoroughly, these measures are often adopted merely on paper, so as to keep aid money flowing.
The question of the political economy system is quintessentially a sovereign issue.
External parties have little standing or ability to influence the situation. At one level, this seems
self-evident. On the other hand, simply relying on “technical solutions” to improve governancehas done little. It is similar to taking a “micro view” and continuing with specific projects that“ought to” help the poor. Are there ways for development partners to provide more effective
assistance to a country whose problem is governance? This report will suggest a framework inwhich to think about the issue and how development partners can address it better.

Some development partners have gone a step further; they recognized the importance of strengthening
civil society and the media. This gets closer to addressing the real issue, but it does not seem to become
the main focus of assistance.
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2. Taking a broader view on development and aid
2.1 Argument for the centrality of political economy system in development
In the early days, development aid was based on a simple concept that “underdevelopment” was a result primarily of the shortage of capital (and more advanced technologies
embedded in capital goods) and skilled labor. Therefore, aid can contribute to filling these gaps.
By the 1970s, it was clear that resource transfers were not improving the economic performanceof many developing countries. For instance, the Pearson Commission on International
Development noted in its pioneering report (Pearson 1969, 49) that “the correlation between theamounts of aid received in the past decades and the growth performance is very weak.” This led
to the advent of “structural adjustment programs,” ostensibly to help create a sound policy
environment for economic development. This too proved to be an unsatisfactory answer.
Subsequently, the development community emphasized institutional reforms and capacity
building, and more recently even broader systemic issues, namely the nature of the political
economy system.
This section will present a theoretical framework that argues that vigorous and sustained
economic development requires an “inclusive political economy system.” It will also present the“fungibility” argument to underline why aid tends to fail in an environment of poor governance.

2.1.1 “Fungibility” argument
A key caution on the effectiveness of development aid in an environment of poor
governance was articulated in Assessing Aid: What Works, What Doesn’t, and Why (1998), byDavid Dollar and Lant Pritchett. Based on cross-country analyses as well as analyses of the same
countries under different policy regimes, they demonstrate how the impact of aid varies greatly,
depending on the quality of the policy environment. Their explanation of the ineffectiveness of
aid in a poor governance environment is built around the concept of the “fungibility” of aid. Dollar
and Pritchett point out that when a development partner provides $1 in aid for agriculture, the4country’s government spending on agriculture does not increase by $1. Empirical analyses
showed that it goes up on average by only about 5 cents (Dollar and Prichett 1998, 68-69). This
is not because the rest of the money is stolen. It is simply a practical matter of fiscal management.
Faced with competing demands from all sectors, any sensible minister of finance would reduce
the government’s own funding for agriculture and reallocate that money to the priority programsin other sectors. Although the development partner that provided the $1 in aid to agriculture may
have thought it was boosting the spending on agriculture by that amount, in reality it has allowed
the government to finance $1 in additional spending spread across all sectors.
This is the nub of the matter. If the quality of the government spending in general is very
poor, then much of the additional $1 will have little development impact. One might argue that,with strict oversight from the development partner over the $1 for agriculture, “high-quality
spending” will increase by $1. This is a questionable argument. In this age of democracy, every
government seeks to maintain a modicum of legitimacy by providing some public services.
Without it, social and political opposition to the government could become dangerous to theregime’s survival. If development partners provide valuable public services, it can reduce popular
discontent, thereby in effect allowing the ruling regime to continue wasting domestic resourceson its more dubious priorities.

2.1.2 “Political economy” argument
More recently, North, Wallis, and Weingast have outlined3 a conceptual framework to
describe how transition from a “limited access order” to an “open access order” has been the key
to constructing a thriving economic system. They argue that in the post hunter-gatherer phase ofhuman history (starting approximately 10,000 years ago), violence was controlled by the ruler bycreating economic privileges for the elites so as to keep them contented with the existing politicalorder. (See North, Wallis, and Weingast 2009, Chapter 2.2.1.) Naturally, most people were
excluded from such benefits. This system allowed the elites to control the social and economic
3

Violence and Social Orders (2009), Douglass C. North, John Joseph Wallis, and Barry R. Weingast.

5

order. In the last few hundred years, some societies have moved to a more open order in which
all citizens had access to the political process as well as economic opportunities. Such open accessorder has proven to be far more dynamic economically. They explain the logic as follows (North,
Wallis, and Weingast 2009, 23):
Individuals and organizations pursue rents as vigorously in an open access society as
they do in a natural state, but impersonal economic and political competition result in
the rapid erosion of rents. Joseph Schumpeter (1942) described this process of innovationand change in the economy as “creative destruction.” Innovation itself is a source ofrents. An important form of economic competition occurs through the development of new
products and services rather than lower prices or higher quality. Organizations form to
exploit new opportunities and pursue the rents associated with innovation. Open entry
and access to sophisticated economic organizations are prerequisites for creative
destruction and a dynamic economy.
Except for a few oil-rich countries, all high-income countries today are open access order.
In Why Nations Fail (2012), Daron Acemoglu and James Robinson have developed thisidea further; they explained more clearly why the transition from “extractive institutions” (similar
to North’s limited access order) to “inclusive institutions” (which is similar to North’s open accessorder concept) is fundamental in determining a country’s ability to sustain economic growth. Theynote (Acemoglu and Robinson 2012, 76):
Inclusive economic institutions foster economic activity, productivity growth, andeconomic prosperity. A businessman who expects his output to be stolen, expropriated, or
entirely taxed away will have little incentive to work, let alone any incentive to undertake
investments and innovations.
They further note (——— 2012, 77) that in raising the general income levels, sustainedadvances in technologies are critical. In this regard,This process of innovation is made possible by economic institutions that encourage
private property, uphold contracts, create a level playing field, and encourage and allow
the entry of new businesses that can bring new technologies to life.
Consistent with the works of North, et. al. and Acemoglu and Robinson, this report
defines the two contrasting political economy systems as follows:
An “inclusive system” consists of a set of institutions (including social norms) thatassures every citizen of the country equitable opportunities to engage in any lawful

6

economic activities and be rewarded fairly for their efforts. That would commonly
include institutions to conduct economic policies transparently and effectively, regulate
economic activities to check abuse of market power and violation of safety or
environmental rules, and prevent acute economic inequality. There would also be legal
and judicial systems to protect private properties and enforce contracts, as well as an
education system to equip everyone with the abilities to engage productively in economic
activities.
A “non-inclusive system,” which this report often calls more descriptively an “elitefavoring and rent-centered system,” consists of a set of institutions that gives the eliteclass privileged access to profit-making opportunities, i.e., a license to generate rent. Thisis typically done by giving elites a monopolistic power in the market or preference inpublic procurement, allowing them to abuse workers, consumers, and weaker firms, andletting them misuse or even steal public resources outright.
In economics, “rent” generally means an excess return over and above what a market equilibrium
would yield. In this report, “rent,” as in “rent-seeking,” is used more specifically to mean excess
profits from preferential arrangements, including illicit deals.
By reducing the elite group’s privileged access to economic opportunities and protecting
the ability of everyone to benefit from their economic efforts, countries with inclusive institutions
encourage innovation and investment, thereby raising productivity, which ultimately determines
the level of incomes. By contrast, where the elite group can earn large economic rents by using
their monopolistic power or other ways of limiting competition, the entrepreneurial energy tends
to be directed toward rent seeking. Naturally, an inclusive system requires an effective state thatcan enforce appropriate “rules of the game” and provide the public services to equip its citizens
with abilities to participate competently in political processes and engage productively ineconomic activities.

7

The causal relationship between “governance” and economic development/growth has
been long debated. A broad agreement today is that it runs in both directions, but that improvementin certain aspects of governance will likely have a large effect the country’s ability to growrapidly. 4 From that perspective, the argument here is that building an “inclusive political
economy system” has a decisive impact on sustained growth.
This broad conceptual framework, which explains why some countries have succeededin sustaining growth while others have failed to do so, is used in this report to understand thenature of the fundamental development challenges in countries that struggle with governanceproblems.

2.2 Applying the broader perspective
2.2.1 Evidence from East Asia
Most low-income countries are trapped in a non-inclusive political economy system. It is
not easy to tell whether low income levels cause bad governance or bad governance keeps thesecountries poor. Comparisons of growth performance across several East Asian economies are
more instructive in illuminating the central importance of building an inclusive political economy
system. Many East Asian governments have pursued broadly similar economic policies,
characterized by promotion of market economy and exports, investment in infrastructure andeducation, and macroeconomic stability.5 However, the growth outcome has varied vastly. Figure
1 compares the growth in per capita GDP between the Philippines and Thailand. In 1960,
Thailand’s GDP per capita (measured in 2010 US dollars) was $570, while the Philippines
enjoyed nearly twice the level of per capita income, at $1,059. By 2018, however, their positions
had completely reversed. Thailand raised its per capita GDP level by 11 times to $6,361, while
the Philippines raised it by less than 3 times to $3,022.

See Rodrick (2008) and Grindle (2005).
The so-called East Asian miracle formula is outlined in The East Asian Miracle: Economic Growth andPublic Policy (1993) by the World Bank.
4
5

8

.

The most compelling explanation for the difference lies in the extent to which theeconomic system favors the elite class. The Philippines is often characterized as a country thathas been dominated by 30 or so oligarchic families. Traditionally, they controlled the plantation
sector and trade. Today, their strongholds are real estate, finance, and telecommunications. In eachof these sectors, they were able to establish oligopolistic dominance domestically and have tended
to be sheltered from international competition, thereby finding opportunities for large rents. The
manufacturing sector has never become internationally competitive, as it did in many other East
Asian countries. Income inequality and poverty remain high. The poverty rate using the $3.20 per
day threshold (based on 2011 PPP dollars) was 26% in 2015. (This stands in a sharp contrast to
0.5% in Thailand in the same year, though at a comparable level of income, Thailand’s poverty
rate was similar nearly 20 years ago.) Perhaps even more damaging to the future of the country,
the Philippines struggled to raise its primary enrollment rate above 90% for many years. Only inthe last few years, the enrollment rate has risen to about 95%. In Thailand, primary school
enrollment was virtually universal by the 1980s.

9In 2011, according to an estimation by Cielito Habito, the wealth of the 40 richest families
in the Philippines increased by an equivalent of 76% of the GDP increase in that year.6 It is verymuch an elite-favoring economy.
The Thai economy too had been dominated by a relatively small number of family-owned
business groups. They have tended to specialize in trade and agro-processing type industries (e.g.,rice milling, sugar, breweries). Many have relied on monopoly rights to certain products and othermeans of limiting competition to generate large profits. However, the monarchy, which projects
itself as representing the entire nation, has provided a countervailing political weight to the narrowinterests of the economic elite class.7 The state bureaucracy retained a measure of independence
from business interests and was able to pursue economic and social policies that benefited thebroader interests of the people. Access to basic education and healthcare is virtually universal,
though the quality remains a concern. The government also played an instrumental role inpromoting industrial development. It was particularly successful in attracting massive foreign
direct investment (FDI) from Japanese automakers since the 1980s. The share of manufacturing
in GDP rose from 15.9% in 1970 to over 31% by 2010, and created large numbers of jobs withdecent pay. This has contributed to a sharp reduction in poverty; “abject poverty” has been largely
eliminated.8 It was a significant step in the direction of a more inclusive economic system.
However, this impressive growth record of Thailand is overshadowed by that of South
Korea. In Figure 2, one sees that between 1960 and 2018, per capita GDP of South Korea rose by
28 times (as compared to 11 times for Thailand). South Korea’s economy was probably just as
elite captured until the 1950s as the Philippines’ economy. However, under the Park Chung-Hee
regime, all this changed. (See more in section 3.3.3.) Rent seeking as the main business model
Habito presented this finding at the 2013 Philippines Development Forum (March 4-5, 2013). His
calculations also showed that the comparable ratio was 33.7% in Thailand and 2.8% in Japan.
7
Although the Thai monarch’s role is ceremonial, the late King Bhumibol Adulyadej, during his 70-year
reign (1946-2016), became so deeply revered by the Thai people that he gained considerable moral
authority over the government as well as the nation as a whole. His avowed commitment to the bettermentof all Thais exerted an important influence on government policies.
8
According to the World Bank database, the poverty headcount ratio (% of total population) at $1.90 per
day (2011 PPP dollars) has been virtually zero since 2011 and the ratio at $3.20 was 0.5% in 2017.
610

was shut down decisively. The government relentlessly pushed large business groups (“chaebols”)
to compete, especially in export markets (as the country was in desperate need for foreignexchange to support industrial growth). With its control of the banking sector and allocation offoreign exchange, the government would reward or punish companies depending on their export
performance. Although the government’s industrialization strategy initially focused on making
chaebols compete, since the mid-1970s, small and medium-sized enterprises (SMEs) have growndisproportionately. The economic system was becoming more open to new entrants and more“inclusive.” South Korea also implemented land reform after World War II, and created manysmallholder farmers. Although government policies were not supportive of the newly-createdsmallholder farmers through the 1950s, 9 they became much more favorable under the Park
government. This helped to create an agrarian foundation for industrialization. Widespreadownership of land immediately absorbed a large portion of underutilized labor in farming. The
expanding agricultural production improved South Korea’s food security and helped keep foodprices stable. The rising income levels of smallholder farmers generated demand for consumer
goods that stimulated industrial investment. As industries grew, rural families became the sourceof industrial workers. As this process continued, labor became scarce in the rural areas, which led
some farmers to mechanize.10 A robust smallholder agriculture sector and a thriving industrial
sector created a mutually-reinforcing pattern of growth. In the meantime, education was improved
and gave all children a chance at a decent job. Over time, Korean companies went from importing
technologies to developing their own, which is evident from the rise of companies like Samsungand Hyundai. This is also confirmed by an exponential increase in the number of patents granted
to South Korean nationals (see Annex Table 1). South Korea created an inclusive economic

Most importantly, to cater to the needs of urban households, the government instituted a policy of
forcing farmers to sell rice to the government at very low prices.
10
The effect of land reform in South Korea was more modest than that in Japan. In part, this is probably
because most farmers ended up with only about 0.5 ha of land in South Korea, as compared to about 0.75
ha in Japan.
9

11system that was built on competition and innovation. Politically, the regime was not so open but
this also began to change in the 1980s.

Unlike South Korea which sustained fast growth much longer and joined the ranks ofindustrialized countries, 11 Thailand is now struggling with the “middle-income trap.” Thaicompanies are failing to move into higher-value manufacturing (such as precision equipment,
industrial machinery, pharmaceuticals). Because rent-seeking remains an important aspect of Thaibusinesses, many Thai companies do not feel compelled to develop their own technologies andmove up the industrial ladder. Such investments are expensive and risky. When there are lucrative
rent-seeking opportunities available to influential business groups, there is little incentive forinnovation. This shows the critical importance of making a full transition from an elite-favoring,
rent-centered political economy system to an inclusive one. Part of the reason why Thailand has
managed to grow rather successfully is its proximity to fast-growing economies and sources of
FDI.

11

South Korea joined the OECD by 1996.

12

The varying development outcomes from East Asia lends strong support to the conceptthat inclusiveness of the political economy system is the fundamental determinant of sustained
economic growth in the long run.
In Why Nations Fail, the key causal link between an inclusive political economy systemand sustained economic growth is innovation. Acemoglu and Robinson argue that inclusive
systems encourage more innovation, hence stronger growth on a sustained basis. When one
observes how companies like Samsung and Hyundai in South Korea, or Sony and Honda in Japan,
have contributed to economic growth of those countries, this seems intuitively right. However,the Annex offers some quantitative evidence, based on the number of patents, from East Asia tosupport this critical claim.

2.2.2 China exception?
Many would point out that China seems to contradict this thesis. It is evident that thepolitical economy system is not inclusive. By all accounts, senior Communist Party members
enjoy many social and economic advantages. Yet, it has staged perhaps the most spectacular
economic growth in human history. It is premature to judge whether China has found a way tosustain rapid economic growth without becoming an inclusive system. The rapid growth of China
in the past is in significant part a reflection of “catch-up.” China started from a very low income
and technology level, as well as an economic system that provided little incentive for hard work.
When the people were allowed to benefit more directly from their own economic efforts (likeprivate kitchen gardens in the early days of economic liberalization), it unleashed an enormous
amount of productive energy. The country was also able to absorb more advanced technologies
simply by copying what was already widely available outside China. All this, combined with thegovernment’s strong encouragement for economic growth, generated phenomenal growth.
Now that China has largely exhausted the easy opportunities of “catch-up” growth, it will
have to begin developing its own technologies, if it is to continue its march toward the ranks ofOECD countries. This is where the innovativeness of an inclusive system becomes critical. In fact,

13

Acemoglu and Robinson (2012) predicted that it will not be possible for China to sustain its drive
toward a high-income nation, without a major change in the political economy system. Morerecently, they have also argued, in The Narrow Corridor (Acemoglu and Robinson 2019), that theinstitutional capability of the Chinese government is much weaker than many people tend to
think. 12 This too suggests that China may be heading for a middle-income trap. This is notinevitable, but a view that China’s growth momentum is unstoppable is also simplistic. For the
moment, the notion that China has found a different way to reach a status of high-income county
remains an interesting but not a convincing thesis.

3. Aid in a poor governance environment
The thesis that has been outlined above has important implications for development
assistance. At the core, aid should be about helping a country transform itself from a system
controlled by “extractive institutions” into a system that is governed by “inclusive institutions.”
Tinkering at the margins will not go very far. What does this mean for development partners?

3.1 A “hard-nosed” approach
A very hard-nosed approach may be to, in essence, cut off all aid until a country is actuallytrying to overhaul the political economy system. There are many who believe in such an approach,in no small part because they think development partners are part of the problem; motivated bytheir own self-interest, they would tend to continue giving aid even in a bad governanceenvironment. Their criticism of development partners is not without merit. However, there areseveral problems with this idea.

The Narrow Corridor argues that a capable but accountable state emerges only if society also becomesstronger with the state. When the balance of power shifts too much in one or the other direction, the country
will end up with either a tyrannical or a very weak state (thus the “narrow corridor” of balanced evolution).
In their view, because the Chinese Communist Party has not allowed society to become strong, the Chinesestate has not grown in its capabilities, either.
1214First, just to make the correct call on whether a genuine reform is underway, continual
engagement is important. For instance, before a sudden political shift began in Myanmar in 2010,
unlike most other development partners, the Japan International Cooperation Agency (JICA) had
maintained at least its assistance for basic human needs on humanitarian grounds. Its continual
engagement put JICA in a much better position to know what was happening in the country. It
was well ahead of others in becoming aware that an opportunity to support critical economic
reform was emerging and in delivering timely assistance, even while agencies like the World Bank
were scrambling just to reestablish in-country presence.
Second, there is something to the notion that aid can play an important role in supporting
reformers, even before they succeed. The World Bank’s experience in Nepal in the early 2000s is
a case in point. In 2001, the Maoist rebels escalated their armed conflict with the government,
engaging the army for the first time. This led to a sudden pressure on the fiscal position, as themilitary spending rose and the tourist revenues declined. The government sought budget support
from the World Bank to ease its fiscal problem. About the same time, a group of senior civil
servants emerged who recognized the need for social and economic reforms. They saw thedeveloping fiscal crisis as a lever by which to overcome political resistance. This was an importantinternal dynamic the World Bank felt it should support, though government commitment to reformat the political level remained tenuous. For instance, the Community School Support Project wasapproved in 2003, specifically to promote transfer of management responsibilities over public
primary schools to communities, before it was clear that such a policy would be implemented. In
the end, those forward-looking technocrats prevailed and some important reforms were
implemented. 13 In recognition of those actions, the World Bank provided the first Poverty

Key policy measures included revamping of the budget system to focus resources on priority
development projects, handing over of management responsibilities of public primary schools tocommunities, placing under external management teams the two ailing public sector banks, setting up an
independent Roads Board to improve road maintenance, strengthening the legal power of the independentanti-corruption commission, and more.
13

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Reduction Support Credit (PRSC I) of $70 million to Nepal in 2003.14 In this instance, continual
engagement by the World Bank proved pivotal in facilitating the reforms.
Third, there are international agreements that tend to make development partners
unwilling to take hardline positions. A series of joint declarations on aid effectiveness, from theParis Declaration on Aid Effectiveness (2005) and the Accra Agenda for Action (2008) to the
Busan Partnership for Effective Development Co-operation (2011), has emphasized country
ownership of the reform process. It recognized that each country has to navigate through its own
reality of political economy, and hence outside actors should refrain from passing judgment onwhether the recipient country is “doing it right.”15
Fourth, donor countries do face domestic political dynamics that complicate theirsituation. It is not easy for most aid agencies to suddenly increase aid, because the aid budget
tends to be fixed in the national budget. This tends to push for maintaining some level of aid in
all the target countries. In turn, this makes it difficult to take a hardline position on reform.
Because of the diplomatic relations between the aid providing countries and aid receiving
countries, such a pressure tends to be stronger on bilateral aid agencies. However, multilateralagencies are not free from similar pressures.
More importantly, it is rare that development partners cannot find any group of people inthe country whose endeavor to reform the political economy system merits support. As this noteargues in the next section, in every country afflicted by poor governance, most people actuallywant the situation to be different. That desire and the energy it creates for social and politicalFirst Poverty Reduction Support Credit to the Kingdom of Nepal. 2003. World Bank report No. 26556NEP.
15
Behind these agreements is a recognition that the structural adjustment programs that were imposed on
many developing countries in the 1980s and the 1990s often ignored the severe economic and social impact
of policy reforms, especially on the poor. The International Monetary Fund (IMF) and the World Bank
spearheaded such programs, but many bilateral donors were also supportive, often providing co-financing
for IMF or World Bank loans. This has left a deep sense of distrust of such programs in many developing
countries, making them wary of any attempt by development partners to impose their ideas for reform. On
their part, development partners too have become reluctant to make strong recommendations on sensitive
issues like governance.
14

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change give development partners an opening for truly useful development aid, and a realjustification for continuous engagement.

3.2 Situating aid in the historical dynamics of the country
Most of today’s low-income countries remain trapped, to varying degrees, in an elitefavoring and rent-centered political economy system. In today’s world, however, there is likely
to be a more endogenous dynamic that is pushing for transformation. People everywhere havebecome aware of the existence and possibility of an “inclusive political economy system.”16 In
Development as Freedom (1999), Amartya Sen argued the desire for “freedom” is innate andrealizing it is the ultimate goal of development. It seems evident that in every country, mostcitizens want freedom, from oppression, deprivation, and insecurity and freedom to pursue
opportunities to attain one’s full potential. One can expect most people want “inclusive
institutions,” even if specifics of what they want may vary depending on their situations. This
dynamic is the fundamental force that will drive the long-term trajectory of any developing
country. If this transition accelerates, it will improve the chance of the country achieving sustainedand equitable economic growth sooner. More than anything else, this should be the core agenda
for development.
If we accept this “macro” perspective on development, then the goal for aid should be tosupport the internal dynamic that is pushing for the transition to an inclusive political economy
system.

3.3 How do transitions to an inclusive system happen?

North, Wallis, and Weingast (2009) and Acemoglu and Robinson (2012) both suggest that transition to
an inclusive system is not inevitable. Acemoglu and Robinson lays out more explicitly how the transition
tends to be a result of historical accidents, though once a significant movement starts toward an inclusive
system, the process tends to become self-reinforcing. This report takes the view that the process is moreendogenous in many countries, though not deterministic.
16

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To deploy aid in support of the transformational process in a particular country, it isessential to understand the specific dynamics that drive it. Nevertheless, it is useful to see howsuch a transformation has happened in some countries. Why Nations Fail presented the Industrial
Revolution as a key case study. However, there are more recent examples that may be more
relevant to today’s developing countries.
Four countries that have achieved the most impressive economic progress in the past 100
years are Japan, Taiwan, South Korea, and Singapore. They managed to transition from an elitefavoring, rent-heavy economies to an inclusive system, and have all achieved a status of highincome country. What follows is a quick synopsis of the transitions these countries went through.

3.3.1 Japan (1945)
Japanese economic modernization goes well back into the middle of the 19th century. Up
to WWII, however, the industries were dominated by the family-owned “zaibatsu” groups, which
formed close alliances with the military and the military-dominated governments. They benefited
from government procurement, the protected markets and exploitative labor practices in thecolonies (Taiwan, Korea, and Manchuria). All this came to a crashing halt at the end of WWII.
This was the critical moment of transformation. Under the tutelage of the US occupation
administration, the zaibatsu groups were dismantled, and a more transparent and open businessenvironment was put in place. The loss of colonies also meant that to earn precious foreignexchange, Japanese companies had to compete in the export markets in the US and elsewhere.
This led to the growth of a range of competitive modern companies, like Sony, Toyota, Panasonic,
and many more. These companies did not depend on privileged access to markets or sweetheartdeals from the government as key sources of profits. They were focused on producing competitive
products. Simultaneously, a major land reform program was implemented, thereby creating a large
number of smallholder farmers. Land reform in Japan was perhaps one of the most successful.
Even more than in South Korea, it helped to create a mutually reinforcing growth dynamic
between agriculture and manufacturing.

18

3.3.2 Taiwan (1949)
When the Kuomintang was defeated by the Chinese Communists on the mainland andescaped to the island in 1949, the party leadership went through a serious self-reflection process.
One of the key conclusions was that allowing corruption to spread in the government was a fatal
mistake. They resolved to clean up the government institutions. The Kuomintang also faced acompelling need to build a competitive economy, so that it could afford to maintain a strong
enough military to ward off any threat from the Communist forces.
To promote export-oriented industrial investments, the government put in place various
fiscal and other incentives. One key measure was limitations on land purchases, to discourage
land speculation, which often attracts much money in developing countries. This established anenvironment in which corruption was contained and competitive companies, small and large,
thrived. The government’s industrial policy was quite scientific. Taking the concept ofcomparative advantage seriously, it invited prominent economists of Chinese origin from abroad
to advise it on what kinds of industries to promote.17 Over the years, Taiwan was also consciousof the need to build more advanced industries, and the government provided strong incentives forprivate companies to move into high-tech industries.18

3.3.3 South Korea (1961)
When South Korea was freed from Japanese colonial rule in 1945, the economy was
dominated by the landowner class, which also held much of the political power. The businesssector was controlled by the same group of people, who generated much of the profits throughrent. The economy remained extremely weak, and poverty was severe. Even after the Korean War(1950-53) when the need for serious economic reforms was evident, President Rhee Syngman’s

T.C. Liu and S.C. Tsiang, both of Cornell University, were among those who were involved in advising
the government of Taiwan on its industrial policy.
18
For instance, the government established the very successful Hsingchu Science Park in 1980, to promote
high-tech industries.
17

19

government allowed the old ways of business to continue. The turning point came when Park
Chung-hee took power through a military coup in 1961.
He was keenly aware of the need to revamp the whole economic system. An astuteobserver of the Japanese industrialization strategy, he refined it in a critical way. On the basic
approach of infant industry protection, he overlaid ambitious export targets as a performancemeasure. He famously chaired monthly meetings with the heads of main “chaebols” to review
their progress. The exacting performance standards led many chaebols to fail and disappear, but
those that met them were given strong government support (especially in terms of credit andforeign exchange), and turned into the likes of Samsung and Hyundai. These companies, in turn,created a highly meritocratic employment system, a hallmark of an inclusive economic system
which gives fair opportunities to everyone.

3.3.4 Singapore (1965)
When Singapore separated from Malaysia in 1965, its economic and fiscal foundations
were so weak that many wondered whether it could survive as an independent nation. Armedforces were practically nonexistent, and the government feared a possible take-over by communist
sympathizers, with support from their allies in Indonesia. Under these circumstances, Prime
Minister Lee Kwang Yew knew that he must build a strong economy rapidly, to generate enoughjobs for the working-age population and quell social discontent, and to equip the state with basic
capacity to defend the country and support economic growth.
Lacking in any natural resources to exploit, he believed that Singapore needed to become
an “oasis” of good governance (in a region that was known for a corrupt investment environment)
where investors, especially multinational firms, felt comfortable investing. From day one, headopted a “zero tolerance” policy on corruption, creating an anti-corruption agency directly under
the prime minister’s office. The main investment promotion agency (Economic Development
Board) was also placed under his direct oversight. The single-minded effort, in essence, to create
an inclusive economic system paid off, with spectacular growth in investment and income.

20

In all these countries, corruption did not disappear entirely. Still, the main focus of thebusiness community shifted from rent seeking to value creation, a key trait of the inclusive
political economy system. In these cases, foreign aid as such did not play a key role in causing
the transformation itself. The transformation was largely internally driven (though in the case ofJapan, the basic driver was the US-led occupation administration). Nevertheless, aid was wellaligned with what each of these countries was doing to build an inclusive system.

3.3.5 The role of national crisis and autocratic government
What is common across the four episodes is the role of national crisis. Once established,
an elite-favoring and rent-centered political economy system is quite durable.19 Since the elitegroup has both the incentive to maintain the status quo and the political and economic influence
to do so, the general public is hard pressed to upend the control by the elite. When there is a crisis
that forces the national leadership class to rethink the basic structure of political economy, a realchange seems to become possible. Furthermore, all these transitions happened under autocratic
political regimes. It is clearly easier for such regimes to stifle resistance from vested interests.
What has transpired in Rwanda after the genocide (1994) seems to offer another example.
Under President Kagame, the country has been building a transparent business environment. In
fact, Rwanda explicitly views Singapore as its economic model. It is still a work in progress, but
it does seem that a new business culture is taking hold. Again, it took a catastrophic crisis to bringabout a reorientation of the country.
Elite-captured as they may be, many developing countries operate in electoral
democracies of one kind or another. People would often ask whether any democratic country has
made such a transition, especially without falling into an existential crisis of the kind all thesecountries faced. And, can aid play any useful role?

North, Wallis, and Weingast (2009, 2) argue that the first social order to be established in history is anelite-centered structure (“limited-access order”). For that reason, they also refer to it as the “natural state.”
It is only in the last two hundred years or so that some countries started to transition into the open-accessorder.
19

21

3.3.6 Break in history
There is an instructive example in Myanmar. Myanmar had been under military rule since1962. In international isolation, much of the economy was dominated by “crony capitalists” whoformed strong alliances with the Army. In return for huge payments they made to the Armyleadership group, these businesses were given the rights to exploit mineral resources (especially
gem stones) and teak forests and the licenses to deal in highly-valued goods (e.g., imported usedcars). This was a quintessentially rent-centered economy. When the reclusive military regime
launched a process of political and economic opening in 2010, most were caught off-guard. It
appears that the military leadership at the time had quietly concluded that its strategy of isolation
and repression had put the country on a dead-end path. It handed over the responsibility to
implement limited democratization and economic liberalization to the Thein Sein Administration.
His administration started to move with rapidity that surprised everyone. People began to feel theold rules had been jettisoned. There was a “break in history.” In this environment, the government
had the opportunity to rewrite the economic rule book and put in place a set of key institutions to
support an inclusive economic system. As I describe further in Section 4.1.3 below, the Thein
Sein government did move the country significantly in the direction of an inclusive system.
Unfortunately, the military coup d’état of February 2021 shows that the current military leadershipgroup did not appreciate the rare opportunity for systemic transformation that Myanmar had in its
grasp. Nonetheless, the events of the last decade do illustrate how a break in history can play acatalytic role in moving a country toward an inclusive system.20

4. Putting the new perspective into practice
4.1 Identifying opportunities for supporting the internal dynamics fortransformation—three country examples

20

Such a moment can be thought of as a “critical juncture” in the language of Why Nations Fail (2012).

22

Even if the common people’s desire for a more inclusive (or fundamentally moredemocratic) system is universal, how such energy manifests itself in the historical evolution of acountry varies. Development partners need to understand the nature of the change dynamic in any
specific country and identify the right entry points to help the internal process. It is not an easy
undertaking. However, seeing how such analyses have been done in a few cases may offer usefulhints on how to begin the process. The three country examples below are based on my own
experiences, and illustrate a range of approaches that may emerge from such an exercise.

4.1.1 Nepal
A multi-party democracy was restored in 1990 through the “People’s Movement” (JanaAndolan). For a time, the democratically-elected government pursued important economic reform
programs and showed an interest in the wellbeing of the general public. Soon, politics became
corrupted and political power seemed to be sought mostly as a source of private gains. The oldcaste-based social structure proved resilient and the lower social groups continued to suffer fromlimited access to educational, economic, social, and political opportunities, much as they had
under the previous “Panchayat” regime (a ‘partyless’ political system under monarchical rule). It
was in such a context that I served as the World Bank’s Country Director for Nepal, based in
Kathmandu from 2001 to 2007.
In late 2001, the Maoist rebels escalated their armed conflict with the government,
engaging the army for the first time. As described in section 3.1 above, this led to a fiscal crisis,
which in turn gave a group of reform-minded senior civil servants an opportunity to push throughimportant economic and social reform measures. While supporting them wholeheartedly, theWorld Bank team also knew that this could well be a short-term situation, created by a coincidenceof a fiscal situation and a fortuitous presence of several competent and reform-minded civil
servants in influential positions. Nevertheless, there was no organic connection through which the23popular will gave the reformers political power. They had to capitalize on tactical openings topush forward reforms.21 By 2005, it was becoming difficult to sustain the momentum of reform.
The end of the civil war in 2006 was an “open moment”22 created by a national crisis andbreak in history. People were ready even to countenance abolition of monarchy. However, theruling class of Nepal failed to seize that moment. The Maoists came into the political mainstream,in a peace agreement with the “democratic parties.” The history since then abundantly shows thatmost of the Maoist leaders were no different from the other politicians. What started as a cause
for social and political reform ended up being a captive of the old values and norms. It was not
the real driver of the long-term transformation that Nepal desperately needed.23
Even before these political developments, the World Bank team focused on communities
as the source of the real impetus for social transformation. Because of its geography which isolates
many small communities, especially in the hills and mountains, and a harsh climate which
exposed even wealthier families to periodic economic difficulties, community bonds tended to bestrong. As a matter of fact, since the 1970s or so, some of the most successful development
programs in Nepal were community-based. Perhaps the most spectacular case of success iscommunity management of forests. In the 1970s, there was a concern that Nepal was becoming
denuded of forest cover. By allowing communities to manage forest resources, Nepal has reversed
this trend. Forest cover has increased from 36% in 1984 to 45% by 2015.24 The World Bank’s
own experiences with “community-driven development” (CDD) projects has been encouraging.

For instance, the initiative to hand over the oversight responsibility over public primary schools to theparents (through elected school management committees) was vehemently opposed by the teachers’ unions
and mid-level bureaucrats in the Ministry of Education (MOE) as well as many politicians. Many teachers
were actually party activists who were given their positions because they mobilized votes. MOE bureaucrats
had the power to transfer teachers to popular locations in return for bribes. Politicians counted on teachers’
abilities to mobilize votes and protected them in return.
22
This was the terminology Ashraf Ghani (then with the Institute for State Effectiveness, later President of
Afghanistan) used to describe the situation, while he visited Nepal in 2006 to advise the government anddevelopment partners on how to capitalize on the situation.
23
See Upadhya 2020 for an insightful account of the political evolution since 1990.
24
Chapagain and Aase (2020) report that, based on various surveys from different years, the forest coveris estimated to have been 45.5% in 1963/64, 35.9% in 1984, and 44.74% in 2015.
21

24

They seem to empower common citizens, and deliver public services far more effectively thangovernment-run projects.
There was a concern that CDD did not address the real issue, i.e., the dysfunction of
government institutions. By bypassing the government, CDD programs could perpetuate theweaknesses of the state apparatus. In the context of Nepal, however, the World Bank teambelieved that CDD approaches to deliver meaningful development results and the need to build
up the capacity of government institutions were not contradictory.25
Guided by this strategy, the World Bank focused much of its financial support on CDD
projects, in water, rural electrification, rural roads, the Poverty Alleviation Fund, and eveneducation. As noted in section 3.1 (footnote 13), one of the key reform measures supported by
PRSC I was the transfer of school management responsibilities from the Ministry of Education tocommunities. The reformers in the government (and the World Bank team) felt this was aparticularly important reform, in part because they believed that once the reform happened,
communities would fight to keep their oversight power and make the advance irreversible. Indeed,
communities quickly became staunch supporters of the new approach and the reform has not been
reversed since it was launched in 2002, in a testament to the strength of communities.
There were two additional elements in the World Bank’s strategy that complemented themain focus on communities. The first was to support young journalists with training opportunities
and research funds. Although the nature of politics failed to become liberal under the multi-party
A CDD project actually operates like a micro-size local government. In a typical CDD project, somebeneficiary group is formed, with elected leaders. The members agree on a shared project that delivers somelocal service (such as water supply or rural roads). The government or a development partner provides a
grant to finance part of the project cost, but the community members also contribute to the project, often in
the form of labor. Conceptually, this is very similar to what a local government does, albeit on a limited
scale. A local government typically receives some funding from the national government, but also raises
local taxes. The only difference is whereas people often do not have much faith in the local government in
Nepal, they tend to trust CDD projects (and willingly “pay tax” in the form of community contributions).
They feel that the leaders of the CDD projects are accountable to the members. The World Bank team cameto believe that when Nepali citizens experience successful CDD projects, they will develop an instinctive
understanding on what a well-functioning local government should look like. In that sense, CDD projects
were laying the foundation for strong local government. Since there was little prospect of new local
government elections being held in the near term (because of the insecurity situation), it was a perfect time
to be supporting CDD projects in Nepal.
25

25

democracy since 1990, media freedom did expand impressively. High-quality reporting by thoseyoung journalists raised public awareness of the problems of the financial sector and education inparticular and helped build public pressure for reform.26
The second complementary element was to identify and support “institutions that worked.”
In a context in which most institutions operated without much transparency or accountability, theWorld Bank team felt it would be important to help Nepal establish visible examples of
institutions that operated with proper governance. Demonstrating that such institutions can bebuilt in Nepal would help convince people that they should expect the same from all institutions.
With that idea in mind, the World Bank supported, for instance, Kathmandu University, which
had established a reputation as a transparent and merit-based institution.27 However, since theWorld Bank must work with the government to allocate its funds, it was not easy to expand thisinitiative. Besides, organizations that are truly excellent and can protect themselves from the elite
influences are quite rare in Nepal. Nevertheless, this remains a relevant strategy in Nepal.28
In Nepal, the critical transition to an inclusive political economy system has been a slow
process. In several moments of national crisis, including most recently when the country was hit
by a major earthquake in 2015, the elite class utterly failed to respond to the popular hope for adrastic reform. It is clear that the transformation will have to be bottom-up. The increasing socialand political awareness and the energies at the community level will play a decisive role increating a tipping point eventually. 29 Development partners should consciously support
community-led development efforts and programs that empower communities further. If
These journalists formed the Society of Economic Journalist of Nepal (SEJON), which has become oneof the most respected professional bodies with significant influence.
27
Kathmandu University was established in 1991 in the city of Dhulikhel as a “community-owned”
university, a collaborative venture between a visionary mayor of Dhulikhel and a group of academic leaders
who were dissatisfied with the poor quality of the government university system.
28
A recent initiative to establish Madan Bhandari University of Science and Technology, as a governmentfunded but completely independent institution, aims to create a strong academic institution, focusing on
applied research to support Nepal’s economic development. It is another idea that deserves development
partners’ attention and support.
29
In his book “Cabals and Cartels” (2020), Rajib Upadhya notes that communities in Nepal have evenbecome rare examples of reversing “the tragedy of the commons.” He too believes that transformative shift
in Nepal will be led by resilience of its communities.
26

26

development partners can also help Nepal continue to strengthen the professionalism of the media
and build up a few institutions that can serve as the models for well-managed public institutions,that can contribute to bringing forward the time for real change.

4.1.2 Ethiopia
Ethiopia emerged from a long civil war in 1991, when the Ethiopian People’s
Revolutionary Democratic Front (EPRDF) defeated the ruling military-communist regime(‘Derg’). Since then, under the leadership of Prime Minister Meles Zenawi, EPRDF tried toaccelerate social and economic development of Ethiopia through a highly centralized approach.
PM Meles believed that basic social services needed to be upgraded massively and swiftly. He
also fervently advocated the idea of ‘developmental state.’30 He argued that the private sector in
Ethiopia was “immature;” left to their own devices, Ethiopian business people would not be
investing in the industries that are strategically important for the country in the long term. The
state had to “guide” the investment efforts.
This approach achieved significant success in improving the access to basic services,upgrading basic infrastructure, and expanding some business activities. As a matter of priority,
EPRDF had poured large amounts of resources into the rural areas, and by most objective
measures, life was much better by 2005, especially in the rural areas, than in the 1980s (whenEthiopia had suffered the “Great Famine” in 1984-85). This apparently gave EPRDF confidence
that it would win the 2005 national election easily, and in part to improve the international imageof the country, it allowed open electoral campaigns. In the event, the opposition proved far more
successful. Although the election results were much disputed, EPRDF declared its victory. This
led to widespread protests by the opposition supporters, and the ruling regime responded with aviolent suppression of the protests. Thereafter, EPRDF took a harsh attitude toward any group

He presents his views in African Development: Dead Ends and New Beginnings, an unfinished andundated draft of what was understood to be his dissertation in progress. It started to circulate in publicaround 2006.
30

27

unsympathetic to the government. By the 2010 national election, it achieved a virtual dictatorship,with the opposition winning just two out of the 536 parliamentary seats.
It was in the aftermath of the 2005 political incident that I served as the Country Directorof the World Bank in Ethiopia, from 2007 to 2011. While recognizing the massive efforts EPRDF
had made to improve rural livelihood and create the infrastructural foundation for industrialization,
the World Bank team nonetheless believed that the highly top-down and command-and-control
tendency of the development approach was a serious source of risk in the long run, in terms ofboth political stability and effectiveness of development efforts. Certain policies were
implemented at a blinding speed (e.g., distribution of insecticide-infused bed-nets was done sofast that the main manufacturer could hardly keep up with the demand). However, the system did
not allow for bottom-up feedback of concerns or new ideas. Thus, when the government policies
were misguided, no one dared to voice a concern. Negative feedback was met with hostility oreven suspicion of disloyalty. It was not just the tendency of the EPRDF government. It had deep
cultural and social roots,31 which made it more intractable and problematic.
A stunning illustration of this problem emerged in 2010 when the United States Agency
for International Development (USAID), the Ministry of Education, and RIT International jointly
conducted an Early Grade Reading Test (EGRA).32 It tested about 13,000 students at the end ofgrades 2 and 3, in 338 public primary schools. The results of the Connected Text Reading Fluency
Test shocked the government. In this test, each child was given an age-appropriate text of around60 words, which is about what they were expected to be able to read in 1 minute. About 85% of
these children were studying in their mother tongue, and the text given was in it. Thus, for themost part, understanding the language itself was not a problem. After grade 2, the percentage ofstudents who were reading at or above standard was 10% or far less, except in Addis Ababa where
it was 14.5%. At the other end of the spectrum, the percentage of children who could not read a
Wax and Gold (1965), a seminal anthropological work by Donald N. Levine, offers an insightful accountof this.
32
USAID/Ethiopia 2010.
31

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single word correctly in 1 minute was about 34% nationwide. This figure does decline after grade
3, but it was still 20%.33 One cannot learn much in school without being able to read.
The researchers identified many factors that correlate with the reading results, including
availability of textbooks, literacy of parents, and more. But, one observation by a key researcher
seemed most insightful. In the old days, when only small numbers of children went to school,
most of them came from literate families and they had typically attended some form of preprimary class where they were taught basic reading skills. Starting in grade 1, the textbooks andteaching methods were geared toward such children, and focused on the content. Times havechanged. The net primary enrolment rate has gone up from around 25% in 1990 to over 80% by
2010. Yet the textbooks and pedagogy had not adapted to the different demographics of the pupils.
Those children who are new to reading were not being taught the skills to decode written language.
Some teachers must have recognized there was a serious disconnect. Yet, the system did
not allow that feedback to reach policymakers. As a result, despite the enormous amounts offinancial and human resources that have been invested in primary education since the 1990s, alarge percentage of children had received little benefit. This had gone on for 20 years.
The 2010 Country Assistance Strategy (CAS) of the World Bank emphasized theimportance of continuing its support for the government’s effort to improve basic services thatare delivered at the local government levels. The World Bank team felt that citizen engagement
in local government affairs was also building their capabilities to be effective participants indemocratic processes. However, the CAS also pointed out the deep-rooted top-down tendency asa major concern.34 Internally, the World Bank team agreed that it should play an active role inhelping Ethiopia overcome this rigidity in the social system. The team identified two areas ofaction, though any likely impact would not be felt immediately. One was for the World Bank to

A significant part of the decline may be due to the dropping out of those children who could not read at
all after grade 2.
34
Country Assistance Strategy for the Federal Democratic Republic of Ethiopia (2008), para. iv and para.
40.
33

29

provide analysis of the economic policy issues in such a way that it is understandable to a large
segment of the citizens. Ethiopians were often without adequate information to engage inmeaningful discussions about government policies. The other was for the World Bank to “model”
a different behavior and demonstrate that someone could disagree with the government without
being oppositional to it politically. Indeed, it wanted to demonstrate that constructive criticism isan essential element of public policy discourse. Based on this thinking, I as Country Director
published a number of opinion pieces in local newspapers, sometimes agreeing with and othertimes critiquing government policies. 35 Other donor agencies welcomed this approach; theUnited Kingdom (UK)’s Department for International Development (DFID), for instance,
launched its own IDEAS public lecture series to expose Ethiopians to different ways of thinking
about public policy issues.36
It is hard to know what impact these efforts have had. However, soon after Abiy Ahmed
became Prime Minister in 2018, a good 7 years or so after I had published my last op-ed, which
pointed out the need for Ethiopia to create a more open society in which upward feedback is
welcomed, several Ethiopian acquaintances stopped me while I was visiting Nairobi. They told
me with some excitement that they remembered what I had written and that under the new prime
minister, they believed that such a change was finally happening in their country. It seems that theWorld Bank’s message resonated with some Ethiopians. Sadly, the civil war that broke out in the
Tigray region in late 2020 and spread elsewhere since seems to indicate that the possible movetoward a more open social and political environment under Prime Minister Abiy Ahmed may be
another false start.

The last of the author’s opinion pieces in Ethiopia dealt with this very issue, based on the EGRA results
noted above. See Ohashi 2011.
36
In the first lecture at Addis Ababa University in March 2010, Augustine (“Gus”) O’Donnell, Cabinet
Secretary and Head of Public Service at the time, spoke about the importance of professional independenceof the UK Civil Service.
35

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4.1.3 Myanmar
In 2010, the military government of Myanmar surprised the world by suddenly initiating
political and economic liberalization. The senior leaders of the military had concluded that thelong-standing isolationist approach and domestic political suppression were no longer viable.
Following the election in 2010, the military installed a new administration headed by President
Thein Sein (though the National League for Democracy, led by Aung San Suu Kyi, claimed it had
won). His government was given unexpected latitude in implementing economic liberalization
measures.
Under the military regime, much of the non-agricultural economy was operated by verysmall firms. The only large private firms were “crony capitalists” who were for the most part “rentseekers.” In part because international economic sanctions limited opportunities for legitimate
business, they colluded with the military leadership to conduct business. They would provide bothpublic and private goods to the military government in return for mineral extraction rights ormonopoly rights of one kind or another. For instance, a significant portion of the construction of
the new capital Naypyidaw was done by large business groups at their own expense, and thesegroups, in turn, were given opportunities to extract large rents elsewhere. It is widely believedthat senior generals also received large gifts personally. It is no wonder that Myanmar’s economy
was not growing much.
When the ruling military elites decided to bring about far-reaching reforms quite suddenly,
it created a “break in history,” as described in Section 3.3.6. People accepted and anticipated thatthings were going to be different. Even crony capitalists did not seem to be prepared to resist thechange. If anything, some “progressive” groups actually welcomed the reform, as they wanted tobuild more legitimate businesses for their long-term survival.
It was in this context that I worked with JICA in Myanmar from 2012 to 2017. Initially,
my work focused on advising JICA on its assistance strategy in Myanmar in a new environment,

31

but later it shifted toward helping the Ministry of National Planning and Economic Developmentwith management of development aid and relationships with development partners.
I came to believe that what defined the historical context of development in Myanmar
was the break in history it had created for itself. Many donors, especially European donors andthe US, tended to see it more as an opportunity to advance democracy. In particular, they
considered a constitutional amendment to make Aung San Suu Kyi eligible for the presidency a
key test of democratization.37 On several occasions, I expressed my view to such development
partners that they were overlooking the importance of the moment as a chance to shut down therent-centered economic system. If Myanmar failed to revamp the economic system during thiscritical period to establish an “inclusive system,” a rent-based business culture would returnquickly, and it would become nearly impossible to reform it for decades to come. If Myanmar
succeeded in making the critical transition to an inclusive economic system, on the other hand, itwould not only put the country on a path of sustained economic growth, but also strengthen theeconomic and social foundation for democracy.38
Specifically, I advocated for establishing a new set of business rules and norms as quickly
as possible. This would include transparency in corporate accounting, reporting, and taxation,transparency and fairness in public procurement and granting of the rights to exploit natural
resources, protection of intellectual property rights, fair labor practices, compliance withenvironmental regulations, and so on. To promote economic equity and a sense of shared interestin the future of the country, I also advocated for strengthening social protection programs(including pension schemes) and inheritance and/or wealth taxes.
The Thein Sein government did introduce a range of new legislation to create a legal andregulatory environment that was more compatible with international practice. The real challenge,

Under Myanmar’s constitution, any Myanmar citizen who has a parent, spouse, or child with a foreign
citizenship is ineligible to be President. It is widely believed that the provision targeted Aung San Suu Kyi.
38
The head of a major European aid agency in Myanmar privately agreed with my view, but he noted thatdomestic politics made it impossible to advocate such a position.
37

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however, was to overhaul the business culture. In this regard, the Directorate of Investment andCompany Administration (DICA) emerged as a spearhead of the reform efforts. It was headed bya former Army officer with a reputation for integrity and professional competence; it was
supported by experienced JICA advisors. DICA quickly established credibility among foreign
investors as a transparent, clean, and professional office to facilitate investments in Myanmar. It
was clearly a beginning of a sea change that the country needed to modernize the business culture.
Unfortunately, the political developments since then have slowed the initial momentumof reform, and the recent military take-over has all but dashed the hope that Myanmar may bemoving steadily toward an inclusive political economy system.
The three country cases are presented to illustrate how a development partner might
describe the country situation in a long-term context and identify possible ways to align its
assistance program with the internal forces that are moving the country toward an inclusive
system. In Nepal and Ethiopia, the strategy was focused on the long-term and gradual shift in the
country. By contrast, in Myanmar, the focus was on helping the government recognize the historic
opportunity and seize it with alacrity. The jury is out on whether the approach in each case wasright. Nevertheless, more recent developments in each country seem to indicate that the strategies
were not misguided. In Nepal, it is even more evident today that the impetus for the transformation
will have to come from the community level. In Myanmar, despite the recent reversals, the“window of opportunity” for far-reaching reform in the last decade did help the country lay astronger foundation of an inclusive economic system. One hopes that when the broader
environment becomes conducive to progress, Myanmar will be better positioned to take up its
movement toward an inclusive system. And, in Ethiopia, I found that the message on theimportance of overcoming the legacy of strong top-down tendency had been resonating with
Ethiopians, if only at the subterranean level at the time.

33

5. Conclusions“Poor governance” is a pervasive problem in most developing countries. It is usually what
keeps countries trapped in poverty. It reflects the elite-favoring political economy system that isdeeply entrenched. There are no obvious or easy solutions to this problem. Yet, historical evidence
is clear that countries will not achieve a high-income status without addressing it, unless it
happens to be a small country with an enormous reserve of oil or other natural resources.
Development partners have recognized the governance problem but their efforts to help improvegovernance have largely focused on “technical solutions,” such as PFM reforms or transparency
measures, and at best small-scale support for civil society or the media. In the meantime,“traditional aid” has continued on a large scale in most countries. Arguably this has facilitated theelite-captured governments to keep wasting resources for the benefit of the rich and even entrench
further the elite-favoring system.
This is not a satisfactory state of affairs. Aid practitioners have learned enough about the
problem by now. The time has come to rethink the old approach. This note has argued that there
is a better way.
It starts with the notion that in most developing countries, there are social and economic
forces that are pushing the country toward a transformation from an elite-favoring system to an
inclusive system. It reflects the innate desire of the people to be “free.” It is a strong force, notjust a vague hope for some change, because people in developing countries today can see otherpeople enjoying the freedoms they lack. By better understanding the internally-generated impetus
for change in each county, development partners can design a cooperation strategy that places a
central focus on supporting such internal dynamics and make profound contribution to thewellbeing of its people.
The note does not argue that “traditional aid” should stop. What development partners
have done all along, such as investments in infrastructure, agriculture, education, and healthcare,34

is necessary to make an inclusive economy function well. It is important, however, to recognizethat unless the overall political economy system is transformed, such investments alone will notmake a fundamental difference. Therefore, aid programs need to be anchored by an overarchingstrategy to help the county move toward that transition. More “traditional interventions” can also
be modified to support the transformational process in different ways. For instance, a project toexpand the power generation and distribution system can include a component to expand
connections to the poorer segments of the society, with a life-line tariff schedule (i.e., some basic
amounts are provided at a subsidized rate that is widely affordable). One may anticipate that it
will likely promote a broadly-shared expectation that the government should provide social
programs to assure a minimum level of equity and protection of the most vulnerable. Such a shift
in social norms is an important underpinning of an inclusive political economy system. Anotherexample may be an industrial promotion project that includes establishment of an industrial parkthat caters to SMEs that struggle in an environment where the playing field is tilted in favor of
big firms with political connections. By giving a small initial boost to expand the production to apoint of achieving some scale economy and price competitiveness, it could advance theinclusiveness of the economic system. When all the aid-funded projects and programs are oriented
in a consistent direction, their collective impact can be significant.
It is no longer satisfactory to say that the issue of governance is a domestic political matter,and hence, development partners should refrain from playing an active role in addressing it. Thisis the core issue of development; if development partners are unwilling to address it squarely,
what is their role? In the past, development partners have tried to lend a helping hand to the peopleof developing countries by offering tools to make their economies more productive, such as better
infrastructure, technical know-how, and education. It has worked in a handful of countries, theones that were finding their way to an inclusive system. However, in many other countries, it has
not. Actually, it may have contributed to prolonging the elite dominance. If we now accept thatthese countries’ real struggle is with the transformation of the political economy system, it should35

be development partners’ role to lend a helping hand to those social and political forces that aretrying to change the old ways.
Developing an effective assistance strategy for any specific country will not be an easytask. It will require careful investigation and analysis of the historical context and situation of thecountry. This is where serious analysis and thinking are required. However, it will make aid
programs much more coherent and offer a greater chance of achieving important and lasting
impact.

36

Annex

Are inclusive systems more innovative?

In Why Nations Fail, Acemoglu and Robinson’s argument that inclusive systems weremore innovative was based on historical and current comparisons of different systems andeconomic logic. However, for those who seek a more quantitative linkage, East Asia offersinteresting evidence.
One measure of innovativeness is the number of patents generated by each nation. The
number of patents is at best one indication of innovativeness of the country’s economic system.
Many process innovations are not patented, but are vital in raising the productivity of the economy,
especially in the catch-up phase. The standards of what constitutes a patentable idea are notuniform across countries. Still, the aggregate numbers, as reported by the World Intellectual
Property Organization (WIPO), do provide quite striking differences across countries, and lends
support to the notion that inclusive political economy systems are more innovative.

In Japan, Singapore, and South Korea (three countries that have all built an “inclusive
political economy system”), the number of patents has been high and increased sharply between

37

the early 1980s and the most recent period. (The WIPO data start only in 1980.) When the numberof patents is compared on the basis of the number per one million persons, the advance of South
Korea becomes striking. In comparison, the progress made by Thailand is quite slow, and there
has been little progress in the Philippines. Other Asian countries, such as Indonesia, Malaysia,
and Vietnam all fit in this same pattern. They have not shed the legacies of rent-seeking, and theinnovativeness as measured by the number of patents remains lower.
One might reasonably ask whether the larger numbers of patents among the richer nations
might not be merely a reflection of the higher income level itself. Richer nations are able to afford
more spending on R&D, and hence more patents. To investigate this point, Figure 3 traces the
trajectories of the number of patents generated by South Korea and Thailand at similar income
levels. In 1980, South Korea’s per capita GDP was $3,700 (in 2010 constant US dollars), while
Thailand was at a similar income level in 2002. (Although Thailand’s per capita GDP was almost$3,700 in 1996, it was much lower in the intervening years, because of the Asian financial crisisof 1997. To avoid the impact of that crisis, we take 2002 as the starting point of comparison.)Over the following 16 years, Thailand’s income rose to $6,362, and the number of patents per
million persons rose from 0.6 to 5, just catching up with the number of patents South Korea was
generating in 1980. In the meantime, South Korea traversed the income range that took Thailand
16 years to cover in less than 6 years, while raising the number of patents per million persons to
11. Although the graph shows South Korea’s trajectory for only up to 1993 (T+13), by 1996
(T+16), per capita GDP was $12,848 (twice that Thailand had achieved in 16 years since 2002)
and the number of patents per million people had surged to 251. The number of patents granted
to the citizens of South Korea was consistently higher than that for Thailand at comparable income
levels. It is clear that South Korea was on a different trajectory of higher innovation and faster
growth. This too is consistent with the idea that a more inclusive system tends to promote greater
innovation (hence, faster economic growth).

38

Sources: The WIPO for patent data, the World Bank for GDP data.

39

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Abstract (in Japanese)要約
ガバナンス問題は、多くの開発途上国において経済成長の重要な障害であることが広く認識されている。しかし、開発パートナーは、途上国がそれを解決する支援をする有効な戦略を案出できずにいる。その間も、途上国の物的・人的資本のギャップと制度の弱点の補完を主目的とする従来の援助は大規模に続いてきた。本稿は、異なるアプロー
チが必要であると提唱する。第一に東アジア経済の多様な開発経験を基に、政治経済シ
ステムの特性が成長を持続する能力の決定要因だとする理論を検証する。さらに、ガバ
ナンスが悪い環境では、個別のプロジェクトの価値を正当化する従来の手法は不適当だと指摘する。狭義にプロジェクトが有用であるように見えても、援助の「ファンジビリ
ティ」（代替可能性）を考慮すれば、そのような「ミクロ」の見方は不十分である。援助の戦略的目標は、資源のギャップを埋めることから、開発途上国がエリート独占の政
治経済体制を克服し、より包括的な体制を確立する過程を支援することへシフトする必要がある。本稿は、この不可欠な移行にむけて国を推進している内在的なダイナミクスを理解し、そのような傾向を支援することにより、開発パートナーはより有意義な支援を提供できると主張する。ネパール、エチオピア、ミャンマーでの著者の経験を基に、このアプローチが実際に適用された事例を提示している。

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