European Journal of Scientific Research ISSN 1450-216X Vol.35 No.3 (2009), pp.337-346 EuroJournals Publishing, Inc. 2009 http://www.eurojournals.com/ejsr.

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Factors Affecting Good Governance in Pakistan: An Empirical Analysis

Imran Sharif Chaudhry Associate Professor, Department of Economics Bahauddin Zakariya University Multan, Pakistan E-mail: imranchaudhry@bzu.edu.pk Shahnawaz Malik Professor and Chairman, Department of Economics Bahauddin Zakariya University Multan, Pakistan E-mail: shahnawazmalik@bzu.edu.pk Khurram Nawaz Khan PhD Scholar, Department of Economics Bahauddin Zakariya University Multan, Pakistan Sohail Rasool PhD Scholar, Department of Economics Bahauddin Zakariya University Multan, Pakistan Abstract Good governance is the significant issue of sustainable economic development among others. The concept of good governance has gained significant attention in the world and especially in Pakistan in the last decade. Since there are few theoretical studies on this issue in Pakistan, this paper analyzes the impact of some significant macroeconomic variables on good governance using time series data for empirical analysis. In this paper, democracy, economic openness, population size, peace years, unemployment, exchange rate, budget deficit, life expectancy and educational levels are considered the major macroeconomic determinants of good governance. We have employed the concept of stationarity to solve the by using Augmented Dickey Fuller (ADF) test. By conducting the time series regression analysis, we found that the stated variables are affecting the degree of good governance according to their levels. Keywords: Governance; Rule of law; Government effectiveness; Corruption; Time Series Econometrics; Pakistan

I. Introduction
Good governance has gained significant attention in the world especially in the last decade. In recent years, good governance has attracted the attention of economists, political scientists, lawyers, politicians, national institutions, and institutions of World Bank and IMF. Since some empirical and theoretical controversies have been found on the concept and importance of good governance but it can be considered as a prerequisite for economic growth and development (Kaufmann and Kraay, 2002 and

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2003). Governance can also be seen as the instrument of the effectiveness of a societys institutions. If the institutions are appropriate and effective, the outcome should be good governance (Duncan 2003). Governance is the instrument of political, economic and administrative authorities to manage a nation's affairs. It is the diverse mechanisms, processes, relationships and institutions through which residents of country and groups communicative their benefits, exercise their rights and obligations and arbitrate their differences. In good governance countries, the working condition is generally more favourable for providing protection and guarantees for investors. Good governance is therefore a compartment of governance, wherein public capital and problems are managed effectively, efficiently and in response to vital needs of society. Effective elected forms of governance rely on public participation, accountability and transparency. There is an increasing amount of research on the factors that lead to good or bad governance in the world. Good governance creates a good environment for investment, including investment in people, and leads to higher income, reduces poverty, and provides better social indicators. According to UNDP, governance can be worked out as economic, political and administrative authorities to manage a country's affairs at all levels. It joints the systems, processes and institutions, through which residents and groups articulate their interests, put into affect their legal rights, meet their obligations and mediate their differences. More modern studies have pointed out that face-to-face interactions, trust and partnership within voluntary associations enhance the capacity of people to work together. By helping residents to overcome combined action problems, trust and membership in voluntary associations are recognized as important factors in building the basis for responsive governance (Putnam 1993, 2000). World Bank has described the concept of good governance in various dimensions such as rule of law, government effectiveness, regulatory quality and control of corruption. These dimensions cover the whole society and economic sectors of the economies. As a matter of fact, this study will locate the variables that have more effect on these dimensions. Governance has engaged all concerns of society and economic operators for economic development but it is also considered as a fundamental element to be incorporated in the development strategy. Nonetheless, having its importance, differences also exist in respect of hypothetical formulations, policy prescriptions and conceptualization of the subject itself. Researchers have different ideology convictions due to which its formulation differs in different areas. Policy analysis stand empirically on the historical research of governance gives distinction to government failures to deliver, leading to propositions for downsizing or rightsizing, while policy prescriptions for good governance take an evolutionary observation of the matter questioning relevance of public sector management of certain activities in a changed context. Good governance is the term that symbolizes the paradigm shift of the role of governments. Unfortunately, this wide reaching and internationally imperative claim have not been sufficiently proved empirically in Pakistan. To fill this gap in the literature, this study aims to analyze the determinants of good governance in Pakistan. Thus, the hypothesis tested in this analysis is given as follows: how do higher levels of social and economic variables in Pakistan contribute to better governance. Since the major objective of this study is to analyze the factors that affect the good governance in Pakistan, the paper is organised as follows. Section II explores the conceptual and theoretical framework of good governance. Section III presents the brief literature review on good governance. Data and methodological issues are addressed in section IV. Section V presents the results of an econometric model and discussion. Conclusion and policy implications are given in the last section.

II. Conceptual Framework of Good Governance

From 1990s, the idea of "good governance" as an instrument for sustained development and poverty alleviation has gained widespread acknowledgment, especially among international organizations. Local concerns over what would later be labelled "good governance" had long been represent in all regions of the world. However, during the Cold War, much importance was not given to good governance but after it when structural adjustment programme was failed to overcome the economic

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problems of many countries and objectives were not achieved then the need of good governance was realized to implement these policies. This problem was faced mostly in developing countries where policies were effectively prepared but not implemented properly due to bad governance. Good governance is also pointed out as one of the targets of the Millennium Development Goals (MDGs), an agenda for poverty alleviation and sustainable development. At the Sixth Session of the Committee on Development Policy (CDP), promise to good governance and how to improve the progress were one of the agenda. Governance has been defined as the organization of society by the people, or as the use of authority to manage a country's affairs and assets. It has to be noted, however, that there has hardly been consented as to its foundation meanings, and as to how it could be implemented in practice. Less clarity in the meanings of the term "governance" becomes noticeable when its historical evolution is considered. The concept achieved distinction in donor discourse around 1990, after the end of the Cold War. The World Bank was the first donor institution to implement the concept of good governance as a condition for lending to developing countries. In the start, centre of attention was rather political and on the improvement in the quality of public sector institutions. By the mid-1990s, international donors' thinking of good governance had extended to include the concept of transparency, accountability, and participation. This addition was due to financial crises started in the last of 1990s, and for improvement of governance and stability of international financial institutions. Good governance can be identified with the following features: i. Good governance is mutually supportive and cooperative relationships between government, society, and the private sector. The nature of relationships among these three characters, and the need to make stronger viable system to facilitate interactions,assume critical importance. ii. Good governance is defined as control of all, or some combination of, the following elements: contribution, transparency of decision-making, accountability, rule of law, predictability. iii. Good governance is normative in origin. The values that provide the foundation for governance are the values postulated by the defining characters and institutions. This last point needs special consideration and attention. If donor-conceptualized standard of good governance were insisted upon, it would imply an insistence that Western-derived standards of manner be adopted in non-Western cultural environment. Scholars have also raised the problem of possible contradictions and trade-offs among the elements, for instance, economic growth, labour conditions, civil liberties, and the protection of the environment. The standards of good governance applied on the national, global and corporate environments would serve the goals of poverty alleviation and sustainable development.

III. Literature on Good Governance

A modern development within the work of economics is the emergence of so-called new institutional economics, a body of examination generally identified as an attempt to extend the range of neoclassical theory by highlighting the importance of institutions that are fundamental to the effective performance of market-based economies, such as law and order, property rights, contracts and governance structures (Rutherford, 2001). Institutions can be considered of as the set of rules that find out the behaviour of individuals within civil society. The role of institutions in the development of economic growth has long been emphasized by Douglas North, the Nobel prize-winning economic historian (North, 1990). Duncan (2003) has argued that the role of institutions and governance has not been incorporated formally into the economic theory of growth. At present, some studies found associations between institutions and economic growth but not have been incorporated with good governance. Since the development of indicators for good governance have not theoretical basis, we have developed and used some proxies of good governance in the form of economic administration and other government performance-related variables that indicate the standard of governance in a country. If governance is

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result of the appropriateness and effectiveness of a countrys institutions, governance indicators can be seen as indicators of the quality of a countrys institutions. In exploring governance in the Russian Federation, Safavian, Graham and Gonzalez-Vega (2001) noted down that regulatory intrusion into enterprise activities may be manifested in a variety of forms, including obstacles to entry in the form of registration permits and licenses, repressive, unpredictable and arbitrary taxation, required compliance with wide ranging, superfluous statutes and regulations, and significant statutory power given to regulatory officials charged with monitoring and enforcing compliance among firms. Regulations can be used to induce bribes/corruption or other lobbying activities to bring about changes, or at least waivers, of the regulations in question. Djankov et al. (2002) found that heavy regulation of entry for firms is connected with less elected government, greater corruption and larger illegal economies. Fischer et al. (2001) in their evaluation of the Palestinian economy over the period 1994 to 2000 show that extreme red tape, bureaucratic inefficiency and perceptions of poor governance and financial unprofessional conduct deterred local and foreign investors. Gausch and Hahn (1997) explain that the overall lesson is not that regulation is generally undesirable, but that it often has undesirable economic consequences. Given that governance outcomes are extensive and various we have selected governance scope that largely reflect the descriptions of governance as proposed by Kaufmann et al. (2003), Kaufmann et al. (1999), Neumayer (2002) and Polidano (2000). Using these explanations as a guide, four foundations of governance dimensions were formulated: the rule of law, government effectiveness, regulatory quality, and corruption. The dimensions of governance were extended to include aspects of societal welfare. Each of the four dimensions of governance has sub-dimensions; and indicator variables that are believed to directly or indirectly capture or reflect these sub-dimensions of governance are used in their measurement such as rule of law leads to registered crimes in police stations, government effectiveness and regulatory quality leads to private investment in a country. The present paper follows primarily two types of studies in the literature. The first type is concerned with the determinants of government performance and tries to answer the question why the quality of governance is affected in Pakistan. The majority of studies concentrate on factors such as per capita income, ethnic heterogeneity, a countrys legal origin or the degree of economic openness. For example, La Porta et al. (1999) described those rich countries and those, which are ethno-linguistically identical and look back on an English legal system, have better governments. Furthermore, Islam and Montenegro (2002) expressed that openness in trade is positively linked to the quality of institutions while a French legal origin negatively affects governance. Others consider the impact of political institutions and the institutional design (Lederman et al., 2001; Persson et al., 1997). The second type of research examines the possible outcome of social capital. In an early analysis, Coleman (1988) observed the influence of social capital on the creation of human capital. He showed that both social capital and economic indicators contributes significantly to the governance. Over the last few years, literature on the problems and prospects of developing and transition countries has started to stress the importance of social capital in sustainable social and economic development. For example, Pretty and Ward (2001) demonstrated how social capital in the form of relations of trust, reciprocity, connectedness in institutions, common rules, norms and sanctions is connected with the improvement in the natural capital of rural societies. Focusing on Northeast Brazil, Tendler and Freedheim (1994) revealed that social capital and extended trust between health care workers and citizens was capable to counter prevalent client elastic rent-seeking practices in the region, which finally permitted the implementation of a functioning preventive health care program. Dense social networks succeeded here in creating a learned and demanding society, which managed to force local and state level politicians into supporting the health care program and helped to create the base for better and more responsive governance. Developing a number of correlations, Putnam (2000) added some areas in which social capital has a positive impact. He concluded that not only having the high levels of public engagement and trust mentioned for an inspiring influence on education and childrens welfare but it can also has safe and creative neighbourhoods as well as peoples health and happiness. Additionally, areas high in social

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capital seem to reach higher levels of economic prosperity. Regular interaction with fellow citizens or business partners and the creation of trust and responsibility seem to make business and social transactions less costly since there is no need to spend time and money making sure those others will uphold their end of the arrangement This goes in line with an argument advanced by Fukuyama (1995): one of the most important lessons we can learn from the examination of economic life is that a nations well-being, as well as its ability to compete, is conditioned by a single, pervasive characteristic: the level of trust inherent in a society. Knack and Keefer (1997) and Whiteley (1997, 1998) showed that high levels of social capital and economic variables promote economic growth. The concept of governance has gained significant attention in the international policy making arena and recently in Pakistan. Now we come to the research conducted in Pakistan on good governance. Since there are few studies on good governance in Pakistan, some of significant studies are briefly reviewed here. These are Hijazi (1999), Husain (1999), Qureshi (1999), Shafqat (1999), Shah (1999), Streeten (1999), Tahir (1999) and Chaudhry et al. (2006). Hijazi (1999) analyzed the relationship between motivation theories and role of the government servants. He concluded that the working system in government is administrative and not management and good governance can be achieved by considering the motivation of the key role occupant. Hussain (1999) has undertaken a detailed study on governance and institutions with particular reference to Pakistan. He elaborated the concepts of governance and institutions, their definitions and relationships. He divided public sector functions into three categories, namely, policy-making, service delivery, and oversight and accountability, and focused on the last. Moreover, he also presented the pillars of good governance. Qureshi (1999) also emphasized on good governance based on appropriate institutional reforms and broad-based sustained economic growth policies. Shafqat (1999) focused on the role and assessment of bureaucracy with some changing socioeconomic profile and corresponding attitudinal changes and provided guidelines for possible reforms in Pakistan. He concluded that a piece-meal but holistic reform of the existing bureaucratic institutions is really needed. Shah (1999) also contributed with three complementary themes in bringing about responsive and accountable public governance namely globalization, localization and a results oriented management and evaluation. Since these analyses have focused on the different issues related with good governance at the macro level, Chaudhry et al. (2007) have correlated the concept of good governance with urban poverty using primary source of data. They concluded that poor people who are in the weakest position and who are most powerless in influencing decisions that affect their lives, become most vulnerable on the face of bad governance. They also suggested that urban poverty can be alleviated through good governance in infrastructure, socio-economic and demographic variables at the city level.

IV. Data and Methodology

Since governance has various diverse dimensions, we will employ World Bank described six comprehensive measures that capture various dimensions of governance. To examine these factors and their impact on governance, data is collected from various secondary sources. Since the indicators include measures for voice and accountability, political instability and violence, government effectiveness, the rule of law, regulatory Quality and control of corruption but from measuring point of view, the World Bank uses only four elements; the effectiveness of governments, the rule of law, the control of corruption and the regulatory quality to minimize simultaneity. The World Bank uses datasets of 150 countries (Kaufmann, Kraay, Zoido-Lobaton 1999). But this data set does not have much information about Pakistan because of shortage of data. Indicators do not provide good result for future planning. So we are using only Rule of law and government effectiveness indicators as variables of good governance. These are described by the reported crimes in police stations and private investment respectively.

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In order to analyze the determinants of good governance, the secondary data source is used for empirical analysis for the period 1972-2007 in Pakistan. Data is retrieved from different sources; Pakistan Economic survey (various issues), Federal Bureau of Statistics, State Bank of Pakistan and International Data Base (IDB) data sets. In this paper, variables like democracy, economic openness, population size, peace years, unemployment, budget deficient, and health and education are considered as determinants of good governance in Pakistan. To analyze the impact of these variables on good governance, time series econometric methodology has been employed to avoid the problem of spurious results. Initially, one of the popular techniques i.e. Augment Dickey Fuller has been used to test the unit roots of the concerned time series variable. This test has been employed in the first difference with intercept and trend & intercept. OLS method with respective differences of the variables based on the ADF test will be employed because series can not be co-integrated. We have tested the good governance indicators separately. The required econometric models are given as follows: Good governance 1972-2007 = 0 + 1 DEMO+2 OPEN + 3 LITE + 4 POPU+ 5 HEAL + 6 PEAC + 7 UNEMP + ei (1) Good governance 1972-2007 = 0 + 1 DEMO+2 OPEN + 3 LITE + 4 POPU+ 5 PEAC + 6 UNEMP + 7 BDEF + 8 EXCH + ei (2) In equation (1), good governance is measured by reported crimes in police stations as a proxy of rule of law and in equation (2); good governance is measured by private investment as a proxy of government effectiveness in a country. DEMO is Democracy as rating levels in years, OPEN is economic openness (measured by Exports + Imports divided by real GDP), LITE is Literacy rate of a country, POPU is total population, HEAL is life expectancy of people, PEAC is taken as peace years. UNEMP represents the unemployment rate. BDEF and EXCH represent budget deficit and exchange rate respectively and ei is random error term. Reported crimes and private investment have been taken as dependent variables used as proxies for good governance while DEMO, OPEN, LITE, POPU, HEAL, UNEMP, BDEF, EXCH and PEAC are considered as explanatory variables.

V. Results and Discussion

The preliminary step of our empirical analysis is concerned with establishing descriptive statistics of selected variables. The descriptive analysis aims to provide an overview of the variables and an insight into their behavioural patterns.The results of descriptive statistics of the variables used in the analysis are presented in table 1. The table indicates that on average 277209 cases are reported in the police stations during one year going up to 538048 cases of all categories. The variables like crime, trade openness, literacy, population, life expectancy, unemployment, budget deficit, private investment and exchange rate are found normally distributed as JB test accepts the null hypotheses of normality. The variables like peace years, unemployment, budget deficit, years of democracy and trade openness having small variability as compared to crime, literacy rate, population, private investment and exchange rate. The results show that democracy and peace years are absent in the data set. Since unit root test has been performed with intercept and trend and intercept, ADF test implies that crime series is stationary at 1st difference at 5 percent level of significance and same case is with DEMO, HEAL, LITE, UNEMP, BDEF, and EXCH. While remaining variables are stationary at level. The results are reported in Table 2.

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Table 1:
Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis JB test Probability n

Imran Sharif Chaudhry, Shahnawaz Malik, Khurram Nawaz Khan and Sohail Rasool
Descriptive Statistics of Selected Variables
CRIME 277209.28 283997.00 538048.00 20197.00 134999.13 -0.02 2.34 0.65 0.72 36 DEMO 3.97 5.00 8.00 0.00 3.73 -0.05 1.15 5.15 0.08 36 OPEN 33.82 34.35 38.91 27.72 3.18 -0.30 2.18 1.53 0.46 36 LITE 36.90 34.35 54.00 22.10 10.87 0.23 1.54 3.51 0.17 36 POPU 108.99 108.27 158.00 63.34 29.35 0.07 1.71 2.51 0.28 36 HEAL 56.69 56.54 65.00 50.60 4.38 0.14 1.78 2.33 0.32 36 PEAC 0.58 1.00 1.00 0.00 0.50 -0.34 1.11 6.02 0.05 36 UNEMP 4.81 3.90 8.30 3.10 1.57 0.60 2.09 3.36 0.19 36 BDEF 6.22 6.15 9.50 2.40 1.70 -0.08 2.36 0.66 0.72 36 PINV 16.44 14.19 40.51 11.44 10.06 0.19 3.88 1.38 0.50 36 EXCH 29.37 21.66 61.22 9.90 19.72 0.56 1.69 4.42 0.11 36

Source: Authors Estimations

Table 2:

Results of Augmented DickeyFuller (ADF) Test

Conclusion I(1) I(1) I(1) I(1) I(0) I(0) I(0) I(1) I(1) I(0) I(1) Level -3.39 -2.21 -3.07 -2.13 2.39 -2.9 -3.49 -3.17 -3.16 -4.75 -2.05 With Trend & Intercept 1st Difference Conclusion I(0) -5.65 I(1) -4.54 I(1) -6.11 I(1) I(0) -5.93 I(1) I(0) -6.53 I(1) -7.3 I(1) I(0) -3.67 I(1)

With Intercept Variables Level 1st Difference -2.63 -6.88 Log(CRIME) -2.13 -5.66 DEMO 1.53 -4.33 HEAL 0.23 -6.09 LITE -7.95 POPU -2.92 OPEN -3.17 PEAC -1.49 -6.64 UNEMP -2.2 -7.28 BDEF -4.85 PINV 1.22 -3.63 EXCH Source: Authors Estimations

The results of OLS estimates are reported in table 4. These results support the hypotheses that social and economic variables affect good governance. Conventional OLS methodology has been used for the empirical analysis. The results of equation (1) show that model is good fit and there is no autocorrelation because of autoregressive (AR) and moving averages (MA) process. The variable of democracy has positive relationship with good governance because in democracy, government is ruled by elected people. They can control and understand the point of view of people about their problems. Openness has negative relation with good governance. It means that when a country increases trade relationship with the rest of world then customs and interference increase with each other and criminal activities also increase. Literacy and health has negative and significant relation with crime. It means that illiterate and unhealthy people are not economic persons due to which they participate in criminal activities to earn money. The results also show that population of a country is significant variable and positively related with crime, means when population increases, number of crime also increases and vice versa. Unemployment rate has negative and significant relationship with crime rate. The peace years in a country also have an important role in good governance. In other words, when uncertainty increases in a country, crime rate also increases and it is evident from our empirical analysis. The all results are consistent with our hypothesis and theory.

Factors Affecting Good Governance in Pakistan: An Empirical Analysis

Table 3: Results of OLS Estimates of Model (1)
Dependent Variable: LCRIME Method: Least Squares Coefficient 11.08344 0.017534 -0.018151 -0.020935 0.013748 -0.061569 -0.068676 -0.04679 0.81351 -0.994939 0.989078 0.984983 1.876598

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Variable C D(DEMO) D(OPEN) D(LITE) POPU D(HEAL) PEAC D(UNEMP) AR(1) MA(2) R-squared Adjusted R-squared Durbin-Watson stat Source: Authors Estimations

t-Statistic 89.98733 4.06358 -3.767487 -1.966871 14.29813 -1.523417 -1.925037 -4.097387 6.646983 -69.17646 F-Statistic: 241.4998 Prob(F-Statistic): 0.0000

Table 4:

Results of OLS Estimates of Model (2)

Dependent Variable: PINV Method: Least Squares Coefficient 17.29964 0.390942 2.738177 0.742179 -0.020382 1.071184 4.412278 3.163287 1.186278 1.335251 0.711191 0.607219 2.068825

Variable C D(DEMO) D(OPEN) D(LITE) POPU PEAC D(UNEMP) D(BDEF) D(EXCH) MA(2) R-squared Adjusted R-squared Durbin-Watson stat Source: Authors Estimations

t-Statistic 1.686408 0.692709 6.992203 0.847679 -0.284229 0.278732 2.958911 2.830721 2.328103 5.97077 F-Statistic: 6.840257 Prob (F-Statistic): 0.000064

The private investment variable is another proxy for the government effectiveness in good governance. The results are reported in table 4 that show there is goodness of fit with no autocorrelation because of MA process. The variables of Democracy and openness have significant positive relation. The relationship of literacy is positive but it is not significant because mostly small businessmen are not properly educated but effectively running their businesses in Pakistan. It is concluded based on empirical analysis that good governance is affected by all variables listed above. If government makes control on these variables, we can observe good governance. In other words, it can be concluded from our empirical results that social and economic variables can lead to accelerate the level of good governance.

VI. Concluding Remarks

The findings of empirical analysis suggest that social and economic variables have greatly effect on governance. These demonstrate a significant influence on the quality of governance, giving empirical support to our hypothesis. More specifically, measures to increase general social variables and especially literacy, population, peace and democracy become the cause of good governance.

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The results of this analysis should have interesting implications for policymaking and advocacy campaigns. Policymakers and international donor organizations that are designing projects to give confidence more citizen participation, better governance or democracy should be attentive in the areas where more active and trusting citizenry can help to do well. In sum, social and economic variables have a positive impact on good governance even when subjected to a number of statistical controls; this research has supplied perceptive new proof to the scholarly literature on civil society and good governance. In addition, by extending our knowledge of the influence of social capital on the aggregate level, this research could provide an empirical base for the achievement of projects geared towards the strengthening of civil society and democratic institutions. Authors Note: The preliminary version of this paper was presented in the International Conference on Globalization and Governance at Lahore School of Economics, 19km-Burki Road, Lahore, Pakistan on 21st April 2007.

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