[MUSIC] Hello again and welcome back. Over the last couple of weeks, we've been looking at concepts of trust and fragmentation, and their relationship to each other. In this series of lectures, we're going to look at the origin of the concept of governance, and its application to the problem of development aid. We'll look very closely at attempts by the World Bank to define governance, and also to measure it. And then in three separate videos, we'll look at detail of three dimensions of governance, democracy, the rule of law and corruption. And we'll link them to issues of trust, growth and economic development. So in this video, we'll make start by looking at the meaning of governance. And we'll trace how it became entwined with the issue of foreign aid. But before we can do any of this, we have to define what we mean by governance, so here comes the official definition. Generally speaking, it describes the processes by which institutions provide outcomes. Those institution could be tribes, villages, businesses, corporations, governments, international organizations or NGO's. And the outcomes can be in the form of physical goods and services, laws, rules and regulations and enforcement mechanisms. In our case, the focus is on states' governments, so we could define governance as the process by which national governments decide upon their goals and deliver the goods and functions expected of them. In the case of good governance then, the state should do some of the following things, in fact, it should do all of them. Should take citizens demands into account when formulating its policies. It should do this in an open and transparent manner. It should provide goods and services efficiently and effectively and shouldn't be siphoning off funds into the pockets of those supposedly providing these services. It will regulate outcomes and enforce its laws of decisions fairly, efficiently, and without bias and favor. Bad governance, of course, is the opposite. In the state of bad governance, the state will do the following, for example. It will implement policies that are in the interest of the minority or in the interest of a clique. It will deliberately hide and falsify its decision-making processes. It will implement efficiently only policies in its own interest and it will make sure that gleans off surplus cash whenever it can. It will apply regulations so as to favor it clique and the highest bidder and protect them against the enforcement of law. And it will bias decisions against its opponents and use the instruments of states as weapons against them. So why should any of this concern the World Bank? Well, it was only after the Second World War that states began giving money to other states who didn't happen to be their colonies. Immediately after the end of the Second World War, the United Nations began an Aid and Relief Program, which included the provision of raw materials needed to jump-start the raw ravaged, war damaged economies. This was followed in 1948 by the American aid program to western Europe known as Marshall Aid. And at about the same time, the World Bank was created to provide structural development funds to poorer countries. Well then in the 1950s, the US began bilateral aid programs towards its allies, whilst Russia did the same. Russian aid was initially directed towards China and later Africa. Towards the end of the 1950s when the accent of the Cold War shifted away from military confrontation, the Americans called on their Western allies to share the aid burden, both bilaterally and through their contribution to the World Bank. Now in all of these years, the main analysis of development economics had focused on what was called the two-gap model to explain underdevelopment. The less developed countries were caught with two shortages, investment capital and foreign exchange. And foreign aid would alleviate both shortages. Now the favored strategy for aid was to direct funds towards promoting industrial development, preferably large-scale projects. Eventually, and no time span was specified, the benefits would trickle down to the rest of the population. But by the end of the 1970s and the 1980s, one overall conclusion was becoming obvious. Aid was failing to promote growth. At this point of time, two developments were beginning to converge that would change the aid paradigm. First, there were a series of financial crises in Latin America. These countries had been growing but in fits and starts and prone to repeated crises. The response of the IMF was to link its financial aid to demand for government reforms. Secondly, sociologists began to argue that a major problem with the aid effort was one of ownership. The recipients did not identify themselves with aid projects. Aid should be more a question of partnership, leaving more initiatives with the recipients. And this shift in perspective placed a new emphasis on how aid was managed. It called for more attention to be paid to the social conditions at the local level. And greater efficiency and effectiveness at the national level. Efficiency was defined in sense of value for money, no corruption. And effectiveness was defined in the sense of becoming viable. Viable in terms of competing in world markets. In 1989, the term Washington Consensus was first coined to describe this new approach. Represented a set of policy measures favored by the IMF, the World Bank and the American government. Now among the main measures it advocated were the following. Control of the size of government spending. The phasing out of subsidies to inefficient sectors. The freeing of controls over trade and foreign investment. The introduction of pro-market reforms and the protection of property rights. This new emphasis reflected a major change in the world economy. Globalization was accelerating. Back in the late 1940s and early 1950s, there had been very little private investment available. Government funded aid programs formed part of the solution. In the 1980's following three decades in which dollars had hemorrhaged out of the United States, and following the relaxation of capital controls, the world economy was awash with capital. If countries could find the key to unlock foreign direct investment, they could tap into a pool of funding that far exceeded the amounts of foreign aid that was available by government. Good governance was to be that key, so all one needed now was to find some way of measuring progress towards it. Let's sum up now. In this video we've defined the concept of governance and we've framed some expectations about good and bad governance. We've reviewed the history behind foreign aids thinking. And we saw how the emphasis changed from the provision of investment funds to a concern with governance. Now in the next video, we'll look at how the World Bank attempted to quantify differences in governance among nations.