GOVERNANCE IN THE 21st CENTURY: PERSPECTIVES FOR PARTNERSHIPS

VII Annual International Scientific Conference 
“Modernisation of the Economy and the State”
State University-Higher School of Economics 
Moscow, 4 April 2006

The Honourable Donald J. Johnston
Secretary-General Organisation for Economic Co-operation and Development

Mr. Chairman, ladies and gentlemen, it is a pleasure for me to participate in this important conference.
All the more so because the issue at hand - the importance of governance - is central to the mission of the OECD. In fact, it is the backdrop to all our activities, and the reason that our Member countries come together at OECD to share analysis and compare experience. Simply put, good governance is essential for all economic and social progress.
This fundamental truth was often forgotten in the initial stages of post-communist economic transformation, when there was a widespread tendency to underestimate the importance of re-engineering state capacities rather than simply 'rolling back the state'. However, such naive 'market romanticism' has long since given way to a renewed awareness that dynamic, efficient markets require a framework of good governance that only the state can provide. This conference's focus on the modernisation of Russia's state and its economy is therefore to be welcomed.
When I came to the OECD in 1996, I introduced what I call the triangular paradigm of social progress. It depends on three elements, each anchoring one corner of the paradigm: economic growth, social cohesion or social stability and good governance. These are the building blocks of sustainable development. History tells us that the absence of any one of these elements will slow down or even arrest social progress and in the extreme will give rise to violence and even revolution.
For example, sustainable economic growth is essential to provide the national wealth upon which societies are built. The economic pie must continue to grow in order to nourish the ambitions of all social segments. But this depends on good governance to provide the right framework policies to allow markets to work to protect the environment and to correct market failures. A current example would be the trade liberalisation agenda where we have measurable results to show that countries that open markets increase their wealth. Much of the anti-globalisation movement does not dispute the wealth creating potential of trade and investment liberalisation, but rather questions how that wealth is distributed within our societies. Some claim it has been good for Wall Street but not for Main Street. Once again, good governance is critical to ensure that the wealth created through globalisation of markets is diffused equitably across society so that all benefit.
This is a tough challenge in any society and it is likely to be exceptionally difficult in a country like Russia, which is simultaneously engaged in both fundamental structural economic reforms and the reconstruction of its state institutions. The policy options concern structural areas where many vested interests must be challenged, where political minefields abound and where many politicians fear to tread.
Where good governance keeps economic growth robust and facilitates its diffusion, principally through fiscal measures and the creation of well paying jobs within a flexible labour market, society will march forward, and standards of living will rise. Maintaining the balance in the paradigm through good governance is critical. Think of a tight ropewalker holding a balancing rod. The walker is governance and the rod has economic growth on one end and social cohesion on the other. Losing either makes forward motion virtually impossible and makes tumbling off the rope a distinct possibility. Keeping them in balance makes progress possible. Governments everywhere find themselves walking such tight ropes with greater or lesser success.
These are not new challenges for governments, but rising public expectations of the welfare state in the second half of the 20th century, as well as the need for better environmental stewardship, have made the role of government increasingly complex in maintaining the balance in the paradigm. Moreover, it is not enough to seek the right balance within our societies. There is broad recognition that the planetary balance is in serious jeopardy with widespread poverty, illiteracy, disease and even hunger afflicting billions in the developing world. But here there is no global governance to introduce and enforce policies to maintain the balance. Here, partnerships, often operating through international organisations, are needed to ensure adequate international co-operation and co-ordination.
Before turning to specifics, let me emphasise that I am not recommending uniform approaches within countries to achieve the right balance. No one size fits all. Each society must find its own balance within the paradigm, based on the particularities of its own social, economic and cultural values. For instance, the welfare states of many European nations contrast with that of the United States, with major differences in taxation, and the provision of public goods and services. But, provided there is an accepted base of social stability, one cannot objectively conclude that the balance of the paradigm in one country is better or worse than in another. Values vary greatly, even within the OECD.
Turning to this Conference, may I suggest that its focus on the modernization of the state is very timely. Governments will face very significant challenges in the 21st century in maintaining the balance in the triangular paradigm, both within their own societies and globally. If Russia is to confront these challenges successfully, it will need to press ahead with long-promised, yet long-delayed reforms to public administration and with the creation of the kinds of new state capacities that governing a market economy in the new century will require.
This morning, I will address governance issues that concern primarily the developed market economies of the OECD, with an emphasis on the evolution of governance over the latter part of the 20lh century. I shall begin with an examination of what has changed in the last quarter-century and what that change implies for policy-makers. In short, I want to "examine the present in light of the past for the purposes of the future," as Keynes counselled.
Part of that examination will address the perspectives for government partnerships with business, labour and citizen activists. These are not usually formal partnerships, but rather more co-operative approaches to governance. I will also discuss the evolution of international partnerships to address global challenges.
While I shall suggest a few points where this examination may have particular resonance for the Russian Federation, my focus will be on the OECD countries; I leave it to you, who know Russia far better than I, to consider where our experience may be may be relevant for Russia.
What, then, has changed and what does it portend for policy-makers?
I will not offer you a comprehensive review or inventory. That is best left to political scientists. Let me instead offer my own perspectives on three areas I have watched evolve over the past 25 years. 
During the early 1980s, I held a number of economic portfolios in the Canadian Federal Cabinet, including management of government and budget (as President of the Treasury Board), Economic and Regional Development, and Science and Technology. From those perspectives, I had both an active policy and management role, as well as a view of what was transpiring across our government, and in mane other OECD government as well. What did I witness then that differs from what I see today?
First, what I saw then, principally in a Canadian context, but also having broader application in OECD countries.
Concerning the role of government, many in positions of authority in the 1980s believed that the Government should participate directly in the economic growth dimension of the paradigm. They thought the Government should not only set framework conditions for economic development, but also be an active player. In many cases, this meant the ownership of major industries engaged in commercial activities, be they aircraft manufacturing, rail transportation, utilities and even the petroleum sector, both upstream to exploration and downstream to relating at the gas pump. These, so it was said, were the ”commanding heights” of the company. Moreover, governments believed that they could pick winners strategically, and this meant tax incentives and subsidies for some industries with little thought given to the market distorting consequences. Some sectors, for example, monopolies in, say, telecommunications or power generation, lived in a world of heavy regulation to protect consumers. Much of what I am here describing must, of course, have a certain familiar ring to Russian ears.
On macro-economic policy, there were sharp disagreements concerning the benefits of what we now call fiscal consolidation. The deleterious effects of primary deficits and concomitant public debt were not evident to all, and the deterrent effect on Foreign Direct Investment was even welcomed by many nationalists, who saw equity investments as a threat to sovereignty.
On globalisation, the word was not much used if at all. Domestic policy and international policy lived in separate worlds. Seldom, if ever, did we consider the international implications of domestic policies, even where heavy public subsidisation was involved.
On development, there was not much political focus on assistance to the developing world, except in a few European countries. The notion of actually moving to development aid at the level of 0.7% of GDP was for most a dream beyond realisation. The partnership concept had not really taken hold despite the seminal study of the late 1960s, "Partners for Development".
On sustainable development we were at an embryonic stage. The Brundtland Report, "Our Common Future", did not appear until 1987.
Second, what I see now.
The role of government has by and large changed dramatically. Governments have withdrawn or are withdrawing from being active players in the market, and we have seen massive privatisation of state-owned corporations. Market competition has increased in all areas with substantial benefits to growth and to consumer interests. In Russia, of course, this transformation of the role of the state has taken place on a scale only a few of the newer OECD members can even imagine. Progress has not always been easy or steady: in Russia no less than in OECD countries, politicians still face - and occasionally succumb to - the temptations of the old dirigisme. But the overall direction of change has never really been in question.
That does not, however, mean that we now live, as some of the more extreme globalisation theorists have suggested, in a world where markets rule and states are irrelevant. On the contrary, the role of governments in setting the right frameworks for healthy competition through regulatory reform has become even more important because of the disappearing line of demarcation between domestic and international policies. Governments are concentrating on making markets work, occasionally attempting to correct market failures and reinforcing their primary role in ensuring the safety and security of the public.
There has been a strong convergence of views across the globe on macroeconomic policy. Strengthening national balance sheets is a goal everyone applauds - although this support is sometimes expressed more in words than in deeds: the fiscal balances of a number of the larger OECD economies have deteriorated since the late 1990s. This fiscal slippage is all the more unfortunate for having followed a period which witnessed some remarkable successes. Fiscal consolidation in Europe, of course, was driven during much of the 1990s by the necessity of meeting the Maastrich criteria. But other countries as well, such as Canada, broke the deficit cycle, moved into surplus territory, and substantially reduced their public debt ratios. Like Russia, Canada has benefited in recent years from extremely favourable shifts in the terms of trade, especially towards natural resources, and this has clearly facilitated fiscal consolidation. However, that is not the whole story: the fiscal turnarounds achieved by both Canada and Russia also owe much to the authorities' readiness to take tough decisions.
Where once foreign direct investment was seen as a threat, it is now seen as desirable, even essential, especially when it comes bundled with technology and managerial skills. It is also a good measure of investors' perception of public policy.
With respect to globalisation, the continuing resistance in many quarters suggests that we have not prepared the groundwork sufficiently to help citizens understand the benefits of structural reform and market liberalisation. All such policies must have a social objective, and it seems to me that we have not convinced enough of our electorates that these economic choices do have social benefits which will accrue to them and to their families. And while there are demonstrable economic benefits generated by increased trade and investment, they are not perceived as being equitably shared within countries, thus putting the balance of the paradigm in jeopardy.
Part of the problem here may stem from the fact that cost of the reform are often more visible than the costs of non-reform. Failure to reform sub-optimal institutions and policies can impose significant opportunity costs on an economy. But opportunity costs – the value of wealth never created, as it were - are by definition invisible to the electorate. When structural adjustment takes place, it can involve the loss of jobs and the downsizing of existing industries. These costs are likely to be evident and not recognised as products of reform. The closure of factories and the dismissal of workers is a well known example.
Less apparent are the new jobs and industries that emerge that would not have existed but for the reform. And, of course, if reform is blocked, then the jobs and wealth that are never created may never be recognized for the welfare lost that they аre.
However, it is not merely a question of better communication or Public Relations for reform: if governments are to secure the trust of business and the public, they must act in a manner consistent with their states principles. The most sophisticated pro-reform spin in the world will not fool entrepreneurs or voters who see the state violating its own commitments. And there is no denying that some policies — including protectionism in certain sectors in many OECD countries - are starkly inconsistent both with out declared principles of open markets and with our efforts to promote development in developing countries.
In that regard, never has there been as much international focus on development as we have seen in recent years. It coalesced in the recent Johannesburg Summit on Sustainable Development in 2002 and has since been a central item on the agenda of the G8. The convergence of expressed concerns about development and poverty alleviation within the framework environmental stewardship has been marked with bold statements of good intentions. There is also recognition of the locolmotive effect of trade and investment for development, provided the right conditions exist: good governance for starters. We have fallen well short of objectives I am pleased that my presence in Moscow coincides with a forum of non OECD donors who are bound to become an increasingly important contributor to poverty alleviation.
I now turn to governance in the 21st century and perspectives for partnerships.
I begin by declaring that the challenges of governance may be difficult, but certainly not more so than those that OECD members have confronted in my own lifetime. Not only confronted but overcome.
Just a few examples Much of Europe lay in devastation at the end of WWII. Physical and institutional infrastructure was either non-existent or in tatters. Look at Europe today! Certainly there are problems, but they are embarrassing in their triviality when compared with the bleak outlook at the time the Marshall Plan was introduced in 1948. Look at Japan. The same thing.
We are all concerned about the capacity of the Japanese to implement the necessary policy reforms to make it once again a major locomotive for economic growth. Recent data points to an economic resurgence after more that ten years of decline. 
But when I look at what the Japanese peoples have accomplished in the post war period, how could any one be anything but optimistic about the long term.
And Кorea! From the ashes of war, Korea has joined the ranks of the most developed nations, and in a number of areas such as education and the penetration of broad band networks for ICT, it leads the pack.
So as we look at the challenges of governance of the 21st century, let us not forget the challenges that were overcome in the 20th! There are some great lessons there.
As I look ahead I see many issues to be addressed in the areas I cited, namely, the role of government, macro-economic policy, globalisation, development and sustainable development. 
Let us briefly look at each.
The role of government remains central to achieving balance in the paradigm. The phenomenon of globalisation complicates this enormously. Governments must take the lead in addressing with appropriate policies the consequences of trade and investment liberalisation. This means macroeconomic stability, structural reform and market liberalisation to make the whole "pie" bigger, while maintaining social cohesion by ensuring its equitable division. This is accomplished largely through job creation and necessary adjustment policies. We know the measures that need to be applied, but the power of vested interests must be overcome. Effective communication to the greater public of the benefits of these policies is essential.
Another field which will have tremendous importance for social progress and increasing the size of the pie, is scientific discovery and. innovation. In the past 50 years we have witnessed a continuous scientific revolution. To many citizens the pace seems too fast. To preserve the vast potential of science to better the human condition, governments must do much more to ensure the maintenance of public confidence. They must also create the kind of framework conditions that, foster innovation, ensuring that the fruits of science can bring real benefits. For Russia, with its strong science base, this is a particular challenge. We should not underestimate the difficulties of putting Russia onto the path of innovation-based growth that the government has set as its medium-term goal, but neither should we underestimate the benefits that could be realised if Russia were to turn its rich scientific heritage into a real engine of growth.
The direction of changes, which have, been embarked upon in regulatory reform, letting markets work, including labour markets, must be continued and reinforced. In knowledge-based societies, this means greater emphasis on education and training where I see government as having an increasingly important role. It ranges from providing state-of-the-art education infrastructure, including broad-band access, to ensuring the quality of teachers. It also means addressing all areas where human capital could be improved in a cost-effective way. I think particularly of health care systems, to which a great deal of OECD work has been devoted in recent years.
Besides the substance of governing in the years ahead, there is also the form it will take. We see much evidence of the increasing role of ICT in the effective delivery of government services. I believe we are just at the beginning - still an embryonic beginning of the use of this technology and that it increasingly will be used to deliver more services and better information to the citizenry. Coping with “real time” electorates will be a challenge that no one has even begun to think seriously about.
With regard to globalisation, it is an irreversible process. It holds out the prospect of global wealth creation, but as I have said, the equitable distribution of that wealth is far from assured. That is the challenge of governments domestically and in a concerted manner, internationally. Our task is to maximise the benefits and minimise the costs to societies and peoples adversely affected, as some must inevitably be, through the adjustment process. In the OECD area this means primarily low-skilled workers. Thus the accent on the role of government on protecting and improving human capital bears repetition. Communication of the benefits remains one of government's greatest challenges. The OECD has played and will continue to play a key role here in evaluating the benefits and the future potential of trade and investment liberalisation. 
As I indicated at the outset, for most of these crucial policy areas — social policy, science, globalisation, the role of governance is to strike the right balance among tradeoffs. Necessarily, in trade-off, someone suffers or benefits less — at least initially. This is difficult and dangerous territory for politicians with an eye on upcoming elections. To my mind an important part of moving ahead will be to communicate more effectively the risks and benefits of various trade offs to the electorate. The issues are often complex and difficult. Governments must do a great deal more to ensure transparency, consultation and ownership of policy by the electorate. The truth, as best we know it, must reach the public mind. 
Meeting the governance challenges I have just outlined will make enormous demands on the state itself. It is not enough for the state to 'get out of the way' of the market. The state must be capable of devising and implementing the kinds of policies needed to maintain the balance of the triangular paradigm.
That is why so many observers have come to see the reform of state institutions themselves as perhaps the most important reform challenge facing Russia. If privatisation, the elimination of subsidies and macroeconomic stabilisation dominated the reform agenda in the early years of the market transformation, attention has in recent years been focused on reforming the courts, the civil service and the major regulatory institutions, as well as recasting relations between the federal centre and sub-national governments.
Failure to tackle these reform challenges will impinge directly on the state's ability to devise, adopt and implement any policies that make significant demands on the probity or administrative capacities of the state - precisely the kind of policies on which, if my analysis is correct, Russia's economic success in decades to come will increasingly depend. Building an honest, accountable and efficient public administration is arguably, therefore, the most important structural reform priority facing Russia today.
It is critical to recognise that successful reform will involve more than simply the recovery of capacities eroded or lost in the 1990s. Russia does not merely need a strong state; it needs a different kind of state from that which it inherited from the Soviet Union. Soviet administrative bureaucracies were chiefly concerned with directing economic activities, assigning economic tasks to agents and rewarding them for fulfillment of those tasks. The role of the state in a market economy, by contrast, is overwhelmingly regulatory. In most cases, the state's function is not to tell economic agents what ends to pursue but to act as an impartial referee and a provider of public goods in a marketplace full of autonomous actors choosing and pursuing their own ends.
Unfortunately, the task-fulfilling mindset of the Soviet bureaucracy is often reflected in the behaviour of its Russian successor. Even after more than a decade of reforms, the state is still prone to rely too much on direct control over assets and intervention in markets; one of the chief aims of reform is to move towards greater reliance on law and regulation instead.
The government's ambitions plans for administrative and civil service reform leave little doubt that it understands, and is committed to, these priorities. Recent years have seen important steps towards realising them. However, reform continues to proceed very slowly and the actions of state bodies often contradict stated reform goals. There has also been considerable evidence of a drift towards more interventionist, less rule-governed - and sometimes predatory - behaviour on the part of the state bureaucracy. Russia's long-term growth depends in no small measure on checking such tendencies and reinvigorating those lines of reform that aim at creating not merely a strong state, but one which is law-based, accountable and efficient:
Thank you for your attention.
As I conclude my comments, let me raise with you the most important challenge facing all governments, especially those of the OECD. We must move to correct the balance in the global paradigm: to bring sustainable development to the entire planet and to close the gap between the world’s rich and the world's poor. As we have been reminded many times, global poverty of the magnitude we witness today will certainly undermine international stability. It is shocking to think that of the four to five billion people in developing countries, 60 per cent live in communities without basic sanitation and about a billion go without safe drinking water. The developed world of the OECD represents 60 per cent of world output, commands approximately 85 per cent of the world's economic resources and is responsible for over 95 per cent of basic scientific research, while representing a mere 18 percent of the world's population.
Member countries of the OECD are also responsible for many of the pressing ecological challenges of the world's basis, and of course they have benefited disproportionately from the exploitation of the world's resources relative to the rest of the global village.
It is for these reasons that we in the OECD must accept the lead responsibility to address the challenges of sustainable development of the planet, and not just our own needs within our respective societies
But themes no global governance, so how might this be accomplished? Only through effective partnerships. At the OECD we are attempting to join up the system to the extent that we can, working with other international organisations, such as the World Bank, regional development banks and the World Health Organisation and others. These partnerships will continue to grow and flourish. Global poverty must be reduced and partnerships are indeed the key. At Johannesburg, new Type II partnerships were launched which engage industry, an innovative and exciting development. 
Let me close by quoting from an article of August 10th, 1999 In the International Herald Tribune signed by Eveline Herfkens, then Dutch Minister for Development Co-operation; Hilde F. Johnson, Norwegian Minister for International Development and Human Rights; Clare Short, British Secretary of State for International Development; and Heidemarie Wieczorek-Zeul German Minister for Development Co-operation:
“Poverty is a moral issue but also a root cause of many global problems. As ministers for development, our most immediate challenge is to build the broadest possible understanding a home and abroad, as we enter the 21st century, that it can and must be Eradicated. We call for genuine partnership, first and foremost with developing countries, but also with action-oriented groups in civil society, the private sector and the best minds in the academic community. There is no need more urgent, no cause more noble. No responsibility weighs more on us.”
This is the greatest challenge for governance in the 21st century. Thank you for your attention.