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1 Debunking Myths about Governance and Corruption Lessons from Worldwide Evidence Daniel Kaufmann, The World Bank Institute For Presentation at the Anti-Corruption Workshop for Strategy and Program Development, USAID, in Bangkok, Thailand, May 4 th, 2006 "If you cannot measure it, you cannot improve it." -- Lord Kelvin 1

2 Challenging Convention key tenets 1. Good Governance = Anti-Corruption 2. Governance Measurement Skepticism Unmeasurable, or, Measurable, but so imprecise that it is not useful, or, Measurable, but only through Objective Indicators Cannot Assess Trends: Unreliable or No Time Series 3. Some evidence: Governance has improved globally? 4. Good Governance: outcome of development and growth? & emerging economies are corrupt? 5. The trouble with Public Sector & Officials in LDCs Cultural & Historical Determinism of Corruption 7. Fighting corruption by Fighting Corruption 2 (Laws, Codes, Campaigns, Agencies & Regulations

3 Tenet # 8: Challenging the previous 7 popular notions 1. Data Matters -- on Governance & Institutions: while sensitive, & margins of error (not uniquely) data can be gathered, analyzed, and used judiciously 2. Expanding Beyond the Washington Consensus-- Adding to the Macro and the Structural /Sectoral: Institutions, Governance and Corruption Matters 3. On Average: stagnation on Governance, and level is low - - Has it become a binding constraint nowadays? 4. Significant variance: some countries show that it is feasible to improve governance in the short term 5. Interventions that have not worked vs. what may work better in the future? Transparency matters 3

4 Evolution of Governance/A-C C at the World Bank: From C... Prohibition era to Mainstreaming WDR on Institutions 1982 JDW Cancer of Corruption Speech (10/96) TI CPI (5/95) The Prohibition Era Data & Research Corruption- Development State in a Changing World (97) Strategic Compact (97) Anticorruption Strategy (97) Governance Pillar - CDF (98) Gov/A-C Diagnostics start (98) Internal AC unit created in WB (98) O.P. Mainstreaming AC in CAS (99) Broadening & Mainstreaming 1st set of firms Debarred from WB (99) Governance Strategy (00) Public Expenditure, Financial Mgt. & Procurement Reforms Diagnostic/Data/ Monitoring Tools Administrative & Civil Service Reform Civil Society Voice, Accountability, Media & Transparency Mechanisms State Capture/Corporate Governance Legal/Judicial Reform Formalization of INT (01)

5 Governance & Anti-Corruption (A-C) at the Bank--Themes 1. Evolution of Governance/A-C at the World Bank: -- From missing in Washington consensus to center stage -- Bank: From C. Prohibition era to Mainstreaming 2. Main components of the World Bank s strategy: -- Governance/A-C key in Country Strategy & Lending -- Working with Countries on Governance Reforms/A-C -- Working with International Partners -- Anti-Corruption In-house: Projects and Staff Integrity 3. Specifics on Preventing & Sanctioning Corruption in Bank-funded projects: work of INT Department prevention, deterrence & investigation 5 4. The Data Revolution : Integration at 3 Levels

6 The Power of Data : Technical progress in measurement -- gradual increase in use 1. The Macro /Aggregate Level of Measurement: Worldwide Aggregate Governance Indicators: 200 countries, 6 components, periodic. 2. Mezzo : Cross-Country Surveys of Enterprises 3. Micro : Specialized, in-depth, in-country Governance and Institutional Capacity Diagnostics: Includes surveys of: i) user of public services (citizens); ii) firms, and, iii) public officials On Aggregate/Macro Level first 6

7 Six Dimensions of Governance Governance as the set of traditions and institutions by which authority in a country is exercised -- specifically: The process by which those in authority are selected and replaced VOICE AND ACCOUNTABILITY POLITICAL STABILITY & ABSENCE OF VIOLENCE/TERRORISM The capacity of government to formulate and implement policies GOVERNMENT EFFECTIVENESS REGULATORY QUALITY The respect of citizens and state for institutions that govern interactions among them RULE OF LAW CONTROL OF CORRUPTION 7

8 Governance Data Data on governance from 37 different sources constructed by 31 different organizations Data sources include cross-country surveys of firms, commercial risk-rating agencies, thinktanks, government agencies, international organizations, etc. 352 proxies for all dimensions of governance Organize these measures into six clusters corresponding to definition of governance, for five periods: 1996, 1998, 2000, 2002,

9 Sources of Governance Data Cross-Country Surveys of Firms: Global Competitiveness Survey, World Business Environment Survey, World Competitiveness Yearbook, BEEPS Cross-Country Surveys of Individuals: Gallup International Voice of the People, Latinobarometro, Afrobarometer, Vanderbilt University/USAID 9

10 Sources of Governance Data, Cont d Expert Assessments from Commercial Risk Rating Agencies: DRI, PRS, EIU, World Markets Online, Merchant International Group, IJET Travel Consultancy, PERC Expert Assessments from NGOs, Think Tanks: Reporters Without Borders, Heritage Foundation, Freedom House, Amnesty International, Bertelsmann Foundation, Fundar, International Research and Exchanges Board, Brown University, Columbia University, Binghamton University Expert Assessments from Governments, Multilaterals: World Bank CPIA, EBRD, AFDB, ADB, UNECA, 10 State Dept. Human Rights Report

11 Building Aggregate Governance Indicators Use Unobserved Components Model (UCM) to construct composite governance indicators, and margins of error for each country Estimate of governance: weighted average of observed scores for each country, re-scaled to common units Weights are proportional to precision of underlying data sources Precision depends on how strongly individual sources are correlated with each other Margins of error reflect (a) number of sources in which a country appears, and (b) the precision of those sources 11

12 Control of Corruption: one Aggregate Indicator (selected countries from 204 worldwide, for illustration, based on 2004 research data) 2.5 Good Governance Governance Level Margins of Error 0 Poor -2.5 Governance EQUATORIAL GUINEA KOREA, NORTH TURKMENISTAN UZBEKISTAN TAJIKISTAN BANGLADESH VENEZUELA ZAMBIA RUSSIA KOREA, SOUTH MAURITIUS Source for data: : 'Governance Matters IV: Governance Indicators for , D. Kaufmann, A. Kraay and M. Mastruzzi, 12 ( Colors are assigned according to the following criteria: Dark Red, bottom 10 th percentile rank; Light Red between 10 th and 25 th ; Orange, between 25 th and 50 th ; Yellow, between 50 th and 75 th ; Light Green between 75 th and 90 th ; Dark Green above 90 th. SOUTH AFRICA GREECE ITALY BOTSWANA SLOVENIA CHILE FRANCE SPAIN UNITED KINGDOM NETHERLANDS NORWAY NEW ZEALAND FINLAND

13 Control of Corruption, 2004: World Map Source for data: : 'Governance Matters IV: Governance Indicators for , D. Kaufmann, A. Kraay and M. Mastruzzi, 13 ( Colors are assigned according to the following criteria: Dark Red, bottom 10 th percentile rank; Light Red between 10 th and 25 th ; Orange, between 25 th and 50 th ; Yellow, between 50 th and 75 th ; Light Green between 75 th and 90 th ; Dark Green above 90 th.

14 Governance Matters: The 300% Dividend 1. Large Development Dividend of Good Governance: a one-standard-deviation improvement in governance raise incomes per capita in a country by about 300% in long-run 2. But is such a decline in corruption unrealistically large?: NO -- One S.D. is the difference from: Angola Brazil Estonia or Botswana US, Canada or Germany, or, the difference from Equatorial Guinea Cuba or Uganda Mauritius Portugal Finland or New Zealand 3. The impact is from governance to incomes, and not viceversa -- higher incomes alone will not do 14

15 Development Dividend From Good Governance $30,000 Control of Corruption $3,000 $300 Low Governance Medium Governance High Governance 15 Data Source for calculations: KK Y-axis measures predicted GDP per capita on the basis of Instrumental Variable (IV) results for each of the 3 categories. Estimations based on various authors studies, including Kaufmann and Kraay.

16 High Growth Competitiveness Index (EOS) 6 4 Good Governance associated Country s Competitiveness r = 0.90 CHN THA IND EGY POL MEX SLV GHA COL BGR TTO KAZ HRV PERROM TURBRA NAM AZE JAM TZA IDN RUS ARG PAN PHL DZA MAR UKR PAK MDA VNM YUG NGA VEN GEO UGA MOZ MLI MKD KEN HNDGMBIH GTM MNG NIC LKA BOL ALB DOM TJK ETH MWI ECU MDG ZWE TMP BGD CMR PRY KHM GUY BEN KGZ TCD MUS URY CRI USA SWE TWN CHE NOR JPN AUS NLD GBR KOR DEUCAN NZL QAT ARE PRT AUT MYS CHL LUX ISR IRL FRA ESP HKG KWT SVN BEL CYP MLT BHR CZE HUN LVA TUN JOR LTU SVKZAF GRC ITA BWA DNK SGP ISL FIN Low Low KK Control of Corruption High Sources: GCI drawn from EOS firm survey, WEF countries; Control of Corruption from Kaufmann, Kraay 16 and Mastruzzi, Governance Matters IV: Governance Indicators for

17 Measurable Worldwide Trends in Governance Through new method, we showed that it is possible to identify significant changes over time It is found that changes can take place in the short-term: in 6-to-8 years, some deteriorations as well as some significant improvements as well Yet the world on average has not improved Good News: Some countries are improving (while others deteriorate) in governance 17

18 3 High Inflation Significant Decline in Inflation Rates Worldwide TRANSITION 1.5 EMERGING (avg. in logs) Low OECD+NIC Source: Rethinking Governance, based on calculations from WDI. Y-axis measures the log value of the average inflation for each region across each period

19 Quality of Infrastructure 6.5 High East Asia Industrialized OECD 4 Transition Low Emerging Source: EOS (Quasi-balanced panel). Question 6.01: General infrastructure in your country is among the best in the world? 19

20 Judiciary Independence (EOS survey resuls ) High Independence No Independence Independencia de la Judicatura OECD East Asian NICs Latin America NON OECD 20

21 No Significant Trend in Control of Corruption Worldwide Averages Good 0.8 EIU PRS QLM Poor PRS country coverage in 1996: 129, all other periods 140; QLM and EIU country coverage: 115 for all periods. 21

22 Good 0.8 No Significant Trend in Government Effectiveness Worldwide Poor EIU PRS GCS PRS country coverage in 1996: 129, all other periods 140; GCS country coverage in 1996: 58, 1998: 59, 2000: 75, & 2004: 82; EIU country coverage: 115 for all periods.

23 Changes in Voice and Accountability, Major Deterioration (selected countries) Insignificant Change 0 Major Improvement (selected countries) IVORY COAST ZIMBABWE HAITI NEPAL C. AFR. REP. KYRGYZ REP. ERITREA RUSSIA VENEZUELA BELARUS CUBA MYANMAR UZBEKISTAN PHILIPPINES BOLIVIA YEMEN JAMAICA MAURITIUS BURUNDI BRAZIL AZERBAIJAN ALBANIA ROMANIA TANZANIA ESTONIA EL SALVADOR BULGARIA LATVIA GAMBIA MEXICO SIERRA LEONE INDONESIA GHANA BOSNIA NIGERIA SLOVAK REP. CROATIA SERBIA Changes were calculated on the basis of the differences in country estimates from 1996 and Classification for major deteriorations and improvements were based on 75% confidence interval. Source for data:

24 Changes in Rule of Law, Major Deterioration (selected countries) Insignificant Change 0 Major Improvement (selected countries) -2 ZIMBABWE IVORY COAST THAILAND VENEZUELA MOLDOVA C. AFR. REP. ETHIOPIA CUBA EGYPT GERMANY U.K. Changes were calculated on the basis of the differences in country estimates from 1996 and Classification for major deteriorations and improvements were based on 75% confidence interval. Source for data: NIGERIA UGANDA JORDAN ROMANIA SLOVAK REP. SERBIA SLOVENIA MOZAMBIQUE MALTA ESTONIA CROATIA 24 LITHUANIA

25 Governance Indicators for Venezuela, 1996 & 2004 Source for data: : 'Governance Matters IV: Governance Indicators for , D. Kaufmann, A. Kraay and M. Mastruzzi, 25 ( Colors are assigned according to the following criteria: Dark Red, bottom 10 th percentile rank; Light Red between 10 th and 25 th ; Orange, between 25 th and 50 th ; Yellow, between 50 th and 75 th ; Light Green between 75 th and 90 th ; Dark Green above 90 th.

26 Croatia 2004 vs

27 Governance Indicators: Chile, 2004 vs Source for data: ; Colors are assigned according to the following criteria: Dark Red, bottom th percentile rank; Light Red between 10 th and 25 th ; Orange, between 25 th and 50 th ; Yellow, between 50 th and 75 th ; Light Green between 75 th and 90 th ; Dark Green above 90 th.

28 KK Control of Corruption, : East Asia in Comparative Perspective Percentile Rank (0-100) East Asia (NIC) East Asia dev. East Asia dev. (small Islands) East Asia dev. (larger countries) Latin America Source for data: : 'Governance Matters IV: Governance Indicators for , D. Kaufmann, A. Kraay and M. Mastruzzi, ( The East Asian developing balanced sample comprised of 9 small islands and 12 larger countries. 28

29 KK Rule of Law, : Selected Regions Percentile Rank (0-100) East Asia (NIC) East Asia dev. East Asia dev. (small Islands) East Asia dev. (larger countries) Latin America Source for data: : 'Governance Matters IV: Governance Indicators for , D. Kaufmann, A. Kraay and M. Mastruzzi, ( The East Asian developing balanced sample comprised of 8 small islands and 12 larger countries. 29

30 Percentile Rank (0-100) KK Government Effectiveness, : East Asia in Comparative Perspective East Asia (NIC) East Asia dev. East Asia dev. (small Islands) East Asia dev. (larger countries) Latin America Source for data: : 'Governance Matters IV: Governance Indicators for , D. Kaufmann, A. Kraay and M. Mastruzzi, ( The East Asian developing balanced sample comprised of 9 small islands and 12 larger countries. 30

31 KK Regulatory Quality, : East Asia in Comparative Perspective Percentile Rank (0-100) East Asia (NIC) East Asia dev. East Asia dev. (small Islands) East Asia dev. (larger countries) Latin America Source for data: : 'Governance Matters IV: Governance Indicators for , D. Kaufmann, A. Kraay and M. Mastruzzi, ( The East Asian developing balanced sample comprised of 9 small islands and 12 larger countries. 31

32 Control of Corruption: East Asia 2004 vs

33 Rule of Law: East Asia 2004 vs

34 The Mezzo Level of Governance Measurement Based on cross-country surveys, mainly of enterprises (such as the EOS of WEF, BEEPS/WBES of WB, etc.) Thousands of firms interviewed on a range of issues; focus on governance, specialized questions More detailed unbundling of governance and corruption phenomena than aggregate indicators Relatively broad country coverage, but less than aggregate governance indicators Measuring what is taking place De Facto matters: it uncovers stark realities masked in De Jure indicators Addresses empirically: It takes two to tango 34

35 100 Constraints to Business vary across regions & countries (responses from the Firm in EOS 2005) % firms reporting constraint among top 3: Infrastructure Corruption Tax Regulations Inflation East Asia (NIC) East Asia dev. South Asia Sub-saharan Africa Eas tern Europe Latin America Cambodia China East Timor Philippines Thailand Vietnam Source: EOS The question posed to the firm was: Select among the above 14 constraints the five most problematic factors for doing business in your country. Note that the overall EOS sample covers 117 countries, and in some regions particularly in the Middle 35 East, Africa and the FSU, many countries are not surveyed. Thus, regional averages need to be interpreted with caution, since typically countries not surveyed tend to rate lower in governance than those surveyed.

36 Unbundling Corruption: Different types of Bribery (responses by firms 2005) % Firm Report High Bribery (1-3) 100 Bribery in: Connection to Utilities Taxation Procurement Judiciary Frequency of Bribery East Asia NICs East Asia dev. China Hong Kong India Malaysia Philippines Thailand Vietnam Source: EOS firm survey, WEF countries. Question: In your industry, how commonly firms make undocumented 36 extra payments or bribes connected with permits / utilities / taxation / awarding of public contracts / judiciary? (common never occurs).

37 Multinationals Bribe Abroad? % Firms Reporting Frequent Procurement Bribery, EOS 2005 % Firms Reporting Procurement Bribery is Prevalen Domestic Firm in OECD Country OECD Multinational in another OECD country OECD Multinational in Non-OECD country Domestic Firm in Non-OECD Country Procurement Bribery is prevalent (% Firms Report) Source: EOS, preliminary. Question: In your industry, how commonly would you estimate that firms make undocumented extra payments or bribes connected with the following: permits, public utilities, tax payments, loan applications, awarding of public 37contracts, influencing of laws, policies, regulations and decrees to favor selected business interest, and judicial decisions. Any firms reporting answers 1 through 3 were considered to be reporting at least high frequency of bribery, while answers 4 through 7 were not.

38 State Capture Firms shape the legal, policy and regulatory environment through illicit, non-transparent provision of private gains to public officials Examples include: private purchase of legislative votes private purchase of executive decrees private purchase of court decisions illicit political party financing 38

39 Addressing Capture: Economic Reform, Political Competition & Voice/Civil Liberties Matter 0.4 State Capture Index Partial Civil Libs High Civil Libs Partial Advanced Slow Pace of Econ Reform Political/Civil Liberties Reforms 39

40 The Micro Level In-depth in-country diagnostics for action programs Key Features of Governance Diagnostic Tools Multi-pronged surveys of: households, firms and public officials [ triangulation ] Experiential questions (vs. opinions /generic) Local Institution Implements, w/wb Collaboration Recognizing Multidimensionality of Governance Focus on Service Delivery Input for Action and Change: Action Programs 40

41 Extent of Integrity in Institutions in Guatemala (2004 Diagnostic, responses from service users; firms, and public officials) Church San Carlos University Media International Donnors Political Parties Customs Police Congress 0% 20% 40% 60% 80% 100% % of respondents reporting the institution to be honest Usuarios Empresas Funcionarios Publicos 41

42 Citizen Voice Helps Control Bribery (Bolivia Diagnostics) Bribery Low Moderate_Low Moderate_High High Voice / External Accountability Simple Average Association Control Causal Link Margin of Error 42 Based on 90 national, departmental, and municipal agencies covered in the Bolivia Public Officials Survey.

43 Transparency within Government Agencies Prevents Purchase of Public Positions Job Purchase Low Moderately Low Moderately High High Internal Transparency Simple Average Association Control Causal Link Margin of Error Based on 90 national, departmental, and municipal agencies covered in the Public Officials Survey. 43

44 Some Implications 1 Measuring governance is important and feasible--with caution 2 Governance Matters: large development dividend 4. The world on average is stagnant some countries have improved significantly, others deteriorated, many stagnated 5. Need to refocus efforts to improve governance Frankly questioning of what doesn t work: -- Obsession with bureaucratic corruption (vs. grander forms) -- Anti-Corruption Campaigns -- Drafting more laws, codes, and Conventions or over-regulating -- Creation of yet more Ethics and Anti-Corruption agencies -- Pure Supply Side Public Sector Management & Legal TA -- Fully Ringfencing Projects/Programs (w/out systemic reforms) -- Blaming History, Culture or Legal Origins 44

45 What Appears to Work or Holds Promise 1. Data Power / Metrics Matters 2. Voice and Accountability incl. Freedom of the Press 3. Transparency Strategy and Reforms (vs. Over-Regulations) 4. Focus on Incentives and on Prevention 5. Political Reform, including on Political/Campaign Finance 6. Working with the Corporates, MNC, Banking Sector 7. Capital Markets Development as market-disciplining 8. For Rich/Donor Countries, & IFIs: Tougher Love on Governance may make a difference? & Joining Clubs 45

46 Basic Scorecard: 10 Transparency Reform Components 1. Public Disclosure of Assets & Incomes of Candidates, Public Officials, Politicians, Legislators - & dependents 2. Public Disclosure of Political Campaign contributions by individuals and firms, and of campaign expenditures 3. Public Disclosure of Parliamentary Votes, w/out exceptions 4. Effective Implementation of Conflict of Interest Laws, separating business, politics, legislation, & government 5. Publicly blacklisting firms bribing in public procurement 6. Effective Implementation of Freedom of Information Law, with easy access to all to government information 7. Fiscal/Financial transparency: central/local budgets; EITI 8. E*procurement: transparency (web) and competition 9. Adoption and implementation of Lobby Law 10. Corruption Diagnostic & Public Expenditure Tracking Surveys 46

47 Economic/Institutional & Political Transparency Index, preliminary High Transparency Indices OECD East Asia NICs East Asia dev. South Asia Sub-saharan Africa Former Soviet Union Eastern Europe Latin America CHILE -2.5 THAILAND Low 47 Index ranges from -2,5 (worst) to 2.5 (best).

48 Global Competitiveness vs. Institutional Transparency, 2004 High 6 FIN Global Competitiveness Index Low 4 2 r = 0.79 Low TWN DNK SWE NOR SGP CHEJPN ISL NLD GBR AUT NZL CAN ARE HKG ISR ES T BEL ES P PRT CHL BHR MYS LUX KOR IRL FRA MLT SVN GRC THA LTU HUN CZE TUNCYP ZAF BWA JOR LVA SVK CHN ITA MEX MAR MUS TTO URY CRI SLV NAM PAN IND BRAPOL EGY ROM HRVBGR GHA JAM COLPER TUR DZA RUS KEN VNM IDN DOM GMB LKA ARG ZMB TZA UGABIH PHL VEN GTM MKD UKR MWI MLI NGA ECU YUG PAK MOZ MDG HNDGEO BOL ZWE PRY NIC BGD AGO ETH TCD Institutional Transparency High 48 Sources: EOS 2004 and Transparenting transparency by BK (2005).

49 Policy applications- Transparency reforms as second generation institutional change Despite potential benefits, transparency reforms insufficiently integrated into reform programs Transparency reforms can be substitutes to costly (over)- regulation, to creation of additional public institutions (eg. A-C agencies) and to incessant legal drafting Transparency reforms have low financial cost, and high benefits: net savers of resources (eg. E*procurement) Transparency reforms may require political capital: but where present, technocratic areas where IFIs have a role Transparency reforms well-suited to be entry points catalyzing further institutional change, since: i) effective in changing incentives of political leaders to serve broad 49 social groups, and ii) politically more feasible

50 The case of Chile: unbundling transparency Since 1996, Chile has made considerable advances in governance indicators, comparing well today w/ OECD In terms of economic and institutional transparency, Chile is in 8 th position (e.g. Central Bank of Chile among the most effective and transparent in the world) Yet Chile faces challenges on political transparency -- the gap : Ec/Institutional Transparency = 2.38 vs. Political Transparency = 0.82 Weak areas requiring specific progress: Implementation of Freedom of Information law with effective mechanism to access the information Financial disclosure for public officials, legislators, judges Further transparency in ( sole sourced ) procurement Disclosure of political funding/expenditures (& lobby law) 50

51 Transparency and Citizen Oversight equiv. US$ per student 3.5 Tracking Education Dollars in Uganda Public info campaign Intended grant Source: Uganda Public Expenditure Tracking Surveys Actual grant received by primary school (means) 51

52 Governance Has Improved in Some Groups: e.g. Pull Effect of EU Accession High 1 Rule of Law Low EU Accessed ex-soviet Union (no access) Source for data: EU EE Accessed Countries: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia.

53 Bibliographical References 1. Kaufmann, D., A. Kraay, and M. Mastruzzi "Governance Matters IV: Governance Indicators for " pdf (synthesis), and, pdf (full paper) 2. Kaufmann, D. and A. Kraay "Governance and Growth: Causality Which Way?" 3. Kaufmann, D "Rethinking Governance: Empirical Lessons Challenge Orthodoxy." 4. Kaufmann, D "Corruption, Governance and Security: Challenges for the Rich Countries and the World." 5. Bellver, A. and D. Kaufmann (2005). "Transparenting Transparency: Initial Empirics and Policy Applications". Governance Indicators User Interface: 53

54 Data for Analysis and Informing Policy Advice, Not for Precise Rankings Any data on Governance, Institutions, and Investment Climate is subject to a margin of error. It is not intended for precise country rankings, but to highlight relative strengths and weaknesses and draw analytical and policy lessons. The data and indicators do not necessarily reflect official views on rankings by the World Bank or its Board of Directors. Errors are responsibility of the authors. Further materials & access to interactive data: General: Data: Governance Matters IV Report and Materials: Synthesis Article about Myths on Governance in F&D: 54