Governance Redux The Empirical Challenge Daniel Kaufmann, World Bank Institute www.worldbank.org/wbi/governance Presentation at the JPA Retreat, Preston Auditorium, Washington, DC, April 3 rd, 2004
Is it Culture A Live Test: Culture,, or instead Information, Transparency and Incentives? You are approaching your car in the empty and unattended garage late at night You see an envelope on the floor, and you pick it up It contains 20 bills of US $100 each. If no possibility that anyone would know: No cameras, no monitoring, no reporting What would you do with such envelope full of cash?
A. If no possibility that anyone would know: You are alone, there is no monitoring, cameras, or possibility of resporting 33% Report and Return Funds 50% Undecided 17% Keep Option Finder Results: Various Audiences
B. If 30% probability that information is shared (e.g. 30% that camera recording info which may be reviewed) 22% Undecided 4% Keep 74% Report and Return Funds
The initial ascent getting to base camp WDR on Institutions 1982 TI CPI (5/95) The Prohibition Era JDW Cancer of Corruption Speech (10/96) State in a Changing World (97) Strategic Compact (97) Anticorruption Strategy (97) Governance Pillar - CDF (98) Gov/A-C Diagnostics start (98) O.P. Mainstreaming AC in CAS (99) Broadening & Mainstreaming 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 Internal AC unit created in WB (98) 1st set of firms Debarred from WB (99) Formalization of INT (01) 1970 1980 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
Explosion of activities: Examples of major programs launched across countries Albania (public admin.) Latvia (anticorruption) Ukraine (tax admin) Russia (customs/treasury) Kyrgyz Republic (governance reform) Jordan (civil society) Cambodia (PE; forestry) Guatemala (diagnostic to action program) Colombia (diagnostics & civil society) Bolivia: (public admin.) Ghana (PE accountability) Gabon (water/electricity) Uganda (PRSC; education) Tanzania (PSR) Pakistan (devolution) Ethiopia (decentralization) Bangladesh (civil society) Philippines (transport) Indonesia (local governance) India Andra Pradesh (power; e-gov); Karnataka (right to info)
Outlining Key Themes 1. Data Power : Governance & Corruption can be measured and analyzed & it matters 1 trillion! 2. Governance broader than Corruption 3. Governance is a major challenge in virtually every corner of the world yet averages can be misleading 4. Prevention and Incentives is key (not just laws ) 5. Need for focus on: i) Politics; ii) Private Elites; iii) Voice & Transparency; & iv) Capacity-Building 6. Implications for us all
Governance: A working definition Governance is the process and institutions by which authority in a country is exercised: (1) S -- the process by which governments are selected, held accountable, monitored, and replaced; (2) E -- the capacity of gov t to manage resources and provide services efficiently, and to formulate and implement sound policies and regulations; and, (3) R -- the respect for the institutions that govern economic and social interactions among them
Operationalizing Governance: Unbundling its Definition into Components that can be measured, analyzed, and worked on Each of the 3 main components of Governance Definition is unbundled into 2 subcomponents: Voice and (External) Accountability Political Instability and Violence Regulatory Burden Government Effectiveness Corruption Rule of Law We measure these six governance components
Sources of Governance Data Subjective data on governance from 25 different sources constructed by 18 different organizations Data sources include cross-country surveys of firms, commercial risk-rating agencies, think-tanks, government agencies, international organizations, etc.) Over 200 proxies for various dimensions of governance Organize these measures into six clusters corresponding to definition of governance, for four periods: 1996, 1998, 2000, and 2002, covering up to 199 countries
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, Latinobarometro, Afrobarometer Expert Assessments from Commercial Risk Rating Agencies: DRI, PRS, EIU, World Markets Online, Expert Assessments from NGOs, Think Tanks: Reporters Without Borders, Heritage Foundation, Freedom House, Amnesty International Expert Assessments from Governments, Multilaterals: World Bank CPIA, EBRD, State Dept. Human Rights Report
Inputs for Governance Indicators 2002 Publisher Publication Source Country Coverage Wefa s DRI/McGraw-Hill Country Risk Review Poll 117 developed and developing Business Env. Risk Intelligence BERI Survey 50/115 developed and developing Columbia University Columbia U. State Failure Poll 84 developed and developing World Bank Country Policy & Institution Assmnt Poll 136 developing Gallup International Voice of the People Survey 47 developed and developing Business Env. Risk Intelligence BERI Survey 50/115 developed and developing EBRD Transition Report Poll 27 transition economies Economist Intelligence Unit Country Indicators Poll 115 developed and developing Freedom House Freedom in the World Poll 192 developed and developing Freedom House Nations in Transit Poll 27 transition economies World Economic Forum/CID Global Competitiveness Survey 80 developed and developing Heritage Foundation Economic Freedom Index Poll 156 developed and developing Latino-barometro LBO Survey 17 developing Political Risk Services International Country Risk Guide Poll 140 developed and developing Reporters Without Borders Reporters sans frontieres (RSF) Survey 138 developed and developing World Bank/EBRD BEEPS Survey 27 transition economies IMD, Lausanne World Competitiveness Yearbook Survey 49 developed and developing Binghamton Univ. Human Rights Violations Research Survey 140 developed and developing
Rule of Law, Selected Countries, KK 2002 2.5 Good 0 Poor -2.5 HAITI AFGHANISTAN ANGOLA ZIMBABWE PARAGUAY VENEZUELA CUBA GUATEMALA HONDURAS COLOMBIA ARGENTINA NICARAGUA BOLIVIA EL SALVADOR BRAZIL MEXICO PANAMA URUGUAY COSTA RICA BOTSWANA ITALY KOREA, SOUTH SLOVENIA CHILE BELGIUM UNITED STATES NETHERLANDS DENMARK FINLAND Source: Governance Research Indicators, KK 2002. Units in vertical axis are expressed in terms of standard deviations around zero. Country and regional average estimates are subject to margins of error (illustrated by thin line atop each column), implying caution in interpretation of the estimates and that no precise country rating is warranted.
Voice and Accountability. Rule of Law and Control of Corruption, Regional Averages, KK 2002 Good Governance 2 Voice and Accountability Rule of Law Control of Corruption 0-1 OECD Poor Governance East Asia (NIC) East Asia dev. South Asia Eastern Europe Former Soviet Union Middle East North Africa Latin America Sub-Saharan Africa Source: Governance Research Indicators (KK) based from data in D. Kaufmann, A. Kraay and M. Mastruzzi, 'Governance Matters III: Updated Indicators for 1996-2002', for 199 countries, details at http://www.worldbank.org/wbi/governance/pubs/govmatters3.html. Units in vertical axis are expressed in terms of standard deviations around zero. Country and regional average estimates are subject to margins of error (illustrated by thin line atop each column), implying caution in interpretation of the estimates and that no precise country rating is warranted.
Governance World Map : Control of Corruption, 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Map downloaded from : http://info.worldbank.org/governance/kkz2002/govmap.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse ( bottom 10% in darker red); Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%
A Quiz: How Many zeros? Estimating Annual Worldwide Bribery, in US $s 1. 10 to the 3 rd exponential (1 followed by 3 zeros) 2. 10 to the 6 th 3. 10 to the 12 th 4. 10 to the 11 th 5. 10 to the 9 th But that is only a partial estimate of the cost of corruption And Misgovernance goes beyond corruption
Worldwide Evidence: Improved Governance, Public and Private, makes an enormous difference in Per Capita Incomes of Nations Good Governance and Anti-Corruption Pays Not merely responsibility of the Public Sector The 400% Dividend The 3% decline on business growth rates The 20% Tax on Investors The Regressive Tax on (low income) households
Governance Indicators and Income per Capita, Worldwide High US$20,000 Low Level of Governance Medium Level of Governance High Level of Governance Income per capita US$3,000 Low US$400 Voice and Accountability Government Effectiveness Control of Corruption Sources: Kaufmann D., Kraay A., Mastruzzi M., Governance Matters III: Governance Indicators for 1996-2002 (KK 2002); Income per capita (in Purchasing Power Parity terms) obtained from Heston-Summers (2000) and CIA World Factbook (2001).
5 Corporate Ethics, Public Sector Transparency and Income Growth -- Worldwide Crecimiento Anual del PIB (%) Transparent Info [Gov't] Parlament Effectiness No State Capture Corporate Ethics 3 1 Low Medium High Public Transparency and Corporate Ethics
Overall Evidence is Sobering: Progress on Governance is modest at best, so far Evidence points to slow, if any, average progress worldwide on key dimensions of governance This contrasts with some other developmental dimensions (e.g. quality of infrastructure; quality of math/science education; effective absorption of new technologies), where progress is apparent At the same time, substantial variation crosscountry, even within a region. Some successes. And it is early days.
3 High Inflation Significant Decline in Inflation Rates Worldwide TRANSITION 1.5 EMERGING (avg. in logs) Low OECD+NIC 0 1984-1988 1989-1993 1994-1998 1999-2001 Source: Rethinking Governance, based on calculations from WDI. Y-axis measures the log value of the average inflation for each region across each period
Quality of Infrastructure 6.5 High East Asia Industrialized OECD 4 Transition Low Emerging 1.5 1997 1998 1999 2000 2001 2002 2003 Source: EOS 1997-2003 (Quasi-balanced panel). Question 6.01: General infrastructure in your country is among the best in the world?
Extent of Independence of the Judiciary 7 Independent OECD 4.5 East Asia Industrialized Transition Non- Independent Emerging 2 1998 1999 2000 2001 2002 2003 Source: EOS 1998-2003 (Quasi-balanced panel). Question 5.01: The judiciary in your country is independent from political influences of members of government, citizens or firms?
Rule of Law and Corruption have not improved recently 1.00 Good Control of Corruption Rule of Law 0.75 0.50 0.25 Poor 0.00 1996 1998 2000 2002 Why should we be concerned?
Regional Corruption Trend, Past 3 Years 2003 reports Latin America / Caribbean Middle East North Africa Sub-saharan Africa South Asia Eastern Europe Former Soviet Union East Asia dev. East Asia (NIC) OECD Deterioration -1.5 0 1.5 Corruption Trend Improvement Source: EOS 2003. Each region has the following number of countries: OECD: 23; East Asia (Developing): 6, East Asia (NIC): 4; Eastern Europe: 14; Former Soviet Union: 2 (Russia and Ukraine); South Asia: 4; Sub-Saharan Africa: 21; Middle East North Africa: 7; Latin America and Caribbean: 21.
Corruption Trend in Past 3 Years, Selected Countries Slovenia Panama Nicaragua Mexico Jamaica Honduras Guatemala El Salvador Ecuador Costa Rica Colombia Brazil -2.5 0 2.5 Deterioration Source: EOS 2003 Corruption Trend Improvement
Unbundling Corruption [Regional Averages] Preliminary results 2003, View of the Firm, 102 countries 70 Extent of Bribery for: Access Public Utilities Procurement Capture of Laws & Regulations 35 0 East Asia Industrialized OECD East Asia Developing Eastern Europe Latin America South Asia Former Soviet Union % of firms rating type of corruption as high/very high Source: EOS 2003. Each region has the following number of countries: OECD: 23; East Asia (Developing): 6, East Asia (NIC): 4; Eastern Europe: 14; Former Soviet Union: 2 (Russia and Ukraine); South Asia: 4; Sub-Saharan Africa: 21; Middle East North Africa: 7; Latin America and Caribbean: 21.
Politics and Institutions: a governance challenge in Latam % of Firms reporting large extent of: 100 Pervasive Ineffective Parliament Illegal Political Financing Honesty of Politicians 55 Not a problem 10 OECD East Asia Developing East Asia Industrialized Eastern Europe Former Soviet Union Latin America Source: EOS 2003. Each region has the following number of countries: OECD: 23; East Asia (Developing): 6, East Asia (NIC): 4; Eastern Europe: 14; Former Soviet Union: 2 (Russia and Ukraine); South Asia: 4; Sub-Saharan Africa: 21; Middle East North Africa: 7; Latin America and Caribbean: 21.
Corruption is a Regressive Tax (In-depth diagnostic, Colombia, 2002) 18 16 14 12 10 8 6 4 2 0 Bajo Ingreso Mediano Ingreso Alto Ingreso Bajo Ingreso Mediano Ingreso Alto Ingreso
Citizen Voice Improves Accessibility of Public Services to the Poor Accessibility to the Poor 100 80 60 40 20 r = 0.54 Controlled Causal Link 0 10 20 30 40 50 60 70 80 90 Voice / External Accountability Based on Public Officials Survey. The sample of institutions includes 44 national, departmental, and municipal agencies which are a prior anticipated to be accessible to the poor
Transparency within Government Agencies Prevents Purchase of Public Positions 18 15 Job Purchase 12 9 6 3 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.
Role of Donors -- Evidence for us The need for OECD to provide an example What do Firms tell us? Some evidence from the Global Poll Responses from other surveys Implications for debate
Unbundling Governance: Ratings by Firms (2003) Good 100 Rank Percentile Rank (0-100) Poor 80 60 40 20 0 Terrorist threat Political Finance Influence Politically Connected Firms Dominant Firms Complex Tax system Tax burden Organized crime Street crime Insider trading Bribery in judiciary Money Laundering USA Finland Illegal political finance Preliminary, based on a survey of firms. Percentile ranks based on comparative performance among the 102
Control of Cronyism: Differences across industrialized countries (OECD) 100 No Cronyism Percentile Rank 50 0 Denmark Austria Finland Sweden Singapore Botswana Netherlands Australia Germany United Kingdom France United States Greece Italy Cronyism Crony Bias constructed based on data from EOS, 2003, in 102 countries, calculated as the difference between influence by firms with political ties and influence by the firm s own business association.
Capture, Political Influence and Cronyism: 4 countries Good Control 100 USA Chile Finland Singapore 80 Percentile Rank (0-100) 60 40 20 Poor 0 Judiciary Bribery Illegal Political Financing Political Financing Influence Crony Bias Preliminary, based on a survey of firms. Percentile ranks based on comparative performance among the 102 countries in the sample. All variables rated from 0 (very bad) to 100 (excellent).
Political Influence by Powerful Firms: % of Firms Report Undue Influence of Political Financing and Politically Connected firms % Firms Reporting Poor Rating 100 Legal Political Financing Influence by Firms with Political ties 75 50 25 0 Denmark Finland Sweden Source: EOS, 2003. Singapore Japan Botswana Netherlands New Zealand Germany United Kingdom United States Canada Chile Ireland
Listening to Stakeholders: Responses on Donor Aid and Anti-Corruption Global Poll Responses on World Bank Effectiveness in priority and quality of its job various dimensions % respondents rate priority/quality satisfactory 100 75 Priority given to issue Quality of Job on Issue 50 25 0 Corruption Control Environment Education Health Source: Global Poll 2003. Global Poll questions: How much of a priority does the WB give to helping your country reduce corruption/strengthen governance/improve health/build investment climate/etc.. (1=none, 10=top) ; How good of a job does the WB do in helping your country reduce corruption /strengthen governance/improve health/build investment climate/etc. (1=bad, 10=excellent). Satisfactory percentage based on respondents giving a rating of 6 or higher.
Listening to Stakeholders: Responses on Donor Aid and Anti-Corruption 75 Where is Financial Aid Well Used, Where Wasted? Percentage Global Poll respond aid well used vs. extent of corruption % Global Poll respond aid well used Government officials Global Poll Respondents 50 Non-Government Global Poll Respondents 25 0 High Corruption Medium Low Corruption Extent of Corruption in Country (KK 2002 Indicator) Sources: Global Poll 2003 (vertical axis on question of whether financial aid is well used), and KK 2002 Governance Indicators for extent of corruption at the country level. Global Poll question: Because of corruption, foreign assistance to developing countries is wasted (1=yes, 4=no). A response of 3 or 4 was coded as aid well used for analysis in this chart.
Listening to Stakeholders: Responses on Donor Aid and Anti-Corruption Most Important Role for Donors in Helping Country on Anti-Corruption (A-C) % respondents Pre-Conditionality Work w/ Country A-C Awareness/Education Control corruption in Donor projects Collaborate w/ NGOs Donors out of A-C 0% 10% 20% 30% Percentage of Responses selected as Most Important Role for Donors Source: World Bank Institute Governance WebSurvey, http://www.wbigf.org/hague/hague_survey.php3. Based on 2,427 responses.
Some Key Lessons from Empirical Research Worldwide Cross-Country & US Cross-State Consequences and Costs of Corruption: Lower Incomes, Investment; Poverty & Inequality But no automatic virtuous circle (from incomes) Determinants of Corruption: Capture and Undue Influence by Vested Interests No Voice, Press Freedoms, Devolution, Transparency Low Professionalism of Public Service No Example from the Top / Lack of Leadership Easy and Gradualist Panaceas
Good Controlling Corruption and Voice and Accountability 80 Control of Corruption 40 Poor 0 Low Average High Voice and Accountability
Good Freedom of the Press to improve Rule of Law and Controlling Corruption 80 Rule of Law Control of Corruption Percentile Rank 40 Poor 0 Not Free Average Free Sources: Freedom House, 2002 and KK2002
Transparency and Citizen Oversight US$ per student Tracking Education Dollars in Uganda 3.5 3.0 2.5 Public info campaign 2.0 1.5 1.0 0.5 0.0 1990 1991 1993 1994 1995 1999 Intended grant Actual grant received by primary school (means) Source: Uganda Public Expenditure Tracking Surveys
No Evidence to support some popular notions 1. Constant drafting of new A-C laws/regulations 2. Creating many new Commissions & Agencies 3. Blaming Globalization or Privatization 4. Cultural Relativism (or Regional Characteristics) 5. Historical Determinism by contrast, what may be particularly important
Qué a hacer sobre la corrupción? Respuestas de funcionarios en 62 países 90% % de entrevistados que dan un alto grado 80% 70% 60% 50% 40% 30% 20% Comisiones Anti-corrupcion Privatizacion Voz y libertades civiles Reformas Publicas Transparencia presupuestaria Economia desregulada Liderazgo ejemplar Fuente: D. Kaufmann, Corruption: The Facts, Foreign Policy, Verano, 1997
In sum, what may work 1. Transparency Mechanisms (e*governance, data) 2. Capacity Building within Governance framework 3. Voice and Democratic Accountability (incl. youth, women) 4. Collective Action (Judiciary, Legislative, Executive, Private, CivScty) 5. Focus on Prevention & Incentives (w/in PSR) 6. Political Reforms (incl. Party Finance, etc.) 7. Private Sector & MNCs Corporate Ethics 8. Donor tough selectivity, within large supporting role 9. What to do less, so to be focused (e.g. A-C commissions )
Issues for debate for us need to question and innovate 1. Capacity-Building support: beyond hardware and organizational support governance is key 2. Facilitating role: country takes the lead within participatory Collective Action approach 3. Tougher selectivity; yet large supporting role 4. What to do less (e.g. A-C commissions ) 5. Politics: better understanding by IFIs; bilaterals partner on specific areas? 6. Institutionalizing Power of Data (incl. Diagnostics) 7. The Ultimate Incentive?: Joining global markets, trade bodies; reduce trade barriers
Women Rights and Corruption Control Corruption Index (ICRG, 1990s) 10 9 8 7 6 5 4 3 2 1 0 PAK YEM R 2 = 0.38 Source of Women s Right Variable: Stohl, Michael (Convenor) Global Studies Program, Global Governance of Human Rights GNB EGY IND SDN ARE SAU MLI BGD IRQ SLE TGO NER NGA GTM KWT SEN MAR TUN COG DZA DOM MEX SYR IRN CIV LBY JOR BHR GIN GAB IDN MMR HTI BOL ECU ZMB TZA BFA LKA GRC PRY PAN HND PHL KEN CMR AGO VEN YUG GHA ARG CHL MYS ISR ZWE ITA CHN BWA ESP KOR CZE BEL IRL PRT HUN USA GBR AUT CRI JPN AUS POL FRA NZL CHE NLD URY COL THA SWE CAN DEU NOR 4 4.5 5 5.5 6 6.5 7 Women Social and Economic Rights, 1990s FIN DNK RUS
Illustration of Concrete Projects and Measures promoting Transparency and Accountability Transparency & reform in political/party finance: e.g. new methods for disclosure (expenses), etc. E*disclosure (web) of votes of parliamentarians Public Disclosure of Assets/Incomes by public officials and legislators and their dependents E*procurement; e*data.governance; diagnostics PET diagnostic for budgetary transparency Civil society involvement: voice/feedback is key
On the growing gap between EU-accession countries and the rest of transition --Rule of Law Over Time, Selected Regions, 1996-2002 High 2 OECD Rule of Law 1 0 East Asia (NIC) Transition EU Accession Countries Sub-Saharan Africa Low -1 1996 1998 2000 2002 Other Transition Countries Source for data: http://www.worldbank.org/wbi/governance/govdata2002. Each region has the following number of countries: OECD: 28; East Asia (Developing): 35, East Asia (NIC): 4; Eastern Europe: 16; Former Soviet Union: 12; South Asia: 8; Sub-Saharan Africa: 47; Middle East North Africa: 21; Latin America and Caribbean: 38.
Governance: Many dimensions -- & entry points will vary by country Institutional Institutional Checks Checks & Balances Balances Independent, Independent, effective effective judiciary judiciary Legislative Legislative oversight oversight Decentralization Decentralization with with accountability accountability Global Global initiatives: initiatives: OECD OECD Convention, Convention, antimoney antimoney laundering, laundering, WCO WCO Political Political Accountability Accountability Political Political competition, competition, credible credible political political parties parties Transparency Transparency in in party party financing financing Disclosure Disclosure of of parliamentary parliamentary votes votes Asset Asset declaration, declaration, conflict-of-interest conflict-of-interest rules rules Civil Civil Society Society Voice Voice & Participation Participation Freedom Freedom of of information information Public Public hearings hearings on on draft draft laws laws Media/NGOs Media/NGOs Community Community empowerment empowerment Report Report cards, cards, client client surveys surveys GOOD GOVERNANCE Competitive Competitive Private Private Sector Sector Economic Economic policies policies Restructuring Restructuring of of monopolies monopolies Effective, Effective, streamlined streamlined regulation regulation Robust Robust financial financial systems systems Corporate Corporate governance governance Collective Collective business business associations associations Public Public Sector Sector Management Management Meritocratic Meritocratic civil civil service service with with adequate adequate pay pay Public Public expenditure, expenditure, financial financial management, management, procurement procurement Tax Tax and and customs customs Frontline Frontline service service delivery delivery (health, (health, education, education, infrastructure) infrastructure)
Who Should take the lead in a National Governance/Anticorruption Program? Broad Coalition 48% A-C Agency 18% Civil Society Alone Executive Alone Enforcement Agencies Legislative Int'l Experts NGOs Alone Not Worth It 8% 7% 4% 4% 4% 3% 4% Percentage of Respondents A-C: Anti-Corruption 0% 10% 20% 30% 40% 50%
Data for Analysis and informing Policy Advise, not for Precise Rankings Data in this presentation is from aggregate governance indicators, surveys, and expert polls and is subject to a margin of error. It is not intended for precise comparative rankings across countries, but to illustrate performance measures to assist in drawing implications for strategy. It does not reflect official views on rankings by the World Bank or its Board of Directors. Errors are responsibility of the author(s), who benefited in this work from collaboration with many Bank staff and outside experts. www.worldbank.org/wbi/governance