Governance, Security and Development Data Power Challenges Myths -- and Implications for Strategies in the next stage

Governance, Security and Development Data Power Challenges Myths -- and Implications for Strategies in the next stage Daniel Kaufmann, World Bank Institute www.worldbank.org/wbi/governance Presentation at OECD, Paris, July 11 th, 2005 The newly released Governance Matters IV Report (May 2005), by D. Kaufmann, A. Kraay, and M. Mastruzzi, with access to the data, is at: www.worldbank.org/wbi/governance/ 1

Challenging Convention key tenets 1. 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 2. Some evidence: Governance has improved globally 3. Good Governance: outcome of development and growth & emerging economies corrupt; rich a model 4. The trouble is with Public Officials/Sector in LDCs 5. Cultural & Historical Determinism of Corruption 6. Fighting corruption by Fighting Corruption (Laws, Codes, Campaigns, Agencies & Regulations) 2

Tenet # 7: Previous Six Popular Notions Challenged 1. Governance (& Human Rights/Security) can be measured, analyzed, & monitored over time: just released Governance Matters IV Report -- with worldwide data 2. Huge development dividend of good governance 3. Worldwide Governance has not improved 4. Some countries improved in the short term: feasible! 5. Implications for new Strategies -- also for rich world 3

Empirical Approach to Governance 1. Macro : 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 4

Main Findings in Governance Matters IV Updated dataset: 6 dimensions of governance for 209 countries more data sources, increased precision Yet margins of error in governance estimates remain incorporate when comparing countries and over time Not unique to our aggregate subjective indicators Changes in governance over time 1996-2004 Are these changes are significant?: new method Have occurred in some countries, not worldwide How useful are perceptions -data on governance? What is the development dividend of good governance, and is a poverty discount warranted? 5

The Governance Macro Level Defining and unbundling succintly The 6 dimensions of Governance: how conceptually derived, how measured The governance worldmap, & web interactivity What the Macro can and cannot do Governance Matters IV new report with major findings 6

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

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 various dimensions of governance Organize these measures into six clusters corresponding to definition of governance, for five periods: 1996, 1998, 2000, 2002, 2004 8

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

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

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 1996-2004, D. Kaufmann, A. Kraay and M. Mastruzzi, 11 (http://www.worldbank.org/wbi/governance/govdata/); 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

Voice & Accountability, 2004 (Selected Countries) 2.5 Good Governance Governance Level Margins of Error 0-2.5 Poor Governance MYANMAR KOREA, NORTH ERITREA TURKMENISTAN SUDAN UZBEKISTAN SYRIA SOMALIA BELARUS ZIMBABWE PAKISTAN EGYPT RUSSIA VENEZUELA MADAGASCAR Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004, D. Kaufmann, A. Kraay and M. Mastruzzi, 12 (http://www.worldbank.org/wbi/governance/govdata/); 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. INDIA GHANA ARGENTINA KOREA, SOUTH SOUTH AFRICA GREECE MAURITIUS URUGUAY CHILE ESTONIA POLAND HUNGARY GERMANY NETHERLANDS FINLAND NORWAY DENMARK

Control of Corruption, 2004: World Map Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004, D. Kaufmann, A. Kraay and M. Mastruzzi, 13 (http://www.worldbank.org/wbi/governance/govdata/); 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.

Government Effectiveness, 2004: World Map Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004, D. Kaufmann, A. Kraay and M. Mastruzzi, 14 (http://www.worldbank.org/wbi/governance/govdata/); 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.

Precision vs. Number of Sources, KKZ Governance Estimates, 2000/01 0.7 0.6 Margin of Error 0.5 0.4 0.3 0.2 0.1 0 Note: See explanatory details in this slide s note 0 2 4 6 8 10 12 14 Number of Sources Per Country 15

Application: MCA Eligibility Criteria, Control of Corruption, 1996, 52 Countries (18 countries with no data) 1 0.95 1.5 Probability (0-1) 0.9 0.85 0.8 0.75 0.7 0.65 0.6 0.55 0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 ZAR SLE TJK TKM IRQ Probability Country is in Top Half of Sample Governance Score Margin of Error NGA CMR GEO KEN TZA AGO MWI ETH HTI TGO PAK ZMB AZE HND LAO BOL COG KGZ UKR ARM VNM UGA MOZ PRY IDN GHA BGD PHL SEN IND NER MLI BFA GUY NPL PNG YEM LKA MDA NIC CHN EGY MAR MDG MNG GIN GMB Median Corruption Score 18 Missing countries: AFG, BEN, BTN, COM, DJI, ERI, GNQ, KIR, LSO, MRT, RWA, SLB, STP, SWZ, TCD, TMP, TUV, VUT 1 0.5 0-0.5-1 -1.5-2 -2.5 Corruption Rating for 1996 0.05 0-3 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Country Rank (0-1) 15 countries (green) have a probability of 75% or above to be in the top half; 19 countries (red) have a probability 16 of 25% or less to be in the top half; 18 countries (yellow) have a probability between 25% and 75% to be in the top half.

1 0.95 MCA Eligibility Criteria, Control of Corruption, 2004, 70 Countries Data for all, lower margins of error 1 0.9 0.85 Probability Country is in Top Half of Sample BTN 0.5 0.8 Margin of Error 0.75 Probability (0-1) 0.7 0.65 0.6 0.55 0.5 0.45 0.4 0.35 0.3 0.25 Governance Score HTI IRQ TKM AFG ZAR SLB LAO COM TCD AGO NGA TJK BGD AZE COG PRY SWZ DJI KGZ TGO GEO PNG IDN UKR KEN SLE NER PAK MDA ETH YEM MWI GIN MOZ TUV BOL CMR ZMB VNM UGA HND STP ERI GMB NPL TZA PHL VUT ARM MLI CHN MNG SEN RWA BFA GUY NIC BEN IND TMP EGY GHA LKA MDG LSO KIR MAR MRT Median Corruption Score 0-0.5-1 -1.5 Corruption Rating for 2004 0.2 GNQ 0.15-2 0.1 0.05 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Country Rank (0-1) 26 countries (green) have a probability of 75% or above to be in the top half; 24 countries (red) have a probability 17 of 25% or less to be in the top half; 20 countries (yellow) have a probability between 25% and 75% to be in the top half. -2.5

3 High Inflation Significant Decline in Inflation Rates Worldwide TRANS ITION 1.5 EMERGING (avg. in logs) Low OECD+NIC 0 1984-1988 1989-1993 1994-1998 1999-2001 18 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? 19

No Significant Trend in Control of Corruption Worldwide Averages Good 0.8 EIU PRS QLM 0.5 0.2 Poor 1996 1998 2000 2002 2004 PRS country coverage in 1996: 129, all other periods 140; QLM and EIU country coverage: 115 for all periods. 20

Good 0.8 Rule of Law (lack of) Trend Worldwide 0.5 0.2 Poor EIU PRS GCS HERITAGE QLM 1996 1998 2000 2002 2004 PRS country coverage in 1996: 129, all other periods 140; GCS country coverage in 1996: 58, 1998: 59, 2000: 75, 21 2002 & 2004: 82; Heritage country coverage in 1996: 137; all other periods 155. QLM & EIU country coverage: 115 for all periods.

Human Rights; 1 st GHR (1): Absence of Killings 1 Good 1996 2004 Bad 0 Oecd Eastern Europe Former Soviet Union East Asia (NIC) East Asia dev. Latin America / Caribbean Subsaharan Africa South Asia Source: Cingranelli / Richards dataset http://www.humanrightsdata.com. A high value reflects respect for human rights. 22

Human Rights; 1 st GHR (3): Absence of Torture 1 Good 1996 2004 Bad 0 Oecd Eastern Europe Former Soviet Union East Asia (NIC) East Asia dev. Latin America / Caribbean Subsaharan Africa Source: Cingranelli / Richards dataset http://www.humanrightsdata.com. A high value reflects respect for human rights. South Asia 23

Human Rights; 1 st GHR: Life Protection (Composite of Absence of Killings, Absence of Disappearances, Absence of Torture, & Absence of Imprisonments) 1 Good 1996 2004 Bad 0 Oecd Eastern Europe Former Soviet Union East Asia (NIC) East Asia dev. Latin America / Caribbean Subsaharan Africa Source: Cingranelli / Richards dataset http://www.humanrightsdata.com. A high value reflects respect for human rights. South Asia 24

Human Rights; 1 st GHR: Women s Rights (Composite of Economic, Social, and Political Rights) 1 Good 1996 2004 Bad 0 Oecd Eastern Europe Former Soviet Union East Asia (NIC) East Asia dev. Latin America / Caribbean Subsaharan Africa Source: Cingranelli / Richards dataset http://www.humanrightsdata.com. A high value reflects respect for human rights. South Asia 25

Are all Countries Stagnating in Governance? The world on average has not improved But large or small variation across countries? New method: for each country, we can identify whether there are 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 26

Changes in Voice and Accountability, 1996-2004 2 Major Deterioration (selected countries) Insignificant Change 0 Major Improvement (selected countries) -2 27 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 2004. Classification for major deteriorations and improvements were based on 75% confidence interval. Source for data: http://www.worldbank.org/wbi/governance/govdata/.

Changes in Rule of Law, 1996-2004 2 Major Deterioration (selected countries) Insignificant Change 0 Major Improvement (selected countries) -2 ZIMBABWE IVORY COAST SWAZILAND 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 2004. Classification for major deteriorations and improvements were based on 75% confidence interval. Source for data: http://www.worldbank.org/wbi/governance/govdata/. NIGERIA UGANDA JORDAN ROMANIA SLOVAK REP. SERBIA SLOVENIA MOZAMBIQUE MALTA ESTONIA CROATIA 28 LITHUANIA

Governance Indicators: Zimbabwe, 1996/2004 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Colors are assigned according to the following criteria: Dark Red, bottom 10 29 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.

Governance Indicators: Ukraine, 1996/2004 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Colors are assigned according to the following criteria: Dark Red, bottom 10 30 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.

Croatia 2004 vs.1996 31

Governance Indicators: Mexico, 1996/2004 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Colors are assigned according to the following criteria: Dark Red, bottom 10 32 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.

Governance Indicators for South Africa, 1998 & 2004 Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004, D. Kaufmann, A. Kraay and M. Mastruzzi, 33 (http://www.worldbank.org/wbi/governance/govdata/); 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.

Governance Indicators: Chile, 1996/2004 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Colors are assigned according to the following criteria: Dark Red, bottom 10 34 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.

Governance Indicators: Finland, 1996/2004 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Colors are assigned according to the following criteria: Dark Red, bottom 10 35 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.

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: Eq. Guinea Iran 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 4. Urgency of interventions to improve governance 36

Development Dividend From Good Governance $30,000 Control of Corruption $3,000 $300 Low Governance Medium Governance High Governance 37 Data Source for calculations: KK 2004. 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.

Voice & Accountability vs. Control of Corruption 2.5 ISL DNK USA NLD GBR CAN NOR CHL FRA Control of Corruption 0.0 TUN MRT EGY CHN DZA IRN RWA PAK YEM CMR GTM LBR GIN ETH SLE LBY RUS UGA VEN CIV COG ZMB SDN AGO BGD BDI TCD TKM SOMZWE ZAR AFG CAF NGA MMRPRK IRQ HTI NER PER PHL ATG HRV BRA GHA DOM JAM SVN URYCRI EST ITA ZAF KOR r = 0.73-2.5-3 0 3 Voice & Accountability Low Source: KK 2004 High 38

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 39

Global vs. Domestic Governance Challenges: % Firms Report High Cost of Terrorism and Crime, EOS 90 80 70 60 50 40 30 20 10 0 % Firms Report High Cost of: Terrorism Organized Crime Canada Chile Colombia Israel Italy Japan Mexico Russia United Kingdom United States 40 Percentage Firms Report High Cost

High 6 Money Laundering through Banks and Diversion of Public Funds Money Laundering through Banks FIN IRL ESP PRT DEU BEL NORAUT BWA NLD CHL SVN SWE CAN USA AUS SGP GBR NZL TUN DNK ISL ISR URY CHE HKG r = 0.85 UKR ARG RUS COL IDN PRY PHL HTI NIC HND ROM BOLECU GTM MEX BGD BGR VENNGA LVA PER PAN TTO JAM CZE POL TUR IND DOM ZWE LTU THA LKA SVK CRI BRA MAR GRC SLV MUS KOR HUN ITA MYS JOR HRV TWN ZAF VNM CHN EST JPN FRA NAM Low 1 1 7 Diversion of Public Funds High 41

Multinationals Bribe Abroad? % Firms Reporting Frequent Procurement Bribery, EOS 2005 % Firms Reporting Procurement Bribery is Prevalen 100 80 60 40 20 0 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 42contracts, 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.

Procurement Bribe Fee % Structure, 2004 -- Responses by Firms Procurement Bribe Fee (%) 8 6 4 2 Domestic Firm in OECD Country Multinational in another OECD country OECD Multinational in Non-OECD country Domestic Firm in Non-OECD Country 0 Procurement Bribe Fee (%) 43 Source: EOS 2004. Questions: When firms in your industry do business with the government, how much of the contract value must they offer in additional payments to secure the contract? ; Variables were converted using midpoints.

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 44

In a diagnostic in a Latin American country, misgovernance is a regressive tax (similarly in other countries) Bribe/Total Income ratio, % 4.2 4 3 2 1 0 2.1 1.4 Low Income Middle Income High Income 45

Misgoverned vs. well Governed Agencies in-country (as ranked by public officials, 2000 diagnostic) The Transit Commission of Guayas Congress Transit Council Customs Police Petroecuador The President of the Republic Ombudsman NGOs Army The Church Professional Oranizations 0 10 20 30 40 50 60 70 80 % reporting that the agency is very corrupt 46

Citizen Voice Helps Control Bribery (Bolivia Diagnostics) 50 40 Bribery 30 20 10 Low Moderate_Low Moderate_High High Voice / External Accountability Simple Average Association Control Causal Link Margin of Error 47 Based on 90 national, departmental, and municipal agencies covered in the Bolivia Public Officials Survey.

20 Politicized Agencies tend to have high incidence of Budgetary Leakages 15 10 5 0 Low Moderately Low Moderately High High -5 Politicization Yellow columns depict the unconditional average for each category. Blue line depicts the controlled causal effect 48 from X to Y variables. Dotted red lines depict the confidence ranges around the causal effect depicted by the blue line.

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. 49

Perceptions Matter Perceptions-based data on governance are useful: Often only alternative (e.g. corruption) Captures more closely the concept being measured De facto measures are closer to on the ground phenomena than objective de jure information Perceptions do matter Perception questions are now more rigorous, experiential and quantitative Ideological & other biases: concerns are exaggerated Their margins of error are not unique Adds insights that objective data does not 50

Perception Measures Capture Pervasive Effects of Corruption How Much Harder is it to Start a Business... 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.If Days to Start a Business is High? And If Corruption is High? Source: Kaufmann, Kraay and Mastruzzi (2005). The vertical axis measures the estimated impact on firms responses to a survey question regarding the difficulty of starting a business (the 2004 Global Competitiveness Survey) corresponding 51 to a de jure measure (capturing the number of days required to start a business) moving from the 50th percentile to the 75th percentile (first bar) and from also having overall corruption levels move from the 50th to the 75th percentile (second bar).

Large Margins of Error for Objective Governance Indicators 3.5 3 Standard error Objective Indicator Scenario A Standard error of Objective Indicator Scenario C Standard error of Subjective indicator: KK 2002 2.5 Standard error 2 1.5 1 0.5 0 Telephone Wait line Phone faults Trade Tax revenue Budgetary Volatility Revenue Source Volatility Contract Intensive Money Contract En force m e n t Regulation of En try Aggregate Indicator Option A: estimate of standard deviation of measurement error in subjective indicator is correct. Option C: standard deviation of measurement 52 error in subjective indicator is twice as large as that in the objective indicator. The standard error of subjective indicator refers to the Governance component closely related to the associated objective indicator

Conclusions and Policy Implications 1. Measuring governance, human rights, and security is imperative Policymakers, citizens, enterprises and investors know that good governance is key: demand data Empowers civil society and reformers for change Helps donors assess aid effectiveness Enables policy-relevant research on causes and consequences of good (and bad) governance 2. Measuring Governance is feasible 53

Policy Implications, Cont d 3. Governance Matters: large development dividend strong causal impact of governance on incomes, but little evidence that higher incomes raise governance 4. But the world on average is stagnant w/ variance 5. Misgovernance in Failed States--link to Security 6. Thus, need to refocus efforts to improve governance frank questioning of what doesn t work Anti- Corruption campaigns, drafting of more laws, more ethics commissions, voluntary codes, conventions?, etc) Move away from silos of governance, Anti- Corruption, Human Rights, Security and development 54

7. Deserving particular attention 1. Data Power / Metrics Matters: Indicators and More 2. Accountability, Voice & Human Rights Matters 3. Transparency Strategy and Reforms (vs. Over-Regulations) 4. Focus on Incentives and on Prevention 5. The Role of the Firm and Elites (influence, capture, assoc.) 6. Political Reform, including on Political/Campaign Finance 7. Governance strategy in Post Conflict & quasi-failed states 8. Capital Markets Development as market-disciplining 9. For Rich/Donor Countries, & IFIs: Serious Implications in terms of Linking Aid & Good Governance for Development and Security 55

Collective Responsibility: Role Rich Countries 1. MNCs still misbehave 2. Globalization means globalized terror 3. Influence on IFIs: Aid with Governance 4. Trade Barriers and Subsidies 5. Banking Opacity 6. Restitution of Looted Assets 7. Arms Trading 8. Examples in Good Governance & Transparency 9. Scaling Up Aid integrated w/ Good Governance: Selectivity 10. Incentives: Joining Elite Political/Economic Groups 56

Governance Has Improved in Some Groups: e.g. Pull Effect of EU Accession High 1 Rule of Law Low 0.5 0-0.5-1 EU Accessed ex-soviet Union (no access) -1.5 1996 1998 2000 2002 2004 57 Source for data: http://www.worldbank.org/wbi/governance/govdata/. EU EE Accessed Countries: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia.

Subnational Indices are feasiable: : Index of State Capture in Mexican States by Monterrey Tech, 2002 Baja Media Baja Media Media Alta Alta Querétaro Aguascalientes Coahuila Durango Sinaloa Sonora Yucatán Baja Baja California Guanajuato Nayarit Nuevo León León Puebla Tlaxcala Zacatecas Baja Baja California Sur Sur Colima Chihuahua Jalisco México Michoacán Morelos Oaxaca San San Luis Luis Potosí Tabasco Tamaulipas Campeche Chiapas Distrito Federal Guerrero Hidalgo Quintana Roo Roo Veracruz 58

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 presented here and in the Report 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: www.worldbank.org/wbi/governance Data: www.worldbank.org/wbi/governance/govdata/ Report: www.worldbank.org/wbi/governance/pubs/govmatters4.html 59