Governance and Corruption:

Governance and Corruption: Empirics, Lessons, and Policy Options for IFIs Daniel Kaufmann, The World Bank Institute www.worldbank.org/wbi/governance ECONOMICS TRAINING PROGRAM SEMINAR -- IMF INSTITUTE, Washington, DC, September 1st, 2005 "If you cannot measure it, you cannot improve it." -- Lord Kelvin 1

A Live Test: Culture,, Information 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? 2

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 3

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 4

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 are corrupt? 4. The trouble with Public Sector & Officials in LDCs... 5. Cultural & Historical Determinism of Corruption 6. Fighting corruption by Fighting Corruption (Laws, Codes, Campaigns, Agencies & Regulations) 5 7. Governance not the domain or competence of IFIs

Tenet # 8: Challenging the previous 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 6. Strategic and Policy Implications for IFIs: Governance 6 not a sector, but approached as an umbrella filter?

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 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 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 various dimensions of governance Organize these measures into six clusters corresponding to definition of governance, for five periods: 1996, 1998, 2000, 2002, 2004 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 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, 11 State Dept. Human Rights Report

Examples of Governance Questions 1. Expert assessment polls Government interfere w/ private investment? (RQ How transparent and fair is the legal system? (RL) Risk of coup, civil war, org. crime, terrorism? (PV) How severe is the bureaucratic red tape? (RQ) What is risk of loss of FDI due to corruption? (CC) Freedom of the press, expression, association (VA) 2. Survey Responses % bribery to get things done? (CC) Transparent info given by government? (GE) % Management Time spent on red tape? (RQ) 12 Access & quality of government services? (GE)

Why Aggregate Indicators of Governance? Governance viewed as a much broader notion than formal rules of the game Multiple individual data sources provide a noisy signal of broader concept of governance, e.g.: trust in police RULE OF LAW freedom of press VOICE & ACC TBILITY policy consistency GOV T EFFECTIVENESS Benefits of Aggregation--through U.C. Method aggregate indicators are more informative about broad concepts of governance broader country coverage (than individual indicators) generate explicit margins of error for country scores 13

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 14

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, 15 (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: 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, 16 (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

Control of Corruption, 2004: World Map Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004, D. Kaufmann, A. Kraay and M. Mastruzzi, 17 (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, 18 (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.

Regulatory Quality, 2004: Latin America & Caribbean Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004, D. Kaufmann, A. Kraay and M. Mastruzzi, 19 (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.

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 of 25% or 20 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

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 21

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 22 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? 23

Judiciary Independence (EOS survey resuls 1998-2004) High Independence 7 4 1 No 1998 1999 2000 2001 2002 2003 2004 Independence Independencia de la Judicatura OECD East Asian NICs Latin America NON OECD 24

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. 25

Good 0.8 No Significant Trend in Government Effectiveness Worldwide 0.5 0.2 Poor 1996 1998 2000 2002 2004 EIU PRS GCS PRS country coverage in 1996: 129, all other periods 140; GCS country coverage in 1996: 58, 1998: 59, 2000: 75, 26 2002 & 2004: 82; EIU country coverage: 115 for all periods.

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 27

Changes in Voice and Accountability, 1996-2004 2 Major Deterioration (selected countries) Insignificant Change 0 Major Improvement (selected countries) -2 28 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 29 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 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: 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 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 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 33

Governance Matters -- The Development Dividend Isolating Causality: From governance to income) Kaufmann-Kraay (2002) 3 log(real GDP Per Capita) Alcala-Ciccone (2004) 2 Rodrik-Subramanian-Trebbi (2004) Acemoglu-Johnson-Robinson (2000) 1 0-3 -2.5-2 -1.5-1 -0.5 0 0.5 1 1.5 2 2.5-1 Rule of Law 2004-2 -3 34

Isolating Reverse Causality: Little if any Effect From Income to Governance Causal Effect of Income on Governance 2.5 2 Rule of Law Index, 2004 Kaufmann-Kraay (2002) Rodrik-Rigobon (2004) ZAR LSO GHA MWI MDG SEN MLI GMB TZA ZMB MOZ BFA BEN MRT STPDJI UGAERI ETH NERWA TGO KEN TCD SLE COM GNQ GIN GNB COG CMR CAF AGO BDI NGA CIV SDN ZWE 1.5 1 0.5-0.5-1.5-2.5 CPVNAM 0-1 -2 BWA SWZ MUS ZAF SYC GAB OLS Regression -3-3 -2.5-2 -1.5-1 -0.5 0 0.5 1 1.5 2 2.5 ln(gdp Per Capita at PPP in 1996), Standardized 35

Development Dividend From Good Governance $30,000 Control of Corruption $3,000 $300 Low Governance Medium Governance High Governance 36 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.

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 37

Control of Corruption -- view of the firm: Lat Am in comparative perspective, % of firms reporting satisfactory control, EOS/GCR 2004 % firms reporting satisfactory (5,6,7) rating Control of Corruption 100 80 60 40 20 Illegal Party Financing Procurem ent Bribery Bribes for Laws/Reg ulations/p olicies Judicial Bribery 0 OECD Asia Tigers Lat. America 38 Chile Mexico Venezuela

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 39

Economic Cost of Capture for Growth 25 Firms' Output Growth (3 yrs) 20 15 10 5 0 Low capture economies Based on survey of transition economies, 2000 High capture economies 40

Addressing Capture: Economic Reform, Political Competition & Voice/Civil Liberties Matter 0.4 State Capture Index 0.3 0.2 0.1 0 Partial Civil Libs High Civil Libs Partial Advanced Slow Pace of Econ Reform Political/Civil Liberties Reforms 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.

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 43

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 44 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).

Explanatory Power of Subjective Measures of Corruption: The case of Tax Burden How Much Higher is Perception of Tax Burden... 0.25 OECD/NIC 0.2 NON OECD 0.15 0.1 0.05 0.If De-Jure/Statutory Tax Rates are 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 burden of tax rates (the 2004 Global Competitiveness Survey) corresponding to a de jure measure (capturing the level of corporate tax levels in 88 countries) 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). 45

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 46 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

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 47

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 48

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 49 Based on 90 national, departmental, and municipal agencies covered in the Bolivia Public Officials Survey.

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. 50

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 51

Conclusions and Policy Implications 1. Measuring governance is important 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 Important to exercise care, margins of error matter Objective Indicators are also challenged Being precise about degree of imprecision in all data 52

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 Thus, no rationale for applying a governance discount to poor countries 4. The world on average is stagnant some countries have improved significantly, others deteriorated, many stagnated 5. Need to refocus efforts to improve governance frank questioning of what doesn t hold water : -- Anti-Corruption campaigns -- Drafting more laws, codes, and Conventions -- Create additional ethics and A-C agencies -- Blame History, Culture or Legal Origins 53 -- Blame Reform, Privatization, Globalization

Does Legal Origin Matter for quality of Governance today in emerging economies? Percentile Rank 100 Good Governance Legal Origin: Common law Civil law 50 Poor 0 Governance Voice and Accountability Political Stability, No Violence Government Effectiveness Regulatory Quality Governance Indicators Rule of Law Control of Corruption 54

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? on some of the above 55

World Bank s Project Effectiveness Depends on Extent of Country-Level Corruption: Adjustment Loans in 1 Economic Policy (preliminary) 0.8 Successful Project Implementation % Projects 0.6 0.4 0.2 0 High Corruption Medium Corruption Low Corruption Source: Business Warehouse Project Evaluation Database, 1994-2005 (1,060 projects) and World Bank CPIA 2004 for country performance rating in corruption. Low corruption includes countries with a CPIA rating of corruption of 56 4 or higher. Medium corruption includes countries with a CPIA rating of corruption of 3 or 3.5. High corruption includes countries with a CPIA rating of corruption of 2.5 or lower. Preliminary, work-in-progress.

For IFIs and Donors Issues for Debate 1. Towards a Governance Lense in our programs? 2. More explicit Linkage of Aid & Good Governance, with some further selectivity? 3. Global incentive: Supporting Countries in Joining Elite Political/Economic Groups 4. Towards a Transparency Reform Strategy 57

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 58 social groups, and ii) politically more feasible

Freedom of Information Law (FOIL) vs Fiscal Transparency (IMF) NO FOIL Processing FOIL FOIL Adopted High Transparency (IMF rating >.5) BRAZIL CHILE GERMANY PAPUA NEW GUINEA ALBANIA,ARMENIA,BULGARIA,CAN ADA, CZECH REPUBLIC, ESTONIA,FRANCE, GREECE, HUNGARY, INDIA, ISRAEL, ITALY, JAPAN,LATVIA, ITHUANIA,MEXICO, POLAND PHILIPPINES, PORTUGAL, ROMANIA,SLOVAK REPUBLIC SLOVENIA, SWEDEN UKRAINE, UNITED STATES Low Transparency (IMF rating =<.5) AZERBAIJAN,BENIN, BURKINA FASO,CAMEROON IRAN,KAZAKHSTAN; KYRGYZ REPUBLIC, MALI,MAURITANIA,MONGOLIA, RWANDA, TUNISIA BANGLADESH GHANA,HONDURAS MALAWI,MOZAMBIQU E NICARAGUA,SRI LANKATANZANIA, UGANDA, URUGUAY COLOMBIA GEORGIA KOREA, SOUTH PAKISTAN PERU TURKEY Declined AFGHANISTAN, ALGERIA, ANDORRA, ANTIGUA AND BARBUDA,BAHAMAS, BAHRAIN, BARBADOS, BHUTAN, BRUNEI, BURUNDI, CAMBODIA, CAPE VERDE, CENTRAL AFRICAN REPUBLIC, CHAD, CHINA, COMOROS, CONGO, Congo, Dem. Rep. (Zaire), COSTA RICA, CUBA, CYPRUS, DJIBOUTI, DOMINICA, EGYPT, EQUATORIAL GUINEA, ERITREA, FIJI, GABON, GAMBIA, GRENADA, GUINEA, GUINEA-BISSAU, GUYANA, HONG KONG, IVORY COAST, JORDAN, KIRIBATI, KOREA, NORTH, KUWAIT LAOS, LEBANON, LIBERIA, LIBYA, LUXEMBOURG, MACEDONIA, MADAGASCAR, MALAYSIA, MALDIVES, MALTA, MARSHALL ISLANDS, MAURITIUS, MICRONESIA, MONACO, MOROCCO, MYANMAR, NAURU, NIGER, OMAN, PALAU, QATAR, SAMOA, SAN MARINO, SAO TOME AND PRINCIPE, SAUDI ARABIA, SENEGAL, SEYCHELLES, SIERRA LEONE, SINGAPORE, SOLOMON ISLANDS, SOMALIA, ST. KITTS AND NEVIS, ST. LUCIA, ST. VINCENT AND THE GRENADINES, SUDAN, SURINAME, SWAZILAND, SWITZERLAND, SYRIA, TAIWAN, TIMOR, EAST, TOGO, TONGA, TURKMENISTAN, TUVALU, UNITED ARAB EMIRATES, VANUATU, VENEZUELA, VIETNAM, WEST ARGENTINA, BELARUS BOLIVIA, BOTSWANA EL SALVADOR ETHIOPIA, GUATEMALA, HAITI INDONESIA, KENYA LESOTHO, NAMIBIA NEPAL, NIGERIA PARAGUAY, RUSSIA ZAMBIA ANGOLA, AUSTRALIA, AUSTRIA, BELGIUM, BELIZE, BOSNIA- HERZEGOVINA, CROATIA, DENMARK, DOMINICAN REPUBLIC ECUADOR, FINLAND,ICELAND,IRAQ IRELAND,JAMAICA,LIECHTENSTEIN MOLDOVA,NETHERLANDS NEW ZEALAND, NORWAY,PANAMA SERBIA,SOUTH AFRICA SPAIN,TAJIKISTAN THAILAND TRINIDAD AND TOBAGO UNITED KINGDOM UZBEKISTAN 59

CHILE High 2.5 Economic/Institutional & Political Transparency Index (Initial, 2004) Ec/Institutional Transparency Index Political Transparency Index 0-2.5 60 Transparency Indices OECD East Asia NICs East Asia dev. South Asia Sub-saharan Africa M. East/N. Afr Former Soviet Union Eastern Europe Latin America Caribbean Low Index ranges from -2,5 (worst) to 2.5 (best).

The case of Chile: unbundling transparency Since 1996, Chile has made considerable advances in governance indicators compare to the Latin American average, and today it is highly rated in governance In terms of economic and institutional transparency, Chile is in 8 th position (eg Central Bank of Chile among the best rated in effectiveness and transparency 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, etc. Further transparency in ( sole sourced ) procurement 61 Disclosure of political funding/expenditures (& lobby law)

10 Transparency Initiatives in a Strategy 1. Public Disclosure of Assets and Incomes of Public Officials, Politicians, Candidates, Legislators, Judges, & dependents 2. Public Disclosure of Political Campaign contributions by individuals and firms, and of campaign expenditures 3. Public Disclosure of Parliamentary Votes, without 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 by all to government information 7. Fiscal/Financial transparency: central/local budgets; EITI 8. Transparency in Ownership and Financial Status of Banks 9. E*procurement: transparency (web) and competition 10. Governance Diagnostic Surveys and PETS 62

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 63 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.

Bibliographical References 1. Kaufmann, D., A. Kraay, and M. Mastruzzi. 2005. "Governance Matters IV: Governance Indicators for 1996-2004." http://www.worldbank.org/wbi/governance/pdf/synthesis_govmatters_iv.pdf (synthesis), and, http://www.worldbank.org/wbi/governance/pdf/govmatters_iv_main.pdf (full paper) 2. Kaufmann, D. and A. Kraay. 2003. "Governance and Growth: Causality Which Way?" http://worldbank.org/wbi/governance/pdf/growthgov_synth.pdf 3. Kaufmann, D. 2003. "Rethinking Governance: Empirical Lessons Challenge Orthodoxy." http://worldbank.org/wbi/governance/pdf/rethink_gov_stanford.pdf. 4. Kaufmann, D. 2004. "Corruption, Governance and Security: Challenges for the Rich Countries and the World." http://worldbank.org/wbi/governance/pdf/kaufmann_gcr_101904_b.pdf. 5. Bellver, A. and D. Kaufmann (2005). "Transparenting Transparency: Initial Empirics and Policy Applications". http://worldbank.org/wbi/governance/pubs/transparencyimf.html Governance Indicators User Interface: http://www.worldbank.org/wbi/governance/govdata/ 64

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: www.worldbank.org/wbi/governance Data: www.worldbank.org/wbi/governance/govdata/ Governance Matters IV Report and Materials: www.worldbank.org/wbi/governance/pubs/govmatters4.html Synthesis Article about Myths on Governance in F&D: http://www.imf.org/pubs/ft/fandd/2005/09/basics.htm 65