Governance, Anti-Corruption, and Education An initial empirical approach

Governance, Anti-Corruption, and Education An initial empirical approach Daniel Kaufmann, The World Bank Institute Presentation at the International Working Group Annual Meeting on Education Wash., DC, October 19 th, 2004 1

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 -- Assisting Countries on Governance Reforms/A-C -- Monitoring/Lessons from Data/Diagnostics/Indicators -- Working with International Partners -- Anti-Corruption In-house: Projects and Staff Integrity 2

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 3

World Bank projects with Governance Components 200 (Annual Averages) 172 186 Number of Projects 150 155 100 1997 1998-2001 2002-03 Source: World Bank Business Warehouse 2003 4

Number of IBRD/IDA Operations with Explicit Anti- Corruption Components, 1997-2003 40 Number of Projects 20 12 14 14 28 31 0 1997-98 1999-00 2001 2002 2003 (Source: Business Warehouse Data, 7/14/2003) Anti-Corruption 5

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) 6

Challenges: WBI Governance & Anticorruption Program Lessons learned: 7 African Countries Anticorruption Core Course: Integrated Participatory Strategy Approach Phase 1 D.C. Phase 2 V.C. Phase 3 Durban Phase 4 Implement Participatory Participatory process process Country-led Country-led Diagnostics, Diagnostics, R&D, R&D, & Data Data Power Power External External accountability accountability Empowerment From From individuals individuals to to multi-stakeholder Country Country Teams Teams Integrating Integrating governance governance components components Participatory Participatory Action Action applied applied to to many many programs programs 1 st Steps for an AC Strategy: Empowerment & Coalition- Building Towards Priorities for Systemic Change Strategy Design Tools for Diagnosis: Data Power Distance Learning through VC to 7 capitals in AFR (over 6 weeks) Specialized Modules for Program Formulation: Financial Management & Procurement Rule of Law Customs Civil Service Reform Presentation of Action Program for each country (international Anti- Corruption Conference in Durban) Program Implementa tion Institutional Reforms 7

Challenges: WBI Governance & Anticorruption Program (1999) Lessons learned: 7 African Countries Results Results Obstacles Lessons 1 3 5 6 10 Malawi Benin Ethiopia Kenya Tanzania Ghana Uganda Underestimation of politics and insufficient buyin by top decision makers in General: Major spillover effect from this A-C program in mainstreaming strategies involving voice / collective action; in diagnostic data approaches; in action programming; and ex-post recognition of political constraints. Politics: Understanding & realism Drawing in in the the private private sector sector Integration of of decision makers Better integration within the the Bank Upstream focus on on implementability 8

Latvia s s Anticorruption program Objectives Approach Results Increasing efficiency and and accountability of of gov t gov tby by strengthening: 1) 1) strategic capacity; 2) 2) transparency; 3) 3) incentives; 4) 4) internal controls; 5) 5) participation and and oversight Building capacity in in gov t gov t 1) 1) to to manage and and coordinate reforms and and 2) 2) to to provide information and and opportunities to to public public to to monitor reforms After After 6 years years of of assistance and and program implementation: State State capture capture has has declined declined and and corruption corruption is is less less of of an obstacle an obstacle to to doing doing business business Latvia Latvia is is expected expected to to integrate integrate into into the the EU EU in in 2004 2004 Challenges Implementation is is uneven across across areas areas and and over over time time Identify Identify whether whether constraint constraint is is technical technical or or political political If If technical, technical, provide provide TA TA (although (although resources resources are are limited) limited) If If political, political, withhold withhold financial financial support support (PSAL2 (PSAL2 was was delayed and delayed and then then reduced reduced by by 50%) 50%) 9

Indonesia: A Country Case Illustrating the Bank seen as part of the problem in the past towards part of the solution now 10

2004: Indonesia s Country Assistance Strategy (CAS) is on Governance -- Harnessing the entire Bank portfolio on Anti-Corruption (A-C) Strategy: Fully Mainstreaming Governance/A-C in the CAS Process--specifics Lending volumes linked to governance/a-c progress Anti-corruption plans for all projects Selecting projects linked to governance challenges (saying No...) Picking winners at the local level decentralized strategy Staffing Resident Governance Leader/Advisor Anti-Corruption Committee; collaboration w/ civil society In-house: Fiduciary team; Investigators & Project advisors 11

Indonesia: Anti-Corruption (A-C) Action Plans Bank-funded projects in Indonesia must have an A-C plan, approved by the A-C Committee -- to include: i) Disclosure; ii) Civil society oversight; iii) Complaints mechanism; iv) Anti-collusion; v) Sanctions and remedies; and, vi) Strengthened financial controls Illustration of Some Recent Actions: i) Misprocurement has been declared, funds returned; ii) Funds have been suspended or cancelled; iii) Prosecutions: number of consultants and civil servants being fined and/or jailed Next: Other countries embarking in Governance CAS 12

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 13

Governance: A working definition Governance is the process and institutions by which authority in a country is exercised: (1) the process by which governments are selected, held accountable, monitored, and replaced; (2) the capacity of gov t to manage resources and provide services efficiently, and to formulate and implement sound policies and regulations; and, (3) the respect for the institutions that govern economic and social interactions among them 14

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: Democratic Voice and (External) Accountability Political Instability, Violence/Crime & Terror Regulatory Burden Government Effectiveness Corruption Rule of Law We measure these six governance components 15

Sources of Governance Data 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 16

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 17

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 Margins of error of the aggregate indicator reflect (a) number of sources in which a country appears, and, (b) the precision of those sources 18

Control of Corruption: Selected Countries, 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Colors are assigned according to the following criteria: Dark Red, bottom 10 19 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 World Map: Rule of Law, 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% 20

Governance World Map : Voice and Accountability, 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% 21

Governance World Map : Government Effectiveness, 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% 22

Measuring Governance Matters: Disentangling Channels of Causation Between Incomes and Governance Does Good Governance Matter in raising per capita incomes, controlling for other factors and for reverse causality i.e. is there a large governance dividend?: Yes, about 400% Conversely: to what extent do increases in income lead to improvements in governance i.e. is there a virtuous circle?: No, governance is not a luxury which countries automatically attain only when they become wealthier 23

The Economic Development Dividend of Good Public Governance 90 80 70 60 Infant Mortality and Corruption 12,000 10,000 Per Capita Income and Regulatory Burden 50 8,000 40 30 20 6,000 4,000 x 100 75 10 0 Development Dividend Weak Average Good Control of Corruption Literacy and Rule of Law x 2,000 0 Development Dividend 10000 9000 8000 Weak Average Good Regulatory Burden Per Capita Income and Voice and Accountability 7000 50 6000 5000 25 4000 3000 2000 0 1000 0 x Development Dividend Weak Average Good Rule of Law x Development Dividend Weak Average Strong Voice and Accountability Note: The bars depict the simple correlation between good governance and development outcomes. The line depicts the predicted value when taking into account the causality effects ( Development Dividend ) from improved governance to better development outcomes. For data and methodological details visit http://www.worldbank.org/wbi/governance. 24

Voice & Accountability Matters for Development 200 180 160 Infant Mortality 140 120 100 80 60 40 20 0 Finland -2-1 0 1 2 'Voice' (including freedom of the press), Civil Liberties and Accountability 25 Source: KKZ 1999

Worldwide Progress on Governance is modest on average, but variation is large Evidence so far: very slow average progress worldwide on key dimensions of governance/a-c But average hides large variation across countries, and across different types/manifestations of corruption 26

Good 7 Control of judicial bribery over time: EOS 1998 2004 Control of Judicial Bribery Bad 4 1 1998 1999 2000 2001 2002 2003 2004 OECD East Asia (NIC) Emerging Economies Latin America Source: EOS 1998-2004. Question: In your industry, how commonly firms make undocumented extra 27 payments or bribes connected to getting favorable judicial decisions? common / never occur.

Unbundling Governance some illustrations View of the Firm, 102 countries, EOS 2003 % firms rating constraints dissatisfactory 100 Administr Bribery Bribery to Influence Laws Illegal Political Financing 50 0 OECD East Asia (NIC) East Asia dev. Former Soviet Union Eastern Europe South Asia Sub-saharan Africa Latin America / Caribbean Source: EOS 2003. Each region has the following number of countries: OECD: 23; East Asia (Developing): 6, East Asia 28(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.

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 29

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 30

Working with Competitive Business Associations does Matter Business association members (% of firms) 90 80 70 60 50 40 30 20 10 0 Hungary Russia Azerbaijan Active members Nonactive members Source: J. Hellman, G. Jones, D. Kaufmann. 2000. Seize the State, Seize the Day: State Capture, Corruption and Influence in Transition World Bank Policy Research Working Paper 2444. 31

No Gap 7 Rich/Poor Health Care Access Gap, EOS 2004 Regional Averages Health Care Access Gap 4 High 1 OECD East Asia (NIC) East Asia dev. Former Soviet Union Eastern Europe South Asia Sub-saharan Africa Middle East North Africa Latin America / Caribbean Source: EOS 2004 (firm survey); Question: The difference in the quality of healthcare available to 32rich and poor is large / small.

Quality of Public Schools [EOS 2004 Regional Averages] Good Quality of Public Schools 6 4 Poor 2 OECD East Asia (NIC) East Asia dev. Former Soviet Union Eastern Europe South Asia Sub-saharan Africa Middle East North Africa Latin America / Caribbean Source: EOS 2004 (firm survey); Question: The public (free) schools in your country are of poor quality 33 / equal to the best in the world

Good 6 Quality of Math and Science Education, EOS 2004 Regional Averages Quality of Math and Science 4 2 Poor OECD East Asia (NIC) East Asia dev. Former Soviet Union Eastern Europe South Asia Sub-saharan Africa Middle East North Africa Latin America / Caribbean Source: EOS 2004 (firm survey); Question: Math and Science education in your country s schools are among 34 the worst / best in the world.

Quality of Math & Science Education, EOS 1997-2004 Good 6 Quality of Math & Science Education 4 OECD East Asia (NIC) Latin America Eastern Europe 2 Bad 1997 1998 1999 2000 2002 2003 2004 Source: EOS 1997-2004. Quasi-balanced Sample (2001). Question: Math and science education in 35 your country s schools are among the world s best.

Quality of Research Institutions, EOS 1997-2004 Good Quality of Research Institutions 7 4 OECD East Asia (NIC) Latin America East Asia dev. Former Soviet Union Eastern Europe South Asia Sub-saharan Africa Middle East North Africa Latin America / Caribbean Bad 1 1997 1998 1999 2000 2001 2002 2003 2004 Source: EOS 1997-2004. Quasi-balanced Sample (2001). Question: Scientific research institutions 36 in your country are among the world s best.

Does the Educational System Promote the Country s Competitiveness? [EOS 2004 Regional Averages] Good 6 Educational System Helps Competitiveness 4 2 Poor OECD East Asia (NIC) East Asia dev. Former Soviet Union Eastern Europe South Asia Sub-saharan Africa Middle East North Africa Latin America / Caribbean Source: EOS 2004 (firm survey); Question: The educational System in your country 37 meets the needs of a competitive economy.

Diversion of Public Funds vs. Quality of Public Schools High Quality of Public Schools Poor 7 4 1 Low FIN ISL DNK CHE NLD SGP NZL AUS NORSWE GBR ARE AUT BEL IRL LUX HKG DEU USA FRA CAN JPN EST MYS TWN TUN ISR CYP PRT ESP JOR MLT CHL BWABHR CRI URY r = -0.83 CZE r = -0.83 ROM LVA LTU ITA KOR HRV RUS POLBGR MAR IDN GRC YUG UKR MKD THA GMBNAM MUS CHN TTO ZAF VNM BIH LKA DZA JAMKEN TUR ZWE EGY MEX PAN ARG GHA COL UGA SLV BRA GEO IND ZMB TZA PAK PHL PRY ETH MLI MDGDOM MOZ NIC NGA BGD BOL ECU VEN MWI HND PER TCD GTM Source: EOS 2004 (firm survey); Questions: 1) The public (free) schools in your country are of poor quality / equal 38 to the best in the world; 2) In your country, diversion of public funds to companies, individuals or groups due to corruption is common / never occurs SVN 1 4 7 Diversion of Public Funds HUN SVK AGO High

Diversion of Public Funds vs. Education System Serving Competitiveness, EOS 2004 Good Education System Serving Competitiveness 7 4 r = -0.84 Bad 1 1 4 7 Low Diversion of Public Funds High Source: EOS 2004 (firm survey); Questions: 1) The educational System in your country meets the needs of a competitive economy; 2) In your country, diversion of public funds to companies, individuals or 39 groups due to corruption is common / never occurs

Good Bribery in Judiciary vs. Education System Serving Competitiveness, EOS 2004 Education System Serving Competitiveness 7 4 r = -0.79 Bad 1 1 3.5 6 Low Bribery in Judiciary High Source: EOS 2004 (firm survey); Questions: 1) The educational System in your country meets the needs of a competitive economy; 2) In your industry, how commonly would you estimate that firms make 40 undocumented extra payments or bribes connected with getting favorable judicial decisions.

Impact on Global Competitiveness Index (GCI) Rank of Improvement in Constraint to the Firm 30 Competitiveness Gain in Number of Rankings (Change in Rank Positions) 25 20 15 10 5 0 Financing Labor Regulations Foreign Currency Regulations Infrastructures Bureaucracy Education of the Workforce Workforce Ethics Policy Instability Government instability Constraint Crime Corruption Tax Regulations Tax Rates Inflation Source: Constraints to Business data based on EOS 2004 (Question: From the following list, please select the five most problematic factors for doing business in your country, and rank them from 1 to 5. ); GCI based on GCR team calculations for 2004/2005 Report; GDP per capita from World Bank. Calculations 41 based on regression estimates of the impact on the GCI of an improvement in the constraint by one standard deviation.

Corporate and Public Sector Ethics Indices, 2004 % Firms rate satisfactory 100 Nordic Countries 80 G-7 Index 60 40 20 Southern Europe East Asia NICs Non-OECD 0 CEIC CELC CEI PSEI JLEI CGI Acronyms: CEIC: Corporate Illegal Corruption Component; CELC: Corporate Legal Corruption Component; CEI: Corporate Ethics Index (the average of both legal and illegal corporate corruption components, CEIC and CELC), ; PSEI: Public Sector Ethics Index; JLEI: Judiciary / Legal Effectiveness Index; CGI: Corporate 42 Governance Index. Source: Author s calculations based on EOS 2004. See Legend of Table 2 for detailed definition and inputs into each ethics index.

Evidence challenges some popular notions 1. Country first needs to get to higher incomes to attain good governance & corruption control 2. Culture or Legal-Historical Determinants 3. Transplants of OECD codes, rules, etc. 4. Ethical Exhortations or Training 5. A-C by; legal fiat, Campaigns, new Agencies 43

Most effective Anticorruption Measures? Responses from Officials and Leaders in 62 countries % of respondents that mark 'high' 70% 40% 10% Anti-Corruption Commissions Privatization Civil Liberties/ Voice Public Sector Reform Transparent Budget Source: D. Kaufmann, Corruption: The Facts, Foreign Policy, Summer, 1997 Economic Deregulation Leadership Example 44

What deserves particular attention 1. Frankness on what it takes for attaining EFA & MDGs: the centrality of Governance & A-C 2. External Accountability Mechanisms (voice) 3. Transparency Mechanisms (e*governance, data) 4. Incentives as drivers, Prevention (e.g. Meritocracy) 5. The Role of the Firm and Elites (influence, capture) 6. Political Reform, including Political Finance 7. Early Education -- but address myths 8. Responsibility of Industrialized World and IFIs with some modesty: learning; difficult global challenge, interdisciplinary, where politics matter 45

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 Source: Uganda Public Expenditure Tracking Surveys Actual grant received by primary school (means) 46

On the growing gap between EU-accession countries and the rest of transition --Rule of Law Over Time, Selected Regions, 1996-2002 High 1 Rule of Law Low 0-1 1996 1998 2000 2002 EU Accession Countries 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. 47

Governance Indicators: Chile 1998 vs. 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Colors are assigned according to the following criteria: Dark Red, bottom 10 48 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.

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 In-depth Institutional Country Diagnostics for Agency and Budgetary transparency Delisting Firms Publicly 49

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 50

References and Links to full papers and further materials Governance Matters III: http://www.worldbank.org/wbi/governance/pubs/govmatters 3.html New Paper: Governance, Corruption and Security: Challenges for Rich Countries and the World http://www.worldbank.org/wbi/governance/pubs/gcr2004.html Growth without Governance: http://www.worldbank.org/wbi/governance/pubs/growthgov. html Governance Indicators Dataset: http://www.worldbank.org/wbi/governance/govdata2002/ Governance Diagnostic Capacity Building: http://www.worldbank.org/wbi/governance/capacitybuild/ 51