Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute www.worldbank.org/wbi/governance Presentation to Warwick University visitors to the World Bank Group, Washington, DC, December 4 th, 2003
Governance and Anticorruption in the World Bank: Evolution WDR on Institutions 1982 JDW joins WB (7/95) TI CPI (5/95) The Prohibition Era Power of Evidence: Development Impact JDW Cancer of Corruption Speech (10/96) WDR 97 Public Sector Anti-corruption Strategy (97) Legal & Judiciary Reforms 1 st Participatory & Action- Oriented A- C Core Program (Africa 7 countries) 1999 Broadening & Mainstreaming 1st set of firms Debarred from WB projects Governance Strategy (00) Budget, Procurement & FM Reforms Diagnostic/Data/ Monitoring Tools Administrative & Civil Service Reform Civil Society Voice, Accountability, Media & Transparency Mechanisms Judicial/Legal Reform State Capture/Corporate Governance WB INT created (3/01) 1970 1980 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 We have traversed and progressed yet
Examples of programs of support by the World Bank in many 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)
Governance Redux: Outlining Key Themes 1. Data Power : Governance & Corruption can be measured (& it matters) the Transparency Revolution 2. Anti-Corruption within broader Governance framework, and Power of Prevention & Incentives 3. Worldwide Progress on Governance? -- Sobering Reality, although some countries have done well 4. Under-estimated centrality of: i) Politics (and its financing ); ii) role of the Private Sector; iii) Citizen Participation -- External Accountability 5. Myths -- vs. Strategic Implications that may work
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
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
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
2.5 Good Control of Corruption, Some Countries out of 200)--2002 0 Poor -2.5 EQUATORIAL GUINEA HAITI IRAQ Congo, Dem. Rep. (Zaire) MYANMAR AFGHANISTAN NIGERIA LAOS PARAGUAY TURKMENISTAN SOMALIA ZIMBABWE INDONESIA ANGOLA BANGLADESH CAMEROON SUDAN AZERBAIJAN TAJIKISTAN KAZAKHSTAN KENYA UZBEKISTAN BURUNDI CHAD ECUADOR ETHIOPIA 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. MALI LESOTHO SWAZILAND MEXICO SENEGAL BRAZIL BURKINA FASO MOROCCO ERITREA NAMIBIA CAPE VERDE SOUTH AFRICA SEYCHELLES MAURITIUS GREECE HUNGARY BOTSWANA URUGUAY ITALY COSTA RICA SLOVENIA CHILE UNITED STATES NORWAY CANADA SWEDEN DENMARK NEWZEALAND SINGAPORE FINLAND
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%
Governance World Map : Political Stability/ Lack of Violence, 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%
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.
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?
In emerging economies, while on average little progress, there are excellent examples, and possible to learn from variation In Africa, Mauritius, Botswana, Mali, and also countries like Madagascar, Mali, and some others making progress in some dimensions Slovenia, Hungary, Costa Rica, S. Korea The case of Chile Learning from the world over.rethinking capacity building.
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 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: Indonesia Note: the thin lines depict 90% confidence intervals. Colors are assigned according to the following criteria: Red, 25 th percentile; Orange, between 25 th and 50 th percentile; Yellow, between 50 th and 75 th percentile; Light Green between 75 th and 90 th percentile; Dark Green above 90 th percentile.chart downloaded from : http://info.worldbank.org/governance/kkz/.
The Data Challenges OECD vs. Emerging Economies and the case of USA There is variation within OECD Some examplary cases in developing countries Governance is not a Luxury good US in Worldwide Perspective Variance across US States
Governance Indicators: United States, 1998 and 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; 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.
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 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.
Unbundling Governance: Ratings by Firms (2003) Good Rank Percentile Rank (0-100) Poor 100 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
High 2 Overall Corruption Score - US States, 2000/01 Corruption Index 0 Low -2 South Dakota Vermont Colorado Iowa North Dakota Maine Alaska Oregon Minnesota Tennessee South Carolina Virginia Wisconsin Nevada Idaho Michigan Montana Wyoming Texas Arkansas Nebraska Arizona North Carolina New York Utah Kansas Indiana Washington Hawai West Virginia Missouri Oklahoma California Pennsylvania Georgia Connecticut Kentucky Maryland Mississippi Ohio Alabama Louisiana Florida Delaware Ilinois Rhode Island New Mexico Source: Boylan and Long, University of Washington, 2001. Index computed as normalized average of scores from 7 questions on corruption.
Income vs. Campaign Finance Transparency All States in USA $45,000 Low Transparency Medium Transparency High Transparency Average Family Income $40,000 $35,000 Campaign Finance Transparency Source: Center For Public Integrity: www.stateprojects.org (Nationwide Numbers) and US Census, 2000.
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
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
The Importance of In-depth, incountry/in-state/in-city Diagnostics
New Diagnostic Tools permit measuring important dimensions of capacity illustration #1 from Bolivia diagnostics: How Politicized Agencies exhibit Budgetary Leakages 20 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 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 Margin of Error Based on 90 national, departmental, and municipal agencies covered in the Public Officials Survey.
% Reported Extent of Budgetary Leakages by Agency in Sao Paulo 2002 City Diagnostic (% funds diverted & % Corrupt contracts, reported by public officials) 40 20 0 N.A. SIS SMS SME SF SAS SSO SEHAB % budgetary funds diverted Source: Public Officials Survey, Sao Paulo 2002,. Very preliminary
State Capture vs. Level Playing Field (BEEPS survey in transition economies, 1999) 45 40 35 Proportion of firms affected by capture of.. Parliament Pres admin Civil courts 30 25 20 15 10 5 0 Hungary Estonia Russia Azerbaijan
Very high Economic Cost of Capture for Private Sector Development and Growth 25 Firms' Output Growth (3 yrs) 20 15 10 5 0 Low capture economies High capture economies Based on survey of transition economies, 2000
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.
Peru: Sources of Undue Private Influence on the State % reporting agent is highly influential 100 70 40 10 Drug Economic Conglomerates Groups Responses by: Firms Public officials FDI/ Transnational Corporations Organized Crime Professnl Labor Unions Associations Based on governance diagnostic surveys of public officials and enterprises
Civil Society International Legislative Branch Judiciary Political Parties Media Private Sector 1 Vladimiro Montesinos Alberto Fujimori Municipal Government State (Bureaucracy) Military Peru: Resource Dependency Network, 2000 Source: Moreno- Ocampo
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 (No Shock Treatment)
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 (Corruption is culturally-determined ) 5. Historical Determinism by contrast, what may be particularly important
In sum, what may work a list of 10 1. Corruption in broader Governance Context 2. Transparency Mechanisms (e*governance, data) 3. Voice and Democratic Accountability 4. Collective Action (Judcry, Legislative, Exec, Private, CS) 5. Judicial Independence (& rule of law) 6. Meritocratic Public Sector 7. Focus on Prevention & Incentives 8. Political Finance Reform 9. Private Sector & MNCs Corporate Ethics 10. IFI, G-7, OECD Responsibility (Global Compact)
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