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Governance and Corruption Worldwide:Empirical Evidence and Lessons for Policy

Daniel Kaufmann, The World Bank Institutewww.worldbank.org/wbi/governance

Global Issues Seminar Series,March 1st, 2006

"If you cannot measure it, you cannot improve it."-- Lord Kelvin

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Challenging Convention – key tenets

1. Governance and Corruption are Unmeasurable

2. Some evidence: Governance has improved globally?

3. Good Governance: outcome of development and growth? – & emerging economies are corrupt…?

4. The trouble is with Public Sector & Officials in LDCs

5. Cultural & Historical Determinism of Corruption

6. Fighting corruption by ‘Fighting Corruption’(Laws, Codes, Campaigns, Agencies & More Regulations)

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Tenet # 7: 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, Meritocracy and Deregulation matters – within collective action with private sector, legislative and judiciary

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Six Dimensions of GovernanceGovernance 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

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Voice & Accountability, 2004 (Selected Countries)

-2.5

0

2.5M

YAN

MAR

KORE

A, N

ORT

H

ERI

TREA

TUR

KME

NIS

TAN

SUD

AN

UZB

EKI

STA

N

SYRI

A

SO

MA

LIA

BEL

ARU

S

ZIM

BAB

WE

PAKI

STA

N

EGYP

T

RUS

SIA

VEN

EZU

ELA

MA

DAG

ASC

AR

INDI

A

GHA

NA

ARG

ENTI

NA

KORE

A, S

OUT

H

SOUT

H AF

RIC

A

GRE

ECE

MA

URIT

IUS

URUG

UAY

CHIL

E

EST

ONI

A

PO

LAND

HUNG

ARY

GE

RMAN

Y

NETH

ERL

AND

S

FINL

AND

NO

RWAY

DENM

ARKPoor

Governance

GovernanceLevel

Margins of Error

Good Governance

Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004’, D. Kaufmann, A. Kraay and M. Mastruzzi, (http://www.worldbank.org/wbi/governance/govdata/); Colors are assigned according to the following criteria: Dark Red, bottom 10th percentile rank; Light Red between 10th and 25th ; Orange, between 25th and 50th ; Yellow, between 50th and 75th ; Light Green between 75th and 90th ; Dark Green above 90th.

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Control of Corruption: one Aggregate Indicator (selected countries from 204 worldwide, for illustration, based on 2004 research data)

-2.5

0

2.5EQ

UA

TOR

IAL

GU

INEA

KO

REA

, NO

RTH

TUR

KM

ENIS

TAN

UZB

EKIS

TAN

TAJI

KIS

TAN

BA

NG

LAD

ESH

VEN

EZU

ELA

ZAM

BIA

RU

SSIA

KO

REA

, SO

UTH

MA

UR

ITIU

S

SOU

TH A

FRIC

A

GR

EEC

E

ITA

LY

BO

TSW

AN

A

SLO

VEN

IA

CH

ILE

FRA

NC

E

SPA

IN

UN

ITED

KIN

GD

OM

NET

HER

LAN

DS

NO

RW

AY

NEW

ZEA

LAN

D

FIN

LAN

DPoor Governance

Governance Level

Margins of ErrorGood

Governance

Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004’, D. Kaufmann, A. Kraay and M. Mastruzzi, (http://www.worldbank.org/wbi/governance/govdata/); Colors are assigned according to the following criteria: Dark Red, bottom 10th percentile rank; Light Red between 10th and 25th ; Orange, between 25th and 50th ; Yellow, between 50th and 75th ; Light Green between 75th and 90th ; Dark Green above 90th.

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Government Effectiveness, 2004: World Map

Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004’, D. Kaufmann, A. Kraay and M. Mastruzzi, (http://www.worldbank.org/wbi/governance/govdata/); Colors are assigned according to the following criteria: Dark Red, bottom 10th percentile rank; Light Red between 10th and 25th ; Orange, between 25th and 50th ; Yellow, between 50th and 75th ; Light Green between 75th and 90th ; Dark Green above 90th.

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Judiciary Independence (EOS survey results 1998-2004)

1

4

7

1998 1999 2000 2001 2002 2003 2004

Inde

pend

enci

a de

la J

udic

atur

a

OECD

East Asian NICs

Latin America

NON OECD

HighIndependence

No Independence

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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

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Changes in Rule of Law, 1996-2004

-2

0

2ZI

MB

AB

WE

IVO

RY

CO

AST

SWA

ZILA

ND

VEN

EZU

ELA

MO

LDO

VA

C. A

FR. R

EP.

ETH

IOPI

A

CU

BA

EGYP

T

GER

MA

NY

U.K

.

NIG

ERIA

UG

AN

DA

JOR

DA

N

RO

MA

NIA

SLO

VAK

REP

.

SER

BIA

SLO

VEN

IA

MO

ZAM

BIQ

UE

MA

LTA

ESTO

NIA

CR

OA

TIA

LITH

UA

NIA

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/.

Major Deterioration

(selected countries)

Major Improvement

(selected countries)

Insignificant Change

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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 10th

percentile rank; Light Red between 10th and 25th ; Orange, between 25th and 50th ; Yellow, between 50th and 75th ; Light Green between 75th and 90th ; Dark Green above 90th.

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Croatia 2004 vs.1996

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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 10th

percentile rank; Light Red between 10th and 25th ; Orange, between 25th and 50th ; Yellow, between 50th and 75th ; Light Green between 75th and 90th ; Dark Green above 90th.

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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

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-1

0

1

Low Voice Middle Voice High VoiceVoice and Accountability

Con

trol

of C

orru

ptio

n

GoodVoice and Accountability vs. Control of Corruption

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

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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”’

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Some Key Constraints to Business, by Region, Responses from the Firm in EOS 2005

0

10

20

30

40

50

60

70

OECD East Asia NICs East Asiadeveloping

Middle East &North Africa

Latin America

Foreign Currency Bureaucracy Corruption

Tax Regulations Inflation

% firms reporting constraint among top 3:

Source: EOS 2005. The question posed to the firm was: Select among the above 14 constraints the five most problematic factors for doing business in your country.

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Figure 1: Better Governance is Associated with Higher Country’s Competitiveness

ZWE

VNMVEN

URY

USA

GBRARE

UKRUGA

TUR

TUN

TTO

THA

TZA

TJK

TWNCHE

SWE

LKA

ESP

ZAF

SVN

SVK

SGP

YUGRUS

ROM

QAT PRT

POL

PHL

PER

PRY

PAN

PAK

NOR

NGA

NIC

NZLNLD

NAM

MOZ

MAR

MNG

MDA

MEXMUS

MLT

MLI

MYS

MWI MDG

MKD

LUX

LTULVA

KGZ

KWT

KOR

KEN

KAZ

JOR

JPN

JAM

ITA

ISR IRL

IDN

IND

ISL

HUN

HKG

HND

GUY

GTM

GRC

GHA

DEU

GEOGMB

FRA

FIN

ETH

SLVEGY

ECUTMP

DOM

DNK

CZECYP

HRV CRICOL

CHN

CHL

TCD

CAN

CMRKHM

BGRBRA

BWA

BIHBOL

BEN

BEL

BGD

BHR

AZE

AUT

AUS

ARGDZA

ALB

2

4

6

-2 -1 0 1 2 3Control of Corruption

Glo

bal C

ompe

titiv

enes

s In

dex

Low

Low High

High

r = 0.90

Sources: GCI is from GCR2005/6 by WEF, Control of Corruption from Kaufmann, Kraay and Mastruzzi, ‘Governance Matters IV: Governance Indicators for 1996-2004’.

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2

3

4

5

6

7

Yaounde Douala Bogota Medellin Vilnius Kaunas Madrid Barcelona

Freq

uenc

y of

Bri

bery

Variance in Governance across cities within same country: Bribery in Procurement as an illustration

High Bribery

Low

Source: author calculations based on EOS firm survey, WEF2003, 271 cities. Question: In your industry, how commonly firms make undocumented extra payments or bribes connected with awarding of public contracts? (7: very common…. 1: never occur)

SpainColombia LithuaniaCameroon

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Local Services:Local Services:Access to Water, City Governance and GlobalizationAccess to Water, City Governance and Globalization

(Non OECD Sample)(Non OECD Sample)

20%

100%

Acc

ess t

o W

ater

(%)

Poor Governance Good Governance

Control of Corruption

Bribery in Utility State Capture Control of Corruption

Bribery in Utility State Capture

Local City

Global City

Sources: EOS 2003, UN 1998, KK 2002 & KLM 2004

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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

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Misgoverned vs. well Governed Agencies in-Country (as ranked by public officials, 2000 diagnostic)

0 10 20 30 40 50 60 70 80

Professional Oranizations

The Church

Army

NGOs

Ombudsman

The President of the Republic

Petroecuador

Police

Customs

Transit Council

Congress

The Transit Commission of Guayas

% reporting that the agency is very corrupt

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Citizen Voice Helps Control Bribery Citizen Voice Helps Control Bribery (Bolivia Diagnostics)(Bolivia Diagnostics)

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

10

20

30

40

50

Low Moderate_Low Moderate_High High

Voice / External Accountability

Brib

ery

Simple Average Association Control Causal Link Margin of Error

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Policy Implications1. Measuring governance is important2. Measuring Governance is feasible3. Governance Matters: large “development dividend”

• strong causal impact of governance on incomes, but little evidence that higher incomes raise governance

4. The world on average is ‘stagnant’ – but some countries have improved significantly

5. Need to refocus efforts to improve governance • frank questioning of what doesn’t work: -- Anti-Corruption campaigns-- Drafting more laws, codes, and Conventions-- Create additional ethics and A-C agencies-- ‘Blame’ History, Culture or Legal Origins-- ‘Blame’ Reform, Privatization, Globalization

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What Appears to Work…1. ‘Data Power’ + Transparency Strategy & Reforms

2. Voice and Accountability – incl. Freedom of the Press

3. Subnational Level Reforms and Focus (cities, villages..)

4. Deregulation/ Integrate to world economy & markets

5. Focus on Incentives and on Prevention 6. Meritocratic Civil Service & Oversight Institutions

7. Budgetary/Public Expenditure Reforms

8. Political Finance Reform

9. Role of Corporate/Banking Sectors & Multinationals 10. Judicial Reform

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Governance Has Improved in Some Groups:e.g. “Pull Effect” of EU Accession

-1.5

-1

-0.5

0

0.5

1

1996 1998 2000 2002 2004

Rul

e of

Law

EUAccessed

ex-SovietUnion (noaccess)

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.

High

Low

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Bibliographical References1. 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/Synthesis_GovMatters_IV.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 LessonsChallenge 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/.