1

Rethinking Governance: Empirics Challenges Orthodoxy

Daniel Kaufmann, The World Bank *

Presentation to Governance & A-C Flagship Course,

Washington, DC, April 23rd, 2003

www.worldbank.org/wbi/governance

* Collaboration and substantive inputs from many colleagues at the Bank is acknowledged.

2

Legal &

Judiciary

Reforms

The ‘Prohibition’ Era

1970 1980 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003

WDR on Institutions 1982

JDW joins WB (7/95)

JDW “Cancer of Corruption” Speech (10/96)

WDR ‘97 Public Sector

• 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

Broadening & Mainstreaming

Governance and Anticorruption in the World Bank: Evolution

TI CPI (5/95)

Anti-corruption Strategy (97)

Governance Strategy (00)

1st set of firms Debarred from WB projects

1st Participatory & Action- Oriented A-C Core Program (Africa – 7 countries) 1999

WB INT created (3/01)

Power of Evidence: Development Impact

We have traversed and progressed…yet…

3

1. ‘Data Power’: Governance can be measured & Matters

2. Reality: Sobering Reality on balance: Lessons?

3. Under-estimated centrality of: i) Politics, unbundled -- especially influence/capture; ii) role of the Private Sector (I-climate); iii) Participatory Collective Action; iv) Selectivity; iv) Role of OECD, and, v) ‘Clubs’

4. Over-estimated?: i) traditional templates for Public Sector Management; ii) creation of new public sector agencies; iii) traditional legal & judiciary reform

5. Some Implications for moving forward -- debate

Some Key Issues and Challenges

4

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

5

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 Stability and lack of Violence&Terror

• Quality Regulatory Framework

• Government Effectiveness

• Control of Corruption

• Rule of Law

We measure these six governance components…

6

Inputs for Governance Indicators 2002Publisher 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

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Control of Corruption: one Aggregate Indicator (selected countries, for illustration, based on 2000/01 research data)

-2.5

0

2.5

Co

ng

o,

Dem

. R

ep.

(Zai

re)

KE

NY

A

ZIM

BA

BW

E

IND

ON

ES

IA

TA

NZ

AN

IA

KO

RE

A,

NO

RT

H

HA

ITI

MO

LD

OV

A

AR

ME

NIA

VIE

TN

AM

IVO

RY

CO

AS

T

BA

NG

LA

DE

SH

AL

BA

NIA

IND

IA

CH

INA

ME

XIC

O

BU

LG

AR

IA

CR

OA

TIA

MO

ZA

MB

IQU

E

MA

LA

YS

IA

UR

UG

UA

Y

TU

NIS

IA

CO

ST

A R

ICA

BO

TS

WA

NA

CY

PR

US

NA

MIB

IA

CH

ILE

NE

W Z

EA

LA

ND

Source: KKZ 2000/01

POOR GOOD

Corruption Level

Margin of Error

Good Corruption Control

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Rule of Law, 1998 vs. 2000 – Latin America

Source for data: http://www.worldbank.org/wbi/governance/govdata2001.htm ; Chart downloaded from : http://info.worldbank.org/governance/kkz/Note: the thin lines depict 90% confidence intervals. Colors are assigned according to the following criteria: Red, 25% or less rank worse; Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

10

‘Traffic Light’ Map: Rule of Law, 2000

Source for data: http://www.worldbank.org/wbi/governance/govdata2001.htm ; Map downloaded from : http://info.worldbank.org/governance/kkz/gov2001map.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse; Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

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‘Traffic Light’ World MapVoice and Accountability – 2000

Source for data: http://www.worldbank.org/wbi/governance/govdata2001.htm ; Map downloaded from : http://info.worldbank.org/governance/kkz/gov2001map.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse; Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

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Figure 1: Rule of Law, Voice and Accountability and Control of Corruption, Regional Averages, KKZ 2000

Source: Governance Research Indicators (KKZ) based from data in D. Kaufmann and A. Kraay, 'Growth without Governance', for 175 countries, details at http://www.worldbank.org/wbi/governance/pubs/growthgov.htm. 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. See also regional clarifications in note 6.

-1.0

0.0

1.0

2.0

O ECD East Asia NIC Eastern Europe Middle East N.Africa

Latin America East Asiaemerging

Sub-SaharanAfrica

Former SovietUnion

South Asia

Rule of Law

Control of Corruption

Voice and Accountability

Poor Governance

Good Governance

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Governance Indicators: Indonesia

Note: the thin lines depict 90% confidence intervals. Colors are assigned according to the following criteria: Red, 25th percentile;Orange, between 25th and 50th percentile; Yellow, between 50th and 75th percentile; Light Green between 75th and 90th

percentile; Dark Green above 90th percentile.Chart downloaded from : http://info.worldbank.org/governance/kkz/.

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Governance Indicators: Chile

Note: the thin lines depict 90% confidence intervals. Colors are assigned according to the following criteria: Red, 25th percentile;Orange, between 25th and 50th percentile; Yellow, between 50th and 75th percentile; Light Green between 75th and 90th

percentile; Dark Green above 90th percentile.Chart downloaded from : http://info.worldbank.org/governance/kkz/.

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The ‘Dividend’ of Good GovernanceInfant Mortality and Corruption

0

10

20

30

40

50

60

70

80

90

Weak Average Good

Control of Corruption xDevelopment

Dividend

0

2,000

4,000

6,000

8,000

10,000

12,000

Weak Average Good

Regulatory Burdenx Development

Dividend

Per Capita Income and

Regulatory Burden

Literacy and Rule of Law

0

25

50

75

100

Weak Average Good

Rule of Law x Development Dividend

Per Capita Income and Voice and Accountability

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Weak Average Strong

Voice and Accountabilityx DevelopmentDividend

Note: The bars depict the simple correlation between good governance and development outcomes. The line depicts thepredicted value when taking into account the causality effects (“Development Dividend”) from improved governance to betterdevelopment outcomes. For data and methodological details visit http://www.worldbank.org/wbi/governance.

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Precision vs. Number of Sources, KKZ Governance Estimates, 2000/01

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 2 4 6 8 10 12 14

Number of Sources Per Country

Ma

rgin

of

Err

or

Note: See explanatory details in this slide’s note

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Measurement Error for Objective Indicators

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1Correlation of "Subjective" and "Objective" Indicator

Stan

dard

Err

or fo

r "O

bjec

tive"

Indi

cato

r

Days to Start Business

Contract Intensive Money

Actual S.E. for RL = 0.3

Actual S.E. for RQ = 0.4

22

21

2

11

1

Corrltn:

Known: Correlation of objective & subjective; standard error of subjective indicatorUnknown: standard error of objective indicator

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Overall Evidence is Sobering, however: 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 cross-country, even within a region. Some successes.

•And it is early days.

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0

1.5

3

1984-1988 1989-1993 1994-1998 1999-2001

TRANSITION

EMERGING

OECD+NIC

Source: ‘Rethinking Governance’, based on calculations from WDI. Y-axis measures the log value of the average inflation for each region across each period

Significant Decline in Inflation Rates WorldwideHighInflation

Low

(avg. inlogs)

20

1.5

4

6.5

1997 1998 1999 2000 2001 2002

OECD

East AsiaIndustrialized

Middle East

EasternEurope

East AsiaDeveloping

Latin America

Former SovietUnion

South Asia

Quality of Infrastructure(Regional Averages of High/Low Quality every year, GCR 1997-2002)

Low

High

21

2.5

4.5

6.5

1997 1998 1999 2001 2002

OECD

East AsiaIndustrializedMiddle East

East AsiaDeveloping

South Asia

EasternEurope

LatinAmerica

FormerSovietUnion

Effective Absorption of New Technologies(Regional Averages of High/Low Absorption every year, GCR 1997-2002)

Note: No data exists for 2000.

Low

High

22

1

2

3

4

5

6

1984-1988 1989-1993 1994-1998 1999 2000 2001

Emerging & Transition Economies

Source: ICRG/PRS, 1984-2001, data subject to margins of error

Control of Corruption Over Time for Emerging/Transition Economies – PRS/ICRG

Poor

Good

23

2

4.25

6.5

1998 1999 2000 2001 2002

OECD

East AsiaIndustrialized

Middle East

East AsiaDeveloping

Eastern Europe

Latin America

Former SovietUnion

Extent of Independence of the Judiciary (Regional Averages of Extent/Lack of Independence every year)

Non-Independent

Independent

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IFI Responsibility: Firms Evaluate World Bank’s Effectiveness in PSD: (GCR 2002, Emerging Economy sample)

-30

0

30

Quality ofParliament

ProtectionFinancial

Assets

Quality ofFinancial Audit

Capture (GrandCorruption)

CorruptProcurement

CorporateEthics

Labor MarketFlexibility

Poor Governance

Good Governance

Source: GCS 2002. The vertical axis depicts the firms’ net effectiveness evaluation of World Bank’s performance in supporting Private Sector Development (PSD) in their country. Net effectiveness is calculated as the difference between the percentage of respondents reporting the institution to be effective minus the percentage of respondents reporting it to be ineffective. Each set of 2 columns display the net effectiveness ratings provided by countries with a good record in given constraint (in green) versus those provided by countries with a poor performance in such constraint (in red). Calculations based on country averages.

Net WB Effectiveness as Rated by Firms (%)

GoodPoor

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State CaptureEfforts of firms to 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

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Unbundling Corruption – [Regional Averages]Preliminary results 2002, View of the Firm, 80 countries

0

35

70

LatinAmerica

FormerSovietUnion

EasternEurope

Sub-saharanAfrica

Middle East East Asiadeveloping

South Asia OECD East AsiaIndustrial

% of firms rating type of corruption as high/very high

Access Public UtilitiesProcurementCapture of Laws & Regulations

Extent of Bribery for:

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Colombia: Extent of "State Capture" by elite unduly influencing laws and regulations

(as reported by public officials, 2001)

30 50 70 90

Central Bank decisions

Regulatory Agencies

High Officials (influencing presidentialdecrees/decisions)

Judiciary (influencing major courtdecisions)

Parliamentarians (to influence laws)

Colombia% public officials report bribes to

agency influence business climate

Capture by Vested Interests of:

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Very high Economic Cost of Capture for Private Sector Development and Growth

0

5

10

15

20

25

Firms' Output Growth (3 yrs)

Low captureeconomies

High captureeconomies

Based on survey of transition economies, 2000

31

Addressing Capture: Economic Reform, Political Competition & Voice/Civil Liberties Matter

0

0.1

0.2

0.3

0.4

Sta

te C

aptu

re I

ndex

Partial Civil Libs High Civil Libs

Advanced

Partial

Slow

Pace of Econ Reform

Political/Civil Liberties Reforms

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Working with Competitive Business Associations does Matter

0102030405060708090

Hungary Russia Azerbaijan

Business association members

(% of firms)

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.

33

Foreign Firms do not always help improve governance in recipient country

Evidence from transition economies – beeps survey, 1999

0 5 10 15 20 25

FDI LocalHQ

FDI ForeignHQ

DomesticFirms

Share of Captor Firms

High CaptureEconomiesLow CaptureEconomies

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Firms Rate Quality of Parliament, World Bank & the IMF in their Effectiveness in Private Sector Development -- Regional Averages

0

40

80

OECD+NIC South asia East asia dev Mena Africa Eastern Europe Latin America Former SovietUnion

Parliament

WB PSD

IMF PSD

Source: GCS, 2002

% assess highly/ /very highly

35

0%

25%

50%

75%

100%

OECD Sub SaharanAfrica

South Asia Latin America Former SovietUnion

Illegal Political Financing

Favoritism in Procurement Award

% of firms that report:

Pervasive

Not a Constraint

Extent of:

More broadly: Politics Matters – and it can be measured (GCR, 2002)

Selected Regions, based on EOSurvey of 5,000 firms in 80 countries, WEF-GCR

37

Recent Findings on Unequal InfluenceFirms who perceive a greater inequality of

influence in their country ( where political system biased towards political cronies), exhibit:

• Negative assessment of Court system -- in terms of its fairness, impartiality, & enforcement of decisions

• Less use of courts to resolve business disputes;

• Less secure property and contract rights;• Pay more bribes; and, • Less tax compliance, more unofficial activities

-- Thus, less credibility of formal institutions, which in turn are undermined by behavior of economic agents

•Inequality of influence is related to the extent of political liberalization -- in a non-linear fashion

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ARG

AUSAUT

BGD

BEL

BOL

BWA

BRABGR

CANCHL

CHN

COL

CRIHRV

CZE

DNK

DOMECU

SLV

EST

FINFRA

DEU

GRC

GTM

HTI

HND

HKG

HUN

ISL

IND

IDN

IRLISR

ITA

J AM

J PN

J OR

KOR

LVA

LTUMYS

MUS

MEX

MAR

NAM

NLDNZL

NIC

NGA

NOR

PAN

PRYPERPHL

POL

PRT

ROM

RUS

SGP SVK

SVN

ZAF

ESP

LKA

SWECHE TWN

THA

TTO

TUN

TUR UKR

GBRUSA

URY

VEN

VNM

ZWE

0.0

30.0

60.0

0.0 0.5 1.0

Tax Compliance (Unofficial Economy) vs. Crony Bias (from EOS, GCR, 80 countries)

% F

irm

s U

nof

fici

al

Crony Bias (1)

Crony Bias (1) defined as the difference between Government favoritism and business association effectiveness. Source: Global Competitiveness Survey, 2002

r = 0.64

39

Crony bias vs. Democratic Voice & Accountability

(from Executive Survey for the Global Competitiveness Report, 2002/3, for 80 countries)

Crony Bias vs. Democratic Voice and Accountability

0.0

0.5

1.0

-2.0 0.0 2.0

Democratic Voice and Accountability

Cro

ny B

ias

r = - 0.41

Low

High

Low

High

 

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Some Implications for the next stage

(1) A Broader Governance Framework(2) The Power of Data, Indicators, Country-Diagnostics(3) Localize Know-how: Diagnose & Differentiate(4) Beyond traditional PSM & Legal measures(5) Unbundling Politics: Influence, Capture, Party

Finance(6) Responsibility of IFIs, OECD, MNCs, Private Sector(7) External Accountability: Voice, Transparency, &

systemic incentives (with new e*governance tools/data)

(8) Capital Market Development, & PSD link(9) International ‘Club’ Membership as motivator(9) Tough & Rigorous Selectivity in aid (10) Intersectoral Mainstreaming: ‘Umbrella’ Issue

41

Transparency within Government Agencies Prevents Purchase of Public Positions

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

3

6

9

12

15

18

Low Moderately Low Moderately High High

Internal Transparency

Job

Pu

rch

ase

Simple Average Association Control Causal Link Margin of Error

42

External Accountability/Feedback Improve Access of Public Services to the Poor (Bolivia diagnostic)

Based on Public Officials Survey. The sample of institutions includes 44 national, departmental, and municipal agencies which are a prior anticipated to be accessible to the poor

0

20

40

60

80

100

10 20 30 40 50 60 70 80 90

Voice / External Accountability

Con

trol

of B

ribe

ry

ControlledCausalLink

r = 0.54

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Identifying Institutional Vulnerabilities and Governance-driven Economic Fragility

Source: KKZ 2000/01 Governance Indicators, and Kaufmann and Kraay, “Growth without Governance”.

VEN

URY

TTO

SUR

SLVPRY

PER

PAN

NIC

MEX

JAM

HTI

HNDGUY

GTM

ECU

DOM

CRICOL

CHL

BRA

BOL

BLZ

BHS

ARG

5

5.5

6

6.5

7

7.5

8

8.5

9

9.5

10

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2

Governance 2000/01 (Rule of Law)

Inc

om

e P

er

Ca

pit

a (

log

)

High

High

Low

Low

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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