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1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute www.worldbank.org/wbi/ governance Background Handout for presentation and discussion at the Anti-Corruption Core Course to be held at The World

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Page 1: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

1

Governance Redux:The Empirical Challenge

Daniel Kaufmann, World Bank Institute

www.worldbank.org/wbi/governance

Background Handout for presentation and discussion

at the Anti-Corruption Core Course to be held at

The World Bank, December 1st-3rd, Washington, D.C.

Page 2: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

2

‘Power of Data’: Participatory Web-Interactivity

Requests for your e*governance participation prior to presentation/discussion on Wednesday, December 3rd:

1. Please take the 2-minute web-survey on anti-corruption, responding to a few questions, at: http://www.wbigf.org/hague/hague_survey.php3

2. Review the instant results of this (from 1,000s of respondents so far), and ponder on the differences and/or similarities between your and the rest of the respondents

3. Select one country of your current work/expertise at: http://info.worldbank.org/governance/kkz2002/sc_country.asp

and generate the indicators, review them to ascertain wether the percentile ranks on each of the 6 governance dimensions (of your chosen country) concords with your priors on the country.

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The Bank has been very involved with many clients in Governance and A-C for the past 6 years…

• And there are many products, diagnostics, operations, and some successes to show for it

• Yet the evidence, on balance, is rather sobering• Need to learn from the lessons, and from the analysis

of data gathered: i) little progress on average?; ii) if so, why (other than relatively short period of time has elapsed)?; and, iii) looking ahead, what could we do differently?

This presentation, based on an empirical approach, is intended to elicit debate and discussion around these key issues

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1. Governance can be measured, monitored, analyzed2. Aggregate and Disaggregated Governance Indicators: How constructed, interpreted -- & margins of error3. Governance Performance: major variation across

regions, countries & dimensions of governance

4. Lack of Worldwide/Regional Progress on Governance5. Data supports new research findings: Governance

Matters enormously for growth-- yet growth does not automatically translate into improved governance

6. Main Lessons learnt, 1: Over-estimated traditional Public Sector Management approaches

7. Main Lessons, 2: Underestimated role of: i) Politics (and its financing); ii) Private Sector; iii) Citizen Voice

Governance Redux: Outlining Key Themes

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Empirical Approach to Governance

1. ‘Macro’: Worldwide Aggregate Governance Indicators: 200 countries, 6 components, periodically constructed

2. ‘Mezzo’: Cross-Country Surveys of Enterprises

3. ‘Micro’: Specialized, in-depth, in-country Governance and Institutional Capacity Diagnostics. It includes surveys of: i) user of public services (citizens); ii) firms, and, iii) public officials On ‘Aggregate/Macro’ Level first…

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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

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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…

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Sources of Governance Data• “Subjective” 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

Page 9: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

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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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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

Page 11: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

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Precision and Number of Sources: Rule of Law, KK 2002

0

0.1

0.2

0.3

0.4

0.5

0.6

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Number of Sources

Sta

nd

ard

Err

or

of

Go

ve

rna

nc

e E

sti

ma

te

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Margins of Error Are Not Unique to Subjective Indicators –

There are potential objective/quantitative indicators of governance, yet subject to significant margins of error and measurement issues, which also need to be addressed

For instance-- • Regulatory Quality: Days to start a business• Rule of Law: Contract-intensive money (share of M2

held in banking system, confidence in property rights protection)

• Government Effectiveness: Stability of budgetary revenue and expenditure shares (policy instability), share of trade taxes in revenue (narrow tax base)

Like all indicators, they are imperfect proxies for broader notions of governance – and so have implicit margins of

error relative to these broader concepts

Page 13: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

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Large Margins of Error for Objective Governance Indicators

0

0.5

1

1.5

2

2.5

3

3.5

Telephone Waitline

Phone faults Trade Taxrevenue

BudgetaryVolatility

Revenue SourceVolatility

ContractIntensive Money

ContractEnforcement

Regulation ofEntry

AggregateIndicator

Stan

dard

err

or

Standard error Objective Indicator Scenario A

Standard error of Subjective indicator: KK 2002

Option A: estimate of standard deviation of measurement error in subjective indicator is correct. Option C: standard deviation of measurement 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

Page 14: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

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Assigning Countries to Governance Categories: Margins of Error Matter

Note: Confidence Interval: 90%

AF

G

AL

BD

ZA

AG

O

AR

G

AR

M

AU

SA

UT

AZ

E

BH

S

BH

R

BG

D

BLR

BE

L

BLZ

BO

L

BIH

BW

A

BR

A

BR

NB

GR

BF

A

BD

I

KH

M

CM

R

CA

N

CH

L

CH

N

CO

L

CO

G

CR

I

CIV

HR

V

CU

B

CY

P

CZ

E

DN

K

DO

M

EC

U

EG

Y

SLV

ER

I

ES

T

ET

H

FJI

FIN

FR

A

GA

B

GM

B

GE

O

DE

U

GH

A

GR

C

GT

M

GIN

GN

B

GU

Y

HT

I

HN

D

HK

G

HU

N

ISL

IND

IDN

IRN

IRQ

IRL

ISR

ITA

JAM

JPN

JOR

KA

Z

KE

N

PR

K

KO

R

KW

T

KG

Z

LA

O

LVA

LBN

LB

R

LBY

LTU

LUX

MK

D

MD

G

MW

I

MY

S

ML

I

MLT

MR

T

MU

S

ME

X

MD

A

MN

G

MA

R

MO

Z

MM

R

NA

M

NP

L

NLD

NZ

L

NIC

NE

R

NG

A

NO

R

OM

N

PA

K

PA

N

PN

G

PR

Y

PE

R

PH

L

PO

L

PR

T

PR

I

QA

T

RO

M

RU

S

RW

A

SA

U

SE

N

SL

E

SG

P

SV

K

SV

N

SO

M

ZA

F

ES

P

LK

A

SD

N

SU

R

SW

E

CH

E

SY

R

TW

N

TJK

TZ

A

TH

A

TG

O

TT

O

TU

N

TU

R

TK

M

UG

A

UK

R

AR

E

GB

R

US

A

UR

Y

UZ

B VE

N

VN

M

WT

B

YE

M

YU

G

ZA

R

ZM

B

ZW

E

0

0.25

0.5

0.75

1

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Pro

bab

ilit

y (0

-1)

-2.5

0

2.5

Co

ntr

ol o

f C

orr

up

tio

n R

atin

g

Median CC Score

Probability Country is in Top Half of Sample

Governance Score

Margin of Error

Control of Corruption Percentile Rank

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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%

Page 16: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

21Source 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

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Voice and Accountability. Rule of Law and Control of Corruption, Regional Averages, KK 2002

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.

-1

0

2

OECD East Asia(NIC)

East Asia dev. South Asia EasternEurope

FormerSoviet Union

Middle EastNorth Africa

LatinAmerica

Sub-SaharanAfrica

Voice and AccountabilityRule of LawControl of Corruption

Poor Governance

Good Governance

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In emerging economies, while on average little progress, there are excellent examples,

and possible to learn from variation

• The cases of Slovenia, Baltic countries, Costa Rica, S. Korea, Chile, Mauritius, Botswana, etc

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Control of Corruption -- Selected Countries, KK 2002

Source for data: Kaufmann D., Kraay A., Mastruzzi M., Governance Matters III: Governance Indicators for 1996-2002, WP #3106, August 2003. Units in vertical axis are expressed in terms of standard deviations around zero. Country 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.

Good

Bad

-2.5

0

2.5

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Control of Corruption -- Selected Countries, KK 2002

Source for data: Kaufmann D., Kraay A., Mastruzzi M., Governance Matters III: Governance Indicators for 1996-2002, WP #3106, August 2003. Units in vertical axis are expressed in terms of standard deviations around zero. Country 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.

Good

Bad-2.5

0

2.5

Page 21: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

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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: Croatia, 1998 & 2002

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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Indicadores de Governança : Brasil, 1998 & 2002

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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Indicadores de Governança: Jordânia, 1996, 2000 & 2002

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 Indicators: Slovenia, 1998 & 2002

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 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 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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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….

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The ‘Mezzo’ Level of Measurement

-- Listening to Firms

-- Large Cross-country Survey of Enterprises

-- Significant More Unbundling is possible

-- Stay mindful of Margins of Error

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The ‘Governance Gap’: 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 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)

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Extent of Independence of the Judiciary

2

4.5

7

1998 1999 2000 2001 2002 2003

Independent

Non-Independent

OECD

East AsiaIndustrialized

Transition

Emerging

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?

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Rule of Law and Corruption have not improved recently

0.00

0.25

0.50

0.75

1.00

1996 1998 2000 2002

Control of Corruption

Rule of LawGood

Poor

Why should we be concerned?…

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Does Good Governance Really Matter?

Worldwide Evidence: Improved Governance, Public and Private, makes an enormous

difference in Per Capita Incomes of Nations• Good Governance ‘Pays’: The 400% ‘Dividend’

• The reverse causality does not hold: -- No Evidence that Higher Incomes/Richer countries automatically results in improved governance

Page 34: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

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Governance Indicators and Income per Capita, WorldwideIn

com

e pe

r ca

pita

Voice and Accountability Government Effectiveness Control of Corruption

Low Level of GovernanceMedium Level of GovernanceHigh Level of Governance

US$3,000

US$20,000

US$400

High

Low

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).

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5

6

7

8

9

10

-2 -1 0 1 2

Governance and Growth: Causality which way?

I.V.

I.V.

OLS

OLS

Growth on Governance

Governance on Growth ‘Bad History’

‘Bad History’

‘Good History’

‘Good History’

Source: KKZ 2000/01 Governance Indicators and D. Kaufmann and A. Kraay, “Growth without Governance,” Economia 3(1): 169-229. http://www.worldbank.org/wbi/governance/pubs/growthgov.htm

Quality of Rule of Law, 2000/01

Inco

me

Pe

r C

apit

a (

log

)

A

B

D

C

Low High

I.V.l

I.V.l

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Why non-positive effect of Income growth on Governance: State Capture & Unequal Influence

• Elites Vested Interest = National Governance Interest• State Capture & Undue Influence implies that elites

appropriate fruits of growth• Such fruits are not funneled to improve public

governance, furthering Capture & Unequal Influence• Thus, when growth takes place in captured settings,

governance will not automatically improve (no virtuous circle)

• Thus, we need to understand, measure & draw implications from the institutions of influence and capture…

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On the Notion and Empirical Relevance of ‘State Capture’

Defining State Capture: Influential firms that shape the formation of rules of the game (laws, regulations and policies of the state) to their advantage -- through illicit, non-transparent private payments to officials/politicians

Includes the following measurable manifestations:– purchase of legislative votes– purchase of executive decrees– purchase of major court decisions– illicit political party financing– Illicit influence on Central Bank policies/regulations

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The ‘Mezzo’ Level of Measurement

-- Listening to Firms

-- Large Cross-country Survey of Enterprises

-- Significant More Unbundling is possible

-- Stay mindful of Margins of Error

Page 39: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

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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

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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.

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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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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

Page 43: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

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1

3

5

Low Medium High

Public Transparency and Corporate Ethics

Transparent Info [Gov't]

Parlament Effectiness

No State Capture

Corporate Ethics

Crecimiento Anual del PIB (%)

Corporate Ethics, Public Sector Transparency and Income Growth -- Worldwide

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Illustration of “Mezzo” Approach to empirical work – From cross-country enterprise surveys to Institutional Clusters for

103 countries, 2003, preliminary, Chile rankings

0

50

100

Contr

ol of

corr

uption

Corpo

rate

Respo

nsib

/Gov

ernan

ce

Decen

traliz

ation

Enviro

nmen

t

Finan

cial S

ecto

r Cap

acity

Finan

cial G

over

nance

Gov

ernm

ent E

ffect

ivene

ss

Gen

der E

qual

ity

Hum

an C

apita

l

Multi

late

ral O

rgan

izatio

ns

Qua

lity o

f Inf

rastr

uctu

re

Legal

effe

ctive

ness

Qua

lity o

f lab

or m

arket

s

Politic

al Fin

ancin

g

Parlia

men

t Effe

ctiv

enes

s

Police

Effe

ctiv

enes

s

Politic

al In

fluen

ce

Regul

ator

y Cap

acity

Techn

ology

Tax ef

ficien

cy

Unoffi

ciald

om

Voice

& A

ccou

ntabi

lity

Per

cen

tile

Ran

k (

0-10

0)

Source: EOS 2003 WEF, preliminary. Percentile ranks based on comparative performance among the 103 countries in the sample. All variables rated from 0 (very bad) to 100 (excellent).

Page 45: 1 Governance Redux: The Empirical Challenge Daniel Kaufmann, World Bank Institute  Background Handout for presentation

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Illustration of “Mezzo” Approach to empirical work – From cross-country enterprise surveys to Institutional Clusters for

103 countries, 2003, preliminary, Peru rankings

0

50

100

Contr

ol of

corr

uption

Corpo

rate

Respo

nsib

/Gov

ernan

ce

Decen

traliz

ation

Enviro

nmen

t

Finan

cial S

ecto

r Cap

acity

Finan

cial G

over

nance

Gov

ernm

ent E

ffect

ivene

ss

Gen

der E

qual

ity

Hum

an C

apita

l

Multi

late

ral O

rgan

izatio

ns

Qua

lity o

f Inf

rastr

uctu

re

Legal

effe

ctive

ness

Qua

lity o

f lab

or m

arket

s

Politic

al Fin

ancin

g

Parlia

men

t Effe

ctiv

enes

s

Police

Effe

ctiv

enes

s

Politic

al In

fluen

ce

Regul

ator

y Cap

acity

Techn

ology

Tax ef

ficien

cy

Unoffi

ciald

om

Voice

& A

ccou

ntabi

lity

Per

cen

tile

Ran

k (

0-10

0)

Source: EOS 2003 WEF, preliminary. Percentile ranks based on comparative performance among the 103 countries in the sample. All variables rated from 0 (very bad) to 100 (excellent).

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On the ‘Micro’ Level

In-depth, in-country Diagnostics:

Surveys of citizens/users of public services, enterprises and public officials

(complementing Worldwide Aggregate Governance Indicators, and Mezzo cross-country enterprise surveys)

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Diagnostic evidence from Sierra Leone…Perceived level of honesty in public institutions(as reported by managers, public officials and households)

0% 10% 20% 30% 40%

Bank of Sierra Leone

Sierra Leone Broadcasting Service (SLBS)

Sierra Leone Water Company (SALWACO)

University of Sierra Leone

Ministry of Gender Social Welfare & Children’s Affairs

Law Officers Department

Income Tax Department

Surveys and Lands Department

Traffic police

Customs Department

% of respondents reporting the institution to be honest households public officials business

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External Accountability/Feedback Mechanisms Help Control Bribery (Bolivia in-depth country diagnostic)

Based on Public Officials Survey from Bolivia diagnostic. Separate project, this is to illustrate importance of complementing worldwide indicators with in-depth country diagnostics. Each dot reflects rating of a public institutions in Bolivia.

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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-5

0

5

10

15

20

LowModerately LowModerately HighHigh

Politicization

New Diagnostic Tools permit measuring important dimensions of capacity – illustration #1 from Bolivia diagnostics:

How Politicized Agencies exhibit Budgetary Leakages

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.

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Peru: Sources of Undue Private Influence on the State

10

40

70

100

DrugConglomerates

EconomicGroups

FDI/TransnationalCorporations

OrganizedCrime

ProfessnlAssociations

Labor Unions

% r

ep

ort

ing

ag

en

t is

hig

hly

infl

ue

nti

al

Firms Public officialsBased on governance diagnostic surveys of public officials and enterprises

Responses by:

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Unbundling Governance: Ratings by Firms (2003)

0

20

40

60

80

100

Per

cent

ile R

ank

(0-1

00)

USA

Finland

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).

Good Rank

Poor

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Control of Cronyism: Differences across industrialized countries (OECD)

0

50

100D

enm

ark

Aus

tria

Finl

and

Swed

en

Sing

apor

e

Bot

swan

a

Net

herl

ands

Aus

tral

ia

Ger

man

y

Uni

ted

Kin

gdom

Fran

ce

Uni

ted

Stat

es

Gre

ece

Ital

y

Perc

entil

e Ran

k

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.

No Cronyism

Cronyism

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Capture, Political Influence and Cronyism: 4 countries

0

20

40

60

80

100

JudiciaryBribery

Illegal PoliticalFinancing

PoliticalFinancingInfluence

Crony Bias

Per

cent

ile R

ank

(0-1

00)

USA Chile

Finland Singapore

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).

Good Control

Poor

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Some Key Lessons from Empirical Research

Consequences & Costs of Misgovernance and Corruption:• Lower Incomes, Investment; Poverty & Inequality• But no automatic virtuous circle (from incomes)

Determinants of Misgovernance and 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• But Endogeneity is a challenge: Searching for more

fundamental determinants: political, historical variables

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No Evidence to support some ‘popular’ notions

1. Constant drafting of new A-C laws/regulations

2. Creating many new Commissions & Agencies

3. Globalization, Privatization, Reforms as Culprits

4. Cultural Relativism (Corruption is ‘culturally-determined’)

5. Historical Determinism

…by contrast, what appears to be important…

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What may work…a ‘list of 10’ for debate 1. Localize Know-how, Measure & Unbundle

2. Transparency Mechanisms (e*governance, data)

3. Voice and Democratic Accountability (& media)

4. Judicial Independence, Property Rights (RoL)

5. Prevention, Incentives (e.g. Meritocracy, Budget)

6. Political Reform, incl. Political Finance7. Private Sector & MNCs: Corporate Responsibility

8. Technical Innovations in Infrastructure Concessions

9. Compete in GG--joining world’s ‘Economic Clubs’

10. IFI, G-8, OECD Responsibility (Global Compact)

With modesty: learning, interdisciplinary approach

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Per

cap

ita

Inco

me

(log

, PP

P)

Control of Corruption

Sources: KK 2002 and Heston-Summers (2000)

Income per capita vs. Control of Corruption

High

HighLow

Low

ARGENTINA CHILE

INDIA

BANGLADESH

6

8.5

11

-2 0 2

r = .79

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References and Links to full papers and further materials

• Governance Matters III: http://www.worldbank.org/wbi/governance/pubs/govmatters3.html

• Governance Matters: http://www.worldbank.org/wbi/governance/pubs/govmatters.html

• Aggregating Gov Indicators: http://www.worldbank.org/wbi/governance/pubs/aggindicators.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/