Myths Realities Gov Corruption

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Myths Realities Gov Corruption

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<ul><li><p>MPRAMunich Personal RePEc Archive</p><p>Myths and Realities of Governance andCorruption</p><p>Daniel Kaufmann</p><p>October 2005</p><p>Online at http://mpra.ub.uni-muenchen.de/8089/MPRA Paper No. 8089, posted 8. April 2008 20:48 UTC</p></li><li><p>CHAPTER 2.1</p><p>Myths and Realities ofGovernance and CorruptionDANIEL KAUFMANN,1 World Bank</p><p>Governance and corruption remain controversial and mis-understood topics. But they are now given higher priorityin development circles and by the corporate sector,including multinationals.</p><p>Indeed, some donors and international financial insti-tutions (IFIs) increasingly work with emerging economiesto help reduce corruption, and increase citizen voice, gen-der equality, and accountability.The 2005 WorldEconomic Forum in Davos highlighted the agreementreached among 63 multinationals in key sectors to workwithin a set of principles to control corporate bribery.Further, with 29 countries having ratified already, andanother handful of developing countries on the verge ofdoing so,2 the UN convention against corruption signedalmost two years ago is about to come into force, requir-ing, among other things, repatriation of looted assetsstashed abroad by corrupt leaders.3</p><p>And when in July 2005 the Group of Eight countriesannounced their decision to double aid and debt relief tothe poorest countries in Africa, governance concerns wereprominent.As the recent joint report by the AfricaCommission explicitly stated,Good governance is thekey.... Unless there are improvements in capacity, account-ability, and reducing corruption ... other reforms will haveonly limited impact. Similar statements are voiced inother regions of the world, and there is also increasingscrutiny about corruption in OECD countries, and ofmultinationals.</p><p>But is good governance and controlling corruptionreally fundamental for growth, development, and security?The explosion of empirical research over the past decade,coupled with lessons from countries own experience, havegiven us a more solid basis for judging many of the effectsof governance on development, and the effectivenessorlack thereofof strategies to improve it. In our contribu-tions to the Global Competitiveness Reports (GCR) in recentyears4 we have presented a number of selected governancetopics. Insights derived from the analyses of the ExecutiveOpinion Surveys (Survey) conducted by the WorldEconomic Forum every year, and presented in previousGCR chapter contributions, include the study of determi-nants of governance at the city level, the anatomy ofundue influence, state capture and bribery involving manydomestic private firms, multinationals, and public officials,and the links between governance, corruption and securitythreats, and others.</p><p>Unfinished businessYet in spite of the myriad contributions to the field bymany authors, there are still serious unresolved questionsand debates in the development community, not onlyabout the importance of governance and corruption, butalso about the willingness and ability of the international</p><p>81</p><p>2.1:</p><p> Myt</p><p>hs a</p><p>nd R</p><p>ealit</p><p>ies </p><p>of G</p><p>over</p><p>nanc</p><p>e an</p><p>d Co</p><p>rrup</p><p>tion</p></li><li><p>community, including the private sector, to help countriesimprove in these areas.</p><p>In this years chapter, we provide a synthesis of thekey challenges, many of which are unresolved or havebecome popularized notions. Some of them, we believe,are outright myths.At the risk of oversimplification, andfor the sake of expositional clarity and generating debate,we present these unresolved or misunderstood issues asmyths on governance and corruption, although weacknowledge at the outset that there is often a morenuanced reality. In each case, we present a myth, withwhich we obviously disagree, and then discuss why wethink it is mistaken. Following the eight myths, we presentunderemphasized interventions in the area of transparencyreform, complemented by improvements in freedom ofthe press and gender equality. If implemented, suchreforms could have a major impact on improving gover-nance and anti-corruption in the next stage.</p><p>Myth #1: Definition: Governance and anti-corruption areone and the same.We define governance as the traditions and institutions bywhich authority in a country is exercised for the commongood.This includes:</p><p> the process by which those in authority are selected,monitored, and replaced (the political dimension);</p><p> the governments capacity to effectively manage itsresources and implement sound policies (the econom-ic dimension); and</p><p> the respect of citizens and the state for the countrysinstitutions (the institutional respect dimension).</p><p>By contrast, corruption is traditionally defined more nar-rowly as the abuse of public office for private gain. Inlast years GCR chapter on governance, we challenged thisdefinition of corruption as placing too much emphasis onpublic office, and on the ostensible legality of the act.Weanalyzed the implications of viewing corruption as abroader phenomenon where private agents also shareresponsibility, and where many acts which are not ethical(and thus may be regarded as corrupt) may not necessarilybe illegal.We presented empirical evidence of the extentto which many powerful private firms engage in undueinfluence, to shape state policies, laws and regulations, fortheir own benefit. Related to this, we also highlighted theextent to which they make campaign contributions, whichmay, in fact, be legal, but which unduly influences therules of the game, for their benefit. Moreover, from theSurvey results we showed that favoritism toward particularfirms in the awarding of public procurement bids andcontracts is widespread.</p><p>To generate debate, we offered an alternative, broaderdefinition of what constitutes corruption, namely,theprivatization of public policy, in which public policy isseen as including access to public services.According tothis more neutral definition, an act may not necessarily beillegal for it to be regarded as corrupt in a broader sense.Consider the situation in which legislative votes or execu-tive decisions in sectoral policy-makinge.g., in telecom-munications or energyhave been unduly influenced byeither private campaign contributions to legislators, or byprivate favors provided to decision-makers. In such a case,corruption would be considered to have taken place, evenif the act was not strictly illegal.And within such a broaddefinition, responsibility resides with both those who exertundue influence, and those who are unduly influenced. Based onthe empirical results from the Survey last year, we alsoprovided an illustrative index of corruption within thisbroader definition, which pays closer attention to thedeeds of the private sector.We found that a number ofrich OECD countries fare rather poorly when this moresubtle, and not purely legalistic, definition of corruption isused in the analysis.</p><p>Such debates on alternative definitions of corruptionnotwithstanding, it is clear that the scope of the conceptof governance is much broader than that of corruption.Aswe will see later, governance and corruption may be relat-ed, but they are distinct notions, and ought not to beregarded as one and the same.</p><p>Myth #2: Governance and corruption cannot be measured.Less than a dozen years ago, few comparable, worldwidemeasures of governance or corruption existed.Yet inrecent years, through the efforts of institutions such as theWorld Bank (the Governance Indicators), the WorldEconomic Forum (the Executive Opinion Survey),Transparency International (Corruption PerceptionIndex), Freedom House (political and civil liberties andfreedom of the press), and numerous other institutions, wehave sought to counteract this widespread perception.</p><p>At the World Bank, in order to more closely defineand measure governance, we have constructed these aggre-gate Governance Indicators, which now cover more than200 countries, based on more than 350 variables, obtainedfrom dozens of institutions worldwide, including theSurvey.The Governance Indicators capture six key dimen-sions of institutional quality or governance, and measure,through two indicators each, the political, economic, andinstitutional dimensions of governance described above.The following six dimensions are measured:</p><p>1. Voice and accountabilitymeasuring political, civil andhuman rights</p><p>82</p><p>2.1:</p><p> Myt</p><p>hs a</p><p>nd R</p><p>ealit</p><p>ies </p><p>of G</p><p>over</p><p>nanc</p><p>e an</p><p>d Co</p><p>rrup</p><p>tion</p></li><li><p>2. Political instability and violencemeasuring the likeli-hood of violent threats to, or changes in, government,including terrorism</p><p>3. Government effectivenessmeasuring the competenceof the bureaucracy and the quality of public servicedelivery</p><p>4. Regulatory burdenmeasuring the incidence of market-unfriendly policies</p><p>5. Rule of lawmeasuring the quality of contractenforcement, the police, and the courts, as well as thelikelihood of crime and violence</p><p>6. Control of corruptionmeasuring the exercise of publicpower for private gain, including both petty andgrand corruption, and state capture</p><p>While the Governance Indicators may represent a big stepforward, there are measurement challenges. Margins oferror are not trivial, and caution in interpreting the resultsis warrantedi.e., countries cannot be precisely ranked.But these margins of error have declined, and are substan-tially lower than for any individual measure of corruption,governance, or the investment climate.As a result, thesegovernance indicators are used worldwide for monitoringperformance, country assessment, and research.These indi-cators have been available since 1996, and in recentmonths we released the last installment for 209 countries,with data up to the end of 2004.5</p><p>Myth #3: The importance of governance and anti-corruption efforts is overrated.In order to give an approximation of the importance ofcorruption, one might pose the question: How large is thecorruption industry worldwide? But it is very difficultto obtain even a rough estimate of the size of the corrup-tion industry, given its hidden nature, for corruption andbribery typically operate in the dark.This makes officialestimates virtually impossible to obtain, and, of course,unreliable. Nonetheless, thanks to the increasing availabili-ty of particular questions in enterprise and household sur-veys, which ask for quantitative estimates of bribery, it ispossible, under certain conditions, to make calculations,and to extrapolate for the whole population.</p><p>In interpreting the results of this exercise, significantcaution applies, given the margin of error in the data, theassumptions in the extrapolation exercise itself, and thefact that some forms of corruption are not quantifiedthrough this approache.g., budgetary leakages or assettheft within the public sector. Bearing such serious caveatsin mind, an estimate of the extent of annual worldwidetransactions that are tainted by corruption puts it close toUS$1 trillion.The margin of error of this estimate being</p><p>obviously large, it may well be as low as US$600 billion;or, at the other extreme of the spectrum, it could wellexceed US$1.5 trillion.6</p><p>But even if a US$1 trillion estimate of the global sizeof bribery worldwide seems very large, it does not, in andof itself, give us much of a guide to the actual cost of cor-ruption.Theoretically, it could be argued that all thesebribes just grease the wheels of commerce, and no pro-ductive value added is lost to the economy.Therefore, toget a closer idea of the costs of corruption and poor gov-ernance, it is important to relate governance indicatorswith outcome variables, such as incomes or infant mortali-ty, for instance.</p><p>Thanks to the advances in empirical measurement, anumber of researchers have examined the impact of gov-ernance on development.The research generally showsthat countries can derive a very large development dividend,as we have called it, from better governance. Indeed, thereis now a growing consensus among both academics andpolicymakers that good governance provides the funda-mental basis for economic development.Academicresearch has focused on the effects of institutional qualityon growth in the very long run, noting that there is astrong causal impact of institutional quality on per capitaincomes worldwide.These estimates of the developmentdividend of good governance suggest that a realistic one-standard-deviation improvement in governance wouldraise incomes in the long run by about two- to threefold.7</p><p>Such improvement in governance by one standarddeviation is feasible, since it is only a fraction of the differ-ence between the worst and best performers, and wouldcorrespond, for instance, to an improvement in the currentratings of voice and accountability from the lowest levelsof Myanmar to that of Kazakhstan, or Kazakhstan toGeorgia, or Georgia to Botswana. For improvements inrule of law, a one standard deviation difference would con-stitute the improvement from the level of Somalia to thoseof Laos, from Laos to Lebanon, Lebanon to Italy, or Italyto Canada; for control of corruption it is the improvementfrom the lowest levels of Equatorial Guinea to those ofCuba, Honduras, or Uganda, from Uganda to Lithuania orMauritius, from Mauritius to Portugal, or from Portugal tothe stellar standards of Finland, Iceland, or New Zealand.We also find that even over much shorter periods, such asthe past 10 years, countries with better institutional qualityhave grown faster.And in our research, we have also foundthat good governance not only matters significantly forhigher incomes per capita, but also for substantially reduc-ing infant mortality and illiteracy.</p><p>Governance also matters significantly for a countryscompetitiveness. For this years GCR, we performed asimple exercise, relating the recently released GovernanceIndicators (measuring countrys ratings for the 2004 peri-od), with the updated Growth Competitiveness Index</p><p>83</p><p>2.1:</p><p> Myt</p><p>hs a</p><p>nd R</p><p>ealit</p><p>ies </p><p>of G</p><p>over</p><p>nanc</p><p>e an</p><p>d Co</p><p>rrup</p><p>tion</p></li><li><p>(GCI) for 2005, which is featured in this Report (Part 1). Itshould be noted that the data used to compute the GCIthis year (drawn in large measure from this years Survey)did not feature in any of the calculations for theGovernance Indicators, which utilized earlier data.Againstsuch a background, it is noteworthy that the correlationbetween governance (measured through the GovernanceIndicators) and competitiveness (through the GCI) isextremely high.As we observe in Figure 1, for the case ofone of the Governance Indicators, namely corruptioncontrol, the correlation is 0.9, i.e. an extremely tight fit.Obviously such a close correlation is highly significant sta-tistically, and remains so after controls for income levels areincluded in econometric specifications which explain thecountrys competitiveness. On average, an improvement incontrol of corruption by only one standard deviation(which is realistic) is associated with a jump in the GCIfor a country by almost 30 rank positions. Even after con-trolling for the income level of the country, improvementin corruption control can produce a very large jump inthe competitiveness of a country, between 15 and 20 rankpositions.</p><p>The most direc...</p></li></ul>