On Governance & Anti-Corruption
Some ‘Beyond Convention’ Measurement Issues
and Insights from Empirical Analysis
Daniel Kaufmann, The World Bank Institute
www.worldbank.org/wbi/governance
or,
www.govindicators.org
Background Handout for World Bank GAC
Course, session on Measurement Issues
Washington, DC, April 24th, 2007
1
Measurement: challenges and lessons
• Beyond myths on measurement: challenges faced by all
governance and investment climate indicators
• Worldwide Governance Indicators (WGI) and Beyond
• Implications on Measurement, ways forward…
• Beyond traditional definition of corruption
• Beyond ‘Fighting Corruption by Fighting Corruption’: Good
Governance is key
• Beyond facile solutions [such as Voluntarism, Legalism,
Conmissions] - instead: Politics, Systemic Change,
Transparency Reforms
• Beyond the World Bank…
2
Intro: Worldwide Governance Indicators:
Defining Governance Broadly
Governance consists of the traditions and institutions
by which authority in a country is exercised.
This includes:
– the process by which governments are selected,
monitored and replaced,
– the capacity of the government to effectively
formulate and implement sound policies, and
– the respect of citizens and the state for the
institutions that govern economic and social
interactions among them.
3
Worldwide Governance Indicators
• Six aggregate governance indicators covering 213
countries over past decade
– Voice and Accountability
– Political Stability/Absence of Violence
– Government Effectiveness
– Regulatory Quality
– Rule of Law
– Control of Corruption
• Based on 31 data sources from 25 organizations,
capturing views of thousands of informed
stakeholders
• Widely used by analysts, officials, civil society, and
researchers to monitory governance and study its
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causes and consequences
2006 Update of Worldwide Governance Indicators:
Key Features
• Move to annual data
– complement biannual data 1996-2004 with annual
data for 2003, 2005
– continue reporting data annually in future
• First-time access to data underlying aggregate
indicators
– hundreds of individual indicators over past
decade
– one of the largest on-line governance data
resources at www.govindicators.org
5
Sources of Governance Data
• Cross-Country Surveys of Firms: Global Competitiveness
Survey, World Business Environment Survey, World
Competitiveness Yearbook, BEEPS
• Cross-Country Surveys of Individuals: Gallup International
Voice of the People, Latinobarometro, Afrobarometer
• Expert Assessments from Commercial Risk Rating
Agencies: DRI, PRS, EIU, World Markets Online, Merchant
International Group, IJET Travel Consultancy, PERC
• Expert Assessments from NGOs, Think Tanks: Reporters
Without Borders, Heritage Foundation, Freedom House,
Amnesty International, Bertelsmann Foundation, Columbia
University, International Research and Exchanges Board
• Expert Assessments from Governments, Multilaterals:
World Bank CPIA, EBRD, AFDB, ADB, State Dept. Human
Rights Report, Trafficking in Persons Report
6
Why Aggregate Indicators?
Basic Premise: individual data sources provide a noisy
“signal” of broader concept of governance, e.g.:
– trust in police  RULE OF LAW
– freedom of press  VOICE & ACCOUNTABILITY
– bureaucratic quality  GOV’T EFFECTIVENESS
Benefits of Aggregation
• aggregate indicators are more informative about broad
concepts of governance – simple intuition of averaging
• less likely to generate extreme outliers
• generate explicit margins of error for country scores
7
Levels of Governance Worldwide, 1996-2005
• Estimates of governance for 213 countries
• Standard errors to assess the precision of the estimates
– Rule of thumb: cross-country differences in
governance significant if 90% confidence regions
don’t overlap
– Many small differences between countries not
significant…
– But many larger differences are statistically
significant
• 70% of all comparisons based on aggregate
indicator...
• but only 30% of all comparisons based on
individual indicators
• Precision of governance indicators has improved over
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time with more, and better, data sources
Control of Corruption
Good
Governance
Selected Countries, 2005
2.5
Margins
of Error
Governance
Level
Source for data: 'Governance Matters V: Governance Indicators for 1996-2005’, D. Kaufmann, A. Kraay and M. Mastruzzi, September 2006.
9 10th
Note: Colors are assigned according to the following criteria: Dark Red, below 10th percentile rank among all countries in the world; Light Red between
and 25th; Orange, between 25th and 50th; Yellow, between 50th and 75th; Light Green between 75th and 90th; Dark Green above 90th.
ICELAND
FINLAND
SINGAPORE
NEW ZEALAND
DENMARK
UNITED STATES
CHILE
JAPAN
BOTSWANA
SLOVENIA
ESTONIA
URUGUAY
HUNGARY
SOUTH AFRICA
KOREA, SOUTH
SLOVAK REPUBLIC
ITALY
GREECE
BRAZIL
INDIA
MEXICO
CHINA
KENYA
CAMBODIA
CAMEROON
PARAGUAY
SUDAN
HAITI
MYANMAR
Poor
Governance
SOMALIA
-2.5
EQ. GUINEA
0
Three Principles for Using Governance Indicators
1. All indicators have measurement error
– rely on variety of data sources
– reduce noise by aggregation
2. There are no silver bullets
– subjective/perceptions vs. objective/statutory
– aggregate vs. individual indicators
– regular cross-national monitoring/research vs.
detailed country diagnostics/country policy
advice
– complements vs. substitutes
3. Links from policy actions to outcomes are complex
10
– “actionable” versus “action-worthy” indicators
1. All Indicators Have Measurement Error
• Governance is difficult to observe directly, so all
available measures are only proxies, e.g.
– Perceptions measures:
• Corruption in procurement?
• Confidence in the courts?
• Onerous regulation of entry for a new firm?
– Objective/Statutory measures
• Do regulations stipulate competitive bidding
• Do materials used match materials paid for?
• How many procedures to fire a worker?
11
1. Measurement Error, Cont’d
• Two types of measurement error in any proxy:
1. Errors in measuring specific proxies, e.g.
– sampling error in survey
– factual errors in objective measures
– differences of opinion
2. Gaps between proxies and broader concepts, e.g.
– corruption in judiciary vs. overall graft
– business entry regulation vs. overall regime
• WGI (unusually!) reports explicit margins of error
– Yet margins of error are implicit in ‘objective’ and
in individual subjective indicators – and they are
12
large too
2. No Silver Bullets:
a) Aggregate vs. Individual Indicators
• Aggregate indicators have:
– broad country coverage (e.g. TI; WGI)
– more information on broad concepts of governance
– (potentially) can exhibit explicit margins of error
• Individual indicators are:
– easier to interpret
– (potentially) identify policy interventions
• Ideally use aggregate indicators that can be unbundled
– Multi-source: WGI aggregate & individual indicators
– Single-source: World Bank CPIA; and Global Integrity
Index (GII)
13
Three Principles for Using Governance Indicators
1. All indicators have measurement error
– rely on variety of data sources
– reduce noise by aggregation
2. There are no silver bullets
– subjective/perceptions vs. objective/statutory
– aggregate vs. individual indicators
– regular cross-national monitoring/research vs.
detailed country diagnostics/country policy
advice
– complements vs. substitutes
3. Links from policy actions to outcomes are complex
14
– “actionable” versus “action-worthy” indicators
1. All Indicators Have Measurement Error
• Governance is difficult to observe directly, so all
available measures are only proxies, e.g.
– Perceptions measures:
• Corruption in procurement?
• Confidence in the courts?
• Onerous regulation of entry for a new firm?
– Objective/Statutory measures
• Do regulations stipulate competitive bidding
• Do materials used match materials paid for?
• How many procedures to fire a worker?
15
1. Measurement Error, Cont’d
• Two types of measurement error in any proxy:
1. Errors in measuring specific proxies, e.g.
– sampling error in survey
– factual errors in objective measures
– differences of opinion
2. Gaps between proxies and broader concepts, e.g.
– corruption in judiciary vs. overall graft
– business entry regulation vs. overall regime
• WGI (unusually!) reports explicit margins of error
– Yet margins of error are implicit in ‘objective’ and
in individual subjective indicators – and they are
16
large too
2. No Silver Bullets:
a) Aggregate vs. Individual Indicators
• Aggregate indicators have:
– broad country coverage (e.g. TI; WGI)
– more information on broad concepts of governance
– (potentially) can exhibit explicit margins of error
• Individual indicators are:
– easier to interpret
– (potentially) identify policy interventions
• Ideally use aggregate indicators that can be unbundled
– Multi-source: WGI aggregate & individual indicators
– Single-source: World Bank CPIA; and Global Integrity
Index (GII)
17
Aggregate Governance Indicators for Chile [2005 vs. 1998]
18
Unbundling WGI Aggregate Indicators – Chile
Reporters Without Borders
http://www.rsf.org
Reporters without Borders, headquartered in Paris, is an international organization dedicated to the protection of
reporters and respect of press freedom in the world. In 2002, International Reporters Without Borders published its
first worldwide press freedom index, compiled for 139 countries. The index was drawn up by asking journalists,
19
researchers, and leagl legal experts worldwide to answer 50 questions about a whole range of press freedom violations.
2. No Silver Bullets:
b) Subjective vs. Objective Measures
• Perceptions data are very useful even when objective
measures exist
– But often only type of cross-country data available
(e.g. corruption)
• Perceptions matter directly!
• Perceptions data add insight over de jure measures
when such objective measures exist, e.g. comparison of:
• statutory number days to start a business from
Doing Business database (de jure)
• firms perceptions of ease of business entry from
Global Competitiveness Survey (de facto)
– two are weakly correlated in developing countries
– prevalence of corruption explains much of gap
between the two
20
Subjective and Objective Measures of
Ease of Business Entry: OECD/NIC Sample
Difficulty of Starting a Business (EOS)
High
5
4
3
r = 0.51
Low 2
0
40
80
Number of Days to start a Business (DB)
21
120
Subjective and Objective Measures of Ease of
Business Entry: Developing Country Sample
Difficulty of Starting a Business (EOS)
High
Low
7
r = 0.24
5
3
1
0
40
80
120
160
22
Number of Days to start a Business (DB)
2. No Silver Bullets:
b) Subjective vs. Objective Measures, cont’d
• ‘Objective’ indicators can be very specific, but
interpretation can be ambiguous and imprecise
– parliamentary vs. presidential system may matter for
outcomes, but not a “governance indicator” per se
– does an anti-corruption commission exist?
– prosecutions for bribery?
• ‘Perceptions’ data need not be vague or imprecise
– “do you think corruption is a problem, yes or no?” vs.
– “what percent of the total contract value do firms like
yours typically have to pay in bribes to secure
procurement contracts?”
False dichotomy between subjective and objective measures not helpful
23
Corruption Control and Prosecutions
for Bribery negatively correlated…
Best
100
FIN
SGP
NZL
ESP
80
HKG
PRT
JPN
Control of Corruption
SVN
CRI
HUN
60
CZE
KOR
SVK
HRV
LVA
BLR
BGR
SLV
40
DOM
CHN
ROM
MKD
GTM
GEO
20
r = -0.16
ARM
ZMB
MDA
KGZ
PAK
Worst
ZWE
UKR
0
RUS
0
Worst
20
40
60
Prosecutions for Bribery
80
Best (least)
24
Sources: Worldwide Governance Indicators and Seventh United Nations Survey on Crime Trends and the Operations of
Criminal Justice Systems, 2000. Axis report percentile ranks ranging from 0 (worst) to 100 (best). See Lambsdorff 2006
100
2. No Silver Bullets:
c) Timely Monitoring vs. In-Depth Evaluation
• Worldwide benchmarking, regular monitoring and
cross-country research:
– aggregate (and some individual) governance
indicators
• In-depth evaluation of particular country based on
many potential instruments and techniques, e.g.:
– PEFA, OECD Procurement Indicators
– Country Governance & A-C (GAC) Diagnostics
– comparing “inputs” and “outputs”, e.g.
infrastructure in Italy, roads in Indonesia
• Complementarity between two types of indicators
25
– e.g. Kenya governance assessment
3. Links from Policy Interventions to
Governance Outcomes are Complex
• ‘Objective’ and easy-to-measure indicators may not
matter most, e.g.
– existence of anticorruption commission?
– turnover of civil servants?
– proportion of population incarcerated?
• Risk of confusing reform reality and reform illusion
• Across countries, priority actions and their impact
will differ
crucial to measure outcomes as well
• Thus, measure BOTH: i) “action-worthy” indicators,
and, ii) outcome indicators – it means asking firms,
citizens and experts
26
3. Complex Links, Cont’d:
Leading GMR “Actionable” Indicators
• Global Integrity Index 2006
– 43 countries (15 with one previous observation)
– 290 indicators of existence and effectiveness
• OECD-DAC Procurement Indicators
– very detailed assessment of laws/practices
– 5 pilots done, public access limited
• PEFA Indicators
– 28 indicators of public financial management
– 31 countries done, 47 in progress/planning, public
access limited
– very limited panel dimension
• Open Budget Initiative
– 122 indicators of budget transparency
– 59 countries, single cross-section
27
Ten Implications on Governance Measurement
1. caution in use of indicators due to margins of error
2. aggregate indicators reduce margins of error
3. but disaggregated indicators are also needed
4. need multiplicity of indicators, different methods &
approaches, complement and combine
5. false divide between subjective & objective indicators
6. actionable vs. action-worthy indicators
7. action-worthy vs. outcome indicators
8. match indicator/measurement tool with objective: indepth, in-country GAC diagnostics are important
9. transparent disclosure and rigorous scrutiny
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10.realism about what it takes to deliver new indicators
On defining Corruption – some pitfalls…
• Traditional definition of corruption:
‘Abuse of public office for private gain’
• 3 Problems: i) interpreted in terms of legality of act
(illegal = corrupt; legal = non-corrupt?);
ii) onus is on the public official (asymmetry), and,
iii) measurement bias towards ‘petty corruption’
• Alternative: ‘Privatization of public policy’
(e.g. undue & distortive influence by private interests
on public decisions, on granting monopoly powers)
• This implies that some actions may be legal, strictly
speaking, but lack in legitimacy (and inconsistent
with ethics standard )
can be seen as corrupt
• These legal forms of corruption can be measured
29
Beyond Bureaucratic Corruption: Unbundling
Share of Firms Reporting High Bribery
100
Bribery in:
Utilities
Procurement
Judiciary
80
60
40
20
0
East Asia NICs
Sub-saharan Africa Former Soviet Union
Source: EOS firm survey, WEF2006 – 126 countries.
30
Eastern Europe
State Capture, Undue Influence & Political
Funding, Report of Firms, 2006
Share of Firms Report Poor Governance
100
State Capture
Illegal Political Funding
Influence Peddling
80
60
40
20
Fo
rm
N
or
di
cs
7
G
er
So
So
vi
e
ut
h
A
tU
ni
on
sia
0
Source: EOS firm survey, WEF2006 – 126 countries.
31
Capture by Corporates Impairs Competitive Growth
25
20
Firms'
15
Output
Growth
10
(3 yrs)
5
0
Low capture
economies
High capture
economies
33
Based on survey of transition economies, 2000
Fighting Capture: Economic Reform,
Political Competition & Civil Liberties Matter
State Capture Index
0.4
0.3
Slow
0.2
Partial
0.1
Advanced
0
Partial Civil Libs High Civil Libs
Political/Civil Liberties Reforms
Economic
Reforms
34
Freedom of the Press is associated with
better Control of Corruption (& civil liberties more
generally is associated with better performance of World Bank-funded
projects – see WBER article 1997)
Good
Control of Corruption
1.51.00.5-
0-0.5-1.0-1.5- _________________________________________________________________
Press Freedom
Status:
Not Free of
Partially Free
Free
Source for control of corruption: : 'Governance Matters V: Governance Indicators for 1996-2005’, D. Kaufmann, A. Kraay and M. Mastruzzi, September
35
2006 (http://www.govindicators.org/). Source for Press Freedom: 2006 Freedom House’s Press Freedom Report. Terciles divided according to Press
Freedom ratings (190 countries total). Free: 0-30 (69); Partly Free: 31-60 (54); Not Free: 61-100 (67).
Press Freedom in the World, 1995 vs. 2004:
Stagnant?
32
34
% countries
in 1995
Not Free
% countries in 2004
Part Free
Free
34
36
38
Not Free
Part Free
Free
26
36
Source: Freedom House. Y axis measures percentage of countries in the region with free press (rating of 30 or below),
partly free (ratings between 30 and 60) and not free (rating above 60).
Responsibility of the Private Sector &
Multinationals on Anti-Corruption
(% of Firms Reporting Procurement Bribery, 2006)
70605040302010-_________________________________________________________________
Multinational
Domestic Firms in NON
Location Multinational in
operating outside
OECD Countries
of Firm: OECD, HQ in
(comparable)
another OECD
OECD, HQ in OECD
38
Source: EOS2006. Questions: When firms like yours do business with the government, how much of the contract value must they offer in additional payments to
secure the contract?”. Y-axis shows percentage of firms who admitted paying bribes. Last bar excludes small with less than 50 employees.
An Effective Parliament does Matter for
Controlling Corruption, 2006
Good
Control of Corruption
1.51.00.50-0.5-1.0-1.5- _________________________________________________________________
Ineffective or
Parliamentary
Effectiveness: Partially Effective
Effective
Source for control of corruption: : 'Governance Matters V: Governance Indicators for 1996-2005’, D. Kaufmann, A. Kraay and M. Mastruzzi, September
39
2006 (http://www.govindicators.org/). Source for Parliamentary Effectiveness: 2006 EOS. Terciles divided evenly according to Parliament Effectiveness
ratings (125 countries total).
Transparency Matters for Controlling Corruption
Good
Control of Corruption
2
1.5
1
0.5
0
-0.5
-1
-1.5
Not Transparent
Partially Transparent
Transparent
Overall Transparency
Sources: Governance Matters IV by KKM (2005) and Transparenting transparency by BK (2005). N. of countries: 190
40
300% Development Dividend from
$30,000Good Governance
$3,000-
$300-_________________________________________________________________
Low Corruption
Control
Medium Corruption
Control
High Corruption
Control
41
Data Source for calculations: KK 2004. Y-axis measures predicted GDP per capita on the basis of Instrumental Variable (IV)
results for each of the 3 categories. Estimations based on various authors’ studies, including Kaufmann and Kraay.
Good Governance associated Country’s Competitiveness
High
6
FIN
Growth Competitiveness Index (EOS)
USA
SWE
TWN
CHE
NOR
AUS
NLD
GBR
DEUCAN
JPN
KOR
r = 0.90
QAT
MYS
THA
ISR
KWTCYP SVN
BHR
CZE
HUN
TUN
SVKZAF
LTU
LVA
JOR
GRC
ITA
BWA
ARE
PRT
CHL
ESP
FRA
DNK
SGP
ISL
NZL
AUT
LUX
IRL
HKG
BEL
MLT
CHNIND
4
POL MUS
EGY
MEX
COL
BGR
GHA
TTO
KAZ
HRVNAM
BRA
TUR
PER
ROM
AZE
JAM
TZA ARG
PAN
RUS
MAR
DZA
UKR
YUG
MDA
PAK
MKD
GEO
UGA
NGA VEN
MLI
KENMOZ
HNDGMB
BIH
GTM
LKA
ALB
BOL
DOM NIC
TJK
ETH
MWIECU
MDG
ZWE
BGD
CMR
KHM
PRY
BEN
GUY
SLV
URY
CRI
IDN
PHL
VNM
MNG
TMP
KGZ
TCD
2
Low -1.5
-1.0
Low
-0.5
0.0
0.5
1.0
1.5
WGI Control of Corruption
2.0
2.5
3.0
High
43 and
Sources: GCI drawn from EOS firm survey, WEF 2005 – 117 countries; Control of Corruption from Kaufmann, Kraay
Mastruzzi, ‘Governance Matters IV: Governance Indicators for 1996-2004’.
Countries can Improve in the Short Term
• On average worldwide, not much of an
improvement on governance and corruption
control over the past decade
• But significant improvement in a number of
countries – Eastern Europe, some in Africa,
etc., challenging pessimism…it is possible
44
Governance Indicators for Madagascar, 1998-2005
Source for data: 'Governance Matters V: Governance Indicators for 1996-2005’, by D. Kaufmann, A.Kraay and M. Mastruzzi, September 2006 www.govindicators.org. Colors are assigned according to the following criteria: Dark Red: country is in the bottom 10th percentile rank
(‘governance crisis’); Light Red: between 10th and 25th percentile rank; Orange: between 25th and 50th percentile rank; Yellow, between 50th and
75th; Light Green between 75th and 90th percentile rank; and Dark Green: between 90th and 100th percentile (exemplary governance).45
Estimates
subject to margins of error.
In Sum – some questions to ponder
1. Anticorruption ought to be increasingly seen through a
broader ‘good governance’ lens
-- key issue is the respective roles of governments, civil
society, donors, and privates
-- Voice, civil liberties, free press: all important for A-C
2. Government, Donor & Private Initiatives are key for good
governance, but how to move beyond easy picks (e.g.
redrafts of laws, codes, commissions) to the more
difficult and often under-emphasized issues of:
i) Political Finance Reform;
ii) Financial Sector (incl. equity markets) & Deregulation;
iii) Transparency (incl. e*procurement) & Media Reforms (IT);
iv) Raising the cost to the briber
46
Basic Scorecard: 10 Transparency Reform Components
1. Public Disclosure of Assets & Incomes of Candidates, Public
Officials, Politicians, Legislators - & dependents
2. Public Disclosure of Political Campaign contributions by
individuals and firms, and of campaign expenditures
3. Public Disclosure of Parliamentary Votes, w/out exceptions
4. Effective Implementation of Conflict of Interest Laws,
separating business, politics, legislation, & government
5. Publicly blacklisting firms bribing in public procurement
6. Effective Implementation of Freedom of Information Law, with
easy access to all to government information
7. Fiscal/Financial transparency: central/local budgets;ROSC, EITI
8. E*procurement: transparency (web) and competition
9. Media Freedoms & Media Development
10. Country Diagnostic (& Scorecard) on Transparency &
47
Governance
Power of Data, Transparency and Citizen Oversight
Tracking Education spending in Uganda
equiv. US$ per student
3.5
3.0
Public info campaign
2.5
2.0
1.5
1.0
0.5
0.0
1990
1991
Intended grant
1993
1994
1995
1999
Actual grant received by primary school (means)
Source: Uganda Public Expenditure Tracking Surveys
49