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.
1
‘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.
2
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
5
Governance Redux: Outlining Key Themes
1. Governance can be measured, monitored, analyzed
2. Aggregate and Disaggregated Governance Indicators:
How constructed, interpreted -- & margins of error
3. Governance Performance: major variation across
regions, countries & dimensions of governance
4. Lack of Worldwide/Regional Progress on Governance
5. 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
6
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…
7
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
8
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…
9
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
10
Inputs for Governance Indicators 2002
Publisher
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
12
•Binghamton Univ.
Human Rights Violations Research
Survey
140 developed and developing
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
14
those sources
Precision and Number of Sources:
Standard Error of Governance Estimate
Rule of Law, KK 2002
0.6
0.5
0.4
0.3
0.2
0.1
0
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16
Number of Sources
15
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
16
error relative to these broader concepts
Large Margins of Error for Objective Governance Indicators
3.5
Standard error Objective Indicator Scenario A
3
Standard error of Subjective indicator: KK 2002
Standard error
2.5
2
1.5
1
0.5
0
Telephone Wait
line
Phone faults
Trade Tax
revenue
Budgetary
Volatility
Revenue Source
Contract
Volatility
Intensive Money
Contract
Enforcement
Regulation of
Entry
Aggregate
Indicator
18
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
AFG
BDI
Probability (0-1)
0.5
0.25
ZAR
SDN
PNG
MMR
SOM
IRQ
AGO
TKM
CMR
KEN
NER
ZWE
TJK
NGA
AZE
YUG
RUS
IDN
ECU
PRY
ERI
MRT
BFA
MDG
UGA
TZA
LBY
UKR
PRK
ZMB
KGZ
HTI
KAZ
SYR
MDA
ARM
NIC
PAK
VNM
BOL
CIV
YEM
GTM
GEO
UZB
BGD
IRN
HND
LBN
DZA
ALB
VEN
LBR
GAB
ROM
MKD
PHL
COG
BIH
TGO
TUR
THA
GUY
SLE
PAN
MLI
ETH
SEN
IND
COL
ARG
SAU
SLV
LAO
NPL
CHN
MEX
GHA
DOM
MNG
BRN
BGR
EGY
CUB
BLR
JAM
PER
LVA
BRA
LKA
HRV
BHR
JOR
MWI
MOZ
GNB
MYS
ARE
GMB
SUR
MLT
GIN
LTU
SVK
CZE
KHM
ZAF
RWA
KOR
POL
MAR
OMN
BLZ
TTO
MUS
TWN
QAT
KWT
ITA
HUN
WTB
URY
GRC
EST
BHS
TUN
CRI
BWA
1
0.75
Governance Score
0
0.1
Note: Confidence Interval: 90%
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Control of Corruption Percentile Rank
0
Median CC Score
0
0.9
1
-2.5
19
Control of Corruption Rating
Probability Country is in
Top Half of Sample
AUS
NOR
LUX
GBR
CHE
CAN
DNK
NZL
NLD
SGP
ISL
SWE
FIN
Margin of Error
FJI
BEL
SVN
ISR
FRA
IRL
HKG
PRI
JPN
PRT
CYP
NAM
DEU
CHL
ESP
USA
AUT
Assigning Countries to Governance Categories:
Margins of Error Matter
2.5
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
20
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
Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Map downloaded from : http://info.worldbank.org/governance/kkz2002/govmap.asp
21
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%
Voice and Accountability. Rule of Law and Control of Corruption,
Regional Averages, KK 2002
Good
Governance
2
Voice and Accountability
Rule of Law
Control of Corruption
0
-1
OECD
Poor
Governance
East Asia
(NIC)
East Asia dev. S outh Asia
Eastern
Europe
Former
Middle East
S oviet Union North Africa
Latin
America
S ub-S aharan
Africa
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 expressed22
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.
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
23
Control of Corruption -- Selected Countries, KK 2002
Good
Bad
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 line24
atop each
column), implying caution in interpretation of the estimates and that no precise country rating is warranted.
Control of Corruption -- Selected Countries, KK 2002
Good
Bad
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 line25
atop each
column), implying caution in interpretation of the estimates and that no precise country rating is warranted.
Governance Indicators: Indonesia
Note: the thin lines depict 90% confidence intervals. Colors are assigned according to the following criteria: Red, 25 th percentile;
Orange, between 25th and 50th percentile; Yellow, between 50th and 75th percentile; Light Green between 75th and 90th 26
percentile; Dark Green above 90th percentile.Chart downloaded from : http://info.worldbank.org/governance/kkz/.
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
27
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.
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
28
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.
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
29
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.
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
30
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.
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
31
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.
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….
32
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
33
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 35
cross-country, even within a region. Some
High
Significant Decline in Inflation Rates Worldwide
3
Inflation
TRANS ITION
1.5
EMERGING
(avg. in
logs)
OECD+NIC
Low
0
1984-1988
1989-1993
1994-1998
1999-2001
36
Source: ‘Rethinking Governance’, based on calculations from WDI. Y-axis measures the log value of the average inflation for each
region across each period
Extent of Independence of the Judiciary
7
Independent
OECD
East Asia
Industrialized
4.5
Transition
Emerging
NonIndependent
2
1998
1999
2000
2001
2002
2003
Source: EOS 1998-2003 (Quasi-balanced panel). Question 5.01: The judiciary in your country is independent 38
from political influences of members of government, citizens or firms?
Rule of Law and Corruption have not improved
recently
1.00
Control of Corruption
Good
Rule of Law
0.75
0.50
0.25
Poor
0.00
1996
1998
2000
2002
39
Why should we be concerned?…
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
40
Governance Indicators and Income per Capita, Worldwide
Low Level of Governance
Medium Level of Governance
High Level of Governance
High
Income per capita
US$20,000
US$3,000
US$400
Low
Voice and Accountability
Government Effectiveness
Control of Corruption
Sources: Kaufmann D., Kraay A., Mastruzzi M., Governance Matters III: Governance Indicators for 1996-2002 (KK 2002);
41
Income per capita (in Purchasing Power Parity terms) obtained from Heston-Summers (2000) and CIA World Factbook (2001).
Governance and Growth: Causality which way?
I.V.l
10
‘Good History’
I.V.
Income Per Capita (log)
OLS
9
‘Bad History’
D
B
8
C
A
7
Growth on
Governance
I.V.l
‘Good History’
OLS
6
Governance on
Growth I.V.
‘Bad History’
5
-2
-1
Low
0
Quality of Rule of Law, 2000/01
1
2
High
43
Source: KKZ 2000/01 Governance Indicators and D. Kaufmann and A. Kraay, “Growth without Governance,” Economia 3(1): 169229. http://www.worldbank.org/wbi/governance/pubs/growthgov.htm
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…
44
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
46
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
47
Very high Economic Cost of Capture for
Private Sector Development and Growth
25
20
Firms'
15
Output
Growth
10
(3 yrs)
5
0
Low capture
economies
High capture
economies
48
Based on survey of transition economies, 2000
Working with Competitive Business
Associations does Matter
Business
association
members
(% of
firms)
90
80
70
60
50
40
30
20
10
0
Hungary
Russia
Active members
Azerbaijan
Nonactive members
49
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.
Addressing Capture: Economic Reform,
Political Competition & Voice/Civil Liberties Matter
State Capture Index
0.4
0.3
Slow
0.2
Partial
0.1
Advanced
Pace of
Econ Reform
0
Partial Civil Libs High Civil Libs
Political/Civil Liberties Reforms
50
Foreign Firms do not always help improve
governance in recipient country
Evidence from transition economies – beeps survey, 1999
Domestic
Firms
High Capture
Economies
Low Capture
Economies
FDI Foreign
HQ
FDI Local
HQ
0
5
10
15
20
Share of Captor Firms
25
51
Corporate Ethics, Public Sector Transparency
and Income Growth -- Worldwide
Crecimiento Anual del PIB (%)
5
Transparent Info [Gov't]
Parlament Effectiness
No State Capture
Corporate Ethics
3
1
Low
Medium
High
Public Transparency and Corporate Ethics
52
or
po
ra C
te on
R tr
es ol
po o
ns f co
ib rr
/
D Gov upt
ec e io
Fi
en rn n
na
tr an
nc
ia E aliz ce
a
F lS n
G ina ect viro tion
ov n o n
er cia r C me
nm l
a n
en Gov pac t
t E er ity
ffe na
G
M
en cti nce
ul
de ve
til
H r ne
Q ater um Eq ss
u
ua a
lit l O an C alit
y
y
of rga ap
n
Q Le Inf iza ital
ua g ra ti
lit al str on
y eff u s
of ec ct
Pa P lab tiv ure
rl oli or ene
ia tic m s
m a a s
en l F rk
Po t E ina ets
lic ffe nc
e ct in
Po Eff ive g
R liti ect nes
eg ca iv s
ul l en
at In es
or flu s
y
Ca enc
Te pa e
Ta chn city
V
x olo
oi
ce Un effi gy
& of cie
Ac fic ncy
co ial
un do
ta m
bi
lit
y
Source: EOS 2003 WEF, preliminary. Percentile ranks based on comparative performance53
among
the 103 countries in the sample. All variables rated from 0 (very bad) to 100 (excellent).
C
Percentile Rank (0-100)
Illustration of “Mezzo” Approach to empirical work – From
cross-country enterprise surveys to Institutional Clusters for
103 countries, 2003, preliminary, Chile rankings
100
50
0
or
po
ra C
te on
R tr
es ol
po o
ns f co
ib rr
/
D Gov upt
ec e io
Fi
en rn n
na
tr an
nc
ia E aliz ce
a
F lS n
G ina ect viro tion
ov n o n
er cia r C me
nm l
a n
en Gov pac t
t E er ity
ffe na
G
M
en cti nce
ul
de ve
til
H r ne
Q ater um Eq ss
u
ua a
lit l O an C alit
y
y
of rga ap
n
Q Le Inf iza ital
ua g ra ti
lit al str on
y eff u s
of ec ct
Pa P lab tiv ure
rl oli or ene
ia tic m s
m a a s
en l F rk
Po t E ina ets
lic ffe nc
e ct in
Po Eff ive g
R liti ect nes
eg ca iv s
ul l en
at In es
or flu s
y
Ca enc
Te pa e
Ta chn city
V
x olo
oi
ce Un effi gy
& of cie
Ac fic ncy
co ial
un do
ta m
bi
lit
y
Source: EOS 2003 WEF, preliminary. Percentile ranks based on comparative performance54
among
the 103 countries in the sample. All variables rated from 0 (very bad) to 100 (excellent).
C
Percentile Rank (0-100)
Illustration of “Mezzo” Approach to empirical work – From
cross-country enterprise surveys to Institutional Clusters for
103 countries, 2003, preliminary, Peru rankings
100
50
0
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)
55
Diagnostic evidence from Sierra Leone…
Perceived level of honesty in public institutions
(as reported by managers, public officials and households)
Customs Department
Traffic police
Surveys and Lands Department
Income Tax Department
Law Officers Department
Ministry of Gender Social Welfare & Children’s Affairs
University of Sierra Leone
Sierra Leone Water Company (SALWACO)
Sierra Leone Broadcasting Service (SLBS)
Bank of Sierra Leone
0%
10%
20%
30%
40%
% of respondents reporting the institution to be honest
households
public officials
business
56
External Accountability/Feedback Mechanisms Help
Control Bribery (Bolivia in-depth country diagnostic)
100
Control of Bribery
r = 0.54
80
60
Controlled
Causal
Link
40
20
0
10
20
30
40
50
60
70
80
90
Voice / External Accountability
57
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.
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
58 from
X to Y variables. Dotted red lines depict the confidence ranges around the causal effect depicted by the blue line.
% reporting agent is highly influential
Peru: Sources of Undue Private Influence
on the State
100
70
40
10
Drug
Economic
FDI/
Organized
Professnl Labor Unions
Conglomerates Groups Transnational
Crime
Associations
Corporations
Responses by:
Firms Public officials
Based on governance diagnostic surveys
60
of public officials and enterprises
Te
rr
ica
or
ist
lF
Po
th
in
an
re
lit
at
ce
ica
In
lly
flu
Co
en
nn
ce
ec
te
d
Fi
Do
rm
m
s
in
Co
an
tF
m
pl
irm
ex
s
Ta
x
sy
ste
m
Ta
xb
ur
O
rg
de
an
n
ize
d
cr
im
St
e
re
et
cr
In
im
sid
e
e
rt
Br
ra
ib
di
er
ng
y
in
ju
M
di
on
cia
ey
ry
La
Ill
eg
un
al
de
po
rin
lit
g
ica
lf
in
an
ce
Po
lit
Percentile Rank (0-100)
Unbundling Governance: Ratings by Firms (2003)
Good100
Rank
Poor
USA
Finland
80
60
40
20
0
61
Control of Cronyism:
Differences across industrialized countries (OECD)
Percentile Rank
100
No
Cronyism
50
Italy
Greece
United States
France
Germany
Australia
Netherlands
Botswana
Singapore
Sweden
Finland
Austria
Denmark
0
United
Kingdom
Cronyism
62
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.
Capture, Political Influence and Cronyism: 4 countries
USA
Finland
Chile
Singapore
Good Control
100
Percentile Rank (0-100)
80
Poor
60
40
20
0
Judiciary
Bribery
Illegal Political
Financing
Political
Financing
Influence
Crony Bias
63
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).
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
66
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…
67
What may work…a ‘list of 10’ for debate
1.
2.
3.
4.
5.
6.
Localize Know-how, Measure & Unbundle
Transparency Mechanisms (e*governance, data)
Voice and Democratic Accountability (& media)
Judicial Independence, Property Rights (RoL)
Prevention, Incentives (e.g. Meritocracy, Budget)
Political Reform, incl. Political Finance
7.
8.
Private Sector & MNCs: Corporate Responsibility
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
68
Income per capita vs. Control of Corruption
11
High
Per capita Income (log, PPP)
r = .79
ARGENTINA
CHILE
8.5
INDIA
BANGLADESH
6
Low
-2
0
Low
2
High
Control of Corruption
Sources: KK 2002 and Heston-Summers (2000)
70
References and Links to full papers and further materials
• Governance Matters III:
http://www.worldbank.org/wbi/governance/pubs/govmatters
3.html
• Governance Matters:
http://www.worldbank.org/wbi/governance/pubs/govmatters.
html
• Aggregating Gov Indicators:
http://www.worldbank.org/wbi/governance/pubs/aggindicato
rs.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/71