Governance and Development

1. Governance and Development Presented to: Public Sector and Anticorruption Core Course April 23-26, 2007 Washington D.C. Presented by: Ed Campos Governance Adviser for Bangladesh SASPR

2. The World Bank has come a long way in a brief period of time State in a Changing World (97) O.P. Mainstreaming AC in CAS (99) PSG Implementation Update (02) Governance Pillar - CDF (98) Strategic Compact (97) Governance Strategy (00) • Diagnostic/Data/ Monitoring Tools • Public Financial Management and Procurement • Administrative & Civil Service Reform • Civil Society Voice, Transparency, & CDD • State Capture • Legal & Judicial Reform JDW “Cancer of Corruption” Speech (10/96) WDR on Institutions 1982 Anti-corruption Strategy (97) Gov/A-C Diagnostics start (98) TI CPI (5/95) Broadening &Mainstreaming The ‘Prohibition’ Era 1st set of firms Debarred from WB (99) Internal AC unit created in WB (98) Board endorses Integrity Strategy (04) Formalization of INT (01) PW Bank President (05) 1980 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

3. Aid, Governance, andDevelopment Outcomes

4. Governance and Development: Lessons of Global Experience • An effective state is crucial for growth and poverty reduction (WDR ’97) • For an effective state, good governance is a cross-cutting priorityfor: • Building a sound investment climate for growth (macroeconomic stability, rule of law, regulatory system, physical & financial infrastructure) • Empowering people to make growth inclusive through effective delivery of basic services (education, health, social protection)

5. 2% 1.5% 1% 0.5% 0% -0.5% -1.0% -1.5% Good Governance matters for investment and growth Income per capita Growth Rate % Investment share in GDP 20% 15% 10% Medium Low High High Medium Low Governance Quality Governance Quality measured by perception of 4000 firms in 67 countries on: (i) protection of property rights; (ii) judicial reliability; (iii) predictability of rules; (iv) control of corruption. World Development Report Survey 1997

6. Corruption and Growth in Bangladesh For Bangladesh, a reduction of corruption from its observed level (measured by ICRG corruption index) to a level of, say, Poland would increase the annual average growth rate during 1990-97 by 2.14 percentage points (raising average per capita growth rate to 5.5 percent). The latter growth rates, if extrapolated to 1990-2004, would yield a per capita income about 1/3 above the current level. Source: Extrapolated based on Rahman, Aminur, et al, Estimating the Effects of Corruption: Implications for Bangladesh, PRWP #2479, World Bank, 2000

7. The direction of causality … Growth causes governance to improve ... … and better governance causes growth • Using measures of rule of law, bureaucratic quality and corruption, Chong and Calderon (2000) found significant causality from good governance to growth and vice versa – i.e. “good governance” both contributes to and results from strong economic performance • Other studies have dealt with the potential for reverse causation by using exogenous instruments for the governance indicators and concluded that good governance has a significant and strong causal impact on economic performance … • Burkhart and Lewis-Beck (1994) found that while higher per capita incomes foster democracy, democracy in turn does not foster higher incomes • B. Friedman (2005) argues that higher living standards encourage more open, tolerant and democratic societies … but the debate on causality continues …

8. Reduction in the percentage of population living on less than $2/day due to the increase in the quality of governance (ICRG composite index) Additional annual income growth due to an increase in the quality of governance (ICRG composite index) by 1 point Governance & Growth Good governance is pro-poor Source: Knack, 2002

9. Good Governance has many dimensions Citizens/Firms • Political Accountability • Political competition, broad-based political parties • Transparency & regulation of party financing • Disclosure of parliamentary votes • Civil Society & Media • Freedom of press, FOI • Civil society watchdogs • Report cards, client survey • Effective Public Sector Management • Ethical leadership • Public finance management & procurement • Civil service meritocracy & adequate pay • Service delivery and regulatory agencies in sectors • Formal Oversight Institutions • Independent, effective judiciary • Legislative oversight (PACs, PECs) • Independent oversight institutions (SAI) • Global initiatives: UN, OECD Convention, anti-money laundering • Private Sector Interface • Streamlined regulation • Public-private dialogue • Extractive Industry Transparency • Corporate governance • Collective business associations Citizens/Firms Citizens/Firms • Decentralization and Local Participation • Decentralization with accountability • Community Driven Development (CDD) • Oversight by parent-teacher associations & user groups • Beneficiary participation in projects Outcomes: Services, Regulations Citizens/Firms

10. The Bank operations focus only on some Citizens/Firms • Political Accountability • Political competition, broad-based political parties • Transparency & regulation of party financing • Disclosure of parliamentary votes • Civil Society & Media • Freedom of press • Freedom of information • Civil society watchdogs • Public hearings of draft laws • Report cards, client surveys • Participatory country diagnostic surveys • Effective Public Sector Management • Ethical leadership • Public finance management • Civil service administration • Sector management: • Service delivery • Regulation • Formal Oversight Institutions • Independent,effective judiciary • Legislative oversight (PACs, PECs) • Independent oversight institutions (SAI) • Global initiatives: UN, OECD Convention, anti-money laundering Citizens/Firms • Private Sector Interface • Streamlined regulation • Public-private dialogue • Break-up of monopolies • ICA/Doing buisness • Extractive industries • Corporate governance • Collective business associations Citizens/Firms • Local Participation & Community Empowerment • Decentralization with accountability • Community Driven Development (CDD) • Oversight by parent-teacher associations & user groups • Beneficiary participation in projects Outcomes: Services, Regulations, Corruption Primary focus of WB operations in governance Citizens/Firms

11. Management of Public Finances Tax/Customs Administration Budget Formulation Public sector accounting Budget Execution Integrated FMIS Cash/Treasury Mgmt Procurement Auditing Internal Controls Reporting Public Financial Management Raising Revenues Allocating Revenues Using Revenues

12. Recruitment Promotion Transfers Career management Training Internal Restructuring Corporatization Executive Agencies Outsourcing Privatization Administrative and Civil Service Reform Personnel Management Organizational Design

13. Governance and Corruption Not the same thing! Governance The manner in which theState acquires and exercises its authority to provide public goods and services Corruption Usingpublicoffice for privategain • Corruptionis an outcome– a consequence of weak or bad governance • Poor delivery of services and weak investment climate are other outcomes of bad governance

14. Corruption poses three risks Development Effectiveness Risk That corruption will undermine the impact of development efforts in general and in Bank-supported projects Fiduciary Risk Reputational Risk That Bank lending in countries with corrupt leaders will tarnish the Bank’s reputation That Bank resources will be misappropriated and in some cases loans may not be repaid

15. Administrative Corruption: Private payments and other benefits to public officials in connection with the implementation of government policy and regulations Nepotism & Patronage: Favoritism shown to narrowly targeted interests by those in power such as granting favors, giving contracts or making appointments to office in return for political support State Capture: Influence of powerful economic interests in the public and private sectors in the formation of laws, regulations, policies through illegal provision of private benefits for public officials Corruption

16. Poor Governance Lack of Transparency Monopoly Power Wide Discretion Weak Voice & Accountability Inefficiency Corruption

17. When Governance Breaks Down . . . State Capture Citizens/Firms • Political Actors & Institutions • Political Parties • Competition, transparency Patronage & Nepotism Executive-Central Govt • Civil Society & Private Sector • Civil Society Watchdogs • Media • Business Associations • Formal Oversight Institutions • Parliament • Judiciary • Oversight institutions Cross-cutting Control Agencies (Finance, HR) Citizens/Firms Citizens/Firms Administrative Corruption Service Delivery & Regulatory Agencies Outcomes: Services, Regulations, Corruption Subnational Govt & Communities Citizens/Firms

18. Improving GovernanceAn Overall Operational Approach • Unbundle governance – What are the specific governance problems of concern?(Diagnostics) • Corruption? If so, where is it concentrated? Health? Education? Financial sector? Procurement? Grand corruption and capture? Administrative corruption? • Poor delivery of public services? If so, which one? • Insufficient private investment? (Integrating Governance into the CAS: http://www1.worldbank.org/publicsector/anticorrupt/documents/items of special interest) • Analyze underlying dynamics – What are the specific drivers of poor outcomes? (Political Economy/Institutional Analysis) • Powerful interests purchasing state policy for private interest • Lack of citizen voice to influence service delivery • Weak checks and balances to constrain arbitrary action • Sequence reforms and donor strategies – How to support drivers of change? (Implementation strategy) • Analyze and support drivers of change • Develop appropriate sequencing of public management and checks & balances • Balance supply side interventions with demand side pressures • Rely on multidonor partnerships, based on mandate & comparative advantage (Managing the Politics of Reform: http://www1.worldbank.org/publicsector/anticorrupt/)

19. Diagnostics: Drilling Down • Diagnosing Governanceas a whole • Assessing the incidence ofparticular forms of corruption:where are the most affected areas? • Evaluating corruption incross cutting government processes, e.g. procurement • Evaluating corruption at thesector level, e.g. education • Assessing risks at the project level

20. http://www.worldbank.org/wbi/governance/pubs/govmatters4.htmlhttp://www.worldbank.org/wbi/governance/pubs/govmatters4.html “Measuring” Quality of Governance and Corruption at the Country Level(Kaufmann-Kraay indices:) • Rule of law • Political stability • Voice and accountability • Government effectiveness • Regulatory quality • Control of corruption

21. Control of Corruption: Cross country Comparisons

22. Governance Indicators: Bangladesh

23. “Measuring” Quality of Governance and Corruption at the Country Level: Other Sources • The Open Budget Index (http://www.openbudgetindex.org/OpenBudgetIndex2006.pdf) • Global Integrity Index (http://www.globalintegrity.org/2004/scores.aspx?cc=id&act=scores)

25. Forms of Corruption: Assessing State Capture Proportion of firms affected by capture of … 30 Parliamentary Votes 25 Presidential Admin. Decrees Civil Court Decrees 20 15 10 5 Hungary Estonia Russia Ukraine

26. Forms of Corruption: Administrative Corruption Service Delivery: Composition of Total Bribes Paid by Households in Cambodia

27. Enterprises Type of License/Service/”Favor” Average fee required admitting need to pay (1996) “unofficially” Enterprise registration $176 66% Each visit by fire/health inspector $42 81% Tax inspector (each regular visit) $87 51% Telephone line installation $894 78% Lease in state space (square ft. per month) $7 66% Export license/registration $123 61% Import license/registration $278 71% Border crossing (lump sum) $211 100% Border crossing (percent of value) 3% 57% Domestic currency loan from bank on 4% 81% preferential terms (percent of value) Hard currency loan on preferential 4% 85% terms (percent of value) Forms of Corruption: Administrative Corruption The “Bribe Fee” List: Unofficial Payments by Firms in Ukraine

28. Forms of Corruption: Patronage & the Market for Public Office Public Officials Surveys: Purchasing Public Positions 60 Customs inspectors 48 41 52 Tax inspectors 41 25 43 Natural resource licensers 33 27 39 Judges 32 16 Albania 25 Ordinary police 40 Georgia 23 Latvia 32 Investigators/ prosecutors 33 14 24 Local officials 21 18 Based on 1998 World Bank surveys of public officials in these countries: 218 public officials in Latvia (with Latvia Facts); 350 public officials in Georgia (with GORBI); and 97 public officials in Albania (with ACER). 5 Ministers 10 19 0 20 40 60 80 Percent of public officials believed to have purchased their positions

29. Sector Level: The Value Chain& Corruption Risk Mapping Health Sector -- Delivery of Essential Drugs

30. Health Sector: Delivery of Essential Drugs Tackling decision points vulnerable to corruption Competition & Transparency Registration Tracking systems Selection User surveys Procurement Monitoring based on transparent & uniform standards Distribution Media coverage of drug selection committee meetings Prescription & Disbursement

31. Procurement Planning Preparation Advertisement Pre-qualification Bid Evaluation Award of Contract Public Procurement: Process Flow& Corruption Risk Mapping Stages of the Procurement Process Contract Implementation

32. Lack of competition Lack of Transparency Procurement Planning: Corruption Vulnerabilities Problem Area Possible Distortion Mis-governance • Purposeful delay of procurement to feign “urgency” and go to direct negotiation • Lack of Plans • misallocation of resources • Unclear Criteria for Project Selection Procurement of goods and civil works

33. Lack of competition Lack of Transparency Preparation: Corruption Vulnerabilities Problem Area Possible Distortion Mis-governance • PMO given sole responsibility over the determination of contract packages and preparation of specifications (for civil works) • Contract splitting to allow unqualified bidders to participate or to revert to “simplified” bidding • tailor fitting to favor a preferred bidder • BAC members chosen to stack deck in favor of Head’s choice of contractor • BAC members designated solely by Head of agency Procurement of goods and civil works

34. How can we improve governance and reduce corruption?

35. Enhancing Transparency

36. The Power of Transparency and Monitoring:PETS & Primary Education in Uganda Source: Reinikka and Svensson (2001), Reinikka and Svensson (2003a)

37. Freedom Of Information

38. Media Freedom Why isn’t this man smiling?

39. Strengthening Accountability

40. The Report Card: Improving Public Services in Bangalore Source : PAC

41. Strengthening Demand for Public Financial Accountability Civil Society Oversight; transparent, competitive procurement (Slovakia) Transparent, competitive e-procurement (LAC) Strengthening Supreme Audit Institutions (Hungary) Strengthening Public Accounts Committees of Parliament (Kenya, Ghana, Zambia -- AFR) Procurement oversight by CSOs (Philippines) Accountability, Transparency & Integrity Project (Tanzania) Strengthening Public Accounts Committees of Parliament (India) Participatory Budgeting, Porto Alegra (Brazil) Public Expenditure Tracking & Information Campaigns (Ghana, Madagascar, Mozambique, Peru, Senegal, Tanzania, Zambia)

42. PEFA Indicators: Monitoring Progress Note: The scores range from A (highest) to D (lowest). Shaded patterns indicate a “+” score (e.g. PI-4 is a B+). PI-19 is not scored. This Table is based on PFM Performance Indicator Table in Annex A.

43. Increasing Competition & Reducing Discretion

44. Using ICT:Chile Engaging CSOs:Philippines • All supplier companies register, indicating areas of business (e.g., IT, construction, furniture) • Public agencies submit tenders through internet • Automatic e-mail to all companies in selected area • Online information on name, position of official in-charge • Online information on results: who participated, proposals made, scores received, who won bid, historical record of agency’s purchases and contracts • Legal foundation a mess with over 100 laws and regulations • New omnibus law needed for clarity and predictability in the process • New law in 2003 with determined efforts of reform minded public officials allied with strong and unified advocacy efforts of CSOs to offset entrenched vested interests • For credible enforcement: requirement that all bids and awards committees must have at least one observer from a certified CSO • Extensive training of CSOs now under way Public Procurement

45. Emerging Issues

46. Reducing corruption in high-risk countries: Priorities for action Better understanding and management ofpolitical economyof reforms Tackle governance challenges in sectors (e.g., power, ports, extractive industries) Partnerships and new instruments to support demand-side initiatives: working with civil society, media, parliamentarians Tackling political corruption(e.g. party finance, electoral corruption, etc. ) with partners Develop operational strategies to engage with corrupt leadership in clientelist, captured states

47. Improving Governance SystemsMatching Supply and Demand • Supply-side Strengthen capacities and organizational arrangements – leadership, skills, human resource & financial management systems – embodied in state institutions to deliver public goods and services • Demand-side Strengthen accountability arrangements that enable citizens and firms to hold state institutions and officials responsible for decisions and outcomes: State institutions --elections, political parties, parliaments, judiciaries Non-state institutions -- free press/media, civil society organizations

48. Creating Reform CoalitionsPhilippines: Procurement Reform Transparency and Accountability Network (20+ member groups) Walang Ku-Corrupt Movement (Youth) Procurement Watch: Drew other civil society groups into the advocacy efforts and coordinated the activities PAGBA & AGAP (w/in Gov’t) CBCP (Church) Philippine Contractors Association (private sector – main takeholder) Local chambers of Commerce (Private sector)

49. 1 Entrenched Corruption Networks: The Case on Montesinos in Peru Judiciary Civil Society Legislative Branch International Alberto Fujimori State (Bureaucracy) Political Parties Vladimiro Montesinos Media Military Municipal Government Private Sector Source: “Robust Web of Corruption: Peru’s Intelligence Chief Vladimiro Montesinos,” Kennedy School of Government Case Program, Case C14-04-1722.0, based on research by Professor Luis Moreno Ocampo; Peru: Resource Dependency Network, 2000

50. Radio: The swath & the dagger TV: Raising the ante Reaching Out Print Media: Amplifying the problem Advertising: Creating a ‘brand name’ Using Communications Strategically