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The Private Sector and Improved Governance: Challenging some Myths through Empirics

The Private Sector and Improved Governance: Challenging some Myths through Empirics. Daniel Kaufmann, WBI The World Bank www.worldbank.org/wbi/governance Presentation for Plenary Session: ‘Creating a Competitive Private Sector’, October 9 th , 2001 10 th IACC, Prague, Czech Republic

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The Private Sector and Improved Governance: Challenging some Myths through Empirics

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  1. The Private Sector and Improved Governance: Challenging some Myths through Empirics Daniel Kaufmann, WBI The World Bank www.worldbank.org/wbi/governance Presentation for Plenary Session: ‘Creating a Competitive Private Sector’, October 9th, 2001 10th IACC, Prague, Czech Republic Note: Some of the empirical work presented here is preliminary, and subject to a margin of error. Caution in interpretation is needed, and no precise ranking of countries is warranted.

  2. Challenging some Myths • Firms naturally tend to be competitive… • Investment Climate: wholly government-determined • Government Policies: the obstacle to competition • Governments discriminate against smallest firms • Key Implication, part I: Adopt more laws to deregulate, to demonopolize, and to penalize bribery • Key Implication, part II: Help Smallest firms directly The above 6 contain elements of myths; to be challenged

  3. Challenging the idealized view of the private sector as the ‘Investment Climate-Taker’: Recognizing the Problem of State Capture – The Private sector elite as the Business Climate-Maker? Putin’s statement to Russia’s business leaders, during their meeting in July 2000: “I only want to draw your attention straightaway to the fact that you have yourselves formed this very state, to a large extent through political and quasi-political structures under your control, so perhaps what one should do least of all is blame the mirror.”

  4. Defining State Capture Firms that shape the rules of the game to their advantage through illicit, non-transparent provision of private gains to public officials, including: • private purchase of legislative votes • private purchase of executive decrees • private purchase of court decisions • illicit political party financing Measuring State Capture (BEEPS, WB-EBRD)

  5. Measuring State Capture (BEEPS, late 1999) Only selected countries in transition shown here, for illustration; for details and full data set, see Hellman, Jones and Kaufmann, www.worldbank.org/wbi/governance

  6. ‘Captor’ Firms Get Big Gains – But only in High Capture States

  7. Yet Capture comes at a high Socio-Economic Cost

  8. Transnational Corporate Responsibility Matters as Well: % of firms that 'Purchase' Legislation and Decrees in Transition Economies 12% 10% 8% % firms 'purchase' legislative 6% 4% 2% Domestic With Investor FDI Note: For transition economies, average of 20 countries. Source: Hellman, Jones and Kaufmann, 2000 (www.worldbank.org/wbi/governance)

  9. Towards a Solution:More Political Competition (and Economic Reform) Pace of Econ Reform Political Reforms

  10. Towards a Solution:Collective Action by Firms

  11. [Peru]

  12. Excessive Influence on the State: Main Source of state capture and grand corruption? [Peru] %

  13. Corruption in the Banking Sector(Selected countries -- Source: EIU, early 2001) Systemic corruption Honest Banking

  14. Higher Bribery in Banking where lax Financial Regulations(prelim., GCS 2001) BGD 5.70 r = .79 UKR UKR PRY VNM NGA IDN CZE NIC KOR Bribery in Banking CHN ZWE RUS HND IND VEN GTM ARG LVA TUR URY SLV PHL THA LKA POL PAN SVN ECU CRI BOL COL BRA JOR GRC DOM EGY MEX BGR ROM SVK EST ZAF HUN PER TTO MYS JAM ITA PRT MUS DEU CHE ESP ISR FRA IRL JPN LTU HKG AUT TWN LUX CHL USA BEL NOR AUS GBR SGP NLD CAN SWE NZL FIN DNK ISL 1.00 1.40 6.20 Quality of Financial Regulations

  15. Small and Medium - Sized Firms Are More Affected By Tax/Regulatory Burden(Source: Worldwide Enterprise Survey WBES '99/'00)

  16. The Underground Economy in Transition % Unofficial GDP 50% Ukraine 40% Russia 30% 20% Poland 10% 1990 1991 1992 1993 1994 1995 31 Source: Johnson, Kaufmann and Shleiffer, 1997

  17. Some Implications 1. Segmented Corporate Sector: i) Competitive; ii) Captor; iii) ‘Black-hole’ Banking; and, iv) Underground/Unofficial Economy • Actions to Address Capture: i) Information attack involving competitive private sector; ii) Business Associations; iii) political competition • The ‘forgotten middle’: midsized firms – overall investment/business climate needs to improve • Collective responsibility: FDI as well • The ‘missing link’: Incentives for Private sector involvement in anti-corruption/anti-capture • Reclaiming the Underground Economy: incentives

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