Governance, Corruption and Poverty: Analytical and Empirical approaches

1. Governance, Corruption and Poverty: Analytical and Empirical approaches Daniel Kaufmann and colleagues The World Bank Institute http://www.worldbank.org/wbi/governance Handout for session on Governance and Poverty Reduction In Learning Activity "Attacking Poverty for APP Family" January 28 and 29, 2002, Washington D.C.

2. Governance: 9 Orthodoxies + 1 Challenge • Poverty is key cause of misgovernance and corruption • Ambiguous evidence on whether misgovernance affects poverty and under-development • Poverty of Data on Governance: cannot use empirics • Unclear evidence on links between Governance and Public Expenditures / Public Service Delivery • Misgovernance = Corruption • Focus: Bureaucratic bribery in developing countries • Government ‘leads’ Anti-Corruption (A-C) program • Paramount: A-C Agencies/Commissions/Ethics Office • High Pay in public service for combating corruption • Challenge: The 9 orthodoxies above contain myths

3. What is Governance?:A working definition for governance • 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 governments to manage resources efficiently, and to formulate, implement, and enforce sound policies and regulations; and, (3) the respect for the institutions that govern economic and social interactions among them

4. Operationalizing Governance:Unbundling its Definition into Components that can bemeasured, analyzed, and worked on Each of the 3 main components of Governance Definition is unbundled into 2 subcomponents: • Voice and Accountability • Political Stability and lack of Violence • Quality Regulatory Framework • Government Effectiveness • Control of Corruption • Rule of Law For access to data on these indicators:http://www.worldbank.org/wbi/governance/pubs/govmatters2001.htm

5. Lower Investment and Growth Unsound economic/institutional policies due to vested interests Distorted allocation of public expenditures/investments Low human capital accumulation Elite corporate interests capture laws and distort policymaking Absence of rule of law and property rights Governance obstacles to private sector development Governance and Poverty Nexus, I Immediate Causes of Poverty: How Misgovernance and Corruption affects “Immediate” Cause of Poverty Lack of Health and Education • Low human capital accumulation • Lower quality of education and health care Cont…

6. Poor have Smaller share in Growth State capture by elite of government policies and resource allocation Regressiveness of bribery “tax” on small firms and the poor Regressiveness in public expenditures and investments Unequal income distribution Bribery imposes regressive tax and impairs access and quality of basic services for health, education, and justice Political capture by elites of access to particular services Governance and Poverty Nexus, cont. Impaired Access to Public Services

7. Control of Corruption: Aggregate Indicator (selected countries from 155 worldwide, for illustration, based on 1998 research data*) Good Corruption Control Margin of Error Corruption Level GOOD POOR Source: ‘Governance Matters’, PRWP 2196 by Kaufmann, Kraay and Zoido. http://www.worldbank.org/wbi/governance/

8. Application of Rule of Law Varies by Region (based on aggregation of surveys/polls 1997-99*) High Index of Rule of Law Appli- cation Low Index OECD East Middle South Eastern Latin Sub- Former Asia East Asia Europe America Saharan Soviet Africa Union Note: Regional Averages shown for discussion purposes, and hide large intra-regional variation in each case. Thin vertical line reflects estimated margin of error. Source: Kaufmann, Kraay and Zoido-Lobaton (1999). "Aggregating Governance Indicators" and "Governance Matters" PWRP 2195 and 2196. http://www.worldbank.org/wbi/governance

9. Per Capita Income and Infant Mortality and Corruption Regulatory Burden 12,000 90 80 10,000 70 8,000 60 50 6,000 40 4,000 30 20 2,000 10 0 0 Weak Average Good Weak Average Good Development Regulatory Burden Control of Corruption Development x x Dividend Dividend Literacy and Rule of Law Per Capita Income and Voice and Accountability 100 10000 9000 8000 75 7000 6000 50 5000 4000 3000 25 2000 1000 0 0 Weak Average Good Weak Average Strong Development Development Rule of Law x x Voice and Accountability Dividend Dividend The ‘Dividend’ of Good Governance Note : The bars depict the simple correlation between good governance and development outcomes. The line depicts the predicted value when taking into account the causality effects (“Development Dividend”) from improved governance to better development outcomes. For data and methodological details visit http://www.worldbank.org/wbi/governance.

10. Incomes vs. Government Effectiveness

11. Incomes vs. Control of Corruption

12. Voice, Accountability and Civil Liberties Matter for Development Source: KKZ 1999

13. Corruption is associated with absence of Civil Liberties High Corruption Low Not Free Partly Free Free Based on averages of data from 160 countries. Civil Liberties

14. Control of Graft and Freedom of the Press High Control of Graft [kkz] r = .68 Low Low High Freedom of the Press (Freedom House)

15. Salient Features of New Governance Diagnostic Tools • Multi-pronged surveys of: households, firms and public officials [‘triangulation’] • Experiencialquestions(vs. ‘opinions’/generic) • Specially designed and tested closed questions • Conceptual framework: Incentive Structure behind Governance; focus on development • Rigorous technical requirements in implementation • Local Institution Implements, with WB Collaboration • Recognizing Multidimensionality of Governance • Focus on Service Delivery: Input for Action and Change

16. Romania: Disproportionally Negative Impact on the Poor

17. Corruption as a regressive tax on the household(% of income paid in bribes, as reported by all users that requested public services)

18. Corruption as a regressive tax: small firms pay disproportionally in bribes(% of gross monthly revenue paid in bribes)

19. Citizen Voice Improves Accessibility of Public Services to the Poor (Bolivia diagnostic results, 2000) Based on Bolivia Public Officials Survey. The sample of institutions includes 44 national, departmental, and municipal agencies which are a prior anticipated to be accessible to the poor

20. Citizen Voice Helps Control Bribery (Bolivia diagnostic results, 2000) Based on 90 national, departmental, and municipal agencies covered in the Bolivia Public Officials Survey.

21. Transparency within Government Agencies Increases Their Poverty Reduction Impact in Bolivia Based on Bolivia Public Officials Survey. The sample of institutions includes 50 national, departmental, and municipal agencies which are a prior anticipated to have a major impact on poverty reduction.

23. Public Officials’ evaluation of effectiveness and access to the Poor by their public sector agencies [Preliminary results on Governance-Poverty nexus, Bolivia] • Public officials themselves report that only one-half of public services they provide are accessible to the poor • Performance of re-distributive public agencies: Mixed Results; they do not perform better than others in terms of providing access to the poor • Limited public service accessibility to the poor at local level is associated with high bribery in local administration • Bribery in provision of public services reduces accessibility to the poor • Bribery does not increase public service quality • Bribery increases cost of public services

24. ‘Pro-Poor’ Public Officials: Who are they? [Illustrative results from one country diagnostic] Determinants of pro-poverty reduction reporting by public officials (Initial results from multivariate econometric analysis, Bolivia data): • Municipality/Locality plays key role: significant differences across localities • College-educated officials report higher pro-poverty alleviation impact • Public officials in ‘pro-poor’ institutions do not report higher poverty alleviation impact • Public officials in ‘better run’, transparent, less corrupt agencies do report enhanced ‘pro-poor’ impact

25. Lower Public Sector Salaries do not Increase Bribery in Ecuador 15.5% 15% Bribe* = 3MS 12% 8.4% 9% 7.7% Bribe* Bribe* = 6% = 0. 2MS 0. 5MS 3% 0% Monthly Salary Monthly Salary Monthly Salary Less than 3MS Between 3 & 13 MS More than 13 MS * Average bribe to public officials

26. Indonesia (preliminary): Public Sector Corruption in Indonesia Is Not Caused by Low Government Pay(Indonesian Public Official Survey – Very Preliminary Draft) Based on 36 public agencies covered in the Indonesia Public Officials Survey.

27. Indonesia (preliminary): Agencies Providing for Citizen Voice Exhibit Less Bribery(Indonesian Public Official Survey – Very Preliminary Draft) Based on 36 public agencies covered in the Indonesia Public Officials Survey.

28. Indonesia (preliminary): Bribery is More Prevalentin Resource-Rich Public Agencies(Indonesian Public Official Survey – Very Preliminary Draft) Based on 36 public agencies covered in the Indonesia Public Officials Survey.

31. Control of Graft and Freedom of the Press High Control of Graft [kkz] r = .68 Low Low High Freedom of the Press (Freedom House)

32. Understanding the Politics is key to Assess Misgovernace, ‘grand corruption’, and its incidence on socio-economic variables:State Capture Prevails in many countries % 50 % 45 % 40 % 35 % 30 %of Firms affected by state capture % 25 % 20 % 15 % 10 % 5 0 Hungary Estonia Russia Azerbaijan Adverse Impact of ‘Purchases’ of: Parliamentary legislation Decrees Central Bank Influence

33. 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)

34. Enormous Social/Economi costs of state capture: Much lower growth in sales and investment in economy

35. State Capture exists where partial Civil Liberties and slow Economic Reforms Economic Reforms Degree of Civil Liberties in Transition Economies

37. A.Little Political Will Civil Society and Data Power/Diagnostics: Voice/ Accountable Leadership Donor Public Procurement ADRs in the Judiciary Delicensing Process NGO/participatory drive (to improve public service delivery) B. With Political Will Public Procurement and Budgetary Reforms pro-poor Judicial reforms Civil Service Reform Police -- Accountability Collective Action with Civil Society & Private Prioritization: Strategy will differ (illustrative)

38. Who Should take the lead in a National Governance/Anticorruption Program? Percentage of Respondents A-C: Anti-Corruption

39. National Governance: Challenges in Integrating Anti-Corruption Into Institutional Change • A simple Formula synthesizing Governance/Anticorruption: • IG and AC = KI + LE + CA • Improving Governance and Anti-Corruption = • = Knowledge/Info.Data + … • ...+ Leadership (incl. Political) + ... • ... + Collective Action (change)

40. Overall Corruption Over Time (Selected Countries; ICRG index, rescaled 0-10) 10 High corruption Indonesia El Salvador 8 Russia Indonesia 6 Russia 4 El Salvador Poland 2 Poland Low corruption Finland Finland 0 1992 1993 1994 1995 1996 1997 1998 1988-92 7

41. Governance and Poverty: Summing Up • Governance broader concept than corruption • Misgovernance results in poverty through various channels – reduced growth being a key one • Interplay between voice, accountability, rule of law and anti-corruption for attacking poverty is key • Power of Data for analysis, reform formulation, and collective action: i) Cross-Country Indicators & analysis; ii) Regional Surveys, and iii) in-depth country diagnostics. • Focus on varying quality of institutions within each country – enormous variation (e.g. Parliaments) • Misgovernance in extremis: Failed States • Resolute collective action can make a difference, and in 5-10 years – IG = K.I + LE + CA Visit:http://www.worldbank.org/wbi/governance

42. Selected References • Diagnostics: Prem Note No. 7 (early synthesis) • Governance Diagnostic Manual & Methodological Vol. • Chapter 3 of WDR 00/01 on Poverty • Chapter 6 of ‘Quality of Growth’ book • KKZ ‘Governance Matters’ Research & Indicators &web-interactivity:http://www.worldbank.org/wbi/governance/govdata2001.htm • IMF papers on misallocation of pubexp, Y-dist’n, etc. • Governance/A-C Diagnostic Reports (various) • Governance/A-C Participatory Core (Course) Program • Governance, Parliament and PRSP • General website: http://www.worldbank.org/wbi/governance

43. Data Presented for Analysis and informing Policy Advise, not for Precise Rankings The data contained in this presentation originates from a large variety of external sources as well as World Bank surveys and research. Governance data is typically subject to a significant margin of error. The purpose is therefore not to present precise comparative rankings across countries, but instead to illustrate characteristics of governmental and corporate performance in order to assist in drawing implications for action. No ranking of countries is intended in presenting these research-oriented empirical results from these external sources. Further details and data, visit: http://www.worldbank.org/wbi/governance