Governace Crossroads : An Empirical Perspective

1. Governace Crossroads:An Empirical Perspective Daniel Kaufmann www.worldbank.org/wbi/governance Background Slides. It draws from the Chapter in WEF’s GCR 2002-2003 (forthcoming)

2. National Governance: A working definition • Governance is the process and institutions by which authority in a country is exercised: (1) S -- the process by which governments are selected, held accountable, monitored, and replaced; (2) E -- the capacity of gov’t to manage resources and provide services efficiently, and to formulate and implement sound policies and regulations; and, (3) R -- the respect for the institutions that govern economic and social interactions among them

3. 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: • Voice and External Accountability • Political Stability and lack of Violence&Terror • Quality Regulatory Framework • Government Effectiveness • Control of Corruption • Rule of Law We measure these six governance components for almost 200 countries: www.worldbank.org/wbi/governance

4. Inputs for Governance indicators Publisher Publication Source Coverage • Standard and Poor’s Country Risk Review Poll 106 developed and developing Countries DRI/McGraw-Hill • Wall Street Journal Central European Survey 27 transition economies Economic Review • EBRD Transition Report Poll 26 transition economies • Economist Intelligence Unit Country Risk Service & Poll 114 developed and developing Country Forecast • Freedom House Freedom in the World Poll 172 developed and developing • Freedom House Nations in Transit Poll 24 transition economies • Political Economic | Asia Intelligence Survey 11 Asian countriesRisk Consultancy • Gallup International 50th Anniversary Survey Survey 44 mostly developed countries • World Ec Forum / CID Global Competitiveness Survey 75 developed and developing • Heritage Foundation/ Economic Freedom Index Poll 154 developed and developing Wall Street Journal • Political Risk Services Intern’tnl Country Risk Guide Poll 140 developed and developing • World Bank World Business Environment Survey 80 developed and developing • World Bank/EBRD BEEPS Survey 22 transition economies • IMD, Lausanne World Competitiveness Yrbk Survey 46 developed and developing • CUD Columbia U. State Failure Poll 100 developed and developing • PriceWtrhseCoopers Opacity Index Poll 60 developed and developing

5. Governance stagnation worldwide? Evidence points to little progress worldwide on key dimensions of governance. This is in contrast with other developmental variables, (such as macro-stability, quality of infrastructure, science education, effective absorption of new technologies, etc.), where there is evidence of progress. This matters, since the developmental and growth ‘dividend’ of good governance is enormous. There is high variation cross-country (even within each region), and thus averages mask selective improvements in governance, from which we also learn.

6. Strides in Macro-Economic Indicators over past 12 years Average Inflation Rate (in log)

7. Quality of Infrastructure -- Improving(Regional Averages of High/Low Quality every year, EOS-WEF firm surveys -- GCR ‘97-’02) High Low

8. Effective Absorption of New Technologies -- Progress(Regional Averages of High/Low Absorption every year, GCR 1997-2002) High Low Note: No data exists for 2000.

9. Control of Corruption: On average, lack of progress Good Control of Corruption Low Source: ICRG, 1984-2002. Averages for shown periods and across countries for OECD & New Industrialized Countries in East Asia; for former socialist Transition Economies, and Emerging Economies.

10. Quality of Rule of Law: Little Progress in recent years High Low Source: ICRG, 1984-2002. Averages for shown periods and across countries for OECD & New Industrialized Countries in East Asia; for former socialist Transition Economies, and Emerging Economies.

11. Extent of Independence of the Judiciary -- stagnant (Regional Averages of Extent/Lack of Independence every year, GCR 1998-2002) Independent Non-Independent

12. Unbundling Corruption – Regional AveragesBased on EOS-WEF firm survey 2002, 80 countries Extent of Bribery for: %

13. 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.

14. Soundness of Banks vs. Control of Corruption Sound Relatively Unsound Source: Executive Opinon Survey 2002; KKZ 2000/01Governance Indicators, http://www.worldbank.org/wbi/governance/govdata2001.htm The Sample of 80 countries has been divided into 3 sub-samples according to their rating in Control of Corruption. The 3 columns therefore represent the average ratings for Soundness of Banks within each sub-sample. The fitted line instead represents the predicted value of Bank Soundness controlling for the effects of GDP per capita and Regulatory Quality through an OLS regression. Each fitted value is computed as the sum of the estimated constant plus the value of Control of Corruption within each group times the estimated coefficient plus the mean values of Regulatory Quality and GDP per capita times their respective estimated coefficients.

15. Transparency, Ethics and GDP Growth: Closely linked Annual GDP Growth (%) Source: Annual GDP growth over 1999-2001 is taken from WDI 2002; GDP is computed in PPP terms. The various transparency / governance variables drawn from Executive Opinion Survey, 2002.

16. Collective Responsibility in Improving Governance -- The Public Sector & Political system not responsible alone for the Governance and investment climate Policies in each country-- Inequality of Influence by segments of private sector in shaping the rules of the game – is key-- ‘State Capture’ as extreme manifestation of undue influence in shaping rules of the game-- Consequently, improving governance requires collective action, w/ major role for private sector

17. High Economic Cost of State Capture (by some firms) for Rest of the Private Sector

18. Also, where Capture/Grand Corruption: Greater Property Rights Insecurity for All Others % Share of Firms with Secure Property Rights 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.

19. Bribery in Procurement and Corporate Ethics – linked High r = -0.88 Low Low High Source: Source: WEF GCR 2002. Firms were asked for their assessment of the extent of bribery within their industry for procurement, as well as their rating of the quality of corporate ethics in their industry.

20. Corruption in Judiciary and Corporate Ethics closely linked High r = -0.88 Low Low High Source: WEF GCR 2002. Firms were asked for their assessment of the extent of bribes in their industry for the judiciary, as well as their rating of the quality of corporate ethics in their industry.

21. Governance: Rethinking Main Tenets (1)Governance: broader & integrated approach needed (2) Power of Data – Quantification, analysis & monitoring (3) Sobering Evidence: Little progress recently (on average) (4) Challenge of Localizing Know-How – Diagnostic tools (5) Promoting Voice, Participation & Transparency is key (6) Imperative of Incentives (& less exhortation/PR) (7) Private-Public Sector Governance Nexus: Institutions of Capture/Elite Influence – not just focus on Public Sector (8)Rethink ‘Investment Climate’: linking corporate-public governance – elite firms and MNCs help shape I-climate (9) Governance in Finance, in Natural Resources, Social (10) Impact on the Ground – Collective Action, Nat’l & Int’l

22. Data for Analysis and informing Policy Advise, not for Precise Rankings Data in this presentation is from aggregate governance indicators, surveys, and expert polls and is subject to a margin of error. Not intended for precise comparative rankings across countries, but to illustrate performance measures to assist in drawing implications for strategy. It does not reflect official views on rankings by the World Bank or its Board of Directors. Errors are responsibility of the author, who benefited in this work from collaboration with World Bank, WEF and others. www.worldbank.org/wbi/governance