New Empirical Frontiers, Lessons and Implications for Action Daniel Kaufmann, The World Bank Distanc

1
New Empirical Frontiers, Lessons and
Implications for Action Daniel Kaufmann, The
World BankDistance Learning Event with USAID
and CIPE in session on Prevention as the First
Step in Combating Corruption Reforming Economic
Policies, Institutions and IncentivesBudapest,
March 27th, 2002
2
Governance Challenging Orthodoxies through the
Power of Data

• Good Governance and Democracy are Luxury goods?
• Unreliability/Unavailability of Data in
  governance?
• Impossible to measure high level corruption?
• Improved Governance by Enforcement (vs.
  Incentives)?
• Improved Governance Control of Corruption?
• Governance as a Public Sector Challenge Only?
• Corruption as a Symptom of more fundamentals?
• Administrative Bribery as key Corruption
  challenge?
• These orthodoxies will be answered in the
  negative

3
What is Governance? A working definition for
public 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 be measured,
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

5
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.or
g/wbi/governance/
6
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
7
Traffic Light World MapsRule of Law 2000/01
Source for data http//www.worldbank.org/wbi/gove
rnance/govdata2001.htm Map downloaded from
http//info.worldbank.org/governance/kkz/gov2001ma
p.asp Colors are assigned according to the
following criteria Red, 25 or less rank worse
Orange, between 25 and 50 Yellow, between 50
and 75 Light Green between 75 and 90 Dark
Green above 90
8
Traffic Light World MapsVoice and
Accountability 2000/01
Source for data http//www.worldbank.org/wbi/gove
rnance/govdata2001.htm Map downloaded from
http//info.worldbank.org/governance/kkz/gov2001ma
p.asp Colors are assigned according to the
following criteria Red, 25 or less rank worse
Orange, between 25 and 50 Yellow, between 50
and 75 Light Green between 75 and 90 Dark
Green above 90
9
Traffic Light World Maps Control of Corruption
2000/01
Source for data http//www.worldbank.org/wbi/gove
rnance/govdata2001.htm Map downloaded from
http//info.worldbank.org/governance/kkz/gov2001ma
p.asp Colors are assigned according to the
following criteria Red, 25 or less rank worse
Orange, between 25 and 50 Yellow, between 50
and 75 Light Green between 75 and 90 Dark
Green above 90
10
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/governa
nce.
11
(No Transcript)
12
Voice, Accountability and Civil Liberties Matter
for Development
Source KKZ 1999
13
Corruption/Absence of Rule of Law Civil
Liberties
High
Corruption and Absence of Rule of Law
Low
Not Free
Partly Free
Free
Civil Liberties
Based on averages of data from 160 countries.
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
Diagnostic Surveys as Input to Action Program
Design and Strategy Illustrations

• 1. In-depth Country Diagnostic surveys of Firms,
  Users and Public Officials identify
  misgovernance, corruption and institutional
  vulnerabilities in each agency
• 2. How costly is corruption in afflicted
  agencies?
• 3. How to Prioritize and design politically
  feasible reforms? Support Strategies?
• 4. Capacity Building and Institutional
  Development

16
Lower Income Households Pay Disproportionally
Bribe/Total Income ratio ( A Latin American
Country )
17
The Bribe Fee List Unofficial Payments by
Enterprises for Official Licenses and Services,
Ukraine and Russia 1996
Average "unofficial" fee required for favor
"Unofficial fee" type of license/"favor"
Ukraine
Russia
176
288
Enterprise registration
42
67
Each visit by fire/health inspector
87
250
Tax inspector (each regular visit)
894
1,071
Each phone line installation
Lease in state space (sq. meter per month)
7
26
Each export registration/consignment
123
643
Each import registration/consignment
278
133
4
8
Domestic currency loan from bank
(preferential terms)
4
23
Hard currency loan (preferential terms)
18
Citizen Voice Helps Control Bribery in LAC
country
Based on 90 national, departmental, and municipal
agencies covered in the Bolivia Public Officials
Survey.
19
Transparency within Government Agencies Prevents
Purchase of Public Positions
Based on 90 national, departmental, and municipal
agencies covered in the Public Officials Survey.
20
Measuring Governance and Corruption The BEEPS
Data

• Face-to-face survey of over 3,600 firms in 22
  transition countries by World Bank/EBRD
• Questions that unbundle and measure different
  forms of corruption misgovernance
• First direct questions on state capture
• Measurements based on direct experience of
  domestic firms, not external assessments
• Enables link between forms of corruption and
  enterprise performance

21
Comparing Governance Across Countries
22
Assessing Governance within a Country The View
from SMEs in Turkey
23
Assessing the Quality of an Institution Courts
24
(No Transcript)
25
Recognizing the Problem of State Capture

• Vladimir Putins statement to
  Russias business leaders
• 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.

26
The Challenge

• Unbundling the concept of corruption to recognize
  different forms
• Developing a systematic understanding of the
  origins of persistence of state capture
• Using empirical data to measure and compare state
  capture across countries
• Quantifying the private gains and social costs of
  state capture

27
The Myth that Bribery Pays
28
Why State Capture?

• Corruption is driven by more than just extortion
  by the state
• Links the problem of corruption and vested
  interests the key obstacles to economic reform
• Recognizes the incentives that drive corruption
  on both sides of the transaction
• Distinction between capture and lobbying
• The degree of transparency, competition formal
  structure of the paths through which business
  tries to influence and shape the rules of the game

29
Who Captures?

• Firms The Oligarchs
• The Military
• Ethnic Groups
• Kleptocratic Politicians
• Who captures whom?

30
Defining and Measuring State Capture

• Elite firms illicitly shape rules of the game to
  their advantage, particularly through
• private purchase of legislative votes
• private purchase of executive decrees
• private purchase of court decisions
• Illicit influence of Central Bank
  regulations/policies
• illicit political party financing

31
An Index of State Capture
32
Measuring State Capture
33
Captor Firms Get Big Gains
34
at an enormous Socio-Economic Cost
35
And at a high cost on Property rights protection
to non-captor firms
Share of Firms with Secure Property Rights
36
Do Foreign Investors Behave Better?

• FDI is supposed to import better standards of
  governance
• Survey allows us to compare how different types
  of firms behave
• Domestic firms no foreign ownership
• FDI Foreign HQ firms with foreign ownership
  with headquarters abroad (ex. Multinationals)
• FDI Local HQ firms with foreign ownership with
  headquarters in local country (ex. JVs, minority
  stakes)

37
Do Foreign Firms bring Good Governance?
38
Multinationals Prefer Kickbacks
39
Towards a SolutionMore Political Competition
Pace of Econ Reform
Political Reforms
40
Towards a Solution Collective Action by Firms
41
(No Transcript)
42
(No Transcript)
43
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
44
Strategic Implications for Debate

• Prioritized, Differentiated Comprehensiveness
• Governance Indicators as strategic input, for
  Monitoring, for lessons from failures and
  successes
• Need to complement with in-depth country
  Diagnostic
• Emphasize role of Incentives
• Addressing challenge of State Capture (not just
  govt)
• Upgrade role of private/business sector /
  associations
• Citizen Voice and Transparency as key
  developmental variables -- Collective Action
  Power of Data

Webtool access to data, charts, analysis and
methods http//www.worldbank.org/wbi/governance/

45
Some Conclusions on State Capture

• State capture redistributes rents to a small
  share of firms at a high social cost
• In captured states, firms buy public goods on a
  la carte basis affecting how they are provided to
  society at large
• FDI can be part of the problem the
  self-selection issue
• Uprooting capture requires fundamental political
  reforms
• Visit website www.worldbank.org/wbi/governance
• See papers Seize the State, Seize the Day Far
  From Home (on FDI) Measuring State Capture,
  others.