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 indicatorsPublisher 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 countries

Risk 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

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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

0

1

2

3

1984-1988 1989-1993 1994-1998 1999-2001

TRANSITION

EMERGING

OECD+NIC

Strides in Macro-Economic Indicators over past 12 years

Average Inflation Rate (in log)

7

1.5

4

6.5

1997 1998 1999 2000 2001 2002

OECD

East AsiaIndustrialized

Middle East

EasternEurope

East AsiaDeveloping

Latin America

Former SovietUnion

South Asia

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

Low

High

8

2.5

4.5

6.5

1997 1998 1999 2001 2002

OECD

East AsiaIndustrialized

Middle East

East AsiaDeveloping

South Asia

EasternEurope

Latin America

Former SovietUnion

Effective Absorption of New Technologies -- Progress(Regional Averages of High/Low Absorption every year, GCR 1997-2002)

Note: No data exists for 2000.

Low

High

9

1.5

3.5

5.5

1984-1988 1989-1993 1994-1998 1999-2001 end2002

OECD+NIC

TRANSITION

EMERGING

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.

Control of Corruption: On average, lack of progress

Good Controlof Corruption

Low

10

2

4

6

1984-1988 1989-1993 1994-1998 1999-2001 end2002

OECD+NIC

TRANSITION

EMERGING

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.

Quality of Rule of Law: Little Progress in recent years

High

Low

11

2

4.25

6.5

1998 1999 2000 2001 2002

OECD

South Asia

Sub SaharanAfrica

Middle East

East AsiaIndustrialized

EasternEurope

Former SovietUnion

East AsiaDeveloping

Latin America

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

Non-Independent

Independent

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Unbundling Corruption – Regional AveragesBased on EOS-WEF firm survey 2002, 80 countries

0

35

70

LatinAmerica

FormerSovietUnion

EasternEurope

Sub-saharanAfrica

Middle East East Asiadeveloping

South Asia OECD East AsiaIndustrial

% of firms rating type of corruption as high/very high

Access Public UtilitiesProcurementCapture of Laws & Regulations

Extent of Bribery for:

%

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The ‘Dividend’ of Good GovernanceInfant Mortality and Corruption

0

10

20

30

40

50

60

70

80

90

Weak Average Good

Control of Corruption x Development Dividend

0

2,000

4,000

6,000

8,000

10,000

12,000

Weak Average Good

Regulatory Burdenx Development Dividend

Per Capita Income and Regulatory Burden

Literacy and Rule of Law

0

25

50

75

100

Weak Average Good

Rule of Law xDevelopment

Dividend

Per Capita Income and

Voice and Accountability

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Weak Average Strong

Voice and Accountabilityx Development

Dividend

Note: The bars depict the simple correlation between good governance and development outcomes. The line depicts thepredicted value when taking into account the causality effects (“Development Dividend”) from improved governance to betterdevelopment outcomes. For data and methodological details visit http://www.worldbank.org/wbi/governance.

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Soundness of Banks vs. Control of Corruption

2.5

4.5

6.5

Poor Control of Corruption Average Control ofCorruption

Good Control of Corruption

Sou

ndne

ss o

f Ban

ks

Simple average

OLS 'controlled' estimate

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.

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1

3

5

Low Middle High

Extent of Transparency

Transparent Information by Government

Effective Parliamentary Oversight

Corporate Ethics

Annual GDP Growth (%)

Transparency, Ethics and GDP Growth: Closely linked

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.

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-- 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

Collective Responsibility in Improving Governance

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

0

5

10

15

20

25

Firms' Output Growth (3 yrs)

Low captureeconomies

High captureeconomies

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Also, where Capture/Grand Corruption: Greater Property Rights Insecurity for All Others

10

20

30

40

50

60

70

Low Capture Economies High Capture Economies

% 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.

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Bribery in Procurement and Corporate Ethics – linked

1

4

7

2 5 7

Corporate Ethics

Cor

rup

tion

in

Pro

cure

men

t

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.

r = -0.88

Low High

Low

High

20

Corruption in Judiciary and Corporate Ethics closely linked

1

4

7

2 5 7

Corporate Ethics

Cor

rup

tion

in

Ju

dic

iary

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.

r = -0.88

Low High

Low

High

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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  

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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