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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) 1 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 2 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 3 Inputs for Governance indicators • • • • • • • • • • • • • • • • Publisher Standard and Poor’s DRI/McGraw-Hill Wall Street Journal Publication Country Risk Review Source Coverage Poll 106 developed and developing Countries Central European Survey Economic Review EBRD Transition Report Poll Economist Intelligence Unit Country Risk Service & Poll Country Forecast Freedom House Freedom in the World Poll Freedom House Nations in Transit Poll Political Economic | Asia Intelligence Survey Risk Consultancy Gallup International 50th Anniversary Survey Survey World Ec Forum / CID Global Competitiveness Survey Heritage Foundation/ Economic Freedom Index Poll Wall Street Journal Political Risk Services Intern’tnl Country Risk Guide Poll World Bank World Business Environment Survey World Bank/EBRD BEEPS Survey IMD, Lausanne World Competitiveness Yrbk Survey CUD Columbia U. State Failure Poll PriceWtrhseCoopers Opacity Index Poll 27 transition economies 26 transition economies 114 developed and developing 172 developed and developing 24 transition economies 11 Asian countries 44 mostly developed countries 75 developed and developing 154 developed and developing 140 developed and developing 80 developed and developing 22 transition economies 46 developed and developing 100 developed and developing 60 developed and developing 4 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 5 Strides in Macro-Economic Indicators over past 12 years Average Inflation Rate (in log) 3 2 TRANSITION EMERGING 1 OECD+NIC 0 1984-1988 1989-1993 1994-1998 1999-2001 6 Quality of Infrastructure -- Improving (Regional Averages of High/Low Quality every year, EOS-WEF firm surveys -- GCR ‘97-’02) 6.5 High OECD East Asia Industrialized Middle East Eastern Europe 4 East Asia Developing Latin America Former Soviet Union Low South Asia 1.5 1997 1998 1999 2000 2001 2002 7 Effective Absorption of New Technologies -- Progress (Regional Averages of High/Low Absorption every year, GCR 1997-2002) 6.5 High OECD East Asia Industrialized Middle East East Asia Developing 4.5 South Asia Eastern Europe Latin America Former Soviet Union Low 2.5 1997 Note: No data exists for 2000. 1998 1999 2001 2002 8 Control of Corruption: On average, lack of progress Good Control of Corruption 5.5 OECD+NIC 3.5 TRANSITION EMERGING Low 1.5 1984-1988 1989-1993 1994-1998 1999-2001 end2002 Source: ICRG, 1984-2002. Averages for shown periods and across countries for OECD & New Industrialized 9 Countries in East Asia; for former socialist Transition Economies, and Emerging Economies . Quality of Rule of Law: Little Progress in recent years 6 High OECD+NIC TRANSITION 4 EMERGING Low 2 1984-1988 1989-1993 1994-1998 1999-2001 end2002 Source: ICRG, 1984-2002. Averages for shown periods and across countries for OECD & New Industrialized 10 Countries in East Asia; for former socialist Transition Economies, and Emerging Economies. Extent of Independence of the Judiciary -- stagnant (Regional Averages of Extent/Lack of Independence every year, GCR 1998-2002) 6.5 Independent OECD South Asia Sub Saharan Africa Middle East 4.25 East Asia Industrialized Eastern Europe Former Soviet Union East Asia Developing Latin America NonIndependent 2 1998 1999 2000 2001 2002 11 Unbundling Corruption – Regional Averages Based on EOS-WEF firm survey 2002, 80 countries 70 % Extent of Bribery for: Access Public Utilities Procurement Capture of Laws & Regulations 35 0 Latin America Former Soviet Union Eastern Europe Subsaharan Africa Middle East East Asia South Asia developing OECD East Asia Industrial % of firms rating type of corruption as high/very high 12 The ‘Dividend’ of Good Governance Infant Mortality and Corruption Per Capita Income and Regulatory Burden 90 80 12,000 70 10,000 60 8,000 50 40 6,000 30 20 4,000 10 2,000 0 0 Weak Development Dividend x Average Good Control of Corruption Weak x Average Regulatory Burden Development Dividend Literacy and Rule of Law Good Per Capita Income and Voice and Accountability 100 10000 9000 75 8000 7000 6000 50 5000 4000 25 3000 2000 1000 0 0 Weak x Development Dividend Average Rule of Law Good Weak x Development Dividend Average Strong Voice and Accountability 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. 13 Soundness of Banks vs. Control of Corruption Sound 6.5 Soundness of Banks Simple average OLS 'controlled' estimate 4.5 2.5 Relatively Poor Control of Corruption Unsound Average Control of Corruption Good Control of Corruption 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 14 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. Transparency, Ethics and GDP Growth: Closely linked Annual GDP Growth (%) 5 Transparent Information by Government Effective Parliamentary Oversight Corporate Ethics 3 1 Low Middle High Extent of Transparency 15 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. 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 16 High Economic Cost of State Capture (by some firms) for Rest of the Private Sector 25 20 Firms' 15 Output Growth 10 (3 yrs) 5 0 Low capture economies High capture economies 17 Also, where Capture/Grand Corruption: Greater Property Rights Insecurity for All Others % Share of Firms with Secure Property Rights 70 60 50 40 30 20 10 Low Capture Economies High Capture Economies 18 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. Corruption in Procurement Bribery in Procurement and Corporate Ethics – linked High Low 7 r = -0.88 4 1 2 5 Corporate Ethics 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 their19 rating of the quality of corporate ethics in their industry. 7 Corruption in Judiciary and Corporate Ethics closely linked High Corruption in Judiciary 7 r = -0.88 4 1 Low 2 5 Low Corporate Ethics 7 High Source: WEF GCR 2002. Firms were asked for their assessment of the extent 20 of bribes in their industry for the judiciary, as well as their rating of the quality of corporate ethics in their industry. 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 21 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 22