Transcript Governance: Rethinking Main Tenets

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)
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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
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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
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Inputs for Governance indicators
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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
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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
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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
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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
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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
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Countries in East Asia; for former socialist Transition Economies, and Emerging Economies .
Quality of Rule of Law: Little Progress in recent years
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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
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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
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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
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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.
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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
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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 (%)
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Transparent Information by Government
Effective Parliamentary Oversight
Corporate Ethics
3
1
Low
Middle
High
Extent of Transparency
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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
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High Economic Cost of State Capture (by
some firms) for Rest of the Private Sector
25
20
Firms'
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Output
Growth
10
(3 yrs)
5
0
Low capture
economies
High capture
economies
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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
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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.
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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
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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
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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
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