Transcript The Nexus Between Growth, Poverty and Governance

Di Tella University
Danny Leipziger
Vice President and Head of Network
Poverty Reduction and Economic Management
World Bank
August 8, 2006
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Outline
Governance and growth: The direction of
causality?
The critical importance of growth
Why focus on governance and corruption?
What possible policy interventions?
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Page 1
The direction of causality …
… or does better governance
causes growth?
Does growth cause governance to
improve? ...
 Burkhart and Lewis-Beck (1994) find
that while higher per capita incomes
foster democracy, democracy in turn
does not foster higher incomes
 B. Friedman (2005) argue that higher
living standards encourage more open,
tolerant and democratic societies

Using measures of rule of law, bureaucratic
quality and corruption, Chong and Calderon
(2000) found significant causality from good
governance to growth and vice versa – i.e.
“good governance” both contributes to and
results from strong economic performance

Other studies have dealt with the potential for
reverse causation by using exogenous
instruments for the governance indicators and
concluded that good governance has a
significant and strong causal impact on
economic performance …
… but the debate on causality continues …
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Page 2
There’s a strong correlation between
governance and growth
… and it strengthens in the longer-term
Corruption-Growth Paradox
Medium Term
Long Term
11
0.08
10.5
Per Capita Growth 1993-2003
0.06
Real GDP Per Capita
10
0.04IND
BGD
LKA
0.02NPL
PAK
0
-0.02
y = 0.01x + 0.02
R2 = 0.06
-0.04
9.5
9
8.5
8
India
Pakistan
7.5
Bangladesh
Nepal
-2
-1
Bhutan
y = 0.86x + 8.46
R2 = 0.65
7
6.5
6
-0.06
-3
Sri Lanka
0
1
2
Control of Corruption in 1996
3
-2.5
-1.5
-0.5
0.5
1.5
2.5
Control of Corruption
Source: Aart Kraay, World Bank, Feb 14, 2006.
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Page 3
Either way, growth is vital for poverty
reduction
Average growth rate
10
8
6
4
2
0
-2
-4
EAP
ECA
1981-1989
LAC
MNA
1990-1999
SAR
AFR
2000-2002
Poverty headcount ratio at $1 a day (PPP)
(% of population)
80
60
40
20
0
EAP
ECA
1981-1989
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LAC
MNA
1990-1999
SAR
AFR
2000-2002
Page 4
Annual change in
poverty headcount (%)
Yet, while growth helps reduce poverty …
10
Romania
Zambia
Indonesia
-3
Bolivia
Brazil
Ghana
Burkina Faso
Senegal
6
Bangladesh
India
Tunisia
Uganda
El Salvador
Vietnam
-10
Annual GDP per capita growth, 1990s (%)
Proportion of poor people
… inequality also matters
0.25
Change in poverty in a medium-income country with high inequity:
3% annual growth in income per capita
0.2
after 10 years
0.15
0.1
after 10 years
after 30 years
0.05
0
Today
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Source: World Bank, Pro Poor
Growth in the 1990s. Country
Case studies.
No change in inequality
Inequality brought from
"very high" to "middle high"
(Gini from .55 to .45)
No change in inequality
Page 5
In LAC economic growth has been uneven,
yet it has improved recently …
Real GDP growth in Latin America & Caribbean
10
8
5.9
Percent
6
4
2
0
2006f
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
-4
1970
-2
Source: GDF & WDI database and DECPG for forecasts.
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Page 6
Low growth and persistently high
inequality explain why LAC poverty levels
remain high
Income relative to OECD
Gini coefficient
0.6
60
55
0.4
50
0.2
45
2000
1990
1980
1975
1970
1960
1950
1938
1929
1925
1913
1900
1890
1880
1870
0
40
1950
1960
1970
1980
1990
2000
Approximately 25% of population lives on less than US$2 per day.
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Page 7
Where is the development ‘nexus’?
Policies
Governance
Economic Performance
Institutions
Business
climate
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Page 8
Policies matter for aid effectiveness
and growth
Good policies enable aid to have an impact on
growth
Source: Burnside, Dollar, 2004.
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Page 9
IDA Performance-based allocations (PBA),
FY05-07
IDA PBA (US$ per capita per annum)
20
18
16
IDA performance
rating is driven by
the governance
CPIA indicators
14
12
10
8
6
4
2
0
Low
PBAi 
2003 IDA Performance Rating
( IDA _ rating i ) 2 * Population * (GNI / capitai ) 0.125
 (IDA _ rating )
81
i 1
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High
i
2
* Populationi * (GNI / capitai ) 0.125
Source: World Bank staff estimates

* IDA _ envelope
Page 10
Productivity growth is a key determinant
of long-term sustainable growth
… but it has been slow in LAC
1.5
1
Latin America
OECD
East Asia
0.5
0
-0.5
-1
-1.5
-2
1970–79
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1980–89
Research shows
that over 50
percent of cross
country
differences of
per capita
income levels
and growth rates
is accounted for
by differences in
productivity
growth.
1990–99
Page 11
Institutions matter for growth
Reduction in the % of population
living on less than $2/day
and an increase in the quality of institutions also
helps reduce absolute poverty
24
25
18
20
15
12
10
5
0
increase by 10 increase by 15 increase by 20
points
points
points
Increase in the quality of governance
(ICRG composite index)
Source: Steve Knack, “Social Capital, Growth and Poverty,” in The Role of Social Capital in
Development (Cambridge, UK: Cambridge University Press: 2002).
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Page 12
A business climate conducive to growth
is crucial
It is costly and slow to do business in LAC
Time to Start a Business (in days)
Time to Enforce a Contract (in days)
South Asia
South Asia
OECD HighIncome
OECD HighIncome
LAC
LAC
EAP
EAP
0
10
20
30
40
50
60
70
0
100
200
300
400
500
Source: World Bank, Doing Business
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Page 13
How are “governance” and “corruption”
defined?
Governance is the manner in which the State
acquires and exercises its authority to
provide public goods and services
Corruption is using public office for
private gain
• Corruption is an outcome – a consequence of the failure of
accountability relationships in the governance system
• Poor delivery of services and weak investment climate are
other outcomes of bad governance
• Governance is the door to anticorruption, and the broad
overarching framework for donor engagement
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Page 14
Good governance can be pro-poor
income quintiles
5 (richest)
increase
by 20
points
0.16
4
24
0.22
3
0.21
2
0.21
increase
by 15
points
1
(poorest)
increase
by 10
points
0.33
0
0.1
0.2
0.3
18
0.4
Additional annual income growth due
to an increase in the quality of
governance (ICRG composite index)
by 1 point
12
0
10
20
30
Reduction in the percentage of
population living on less than
$2/day due to the increase in
the quality of governance (ICRG
composite index)
Source: Steve Knack, “Social Capital, Growth and Poverty,” in The Role of Social Capital in
Development (Cambridge, UK: Cambridge University Press: 2002).
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Page 15
Bigger shadow economy … lower tax
collection
Size of Shadow Economy & Tax Leakage
(% of GDP)
Tax Leakage (% of GDP)
7.0
6.0
53.4
5.0
32.8
4.0
3.0
2.0
15.5
1.0
0.0
Low
Medium
High
Size of Shadow Economy
Source: Schneider and Klinglmair (2004); WDI (2005); and Tuan Mihn Le, World Bank estimate.
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Page 16
Public procurement can involve
significant leakages
Extent of Bribes in Public Contracts Procurement
30%
25%
Public construction contracts
Public contracts
20%
15%
10%
5%
0%
Peru
Paraguay
Colombia
Ecuador
Ghana
Sierra
Leone
Source: World Bank Governance and Anti-Corruption Diagnostic Studies, 2000-2003
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Page 17
Public Expenditure Tracking Surveys – An
instrument to assess fiscal leakages



Only 13% of intended
resources reached
schools in Uganda in
1996, 88 % did in 1999.
PETS have been
conducted in 24 countries,
almost exclusively in
health and education;
Coverage of infrastructure
remains limited.
Fiscal leakage figures are
not comparable across
countries, but give
important insights into
overall PFM system.
Source: Chaudhury, N et. al. , 2004.
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Page 18
Quite simply, corruption is a development
issue ...
Exclusion
Inequality
Corruption restricts access of poor households to public
services
Corruption is a regressive tax:
Poor & small firms pay more in bribes
20%
% discouraged users
9
8
7
6
5
4
3
2
1
0
10%
0%
Ecuador
Peru
Small
Medium
Honduras
Low
Large
WBI diagnostics. % of gross monthly revenue paid in bribes, as
reported by managers 2001.
Growth
Negative impact on competitiveness
Bribery is associated with bad
quality of service
Trash collection
High
6
FIN
USA
Public education
SWE DNK
TWN
CHE
NOR
r = 0.90
Public hospitals
License departm ent
4.0
Phone com pany
Construction perm its
Water
Tax collection
Public registry
3.5
National police
Social security
Custom s office
Transit authority police
10
20
30
40
Percent of respondents reported paying any bribes
WBI diagnostics. Citizens’ Responses, Ecuador 2000.
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THA
50
60
QAT
ISR
SVN
KWCYP
T
BHR
CZE
HUN
TUN
SVKZAFGRC
LTU
LVA
JOR
ITA
BWA
CHN IND
POL MUS
EGY
MEX
URY
SLV
COLBGR
GHA
TTO
HRVNAM
BRA
ROM
TUR
JAM PER
TZA
ARG
PAN
IDN RUS
MAR
PHL
DZA
UKR
VNM
Y
UG
MDA
PAK
MKD
NGA VGEO
UGA MLI
EN
KENMOZ
HNDGMB
MNG
GTM BIH
LKA
ALB
BOL
DOM NIC
TJK
EMW
THEICU
TMP MDG
ZWE
BGD
KHM CMR
PRY
BEN
GUY
KGZ
KAZ
AZE
Low
3.0
0
MYS
4
AUS
NLD
CAN
GBR
DEU
JPN
KOR
Pow er com pany
Global Competitiveness Index
Quality of public services:
1=very poor 7=very good
Controlling Corruption is Associated with
Higher Country’s Competitiveness
y = -0.02x + 4.29
R2 = 0.38
r = -0.62
Post office
4.5
High
Income
WBI diagnostics. Discouraged Poor Users Due to Bribes, 2001.
Service delivery
5.0
Medium
Peru
ARE
PRT
MLT
ISL
SGP
NZL
AUT
LUX
CHL IRL
ESPHKG
FRA
BEL
CRI
TCD
2
-2
Low
-1
0
1
Control of Corruption
2
High 3
Sources: GCI is from GCR2005/6 by WEF, Control of Corruption from Kaufmann, Kraay and Mastruzzi, ‘Governance32
Matters
IV: Governance Indicators for 1996-2004’.
Page 19
In LAC, governance and corruption is perceived
to be an issue in many countries
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I------I indicates the margin of error
Page 20
The Bank recognizes the many dimensions of
good governance
Institutional Checks &
Balances
• Independent, effective
judiciary
• Legislative oversight (PACs,
PECs)
• Independent oversight
institutions (SAI)
• Global initiatives: UN, OECD
Convention, anti-money
laundering
Civil Society & Media
•
•
•
•
•
•
Freedom of press
Freedom of information
Civil society watchdogs
Public hearings of draft laws
Report cards, client surveys
Participatory country
diagnostic surveys
Primary focus of WB
operations in governance
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•
•
•
•
Public Sector Management
Sound public finance management
Meritocratic civil service with adequate
pay
Transparent, competitive procurement
Anticorruption in sectors
GOOD
GOVERNANCE
Decentralization and Local Participation
• Decentralization with accountability
• Community Driven Development (CDD)
• Oversight by parent-teacher associations
& user groups
• Beneficiary participation in projects
Political
Accountability
• Political competition,
broad-based political
parties
• Transparency &
regulation of party
financing
• Disclosure of
parliamentary votes
Private Sector
Interface
• Effective, streamlined
regulation
• Transparent publicprivate dialogue
• Break-up of
monopolies
• Transparency in
Extractive Industries
• Corporate governance
• Collective business
associations
Page 21
At the project level, the Bank’s governance
work has a strong focus on core public
management reforms …
Albania
(public admin.)
Russia
Latvia
(customs/treasury)
Ukraine
(inspections)
Kyrgyz Republic
(tax admin)
(governance reform)
Jordan
(civil society)
Guatemala
(diagnostic
to action
program)
Colombia
(diagnostics
& civil society)
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Ghana (PE
accountability)
Gabon
(water/electricity)
Uganda
(education)
Tanzania
(PSR)
Cambodia
(PE; forestry)
Philippines
(procurement)
Indonesia
(local
governance)
Bangladesh
Pakistan (NGOs in
social sectors)
(devolution)
India – Andra Pradesh
Ethiopia
(power; e-gov); Karnataka
(decentralization) (right to info)
Page 22
Examples of project interventions &
other to strengthen checks & balances
Civil Society Oversight;
Transparent,
transparent, competitive
competitive eprocurement
procurement
(LAC) Strengthening Public (Slovakia)
Accounts Committees
of Parliament
Strengthening Supreme
Audit Institutions
(Hungary)
(Kenya, Ghana, Zambia -AFR)
Accountability,
Transparency & Integrity
Project
(Tanzania)
Participatory
Budgeting,
Puerto Alegra
(Brazil)
Procurement
oversight by
CSOs
(Philippines)
Strengthening Public
Accounts Committees of
Parliament
(India)
Public Expenditure Tracking & Information Campaigns
(Ghana, Madagascar, Mozambique, Peru, Senegal, Tanzania, Zambia)
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Page 23
The Bank is also working on identifying
vulnerabilities to corruption at the sector level
Corruption in Pharmaceuticals Sector:
a ‘road map’ of vulnerable points to corruption
Manufacturing
Registration
Random
inspections
Selection
Monitoring
based on
transparent &
uniform
standards
The World Bank
Transparency
Tracking
systems
User
surveys
Procurement
Media
coverage
of drug
selection
committee
meetings
Distribution
Prescription &
Disbursement
Source: Chapter in Ed Campos and Sanjay Pradhan, The Many Faces of Corruption:
Tracking Vulnerabilities at the Sector Level (World Bank, forthcoming)
Page 24
Civil society monitoring of government
services can be an effective means to improve
the delivery of services …
Service Provision: Bangalore
100
94
96
92
85
Percent Satisfied
90
80
73
73
78
73
77
67
70
60
47
50
42
41
34
40
32
32
25
30
16
20
10
34
5
6
4
14
9
n/a
1
n/a
0
Agencies
1994
The World Bank
1999
2003
Source: Public Affairs Center, India
Page 25
Corruption is not just a developing
country problem
Percentage of firms that
pay public procurement
kickbacks by country of
origin of foreign direct
investment
Source: “Are Foreign Investors and Multinationals Engaging in Corrupt Practices in Transition Economies?” by Kaufmann, Hellman, Jones, in Transition, May-June 2000.
Note: Survey Question was “How often nowadays do firms like yours need to make extra, unofficial payments to public officials to gain government contracts?” Firms
responding “sometimes” or “more frequently” were classified as paying kickbacks. These figures are subject to significant margins of error and thus should be regarded as
approximate.
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Page 26
What are the policy interventions at the
international level?
Recent initiatives to curb transnational
corruption

OECD Convention on Combating Bribery of Foreign
Public Officials (1997)

UN Convention Against Corruption Treaty (2003) –
124 countries signed

World Bank debarrs corrupt firms – over 330 firms
and individuals were blacklisted since 1999
 Extractive Industries Transparency Initiative (EITI)
(2002) – 8 countries in implementation and 12 more
have endorsed it
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Page 27
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