On Governance

1
On Governance Anti-Corruption Some Beyond
Convention Measurement Issues and Insights from
Empirical Analysis

• Daniel Kaufmann, The World Bank Institute
• www.worldbank.org/wbi/governance
• or, www.govindicators.org
• Background Handout for World Bank GAC Course,
  session on Measurement Issues Washington, DC,
  April 24th, 2007

2
Measurement challenges and lessons

• Beyond myths on measurement challenges faced by
  all governance and investment climate indicators
• Worldwide Governance Indicators (WGI) and Beyond
• Implications on Measurement, ways forward
• Beyond traditional definition of corruption
• Beyond Fighting Corruption by Fighting
  Corruption Good Governance is key
• Beyond facile solutions such as Voluntarism,
  Legalism, Conmissions - instead Politics,
  Systemic Change, Transparency Reforms
• Beyond the World Bank

3
Intro Worldwide Governance Indicators Defining
Governance Broadly

• Governance consists of the traditions and
  institutions by which authority in a country is
  exercised.
• This includes
• the process by which governments are selected,
  monitored and replaced,
• the capacity of the government to effectively
  formulate and implement sound policies, and
• the respect of citizens and the state for the
  institutions that govern economic and social
  interactions among them.

4
Worldwide Governance Indicators

• Six aggregate governance indicators covering 213
  countries over past decade
• Voice and Accountability
• Political Stability/Absence of Violence
• Government Effectiveness
• Regulatory Quality
• Rule of Law
• Control of Corruption
• Based on 31 data sources from 25 organizations,
  capturing views of thousands of informed
  stakeholders
• Widely used by analysts, officials, civil
  society, and researchers to monitory governance
  and study its causes and consequences

5
2006 Update of Worldwide Governance Indicators
Key Features

• Move to annual data
• complement biannual data 1996-2004 with annual
  data for 2003, 2005
• continue reporting data annually in future
• First-time access to data underlying aggregate
  indicators
• hundreds of individual indicators over past
  decade
• one of the largest on-line governance data
  resources at www.govindicators.org

6
Sources of Governance Data

• Cross-Country Surveys of Firms Global
  Competitiveness Survey, World Business
  Environment Survey, World Competitiveness
  Yearbook, BEEPS
• Cross-Country Surveys of Individuals Gallup
  International Voice of the People,
  Latinobarometro, Afrobarometer
• Expert Assessments from Commercial Risk Rating
  Agencies DRI, PRS, EIU, World Markets Online,
  Merchant International Group, IJET Travel
  Consultancy, PERC
• Expert Assessments from NGOs, Think Tanks
  Reporters Without Borders, Heritage Foundation,
  Freedom House, Amnesty International, Bertelsmann
  Foundation, Columbia University, International
  Research and Exchanges Board
• Expert Assessments from Governments,
  Multilaterals World Bank CPIA, EBRD, AFDB, ADB,
  State Dept. Human Rights Report, Trafficking in
  Persons Report

7
Why Aggregate Indicators?

• Basic Premise individual data sources provide a
  noisy signal of broader concept of governance,
  e.g.
• trust in police ? RULE OF LAW
• freedom of press ? VOICE ACCOUNTABILITY
• bureaucratic quality ? GOVT EFFECTIVENESS
• Benefits of Aggregation
• aggregate indicators are more informative about
  broad concepts of governance simple intuition
  of averaging
• less likely to generate extreme outliers
• generate explicit margins of error for country
  scores

8
Levels of Governance Worldwide, 1996-2005

• Estimates of governance for 213 countries
• Standard errors to assess the precision of the
  estimates
• Rule of thumb cross-country differences in
  governance significant if 90 confidence regions
  dont overlap
• Many small differences between countries not
  significant
• But many larger differences are statistically
  significant
• 70 of all comparisons based on aggregate
  indicator...
• but only 30 of all comparisons based on
  individual indicators
• Precision of governance indicators has improved
  over time with more, and better, data sources

9
Control of Corruption Selected Countries, 2005
Good Governance
Margins of Error
Governance Level
Poor Governance
Source for data 'Governance Matters V
Governance Indicators for 1996-2005, D.
Kaufmann, A. Kraay and M. Mastruzzi, September
2006. Note Colors are assigned according to the
following criteria Dark Red, below 10th
percentile rank among all countries in the world
Light Red between 10th and 25th Orange, between
25th and 50th Yellow, between 50th and 75th
Light Green between 75th and 90th Dark Green
above 90th.
10
Three Principles for Using Governance Indicators

• All indicators have measurement error
• rely on variety of data sources
• reduce noise by aggregation
• There are no silver bullets
• subjective/perceptions vs. objective/statutory
• aggregate vs. individual indicators
• regular cross-national monitoring/research vs.
  detailed country diagnostics/country policy
  advice
• complements vs. substitutes
• Links from policy actions to outcomes are complex
• actionable versus action-worthy indicators

11
1. All Indicators Have Measurement Error

• Governance is difficult to observe directly, so
  all available measures are only proxies, e.g.
• Perceptions measures
• Corruption in procurement?
• Confidence in the courts?
• Onerous regulation of entry for a new firm?
• Objective/Statutory measures
• Do regulations stipulate competitive bidding
• Do materials used match materials paid for?
• How many procedures to fire a worker?

12
1. Measurement Error, Contd

• Two types of measurement error in any proxy
• Errors in measuring specific proxies, e.g.
• sampling error in survey
• factual errors in objective measures
• differences of opinion
• Gaps between proxies and broader concepts, e.g.
• corruption in judiciary vs. overall graft
• business entry regulation vs. overall regime
• WGI (unusually!) reports explicit margins of
  error
• Yet margins of error are implicit in objective
  and in individual subjective indicators and
  they are large too

13
2. No Silver Bulletsa) Aggregate vs.
Individual Indicators

• Aggregate indicators have
• broad country coverage (e.g. TI WGI)
• more information on broad concepts of governance
• (potentially) can exhibit explicit margins of
  error
• Individual indicators are
• easier to interpret
• (potentially) identify policy interventions
• Ideally use aggregate indicators that can be
  unbundled
• Multi-source WGI aggregate individual
  indicators
• Single-source World Bank CPIA and Global
  Integrity Index (GII)

14
Three Principles for Using Governance Indicators

• All indicators have measurement error
• rely on variety of data sources
• reduce noise by aggregation
• There are no silver bullets
• subjective/perceptions vs. objective/statutory
• aggregate vs. individual indicators
• regular cross-national monitoring/research vs.
  detailed country diagnostics/country policy
  advice
• complements vs. substitutes
• Links from policy actions to outcomes are complex
• actionable versus action-worthy indicators

15
1. All Indicators Have Measurement Error

• Governance is difficult to observe directly, so
  all available measures are only proxies, e.g.
• Perceptions measures
• Corruption in procurement?
• Confidence in the courts?
• Onerous regulation of entry for a new firm?
• Objective/Statutory measures
• Do regulations stipulate competitive bidding
• Do materials used match materials paid for?
• How many procedures to fire a worker?

16
1. Measurement Error, Contd

• Two types of measurement error in any proxy
• Errors in measuring specific proxies, e.g.
• sampling error in survey
• factual errors in objective measures
• differences of opinion
• Gaps between proxies and broader concepts, e.g.
• corruption in judiciary vs. overall graft
• business entry regulation vs. overall regime
• WGI (unusually!) reports explicit margins of
  error
• Yet margins of error are implicit in objective
  and in individual subjective indicators and
  they are large too

17
2. No Silver Bulletsa) Aggregate vs.
Individual Indicators

• Aggregate indicators have
• broad country coverage (e.g. TI WGI)
• more information on broad concepts of governance
• (potentially) can exhibit explicit margins of
  error
• Individual indicators are
• easier to interpret
• (potentially) identify policy interventions
• Ideally use aggregate indicators that can be
  unbundled
• Multi-source WGI aggregate individual
  indicators
• Single-source World Bank CPIA and Global
  Integrity Index (GII)

18
Aggregate Governance Indicators for Chile 2005
vs. 1998
19
Unbundling WGI Aggregate Indicators Chile
Reporters Without Borders http//www.rsf.org Repo
rters without Borders, headquartered in Paris, is
an international organization dedicated to the
protection of reporters and respect of press
freedom in the world. In 2002, International
Reporters Without Borders published its first
worldwide press freedom index, compiled for 139
countries. The index was drawn up by asking
journalists, researchers, and leagl legal experts
worldwide to answer 50 questions about a whole
range of press freedom violations.
20
2. No Silver Bulletsb) Subjective vs.
Objective Measures

• Perceptions data are very useful even when
  objective measures exist
• But often only type of cross-country data
  available (e.g. corruption)
• Perceptions matter directly!
• Perceptions data add insight over de jure
  measures when such objective measures exist, e.g.
  comparison of
• statutory number days to start a business from
  Doing Business database (de jure)
• firms perceptions of ease of business entry from
  Global Competitiveness Survey (de facto)
• two are weakly correlated in developing countries
• prevalence of corruption explains much of gap
  between the two

21
Subjective and Objective Measures of Ease of
Business Entry OECD/NIC Sample
High
r 0.51
Low
22
Subjective and Objective Measures of Ease of
Business Entry Developing Country Sample
High
r 0.24
Low
23
2. No Silver Bulletsb) Subjective vs.
Objective Measures, contd

• Objective indicators can be very specific, but
  interpretation can be ambiguous and imprecise
• parliamentary vs. presidential system may matter
  for outcomes, but not a governance indicator
  per se
• does an anti-corruption commission exist?
• prosecutions for bribery?
• Perceptions data need not be vague or imprecise
• do you think corruption is a problem, yes or
  no? vs.
• what percent of the total contract value do
  firms like yours typically have to pay in bribes
  to secure procurement contracts?
• False dichotomy between subjective and objective
  measures not helpful

24
Corruption Control and Prosecutions for Bribery
negatively correlated
Best
r -0.16
Worst
Worst
Best (least)
Sources Worldwide Governance Indicators and
Seventh United Nations Survey on Crime Trends and
the Operations of Criminal Justice Systems, 2000.
Axis report percentile ranks ranging from 0
(worst) to 100 (best). See Lambsdorff 2006
25
No Silver Bulletsc) Timely Monitoring vs.
In-Depth Evaluation

• Worldwide benchmarking, regular monitoring and
  cross-country research
• aggregate (and some individual) governance
  indicators
• In-depth evaluation of particular country based
  on many potential instruments and techniques,
  e.g.
• PEFA, OECD Procurement Indicators
• Country Governance A-C (GAC) Diagnostics
• comparing inputs and outputs, e.g.
  infrastructure in Italy, roads in Indonesia
• Complementarity between two types of indicators
• e.g. Kenya governance assessment

26
3. Links from Policy Interventions to Governance
Outcomes are Complex

• Objective and easy-to-measure indicators may
  not matter most, e.g.
• existence of anticorruption commission?
• turnover of civil servants?
• proportion of population incarcerated?
• Risk of confusing reform reality and reform
  illusion
• Across countries, priority actions and their
  impact will differ crucial to measure
  outcomes as well
• Thus, measure BOTH i) action-worthy
  indicators, and, ii) outcome indicators it
  means asking firms, citizens and experts

27
Complex Links, ContdLeading GMR Actionable
Indicators

• Global Integrity Index 2006
• 43 countries (15 with one previous observation)
• 290 indicators of existence and effectiveness
• OECD-DAC Procurement Indicators
• very detailed assessment of laws/practices
• 5 pilots done, public access limited
• PEFA Indicators
• 28 indicators of public financial management
• 31 countries done, 47 in progress/planning,
  public access limited
• very limited panel dimension
• Open Budget Initiative
• 122 indicators of budget transparency
• 59 countries, single cross-section

28
Ten Implications on Governance Measurement

• caution in use of indicators due to margins of
  error
• aggregate indicators reduce margins of error
• but disaggregated indicators are also needed
• need multiplicity of indicators, different
  methods approaches, complement and combine
• false divide between subjective objective
  indicators
• actionable vs. action-worthy indicators
• action-worthy vs. outcome indicators
• match indicator/measurement tool with objective
  in-depth, in-country GAC diagnostics are
  important
• transparent disclosure and rigorous scrutiny
• realism about what it takes to deliver new
  indicators

29
On defining Corruption some pitfalls

• Traditional definition of corruption
  Abuse of public office for
  private gain
• 3 Problems i) interpreted in terms of legality
  of act (illegal corrupt legal non-corrupt?)
  ii) onus is on the
  public official (asymmetry), and,
• iii) measurement bias towards petty corruption
• Alternative Privatization of public policy
  (e.g. undue distortive influence by
  private interests on public decisions, on
  granting monopoly powers)
• This implies that some actions may be legal,
  strictly speaking, but lack in legitimacy (and
  inconsistent with ethics standard ) can
  be seen as corrupt
• These legal forms of corruption can be measured

30
Beyond Bureaucratic Corruption Unbundling
Share of Firms Reporting High Bribery
Bribery in
Source EOS firm survey, WEF2006 126
countries.
31
State Capture, Undue Influence Political
Funding, Report of Firms, 2006
Share of Firms Report Poor Governance
Source EOS firm survey, WEF2006 126
countries.
32
Corporate Corruption, unbundled, 2004
Firms report corruption type (1-4)
Source Authors calculations based on EOS 2004.
33
Capture by Corporates Impairs Competitive Growth
Based on survey of transition economies, 2000
34
Fighting Capture Economic Reform, Political
Competition Civil Liberties Matter
Economic Reforms
Political/Civil Liberties Reforms
35
Freedom of the Press is associated with better
Control of Corruption ( civil liberties more
generally is associated with better performance
of World Bank-funded projects see WBER article
1997)
Good
1.5-
1.0-
0.5-
Control of Corruption
0-
-0.5-
-1.0-
__________________________________________________
_______________
-1.5-
Not Free of Partially Free
Free
Press Freedom Status
Source for control of corruption 'Governance
Matters V Governance Indicators for 1996-2005,
D. Kaufmann, A. Kraay and M. Mastruzzi, September
2006 (http//www.govindicators.org/). Source for
Press Freedom 2006 Freedom Houses Press Freedom
Report. Terciles divided according to Press
Freedom ratings (190 countries total). Free 0-30
(69) Partly Free 31-60 (54) Not Free 61-100
(67).
36
Press Freedom in the World, 1995 vs. 2004
Stagnant?
countries in 1995
countries in 2004
Source Freedom House. Y axis measures percentage
of countries in the region with free press
(rating of 30 or below), partly free (ratings
between 30 and 60) and not free (rating above 60).
37
Deficient Procurement Systems Linked to Frequent
Bribing by Firms
80-
70-
60-
50-
Share of Firms Bribing
40-
30-
20-
10-
__________________________________________________
_______________
0-
Favoritism in Procurement
Level Playing Field
Favoritism in Public Procurement and Policies
Source EOS2006. Questions When firms like yours
do business with the government, how much of the
contract value must they offer in additional
payments to secure the contract?. Question
When deciding upon policies and contracts,
government officials favor well connected firms /
are neutral.
38
Responsibility of the Private Sector
Multinationals on Anti-Corruption ( of Firms
Reporting Procurement Bribery, 2006)
70-
60-
50-
40-
30-
20-
__________________________________________________
_______________
10-
Multinational in OECD, HQ in another OECD
Multinational operating outside OECD, HQ in OECD
Domestic Firms in NON OECD Countries (comparable)
Location of Firm
Source EOS2006. Questions When firms like yours
do business with the government, how much of the
contract value must they offer in additional
payments to secure the contract?. Y-axis shows
percentage of firms who admitted paying bribes.
Last bar excludes small with less than 50
employees.
39
An Effective Parliament does Matter for
Controlling Corruption, 2006
Good
1.5-
1.0-
0.5-
Control of Corruption
0-
-0.5-
-1.0-
__________________________________________________
_______________
-1.5-
Ineffective or Partially Effective
Effective
Parliamentary Effectiveness
Source for control of corruption 'Governance
Matters V Governance Indicators for 1996-2005,
D. Kaufmann, A. Kraay and M. Mastruzzi, September
2006 (http//www.govindicators.org/). Source for
Parliamentary Effectiveness 2006 EOS. Terciles
divided evenly according to Parliament
Effectiveness ratings (125 countries total).
40
Transparency Matters for Controlling Corruption
Good
Sources Governance Matters IV by KKM (2005) and
Transparenting transparency by BK (2005). N. of
countries 190
41
300 Development Dividend from Good Governance
30,000-
3,000-
__________________________________________________
_______________
300-
Low Corruption Control
High Corruption Control
Medium Corruption Control
Data Source for calculations KK 2004. Y-axis
measures predicted GDP per capita on the basis of
Instrumental Variable (IV) results for each of
the 3 categories. Estimations based on various
authors studies, including Kaufmann and Kraay.
42
Corruption associated with soundness of financial
sector
Low
Source Global Competitiveness Survey, 2001, KK
Governance Indicators
43
Good Governance associated Countrys
Competitiveness
High
r 0.90
Low
Low
High
Sources GCI drawn from EOS firm survey, WEF 2005
117 countries Control of Corruption from
Kaufmann, Kraay and Mastruzzi, Governance
Matters IV Governance Indicators for 1996-2004.
44
Countries can Improve in the Short Term

• On average worldwide, not much of an improvement
  on governance and corruption control over the
  past decade
• But significant improvement in a number of
  countries Eastern Europe, some in Africa, etc.,
  challenging pessimismit is possible

45
Governance Indicators for Madagascar, 1998-2005
Source for data 'Governance Matters V
Governance Indicators for 1996-2005, by D.
Kaufmann, A.Kraay and M. Mastruzzi, September
2006 - www.govindicators.org. Colors are assigned
according to the following criteria Dark Red
country is in the bottom 10th percentile rank
(governance crisis) Light Red between 10th
and 25th percentile rank Orange between 25th
and 50th percentile rank Yellow, between 50th
and 75th Light Green between 75th and 90th
percentile rank and Dark Green between 90th and
100th percentile (exemplary governance).
Estimates subject to margins of error.
46
In Sum some questions to ponder

• Anticorruption ought to be increasingly seen
  through a broader good governance lens
• -- key issue is the respective roles of
  governments, civil society, donors, and privates
• -- Voice, civil liberties, free press all
  important for A-C
• Government, Donor Private Initiatives are key
  for good governance, but how to move beyond easy
  picks (e.g. redrafts of laws, codes, commissions)
  to the more difficult and often under-emphasized
  issues of
• i) Political Finance Reform
• ii) Financial Sector (incl. equity markets)
  Deregulation
• iii) Transparency (incl. eprocurement) Media
  Reforms (IT)
• iv) Raising the cost to the briber

47
Basic Scorecard 10 Transparency Reform Components

1. Public Disclosure of Assets Incomes of
   Candidates, Public Officials, Politicians,
   Legislators - dependents
2. Public Disclosure of Political Campaign
   contributions by individuals and firms, and of
   campaign expenditures
3. Public Disclosure of Parliamentary Votes, w/out
   exceptions
4. Effective Implementation of Conflict of Interest
   Laws, separating business, politics, legislation,
   government
5. Publicly blacklisting firms bribing in public
   procurement
6. Effective Implementation of Freedom of
   Information Law, with easy access to all to
   government information
7. Fiscal/Financial transparency central/local
   budgetsROSC, EITI
8. Eprocurement transparency (web) and competition
9. Media Freedoms Media Development
10. Country Diagnostic ( Scorecard) on Transparency
    Governance

48
Governance Has Improved in Some Groupse.g.
Pull Effect of EU Accession
High
Low
Source for data http//www.worldbank.org/wbi/gove
rnance/govdata/. EU EE Accessed Countries Czech
Republic, Estonia, Hungary, Latvia, Lithuania,
Poland, Slovak Republic, and Slovenia.
49
Power of Data, Transparency and Citizen Oversight
Tracking Education spending in Uganda
equiv. US per student
3.5
3.0
Public info campaign
2.5
2.0
1.5
1.0
0.5
0.0
1990
1991
1993
1994
1995
1999
Intended grant
Actual grant received by primary school (means)
Source Uganda Public Expenditure Tracking Surveys
50
A Governance Framework to Fight Corruption
Transparency as cross-cutting theme
Citizens/Firms/Banks

• Political Accountability
• Political competition
• Transparency regulation of party financing
• Asset and income declarations public

• Financial Sector
• Independent Central Bank
• AM Laundering
• Social Security Fund
• Capital Mks Authority

• Executive
• Professionalized civil service
• E-government
• Public finance
• Transparent and competitive procurement
• Prequalification and blacklisting
• Independent Regulatory agencies in sectors
• Sectorial Ministries

• Independent Oversight Institutions
• Judiciary
• Parliament oversight
• Supreme Audit Institution
• Global initiatives UN Convention, African
  Convention

C/F/B

• Private Sector Interface
• Corporate governance
• Streamlined regulation
• Competitive investment climate
• Privatization of SOEs
• Transparency in Extractive Industries and
  Multinationals

Metrics for Monitoring and Policy
Donor Accountability

• Civil Society
• Media

Citizens/Firms/Banks
51
Data for Analysis and Informing Policy Advice,
Not for Precise Rankings

• Any data on Governance, Institutions, and
  Investment Climate is subject to a margin of
  error. Not intended for precise country
  rankings, but to highlight relative strengths and
  weaknesses and draw analytical and policy
  lessons. Indicators do not necessarily reflect
  official views on rankings by the World Bank or
  its Board of Directors. WGI not used for WB
  policy. Errors are responsibility of the authors.
  Much of the work presented here is the result of
  joint research with Aart Kraay, Massimo
  Mastruzzi, Francesca Recanatini and Joel Hellman.
  
• www.govindicators.org