The Nexus Between Growth, Poverty and Governance

1
The Development Nexus
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
2
Outline
Governance and growth The direction of
causality?
The critical importance of growth
Why focus on governance and corruption?
What possible policy interventions?
3
The direction of causality
Does growth cause governance to improve? ...
or does better governance causes growth?

• 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

• 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

but the debate on causality continues
4
Theres a strong correlation between governance
and growth and it strengthens in the
longer-term
Corruption-Growth Paradox
Medium Term
Long Term
Source Aart Kraay, World Bank, Feb 14, 2006.
5
Either way, growth is vital for poverty reduction
Average growth rate
10
8
6
4
2
0
-2
EAP
ECA
LAC
MNA
SAR
AFR
-4
1981-1989
1990-1999
2000-2002
Poverty headcount ratio at 1 a day (PPP)
( of population)
80
60
40
20
0
EAP
ECA
LAC
MNA
SAR
AFR
1981-1989
1990-1999
2000-2002
6
Yet, while growth helps reduce poverty
10
Romania
Zambia
Annual change in poverty headcount ()
Indonesia
Burkina Faso
-3
6
Bolivia
Senegal
Bangladesh
Brazil
India
Tunisia
Ghana
Uganda
El Salvador
Vietnam
-10
Source World Bank, Pro Poor Growth in the 1990s.
Country Case studies.


Annual GDP per capita growth, 1990s ()

inequality also matters
Change in poverty in a medium-income country with
high inequity 3 annual growth in income per
capita
0.25
0.2
after 10 years
0.15
Proportion of poor people
0.1
after 10 years
after 30 years
0.05
0
Today
No change in inequality
Inequality brought from
No change in inequality
"very high" to "middle high"
(Gini from .55 to .45)
7
In LAC economic growth has been uneven, yet it
has improved recently
Source GDF WDI database and DECPG for
forecasts.
8
Low growth and persistently high inequality
explain why LAC poverty levels remain high
Approximately 25 of population lives on less
than US2 per day.
9
Where is the development nexus?
10
Policies matter for aid effectiveness and
growthGood policies enable aid to have an impact
on growth
Source Burnside, Dollar, 2004.
11
IDA Performance-based allocations (PBA), FY05-07
IDA performance rating is driven by the
governance CPIA indicators
Source World Bank staff estimates
12
Productivity growth is a key determinant of
long-term sustainable growth but it has been
slow in LAC
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.
13
Institutions matter for growth and an increase
in the quality of institutions also helps reduce
absolute poverty
Reduction in the of population living on less
than 2/day
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).
14
A business climate conducive to growth is crucial
It is costly and slow to do business in LAC
Source World Bank, Doing Business
15
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

16
Good governance can be pro-poor
Source Steve Knack, Social Capital, Growth and
Poverty, in The Role of Social Capital in
Development (Cambridge, UK Cambridge University
Press 2002).
17
Bigger shadow economy lower tax collection
Size of Shadow Economy Tax Leakage
( of GDP)
7.0
6.0
53.4
5.0
32.8
4.0
Tax Leakage ( of GDP)
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.
18
Public procurement can involve significant
leakages
Public construction contracts
Public contracts
19
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.
20
Inequality Corruption is a regressive taxPoor
small firms pay more in bribes
Quite simply, corruption is a development issue
...
Exclusion Corruption restricts access of poor
households to public services

• WBI diagnostics. of gross monthly revenue paid
  in bribes, as reported by managers 2001.

WBI diagnostics. Discouraged Poor Users Due to
Bribes, 2001.
Growth Negative impact on competitiveness
Service deliveryBribery is associated with bad
quality of service
WBI diagnostics. Citizens Responses, Ecuador
2000.
21
In LAC, governance and corruption is perceived to
be an issue in many countries
I------I indicates the margin of error
22
The Bank recognizes the many dimensions of good
governance

• Public Sector Management
• Sound public finance management
• Meritocratic civil service with adequate pay
• Transparent, competitive procurement
• Anticorruption in sectors

• Political Accountability
• Political competition, broad-based political
  parties
• Transparency regulation of party financing
• Disclosure of parliamentary votes

• Institutional Checks Balances
• Independent, effective judiciary
• Legislative oversight (PACs, PECs)
• Independent oversight institutions (SAI)
• Global initiatives UN, OECD Convention,
  anti-money laundering

GOOD GOVERNANCE

• Private Sector Interface
• Effective, streamlined regulation
• Transparent public-private dialogue
• Break-up of monopolies
• Transparency in Extractive Industries
• Corporate governance
• Collective business associations

• 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

• Decentralization and Local Participation
• Decentralization with accountability
• Community Driven Development (CDD)
• Oversight by parent-teacher associations user
  groups
• Beneficiary participation in projects

Primary focus of WB operations in governance
23
At the project level, the Banks governance work
has a strong focus on core public management
reforms
Russia (customs/treasury)
Ukraine (tax admin)
Albania (public admin.)
Kyrgyz Republic (governance reform)
Jordan (civil society)
Cambodia (PE forestry)
Ghana (PE accountability)
Guatemala (diagnostic to action program)
Gabon (water/electricity)
Colombia (diagnostics civil society)
Pakistan (devolution)
Tanzania (PSR)
Ethiopia (decentralization)
24
Examples of project interventions other to
strengthen checks balances
Civil Society Oversight transparent, competitive
procurement (Slovakia)
Strengthening Supreme Audit Institutions
(Hungary)
Transparent, competitive e-procurement (LAC)
Strengthening Public Accounts Committees of
Parliament (Kenya, Ghana, Zambia -- AFR)
Procurement oversight by CSOs (Philippines)
Accountability, Transparency Integrity
Project (Tanzania)
Strengthening Public Accounts Committees of
Parliament (India)
Participatory Budgeting, Puerto Alegra (Brazil)
Public Expenditure Tracking Information
Campaigns (Ghana, Madagascar, Mozambique, Peru,
Senegal, Tanzania, Zambia)
25
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
Transparency
Random inspections
Selection
Tracking systems
Monitoring based on transparent uniform
standards
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)
26
Civil society monitoring of government services
can be an effective means to improve the delivery
of services
Service Provision Bangalore
94
96
100
92
85
90
78
77
80
73
73
73
67
70
60
47
Percent Satisfied
50
42
41
34
34
40
32
32
25
30
16
14
20
9
6
5
4
10
1
n/a
n/a
0
Police
Electricity
City council
Telephones
Water supply
Public buses
Land authority
Public hospitals
Transport authority
Agencies
1994
1999
2003
Source Public Affairs Center, India
27
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.
28
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

29
The Development Nexus
Growth, Poverty, and Governance