Governace Crossroads: An Empirical Perspective

1
Governace Crossroads An Empirical Perspective

• Daniel Kaufmann
• www.worldbank.org/wbi/governance
• Background Slides. It draws from the Chapter in
  WEFs GCR 2002-2003 (forthcoming)

2
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 govt 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

3
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 ViolenceTerror
• 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/gover
nance
4
Inputs for Governance indicators

• Publisher Publication Source Coverage
• Standard and Poors Country Risk Review Poll 106
  developed and developing Countries
  DRI/McGraw-Hill
• Wall Street Journal Central European Survey 27
  transition economies Economic Review
• EBRD Transition Report Poll 26 transition
  economies
• Economist Intelligence Unit Country Risk Service
  Poll 114 developed and developing Country
  Forecast
• Freedom House Freedom in the World Poll 172
  developed and developing
• Freedom House Nations in Transit Poll 24
  transition economies
• Political Economic Asia Intelligence Survey 11
  Asian countriesRisk Consultancy
• Gallup International 50th Anniversary
  Survey Survey 44 mostly developed countries
• World Ec Forum / CID Global Competitiveness
  Survey 75 developed and developing
• Heritage Foundation/ Economic Freedom
  Index Poll 154 developed and developing Wall
  Street Journal
• Political Risk Services Interntnl Country Risk
  Guide Poll 140 developed and developing
• World Bank World Business Environment Survey 80
  developed and developing
• World Bank/EBRD BEEPS Survey 22 transition
  economies
• IMD, Lausanne World Competitiveness Yrbk Survey
  46 developed and developing
• CUD Columbia U. State Failure Poll 100
  developed and developing
• PriceWtrhseCoopers Opacity Index Poll 60
  developed and developing

5
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
  within each region), and thus averages mask
  selective improvements in governance, from which
  we also learn.

6
Strides in Macro-Economic Indicators over past
12 years
Average Inflation Rate (in log)

7
Quality of Infrastructure -- Improving(Regional
Averages of High/Low Quality every year, EOS-WEF
firm surveys -- GCR 97-02)
High
Low
8
Effective Absorption of New Technologies --
Progress(Regional Averages of High/Low
Absorption every year, GCR 1997-2002)
High
Low
Note No data exists for 2000.
9
Control of Corruption On average, lack of
progress
Good Control of Corruption
Low
Source ICRG, 1984-2002. Averages for shown
periods and across countries for OECD New
Industrialized Countries in East Asia for former
socialist Transition Economies, and Emerging
Economies.
10
Quality of Rule of Law Little Progress in recent
years
High
Low
Source ICRG, 1984-2002. Averages for shown
periods and across countries for OECD New
Industrialized Countries in East Asia for former
socialist Transition Economies, and Emerging
Economies.
11
Extent of Independence of the Judiciary --
stagnant (Regional Averages of Extent/Lack of
Independence every year, GCR 1998-2002)
Independent
Non-Independent
12
Unbundling Corruption Regional AveragesBased
on EOS-WEF firm survey 2002, 80 countries
Extent of Bribery for

13
The Dividend of Good Governance
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/governa
nce.
14
Soundness of Banks vs. Control of Corruption
Sound
Relatively Unsound
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 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.
15
Transparency, Ethics and GDP Growth Closely
linked
Annual GDP Growth ()
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.
16
-- 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
Collective Responsibility in Improving Governance

17
High Economic Cost of State Capture (by some
firms) for Rest of the Private Sector
18
Also, where Capture/Grand Corruption Greater
Property Rights Insecurity for All Others
Share of Firms with Secure Property Rights
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.
19
Bribery in Procurement and Corporate Ethics
linked
High
r -0.88
Low
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
their rating of the quality of corporate ethics
in their industry.
20
Corruption in Judiciary and Corporate Ethics
closely linked
High
r -0.88
Low
Low
High
Source WEF GCR 2002. Firms were asked for
their assessment of the extent of bribes in their
industry for the judiciary, as well as their
rating of the quality of corporate ethics in
their industry.
21
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,
  Natl Intl
•  

22
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