1

2001 and Beyond: What research Directions on Corruption and governance?

Daniel Kaufmann, WBIThe World Bank

www.worldbank.org/wbi/governance

Workshop Session, October 10th, 200110th IACC, Prague, Czech Republic

Note: Some of the empirical work presented here is preliminary, and subject to a margin of error. Caution in interpretation is needed, and no precise ranking of countries is warranted.

2

What is Governance?: A working definition for public governance

• Governance is the process and institutions by which authority in a country is exercised:

(1) the process by which governments are selected, held accountable, monitored, and replaced;

(2) the capacity of governments to manage resources efficiently, and to formulate, implement, and enforce sound policies and regulations; and,

(3) 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 Accountability• Political Stability and lack of Violence• Quality Regulatory Framework• Government Effectiveness• Control of Corruption• Rule of Law

4

Control of Corruption: Aggregate Indicator (selected countries from 155 worldwide, for illustration,

based on 1998 research data*)

Source: ‘Governance Matters’, PRWP 2196 by Kaufmann, Kraay and Zoido. http://www.worldbank.org/wbi/governance/

POORGOOD

6

The ‘Dividend’ of Good Governance

Infant Mortality and Corruption

0

10

20

30

40

50

60

70

80

90

Weak Average Good

Control of Corruption x Development Dividend

0

2,000

4,000

6,000

8,000

10,000

12,000

Weak Average Good

Regulatory Burdenx Development Dividend

Per Capita Income and Regulatory Burden

Literacy and Rule of Law

0

25

50

75

100

Weak Average Good

Rule of Law x Development Dividend

Per Capita Income and Voice and Accountability

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Weak Average Strong

Voice and Accountabilityx DevelopmentDividend

Note: The bars depict the simple correlation between good governance and development outcomes. The line depicts thepredicted value when taking into account the causality effects (“Development Dividend”) from improved governance to betterdevelopment outcomes. For data and methodological details visit http://www.worldbank.org/wbi/governance.

7

AGOALB

AREARG

ARM

AUSAUT

AZE

!

BEN

BFABGDBGR

BHR

BHS

BIHBLR

BOL

BRABRN

BWA

CANCHE

CHL

CHNCIV

CMR

COGCOL

CRICUB

CYP

CZE

DEU

DNK

DOMDZA ECU

EGY

ESP

EST

ETH

FIN

FJI

FRA

GAB

GBR

GEO

GHA

GIN

GMBGNB

GRC

GTM

GUY

HKG

HND

HRVHTI

HUN

IDN

IND

IRL

IRN

IRG

ISL

ISR

ITA

JAMJOR

JPN

KAZKENKGZ

KOR

KWT

LBN

LBRLBY

LKALSO

LTU

LUX

LVA

MAR

MDA MDGMEX

MKD MLI

MLT

MMR

MNG

MOZ

MUS

MWI

MYSNAM

NER

NGA NIC

NLD

NOR

NZL

OMN

PAKPAN

PER PHL

PNG

POL

PRK

PRT

PRY

QAT

ROMRUSSAU

SDN

SEN

SGP

SLE

SLV

SOM

SURSVK

SVN

SWE

SWZ

SYRTCD

TGO THA

TJK TKM

TTO

TUN

TUR

TWN

TZA

UGA

UKR

URY

USA

UZBVEN

VNM

YEMYUG

ZAF

ZAR

ZMBZWE

r = 0.68-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

0 0.2 0.4 0.6 0.8 1

Control of Graft and Freedom of the Press

High

Low

Low High

r = .68

Freedom of the Press (Freedom House)

Con

trol o

f Gra

ft [k

kz]

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Enormous Social/Economi costs of state capture: Enormous Social/Economi costs of state capture: Much lower growth in sales and investment in economyMuch lower growth in sales and investment in economy

(and also weaker property rights protection)(and also weaker property rights protection)

9

2%

4%

6%

8%

10%

12%

% fi

rms

'pur

chas

e' le

gisl

ativ

e

DomesticInvestor

WithFDI

% of firms that 'Purchase' Legislation and Decrees in Transition Economies

• Transnational Corporate Responsibility Matters as Well:

Note: For transition economies, average of 20 countries. Source: Hellman, Jones and Kaufmann, 2000 (www.worldbank.org/wbi/governance)

10

State Capture exists where partial Civil Liberties and slow Economic Reforms

Degree of Civil Liberties in Transition Economies

EconomicReforms

11

Business Associations Constrains Business Associations Constrains State Capture and Grand CorruptionState Capture and Grand Corruption

0102030405060708090

Hungary Russia Azerbaijan

Business association members

(% of firms)

Active members Nonactive members

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Citizen Voice Improves Accessibility of Public Services to the Poor

Based on Public Officials Survey. The sample of institutions includes 44 national, departmental, and municipal agencies which are a prior anticipated to be accessible to the poor

13

Citizen Voice Helps Control Bribery in LAC country

Based on 90 national, departmental, and municipal agencies covered in the Bolivia Public Officials Survey.

14

Transparency within Government Agencies Prevents Purchase of Public Positions

Based on 90 national, departmental, and municipal agencies covered in the Public Officials Survey.

15

Which Governance Characteristics Matter for Agency Performance? Results from Bolivia Public Officials

Governance Determinant of Performance

Simple Unconditional Relationship

Conditional/Causal Relationship

‘Ethical Values’ 0 0 Agency Autonomy ** 0 Enforcement of Rules ** 0 Quality of Rules * 0 Wage Satisfaction ** 0 Politicization ** ** Internal Transparency ** ** External Voice ** ** Corruption ** **

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4.2

2.11.4

0

1

2

3

4

LowIncome

MiddleIncome

HighIncome

Lower Income Households ‘Pay’ Disproportionally

Bribe/Total Income ratio % ( A Latin American Country )

17

Corruption Potential in Typical Privatization Transaction Structures*

Speed Admin. Discretion

Transparency/ Information

Independent Administration

Voucher-Based Mass Privatization

– – – -

Liquidation - - – –

Capital Market-Based Privatization

++ - - -

Tenders and Trade Sales ++ ++ - -

Management-Employee Buy-Out (MEBOs)

+ ++ ++ +

Spontaneous Privatization + ++ ++ ++

* Note: “-” and “-” equal low and very low corruption potential, respectively.“+” and “++” equal high and very high corruption potential, respectively.

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The Impact of Privatization Structures on Corruption in the Post-Privatization Environment*

Scope of Program

Residual State

Ownership

Residual Purchase

Obligations

“New” Owners

Transaction Corruption

Liquidation ++ – – – –

Voucher-Based Mass Privatization

– ++ – - –

Initial Public Offerings ++ + – – -

Tenders and Trade Sales - – ++ – +

Spontaneous Privatization – – – + ++

Management-Employee Buy-Out (MEBOs)

- – ++ ++ ++

* Note: “-” and “-” equal low and very low corruption potential, respectively.“+” and “++” equal high and very high corruption potential, respectively.

19

The Privatization Process and Impact on Corruption(Average for 16 Transition Economies – ’96 Expert Survey Results, N=50)(Average for 16 Transition Economies – ’96 Expert Survey Results, N=50)

1.5 3.0 4.5

Corruption in Privatized Sectors vs. Others

Privatization Impact on Overall Cooperation

Corruption in Privatized Transactions

Corrupt Reputation of Privatization Program

Information Quality of Privatization Program

Administrative Discretion of PrivatizationProgram

Speed of Privatization Program

Inci

denc

e on

Cor

rupt

ion

Priv

atiz

atio

n Pr

ogra

m

Cha

ract

eris

tics

GOOD POOR

Monopolies and CorruptionMonopolies and Corruption

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Towards a Solution: Improve Institutional Quality – e.g. Courts

Would you describe the courts as...

"Nirvana" Estonia Latvia Lithuania

Fair

Honest

Reliable

EnforcesDecisions

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Research: Data power and concreteness• Challenge of Localizing: micro-level research• Agency-specific research (eg courts, municip)• Unbundling governance and corruption: specifics, components, links among them• Data & Empirical Power & nexus w/ poverty • Public Officials a key source of information• Grand corruption & State Capture: empirics• Integrating Corporate Governance with National Governance challenge• Voice, Participation: analytics, facts, rigour