•

‘Unbundling’ Governance and Corruption:

Some new empirical findings and Collective Action approaches

Daniel Kaufmann World Bank Institute and Colleagues

Anti-Corruption Summit 2000, Wash. DC

Governance Program - The Strategy The power of rigorous empirics and diagnostics Corporate Strategies-National Governance Nexus

Unbundling Corruption: State Capture is key?

http://www.worldbank.org/wbi/governance

8 Key Issues

• Government in the ‘driver’ seat in A-C program• Focus on very focused A-C plan• Use worldwide data for action program• Technocratic approach to fighting corruption• Paramount: A-C Autonomous Agencies/Commissions• High Pay in public service for combating corruption• Focus: eliminate bureaucratic corruption/discretion • Strict Enforcement of civil service rules

Proposition: The ‘8 Key Issues’ above contain an element of mythProposition: The ‘8 Key Issues’ above contain an element of myth

National Governance: Challenges in Integrating Anti-Corruption Into Institutional Change

A simple Formula synthesizing Governance/Anticorruption:

IG and AC = KI + LE + CA

Improving Governance and Anti-Corruption =

= Knowledge/Info.Data + … ...+ Leadership (incl. Political) + ...

... + Collective Action (change)

A ‘Live’ Test:A ‘Live’ Test:‘Culture’, Information and Incentives:‘Culture’, Information and Incentives:

• You are approaching your car in the empty and You are approaching your car in the empty and unattended garage late at night unattended garage late at night

• You see an envelope on the floor, and you pick it upYou see an envelope on the floor, and you pick it up

• It contains 20 bills of US $100 each. It contains 20 bills of US $100 each.

• If no possibility that anyone would know: No If no possibility that anyone would know: No cameras, no monitoring, no reportingcameras, no monitoring, no reporting

• What would you do with such envelope full of What would you do with such envelope full of cash?cash?

50% Undecided 33% Report and Return Funds

17% Keep

A. If no possibility that anyone would know:A. If no possibility that anyone would know:

You are alone, there is no monitoring, cameras, or possibility of resportingYou are alone, there is no monitoring, cameras, or possibility of resporting

Option Finder Results: Various Audiences

B. If B. If 30%30% probability that information is shared probability that information is shared (e.g. 30% that camera recording info which may be reviewed(e.g. 30% that camera recording info which may be reviewed))

74% Report and Return Funds

22% Undecided

4% Keep

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Zaire

Cameroon

Myanmar (Burma)

AzerbaijanParaguay

NigeriaHonduras

Ukraine

KazakhstanNicaraguaGuatemala

EcuadorVenezuela

Kenya

ColombiaEl Salvador

MexicoArgentina

PeruBrazil

MoroccoUruguayCosta Rica

BelgiumSlovenia

ChileSpain

United StatesSingapore

Denmark

Control of Corruption: Aggregate Indicator (From 155 worldwide, transition/selected countries)*

Source: ‘Governance Matters’, PRWP 2196 by Kaufmann, Kraay and Zoido; based on data from 1998. For details and data, visit http://www.worldbank.org/wbi/governance There is a margin of error (thin line); extreme care in interpretation is needed.

POORGOOD

Broadening our Perspective: Assessing Governance

• Control of Corruption (or Graft)

• Rule of Law

• Absence of Regulatory Burden

• Government Effectiveness

• Voice and Accountability (Civil Liberties)

• Political Stability and lack of Violence

Application of Rule of Law Varies by Region

OECD EastAsia

MiddleEast

SouthAsia

EasternEurope

LatinAmerica

Sub-SaharanAfrica

FormerSovietUnion

(based on aggregation of surveys/polls 1997-99*)

High Indexof Rule of LawAppli-cation

LowIndex

Note: Regional Averages shown for discussion purposes, and hide large intra-regional variation in each case. Thin vertical line reflects estimated margin of error. Source: Kaufmann, Kraay and Zoido-Lobaton (1999). "Aggregating Governance Indicators" and "Governance Matters" PWRP 2195 and 2196. http://www.worldbank.org/wbi/governance

Not Free Partly Free Free

Co

rru

pti

on

[an

d A

bse

nce

of

Ru

le o

f L

aw]

Co

rru

pti

on

[an

d A

bse

nce

of

Ru

le o

f L

aw] High

Low

Civil Liberties

Corruption/Absence of Rule of Law & Civil Liberties

Based on averages of data from 160 countries.

AGOALB

AREARG

ARM

AUSAUT

AZE

!

BEN

BFABGDBGR

BHR

BHS

BIH

BLRBOL

BRABRN

BWA

CANCHE

CHL

CHNCIV

CMR

COGCOL

CRI

CUB

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

LKA

LSOLTU

LUX

LVA

MAR

MDA MDGMEX

MKD MLI

MLT

MMR

MNG

MOZ

MUS

MWI

MYSNAM

NER

NGANIC

NLD

NOR

NZL

OMN

PAK

PANPER 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

ZMB

ZWE

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

of

Gra

ft [

kkz]

Salient Features of New Governance Diagnostic Tools

• Multi-pronged surveys of: households, firms and public officials [‘triangulation’]

• Experiencial questions (vs. ‘opinions’/generic)

• Specially designed and tested closed questions

• Conceptual framework: Incentive Structure behind Governance; focus on development

• Rigorous technical requirements in implementation

• Local Institution Implements, with WB Collaboration• Recognizing Multidimensionality of Governance• Focus on Service Delivery: Input for Action and Change

0

5

10

15

20

25

30

35

40

45

50

Hungary Estonia Russia Azerbaijan

Parliamentary legislation

Decrees Central Bank Influence

Firms Reporting Negative Impact of High Level Corruption‘State Capture’ Source: WBES Survey 1999, 20 transition countries

%of

all

Fir

ms

repo

rt n

egat

ive

impa

ct o

f gr

and

corr

upti

on

%

%

%

%

%

%

%

%

%

%

Adverse Impact of ‘Purchases’ of:

Reported Direct Impact of State Capture on the FirmReported Direct Impact of State Capture on the Firm

Country

Parliamentarylegislation(% of firms)

Presidentialdecrees(% of firms)

CentralBank(%of firms)

CriminalCourts(% of firms)

Party finance(% of firms)

Capture index(% of firms)

CaptureClassification

Albania 12 7 8 22 25 16 LowArmenia 10 7 14 5 1 7 LowAzerbaijan 41 48 39 44 35 41 HighBelarus 9 5 25 0 4 8 LowBulgaria 28 26 28 28 42 28 HighCroatia 18 24 30 29 30 27 HighCzech Rep 18 11 12 9 6 11 LowEstonia 14 7 8 8 17 10 LowGeorgia 29 24 32 18 21 24 HighHungary 12 7 8 5 4 7 LowKazakhstan 13 10 19 14 6 12 LowKyrgyzstan 18 16 59 26 27 29 HighLatvia 40 49 8 21 35 30 HighLithuania 15 7 9 11 13 11 LowMoldova 43 30 40 33 42 37 HighPoland 13 10 6 12 10 12 LowRomania 22 20 26 14 27 21 HighRussia 35 32 47 24 24 32 HighSlovakia 20 12 37 29 20 24 HighSlovenia 8 5 4 6 11 7 LowUkraine 44 37 37 21 29 32 HighUzbekistan 5 4 8 5 4 6 Low

Overall 24 21 25 18 20 22

2%

4%

6%

8%

10%

12%

% f

irm

s 'p

urc

has

e' le

gis

lati

ve

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)

% Firms that pay public procurement kickbacks% Firms that pay public procurement kickbacks(of those that trade with the state)(of those that trade with the state)

0

5

10

15

20

25

30

35

40

% of firms

Domestic

FDI (Domestic HQ) FDI (Overseas HQ)

Percentage of firms paying kickbacks by country of FDI origin

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

UK

Ge rmany

France

Othe r

Russia

USA

Austria

Gre e ce

Dome stic firms

All FDI

Proportion of firms

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

0

5

10

15

20

25

Average rate of growth '97-'99

High capture Countries Low capture countries

Sales

Investment

The result: weak property rights

0

10

20

30

40

50

60

70

80

Est

Uzb Pol Sln

Aze

r

Hu

n

Cro Slk

Geo

Bu

l

Arm

Rom B

el

Cze

Kaz L

it

Kyr

Ru

s

Uk

r

Mol

Firms reporting insecure property and contract rights

% o

f A

ll F

irm

s

%

Country-wide: State capture is associated with incomplete civil liberties (& slow economic reforms)

0

0.1

0.2

0.3

0.4

Degree of State Capture

High CivilLiberties

Medium CivilLiberties

Low CivilLiberties

High Reform

Medium Reform

Low Reform

For Firms, Capture is strategy that started with insecure property rights they faced

Enterprises are Prepared to be Taxed for Better Government:Share of Firms that would pay additional taxes to eliminate corruption,

crime and excessive regulations

Prepared to Pay More Taxes to Alleviate:

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 )

Albania

Georgia

Latvia

0 20 40 60 80

Customs inspectors

Tax inspectors

Judges

Ordinary police

Investigators/ prosecutors

Ministers

Which Public Sector Jobs Are “Sold”?

Percent of public officials reporting “purchase” of positions

4860

41

5241

25

3932

16

25

10

4023

5

3332

14

19

Public Prosecutor

Electricicy company

Cent. BankM of Fin - Income

National Fin. Corp.

MunicipalityPresidency

M of Fin - Treasury

Attorney General

Congress

Undersec. Of Gov't

Electoral Supreme TribunalCourts

Universities and schools

M of Energy and MinesM of Fin - Budget

Undersec. Of Social Welfare

Telephone company

National Council of TransitProv. Council

Comptroller

Real Estate Bank

y = -0.05x + 6.05

R2 = 0.50

r=-0.71

1

2

3

4

5

40 50 60 70 80 90 100

Meritocracy in Hiring and Promotion

Public Offic ials Survey: Meritocracy in the Public Service Can Help Reduce Corruption

High

Low

Towards a Social Contract: Consensus Building with Civil Society and Gov’t

• Consultation Process with Parliament (Canada)

• Freedom on information and of the press (OECD)

• Administrative appeals system (Sweden, U.S.)

• Public hearings of draft laws (OECD)

• Participatory coalition building w/NGOs and Gov’t • Social Contract

* Average bribe to public officials

Lower Public Sector Salaries do not Increase Bribery

7.7%

15.5%

8.4%

Bribe*=

3MS

Bribe*=

0.2MS

Bribe*=

0.5MS

0%

3%

6%

9%

12%

15%

Monthly Salary

Less than 3MS Between 3 & 13 MS More than 13 MS

Monthly SalaryMonthly Salary

Which Governance Characteristics Survive After Controlling For Causal Effects?

GovernanceCharacteristics

Simple UnconditionalRelationship

Conditional/CausalRelationship

Ethical Values 0 0

Autonomous Agencies ** 0

Enforcement of Rules ** 0

Wages ** 0

Politicization ** **Transparency ** **Voice ** **

Corruption

Public Oversight and Civil Society:Public Oversight and Civil Society:

OmbudsmanOmbudsman in Albania and Bolivia in Albania and Bolivia¥¥ Private Sector CoalitionPrivate Sector Coalition in Bolivia in Bolivia¥¥ Diagnostic Diagnostic Surveys and Surveys and NGO NGO monitoring in Ecuador and others monitoring in Ecuador and others

Go vernance Im provement in Pract ice:D ifferen tiated Strateg ies in F ive C o un tries

Fina ncial Contro ls:F ina ncial Contro ls: ProcurementProcurement Reform in Bolivia, Reform in Bolivia, Ecuador and Georgia Ecuador and Georgia

Institutional and Civil ServiceInstitutional and Civil ServiceReform:Reform: TransparentTransparent Privatization Privatization in Ecuador in Ecuador¥¥ SalarySalary Reform in Bolivia Reform in Bolivia¥¥ Disclosure of AssetsDisclosure of Assets in in Bolivia and Georgia Bolivia and Georgia

Le gal-Judicia l:Le gal-Judicia l: Revamp of Revamp of Supreme CourtSupreme Court in Bolivia in Bolivia ¥¥ Competency test and firingCompetency test and firing of judgesof judges in Georgia, Albania and Latviain Georgia, Albania and Latvia¥¥ Mediation Mediation in Albania in Albania

Ec onom ic P olicy:Ec onom ic P olicy:

Deregulation and Deregulation and DelicensingDelicensing in Bolivia in Bolivia¥¥ Revamping Revamping CustomsCustoms in Ecuador and Latvia in Ecuador and Latvia¥¥ Tax AdministrationTax Administration in Latvia and Ecuador in Latvia and Ecuador¥¥ Tax/CustomsTax/Customs Code Reform in Albania Code Reform in Albania

Overall Corruption Over TimeOverall Corruption Over Time(Selected Countries; ICRG index, rescaled 0-10)(Selected Countries; ICRG index, rescaled 0-10)

00

22

44

66

88

High High corruptioncorruption

Low Low corruptioncorruption

19921992 19931993 19941994 19951995 19961996 19971997 19981998

IndonesiaIndonesia

IndonesiaIndonesia

FinlandFinland

El SalvadorEl Salvador

1010

El SalvadorEl Salvador

FinlandFinland

RussiaRussia

RussiaRussia

PolandPoland

PolandPoland

1988-921988-927

Data Power and Collective Action: Synthesis

• Logic of Collective Action: beyond ‘participation’ or

standard conditionality

• Power of Data.Knowledge Empowers Coalitions and De-

Personalizes the Challenge -- Systemic Instead

• Beyond Corruption: Governance and Transparency

• Focus on Fundamentals [vs. Symptoms]: Institutions

• Prioritization and Adaptation by Country Realities

• There is Hope, yet no room for Complacency

Some Policy Implications

• Anti-corruption efforts should focused more on grand corruption and state capture as root of misgovernance

• Broader Governance framework• Collective responsibility and Collective Action• Civil society involvement, Civil liberties• Security of property rights and economic liberalization• Need to address link between corporate (including FDI)

and national-level governance

For details, survey, and data:

http://www.worldbank.org/wbi/governance/

Some Issues for Discussion

• Broadening Framework from Corruption to Governance?• How to interpret Worldwide indices judiciously?• Focus on 40-50 countries with acute governance challenge?• Next Stage in In-depth Diagnostics & Methods?• Measuring ‘Grand Corruption’ -- including ‘State Capture’?• Role of Corporate Responsibility, including FDI? • Role of Informatics, Internet power?• What kind of expertise is needed in the next stage?• How to help Empower?: from ‘participation’ to Collective

Action

http://www.worldbank.org/wbi/governance/

Data Presented for Analysis and informing Policy Advise, not for Precise Rankings

The data contained in this presentation originates from various enterprise surveys (as well as outside expert rating agencies) and are subject to a margin of error. The purpose is therefore not to present precise comparative rankings across countries, but instead to illustrate characteristics of governmental and corporate performance in order to assist in drawing implications for action. No ranking of countries is intended in presenting results from these external sources by either the presenter of this work, the World Bank or its Board of Directors.

Further details and data, visit: http://www.worldbank.org/wbi/governance