Good Governance and its benefits on economic Development

An Overview of Current TrendsWorld Bank Institute

OutlineOutline

• What is governance?• Why does governance matter?

– Costs of poor governance– Benefits of good governance

• Identifying, measuring and addressing the problems: Global and local approaches

What is governance?What is governance?

•• Governance is the process and Governance is the process and institutions through which institutions through which decisions are made and authority decisions are made and authority in a country is exercised.in a country is exercised.

•• Governance rests on the twin Governance rests on the twin values of inclusiveness and values of inclusiveness and accountability.accountability.

Accountability can be internal or external Accountability can be internal or external

Inclusiveness implies equal Inclusiveness implies equal participation and equal treatmentparticipation and equal treatment

Inclusiveness Inclusiveness ---- In MENA, female In MENA, female representation in parliaments is lowrepresentation in parliaments is low

0% 0%1%

2% 2%3%

4%5%

6% 6% 6%

11%12% 12%

15%

Kuw

ait

UAE

Yem

en

Leba

non

Egy

pt

Jord

an Iran

MEN

A13

Alg

eria

Mor

occo

Bah

rain

Djib

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Tun

isia

Syr

ia

Wor

ld

To better measure governance, it helps to To better measure governance, it helps to further break it in three categories: further break it in three categories:

1. Selection, accountability and replacement of authorities

– Voice and accountability– Stability and lack of violence

2. Efficiency of institutions, regulations, resource management

– Regulatory framework – Government effectiveness

3. Respect for institutions, laws and interactions among players in civil society, business, and politics

– Control of corruption– Rule of law

Components of Good Governance

voice and accountability stability and lack of violence

Selection and Monitoring

regulatory framework government effectiveness

Efficiency

control of corruption rule of law

Respect

Aggregate indicators: Stimulating the Aggregate indicators: Stimulating the debate about governancedebate about governance

• Easily understood, widely accepted criteria (rule of law, government effectiveness, etc)

• Draw on work of expert institutions tracking specific fields, political risk, investor attitudes

• Aggregation helps improve reliability (wider sample of opinions)

• Encourage countries to focus resources on problem areas, draws public attention

• Encourage countries to learn from each other• More valuable when available over time

Sources of Governance DataSources of Governance Data

• “Subjective” data on governance from 25 different sources constructed by 18 different organizations

• Data sources include cross-country surveys of firms, commercial risk-rating agencies, think-tanks, government agencies, international organizations, etc.)

• Over 200 proxies for various dimensions of governance

• Organize these measures into six clusterscorresponding to definition of governance, for four periods: 1996, 1998, 2000, and 2002, covering up to 199 countries

Sources of Governance DataSources 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, Latinobarometro, Afrobarometer

• Expert Assessments from Commercial Risk Rating Agencies: DRI, PRS, EIU, World Markets Online,

• Expert Assessments from NGOs, Think Tanks: Reporters Without Borders, Heritage Foundation, Freedom House, Amnesty International

• Expert Assessments from Governments, Multilaterals: World Bank CPIA, EBRD, State Dept. Human Rights Report

Inputs for Indicators 2002Inputs for Indicators 2002Publisher Publication Source Country Coverage

•Wefa’s DRI/McGraw-Hill Country Risk Review Poll 117 developed and developing

•Business Env. Risk Intelligence BERI Survey 50/115 developed and developing

•Columbia University Columbia U. State Failure Poll 84 developed and developing

•World Bank Country Policy & Institution Assessment Poll 136 developing

•Gallup International Voice of the People Survey 47 developed and developing

•Business Env. Risk Intelligence BERI Survey 50/115 developed and developing

•EBRD Transition Report Poll 27 transition economies

•Economist Intelligence Unit Country Indicators Poll 115 developed and developing

•Freedom House Freedom in the World Poll 192 developed and developing

•Freedom House Nations in Transit Poll 27 transition economies

•World Economic Forum/CID Global Competitiveness Survey 80 developed and developing

•Heritage Foundation Economic Freedom Index Poll 156 developed and developing

•Latino-barometro LBO Survey 17 developing

•Political Risk Services International Country Risk Guide Poll 140 developed and developing

•Reporters Without Borders Reporters sans frontieres (RSF) Survey 138 developed and developing

•World Bank/EBRD BEEPS Survey 27 transition economies

•IMD, Lausanne World Competitiveness Yearbook Survey 49 developed and developing

•Binghamton Univ. Human Rights Violations Research Survey 140 developed and developing

Precision vs. Number of Sources,Precision vs. Number of Sources,KKZ Governance Estimates, 2000/01KKZ Governance Estimates, 2000/01

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 2 4 6 8 10 12 14

Number of Sources Per Country

Mar

gin

of E

rror

Note: See explanatory details in this slide’s note

Ingredients for Rule of Law IndicatorIngredients for Rule of Law IndicatorSurveys of FirmsBEEPS Courts Honest? Crime? Property rights

protected?Global Competitiveness Survey Crime, money laundering, judicial

independence, protection of financial assets

World Competitiveness Yearbook Justice fairly administered, personal security and private property protected

Surveys of IndividualsGallup Trust in legal system

Risk Rating AgenciesBERI Contract enforcementDRI Costs of crime, enforceability of contractsEIU Costs of crime, enforceability of contracts,

property rights protectionPRS Law and orderWorld Markets Observer Judicial independence, crime

Think TanksFreedom House Rule of lawHeritage Foundation Property rights, black market activity

GovernmentsState Dept Human Rights Report Judicial independence

Type of Questions

Rule of Law: A Composite Governance IndicatorRegional Averages, 2000/01 - Point Estimates

-1.6

0

1.6

OECD E AsiaNICs

E. Europe MENA Caribbean E Asiadev'g

L.America

SubSAfrica

FSU SouthAsia

High

Source: Governance Research Indicators based from data in D. Kaufmann and A. Kraay, 'Growth without Governance', http://www.worldbank.org/wbi/governance/pubs/growthgov.htm. Units in vertical axis are expressed in terms of standard deviations around zero. Country and regional average estimates are subject to margins of error (illustrated by thin line atop each column), implying caution in interpretation of the estimates and that no precise country rating is warranted. For access to the databank and detailed explanations: http://info.worldbank.org/governance/. Note that New Zealand, Australia and Japan are listed under OECD. All other countries are listed according to their geographical location.

Low

‘Traffic Light’ World Map‘Traffic Light’ World MapControl of Corruption Control of Corruption –– 2000/012000/01

Source for data: http://www.worldbank.org/wbi/governance/govdata2001.htm ; Map downloaded from : http://info.worldbank.org/governance/kkz/gov2001map.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse; Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between75% and 90% ; Dark Green above 90%

‘Traffic Light’ Map: Rule of Law, 2000/01‘Traffic Light’ Map: Rule of Law, 2000/01

Source for data: http://www.worldbank.org/wbi/governance/govdata2001.htm ; Map downloaded from : http://info.worldbank.org/governance/kkz/gov2001map.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse; Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between75% and 90% ; Dark Green above 90%

Control of Corruption Selected countries from 155 worldwide, for illustration, based on 1998 research data*

-2

-1

0

1

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Mya

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ico

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lia

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gap

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New

Zea

land

Den

mar

k

Source: ‘Governance Matters’, 1999, PRWP 2196 by Kaufmann, Kraay and Zoido. http://www.worldbank.org/wbi/governance/

POOR GOOD

CorruptionLevel

Margin of Error

Good Corruption Control

Changes in Control of Corruption, 1997/98Changes in Control of Corruption, 1997/98--2000/012000/01

-4

-3

-2

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Rankings were calculated on the basis of the differences in country estimates from 1998 and 2001 data, divided by the standard deviations of 2001. Sources: KKZ98 / KKZ01

From Bottom 20

(selected countries)

From Top 20

(selected countries)Major Deterioration

Major Improvement

Insignificant Change

Indicators as an incentive for change: Indicators as an incentive for change: the power of datathe power of data

• Overall, most powerful indicators are those that draw public attention to problems

• While laws and institutions are important, external accountability measures may have even bigger impact

• Difficult to avoid stronger role for civil society in any comprehensive strategy for addressing governance issues

Governance Improves Growth by Governance Improves Growth by Improving the Business EnvironmentImproving the Business Environment

The Economic Development ‘Dividend’ The Economic Development ‘Dividend’ of Good Public Governanceof Good Public Governance

Infant Mortality and Corruption

0

10

20

30

40

50

60

70

80

90

Weak Average Good

Control of Corruption xDevelopment 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 xDevelopment Dividend

Per Capita Income andVoice and Accountability

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Weak Average Strong

Voice and AccountabilityxDevelopmentDividend

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.

Better governance brings added Better governance brings added growth growth

1985 19871989 1991 1993

19951997

19992001

100

Per

Cap

ita

Inco

me MENA7 EA6

Challenges for business in EgyptChallenges for business in Egypt——registration and contract enforcementregistration and contract enforcement

Business Registration: January 2002

13

52

61

11

60 62

7

32

11

2 2 0

# Procedures Days Cost (% GNP per capita)

Egypt MENA OECD Best Practice

Contract Enforcement: January 2002

17

3.8

23

4.1

16

3.1

10

1.7

# Procedures Days Cost (% GNP per capita)

Egypt MENA OECD Best Practice

2 0 2

3 0 2

2 0 5

7

In MENA, there is a large variation in In MENA, there is a large variation in corruptioncorruption

0

3

6

UAE Qatar Bahrain Oman Kuwait SaudiArabia

Tunisia Jordan Egypt Lebanon

Favoritism in Contracts

Tax evasion

Poor public infrastructures forces Poor public infrastructures forces businesses to spend on private businesses to spend on private alternatives alternatives

Days Without18

13

16 16

S L S L

Algeria Morocco

Own Generator

16

53

25

14

S L S L

Algeria Morocco

Days Without54

17

3 3

S L S L

Algeria Morocco

Own Well

27

43

2832

S L S L

Algeria Morocco

In MENA, most court systems are In MENA, most court systems are much slower that the rest of the worldmuch slower that the rest of the world

Number of days to enforce a standard contract

7

147 150 192 195 202 240

387

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External accountability mechanisms External accountability mechanisms is next frontieris next frontier

• Voice and accountability have had important impact on economic performance in some countries

• Generally an area of difficulty in region, though some countries are making progress

• Difficult to avoid stronger role for civil society in any comprehensive strategy for addressing governance issues

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1990 1991 1993 1994 1995

US$ per student

Intended grant Actual grant received by primary school (means)

1999

Source: Uganda Public Expenditure Tracking Surveys

Tracking Education Dollars in Uganda

Transparency and Citizen OversightTransparency and Citizen Oversight

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1990 1991 1993 1994 1995

US$ per student

Intended grant Actual grant received by primary school (means)

1999

Source: Uganda Public Expenditure Tracking Surveys

Tracking Education Dollars in Uganda

Transparency and Citizen OversightTransparency and Citizen Oversight

Public info campaign

Citizen Voice Improves Accessibility of Public Services to the Citizen Voice Improves Accessibility of Public Services to the Poor in BoliviaPoor in Bolivia

Based on Bolivia 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

30

40

50

60

70

Low Moderately Low Moderately High High

Voice / External Accountability

Acc

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bili

ty t

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Po

or

Simple Average Association Controlled Causal Link

Transparency within Government Agencies Increases Their Poverty Transparency within Government Agencies Increases Their Poverty Reduction Impact in BoliviaReduction Impact in Bolivia

Based on Bolivia Public Officials Survey. The sample of institutions includes 50 national, departmental, and municipal agencies which are a prior anticipated to have a major impact on poverty reduction.

30

40

50

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Internal Transparency

Pov

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Simple Average Association Controlled Causal Link

Not Free Partly Free Free

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Low

Civil Liberties

Corruption is associated with absence of Civil Liberties

Based on averages of data from 160 countries.

0

10

20

30

40

50

60

70

80

90

High income Upper-middle Lower-middle Low income

Free Press and Income Levels Percentage of Countries in Each Income Group Perceived as Free

Source: Freedom House/ World Bank Development Indicators 2000

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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 Corruption and Freedom of the PressHigh

Low

Low High

Freedom of the Press (Freedom House)

Con

trol

of C

orru

ptio

n [k

kz]

Country surveys and diagnostic toolsCountry surveys and diagnostic tools

• Multi-pronged surveys of households, firms and public officials

• Experiential questions (rather than opinions) • Specially designed and tested closed questions• Conceptual framework: Incentive structures 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

Report Card of Latvian Services

0 10 20 30 40percent giving favorable rating

Post Office

State Educational Institutions

Office of Social Benefits

Polyclinic/Health Services

Agency of Immigration & Citizenship

Prosecutor

Customs Service

Courts

Local Housing Authority

Police

Based on a World Bank - Latvia survey of households

Note on data in this presentationNote on data in this presentation

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 of this data is to illustrate characteristics of governmental and corporate performance and to assist in drawing implications for action, not to present precise comparative rankings across countries. 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.

Additional references and sourcesAdditional references and sources--11

• Overview of early work on governance indicators:http://www.worldbank.org/wbi/governance/pdf/fandd_english.pdf

• More recent work and updates:http://www.worldbank.org/wbi/governance/pubs/growthgov.htm

• Download the full paper and access to the data:http://www.worldbank.org/wbi/governance/pdf/growthgov_synth.pdf

• Updated Governance Indicators for 2002:http://www.worldbank.org/wbi/governance/

• Governance Diagnostics, in-country assessments:http://www.worldbank.org/wbi/governance/capacitybuild/diagnostics.html

Additional references and sourcesAdditional references and sources--22

• Work on indicators for the Millennium Development Goals:http://www.developmentgoals.org

• Background on OECD- World Bank DAC work on indicators:http://www.oecd.org/DAC/indicators

• I am indebted to Dariuz K. Rosati, Professor of International Economics at the Warsaw School of Economics for the arguments on globalization.

For further informationFor further information

www.worldbank.org/wbi/governance