1. 1 Misrule of Law in Numbers : Worldwide Empirics means Heresy to Law and Economics? Daniel Kaufmann, The World Bank Institute www.worldbank.org/wbi/governance www.govindicators.org Preliminary Background Material for Presentation at the 2 nd Workshop on Measuring Law & Institutions, to be held in Paris, December 14-15 th, 2007 Preliminary Draft, not for circulation

2. 2 Challenging Convention on Rule of Law (RoL) from an Empirical Development Perspective 1.The WGI, and the disaggregated data: major Governance Databank, including Rule of Law 2.Little Change can take place in RoL in Short Term? 3.Rule of Law Matters for Economic Development? 4.De Facto Data Matters, and so do Margins of Error 5.The gap between De Jure vs. De Facto: Informality 6.Historical Legal Origins determines RoL today? 7.Capturing Capture 8.Some Implications for Research and Policy

3. 3 Empirical Frameworks: from aggregate to disaggregate The Macro-Aggregate Level, e.g. WGI, TI, CPIA The Mezzo Level, e.g. WEF, BEEPS, Doing Business The Micro, in-country, in depth diagnostic, e.g. WBI GAC diagnostics, scorecards (Bangalore), randomized experimental projects (Indonesia/Oken) Complementarities and Hybrids

4. 4 Six Dimensions of Governance The process by which those in authority are selected and replaced –VOICE AND ACCOUNTABILITY –POLITICAL STABILITY & ABSENCE OF VIOLENCE/TERRORISM The capacity of government to formulate and implement policies –GOVERNMENT EFFECTIVENESS –REGULATORY QUALITY The respect of citizens and state for institutions that govern interactions among them –RULE OF LAW –CONTROL OF CORRUPTION Governance as the set of traditions and institutions by which authority in a country is exercised-- specifically:

5. 5 Worldwide Governance Indicators Project WGI: Six aggregate governance indicators covering 212 countries over past decade WGI is annually released, based on 33 data sources, capturing views of thousands of informed stakeholders Used by analysts, officials, civil society, and researchers to monitor governance and study its causes and consequences Transparent availability of the aggregate and disaggregate indicators (and margins of error, methodology, answer to critics, etc.) in the web, at www.govindicators.orgwww.govindicators.org

6. 6 Sources 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 Voice of the People, Latinobarometro, Afrobarometer Expert Assessments from Commercial Risk Rating Agencies: DRI, PRS, EIU, World Markets Online, Merchant International Group, IJET Travel Consultancy, PERC Expert Assessments from NGOs, Think Tanks: Reporters Without Borders, Heritage Foundation, Freedom House, Amnesty International, Bertelsmann Foundation, Columbia University, International Research and Exchanges Board Expert Assessments from Governments, Multilaterals: World Bank CPIA, EBRD, AFDB, ADB, State Dept. Human Rights Report, Trafficking in Persons Report

7. 7 Sources for Rule of Law, 2006 Cont’d

8. 8 Sources for Rule of Law, 2006 contd.

9. 9 Why Aggregate Indicators of Governance? Governance viewed as a much broader notion than ‘formal rules of the game’ Individual data sources provide a noisy “signal” of broader concept of governance, e.g.: –trust in police  RULE OF LAW –freedom of press  VOICE & ACCOUNTABILITY Benefits of Aggregation--through U.C. Method aggregate indicators are more informative about broad concepts of governance broader country coverage ( than individual indicators) generate explicit margins of error for country scores less likelihood of outliers

10. 10 Building Aggregate Governance Indicators Use Unobserved Components Model (UCM) to construct composite governance indicators, and margins of error for each country Estimate of governance: weighted average of observed scores for each country, re-scaled to common units Weights are proportional to precision of underlying data sources Precision depends on how strongly individual sources are correlated with each other Margins of error reflect (a) number of sources in which a country appears, and (b) the precision of those sources

11. 11 Control of Corruption Selected Countries, 2006 Poor Governance Governance Level Margins of Error Good Governance DISCLAIMER: The data and research reported here do not reflect the official views of the World Bank, its Executive Directors, or the countries they represent. The WGI are not used by the World Bank Group to allocate resources or for any other official purpose. Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A. Kraay and M. Mastruzzi, June 2007, www.govindicators.org. Colors are assigned according to the following criteria: Dark Red: country is in the bottom 10 th percentile rank (‘governance crisis’); Light Red: between 10 th and 25 th percentile rank; Orange: between 25 th and 50 th percentile rank; Yellow, between 50 th and 75 th ; Light Green between 75 th and 90 th percentile rank; and Dark Green: between 90 th and 100 th percentile (exemplary governance). Estimates subject to margins of error. www.govindicators.org

12. 12 Quality of Rule of Law, 2006 Source for map: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, June 2007 - www.govindicators.org. Colors are assigned according to the following criteria: Dark Red: country is in the bottom 10 th percentile rank (‘governance crisis’); Light Red: between 10 th and 25 th percentile rank; Orange: between 25 th and 50 th percentile rank; Yellow, between 50 th and 75 th ; Light Green between 75 th and 90 th percentile rank; and Dark Green: between 90 th and 100 th percentile (exemplary governance). Estimates subject to margins of error.

13. 13 Application 1: Quality of Governance and Rule of Law changes very little in short term?

14. 14 Major Deterioration (selected countries) Major Improvement (selected countries) Insignificant Change (selected countries) Change in Voice & Accountability, 98-06 Changes were calculated on the basis of the differences in country estimates from 1998 and 2006. Classification for major deteriorations and improvements were based on 75% confidence interval. Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, June 2007 - www.govindicators.org

15. 15 Governance Indicators for Ghana, 1998-2006 Source for data: : 'Governance Matters VI: Governance Indicators for 1996-2006’, D. Kaufmann, A. Kraay and M. Mastruzzi, July 2007 (http://www.worldbank.org/wbi/governance/govdata/) ; Colors are assigned according to the following criteria: Dark Red, bottom 10 th percentile rank; Lighthttp://www.worldbank.org/wbi/governance/govdata/ Red between 10 th and 25 th ; Orange, between 25 th and 50 th ; Yellow, between 50 th and 75 th ; Light Green between 75 th and 90 th ; Dark Green above 90 th.

16. 16 Governance Indicators for Zimbabwe, 1998-2006 Source for data: : 'Governance Matters VI: Governance Indicators for 1996-2006’, D. Kaufmann, A. Kraay and M. Mastruzzi, July 2007 (http://www.worldbank.org/wbi/governance/govdata/) ; Colors are assigned according to the following criteria: Dark Red, bottom 10 th percentile rank; Lighthttp://www.worldbank.org/wbi/governance/govdata/ Red between 10 th and 25 th ; Orange, between 25 th and 50 th ; Yellow, between 50 th and 75 th ; Light Green between 75 th and 90 th ; Dark Green above 90 th.

17. 17 WGI: Rule of Law, 2000-2006, Selected Countries Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. New Europe Countries: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia. Best 20002006

18. 18 Application 2: Rule of Law Matters for Development? Rule of Law Matters for Development? Taking seriously the challenge of Causality Direction Starting Point: plotting Rule of Law vs. Income per Capita – at first sight such depiction of correlation conveys potential importance of economic development for rule of law formation Yet, upon further reflection…

19. 19 Rule of Law and Development – Illustrating with the case of Africa Is the level of Rule of Law “better than expected” given low income levels in Africa? –2/3 of countries in Africa fall “above the line” in a scatterplot of governance against per capita income doing relatively ok on governance? No. This scatterplot interpretation (implicitly) assumes a strong positive effect of income on governance –but actually most, if not all, of the causation is in the other direction – better governance raises per capita income

20. 20 Rule of Law and Per Capita Income

21. 21 Higher Income Does Not Cause Better Governance Causal Effect of Income on Governance

22. 22 Governance Matters -- The ‘Development Dividend’ Isolating Causality: From governance to income

23. 23 Governance Matters around the world: The 300% ‘Dividend’ Large Development Dividend of Good Governance: a one-standard-deviation improvement in governance (say, in rule of law or in corruption control) raise incomes per capita in a country by about 300% in long-run But is such a decline in corruption unrealistically large?: NO -- One S.D. is the difference from: Somalia  Togo or Guinea- Bissau  Namibia or Rwanda  Botswana or Portugal  Netherlands or Sweden The impact is from governance to incomes, and not viceversa -- higher incomes alone will not automatically do

24. 24 Development Dividend From Good Rule of Law $300 $3,000 $30,000 Data Source for calculations: KK 2004. Y-axis measures predicted GDP per capita on the basis of Instrumental Variable (IV) results for each of the 3 categories. Estimations based on various authors’ studies, including Kaufmann and Kraay.

25. 25 Rule of Law is Associated with Lower Infant Mortality for the Population, 2006 Low High r = - 0.66 Source for Rule of Law: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. Source for infant mortality, WDI 2004.

26. 26 Application 3: De Facto Data Matters? De Jure vs. De Facto data Why disconnect in development?: Informality of Rules: Limits to de Jure… Corruption and Capture matters

27. 27 ‘Subjective’ vs. ‘Objective’ Measures Perceptions data are very useful even when objective measures exist –But often only type of cross-country data available (e.g. corruption) Perceptions matter directly! Perceptions data add insight over de jure measures when such objective measures exist, e.g. comparison of: statutory number days to start a business from Doing Business database (de jure) firms perceptions of ease of business entry from Global Competitiveness Survey (de facto) –two are weakly correlated in developing countries –prevalence of corruption explains much of gap between the two

28. 28 2007 Enforceability of Contracts (DB) vs. Efficiency of Legal Framework (EOS) Low High r = 0.49 Source: Doing Business 2006 & 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org.

29. 29 Subjective and Objective Measures of Ease of Business Entry: OECD/NIC Sample Low High r = 0.51

30. 30 Subjective and Objective Measures of Ease of Business Entry: Developing Country Sample Low High r = 0.24

31. 31 Explaining Difficulty in Starting a Business (de facto): Corruption Matters more than De Jure Regulations Source: Kaufmann, Kraay and Mastruzzi (2005). The vertical axis measures the estimated impact on firms’ responses to a survey question regarding the difficulty of starting a business (the 2004 Global Competitiveness Survey) corresponding to a de jure measure (capturing the number of days required to start a business) moving from the 50th percentile to the 75th percentile (first bar) and from also having overall corruption levels move from the 50th to the 75th percentile (second bar).

32. 32 Unbundling Different Manifestations of Bribery, EOS 2006 % Firm Report High Bribery (1-3) Source: EOS firm survey, WEF2006. Questions: In your industry, how commonly firms make undocumented extra payments or bribes connected with permits / utilities / taxation / awarding of public contracts / influence laws and regulations / judiciary? (common…never occurs). Bribery in: Low Bribery

33. 33 Misrule of Law and Informality of Rules in Extremis: Measuring Extent of State Capture in Transition, BEEPS 2005 Source: BEEPS 2005. Questions: To what extent have the following practices had a direct impact on your business: private payments to parliamentarians to affect their votes; private payments to government officials to affect the content of government decrees; private payment to local government officials to affect their votes or content of government decrees. Y-axis reports % of firms who reported high capture (3 or 4). Bribery to affect laws:

34. 34 Application 4: Revisiting Historical Origins Determinism? Search for fundamental antecedents to institutional outcomes today: important But deeper empirical scrutiny raises questions: i) for developing countries, & ii) normative outcomes of LO (and others?) Statistical Effects Significant with worldwide data?: Somewhat… Magnitude large with worldwide data?: No Significant and sizeable effects for emerging economies: not really

35. 35 Governance and Legal Origin, Full Sample (160 countries) Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. and Djankov et al (2005). R = 0.13R = 0.12R = 0.10 R = 0.18R = 0.12R = 0.11

36. 36 Governance and Legal Origin, World (POP>1M) Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. and Djankov et al (2005). R = 0.10 R = -0.04 R = 0.11R = 0.09R = 0.04

37. 37 Governance and Legal Origin, Emerging Economies (POP>1M) Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. and Djankov et al (2005). R = 0.00R = 0.02R = -0.10 R = 0.03R = 0.00R = 0.01

38. 38 Rule of Law & Legal origin, Emerging Economies (POP>1M) Today History Bottom Half WGI Rule of Law 2006 Top Half in WGI Rule of Law 2006 Common Law Origin swaziland jamaica liberia sierra leone papua new guinea somalia zambia zimbabwe nepal kenya sudan nigeria bangladesh pakistan trinidad and tobago gambia botswana lesotho namibia united arab emirates malawi sri lanka ghana saudi arabia malaysia uganda tanzania south africa thailand india Civil Law Origin guinea-bissau albania congo central african republic eritrea Nicaragua libya laos togo paraguay Honduras burundi haiti bolivia guinea chad guatemala ecuador niger cambodia angola cameroon Ivory coast yemen venezuela iraq peru afghanistan algeria colombia myanmar Congo DR iran ethiopia indonesia mauritius gabon kuwait oman mauritania panama lithuania uruguay lebanon puerto rico costa rica jordan el salvador benin dominican republic rwanda tunisia senegal burkina faso mali chile madagascar syria mozambique romania morocco argentina turkey egypt vietnam philippines mexico brazil Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. and Djankov et al (2005). Full Sample included 98 countries. Top half/Common Law=16; Top Half/Civil Law:33; Bottom half/Common Law=14; Bottom Half/Civil Law: 35 countries.

39. 39 Governance & Settler Mortality, Countries with more than 1 million people (152 countries) Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. and Acemoglu et al (2002). R = 0.52R = 0.53R = 0.37 R = 0.53R = 0.47R = 0.46

40. 40 Rule of Law & Settler Mortality, World for countries (POP>1M) Today History Bottom Half in Rule of Law 2006 Top Half in Rule of Law 2006 Low Settler Mortality Albania Lebanon Bosnia-Herzegovina Moldova Georgia Libya Dominican Rep. Bolivia Serbia Belarus Cuba Guatemala Ecuador Syria Korea, North Iraq Peru Argentina Colombia Ukraine Myanmar Iran Ethiopia Mexico Russia Pakistan Mauritius Estonia Slovenia Latvia Kuwait Mongolia Lithuania Uruguay Puerto Rico New Zealand Ireland Singapore Croatia Norway Finland Slovak Republic Jordan Denmark Israel Hong Kong Switzerland Bulgaria Austria Sweden Tunisia Hungary Czech Republic Belgium Portugal Greece Chile Netherlands Sri Lanka Australia Romania Malaysia Canada Poland Spain South africa Korea, South Italy United Kingdom France Turkey Egypt Germany Japan Brazil United States India China High Settler Mortality Swaziland Gabon Guinea-Bissau Jamaica Armenia Liberia Congo Central Africa Republic Eritrea Turkmenistan Kyrgyz Republic Nicaragua Sierra Leone Papua New Guinea Laos Togo Paraguay Tajikistan El Salvador Honduras Burundi Somalia Azerbaijan Benin Haiti Rwanda Guinea Chad Zambia Zimbabwe Niger Cambodia Kazakhstan Angola Cameroon Cote d'Ivoire Mozambique Yemen Venezuela Uzbekistan Nepal Uganda Afghanistan Algeria Kenya Sudan Zaire Nigeria Bangladesh Indonesia Trinidad & Tobago Gambia Botswana Lesotho Namibia Macedonia Oman Mauritania Panama Costa Rica United Arab Emirates Senegal Malawi Burkina Faso Mali Madagascar Ghana Taiwan Saudi Arabia Morocco Tanzania Thailand Vietnam Philippines Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. and Djankov et al (2005). Full Sample included 114 countries. Top half/ Low Mortality=52; Top Half/High Mortality:24; Bottom half/Low Mortality=26; Bottom Half/High mortality: 50 countries.

41. 41 Application 4: Limits to Historical Determinism? – Legal Origins, and Governance Today Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. and Djankov et al (2005). Legal Origins:

42. 42 Application 5: Limits to Incrementalism? Impact of Incremental or Partial Reforms intrinsically limited in misrule of law settings?

43. 43 WGI: Application of Rule of Law, Regional Averages, 2006 Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. New Europe Countries: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia.

44. 44 % Firms reporting satisfactory quality Quality of Institutions, Rule of Law, view of the firm, EOS 2006 Source: EOS firm survey, WEF2006.

45. 45 WGI: Rule of Law, 2000-2006, Selected Countries Source for data: 'Governance Matters VI: Governance Indicators for 1996-2006’, by D. Kaufmann, A.Kraay and M. Mastruzzi, July 2007 - www.govindicators.org. New Europe Countries: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia. Best 2000 2006

46. 46 Some Conclusions – for debate 1.Rule of Law & Governance can be measured 2.Not relying on one single source: triangulation and aggregation, while also using disaggregated sources, & taking margins of error seriously 3.WGI, aggregate and disaggregate, can be used to test competing historical origin theories 4.Econometric model: Taking seriously: i) causality direction, and, ii) omitted variable bias 5.Magnitude of coefficients matter (not just significance) 6.Limits to De Jure measures of Rule of Law, and Perceptions Matter; measuring de facto phenomena 7.Informality in Development: crucial for measurement and for policy 8.In particular: Capture, Patronage, Corruption 9.Limits to Incrementalism: some shocks needed?

47. 47 Media Private Sector Municipal Government Military State (Bureaucracy) Political Parties Civil Society International Legislative Branch Judiciary 1 Entrenched Corruption Networks: The Case on Montesinos in Peru Source: “Robust Web of Corruption: Peru’s Intelligence Chief Vladimiro Montesinos,” Kennedy School of Government Case Program, Case C14-04-1722.0, based on research by Professor Luis Moreno Ocampo; Peru: Resource Dependency Network, 2000 Vladimiro Montesinos Alberto Fujimori

48. 48 Data for Analysis and Informing Policy Advice, Not for Precise Rankings Any data on Governance, Institutions, and Investment Climate is subject to a margin of error. It is not intended for precise country rankings, but to highlight relative strengths and weaknesses and draw analytical and policy lessons. The data and indicators do not necessarily reflect official views on rankings by the World Bank or its Board of Directors. Errors are responsibility of the author. Further materials & access to interactive data: General: www.worldbank.org/wbi/governance Data: www.govindicators.org