1. Governance in Central and Eastern Europe Cheryl W. Gray Europe and Central Asia Region World Bank

2. This presentation will address 3 questions: 1.Why do we care about governance and corruption? 2.What can countries do to improve governance and reduce corruption? 3.How does BiH compare to other transition economies? –business climate –corruption –public expenditure management

3. 10% 15% 20% High MediumLow % Investment share in GDP HighMediumLow -1.5% 0% 1% 2% 1.5% -0.5% -1.0% 0.5% Income per capita Growth Rate Quality of Governance Quality of Governance in this case was measured by perceptions of 4,000 firms in 67 countries on: (i) protection of property rights; (ii) judicial reliability; (iii) predictability of rules; (iv) control of corruption. Source: World Development Report Survey, 1997 Why do we care? Good governance promotes investment & growth.

4. Structure of Government Horizontal distribution of powers (executive, legislative, judiciary) Vertical distribution of power among levels of government International dimensions: FDI, trade, donor rules/controls Civil Society Voice & Participation Freedom of information Public hearings on draft laws Media/NGOs Community input/monitoring Public Sector Management Meritocratic civil service with adequate pay Public expenditure management Decentralization with accountability Frontline service delivery (health, education, infrastructure) Tax and customs Political Accountability Political competition, credible pol. parties Transparency in party financing Disclosure of parliamentary votes Asset declaration, conflict-of-interest rules Competitive Private Sector Economic policies Restructuring of monopolies Regulatory simplification Transparency in corporate governnance Collective business associations GOOD GOVERNANCE What to do? Improving governance requires actions along many dimensions.

5. Measuring the Quality of Governance: The Business Environment and Enterprise Performance Survey [BEEPS] Survey of over 6000 firms in 27 transition countries by World Bank & EBRD in March-May 2002 First round: 4500 firms in 25 transition countries in 1999 Questions on the business environment, quality of governance, and nature of firm-state interactions Joint work of the World Bank and EBRD – First results published in recent EBRD “ Transition Report ” Will be analyzed in greater detail in “ Corruption in Transition II ”

6. Perceptions of the Business Climate Southeastern Europe, 1999-2002

7. Administrative Corruption Bribes to public officials to distort the prescribed implementation of laws, rules and regulations Includes bribes to: –win procurement contracts –obtain delivery of public services –gain licenses –smooth customs procedures

8. BEEPS data on administrative corruption 1999 and 2002

9. State Capture Efforts of firms to shape the legal, policy and regulatory environment through illicit, non-transparent provision of private gains to public officials Examples include: –purchase of legislative votes –purchase of executive decrees –purchase of court decisions –illicit political party financing

10. BEEPS data on state capture 1999 and 2002

11. Measuring State Capture

12. The Time Tax

13. Public Expenditure Management: Needs Assessment Goal: To review the state of public expenditure management systems in ECA countries Methodology: Assesses countries on 15 key PEM performance indicators –Medium-term framework –Budget formulation –Budget execution –Budget auditing and reporting –Progress and capacity for change

15. Steps have been taken towards PEM reform in BiH.… New Treasury system External audit But much remains to be done… Policy-making and budgeting process –Coordination of policy-making –Linking policies and budget (MTEF) Budget comprehensiveness Procurement Budget control (internal audit, budget reporting)

16. Summary of key messages  Good governance is key to economic growth and development.  Fighting corruption requires a multi-pronged strategy to create accountable institutions (public and private; political and economic)  Businesses perceive a significant improvement in the investment climate since 1999.  BiH’s primary corruption problem is the very high level of “state capture”  Public expenditure management is weak in BiH, even compared to lower-income countries in ECA.