1. GOVERNANCE AND CORRUPTION
WHY DO THEY MATTER AND WHAT DO THEY REALLY MEAN?
Helen Sutch, PRMPS, April 21, 2003

2. Good governance leads to higher investment & growth
% Investment share in GDP
Income per capita Growth Rate
20%
-1.5% 0% 1% 2%
1.5%
-0.5%
-1.0%
0.5%
15%
10%
High
Medium
Low
High
Medium
Low
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

3. Good governance improves development outcomes
Infant Mortality and Corruption 10 20 30 40 50 60 70 80 90
Weak
Average
Good
Control of Corruption x
Development
Dividend
2,000
4,000
6,000
8,000
10,000
12,000
Weak
Average
Good
Regulatory Quality x
Development
Dividend
Per Capita Income and
Regulatory Burden
Literacy and Rule of Law 25 50 75
100
Weak
Average
Good
Rule of Law x
Development
Dividend
Per Capita Income and
Voice and Accountability
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Weak
Average
Strong x
Development
Dividend
Note: Based on a collaborative research project, the bars depict the simple correlation between good governance and development outcomes. The line depicts the predicted value when taking into account the causality effects (“Development Divided”) from improved governance to better development outcomes.

4. Governance – a definition
Governance is how power is exercised and mediated through institutions
Institutions: rules that shape behavior
Formal: constitutions, laws, regulations
Informal: traditional or tribal hierarchies, nomenklatura, mafia, family, other networks

5. The “how” word is critical
Through strict hierarchies/diffused laterally?
Arbitrarily?
Transparently?
Accountably?
Fairly?
With participation and consultation?
Effectively? Do systems work?

6. Do less developed countries have less developed institutions?
We think of countries as having weak or even no institutions – LICUS
But there is no tabula rasa: where formal institutions are weak, informal institutions are often strong
“The most effective system is corruption. The challenge is how to replace it” - JDW, March 2003.

7. What happens to healthy projects …in sick country environments?
The wrong firm gets the contract
Funds don’t arrive on time
Money is diverted or stolen
Projects are not staffed with the right skills
Shoddy materials are substituted, safety standards flouted
The road/bridge… is not built at all
It was the wrong project anyway
……these are all corruption = a cause and a symptom of poor governance

8. State capture/administrative corruption
State capture = corruption in the formation of laws and policies
Administrative corruption = corruption in the implementation of laws and policies

9. Good governance has many dimensions
Structure of Government
Executive decision-making structure
Legislative oversight
Independent and effective judiciary
Decentralization and intergovernmental relations
International dimensions: rules for foreign investors, trading partners, donors
Political Accountability
Political competition, credible political parties
Transparency in party financing
Disclosure of parliamentary votes
Asset declaration, conflict-of-interest rules
Competitive Private Sector
Economic incentive framework/policies
Competitive restructuring of monopolies
Regulatory simplification for entry
Transparency in corporate governance
Collective business associations
Civil Society Voice & Participation
Freedom of information
Public hearings
Role of media/NGOs
Governance monitoring
GOOD
GOVERNANCE
Public Sector Management
Meritocratic civil service with monetized, adequate pay
Public expenditure management (budget preparation and execution, financial accountability, procurement, audit)
Decentralization with accountability
Service delivery (health, education, infrastructure, courts and other dispute resolution mechanisms)
Tax and customs

10. Changing our approach: we are moving…
From a focus on technical, one-off projects to – systems for sustainability
From quick adjustment operations to programmatic lending over a longer time frame – strong formal institutions take time to build
From imposing external models of “best practice” to good fit with the country environment
From Bank to country ownership
To a new focus on key factors in designing interventions: accountability, transparency, voice