1. New Frontiers on Governance and Lessons for New Zealand in a Corrupt World Daniel Kaufmann The World Bank Institute http://www.worldbank.org/wbi/governance Presentation at NZIER’s Annual General Meeting Wednesday, September 19 th, 2001 Auckland, New Zealand Video Link with the World Bank, Washington, DC Note: Data presented here subject to margin of error. Views and errors are authors’..

2. 2 On Governance and Corruption: challenging eight conventions 1. Corporate Governance = National Governance? 2. National (Public) Governance = Control of Corruption? 3. Corporate Responsibility unrelated to Public Governance? 4. Control of Terrorism unrelated to control of corruption? 5. Unavailability/Unreliability of Data in governance field? 6. Administrative/Bureaucratic Bribery is key problem? 7. Corporate Strategies => improved National Governance? 8. NZ exporters/FDI can do little in a corrupt world? The 8 conventions above will be answered in the Negative.

3. 3 What is Governance?: A working definition for public governance Governance is the process and institutions by which authority in a country is exercised: (1) the process by which governments are selected, held accountable, monitored, and replaced; (2) the capacity of governments to manage resources efficiently, and to formulate, implement, and enforce sound policies and regulations; and, (3) the respect for the institutions that govern economic and social interactions among them

4. 4 Operationalizing Governance : Unbundling its Definition into Components that can be measured, analyzed, and worked on Each of the 3 main components of Governance Definition is unbundled into 2 subcomponents: Voice and Accountability Political Stability and lack of Violence Quality Regulatory Framework Government Effectiveness Control of Corruption Rule of Law

5. 5 Control of Corruption: Aggregate Indicator ( selected countries from 155 worldwide, for illustration, based on 1998 research data*) Source: ‘Governance Matters’, PRWP 2196 by Kaufmann, Kraay and Zoido. http://www.worldbank.org/wbi/governance/ POOR GOOD Corruption Level Margin of Error Good Corruption Control

6. 6 Application of Rule of Law Varies by Region OECDEast Asia Middle East South Asia Eastern Europe Latin America Sub- Saharan Africa Former Soviet Union (based on aggregation of surveys/polls 1997-99*) High Index of Rule of Law Appli- cation Low Index 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

7. 7 The ‘Dividend’ of Good Governance Infant Mortality and Corruption 0 10 20 30 40 50 60 70 80 90 WeakAverageGood Control of Corruption x Development Dividend 0 2,000 4,000 6,000 8,000 10,000 12,000 WeakAverageGood Regulatory Burden x Development Dividend Per Capita Income and Regulatory Burden Literacy and Rule of Law 0 25 50 75 100 WeakAverageGood Rule of Law x Development Dividend Per Capita Income and Voice and Accountability 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 WeakAverageStrong Voice and Accountability x Development Dividend Note: 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 Dividend”) from improved governance to better development outcomes. For data and methodological details visit http://www.worldbank.org/wbi/governance.

8. 8 Probability of Losing FDI due to Corruption Probability of Losing Investment Due to Corruption (For FDI, within a 5-year period. Source SP/DRI, 2000, Selected Countries, Preliminary) Certain Unlikely [%]

9. 9

10. 10 Corruption in the Banking Sector, abridged (Source: EIU, 2001) Systemic corruption Honest Banking

11. 11 Not Free Partly FreeFree Corruption [and Absence of Rule of Law] High Low Civil Liberties Corruption/Absence of Rule of Law & Civil Liberties Based on averages of data from 160 countries.

12. 12 Control of Graft and Freedom of the Press High Low High r =.68 Freedom of the Press (Freedom House) Control of Graft [kkz]

13. 13

14. 14 Diagnostic Surveys as Input to Action Program Design and Strategy: Illustrations 1. In-depth Country Diagnostic surveys of Firms, Users and Public Officials: identify misgovernance, corruption and institutional vulnerabilities in each agency 2. How costly is corruption in afflicted agencies? 3. How to Prioritize and design politically feasible reforms? Support Strategies? 4. Capacity Building and Institutional Development

15. 15 Albania Georgia Latvia 020406080 Customs inspectors Tax inspectors Judges Ordinary police Investigators/ prosecutors Ministers Which Public Sector Jobs Are “Sold”? Percent of public officials reporting “purchase” of positions 48 60 41 52 41 25 39 32 16 25 10 40 23 5 33 32 14 19 Source: Diagnostics 1998

16. 16 Citizen Voice and Access to Public Services by the Poor (Bolivia illustration, each observation is a public agency) Based on 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

17. 17 Transparency within Government Agencies Prevents Purchase of Public Positions Based on 90 national, departmental, and municipal agencies covered in the Public Officials Survey.

18. 18 Politicization of Public Agencies in Indonesia Lowers Transparency in Public Sector (Indonesian Public Official Survey – Very Preliminary Draft) Based on 36 public agencies covered in the Indonesia Public Officials Survey.

19. 19 Public Sector Corruption in Indonesia Is Not Caused by Low Government Pay (Indonesian Public Official Survey – Very Preliminary Draft) Based on 36 public agencies covered in the Indonesia Public Officials Survey.

20. 20

21. 21 Lower Income Households ‘Pay’ Disproportionally Bribe/Total Income ratio % ( A Latin American Country )

22. 22 BEEPS: Unbundling and Comparing Governance Constraints Across all countries in Transition (and beyond)

23. 23 Recognizing the Problem of State Capture Vladimir Putin’s statement to Russia’s business leaders (last year): “I only want to draw your attention straightaway to the fact that you have yourselves formed this very state, to a large extent through political and quasi-political structures under your control, so perhaps what one should do least of all is blame the mirror.”

24. 24 Defining State Capture Firms that shape the rules of the game to their advantage through illicit, non-transparent provision of private gains to public officials, including: –private purchase of legislative votes –private purchase of executive decrees –private purchase of court decisions –illicit political party financing

25. 25 Measuring State Capture

26. 26 The Myth that Administrative Bribery Pays

27. 27 ‘Captor’ Firms Get Big Gains – But only in High Capture States

28. 28 At A Cost Of Greater Insecurity for All Others Share of Firms with Secure Property Rights

29. 29 Capture comes at a very high Socio-Economic Cost

30. 30 2% 4% 6% 8% 10% 12% % firms 'purchase' legislative Domestic Investor With FDI % 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)

31. 31 Prevalence of Kickbacks for Public Procurement by FDI (by country of FDI origin, bribing in transition) Source: Hellman, Jones and Kaufmann 2000 (BEEPS in Transition). Estimates subject to margin of error.

32. 32 Towards a Solution: More Political Competition Pace of Econ Reform Political Reforms

33. 33 Towards a Solution: Collective Action by Firms

34. 34 Concrete Implications: What can New Zealand FDI and exporters realistically do? (part I) 1.Work with NZ government to ensure thorough and transparent evaluation of OECD convention implementation by other members 2.Towards Pan-Asian anti-bribery convention 3.Power of Information: Survey, Expose, Shame and Disseminate – media, host governments, e*… 4.Business Associations activism abroad 5.Embassies of ‘cleaner gang of FDI countries’

35. 35 Concrete Implications, part II: What can New Zealand FDI and exporters realistically do? 6. In systemically corrupt countries, stay away 7. In relatively corrupt countries, say No to bribery 8. Logic of collective action: credibly saying No to kickbacks and state capture – the high road 9.Pressure to have international public listings of corrupt firms debarred, such as the one at World Bank http://www.worldbank.org/html/opr/procure/debarr.html http://www.worldbank.org/html/opr/procure/debarr.html 10. NZ Foreign Aid: Support of good governance and Anticorruption programs in developing countries Collective Responsibility: AC = K.I + LE + CA

36. 36 Overall Corruption Over Time (Selected Countries; ICRG index, rescaled 0-10) 0 2 4 6 8 High corruption Low corruption 1992199319941995199619971998 Indonesia Indonesia Finland El Salvador 10 Finland Russia Russia Poland Poland 1988-92 7

37. 37 http://www.worldbank.org/wbi/governance/ c