1. 1 On Governance & Anti-Corruption Some ‘Beyond Convention’ Measurement Issues and Insights from Empirical Analysis Daniel Kaufmann, The World Bank Institute www.worldbank.org/wbi/governance or, www.govindicators.org Background Handout for World Bank GAC Course, session on Measurement Issues Washington, DC, April 24 th, 2007

2. 2 Measurement: challenges and lessons Beyond myths on measurement: challenges faced by all governance and investment climate indicators Worldwide Governance Indicators (WGI) and Beyond Implications on Measurement, ways forward… Beyond traditional definition of corruption Beyond ‘Fighting Corruption by Fighting Corruption’: Good Governance is key Beyond facile solutions [such as Voluntarism, Legalism, Conmissions] - instead: Politics, Systemic Change, Transparency Reforms Beyond the World Bank…

3. 3 Intro: Worldwide Governance Indicators: Defining Governance Broadly Governance consists of the traditions and institutions by which authority in a country is exercised. This includes: –the process by which governments are selected, monitored and replaced, –the capacity of the government to effectively formulate and implement sound policies, and –the respect of citizens and the state for the institutions that govern economic and social interactions among them.

4. 4 Worldwide Governance Indicators Six aggregate governance indicators covering 213 countries over past decade –Voice and Accountability –Political Stability/Absence of Violence –Government Effectiveness –Regulatory Quality –Rule of Law –Control of Corruption Based on 31 data sources from 25 organizations, capturing views of thousands of informed stakeholders Widely used by analysts, officials, civil society, and researchers to monitory governance and study its causes and consequences

5. 5 2006 Update of Worldwide Governance Indicators: Key Features Move to annual data –complement biannual data 1996-2004 with annual data for 2003, 2005 –continue reporting data annually in future First-time access to data underlying aggregate indicators –hundreds of individual indicators over past decade –one of the largest on-line governance data resources at www.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 Why Aggregate Indicators? Basic Premise: 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 –bureaucratic quality  GOV’T EFFECTIVENESS Benefits of Aggregation aggregate indicators are more informative about broad concepts of governance – simple intuition of averaging less likely to generate extreme outliers generate explicit margins of error for country scores

8. 8 Levels of Governance Worldwide, 1996-2005 Estimates of governance for 213 countries Standard errors to assess the precision of the estimates –Rule of thumb: cross-country differences in governance significant if 90% confidence regions don’t overlap –Many small differences between countries not significant… –But many larger differences are statistically significant 70% of all comparisons based on aggregate indicator... but only 30% of all comparisons based on individual indicators Precision of governance indicators has improved over time with more, and better, data sources

9. 9 Control of Corruption Selected Countries, 2005 Poor Governance Governance Level Margins of Error Good Governance Source for data: 'Governance Matters V: Governance Indicators for 1996-2005’, D. Kaufmann, A. Kraay and M. Mastruzzi, September 2006. Note: Colors are assigned according to the following criteria: Dark Red, below 10 th percentile rank among all countries in the world; Light 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.

10. 10 Three Principles for Using Governance Indicators 1.All indicators have measurement error –rely on variety of data sources –reduce noise by aggregation 2.There are no silver bullets –subjective/perceptions vs. objective/statutory –aggregate vs. individual indicators –regular cross-national monitoring/research vs. detailed country diagnostics/country policy advice –complements vs. substitutes 3.Links from policy actions to outcomes are complex –“actionable” versus “action-worthy” indicators

11. 11 1. All Indicators Have Measurement Error Governance is difficult to observe directly, so all available measures are only proxies, e.g. –Perceptions measures: Corruption in procurement? Confidence in the courts? Onerous regulation of entry for a new firm? –Objective/Statutory measures Do regulations stipulate competitive bidding Do materials used match materials paid for? How many procedures to fire a worker?

12. 12 1. Measurement Error, Cont’d Two types of measurement error in any proxy: 1.Errors in measuring specific proxies, e.g. –sampling error in survey –factual errors in objective measures –differences of opinion 2.Gaps between proxies and broader concepts, e.g. –corruption in judiciary vs. overall graft –business entry regulation vs. overall regime WGI (unusually!) reports explicit margins of error –Yet margins of error are implicit in ‘objective’ and in individual subjective indicators – and they are large too

13. 13 2. No Silver Bullets: a) Aggregate vs. Individual Indicators Aggregate indicators have: –broad country coverage (e.g. TI; WGI) –more information on broad concepts of governance –(potentially) can exhibit explicit margins of error Individual indicators are: –easier to interpret –(potentially) identify policy interventions Ideally use aggregate indicators that can be unbundled –Multi-source: WGI aggregate & individual indicators –Single-source: World Bank CPIA; and Global Integrity Index (GII)

14. 14 Three Principles for Using Governance Indicators 1.All indicators have measurement error –rely on variety of data sources –reduce noise by aggregation 2.There are no silver bullets –subjective/perceptions vs. objective/statutory –aggregate vs. individual indicators –regular cross-national monitoring/research vs. detailed country diagnostics/country policy advice –complements vs. substitutes 3.Links from policy actions to outcomes are complex –“actionable” versus “action-worthy” indicators

15. 15 1. All Indicators Have Measurement Error Governance is difficult to observe directly, so all available measures are only proxies, e.g. –Perceptions measures: Corruption in procurement? Confidence in the courts? Onerous regulation of entry for a new firm? –Objective/Statutory measures Do regulations stipulate competitive bidding Do materials used match materials paid for? How many procedures to fire a worker?

16. 16 1. Measurement Error, Cont’d Two types of measurement error in any proxy: 1.Errors in measuring specific proxies, e.g. –sampling error in survey –factual errors in objective measures –differences of opinion 2.Gaps between proxies and broader concepts, e.g. –corruption in judiciary vs. overall graft –business entry regulation vs. overall regime WGI (unusually!) reports explicit margins of error –Yet margins of error are implicit in ‘objective’ and in individual subjective indicators – and they are large too

17. 17 2. No Silver Bullets: a) Aggregate vs. Individual Indicators Aggregate indicators have: –broad country coverage (e.g. TI; WGI) –more information on broad concepts of governance –(potentially) can exhibit explicit margins of error Individual indicators are: –easier to interpret –(potentially) identify policy interventions Ideally use aggregate indicators that can be unbundled –Multi-source: WGI aggregate & individual indicators –Single-source: World Bank CPIA; and Global Integrity Index (GII)

18. 18 Aggregate Governance Indicators for Chile [2005 vs. 1998]

19. 19 Unbundling WGI Aggregate Indicators – Chile Reporters Without Borders http://www.rsf.org Reporters without Borders, headquartered in Paris, is an international organization dedicated to the protection of reporters and respect of press freedom in the world. In 2002, International Reporters Without Borders published its first worldwide press freedom index, compiled for 139 countries. The index was drawn up by asking journalists, researchers, and leagl legal experts worldwide to answer 50 questions about a whole range of press freedom violations.

20. 20 2. No Silver Bullets: b) 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

21. 21 Subjective and Objective Measures of Ease of Business Entry: OECD/NIC Sample Low High r = 0.51

22. 22 Subjective and Objective Measures of Ease of Business Entry: Developing Country Sample Low High r = 0.24

23. 23 2. No Silver Bullets: b) Subjective vs. Objective Measures, cont’d ‘Objective’ indicators can be very specific, but interpretation can be ambiguous and imprecise –parliamentary vs. presidential system may matter for outcomes, but not a “governance indicator” per se –does an anti-corruption commission exist? –prosecutions for bribery? ‘Perceptions’ data need not be vague or imprecise –“do you think corruption is a problem, yes or no?” vs. –“what percent of the total contract value do firms like yours typically have to pay in bribes to secure procurement contracts?” False dichotomy between subjective and objective measures not helpful

24. 24 Corruption Control and Prosecutions for Bribery negatively correlated… Worst Best r = -0.16 Sources: Worldwide Governance Indicators and Seventh United Nations Survey on Crime Trends and the Operations of Criminal Justice Systems, 2000. Axis report percentile ranks ranging from 0 (worst) to 100 (best). See Lambsdorff 2006 Best (least)

25. 25 2.No Silver Bullets: c) Timely Monitoring vs. In-Depth Evaluation Worldwide benchmarking, regular monitoring and cross-country research: –aggregate (and some individual) governance indicators In-depth evaluation of particular country based on many potential instruments and techniques, e.g.: –PEFA, OECD Procurement Indicators –Country Governance & A-C (GAC) Diagnostics –comparing “inputs” and “outputs”, e.g. infrastructure in Italy, roads in Indonesia Complementarity between two types of indicators –e.g. Kenya governance assessment

26. 26 3. Links from Policy Interventions to Governance Outcomes are Complex ‘Objective’ and easy-to-measure indicators may not matter most, e.g. –existence of anticorruption commission? –turnover of civil servants? –proportion of population incarcerated? Risk of confusing reform reality and reform illusion Across countries, priority actions and their impact will differ crucial to measure outcomes as well Thus, measure BOTH: i) “action-worthy” indicators, and, ii) outcome indicators – it means asking firms, citizens and experts

27. 27 3.Complex Links, Cont’d: Leading GMR “Actionable” Indicators Global Integrity Index 2006 –43 countries (15 with one previous observation) –290 indicators of existence and effectiveness OECD-DAC Procurement Indicators –very detailed assessment of laws/practices –5 pilots done, public access limited PEFA Indicators –28 indicators of public financial management –31 countries done, 47 in progress/planning, public access limited –very limited panel dimension Open Budget Initiative –122 indicators of budget transparency –59 countries, single cross-section

28. 28 Ten Implications on Governance Measurement 1.caution in use of indicators due to margins of error 2.aggregate indicators reduce margins of error 3.but disaggregated indicators are also needed 4.need multiplicity of indicators, different methods & approaches, complement and combine 5.false divide between subjective & objective indicators 6.actionable vs. action-worthy indicators 7.action-worthy vs. outcome indicators 8.match indicator/measurement tool with objective: in- depth, in-country GAC diagnostics are important 9.transparent disclosure and rigorous scrutiny 10.realism about what it takes to deliver new indicators

29. 29 On defining Corruption – some pitfalls… Traditional definition of corruption: ‘Abuse of public office for private gain’ 3 Problems: i) interpreted in terms of legality of act (illegal = corrupt; legal = non-corrupt?); ii) onus is on the public official (asymmetry), and, iii) measurement bias towards ‘petty corruption’ Alternative: ‘Privatization of public policy’ (e.g. undue & distortive influence by private interests on public decisions, on granting monopoly powers) This implies that some actions may be legal, strictly speaking, but lack in legitimacy (and inconsistent with ethics standard ) can be seen as corrupt These legal forms of corruption can be measured

30. 30 Beyond Bureaucratic Corruption: Unbundling Share of Firms Reporting High Bribery Source: EOS firm survey, WEF2006 – 126 countries. Bribery in:

31. 31 State Capture, Undue Influence & Political Funding, Report of Firms, 2006 Share of Firms Report Poor Governance Source: EOS firm survey, WEF2006 – 126 countries.

32. 32 Corporate Corruption, unbundled, 2004 Source: Author’s calculations based on EOS 2004. % Firms report corruption type (1-4)

33. 33 Capture by Corporates Impairs Competitive Growth Based on survey of transition economies, 2000

34. 34 Fighting Capture: Economic Reform, Political Competition & Civil Liberties Matter Economic Reforms Political/Civil Liberties Reforms

35. 35 -1.5- -1.0- -0.5- 0- 0.5- 1.0- 1.5- Not Free of Partially Free Freedom of the Press is associated with better Control of Corruption (& civil liberties more generally is associated with better performance of World Bank-funded projects – see WBER article 1997) Free _________________________________________________________________ Source for control of corruption: : 'Governance Matters V: Governance Indicators for 1996-2005’, D. Kaufmann, A. Kraay and M. Mastruzzi, September 2006 (http://www.govindicators.org/). Source for Press Freedom: 2006 F reedom House’s Press Freedom Report. Terciles divided according to Press Freedom ratings (190 countries total). Free: 0-30 (69); Partly Free: 31-60 (54); Not Free: 61-100 (67).http://www.govindicators.org/ Press Freedom Status: Control of Corruption Good

36. 36 Press Freedom in the World, 1995 vs. 2004: Stagnant? Source: Freedom House. Y axis measures percentage of countries in the region with free press (rating of 30 or below), partly free (ratings between 30 and 60) and not free (rating above 60). % countries in 1995 % countries in 2004

37. 37 0- 10- 20- 30- 40- 50- 60- Favoritism in Procurement Deficient Procurement Systems Linked to Frequent Bribing by Firms Level Playing Field _________________________________________________________________ Favoritism in Public Procurement and Policies Share of Firms Bribing Source: EOS2006. Questions: When firms like yours do business with the government, how much of the contract value must they offer in additional payments to secure the contract?”. Question: When deciding upon policies and contracts, government officials favor well connected firms / are neutral. 70- 80-

38. 38 10- 20- 30- 40- 50- 60- 70- Multinational in OECD, HQ in another OECD Multinational operating outside OECD, HQ in OECD Source: EOS2006. Questions: When firms like yours do business with the government, how much of the contract value must they offer in additional payments to secure the contract?”. Y-axis shows percentage of firms who admitted paying bribes. Last bar excludes small with less than 50 employees. Responsibility of the Private Sector & Multinationals on Anti-Corruption (% of Firms Reporting Procurement Bribery, 2006) Domestic Firms in NON OECD Countries (comparable) _________________________________________________________________ Location of Firm:

39. 39 -1.5- -1.0- -0.5- 0- 0.5- 1.0- 1.5- Ineffective or Partially Effective An Effective Parliament does Matter for Controlling Corruption, 2006 Effective _________________________________________________________________ Parliamentary Effectiveness: Control of Corruption Good Source for control of corruption: : 'Governance Matters V: Governance Indicators for 1996-2005’, D. Kaufmann, A. Kraay and M. Mastruzzi, September 2006 (http://www.govindicators.org/). Source for Parliamentary Effectiveness: 2006 EOS. Terciles divided evenly according to Parliament Effectiveness ratings (125 countries total).http://www.govindicators.org/

40. 40 Good Transparency Matters for Controlling Corruption Sources: Governance Matters IV by KKM (2005) and Transparenting transparency by BK (2005). N. of countries: 190

41. 41 $300- $3,000- $30,000- Low Corruption Control 300% Development Dividend from Good Governance High Corruption Control _________________________________________________________________ Medium Corruption Control 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.

42. 42 Corruption associated with soundness of financial sector Low Source: Global Competitiveness Survey, 2001, KK Governance Indicators

43. 43 Good Governance associated Country’s Competitiveness Low High r = 0.90 Sources: GCI drawn from EOS firm survey, WEF 2005 – 117 countries; Control of Corruption from Kaufmann, Kraay and Mastruzzi, ‘Governance Matters IV: Governance Indicators for 1996-2004’.

44. 44 Countries can Improve in the Short Term On average worldwide, not much of an improvement on governance and corruption control over the past decade But significant improvement in a number of countries – Eastern Europe, some in Africa, etc., challenging pessimism…it is possible

45. 45 Governance Indicators for Madagascar, 1998-2005 Source for data: 'Governance Matters V: Governance Indicators for 1996-2005’, by D. Kaufmann, A.Kraay and M. Mastruzzi, September 2006 - 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.

46. 46 In Sum – some questions to ponder 1.Anticorruption ought to be increasingly seen through a broader ‘good governance’ lens -- key issue is the respective roles of governments, civil society, donors, and privates -- Voice, civil liberties, free press: all important for A-C 2.Government, Donor & Private Initiatives are key for good governance, but how to move beyond easy picks (e.g. redrafts of laws, codes, commissions) to the more difficult and often under-emphasized issues of: i) Political Finance Reform; ii) Financial Sector (incl. equity markets) & Deregulation; iii) Transparency (incl. e*procurement ) & Media Reforms (IT); iv) Raising the cost to the briber

47. 47 Basic Scorecard: 10 Transparency Reform Components 1.Public Disclosure of Assets & Incomes of Candidates, Public Officials, Politicians, Legislators - & dependents 2.Public Disclosure of Political Campaign contributions by individuals and firms, and of campaign expenditures 3.Public Disclosure of Parliamentary Votes, w/out exceptions 4.Effective Implementation of Conflict of Interest Laws, separating business, politics, legislation, & government 5.Publicly blacklisting firms bribing in public procurement 6.Effective Implementation of Freedom of Information Law, with easy access to all to government information 7.Fiscal/Financial transparency: central/local budgets;ROSC, EITI 8.E*procurement: transparency (web) and competition 9.Media Freedoms & Media Development 10.Country Diagnostic (& Scorecard) on Transparency & Governance

48. 48 Governance Has Improved in Some Groups: e.g. “Pull Effect” of EU Accession Source for data: http://www.worldbank.org/wbi/governance/govdata/. EU EE Accessed Countries: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia.http://www.worldbank.org/wbi/governance/govdata/ High Low

49. 49 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 19901991199319941995 equiv. US$ per student Intended grant Actual grant received by primary school (means) 1999 Source: Uganda Public Expenditure Tracking Surveys Tracking Education spending in Uganda Power of Data, Transparency and Citizen Oversight Public info campaign

50. 50 Financial Sector Independent Central Bank AM Laundering Social Security Fund Capital Mks Authority Private Sector Interface Corporate governance Streamlined regulation Competitive investment climate Privatization of SOEs Transparency in Extractive Industries and Multinationals Donor Accountability Civil Society & Media Executive Professionalized civil service E-government Public finance Transparent and competitive procurement Prequalification and blacklisting Independent Regulatory agencies in sectors Sectorial Ministries Independent Oversight Institutions Judiciary Parliament oversight Supreme Audit Institution Global initiatives: UN Convention, African Convention Metrics for Monitoring and Policy A Governance Framework to Fight Corruption Political Accountability Political competition Transparency & regulation of party financing Asset and income declarations public Citizens/Firms/Banks C/F/B Citizens/Firms/Banks

51. 51 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. Not intended for precise country rankings, but to highlight relative strengths and weaknesses and draw analytical and policy lessons. Indicators do not necessarily reflect official views on rankings by the World Bank or its Board of Directors. WGI not used for WB policy. Errors are responsibility of the authors. Much of the work presented here is the result of joint research with Aart Kraay, Massimo Mastruzzi, Francesca Recanatini and Joel Hellman. www.govindicators.org