ICPS Roundtable, Kyiv, November 6th, 2000 Governance and Controlling Corruption is Central for Socio-Economic Development and Growth: New Reports and Evidence Presentation by Daniel Kaufmann, The World Bank, on New Books and Research on ‘Quality of Growth’ and ‘Anticorrruption and State Capture in Transition’ ICPS Roundtable, Kyiv, November 6th, 2000

Broadening our Perspective: Assessing Governance Control of Corruption (or Graft) Rule of Law Lack of Regulatory Burden Government Effectiveness Voice and Accountability Political Stability and lack of Violence

Quality of Rule of Law by Region Good Poor

%

( EIU 1997-98, Selected Countries ) Corruption in the Banking Sector ( EIU 1997-98, Selected Countries ) High 4 Corruption 3 2 1 Low Corruption Chile Syria Mexico Turkey Hungary Ecuador Russia Hong Kong Panama

CORRUPTION DETERS FOREIGN INVESTORS: Probability of Investment Loss due to Corruption (within 5 years) TURKMENISTAN 95 COLOMBIA 79 GEORGIA 71 PAKISTAN 68 UKRAINE 62 RUSSIA 58 BULGARIA 44 ROMANIA 41 MEXICO 39 POLAND 29 ESTONIA 24 GREECE 15 COSTA RICA 12 *Source: S&P/DRI 1998 ITALY 10 SINGAPORE 6 UNITED STATES 5 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 %

Government Quality Impact of good government on investment and growth Income per capita Growth Rate % Investment share in GDP 20% -1.5% 0% 1% 2% 1.5% -0.5% -1.0% 0.5% 15% 10% High Medium Low High Medium Low Government Quality

The ‘Dividend’ of Good Governance 2,000 4,000 6,000 8,000 10,000 12,000 Weak Average Good Regulatory Burden x Development Dividend Per Capita Income and Infant Mortality and Corruption 10 20 30 40 50 60 70 80 90 Weak Average Good Control of Corruption x Development Dividend 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 : 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.

Corruption & Bureaucratic Discretion Bureaucratic Discretion High Corruption Low Bureaucratic Discretion

Enterprises are Prepared to be Taxed for Better Government: Share of Firms that would pay additional taxes to eliminate corruption, crime and excessive regulations Prepared to Pay Taxes to Alleviate:

Smaller Firms Are Hit Harder by Corruption in Russia and in Transition Economies Bribes to secure public procurement bids (% of contract value) % 6 4 % of contract value 2 Small Medium Large Small Medium Large

Extent of State Capture in Transition

Differences in Transition Countries on the Extent of State Capture 50 % 45 % 40 % 35 % 30 % %of all Firms report negative impact of grand corruption 25 % 20 % 15 % 10 % % 5 Hungary Estonia Russia Azerbaijan Adverse Impact of ‘Purchases’ of: Parliamentary legislation Decrees Central Bank Influence

Enormous Socio-Economic Costs of State Capture by Oligarchs and Vested Elite Interests: Business sector grows much slower, lacks investments and insecure property rights

The result: weak property rights Firms reporting insecure property and contract rights % 80 70 60 50 % of All Firms 40 30 20 10 Lit Est Uzb Pol Sln Hun Azer Cro Slk Geo Bul Arm Bel Rom Cze Kaz Kyr Rus Ukr Mol

State Capture exists where partial Civil Liberties and slow Economic Reforms Degree of Civil Liberties in Transition Economies

Civil Liberties Help Control Corruption (Worldwide Evidence, 150 countries) High Corruption Low Civil Liberties

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

Strategy for Good Government and Anticorruption Accountability of Political Leadership: Disclosure of parliamentary votes Transparency in party financing Asset Declaration, Conflict of Interest Rules Checks and Balances: Independent and effective judiciary Decentralization with accountability Good and Clean Government Civil Society Oversight: Freedom of information Public hearings of draft laws Monitoring by media/NGO’s Competition & Entry : Competitive restructuring of monopolies Regulatory simplification Public Administration and Public Finance: Meritocratic civil service Transparent, monetized, adequate remuneration Accountability in expenditures (Treasury, Audit, Procurement) 1

Emerging Operational Strategies Albania Judicial reform Tax and customs Standards for health care University entrants Monitoring by NGOs Georgia Regulatory reform Tax and customs Public procurement Fiscal management Replacing Judges Monitoring by NGOs

Overall Corruption Over Time (Selected Countries; ICRG index, rescaled 0-10) 10 High corruption Indonesia El Salvador 8 Russia Indonesia 6 Russia 4 Firm’s Senior Management Time Spent with Officials Do the bribes paid by firms make life easier for them? Not necessarily; as it turns out, firms that pay more bribes end up spending more (not less) time with bureaucrats. In Russia, various estimates suggest that senior managers/owners of SMEs end up spending between 20-30 percent of their time negotiating with officials. Excessive control by officials over enterprise translates into excessive regulations, inordinate amounts of time spent by the enterprise’s owner with bureaucrats, and bribery. Our evidence suggests a very close association throughout the world between the extent of bribery and (higher) senior management time wasted with officials on licenses, as well as a close association between bribery and higher cost of investing and cost of capital for firms. Thus, we find no empirical support for the traditional “grease” argument, which suggested that petty bribery can help oil the squeaky wheels of commerce in developing countries. To the contrary, the business community ends up losing by bribing. El Salvador Poland 2 Poland Low corruption Finland Finland 1988-92 1992 1993 1994 1995 1996 1997 1998

A simple Formula synthesizing Governance/Anticorruption: National Governance: Challenges in Integrating Anti-Corruption Into a Strategy of Institutional Change A simple Formula synthesizing Governance/Anticorruption: IG and AC = KI + LE + CA Improving Governance and Anti-Corruption = = Knowledge/Info.Data + … ...+ Leadership (incl. Political) + ... ... + Collective Action (change)