Unbundling Governance and Corruption: Some new empirical findings and Collective Action approaches Daniel Kaufmann World Bank Institute and Colleagues Anti-Corruption Summit 2000, Wash. DC Governance Program - The Strategy The power of rigorous empirics and diagnostics Corporate Strategies-National Governance Nexus Unbundling Corruption: State Capture is key?

8 Key Issues Government in the driver seat in A-C program Focus on very focused A-C plan Use worldwide data for action program Technocratic approach to fighting corruption Paramount: A-C Autonomous Agencies/Commissions High Pay in public service for combating corruption Focus: eliminate bureaucratic corruption/discretion Strict Enforcement of civil service rules Proposition: The 8 Key Issues above contain an element of myth

National Governance: Challenges in Integrating Anti- Corruption Into 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)

A Live Test: Culture, Information and Incentives: You are approaching your car in the empty and unattended garage late at night You are approaching your car in the empty and unattended garage late at night You see an envelope on the floor, and you pick it up You see an envelope on the floor, and you pick it up It contains 20 bills of US $100 each. It contains 20 bills of US $100 each. If no possibility that anyone would know: No cameras, no monitoring, no reporting If no possibility that anyone would know: No cameras, no monitoring, no reporting What would you do with such envelope full of cash? What would you do with such envelope full of cash?

50% Undecided33% Report and Return Funds 17% Keep A. If no possibility that anyone would know: You are alone, there is no monitoring, cameras, or possibility of resporting You are alone, there is no monitoring, cameras, or possibility of resporting Option Finder Results: Various Audiences

B. If 30% probability that information is shared (e.g. 30% that camera recording info which may be reviewed ) 74% Report and Return Funds 22% Undecided 4% Keep

Control of Corruption: Aggregate Indicator (From 155 worldwide, transition/selected countries)* Source: Governance Matters, PRWP 2196 by Kaufmann, Kraay and Zoido; based on data from For details and data, visit There is a margin of error (thin line); extreme care in interpretation is needed. POOR GOOD

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

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 *) 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

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.

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

Salient Features of New Governance Diagnostic Tools Multi-pronged surveys of: households, firms and public officials [triangulation] Experiencial questions (vs. opinions/generic) Specially designed and tested closed questions Conceptual framework: Incentive Structure behind Governance; focus on development Rigorous technical requirements in implementation Local Institution Implements, with WB Collaboration Recognizing Multidimensionality of Governance Focus on Service Delivery: Input for Action and Change

HungaryEstoniaRussiaAzerbaijan Parliamentary legislation DecreesCentral Bank Influence Firms Reporting Negative Impact of High Level Corruption State Capture Source: WBES Survey 1999, 20 transition countries %of all Firms report negative impact of grand corruption % % % % % % % % % % Adverse Impact of Purchases of:

Reported Direct Impact of State Capture on the Firm

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 (

% Firms that pay public procurement kickbacks (of those that trade with the state)

Percentage of firms paying kickbacks by country of FDI origin

Enormous Social/Economi costs of state capture: Much lower growth in sales and investment in economy

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

Country-wide: State capture is associated with incomplete civil liberties (& slow economic reforms)

For Firms, Capture is strategy that started with insecure property rights they faced

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 More Taxes to Alleviate:

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

Albania Georgia Latvia Customs inspectors Tax inspectors Judges Ordinary police Investigators/ prosecutors Ministers Which Public Sector Jobs Are Sold? Percent of public officials reporting purchase of positions

Towards a Social Contract : Consensus Building with Civil Society and Govt Consultation Process with Parliament (Canada) Freedom on information and of the press (OECD) Administrative appeals system (Sweden, U.S.) Public hearings of draft laws (OECD) Participatory coalition building w/NGOs and Govt Social Contract

* Average bribe to public officials Lower Public Sector Salaries do not Increase Bribery 7.7% 15.5% 8.4% Bribe* = 3MS Bribe* = 0.2MS Bribe* = 0.5MS 0% 3% 6% 9% 12% 15% Monthly Salary Less than3MSBetween 3 & 13 MSMore than 13 MS Monthly Salary

Which Governance Characteristics Survive After Controlling For Causal Effects?

Overall Corruption Over Time (Selected Countries; ICRG index, rescaled 0-10) High corruption Low corruption Indonesia Indonesia Finland El Salvador 10 Finland Russia Russia Poland Poland

Data Power and Collective Action: Synthesis Logic of Collective Action: beyond participation or standard conditionality Power of Data.Knowledge Empowers Coalitions and De- Personalizes the Challenge -- Systemic Instead Beyond Corruption: Governance and Transparency Focus on Fundamentals [vs. Symptoms]: Institutions Prioritization and Adaptation by Country Realities There is Hope, yet no room for Complacency

Some Policy Implications Anti-corruption efforts should focused more on grand corruption and state capture as root of misgovernance Broader Governance framework Collective responsibility and Collective Action Civil society involvement, Civil liberties Security of property rights and economic liberalization Need to address link between corporate (including FDI) and national-level governance For details, survey, and data:

Some Issues for Discussion Broadening Framework from Corruption to Governance? How to interpret Worldwide indices judiciously? Focus on countries with acute governance challenge? Next Stage in In-depth Diagnostics & Methods? Measuring Grand Corruption -- including State Capture? Role of Corporate Responsibility, including FDI? Role of Informatics, Internet power? What kind of expertise is needed in the next stage? How to help Empower?: from participation to Collective Action

Data Presented for Analysis and informing Policy Advise, not for Precise Rankings The data contained in this presentation originates from various enterprise surveys (as well as outside expert rating agencies) and are subject to a margin of error. The purpose is therefore not to present precise comparative rankings across countries, but instead to illustrate characteristics of governmental and corporate performance in order to assist in drawing implications for action. No ranking of countries is intended in presenting results from these external sources by either the presenter of this work, the World Bank or its Board of Directors. Further details and data, visit: