Background handout for discussion at the EILT—WBI’s Leadership Team Capacity Enhancement, Governance, and Evidence-Based Diagnostics and Assessments www.worldbank.org/wbi/governance Background handout for discussion at the EILT—WBI’s Leadership Team DK -- WBIGG WBI, February 4th, 2004 All indices are constructed using data from public official’s surveys of various countries. We used the same technique as in the Bolivia paper (factor analysis). The resulting indices are scaled from 0 to 100.

Institutions &Governance Matters Missing Link in Washington Consensus First Summers’ Lesson from Experience Governance as the weak link in CB/CE ‘Data Power’: governance key for development Yet 5 main challenges about institutions: i) which ones? (prioritizing among institutions & vulnerabilities Diagnostics); ii) how to? (Implementation Expertise); iii) where to? (Sectoral Mainstreaming) iv) measure, monitor, research Lessons v) Localize Know-how and Action Programs

Governance World Map : Control of Corruption, 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Map downloaded from : http://info.worldbank.org/governance/kkz2002/govmap.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse ( bottom 10% in darker red); Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

Where is Financial Aid Well Used, Where Wasted Where is Financial Aid Well Used, Where Wasted? Global Poll (% firms rating satisfactory [6-10]) % firms rating satisfactory

Listening to Stakeholders: Analysis of Responses on Donor Aid and Anti-Corruption Figure 9d : Most Important Role for Donors in Helping Country on Anti-Corruption (A-C)

Anti-Corruption Focus and Quality Assessment by the World Bank Global Poll Respondents, by extent of Corruption in Country (% firms rating satisfactory [6-10]) % firms rating satisfactory

Figure 8a: Firms evaluate World Bank’s effectiveness in PSD: Governance does matter (Survey, Emerging Economy sample) Note: The vertical axis depicts the firms’ net effectiveness evaluation of World Bank’s performance in supporting private-sector development (PSD) in their country. Net effectiveness is calculated as the difference between the percent of respondents reporting the institution to be effective minus the percent of respondents reporting it to be ineffective. Each set of two columns displays the net effectiveness ratings provided by countries with a good record in given constraint (in blue) versus those provided by countries with a poor performance in such constraint (in black). Calculations are based on country averages. Source: Executive Opinion Survey (GCR) 2002.

Corporate Governance and Corporate Ethics % firms rate satisfactory Corporate Governance Corporate Ethics Source: EOS 2002-03.

Soundness of Banks vs. Control of Corruption Relatively Unsound Source: Executive Opinon Survey 2002; KKZ 2000/01Governance Indicators, http://www.worldbank.org/wbi/governance/govdata2001.htm The Sample of 80 countries has been divided into 3 sub-samples according to their rating in Control of Corruption. The 3 columns therefore represent the average ratings for Soundness of Banks within each sub-sample. The fitted line instead represents the predicted value of Bank Soundness controlling for the effects of GDP per capita and Regulatory Quality through an OLS regression. Each fitted value is computed as the sum of the estimated constant plus the value of Control of Corruption within each group times the estimated coefficient plus the mean values of Regulatory Quality and GDP per capita times their respective estimated coefficients.

Transparency, Parliaments, Corporate Ethics, and GDP Growth Annual GDP Growth (%) Source: Annual GDP growth over 1999-2001 WDI 2002; GDP is computed in PPP terms. The various transparency / governance variables drawn from Executive Opinion Survey, 2002.

Kenya – the ‘Mezzo’ Level of CE Assessment – 22 clusters Source: EOS 2003 WEF, preliminary. Percentile ranks based on comparative performance among the 103 countries in the sample. All variables rated from 0 (very bad) to 100 (excellent).

Health Gap vs. ‘Active’ Capture (High Level Corruption) Large Gap r = 0.83 Small High Bribery Low Source: EOS 2003

Romania: Disproportionally Negative Impact on the Poor Key point: the surveys not only reveal the incidence and extent of corruption, but allow us to examine the direct costs to different groups in society. This research demonstrates the highly unequal impact of so-called "gratuity payments" in Romania. Though they are often seen as a quasi-market pricing mechanism, they have an impact on the poor's access to health services.

Governance and political capital (GPK). Institutional Capacity: From revisiting ‘Capacity Building’ to Measuring and Diagnosing Capacity Enhancement Institutional Capacity (IC) unbundling into 3 dimensions: Physical capital and hardware (physical infrastructure, computers, etc.) (K); Human and knowledge capital (including organizational & administrative capital, i.e. the ‘institutional software’) (HK), and,  Governance and political capital (GPK). IC = f (K, HK, GPK) Capacity Enhancement = Changed capacity over time  

Empirical Approach to Institutional and Governance Assessments and Diagnostics ‘Macro’: Worldwide Aggregate Governance Indicators: 200 countries, 6 components, periodic – it permits broad proxy of governance and capacity enhancement ‘Mezzo’ (Middle): Cross-Country Surveys of Enterprises ‘Micro’: Specialized, in-depth, in-country Governance and Institutional Capacity Diagnostics: Includes surveys of: i) user of public services (citizens); ii) firms, and iii) public officials Item #1 above is central for comparative monitoring worldwide and to ‘flag’ a country’s institutional vulnerabilities. On other extreme, item #3 is in-depth input to concrete capacity enhancement strategy at country level. Due to improvements in cross-country enterprise surveys, item #2 provides a relatively detailed quantitative sense of institutional vulnerabilities, complementary to the other 2.

Overall Evidence is Sobering: Progress on Governance is modest at best, so far Evidence points to slow, if any, average progress worldwide on key dimensions of governance This contrasts with some other developmental dimensions (e.g. quality of infrastructure; quality of math/science education; effective absorption of new technologies), where progress is apparent At the same time, substantial variation cross-country, even within a region. Some successes. And it is early days.

Capacity Enhancement Assessment, Level I: The ‘Macro’ or Aggregate Governance Indicators+ Some Illustrations from updated Governance Indicators database: 200 countries, 1996-2002, to be continued

Governance: A working definition – which contains much of what is relevant for CE Governance is the process and institutions by which authority in a country is exercised: (1) S -- the process by which governments are selected, held accountable, monitored, and replaced; (2) E -- the capacity of gov’t to manage resources and provide services efficiently, and to formulate and implement sound policies and regulations; and, (3) R -- the respect for the institutions that govern economic and social interactions among them

Voice and External Accountability 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 External Accountability Political Stability and lack of Violence&Terror Quality Regulatory Framework Government Effectiveness Control of Corruption Rule of Law We measure these six governance components…

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, Latinobarometro, Afrobarometer Expert Assessments from Commercial Risk Rating Agencies: DRI, PRS, EIU, World Markets Online, Expert Assessments from NGOs, Think Tanks: Reporters Without Borders, Heritage Foundation, Freedom House, Amnesty International Expert Assessments from Governments, Multilaterals: World Bank CPIA, EBRD, State Dept. Human Rights Report

Inputs for Governance Indicators 2002 Publisher Publication Source Country Coverage Wefa’s DRI/McGraw-Hill Country Risk Review Poll 117 developed and developing Business Env. Risk Intelligence BERI Survey 50/115 developed and developing Columbia University Columbia U. State Failure Poll 84 developed and developing World Bank Country Policy & Institution Assmnt Poll 136 developing Gallup International Voice of the People Survey 47 developed and developing EBRD Transition Report Poll 27 transition economies Economist Intelligence Unit Country Indicators Poll 115 developed and developing Freedom House Freedom in the World Poll 192 developed and developing Freedom House Nations in Transit Poll 27 transition economies World Economic Forum/CID Global Competitiveness Survey 80 developed and developing Heritage Foundation Economic Freedom Index Poll 156 developed and developing Latino-barometro LBO Survey 17 developing Political Risk Services International Country Risk Guide Poll 140 developed and developing Reporters Without Borders Reporters sans frontieres (RSF) Survey 138 developed and developing World Bank/EBRD BEEPS Survey 27 transition economies IMD, Lausanne World Competitiveness Yearbook Survey 49 developed and developing Binghamton Univ. Human Rights Violations Research Survey 140 developed and developing

Control of Corruption: one Aggregate Indicator (selected countries, for illustration, based on 2000/01 research data) Good Corruption Control Margin of Error Corruption Level POOR GOOD Source: KKZ 2000/01

Governance World Map : Voice and Accountability, 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Map downloaded from : http://info.worldbank.org/governance/kkz2002/govmap.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse ( bottom 10% in darker red); Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

Governance World Map : Government Effectiveness, 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Map downloaded from : http://info.worldbank.org/governance/kkz2002/govmap.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse ( bottom 10% in darker red); Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

Governance World Map: Regulatory Quality, 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Map downloaded from : http://info.worldbank.org/governance/kkz2002/govmap.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse ( bottom 10% in darker red); Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

Governance World Map : Rule of Law, 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Map downloaded from : http://info.worldbank.org/governance/kkz2002/govmap.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse ( bottom 10% in darker red); Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

Governance Indicators: Chile 1998 vs. 2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Colors are assigned according to the following criteria: Dark Red, bottom 10th percentile rank; Light Red between 10th and 25th ; Orange, between 25th and 50th ; Yellow, between 50th and 75th ; Light Green between 75th and 90th ; Dark Green above 90th.

Governance Indicators: Kenya, 1996-2002 Source for data: http://www.worldbank.org/wbi/governance/govdata2002 ; Colors are assigned according to the following criteria: Dark Red, bottom 10th percentile rank; Light Red between 10th and 25th ; Orange, between 25th and 50th ; Yellow, between 50th and 75th ; Light Green between 75th and 90th ; Dark Green above 90th.

Another ‘Macro’ Evidence-Based approach at WBI—KAM Kenya : Knowledge Economy Indexes and Pillars Source: KAM website (www.worldbank.org/kam) – Basic Scorecard mode

Knowledge Economy Index and pillar contribution Souce: KAM website (www.worldbank.org/kam) – Cross country comparison mode

2nd Level: The ‘Mezzo’ Empirical Assessment More detailed institutional vulnerability assessment possible Comparative across over 100 countries Annually Cluster Comparative Analysis permits identification of (relative) vulnerabilities Illustrating Kenya and Chile

Kenya – the ‘Mezzo’ Level of CE Assessment – 22 clusters Source: EOS 2003 WEF, preliminary. Percentile ranks based on comparative performance among the 103 countries in the sample. All variables rated from 0 (very bad) to 100 (excellent).

Chile – the ‘Mezzo’ Level of CE Assessment; 22 clusters Source: EOS 2003 WEF, preliminary. Percentile ranks based on comparative performance among the 103 countries in the sample. All variables rated from 0 (very bad) to 100 (excellent).

Politics Can be Measured as Well, and it Matters Inequality of Influence: a major governance challenge

Foreign Firms do not always help improve governance in recipient country Evidence from transition economies – beeps survey, 1999 3

Working with Competitive Business Associations does Matter Source: J. Hellman, G. Jones, D. Kaufmann. 2000. “Seize the State, Seize the Day: State Capture, Corruption and Influence in Transition” World Bank Policy Research Working Paper 2444. 3

3rd Level: Country Diagnostics Key to Localize Know-how Key Input to Action program, Monitoring One country at the time; staff and resource intensive

Key Features of 3-survey Governance, Anticorruption and Institutional Diagnostics Three surveys: households, firms, and public officials [‘triangulation’] Questions can be chosen to focus on experience and/or perceptions Specially designed and tested closed questions, thoroughly piloted and adapted to local realities Rigorous technical requirements in implementation Local institution implements, with World Bank guidance Recognizes multidimensionality of governance

Type of information elicited (1) Households Experience on interactions with state bodies for health care, education, driver’s licence, police, courts, social benefits, and other agencies Payments solicited, where, how much and how frequently Clarification of what people consider to be corruption, perceptions of levels, their sources of information on corruption, extent of knowledge of their rights, duties, and possible recourse

Type of information elicited (2) Enterprises Experience with customs, tax, procurement, courts, inspections, licences and permits Payments solicited, where, how frequently, how much paid Quality of govt. services, level of red tape Ways in which firms make their views known (e.g. through business associations) Private sector perspectives on state initiatives

Type of information elicited (3) Public officials How hiring and firing decisions are made How “mission-oriented” the body is What complaint mechanisms or public consultations exist What types of problem and risks officials perceive as the worst affecting their organizations

Implementation steps (1) Define objectives, scope, terms of reference Issue tender for work by local firm/institution Review existing standard questionnaires and adapt to local objectives and conditions, commission review by local experts before questionnaire finalized Determine size of sample relative to degree of stratification desired: e.g. by region, sector, size/type of firm, income level; for public officials, level of govt., seniority level, sectors (e.g. health and education); SOEs?

Implementation steps (2) Sample size: usually a minimum of 1000 households, 400 enterprises, 400 officials Pilot in variety of situations (e.g. urban/rural, high income/low income) and review results, discuss quality of results with focus groups Be prepared to revise radically or abandon if data quality too poor Launch surveys (face-to-face more effective than mail or telephone) Respondents must feel confident of anonymity if results are to be reliable

Implementation steps (3) Code data, produce statistical transformations, graphs Analyze and write up for draft report Usually discuss with focus groups to bring out underlying issues Resources needed ? Depends on local costs, size of survey (was $60,000 in several ECA countries) Time taken: 6-9 months

The power of diagnostic data and key dimensions for analysis Unbundle corruption by type – administrative level corruption, capture of the state, bidding, theft of goods and public resources, purchase of licenses and regulations Identify both weak institutions (in need of reform) and strong institutions (example of good governance)

The power of diagnostic data and key dimensions for analysis (con’t) Assess the cost of each type of corruption on different social and economic groups Identify key determinants of good governance Help to develop policy recommendations The reality of institutional vulnerabilities vary greatly from country to country… some illustrations from diagnostics...

The “Bribe Fee List” Unofficial Payments by Enterprises for Official Licenses and Services, Ukraine and Russia 1996 Average "unofficial" fee required for “favor” "Unofficial fee": type of license/"favor" Russia Ukraine Enterprise registration $ 288 $ 176 Each visit by fire/health inspector $ 67 $ 42 Tax inspector (each regular visit) $ 250 $ 87 $ 1,071 $ 894 Each phone line installation Lease in state space (sq. meter per month) $ 26 $ 7 Tax Burden, Tax Evasion and Bribery go Hand in Hand Enterprises perceive the tax regime as being very “anti-competitive” in ex-Soviet economies and other countries. Their perceived tax burden is the outcome of more than the statutory tax rates themselves: the ineffective and often arbitrary administration of the tax regime (and frequent “penalty”and concomitant harassment decisions) matters more significantly than the (scheduled) tax rate itself. Further, the overall tax burden on enterprise of the administration of the tax regime, tax evasion, and bribery are all found to go hand in hand. Each export registration/consignment $ 643 $ 123 Each import registration/consignment $ 133 $ 278 Domestic currency loan from bank (preferential terms) 8% 4% 23% 4% Hard currency loan (preferential terms)

Romania: Disproportionally Negative Impact on the Poor Key point: the surveys not only reveal the incidence and extent of corruption, but allow us to examine the direct costs to different groups in society. This research demonstrates the highly unequal impact of so-called "gratuity payments" in Romania. Though they are often seen as a quasi-market pricing mechanism, they have an impact on the poor's access to health services.

Misgoverned vs. well Governed Agencies in Ecuador (as ranked by public officials, 2000 diagnostic)

National vs. Municipal Corruption (based on public officials' responses, a Latin American country, 2001)

Understanding Causal Factors in CE and Governance Underperformance Illustrating the extent to which political determinants, meritocracy, transparency, and voice and accountability matters

How Politicized Agencies exhibit Budgetary Leakages New Diagnostic Tools permit measuring important dimensions of capacity – illustration #1 from Bolivia diagnostics: How Politicized Agencies exhibit Budgetary Leakages Yellow columns depict the unconditional average for each category. Blue line depicts the controlled causal effect from X to Y variables. Dotted red lines depict the confidence ranges around the causal effect depicted by the blue line.

Illustration of empirical analysis based on diagnostic: Users’ Feedback to Public Agencies Helps Control Bribery Based on 90 national, departmental, and municipal agencies covered in the Bolivia Public Officials Survey.

Citizen Voice Improves Accessibility of Public Services to the Poor 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

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

Evidence-Based: it has contributed some Institutions Matter Enormously – but major challenge to identify the how, which, where… Debunked Myths and popular misconceptions Suggested new approaches and strategic focus Donor rethinking on aid effectiveness; aid allocation; capacity enhancement De-emotionalize/De-personalize/De-verbosize Dialogue with state leaders New field of rigorous empirical research -- But still tough ‘tradeoffs’ within the Bank…

The ‘Dividend’ of Good Governance 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 Burden x Development Dividend Per Capita Income and 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.

Transparency, Parliaments, Corporate Ethics, and GDP Growth Annual GDP Growth (%) Source: Annual GDP growth over 1999-2001 WDI 2002; GDP is computed in PPP terms. The various transparency / governance variables drawn from Executive Opinion Survey, 2002.

No Evidence to support some ‘popular’ notions Constant drafting of new A-C laws/regulations Creating many new Commissions & Agencies Blaming Globalization Blaming (or stopping) Privatization Cultural Relativism (Corruption is ‘culturally-determined’) Blaming History or Regional Characteristics… by contrast, what may be particularly important (cont…)

In sum, strategies that can work Transparency Mechanisms (e*governance, data) Democratic Accountability & Collective Action (Judcry, Legislative, Exec, Private, CS) Judicial Independence (& good rule of law institutions) Budgetary Reforms & Meritocracy in Public Sector Addressing the challenge of State Capture Decrease Regulatory Burden on Firms Focus on Prevention & Incentives Political Finance Reform Private Firms, Multinationals, Corporate Ethics IFI, G-7, OECD Responsibility (Global Compact)

Challenges for us at WBI Scaling up in some key dimensions, across all activities: Evidence-based activities: from 4% to 25% in a year, then to 50% in 2 years? [& lessening PCC…] Action Program/Action Plan content: from 9% to 20% in a year, then to one-third in 2 years? Substantive Institution-Building Content: …%…% Mainstreaming Governance in thematic learning Evidence-based input to ROC/OC/CASes [++] The Web as central tool Substantive/tough input to Bank policy formulation OECD, G-7, UN, NATO, WEF – [non-governance..]

Data for Analysis and informing Policy Advise, not for Precise Rankings Data in this presentation is from aggregate governance indicators, surveys, and expert polls and is subject to a margin of error. It is not intended for precise comparative rankings across countries, but to illustrate performance measures to assist in drawing implications for strategy. It does not reflect official views on rankings by the World Bank or its Board of Directors. Errors are responsibility of the author(s), who benefited in this work from collaboration with many Bank staff and outside experts. www.worldbank.org/wbi/governance