and Beyond: What research Directions on Corruption and governance? Daniel Kaufmann, WBI The World Bank Workshop Session, October 10 th, th IACC, Prague, Czech Republic Note: Some of the empirical work presented here is preliminary, and subject to a margin of error. Caution in interpretation is needed, and no precise ranking of countries is warranted.

2 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

3 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

4 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. POOR GOOD

5 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

6 The ‘Dividend’ of Good Governance Infant Mortality and Corruption 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 WeakAverageGood Rule of Law x Development Dividend Per Capita Income and Voice and Accountability 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

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

8 Enormous Social/Economi costs of state capture: Much lower growth in sales and investment in economy (and also weaker property rights protection)

9 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 (

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

11 Business Associations Constrains State Capture and Grand Corruption

12 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

13 Citizen Voice Helps Control Bribery in LAC country Based on 90 national, departmental, and municipal agencies covered in the Bolivia Public Officials Survey.

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

15 Which Governance Characteristics Matter for Agency Performance? Results from Bolivia Public Officials

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

17 Corruption Potential in Typical Privatization Transaction Structures* SpeedAdmin. Discretion Transparency/ Information Independent Administration Voucher-Based Mass Privatization –––- Liquidation --–– Capital Market-Based Privatization Tenders and Trade Sales Management-Employee Buy-Out (MEBOs) Spontaneous Privatization +++ * Note: “-” and “-” equal low and very low corruption potential, respectively. “+” and “++” equal high and very high corruption potential, respectively.

18 The Impact of Privatization Structures on Corruption in the Post-Privatization Environment* Scope of Program Residual State Ownership Residual Purchase Obligations “New” Owners Transaction Corruption Liquidation ++–––– Voucher-Based Mass Privatization –++–-– Initial Public Offerings +++––- Tenders and Trade Sales -–++–+ Spontaneous Privatization –––+++ Management-Employee Buy-Out (MEBOs) -–++ * Note: “-” and “-” equal low and very low corruption potential, respectively. “+” and “++” equal high and very high corruption potential, respectively.

19 (Average for 16 Transition Economies – ’96 Expert Survey Results, N=50) The Privatization Process and Impact on Corruption (Average for 16 Transition Economies – ’96 Expert Survey Results, N=50) Incidence on Corruption Privatization Program Characteristics GOODPOOR

Monopolies and Corruption

21 Towards a Solution: Improve Institutional Quality – e.g. Courts

22 Research: Data power and concreteness Challenge of Localizing: micro-level research Agency-specific research (eg courts, municip) Unbundling governance and corruption: specifics, components, links among them Data & Empirical Power & nexus w/ poverty Public Officials a key source of information Grand corruption & State Capture: empirics Integrating Corporate Governance with National Governance challenge Voice, Participation: analytics, facts, rigour