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 24th, 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 10th percentile rank among all countries in the world; 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.
10.10
Three Principles for Using Governance Indicators
All indicators have measurement error
rely on variety of data sources
reduce noise by aggregation
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
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:
Errors in measuring specific proxies, e.g.
sampling error in survey
factual errors in objective measures
differences of opinion
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
All indicators have measurement error
rely on variety of data sources
reduce noise by aggregation
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
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:
Errors in measuring specific proxies, e.g.
sampling error in survey
factual errors in objective measures
differences of opinion
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
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
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
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
caution in use of indicators due to margins of error
aggregate indicators reduce margins of error
but disaggregated indicators are also needed
need multiplicity of indicators, different methods & approaches, complement and combine
false divide between subjective & objective indicators
actionable vs. action-worthy indicators
action-worthy vs. outcome indicators
match indicator/measurement tool with objective: in-depth, in-country GAC diagnostics are important
transparent disclosure and rigorous scrutiny
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
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 Freedom 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).
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).
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
Low
High
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 10th percentile rank (‘governance crisis’); Light Red: between 10th and 25th percentile rank; Orange: between 25th and 50th percentile rank; Yellow, between 50th and 75th; Light Green between 75th and 90th percentile rank; and Dark Green: between 90th and 100th percentile (exemplary governance). Estimates subject to margins of error.
46.46
In Sum – some questions to ponder
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
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
Public Disclosure of Assets & Incomes of Candidates, Public Officials, Politicians, Legislators - & dependents
Public Disclosure of Political Campaign contributions by individuals and firms, and of campaign expenditures
Public Disclosure of Parliamentary Votes, w/out exceptions
Effective Implementation of Conflict of Interest Laws, separating business, politics, legislation, & government
Publicly blacklisting firms bribing in public procurement
Effective Implementation of Freedom of Information Law, with easy access to all to government information
Fiscal/Financial transparency: central/local budgets;ROSC, EITI
E*procurement: transparency (web) and competition
Media Freedoms & Media Development
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.
High
Low
49.49
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1990
1991
1993
1994
1995
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
Transparency
as cross-cutting theme
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