GOVERNANCE AND CORRUPTION

1. GOVERNANCE AND CORRUPTION WHY DO THEY MATTER AND WHAT DO THEY REALLY MEAN? Helen Sutch, PRMPS, April 21, 2003

2. 2% 1.5% 1% 0.5% 0% -0.5% -1.0% -1.5% Good governance leads to higher investment & growth % Investment share in GDP Income per capita Growth Rate 20% 15% 10% Medium Low High High Medium Low Quality of Governance Quality of Governance in this case was measured by perceptions of 4,000 firms in 67 countries on: (i) protection of property rights; (ii) judicial reliability; (iii) predictability of rules; (iv) control of corruption. Source: World Development Report Survey, 1997

3. Per Capita Income and Infant Mortality and Corruption Regulatory Burden 12,000 90 80 10,000 70 8,000 60 50 6,000 40 4,000 30 20 2,000 10 0 0 Weak Average Good Weak Average Good Development Regulatory Quality Control of Corruption Development x x Dividend Dividend Literacy and Rule of Law Per Capita Income and Voice and Accountability 100 10000 9000 8000 75 7000 6000 50 5000 4000 3000 25 2000 1000 0 0 Weak Average Good Weak Average Strong Development Development Rule of Law x x Voice and Accountability Dividend Dividend Good governance improves development outcomes Note: Based on a collaborative research project, 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 Divided”) from improved governance to betterdevelopment outcomes.

4. Governance – a definition • Governance is how power is exercised and mediated through institutions • Institutions: rules that shape behavior • Formal: constitutions, laws, regulations • Informal: traditional or tribal hierarchies, nomenklatura, mafia, family, other networks

5. The “how” word is critical • Through strict hierarchies/diffused laterally? • Arbitrarily? • Transparently? • Accountably? • Fairly? • With participation and consultation? • Effectively? Do systems work?

6. Do less developed countries have less developed institutions? • We think of countries as having weak or even no institutions – LICUS • But there is no tabula rasa: where formal institutions are weak, informal institutions are often strong • “The most effective system is corruption. The challenge is how to replace it” - JDW, March 2003.

7. What happens to healthy projects…in sick country environments? • The wrong firm gets the contract • Funds don’t arrive on time • Money is diverted or stolen • Projects are not staffed with the right skills • Shoddy materials are substituted, safety standards flouted • The road/bridge… is not built at all • It was the wrong project anyway • ……these are all corruption = a cause and a symptom of poor governance

8. State capture/administrative corruption • State capture = corruption in the formation of laws and policies • Administrative corruption = corruption in theimplementation of laws and policies

9. Good governance has many dimensions • Structure of Government • Executive decision-making structure • Legislative oversight • Independent and effective judiciary • Decentralization and intergovernmental relations • International dimensions: rules for foreign investors, trading partners, donors • Political Accountability • Political competition, credible political parties • Transparency in party financing • Disclosure of parliamentary votes • Asset declaration, conflict-of-interest rules • Competitive Private Sector • Economic incentive framework/policies • Competitive restructuring of monopolies • Regulatory simplification for entry • Transparency in corporate governance • Collective business associations • Civil Society Voice & Participation • Freedom of information • Public hearings • Role of media/NGOs • Governance monitoring GOOD GOVERNANCE • Public Sector Management • Meritocratic civil service with monetized, adequate pay • Public expenditure management (budget preparation and execution, financial accountability, procurement, audit) • Decentralization with accountability • Service delivery (health, education, infrastructure, courts and other dispute resolution mechanisms) • Tax and customs

10. Changing our approach: we are moving… • From a focus on technical, one-off projects to – systems for sustainability • From quick adjustment operations to programmatic lending over a longer time frame – strong formalinstitutions take time to build • From imposing external models of “best practice” to good fit with the country environment • From Bank to country ownership • To a new focus on key factors in designing interventions:accountability, transparency, voice