Improving Governance in Developing Countries

1. Improving Governance in Developing Countries Presented by: Sanjay Pradhan Director Public Sector Governance Board Presented to: Governance & Anticorruption Core Course The WorldBank

2. Focus for Today: Outline • Importance of Good Governance & Anticorruption • Governance: Framework & Measurement • Priority Areas for Improving Governance • Operational Strategy on Anticorruption

3. Governance – Good and BadLessons from the last 50 years • Some governments have helped deliver substantial improvements in income, health and education outcomes (East Asia) • In other countries, governmental action has resulted in wasted resources, weak investment and growth, and entrenched corruption

4. 2% 1.5% 1% 0.5% 0% -0.5% -1.0% -1.5% Good Governance matters for investment and growth Income per capita Growth Rate % Investment share in GDP 20% 15% 10% Medium Low High High Medium Low Governance Quality Governance Quality measured by perception of 4000 firms in 67 countries on: (i) protection of property rights; (ii) judicial reliability; (iii) predictability of rules; (iv) control of corruption. World Development Report Survey 1997

5. The direction of causality … Growth causes governance to improve ... … and better governance causes growth • Using measures of rule of law, bureaucratic quality and corruption, Chong and Calderon (2000) found significant causality from good governance to growth and vice versa – i.e. “good governance” both contributes to and results from strong economic performance • Other studies have dealt with the potential for reverse causation by using exogenous instruments for the governance indicators and concluded that good governance has a significant and strong causal impact on economic performance … • Burkhart and Lewis-Beck (1994) found that while higher per capita incomes foster democracy, democracy in turn does not foster higher incomes • B. Friedman (2005) argues that higher living standards encourage more open, tolerant and democratic societies … but the debate on causality continues …

6. BangladeshGovernance – Growth Conundrum • Moderate growth rates and high corruption coexist • Need to unbundle governance – not all bad news • State allowed civil society to step in and deliver key services • Is Bangladesh’s governance ‘good enough’? • Bangladesh needs to move to a higher growth path of 6-7% a year to achieve the PRSP’s poverty reduction objectives and related MDGs • Growth rates may not be sustainable –growth is driven largely by garment exports and phase out of the MFA quota system puts this growth at risk • Fiduciary and reputational risk to Bank significant • Improving governance is key to unlocking other sources of growth • According to the 2005 ICA, corruption is now the greatest obstacle to doing business, overtaking power • Bangladesh remains fairly isolated from the world economy and is unable to capitalize on the growth dividend that globalization might bring. Trade openness is very low (Bangladesh ranks 175 out of 182 countries), as is FDI (Bangladesh ranks 137 out of 141 countries). Attracting FDI would require significant improvements in the investment climate • Improving critical infrastructure, especially power and ports, requires solving fundamental governance problems in each sector

7. Focus for Today: Outline • Importance of Good Governance & Anticorruption • Governance: Framework • Priority Areas for Improving Governance • Operational Strategy on Anticorruption

8. Governance & Corruption – Not the same thing! Governance The manner in which theState acquires and exercises its authority to provide public goods and services Corruption Usingpublicoffice for privategain Corruption is an outcome – a consequence of the failure of accountability relationships in the governance system

9. Governance Systems: Supply and Demand • Supply-side: Capacities and organizational arrangements – leadership, skills, human resource and financial management systems – embodied in state institutions to deliver public goods and services • Demand-side: Institutions and accountability arrangements – elections, political parties, parliaments, judicial systems, free press, civil society organizations, accountable local governments – that enable citizens and firms to hold state institutions to account

10. Governance Systems: Actors, Capacities and Accountability Citizens/Firms • Political Actors & Institutions • Political Parties • Competition, transparency Executive-Central Govt • Civil Society & Private Sector • Civil Society Watchdogs • Media • Business Associations • Check & Balance Institutions • Parliament • Judiciary • Oversight institutions Cross-cutting Control Agencies (Finance, HR) Citizens/Firms Citizens/Firms Service Delivery & Regulatory Agencies Subnational Govt & Communities Outcomes: Services, Regulations, Corruption Citizens/Firms

11. Governance Systems: When Accountability Breaks Down State Capture Citizens/Firms • Political Actors & Institutions • Political Parties • Competition, transparency Patronage & nepotism Executive-Central Govt • Civil Society & Private Sector • Civil Society Watchdogs • Media • Business Associations • Check & Balance Institutions • Parliament • Judiciary • Oversight institutions Cross-cutting Control Agencies (Finance, HR) administrative corruption Citizens/Firms Citizens/Firms Service Delivery & Regulatory Agencies Subnational Govt & Communities Outcomes: Services, Regulations, Corruption Citizens/Firms

12. Governance Problems: Some Examples • Grand Corruption: State Capture • Leaders plundering state assets (Mobutu, Abacha) • Powerful “oligarchs” buying state officials (CIS) • Corrupt leaders colluding with corrupt investors: non-competitive, non-transparent award of contracts (oil & gas) • Nepotism and Patronage in Public Service • Political pressure for award of contracts, appointments • Politicized transfers (South Asia) • Administrative (Petty) Corruption & Inefficiency: • Bribes for licenses, permits, government services • Diversion of funds for public programs • Inefficient and ineffective service delivery

13. Two Governance Patterns • Good (enough) governance: Developmental orientation of political leadership, functional check & balances, system not highest performing but mutually reinforcing and self-correcting • Clientelist: Political leaders use authority to maintain their power base or are captured by powerful private interests. Leaders bypass check and balance institutions and use bureaucracy for patronage.

14. Good Governance has many dimensions Citizens/Firms • Political Accountability • Political competition, broad-based political parties • Transparency & regulation of party financing • Disclosure of parliamentary votes • Effective Public Sector Management • Ethical leadership: asset declaration, conflict of interest rules • Cross-cutting public management systems: meritocracy, public finance, procurement • Service delivery and regulatory agencies in sectors • Checks & Balances • Independent, effective judiciary • Legislative oversight (PACs, PECs) • Independent oversight institutions (SAI) • Global initiatives: UN, OECD Convention, anti-money laundering • Civil Society & Media • Freedom of press, FOI • Civil society watchdogs • Report cards, client surveys • Private Sector Interface • Streamlined regulation • Public-private dialogue • Extractive Industry Transparency • Corporate governance • Collective business associations Citizens/Firms Citizens/Firms • Decentralization and Local Participation • Decentralization with accountability • Community Driven Development (CDD) • Oversight by parent-teacher associations & user groups • Beneficiary participation in projects Citizens/Firms

15. The Bank operations focus only on some Citizens/Firms • Political Accountability • Political competition, broad-based political parties • Transparency & regulation of party financing • Disclosure of parliamentary votes • Civil Society & Media • Freedom of press • Freedom of information • Civil society watchdogs • Public hearings of draft laws • Report cards, client surveys • Participatory country diagnostic surveys • Effective Public Sector Management • Ethical leadership: asset declaration, conflict of interest rules • Cross-cutting public management systems: meritocracy, public finance, procurement • Service delivery and regulatory agencies in sectors • Checks & Balances • Independent, effective judiciary • Legislative oversight (PACs, PECs) • Independent oversight institutions (SAI) • Global initiatives: UN, OECD Convention, anti-money laundering • Private Sector Interface • Streamlined regulation • Public-private dialogue • Break-up of monopolies • Extractive Industry Transparency • Corporate governance • Collective business associations Citizens/Firms Citizens/Firms • Local Participation & Community Empowerment • Decentralization with accountability • Community Driven Development (CDD) • Oversight by parent-teacher associations & user groups • Beneficiary participation in projects Primary focus of WB operations in governance Citizens/Firms

16. Operational Implication: Unpack Governance • What are the specific governance problems of concern? • Corruption? If so, where is it concentrated? Health? Education? Financial sector? Procurement? • Poor delivery of public services? If so, which one? • Weak credibility for private investment? • What are the specific drivers of poor outcomes? • Powerful interests purchasing state policy for private interest • Kick-backs in public procurement • Lack of citizen voice to influence service delivery • Weak checks and balances to constrain arbitrary action • What are the priorities for governance reform? • Public regulation and financing of political parties • Transparent, competitive procurement • Strengthened legislative oversight, independent judiciary • Meritocracy in public administration

17. Focus for Today: Outline • Importance of Good Governance & Anticorruption • Governance: Measurement • Priority Areas for Improving Governance • Operational Strategy on Anticorruption

18. Two Approaches to Measuring Governance • Broad and Aggregated: Broad measures to measure governance at more aggregated levels. Help reveal systematic patterns – and basis for monitoring trends over time. • Specific and Disaggregated: Specific measures of quality of key governance subsystems, including using “actionable indicators” to benchmark and track reforms.

19. Control of Corruption: one Aggregate Indicator(selected countries from 204 worldwide, for illustration, based on 2004 research data) Margins of Error Good Governance Governance Level Poor Gov-ernance Source for data: : 'Governance Matters IV: Governance Indicators for 1996-2004’, D. Kaufmann, A. Kraay and M. Mastruzzi, (http://www.worldbank.org/wbi/governance/govdata/); 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.

20. Budget Realism: Is the budget realistic, and implemented as intended in a predictable manner? Accountability and Transparency: Are effective external financial accountability and transparency arrangements in place? Six PFM System Aspects Comprehensive, Policy-based, budget: Does the budget capture all relevant fiscal transactions, and is the process, giving regard to government policy? Control: Is effective control and stewardship exercised in the use of public funds? Comprehensive Fiscal oversight: Are the aggregate fiscal position and risks are monitored and managed? Information: Is adequate fiscal, revenue and expenditure information produced and disseminated to meet decision-making and management purposes? PEFA’s Performance Measurement Framework

21. The “Bribe Fee” List Unofficial payments by firms in Ukraine Enterprises Type of License/Service/”Favor” Average fee required admitting need to pay (1996) “unofficially” Enterprise registration $176 66% Each visit by fire/health inspector $42 81% Tax inspector (each regular visit) $87 51% Telephone line installation $894 78% Lease in state space (square ft. per month) $7 66% Export license/registration $123 61% Import license/registration $278 71% Border crossing (lump sum) $211 100% Border crossing (percent of value) 3% 57% Domestic currency loan from bank on 4% 81% preferential terms (percent of value) Hard currency loan on preferential 4% 85% terms (percent of value)

22. Citizen Report Card of Government Services:Latvia Post Office State Educational Institutions Office of Social Benefits Polyclinic/Health Services Agency of Immigration & Citizenship Prosecutor Customs Service Courts Local Housing Authority Police 0 10 20 30 40 Percent giving favorable rating

23. The Challenge of State Capture Proportion of firms affected by capture of … 30 Parliamentary Votes 25 Presidential Admin. Decrees Civil Court Decrees 20 15 10 5 Hungary Estonia Russia Ukraine

24. Focus for Today: Outline • Importance of Good Governance & Anticorruption • Governance: Framework & Measurement • Priority Areas for Improving Governance • Operational Strategy on Anticorruption

25. Priority Areas for Improving Governance • Strengthening Public Management Systems • Strengthening public finance management & accountability • E-procurement for greater transparency and competition • Improving front-line service provision • Instituting citizen report cards and monitoring • Strengthen community monitoring and oversight • Strengthening Leadership & Ethics for good governance • Strengthening global checks and balances: • Instituting transparency in extractive industries • Strengthening global initiatives to curb transnational corruption

26. Important benefits from using country's own systems -- but need to strengthen capacity and accountability of PFM The new international aid architecture emphasizes the principle of mutual accountability Increasing recognition that "ringfencing" projects will not work Scaling up of donor assistance requires sound PFM systems and reduced corruption in partner countries Strengthening PFM Systems a key priority

27. Bank interventions to build capacity: multiple targets and tools (AFR) Budget realism Tanzania MTEF AAA support merging planning and budgeting in Lesotho Budget Comprehensiveness Information IFMIS in Sierra Leone, accounting training in Africa Control Internal control and audit support in HIPCs Civil society monitoring of Chad Oil Fund, Professional Accountancy Institutions in DRC, Mali, Guinea and Kenya Oversight by CSOs & Professional groups Parliamentary Oversight Support for Parliamentary oversight in Ghana, Kenya and Zambia; Supreme Audit Institutions in Cape Verde, Sierra Leone and Senegal

28. ‘Demand-side’ interventions to strengthen accountability in PFM Strengthening Supreme Audit Institutions (Hungary) Civil Society Oversight; transparent, competitive procurement (Slovakia) Transparent, competitive e-procurement (LAC) Strengthening Public Accounts Committees of Parliament (Kenya, Ghana, Zambia -- AFR) Procurement oversight by CSOs (Philippines) Strengthening Public Accounts Committees of Parliament (India) Participatory Budgeting, Puerto Alegra (Brazil) Public Expenditure Tracking & Information Campaigns (Cambodia, Cameroon, Ghana, Madagascar, Mozambique, Papua New Guinea, Peru, Rwanda, Senegal, Tanzania, and Zambia and on-going in Azerbaijan and Yemen)

29. Chile’s Internet-based Public Procurement:Transparency and Competition • All supplier companies register, indicating areas of business (e.g., IT, construction, furniture) • Public agencies submit tenders through internet • Automatic e-mail to all companies in selected area • Online information on name, position of official in-charge • Online information on results: who participated, proposals made, scores received, who won bid, historical record of agency’s purchases and contracts

30. Civil Society Monitoring for Improved Service Provision: Bangalore Source : Public Affairs Center, India

31. Transparency & Community Monitoring: Primary Education in Uganda US$ per Student 3.5 Public info campaign 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1990 1991 1993 1994 1995 1999 Intended Grant Amount Received by School (mean)

32. CAR MODEL BENEFICIAL OWNER REGISTERED OWNER Nissan Patrol Edwin Abella Sulpicio S. Bulanon Jr. BIR Reg'l Director, 1817 Jordan Plains Subd., Quezon City Quezon City (listed address of Abella in his SALs) Merrick Abella (son of Abella) Suzuki Grand Vitara Ditto 24 Xavierville, Loyola Heights, Q uezon City Nissan Cefiro Ditto Elizabeth S. Buendia 152 Road 8, Pag - asa, Quezon City BMW Lucien E. Sayuno Limtra Dev. Corp. BIR Reg'l Director, Zone 4, Dasmariñas, Cavite Makati City BMW Ditto Marie Rachel D. Mene ses c/o Metrocor and Holdings, G&F, Makati City Honda Accord Danilo A. Duncano Daniel Anthony P. Duncano BIR Reg'l Director, 2618 JP Rizal, New Capital Estate, Quezon City Quezon City Mitsubishi L200 Corazon P. Pangcog Alberto P. Pangcog (husband) Asst. Reg'l Director, B2 L23 Lagro Subd., Quezon City Valenzuela City Honda CR - V Ditto Alberto P. Pangcog 9 Ricardo St., Carmel 1 Subd., Quezon City Honda CR - V Ditto Ditto BMW Flordeliza P. Villegas Charito P. Sico Revenue District Of’cer 8 Ma. Elena St., Carmel 1 Subd., Cabanatuan City Quezon City Media,Transparency, and Combating Corruption “BIR Officials Amass Unexplained Wealth”By Tess Bacalla , Philippine Center for Investigative Journalism Owner: Regional Director in the Bureau of Internal Revenue; forced to resign; currently facing corruption charges; other officials suspended, also facing charges

33. Leadership & Ethics Beyond accountability systems, leadership and ethics in public service shape standards of governance and anticorruption Leaders set standards for integrity, catalyze politically difficult change Way forward is to empower and developcritical mass of reform-minded leaderscommitted to integrity Innovative pilots in transformational leadership to engender paradigm shift: Madagascar, Burundi, Kenya Global Integrity Alliance: Peer support network of public officials committed to ethics in public service

34. Strengthening Public Service Ethics5 Cs to Counter Corruption Connectedness Care & Compassion Creating a sense of belonging to society Creating a sense of Compassion to care for the more needy in society Strengthen Values & Ethics: Counter Corruption Cosmology Courage Overcoming insecurity & incessant quest for material acquisitions Broaden vision by seeing life in the context of the huge universe Commitment to Contribute Creating a commitment to public service – to give v/s take Source: H.H. Sri Sri Ravishankar (Founder, IAHV) @ The International Anticorruption Conference, Korea

35. Recent global initiatives to curb transnational corruption • OECD Convention on Combating Bribery of Foreign Public Officials (1997) • UN Convention Against Corruption Treaty (2003) – 94 countries join • Financial Action Task Force on Money Laundering (FATF) (1989) -- 40 Recommendations (2003) • Recovery of proceeds from corruption (Nigeria 2005) • Publish What You Pay, Extractive Industries Transparency Initiative • World Bank blacklists corrupt firms • Transparency International Principles for countering bribery • Governance Network of OECD DAC (GOVNET) • Norway’s ‘Doers’ Network on Anticorruption (2004)

36. Extractive Industries Transparency Initiative: Key Principles • Independent review of payments made to the government by oil, gas and mining companies and of revenues received by government from those companies by a reputable third party (i.e. audit firm). • Publication in a readily accessible form of payments made by the companies and of revenues received by government. • Extension of all of the above to companies including state owned enterprises. • Active engagement of all stakeholders in the design, monitoring, and implementation process. • Commitment to a work plan and timelines for implementation.

37. Focus for Today: Outline • Importance of Good Governance & Anticorruption • Governance: Framework & Measurement • Priority Areas for Improving Governance • Operational Strategy on Anticorruption

38. Corruption pose three significant risks Development Effectiveness Risk That poor governance-corruption will undermine the impact of development efforts in general and in donor-supported projects Reputational Risk Fiduciary Risk That large amounts of aid in countries with corrupt leaders will tarnish donors’ reputation That donor resources will not be used for the purposes intended

39. Challenges in Identifying High-Risk Countries • 21 Kyrgyz Rep. • 22 Lao, PDR • 23 Lebanon • 24 Liberia • 25 Libya • 26 Myanmar • 27 Nigeria • 28 Paraguay • 29 Sierra Leone • 30 Somalia • 31 Sudan • 32 Swaziland • 33 Tajikistan • 34 Togo • 35 Turkmenistan • 36 Uzbekistan • 37 Venezuela • 38 Yemen, Rep. • Zimbabwe • (Countries in blue are inactive WB borrowers) 1 Afghanistan 2 Angola 3 Azerbaijan 4 Bangladesh 5 Belarus 6 Cambodia 7 Central African. Rep. 8 Chad 9 Comoros 10 Congo, Dem. Rep. 11 Cote D'Ivoire 12 Djibouti 13 Equatorial Guinea 14 Gambia, The 15 Guinea 16 Guinea-Bissau 17 Haiti 18 Iraq 19 Kazakhstan 20 Korea, North Notes: Data on left: Countries listed in alphabetical order using 2004 data. These countries scored in the bottom quartile on the main corruption question in the World Bank’s 2004 CPIA which covered 135 countries AND scored in the bottom quartile on the 5 questions on broader governance issues in the 2004 CPIA OR scored in the bottom quartile on the 2004 Control of Corruption component of the WBI/DEC Kaufmann-Kraay Aggregate Governance Indicator. Countries not included in the 2004 CPIA but included in the WBI/DEC index are here if they fell in the bottom quartile of that index (Afghanistan, Iraq, North Korea, Liberia, Libya, Myanmar, and Somalia). This list includes inactive borrowers and ineligible countries. Inactive countries are defined as those with no lending/grants in SAP for FY04-06.

40. Support international efforts to reduce corruption Prevent fraud and corruption in donor-financed projects Anticorruption as key filter in design of country assistance strategies Help countries that request support in their efforts to reduce corruption Anti-Corruption Strategy World Bank

41. Addressing Corruption in CAS’s • Systematic diagnosis of the nature & drivers of corruption • Aid amount linked to levelof corruption • Actions to address the most significant development risks posed by corruption: • Reducing corruption in key sources of growth, service delivery • Actions to mitigate reputational risk from grand corruption: • Transparency in major procurement deals, asset declaration, • Actions to mitigate fiduciary risk: • Enhanced fiduciary safeguards in projects, PFM assessment for using budget support • Political economy assessments to identify feasible actions • Coordinated donor action for complementarities and collective impact

42. Latvia (inspections) Philippines (procurement) Indonesia (local governance) Bangladesh (NGOs in social sectors) Uganda (education) India – Andra Pradesh (power; e-gov); Karnataka (right to info) Major programs launched… …with some evidence of success Russia (customs/treasury) Ukraine (tax admin) Albania (public admin.) Kyrgyz Republic (governance reform) Jordan (civil society) Cambodia (PE; forestry) Ghana (PE accountability) Guatemala (diagnostic to action program) Gabon (water/electricity) Colombia (diagnostics & civil society) Pakistan (devolution) Tanzania (PSR) Ethiopia (decentralization)

43. Lessons learned: Deeper challenges in high-risk countries Strong on PFM diagnostics Emphasis on core public management reforms Good at technocratic solutions and design • These appear to be working when the underlying environment is conducive: • Committed leadership • Coalition for reform • Capacity Deeper underlying challenges • State capture and corrupt leadership in clientelistic states • Powerful vested interests and political obstacles • Weak ‘demand’ pressures for reform – limited voice, media freedoms, civil rights, etc. • Political drivers of corruption (e.g., lack of political competition, party financing)

44. Reducing corruption in high-risk countries: Priorities for action in the next stage Better understanding and management ofpolitical economyof reforms Develop operational strategies to engage with corrupt leadership in clientelist, captured states Tackle political drivers of governance challenges in sectors (e.g., power, ports, EI) Tackling political corruption(e.g. party finance, electoral corruption, etc. ) with partners Partnerships and new instruments to support demand-side initiatives: working with civil society, media, parliamentarians

45. Q&A