State Capture & the Challenge of Governance around the World: What the evidence tells us – and a rethink? Daniel Kaufmann, President & CEO, Natural Resource Governance Institute (NRGI) www.resourcegovernance.org Seminar at the Donald Gordon Building, WSG, Parktown Campus, Wits University, Johannesburg Wednesday, 19 September 2018 1 Governance & Corruption: Analytical & Empirical Rigor Matters – Main Topics • Empirics: The Power of Data & Diagnostic Tools • Governance can be measured, and it matters • Corruption: very costly symptom of institutional weakness, or governance failure – ‘one doesn’t fight corruption by fighting corruption’ • Game changer: Legal Corruption & State Capture • Governance & Corruption Vulnerabilities in Resource Dependent Countries • Some Implications WGI: Six Dimensions of Governance Governance as the set of traditions and institutions by which authority in a country is exercised-- specifically: • The process by which those in authority are selected and replaced – VOICE AND ACCOUNTABILITY – POLITICAL STABILITY & ABSENCE OF VIOLENCE/TERRORISM • The capacity of government to formulate and implement policies – GOVERNMENT EFFECTIVENESS – REGULATORY QUALITY • The respect of citizens and state for institutions that govern interactions among them – RULE OF LAW – CONTROL OF CORRUPTION 3 Worldwide Governance Indicators • Data on six dimensions of governance covering well over 200 countries from 1996 until the present • Synthesis of hundreds of underlying indicators taken from about 30 different data sources • Aggregate and individual indicators available at www.govindicators.org, about largest publicly- available governance database in the world • Result of longstanding research project, featuring the “Governance Matters” series 4 Individual sources for constructing the WGI • Cross-Country Surveys of Firms: Global Competitiveness Survey, World Competitiveness Yearbook, BEEPS • Cross-Country Surveys of Individuals: Gallup World Poll, Global Corruption Barometer, Latinobarometro, Afrobarometer • Expert Assessments from Commercial Risk Rating Agencies: Global Insight, Political Risk Services, BERI, Economist Intelligence Unit, Merchant International Group, IJET Travel Consultancy, Asia Risk Consultancy • Expert Assessments from NGOs, Think Tanks: Reporters Without Borders, Heritage Foundation, Freedom House, Bertelsmann Foundation, Amnesty International, IREX, Global Integrity, Binghamton University, International Budget Project • Expert Assessments from Governments, Multilaterals: World Bank CPIA, EBRD, AFDB, ADB, State Department,5 OECD, IFAD Good Corruption Corruption Good Control 5430. Available SSRN: at Available 5430. Source: Worldwide Governance Indicator Score -2.5 -1.5 -0.5 Kaufmann, Daniel, Daniel, Kaufmann, 0.5 1.5 2.5 WGI Control of Corruption: Select Countries, 2016 SelectCountries, Corruption: of WGI Control New Zealand http://ssrn.com/abstract=1682130 Finland Kraay Denmark Sweden , Aart Norway Luxembourg and and Singapore Mastruzzi Switzerland Iceland 75 90 Canada , Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Researc Policy Bank World 2010). (September Issues and Analytical Methodology Indicators: Governance Worldwide The , Massimo, th th Netherlands - - 90 100 United Kingdom th Germany th percentile Australia percentile Ireland Belgium Hong Kong Austria Japan France United States Uruguay 25 50 Estonia h th Bhutan - Governance Governance - 50 75 Bahamas th th Chile percentile percentile Taiwan Macao Level Brunei S. Korea Saudi Arabia Fiji Malaysia South Africa Italy Vanuatu 0 10 Margin of Margin th Turkey th - 10 - China 25 Error th India th percentile percentile Argentina Solomon Islands Indonesia Vietnam Thailand Brazil Mongolia Timor-Leste Philippines Myanmar Mexico Russia Papua New Guinea Laos h h W Cambodia N. Korea orking Paper No. No. Paper orking Guinea-Bissau Libya Syria South Sudan 6 Yemen Somalia Equatorial Guinea 2016 Voice & Accountability Source: Worldwide Governance Indicators (www.govindicators.org) 2016 Political Stability & Absence of Violence/Terrorism Source: Worldwide Governance Indicators (www.govindicators.org) 2016 Government Effectiveness Source: Worldwide Governance Indicators (www.govindicators.org) 2016 Rule of Law Source: Worldwide Governance Indicators (www.govindicators.org) 2016 Control of Corruption Source: Worldwide Governance Indicators (www.govindicators.org) 2016 Control of Corruption Source: Worldwide Governance Indicators (www.govindicators.org) 2016 Control of Corruption Source: Worldwide Governance Indicators (www.govindicators.org) 2016 Voice & Accountability Source: Worldwide Governance Indicators (www.govindicators.org) Worldwide Governance Indicators for Colombia: 1996, 2006, 2016 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 Worldwide Governance Indicators for Venezuela: 1996, 2006, 2016 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 Worldwide Governance Indicators for Brazil: 1996, 2006, 2016 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 Worldwide Governance Indicators for Chile: 1996, 2006, 2016 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 Worldwide Governance Indicators for Indonesia: 1996, 2006, 2016 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 Worldwide Governance Indicators for Ukraine: 1996, 2006, 2016 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 Worldwide Governance Indicators for Russia: 1996, 2006, 2016 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 Worldwide Governance Indicators for Tanzania: 1996, 2006, 2016 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 Worldwide Governance Indicators for South Africa: 1996, 2006, 2016 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 WGI Trends: South Africa (up to 2017) Voice and Accountability 2000 2009 2017 Political Stability and Absence 2000 2009 of Violence/Terrorism 2017 Government Effectiveness 2000 2009 2017 Regulatory Quality 2000 2009 2017 Rule of Law 2000 2009 2017 Control of Corruption 2000 2009 2017 0 20 40 60 80 100 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 Worldwide Governance Indicator Trends: Control of Corruption in Select Countries 100 2000 2009 2017 90 80 70 60 50 40 30 20 Governance Indicator % Ranking Indicator Governance 10 0 25 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 But does Governance & Corruption Matter? • OK, governance and corruption can be measured, with caution • But does it really matter? 26 The 3-to-1 Development Dividend From Improving Governance & Controlling Corruption $30,000 $3,000 $300 High Corruption Medium Corruption Low Corruption Data Source for calculations: KK 2004. Y-axis measures predicted GDP per capita on the basis of Instrumental Variable (IV) results for27 each of the 3 categories. Estimations based on various authors’ studies, including Kaufmann and Kraay. Close link between WEF Global Competitiveness (2017) & WGI Control of Corruption (2016) 28 Source: Worldwide Governance Indicators (http://www.govindicators.org) and World Economic Forum 2017-2018 Global Competitiveness Report (http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/) Sovereign Bond % Yield vs Worldwide Governance Indicator Composite: The ‘1,000 basis points dividend of good governance’…? 16 r = -0.73 14 Egypt, Arab UgandaRep.