Corruption can be rooted out, says World Bank

Indonesia improving, Thailand slipping: better governance leads to economic growth in both emerging and developed nations.
The World Bank under its current president, Paul Wolfowitz, has made headlines for its decision to make corruption and governance issues a core part of decisions on extending loans to client governments. To detractors, this is an American neo-con fantasy, either a noble but foolish effort or an outright political attack on WashingtonÆs opponents. Under this thinking, corruption is relative and hard to quantify, while good governance is a luxury for rich countries.

Not so, argues Daniel Kaufman, director of global governance at the World Bank Institute, a research arm of the organisation based in Washington, DC, who recently covered the subject at a lunch in Hong Kong sponsored by the Asia Society. He peppered his arguments with references to his own country - Chile - an emerging market that thanks to proper governance from the top echelons of political life has surpassed its Latin American neighbours across any economic or social indicator.

Lesson number one, he says, is that corruption and bad governance is not linked to history, language or culture: compare similar societies in Chile and Argentina, Poland and Ukraine, or North and South Korea.

Beyond such anecdotes, KaufmanÆs main contention is that governance and corruption can be measured. Data can be brought to the battlefield. Once something can be quantified, policies can be gauged, with transparency key. Governance is, in fact, the missing ingredient from the so-called Washington Consensus of free trade, privatisation, liberalisation and macro stabilisation. And so far the record is clear: governance matters hugely to economic development.

Kaufman says that worldwide, governance hasnÆt improved, but there is a lot of variance. Bad governance should not be confused with corruption; corruption is but one aspect, along with the quality of accountability, political stability, the effectiveness of economic policy, the quality of regulation, and the rule of law. Widespread corruption is often a symptom of other failings. All of these factors can be quantified, through vigorous research, and explain why Chile and Botswana are success stories and most of southern Africa is not.

Kaufman says good governance ultimately reaps a dividend of economic growth 300% better than countries without the right policies. Proper reform can quickly triple income levels, and over time lead to permanent leads in GDP. There is also a high correlation between governance and social factors such as infant mortality, literacy and the competitiveness of the private sector. But the reverse is not true: higher incomes donÆt translate into better governance, he says, citing Russia and Venezuela.

The same goes for high-income countries, says Kaufman, who notes the shenanigans in Washington where he lives demonstrate how rich countries also have governance problems.

East Asia has divergent stories, as do all other regions of the world. Thailand has backtracked, but South Korea has advanced. ôYou can see improvements quickly if the leadership makes the necessary changes,ö Kaufman says. One of the most promising stories in the world is in Southeast Asia: Indonesia. Justifiably notorious for corruption, under the presidency of Susilo Bambang Yudhoyono is making genuine efforts to change the countryÆs ways. Since he took power, the country has gone from 16th worst in the world to somewhere in the 40s. This is still a massively corrupt society but it is trending in the right direction, and Kaufman believes it has the potential to reach the top half of all measured countries within five to 10 years.

But this will require a sustained effort to not only weed out corruption, but to improve the bureaucracy, cut red tape, improve the nationÆs infrastructure and reform its taxes. Why? Because corruption is linked to things such as procurement, rent-seeking, and private interests ôcapturingö (influencing) state organisations or utilities. Indonesia and other countries donÆt need lots of new legislation; that would likely prove counterproductive, and create more dark corners for money to corrupt. Rather it needs to implement existing laws and improve the institutions of the state. Transparency, accountability and a free press are vital ingredients.

Ultimately, says Kaufman, governance depends on deregulation and developed capital markets, which impose discipline on the private sector. The World Bank stands ready to help those countries committed to this path.
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