Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

Governance and Development: A DesignPerspective

Rohini Pande(Harvard)

Outline

1 Corruption and Income: Some Stylized Facts

2 Design Perspective

3 Improving the Regulatory Framework: One example fromIndia

4 Further Avenues

Corruption is high in poor countries...

Corruption Perceptions Index

14/05/2012 19:49Corruption perceptions: The usual suspects | The Economist

Page 2 of 8http://www.economist.com/blogs/dailychart/2010/10/corruption_perceptions

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• By all estimates, corruption– both political andbureaucratic – remainsmuch higher in poorcountries.

And the costs are high but varied..

Paper   Country   Context   Corrup.on  Est.  (in  %)  

Reinikka  &  Svensson  (2004)  

Uganda   GraB  in  public  spending  of  edu.  funds  intended  to  cover  school’s  nonwage  payments  

87%  of  funds  

Olken  (2007)   Indonesia   GraB  in  the  building  of  rural  roads  funded  through  a  na.onal  government  program  

24%  of  cost  of  the  road  

Khwaja  and  Mian  (2005)  

Pakistan   Poli.cally  connected  loans   0.3  -­‐  1.9  percent  of  GDP  

Hsieh  &  MoreY(2006)  

Iraq   Bribes  from  the  under-­‐pricing  of  oil  in  Iraq’s  Oil  For  Food  Program  (OFP)  

2%  of  oil  revenues  

Source:  Pande,  R.,  and    Olken,  B.  (2011).  Corrup.on  in  Developing  Countries.  Annual  Review  of  Economics.  

How do we plug the leaks?

Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

Common Policy Responses to IncreaseAccountability

• Democratization: Increase role ofdemocratic institutions inpolicy-making.

• Aid Conditionality: For instance,the US government decided to makeaid ( MCA funding) conditionalupon country performance on 17third-party measures of policyperformance.

Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

But...

• Income not choice of governanceregime remains the primarypredictor of corruption

-­‐1.5  

-­‐1  

-­‐0.5  

0  

0.5  

1  

1.5  

Rich  democracy     poor  democracy   Poor  non  democracy  

Control  of  corrup,on  (World  Bank  Score  2008)  

Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

And...

• GDP not performance on corruptionindicators remains a strong predictorof subsequent corruption outcomes

• Micro evidence from a fieldexperiment in Indonesia showsmixed and diminishing impacts ofconditional aid over time (Olken etal 2013)

Figure 3: Time Trend in Bribes and GDP in Vietnam

33

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4.5

5

Brib

e S

ha

re o

f R

eve

nu

e (

Ave

rag

e %

)

6.4

6.6

6.8

77

.2

Re

al G

DP

pe

r C

ap

ita

(ln

)

2005 2006 2007 2008 2009 2010

GDP per Capita (log)Bribe Share of Revenue

This figure plots real GDP per capita and the average amount of bribe as a share of revenue paid by firms in Vietnam from2005 to 2010. The bribe share variable is averaged across all firms surveyed in the PCI for the corresponding year.

29

Outline

1 Corruption and Income: Some Stylized Facts

2 Design Perspective

3 Improving the Regulatory Framework: One example fromIndia

4 Further Avenues

Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

One size fits all solutions unlikely to work: Adesign perspective for governance

• Designing institutions that work will require an iterative processthat combines theoretical and empirical insights

• Defining the problem: Is it information, incentives or somethingelse (human capital of providers?)

• Can we test our hypothesis?

• Given the evidence, can we design and test a solution?

• A growing literature is beginning to evaluate specific policycontext to identify channels of influence

Outline

1 Corruption and Income: Some Stylized Facts

2 Design Perspective

3 Improving the Regulatory Framework: One example fromIndia

4 Further Avenues

Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

One Example: The case of India

• Average quarterly GDP growth of 7.45% (since 2000) and rankedamong top group of emerging economies by IMF

• But growth alone cannot enable sustainable development• India has 55 billionaires on Forbes list and is home to a third of

world’s poor• High industrial growth but ranked as the worst country performer

on air pollution by Yale Environmental performance Index.

• And democracy alone cannot deliver effective governance• The world’s largest democracy yet estimates suggest over 1% of

GDP is annually pocketed as bribes. It ranks 132 (very low!) onDoing Business Index

Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

Industrial Growth and Pollution

• High Pollution Current air pollution levels in China and Indiaexceed those ever recorded in any developed country. Likely tohave significant health and economic costs

• Ineffective Regulation: Low compliance with strict Air andWater regulations; low staff capacity and widespread corruption.

• Regulatory Challenge: How can we improve functioning of theregulator so firms are able to remain competitive while investingin cleaner, more efficient technology, rather than finding it cheaperto pay a bribe?

The Case of Gujarat

Figure: Stacks in Surat

• Largest share of of post-licensingreform investment of any state inIndia. 8% annual output growthsince 1991-1992.

• Home to some of India’s mostpolluted industrial clusters.

• This despite the regulatorundertaking frequent inspectionsand having powers to even orderindustry closure.

Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

Third-party auditing

• Used by regulator in Gujarat to supplement government inspectors

• Auditors are chosen and paid for by the firm they audit

• Perverse incentives? May be cheaper to shop for auditors whofalsify readings than reduce pollution.

• With the regulator, we (with Duflo, Greenstone, Ryan):experimentally remove conflict of interest and increase monitoringof environmental auditors

• In and around Gujarat’s two most populous cities, in half theaudit-eligible plants

1 Auditors randomly assigned to plants and paid centrally (ratherthan by plant)

2 Auditors backchecked on performance after 20% of visits.

Most Auditors in Status quo report just understandard

Figure: Audit Treatment Effect in Density Bins, All Pollutants

And this doesnt match findings fromindependent backcheck

Figure: Audit Treatment Effect in Density Bins, All Pollutants

Auditors in treatment cease to under-report andbecome unbiased

Figure: Audit Treatment Effect in Density Bins, All Pollutants

Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

Plants reduce pollution in response

Figure: Audit Treatment Effect on Plant Pollutant Concentrations

Outline

1 Corruption and Income: Some Stylized Facts

2 Design Perspective

3 Improving the Regulatory Framework: One example fromIndia

4 Further Avenues

Introduction Design Perspective for Governance Designing regulatory Innovation to Reduce Opportunities for Corruption Further Avenues for Research and Policy

Where Next?

• Ensuring effective governance is likely to be the most sustainablesolution to high levels of corruption

• However, to identify governance solutions we need researchers toengage with policy actors at the design stage

• There is a growing but still small evidence base on the costs ofcorruption and its correlates

• Simply evaluating existing policies often fails to provide insights onwhat may constrain implementation of proposed solution.

• Need to prioritize project design based on theory and evidence andevaluation of proposed projects before large scale propogation