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Corruption, Governance and Security: Challenges for the Rich Countries and the World

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by Daniel Kaufmann (September, 2004) - Chapter in the Global Competitiveness Report 2004/2005

Traditionally, national governance and corruption challenges have been seen as: i) particularly daunting in the poorer countries, with the richer world viewed as exemplary; ii) anchored within a legalistic framework and focused on formal institutions, iii) a challenge within public sectors, and, iv) divorced from global governance or security issues - seen as separate fields. Through an empirical approach based on the analysis of the 2004 survey of enterprises by the World Economic Forum, we challenge these notions and portray a more complex reality. We suggest that the undue emphasis on narrow legalism has obscured more subtle yet costly manifestations of misgovernance, which afflict rich countries as well.

Emphasis is also given to measurement and analysis of misgovernance when the "rules of the game" have been captured by the elite through undue influence. We construct a new set of Corporate Corruption and Ethics Indices (365 kb xls), encompassing forms of (legal) corruption not subject to measurement in conventional (illegal) corruption indicators. It is found that manifestations of "legal corruption" may be more prevalent than illegal forms, such as outright bribery, and particularly so in richer countries.

Further, we find that governance constraints, and corruption in particular, is a key determinant of a country's global competitiveness. These findings challenge traditional notions of what constitutes the country's 'investment climate', and who shapes it. It is also found that illegal forms of corruption continue to be prevalent in the interaction between transnationals of the rich world and the public sectors in many emerging countries. Finally, we suggest an empirical link between governance and security issues.

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