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Does Transparency have a Payoff for Democratic Governance and Human Development? Exploring Initial Evidence from the Case of Latin America and the Caribbean

Working Paper


Regional Centre for Latin America and the Caribbean, Panama Local Governance and Decentralization Area/Democratic Governance Transparency and Accountability in Local Governments (TRAALOG) Project Internet: http://www.regionalcentrelac-undp.org/en/democratic-governance/66 Cover Photo: Project, UNDP – Dominican Republic, El Salvador and Colombia, and Gerardo Berthin


Does Transparency have a Payo for Democratic Governance and Human Development? Exploring Initial Evidence from the Case of Latin America and the Caribbean

Working Paper By Gerardo Berthin & Charlotta Sandin

UNDP Regional Service Center for Latin America and the Caribbean

September 2011


UNITED NATIONS DEVELOPMENT PROGRAMME

UNDP REGIONAL CENTRE PANAMA

Freddy Justiniano DIRECTOR a.i. UNDP REGIONAL SERVICE CENTRE FOR LATIN AMERICA AND THE CARIBBEAN

Gerardo Berthin GOVERNANCE AND DECENTRALIZATION POLICY ADVISOR

Maria Angelica Vásquez CONSULTANT- DECENTRALIZATION AND LOCAL GOVERNANCE

Charlotta Sandin VOLUNTEER/RESEARCH ASSISTANT -- DECENTRALIZATION AND LOCAL GOVERNANCE Mónica Fernandez Álvarez de Lugo INTERN –LOCAL GOVERNANCE AND DECENTRALIZATION AREA

UNDP REGIONAL BUREAU FOR LATIN AMERICA AND THE CARIBBEAN – NEW YORK Álvaro Pinto COORDINATOR DEMOCRATIC GOVERNANCE CLUSTER

The opinions and views expressed in this article are the exclusive responsibility of the authors and they do not necessarily reflect the views of the United Nations Development Programme (UNDP).


Contents Contents........................................................................................................................................................ 7 Introduction .................................................................................................................................................. 9 Inequality and Democratic Governance in Latin America and the Caribbean: Framing the Problem ....... 11 Why is Latin America not Doing Better? ..................................................................................................... 15 Why Perceptions of Corruption are High and Transparency Demand is Low?.......................................... 19 How is Democratic Governance aected by StratiďŹ ed Societies?.............................................................. 27 Is there a Way Out? .................................................................................................................................... 29 How to Move Forward? .............................................................................................................................. 33 References ..................................................................................................................................................37


Introduction Not much has been written about the relationship between transparency, inequality and human development in Latin America and the Caribbean. The recent global financial crisis has highlighted not only the economic consequences, but also linked the problem to the broader context of transparency in democratic governance. Similarly, Latin America has one of the highest income inequality trends in the world in spite of recent positive economic growth and on some indicators showing that inequality may be falling. Two recent regional UNDP Reports, focus their attention in highlighting factors that may be behind persistent inequalities and democratic governance underperformance (UNDP, 2010; and OEA/PNUD, 2010). Both point to transparency and/or the lack thereof as a key potential factor for inequality and one that affects the quality of democratic governance. During the past three decades a wave of democratization has swept across countries in different continents, and in Latin America and the Caribbean. Yet consensus exists that most of these new democracies are still plagued with serious accountability and transparency challenges. Despite the fact that leaders are democratically elected into office, they still tend to manage public affairs in secrecy, without informing the public about their actions or decisions and without being subject to sanctions for wrongdoing. Free access to information is a critical mechanism for increasing accountability and transparency. It is not surprising that along with the democratization wave, during the past twenty years there has also been a global and a regional surge of Freedom of Information Laws (FOI Laws). During the last two decades, a majority of the countries in Latin America and the Caribbean have adopted Freedom of Information Laws. Although they vary considerable in terms of depth and scope and the extent to which access to information is guaranteed in practice, as of 2011, 19 countries in Latin America and the Caribbean region have passed FOI Laws. It is now generally accepted that transparency in democratic governance is an essential element. The more informed citizens can be, about how their democratically elected governments make and take decisions, the more meaningful the role they will play in policy dialogue with their governments and elected representatives. While in democratic governance citizens do not have to know absolutely everything about the inner workings of their government, two key important qualifications are in order. First, in democratic governance there should be clear definition and parameters as to what is and what is not in the public domain, and second and as important there should be clear and convincing reasons for any opaqueness and secrecy. Both need to be justified in terms of the larger “public interest” and not just within the limited and more individual interests of those holding power, including political parties. This suggests a new and possibly different agenda for democratic governance, where transparency becomes a human development enabler. Essentially, when transparency is linked with democratic governance and human development, it can be argued that transparency is the enabling factor that helps interlock two powerful engines that can help reduce inequality and poverty. More openness and information sharing enables the public to make informed political decisions, improves the accountability of governments, and reduces corruption risks. 9


Greater transparency is also essential to human development, as it can improve resource/budget allocation, enhance efficiency and performance and increase growth prospects for political freedom and participation. Information imperfections increase transaction costs and can give rise to asymmetric relationships between government and the governed, adversely affecting key democratic governance processes such as citizen participation. As the 2002 UNDP Global Human Development Report argued, participation promotes individual as well as collective agency—important because collective action through social and political movements has often been a motor of progress for issues central to human development: for example, protecting the environment, promoting gender equality, and fostering human rights. In addition, participation and other human development gains can be mutually reinforcing. Political freedom empowers people to claim their economic and social rights, while transparency increases their ability to informed participation and therefore the demand quality for economic and social policies that are more responsive to their priorities and needs (UNDP, 2002). In the recent inequality literature, several references are made to “lack of transparency,” as one of the factors that either causes or contributes to the outcome. This working paper departs from the premise that efforts to make human development policies more transparent can lead to enhanced gains for both democratic governance and further reducing inequalities. Although such benefits may not be automatically, as accountability and anti-corruption mechanisms would have to function. Seeing transparency as a means of human development and democratic governance, involves departing from a more traditional way of framing transparency issues as only part of anti-corruption. Traditionally, the way to control corruption in many countries was solely through law enforcement bodies. However, experience from the Latin American and Caribbean region has shown that law enforcement, by itself, is not sufficient to sustain a meaningful and long-term vigilance against corrupt practices in a society. Despite the perceived importance of transparency there has been little theoretical or empirical effort to study it more – for example its role in enhancing human development and reducing poverty under long run economic growth spurs or in improving accountability systems. One of the most encouraging developments in Latin America and the Caribbean region has been the emergence of transparency and accountability as a policy concern for national governments. Most countries in Latin America and the Caribbean have ratified and are implementing the Inter-American Convention against Corruption and the United Nations Convention against corruption. The purpose of this Working Paper is to explore some new elements and variables that may nourish the transparency-democratic governance and human development debate, in particular focusing in Latin America and the Caribbean. The idea is to test potential new hypothesis that could shed new light into the analysis of transparency and democratic governance. This Working Paper is a modest attempt to start understanding the relationship between transparency, democratic governance and human development. Understanding the conditions under which more transparency may improve human development outcomes can refine knowledge and will help shape better policy. 10


Inequality and Democratic Governance in Latin America and the Caribbean: Framing the Problem While all countries in the region have shown progress in human development over the past two decades, reducing poverty and getting out of the persistent inequality trap is still a challenge. A number of factors seem to interact with both inequality and democratic governance performance, which at the end generate a less than desire outcome. While there is broad agreement on the importance of democratic governance and inequality, the debate is still ongoing in terms of cause and effect. Does human development and economic progress encourage more transparency? Or does transparent and accountable democratic governance promote the expansion and trickle down of human development and economic progress? Are there sufficient institutional mechanisms to translate economic growth into expanded opportunities for human development and political freedom? While much more empirical research is needed, available data confirms that human development, economic conditions and democratic governance institutions interact in ways that influence each other, whether positively or negatively. That is, leadership, political institutions, policies, strategic reforms, citizen participation, norms and societies exist in an interdependent relationship. Despite the impressive human and economic development trends and the array of anti-corruption actors, tools and legal frameworks, equality and transparency indicators remain relatively low in Latin America and the Caribbean. Corruption can be perceived both in everyday dealings with governmental officials (petty corruption) and in major national government contracts (grand corruption). In recent years, government and donors have stepped up the pressure for greater transparency to limit this behavior and create a more favorable environment both for more efficient use of public resources and for domestic and foreign investment. Pressure has also grown from civil society organizations. Also, while several indicators show that public perceptions of corruption have improved slightly in recent years, surveys of public opinion continue to show that corruption remains a major risk. Many in the region still tolerate different forms of corruption as a routine way of life and/or of doing business. The Latin America and Caribbean is a region in which significant democratic rights have developed and are exercised. At the same time, one finds an extreme concentration of power in the Executive Branch and in the personalistic figure of presidents. This pattern remains, in spite of movement towards a more decentralized and/or pluralistic set of institutional arrangements. Moreover, an extensive analysis of the legal and institutional arrangements in Latin America and the Caribbean today will reveal that many good laws and institutions are in place, but many suffer from serious gaps and limitations, are heavily oriented toward maintaining executive power, offer few checks on abuse of Executive power and have few provisions for ensuring the autonomy of regulatory or control institutions. Moreover, for many countries the informal sector still represents a key source of employment that is formally outside direct government control and regulation, and conduct operations through semi-autonomous “agencies.” The combination of these developments has produced an environment for non-transparency and corruption risks. For example, four major policy challenges that need to be addressed to significantly improve democratic governance, reduce inequality and increase transparency and accountability are: 11


1. Inadequate checks on executive decision-making resulting from the pattern of extreme concentration of power in the presidency (or mayors in the case of local governments). 2. The lack of transparency in government operations and lack of autonomy of control and regulatory institutions charged with monitoring public expenditures and budget. 3. Lack of service orientation in delivery of services to the public; and, 4. Inadequate and ineffective public opposition to corruption. Two recent regional reports, the Second Report on Democracy and the First Regional Human Development Report provide some evidence to better understand the links between transparency and equality (OAS/UNDP, 2010; and UNDP, 2010). Economic inequality and centralized decision-making can provide a fertile breeding ground for corrupt practices, and even help to justify corrupt behavior, which, in turn, leads to further inequalities. As many studies have shown, just as corruption and inequality can be persistent and sticky, distrust in main national democratic institutions can linger over time, thus creating a vicious circle that is very hard to break and that helps justify illicit behavior. For example, data shows that people don't want to pay taxes because they do not trust governments and/or because they consider the delivery of services ineffective. At the same time, government institutions cannot perform any better not only until they obtain more resources when people pay their taxes, but also until they demonstrate their capacity to manage these resources more transparently and accountably (OAS/UNDP, 2010). Strong correlations are evident in transparency and corruption indicators, economic and human development, and political freedom. Countries with high transparency and low corruption indicators tend to be countries that enjoy greater prosperity, opportunity, and individual liberty. Perceptions about corruption matter because citizens base their actions on their perceptions, impressions, and views. If citizens believe that public services are inefficient or that main democratic institutions are corrupt, they are unlikely to value the benefits of public services and of democratic governance. Similarly, the location of decisions also matter to determine perceptions, impressions and views. If citizens believe that their closest democratically elected government cannot resolve their basic needs and provide livelihood opportunities, they are unlikely to value performance and effectively participate and demand better policies and accountability. If the mechanisms that create and perpetuate inequality cannot be reformed, negative perceptions and distrust prevail and citizens often give-up hope and accept the status quo and/or if they can, they leave to more favorable settings. Transparency is not a magic solution to reduce inequality. And neither is decentralization. Nonetheless, while still not definitive, a growing body of literature argues that localization can potentially offer greater accountability by moving the decision making process closer to people. This, however, does not come automatically by only decentralizing or devolving power to sub-national governments. It depends to a great extent also on a number of other factors, such as the degree of decentralization (delegation, 12


desconcentration or devolution); institutional capacity of sub-national governments; communication and monitoring systems; and citizen participation and oversight. Accountability between different actors in the service delivery chain also makes a difference. Moving from a model of centralized decision-making to a decentralized one, introduces a new relationship of accountability— between national and local policymakers—while alters existing relationships, such as that between citizens and elected politicians. In order to influence outcomes favorable to equality, the process of implementing decentralization processes can be as important as the design of transparency and service delivery systems. As the First Regional Human Development Report points, “inequality tends to breed inequality” often as a result of opaque political systems that offer different groups and different levels of government different access to information and influencing public decisions, and because the systems respond differently to groups with fewer resources and less lobbying capacity. Often access to privileged information can be an important commodity. Such information can be used in numerous ways to gain a competitive and/or private advantage. This is perhaps most significant for the sub-national levels where own budgets are extremely small and citizens themselves have less opportunities. In this context, this privileged access to public information can be one of the few valuable resources at the sub-national level that can create opportunities for corrupt practices. Democratizing and decentralizing the policy-making spheres could be two factors that can help to expand human development. Reducing inequalities requires a redistribution of the decision-making power to enhance democratic governance. Although, evidence also shows that decentralized democratic governance is not immune to corrupt practices. Many of the democratic institutions and public administration structures can be seen as mechanisms to reduce the risk of corrupt practices, particularly if they have the adequate capacity and systems. Periodic elections, public hearings, access to information laws, checks and balances, open budget processes, control systems, procurement laws, integrated financial management systems, and performance evaluations are all costly investments (both in terms on money and bureaucracy), but their purpose is to prevent, control and sanction corrupt practices. Thus it is not only about economic growth, increase human development index or levels of decentralization. It is also about having an anti-corruption apparatus, and how well this apparatus functions or is used in favor or transparency and equality. Corrupt practices, defined as the abuse of entrusted authority for private gain, is found in all countries – rich and poor, democratic and authoritarian. Countries, particularly those that adhere to democratic practices, show different degrees of capacity to prevent and sanction corrupt practices. As such, evidence of recurring corrupt practices and high perception of corruption can shape elite and non-elite beliefs, attitudes, behavior and thinking patterns, and individual and collective response to the problem. Strong correlations are evident in transparency and corruption indicators, economic and human development, and political freedom (Kolstad and Wiig 2009; Van, et.al., 2009; UNDP, 2008; and Bellver and Kaufmann, 2005). Countries with high transparency and low corruption indicators tend to be countries that enjoy greater prosperity, opportunity, and individual liberty.

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Why is Latin America not Doing Better? According to various reports, Latin America and the Caribbean economies have shown during the last five years a strong and more balanced economic performance. Having weathered the global financial downturn comparatively well, the Latin America and Caribbean region has been able to post impressive economic growth numbers (ECLAC, 2010; and Rojas-Suarez, 2008). In the last decade, inequality (and the poverty that has accompanied it) has been declining in 13 of the region’s countries (out of 17 for which comparable data are available), including all the larger ones (Birdsall, et.al, 2011; and Lopez-Calva and Lustig, 2010). In some cases, this economic performance and subsequent positive impact on equality can be attributed to enhanced democratic governance and transparent and accountable policies. However, in the majority of the cases, serious democratic governance challenges remain as this wealth appears to be still concentrated in the hands of small elite groups. As the 1996 UNDP Global Human Development Report argued, economic growth alone cannot distribute resources more equally, unless adequate policies to increase equality are taken. And in order to take adequate policy steps, the democratic governance machinery has to have capacity to design and implement human development policies in a transparent and accountable way. When some democratic governance indicators are analyzed for Latin America, and compared to other regions, perhaps a hint emerges of why the region is still considered a place in the world where income inequality is among the highest (UNDP, 1996). Gross National Income (GNI) comprises the total value of currently produced final goods and services produced by the domestic economy of a country, measured within a given period of time. As Graph 1 shows, Latin America and the Caribbean have decent GNI per capita indicator, if particularly compared with East Asia or Sub Saharan Africa (World Bank, 2009). Although the GNI per capita of Latin America and the Caribbean is five times less than those countries of the Organization for Economic Cooperation and Development (OECD), it is five times more of the Sub Saharan Africa and twice more of East Asia. If the GNI is articulated with democratic governance indicators, some interesting issues emerge. Graph 1: Global GNI per capita 2009 (in US$, World Bank Data/Atlas Method) OECD

34522

Eastern Europe and Baltic

10353

Caribbean

7658

Latin America

6243

Middle East & North Africa

3597

Former Soviet Union

3557

East Asia

3163

Subsaharan Africa

1125

South Asia

1107

Source: World Bank Data.

15


The Worldwide Governance Indicators (WGI), which includes six dimensions of democratic governance1 shows that when compared to other regions, Latin America´s performance is relatively low (Graph 2). While overall it shows better quality indicators than the Middle East and North Africa and Sub Saharan Africa, when compared to OECD countries, Easter Europe and/or even to the Caribbean, Latin America´s indicators show low quality. It is worth noting that even in the Control of Corruption indicator Latin America has a comparably low indicator and is actually closer to Sub Saharan Africa. According to the WGI, only El Salvador and Guatemala have been able to show substantial improvements in controlling corruption between 1996 and 2009. Latin America as a region scored 39.9 on the percentile rank (0-100) in 1996, 43.7 in 2003 and 43.5 in 2009 respectively in the Control of Corruption indicator. Corruption in the Caribbean also seems to be persistent even though corruption is not as high as in Latin America. The Caribbean scored 66.1 in 1998 and 68.9 in 2009. Graph 2: Worldwide Governance Indicators, WGI OECD Total

Caribbean

Control of Corruption

East Europe and Baltic

Rule of Law

East Asia

Regulatory Quality

Latin America

Government Effectiveness Political Stability

Middle East & North Africa Subsaharan Africa

Voice & Accountability

Former Soviet Union South Asia

-2 -1.5 -1 -0.5

0

0.5

1

1.5

2

Source: World Governance Indicators 2009, World Bank. -2 is lowest quality and +2 is highest quality.

This trend is corroborated by Transparency International that since 1995 has annually measured perceptions of corruption across an array of countries using the Corruption Perception Index (CPI). As can be seen in Graph 3, Latin America score in a scale of 0 (high perception) to 10 (low perception) is only 3.6. Latin America is lagging behind the other regions and it has a huge challenge ahead. While the Caribbean scores are slightly higher than Latin America, they are closer to Eastern Europe than to Sub Saharan Africa. The CPI is also complemented by data from the Americas Barometer produced by Vanderbilt University´s LAPOP Initiative. They found that in every country in the region, citizen perceptions of public corruption are quite high (Perez & Seligson, 2010).

1

Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption.

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Graph 3: Corruption Perception Index 2010 (CPI) OECD

7

Eastern Europe and Baltics

4.3

Caribbean

4.1

Middle East & North Africa

3.9

East Asia

3.8

Latin America

3.6

Subsaharan Africa

2.9

South Asia Former Soviet Union

2.85 2.4

Source: Corruption Perception Index, Transparency International, 2010.

If democratic governance is the process and institutions by which authority in a given country is exercised, processes by which governments are selected, held accountable, monitored, and replaced become important. Similarly, the capacity of governments to manage resources and provide services eďŹƒciently, and to formulate and implement sound public policies and regulations are important elements to consider. Furthermore, the respect and trust for the institutions that govern economic and social interactions is crucial. Democratic governance then can be a means not only to encourage patterns of growth, but also to generate an enabling environment for job creation, income growth and human development. Obtaining income can certainly be one of the main means of expanding choices and human development. But the expansion of income does not translate automatically into human capabilities. Government intervention may be needed, for example to rectify investment in human development policies or to ensure that information ows are not asymmetric. Lack of transparency, can reduce a households' incentive and ability to invest in human development or an individual´s awareness of policy impact in their lives. The budget process for example, is a key governance instrument for transparency and accountability. Budgets provide a detailed statement of plans and decisions to which citizens can hold their government accountable. In addition increased transparency can strengthen the hand of key democratic institutions such as congress/legislature, the judiciary, and Supreme Audit Institutions. It also unleashes the potential for citizens to organize in civil society or non-governmental organizations, and partner with media to strengthen civil accountability and oversight by scrutinizing budgets and decisions, providing technical inputs and opening policies to public debate.

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Why Perceptions of Corruption are High and Transparency Demand is Low? There are some features in Latin America that differ from other regions that could help explain what causes the comparably high perceptions of corruption, low quality democratic governance indicators and low demand for more transparency and accountability. Latin American societies are generally more stratified. There are a number of stratification variables in the region that shows comparably high levels of polarization in all of them. Inequality is Highest in the World The economic inequality in Latin America is highest in the world. The regional Human Development Report for Latin America and the Caribbean 2010 argues that the region has fallen into an inequality trap. The inequality is significant and persistent and the region shows the highest unequal distribution of incomes in the world. During the past decade, the income Gini coefficient 2 of the 17 countries in Latin America range from 43.4 (Venezuela) to 58.5 (Colombia). In contrast, countries in central and northern Europe have lower coefficients between 25 and 35, and those of Eastern Europe have coefficients that are closer to 30. It is only Caribbean and a few countries in Africa and Asia that shows a coefficient as high as those found in Latin America. High economic inequality within a nation can affect economic growth. In a global comparison, the correlation between economic growth the past ten years and Income Gini coefficient is 0.41 on a scale where 0 is no correlation and 1 is perfect correlation. As can be seen in Graph 4, most of the Latin American countries would be in the upper left hand corner of the graph where income inequality is high and economic growth is low.

Income Gini coefficient 2000-2009

Graph 4: Correlation Between Economic Growth and Inequality 70 60 50 Subsahara

40

East Asia

South Asia

MENA

OECD

30 20 10 0 0

2

4

6

8

10

12

14

16

18

Annual economic growth 2000-2009, average

Source: Own calculation based on World Bank Data 2009 and Human Development Report 2010. Red plots are Latin American countries, blue plots are Eastern Europe and Baltic countries and green plots are regions.

2

The Gini coefficient is a measure of the inequality of a distribution and is use to describe household income inequality.

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There are of course different types of resources that can be distributed unevenly. The Gini coefficient is measuring the distribution of incomes among a population. The Inequality –adjusted Human Development Index measures and summarizes the uneven distribution of education, income and expectancy at birth. In this index it is clear that health and education, two key components of human development, also are distributed uneven in Latin America, but it is the income distribution that is exceptionally uneven. Research has shown that inequality in education and health can have implications for the overall human development of a country, but it is the income distribution that highly affects the level of stratification of a society and helps to shape values and cultural features that make it “acceptable” to justify irregular conducts, mismanagement, corrupt practices and state capture.3 Moreover, where there are persistent high perceptions of corruption, there is in general lesser probabilities to support the political systems and/or its policies (Perez & Seligson, 2010). As such, inequality also helps to perpetuate perceptions that further nourish the notion of inequality. Levels of corruption will be higher when: Citizens do not value democratic governance. Government’s role is broad and intrusive. Uncertainty about the future is high. Civil servants are poorly paid and not well qualified. Civil society is weak and passive and media does not have an independent role. The private sector is limited and uncompetitive, with unclear rules of the game and opaqueness.

     

Economic inequality provides a fertile breeding ground for corrupt practices, and even helps to justify corrupt behavior, which, in turn, leads to further inequalities. Just as perception of corruption is persistent and sticky, inequality and trust do not change much over time, according to cross-national aggregate analyses. High and persistent levels of inequality lead to low trust and high corrupt practices, and then to more inequality, thus creating a vicious circle (Uslaner, 2010; UNDP, 2010b; and Rothstein & Uslaner, 2006). The link of democratic governance with inequality is important because of its implications in partially explaining the prevalence of corruption.

Interpersonal Trust is Exceptionally Low in Latin America The interpersonal trust4 is also comparably low in Latin America. The Latinobarometro 2010 shows that only 20% of the population in Latin America trust “most people.5” This is low, compared with other

3

Among others, see Eric M. Uslaner and Bo Rothstein (2006). “All for All: Equality, Corruption and Social Trust.” World Politics, vol. 58 (3) and UNDP (2010) Human Development Report LAC. 4 Interpersonal trust is a multidimensional concept, distinguished by several authors according to whether it is directed to relatives or friends, on one side, or to strangers, on the other. Its measures should reflect such multidimensionality. Trust here is defined as “the expectation of one person about the action of others that affects the person's choice” (Serageldin I., Dasgupta P., (2001),

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countries, like the United States, Canada or Japan, where 40% of the population trust “most people, while in Nordic countries it goes up to 70-80 %.6 Interpersonal trust is considered to be the “glue” between social groups and can measure how connected a society is. Trust doesn’t seem to be a prerequisite for good governance, but it does correlate (correlation coefficient is 0.51).7 The higher the interpersonal trust is in a country, the higher democratic governance indicators are. A stronger correlation, 0.5, appears when inequality is related to Interpersonal Trust (Graph 5). The higher economic inequality, the lower interpersonal trust is. Note that in Graph 5, the Latin American countries, red plots, are found in the right lower corner. There could be a possibility to have high interpersonal trust, but still score low in democratic governance indicators. The case of Iraq, Viet Nam, Indonesia, China and Thailand help illustrate this in Graph 6. Chile shows the opposite. That is, it is possible to have low interpersonal trust and score high democratic governance indicators (Graph 6). The majority of the countries surveyed in the World Values Survey, though, show that interpersonal trust and democratic governance relate to each other. Nonetheless, a correlation doesn’t necessarily show the causality. Therefore, a key unanswered question is whether low interpersonal trust creates low democratic governance quality or the other way around? Graph 5: Correlation Trust and Inequality

Interpersonal Trust, WVS

80 70 60 50 40 30 20 10 0 0

10

20

30

40

50

60

70

Income Gini coefficient 2000-2009 Source: Own calculation based on World Values Survey and the Global Human development Report 2010. Red plots; the Latin American countries in WVS, green plots; Eastern Europe and former Soviet Union and blue plots; other countries in WVS.

5

The question asked was: Generally speaking, Would you say that the majority of people can be trusted or that one is never sufficiently careful in treating others? *Here only “The majority of people can be trusted.” Latinobarometro 2010. 6 World Values Survey has asked a similar question in 58 countries in the world. Only eight Latin American countries are measured and shows among the lowest percentage. (www.worldvaluessurveys.org) 7 Correlation coefficients measures the degree of correlation on a scale between 0 (no correlation) and 1, or -1 (perfect correlation). Used here is the Pearson correlation coefficient.

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Interpersonal trust correlates with a number of other highly desirable variables. 8 This research shows that, at the individual level, people who believe that most other people in general can be trusted are more inclined to have a positive view of their democratic institutions, to participate more in politics and to be more active in civic organizations. Data from LAPOP corroborates this. When measuring levels of trust in institutions in a scale of 0 to 100 (where higher levels mean more trust), seven of twelve institutions exceed the midpoint of 50 on this scale. According to LAPOP, respondents in the region express their greatest trust in the Catholic Church with an average of 63, followed by the Army at 62. In the 50’s were in descending order the media (59), electoral courts (52), the president (51) and the national government (50). The remaining institutions are rated below the scale’s midpoint. In the high to mid-40’s were the supreme court, the national police, the judicial system, and congress. Finally, the institution that inspires the lowest level of confidence in the region was political parties, with an average of 36 on the 0-100 scale (Perez & Seligson, 2010).

World Governance Indicators, WGI

Graph 6: Trust and Democratic Governance Correlation 2.5 2 1.5

Chile

1 0.5 Thailand

0 -0.5

0

10

20

30

40

50 Indonesia

China Viet Nam

60

70

80

-1 Iraq

-1.5 -2

Interpersonal Trust, WVS

9

10

Source: Own calculation based on World Bank WGI and World Values Survey. Red plots; LAC countries, blue plots: the rest of the world measured in World Values Survey.

Similarly, people who believe that most other people in general can be trusted are also more tolerant to others, and are more optimistic of their own life possibilities. This reasoning would imply that with high trust, the possibility for sustaining democratic governance over time is increased. However, it could just as well work the opposite direction. By reducing inequality and strengthening democratic governance trust can be strengthened. With societal institutions that ensure security against arbitrariness and favoritism, respect for contracts and transparency, citizens are treated impartially and thus regain trust. 8

See Uslaner & Rothstein (2006) All for All; Equality, Corruption and Social Trust. World Politics. Vol 58. Governance is measured as the total score of the indicators Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption (WB WGI 2009). The indicators score -2.5 (low quality) to + 2.5 (high quality). 10 Interpersonal Trust is measured by World Values Survey (www.worldvaluessurveys.org) in % of the surveyed who trust the majority of other persons. 9

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Interestingly, as can be seen in Graph 7, an even higher correlation appears between Interpersonal Trust and perceptions of corruption (0,567).11 The lower perceptions of corruption are, the more trust among citizens. But this relation can also imply another potential correlation; the higher trust is the less perception of corruption. Data from LAPOP also corroborates this. Not only does the Political Tolerance Index (measured on a 0-100 scale where larger values mean higher levels of political tolerance) has remained steady at the midpoint (50s) for the 11 countries in the region that are part of the study since 2004, but also the percentage of respondents with attitudes conducive towards stable democracy was consistently around 30% also since 2004. Tolerance and support for the political system are key pillars for a stable democracy. Furthermore, when LAPOP asked who is more likely to support a stable democracy, again the answers corroborate a certain link with issues related to inequality. For example, the LAPOP highlights that while political interest and perception of a positive economic situation increase the likelihood for a stable democracy, respondents who perceive high levels of corruption are less likely to hold attitudes favorable to stable democracy. Finally, only two of the socioeconomic variables, wealth and education, have a statistically significant effect on the likelihood of supporting stable democracy. Holding constant other factors, those who are better-off and more highly educated (more human development) are more likely to be the basis for a stable democracy (Perez & Seligson, 2010). Thus interpersonal trust can be a factor that connects societies and thus improves the quality of democratic governance. Graph 7: Trust and Corruption Correlation 10 9 8

CPI 2010

7 6 5 4 3 2 1 0 0

10

20

30

40

50

60

70

80

Interpersonal trust, WVS

Source: Own calculation based on World Values Survey and CPI 2010, Transparency International. Red dots; LAC countries, Blue dots; other countries surveyed in WVS.

11

Correlation coefficient (Pearson measures the degree of correlation on a scale between 0 (no correlation) and 1 or -1 (perfect correlation).

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Social Mobility is Low The intergenerational social mobility is relatively low in Latin America and the Caribbean. The 2010 UNDP Regional Human Development Report shows that the correlation of educational attainment between two successive generations ranges from 0.37 in Paraguay to 0.61 in El Salvador whereas this same value stands at 0.21 in the United States.12 The intergenerational income elasticity, the correlation between the levels of economic performance between two successive generations, is also not optimal in Latin America. Chile, Brazil and Peru have values between 0.52 and 0.60 whereas the same value in the Nordic countries and Canada are 0.19. (0.32 in Germany and 0.47 in the United States respectively). The UNDP Report shows that the persistence of inequality in the region is the result of an intergenerational transmission of relative household achievements levels. “These constraints translate into obstacles that hinder the expansion of peoples´ capabilities from one generation to the next, thus limiting progress in human development” (UNDP, 2010:59). There is not enough data available to test the correlation between social mobility and inequality. However, the UNDP Report assumes that there is a correlation on a global level; a society that is highly unequal shows very low intergenerational social mobility. Small Middle Class The size and strength of the middle class is often pointed out as the engine for economic growth13 and is associated with greater social cohesion and less conflict, as well as with having a key role in protecting and enhancing democratic governance.14 The middle class in Latin America is growing slowly but is still relatively small. Martin Ravallion compared the sizes of the supposed middle classes in the world in 2009.15 For Ravallion the developing world’s middle class is defined as those who are not deemed “poor” by the standards of developing countries but are still poor by the standards of rich countries. Since it differs from region to region what is considered as middle class, depending on the different economic levels, Ravallion left out the OECD countries and estimated the middle class to be formed in the segment of populations where the per capita in the households live between $2 a day and $13 a day. Ravallion also found that one in six people in the developing world live between $2 and $3 per day. While the intervals may be wide, Ravallion´s findings provide inputs for a snapshot of the size and growth of the middle class in the different regions (Table 1).

12

UNDP 2010. Chart 1.1 p. 21. UNDP 2010 p.44. 14 Ibid. 15 http://econ.worldbank.org/external/default/main?pagePK=64165259&piPK=64165421&theSitePK=469382&men uPK=64166093&entityID=000158349_20090112143046 13

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Table 1: Snapshot of the Size and Growth of the Middle Class % of population living Region % of total change below $2 a day 1990 2005 2005 2005 East Asia and Pacific 19.8 59.3 65.9 38.7 Eastern Europe and Central Asia 76.3 73.4 -7.5 8.9 Latin America and Caribbean 63.2 65.8 7.0 17.1 Middle East and North Africa 75.5 78.7 5.7 16.9 South Asia 17.2 25.8 15.4 73.9 Sub-Saharan Africa 22.8 25.8 6.5 72.9 Source: Martin Ravallion Policy Research Working Paper No. WPS 4816. 2009. Living between $2 a day and $13 a day.

Table 1 confirms that the size of the group of people who live between $2 and $13 a day is smaller in Latin America than in the two regions that have the similar economic development, Eastern Europe and Central Asia and Middle East and North Africa. Note that the group of people who live above $13 a day is the same size in Eastern Europe and Latin America and the Caribbean. Nevertheless, there is still work to be done in terms of improving economic welfare and enhancing the governance-influencing middle class segment, since during the period of 15 years comprehended from 1990 to 2005, there is only a slight upgrade of 3% of the population and this score also happens to catalogue Latin America as one of the regions showing the lowest improvement in the world.

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How is Democratic Governance affected by Strati�ied Societies? Global comparison suggests that Latin America, and to a certain extent the Caribbean, have low quality democratic governance indicators. One explanation for this could be explained by the fact that Latin American societies are more stratified. This stratification is driven by mainly four mechanisms: an uneven distribution of incomes, low Interpersonal Trust, low social mobility and a small middleclass. These four mechanisms correlate and affect both economic growth and the quality of governance. Corruption has a crucial role in the link between stratified societies and the quality of governance. Highly stratified countries lack bridging confidence (trust between ethnical groups, social class, extended families, and between citizens and governments). This also enables a conducive environment for engaging and/or justifying in corrupt practices. This could happen in two ways. First, thrives where the opportunities for corrupt behavior are high, the probabilities of being caught are small, and the consequences for illicit behavior are low (Klitgaard, 2004; Parker, et al. 2004; Kaufmann, Kraay and Mastruzzi, 2005; and Berthin, 2008). However, also in a stratified context, not only rational behavior or incentives would prevail, but also the belief of how other act. In this stratified environment, corrupt practices are often justified by “why shouldn’t I play the game since everybody else does?” "If you do not adapt, you perish." “The politicians steal millions; I am only get involved to survive.” Since the notion of living in a stratified society is strong, and the perspectives for improving livelihood seem gloom, individuals justify their corrupt behavior as a way of protecting oneself against injustice and inequality. There is a vicious circle here, which some have called the culture of non-compliance, where the self-interest prevails based on a notion that a belief in higher values (equality, opportunity, freedom) can provide incentives for noncompliance of norms (Garcia Villegas, 2009). Corruption creates inequality, which creates low governance quality indicators, and which helps to justify corrupt behavior. But scholars argue on where the entry-point is. While it is clear that low-quality government institutions have tremendous negative effects on the health and wealth of societies, where to start, and what to do, remain far from clear. However, in Latin America, the key problem seems to be the high degree of inequality. The case of Latin America also demonstrates that democratic governance, when built on a stratified platform, is not immune to corrupt practices. Many of the democratic institutions and public administration structures, which make-up the anti-corruption apparatus, can be seen as mechanisms to reduce the risk of corrupt practices. Periodic elections, public hearings, access to information laws, checks and balances, open budget processes, control systems, procurement laws, civil service systems, integrated financial management systems, judicial systems and performance evaluations are all costly (both in terms on money and bureaucracy), but their purpose is to prevent, control and sanction corrupt practices. Almost all Latin American countries have these. Thus it appears that is not only about having an anti-corruption apparatus, but maybe the determinants of the country’s level of corrupt practices is how well this apparatus functions or is used.

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As was pointed by the UNDP 2002 Global Human Development Report, democratic governance also requires functioning institutions. It requires a legislature that represents the people, not one controlled by the president, bureaucrats or political parties. It requires an independent judiciary that enforces the rule of law with equal concern for all people. It requires well-functioning political parties. It requires an accessible media that is free, independent and unbiased, not one controlled by the state or by corporate interests. And it requires a vibrant civil society, one that can play a watchdog role on government and interest groups—and provide alternative forms of political participation.

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Is there a Way Out? The 2010 UNDP Regional Human Development Report for Latin America and the Caribbean states that “…there are two prerequisites for the redistribution of income: mechanisms to ensure accountability and effective political competition” (UNDP, 2010:96). Almost all countries in Latin America are considered to be electoral democracies.16 But the level of accountability varies. Also, most countries in the region have undertaken some reform towards devolving political power, administrative functions and competencies and fiscal responsibilities. Nonetheless, the degree and scope of decentralization (devolution, delegation and desconcentration) is diverse. Accountability and decentralization may offer a way out, but the evidence so far is mixed and still evolving. According to a study by Mikel Barreda elaborated on available acknowledged data to measure horizontal and vertical accountability in Latin America, 17 there are different levels of accountability quality and Latin America (Graph 8). Vertical accountability is commonly defined as accountability imposed externally on governments, formally through electoral processes or indirectly through citizens and civil society, including mass media.

Graph 8: Vertical and Horizontal Accountability

Source: Mikel Barreda.(2010) Graphic one.

Horizontal accountability is then imposed by governments internally through institutional mechanisms for oversight and checks and balances.18 Apparently, it is possible to perform high levels of vertical accountability while performing poorly in horizontal accountability and vice versa. If accountability were a prerequisite for reducing inequality, one could assume that countries with less inequality perform 16

Freedom House, http://www.freedomhouse.org/template.cfm?page=637 Mikel Barreda (2010). 18 UNDP (2010) Fostering Social Accountability: From Principle to Practice. Guidance Note. 17

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higher vertical accountability. There is no such proof in statistical data. Inequality and accountability, neither horizontal nor vertical, correlate in Latin America. On the other hand, there is a very clear correlation between horizontal accountability and perceptions of corruption (Graph 9). The correlation coefficient between horizontal accountability and perceptions of corruption is 0.76 which is close to perfect and doesn’t leave a doubt. This implies that with qualitative political oversight, executive constraints and Rule of Law, corruption could be curbed. Graph 9: Horizontal Accountability and Corruption

Horizontal accountability 2006-2008

2 1.5 1 0.5 0 -0.5

0

1

2

3

4

5

6

7

8

-1 -1.5 -2

CPI 2010

Source: Own calculation based on CPI 2010, TI and Mikel Barredas indicators for Horizontal Accountability in Latin America

Interestingly, there is also a correlation between vertical accountability and corruption (Graph 10). The correlation between vertical accountability and corruption is also significant (coefficient 0.54) but not as strong as the correlation between horizontal accountability and corruption. Clearly, accountability and corruption are associated. The stronger accountability, the less corruption. Thus, enhancing accountability could help curb corruption. The question remains, how can accountability be strengthened? While accountability is not a panacea, it could be a powerful driver of change and improved performance in democratic governance. For example, if one looks at the issues of improving accountability in service delivery, it needs to be accompanied by other elements (such as increased resources, improved infrastructure and equipment, better technical capacity and internal reforms), which all are complementary to building capacity for greater accountability (Tod, 2008). In general, accountability could be enhanced by empowering citizens, facilitating multi-stakeholder processes and increasing the capacity of local actors to delegate, finance, perform, inform and enforce. Lately, evidence has been presented that suggest another entry-point to break the vicious circle of corruption creating inequality. For a decade, it has been contested whether decentralization can curb or increase corruption. The World Bank Institute has pursued rigorous quantitative analysis by exploring

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the impact of decentralization on the incidence of corruption in a sample of 182 countries. 19 The results shows that decentralization, when measured to mean moving government closer to people by empowering local governments, has significant negative effect on the incidence of corruption or a positive effect on democratic governance. Nonetheless, another study of 68 countries did not provide conclusive evidence (Avellandeda & Cheng, 2005).

Vertical accountability 2006-2008

Graph 10: Vertical Accountability and Corruption 2 1.5 1 0.5 0 -0.5 0

1

2

3

4

5

6

7

8

-1 -1.5 -2

CPI 2010

Source. Own calculation based on CPI 2010, TI, and Mikel Barredas indicators for vertical accountability in Latin America.

What is emerging from the evidence is that empowering local governments could reduce frequency of bribery and amount of bribes paid to government officials both by households and by firms (Ivanya & Shah, 2010:26). Also, that decentralizing expenditures is generally not enough to have a significant effect on a government’s integrity, unless there is also an increase in the local government’s own revenues, and taxation autonomy. Nonetheless, all of these measure are based on the premise that local government have the capacity to manage resources, to plan and develop a budget, and have in place integrated financial management systems.

19

Ivanyna, Maksym and Shah, Anwar (2010). “Decentralization (Localization) and Corruption. New Cross -country Evidence.” Policy Research Working Paper No. WPS 5299. World Bank Institute, Governance Division.

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How to Move Forward? The purpose of this Working Paper was to explore some of the new elements and variables that could provide inputs to the transparency-democratic governance and human development discourse, in particular focusing in Latin America and the Caribbean. The idea was to test potential new hypothesis that could shed new light into the analysis of transparency and democratic governance. Inequality appears to be one main factor in explaining low democratic governance indicators in Latin America. Even though it is not possible to draw conclusions on causation, statistical data can give a few significant correlations that can help us understand the complex mechanisms behind economic, human and political development. For example, with high inequality, citizens tend to show less confidence in other people and in democratic institutions. When interpersonal trust is low, the quality of democratic governance also seems to be low and perception of corruption is high. Although a general conclusion could be that more transparency is good for democratic governance and human development, much research is needed to assess costs and benefits. Many questions remain: Can more transparency lead to greater democratic governance and if so, under what conditions? Has the need for greater transparency increased with globalization and localization? Can knowing how and why decision makers take positions and/or prioritize budgets reduce inequality? How can existing institutional mechanisms of transparency and accountability be more effective? A systematic inquiry into such issues could help frame appropriate policies. What this Working Paper has tried to do is provide some clues on where to start and which traps to avoid. Improving democratic governance is of course more complex and difficult in practice than the logic chain of correlations would suggest. But analyzing data and trends can provide a better understanding on what some new cause and effect hypothesis that could help improve the quality of democratic governance and further reduce inequalities. Often decision makers are instrumental in defining parameters of tolerance of corrupt practices from the top, by opting for a more personalistic decision-making processes, not enforcing laws, not generating national policies and initiatives to combat corruption, promoting transparency and allowing impunity to flourish. On the other hand, citizens are also part of the game, since they have noticed this pattern, and they acknowledged the bad in it, but instead of fighting it and demanding more transparency and accountability they have joined the decision-makers in keeping high levels of tolerance for corrupt behavior. As such, elites (business, politicians) and society at large could be keepers of corrupt practices and of perpetuating inequality. While elites, who have political and economic power (controlling the Executive, National Assembly and Judiciary and the business sector), choose to accept current corrupt practices, they also often use anti-corruption rhetoric to gain popular support (particularly in elections). Meanwhile, the society at large adapts its behavior to such pattern, and on its own decides to engage in corrupt practices as a way to defend their individual aspiration to be included and/or be counted, as well as to defend their aspiration to be like the elites or at minimal to move away from the trap of inequality. The high patterns of inequality reinforced and justified corrupt

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behavior among the citizens, while among the elite the justification has to do more with obtaining personal gain, mostly in economic terms, at the expense of a more collective interest. Here is a region, Latin America and the Caribbean, which stands out over the past decade for having promoted steady economic growth, significantly increased levels of human development, with a sophisticated anti-corruption apparatus in place, and yet enjoys regionally and globally low democratic governance, transparency and integrity confidence ratings. The Latin American case suggests that some quick symbolic fixes in transparency and accountability may not be enough since first it may need to deal with more structural issues of high stratification and inequality. Similarly, while ending impunity and punishing the corrupt could be an important step, it will only be the “signal” or consequence of a shock that has to occur. For citizens to start trusting democracy enough to be keepers of democratic values, they need to feel that they will be treated impartially and that playing into the various justifications to tolerate and engage in corrupt practices is not necessary or “profitable.” Similarly, elites who are the main decision makers need to have the political will to enforce existing laws and strengthen further transparency, integrity and accountability systems and to think more in terms of the interest of all and not only in their own personal interest. Fighting corruption is a complex and multi-dimensional effort that involves both government and citizens and requires trade offs (Berthin, 2008). To fight, control and prevent corrupt practices, there has to be first an understanding of why the problem occurs and where it is most prevalent. Once that is known, the key question is how to prioritize actions. The task is to maximize and optimize tradeoffs, which will depend not only on the particular type of corrupt practices (grand or petty corruption for example) but also on certain features of the country’s context and anti-corruption apparatus. As demonstrated by the case of Latin America, often this context reinforces a set of shared beliefs, assumptions, and modes of behavior, in many cases derived from experiences and accepted narratives. This shapes collective identity and relationships to other individuals and groups, and can determine both not doing anything about a problem and finding appropriate ends and means for promoting more transparency and accountability. Today the prevalence of corrupt practices is seen not only as a consequence of weak governance, but also as a cause of poverty and inequality. As was shown in this Working Paper, perceptions about corruption matter because citizens base their actions on their perceptions, impressions, and views. If citizens believe that the courts are inefficient or the police are corrupt, they are unlikely to value the benefits of their services and/or if they do under current conditions, they will be more predispose to engage in corrupt behavior. Similarly, businesses base their investment decisions - and citizens their voting decisions - on their perceived view of the investment climate and the government's performance respectively. Pervasive perception of corruption may hinder investment and economic growth and decrease the quality of democratic governance, since choices would be made either to keep the status quo or to do nothing about it. In some areas of governance, there are few alternatives to relying on perceptions data. This is most particularly so for the case of corruption, which almost by definition leaves no “paper trail” that can be captured by purely 34


objective measures. As was shown in this paper, even when objective or fact-based data are available, often such data may capture a de jure notion of laws “on the books” that differs substantially from the de facto reality that exists in practice (Kaufmann, Kraay and Mastruzzi, 2005). In great part, because of this gap between de jure and de facto realities combating corruption requires a balanced approach; one that is able to address the causes of this problem and not only its symptoms. Experience shows that successful efforts for controlling and combating corruption requires a comprehensive approach that focuses on prevention, detection, prosecution, and law enforcement. While it is critical to punish the corrupt in order to increase the consequences of engaging in corrupt behavior, it is equally important to reduce the motives and opportunities that generate corruption in the first place. Moreover, and equally significant, anti-corruption efforts require the participation of government, civil society organizations, and the media. On the one hand, democratic governance can be an effective deterrent to corruption, and on the other it can be an important means for human development (see Graph 11). Effective, transparent, and accountable government institutions significantly increase the costs of engaging in corrupt behavior while substantially raising the rewards for adhering to the rule of law. Any strategy must include an important law enforcement component, but it also needs to include policies to improve the quality of public services, increase transparency and accountability in government, engage civil society in community oversight, and restore the dignity of the police force within the community.

Source: Quality of Government Institute, 2011.

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Moving forward can mean prioritizing certain policy initiatives, such as:     

Leverage International Anti-Corruption Conventions to promote compliance and exert pressure for law enforcement and control; Strengthen the Judiciary; Promote access to information to enhance transparency and accountability; Build capacity of government entities at national and local levels for greater transparency and accountability, and social audit as a form of citizen control; and Strengthen Internal Controls as a way to prevent and reduce corruption

Strategic and policy options cannot be a blueprint, but rather a set of rolling recommendations which recognize that corruption is very complex and multidimensional, manifests itself in a variety of ways in different settings, and changes in intensity and scope over time. As such, any strategy must be responsive to ever changing conditions and to targets of opportunity. Since corruption is the result of high opportunities for engaging in corrupt behavior combined with a low level of risk, an effective anticorruption approach must affect both prevention (the reduction of opportunities) and enforcement (the increase of risk and reduction of impunity).

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Does Transparency have a Payoff forDemocratic Governance and HumanDevelopment?