Op-ed: No end to poverty without better governance

May 16, 2013

Sri Mulyani Indrawati, Managing Director of the World Bank First published in Thomson Reuters Foundation- TrustLaw

In April the World Bank governors endorsed two historic goals: to end extreme poverty by 2030 and to ensure that prosperity is shared. It will take a lot to end poverty: strong growth, more infrastructure investments, increased agricultural productivity, better business environments, jobs, good education, and quality health care. We have to do more of this in tough places, particularly those that are fragile and conflict-affected. But it also takes overcoming institutional weaknesses and zero tolerance for corruption. Without improving governance it will not be possible to lift the 1.2 billion people who still live of $1.25 a day or less out of poverty and to ensure that economic growth will benefit all citizens.

Good governance and the role it plays in fighting poverty is complex. A finance minister from a resource rich but otherwise poor country told me recently that the fuel subsidies in that country, designed to protect the most vulnerable from high prices, are ultimately “anti-poor” because the rich benefit most, they are wasteful and ineffective. And another official from a middle income country described achieving shared prosperity as tough because a growing middle class has high expectations and becomes disillusioned by corruption and lack of services, making them less willing to support the state.

The first issue is a spending problem and trying to fix it comes often with high political costs.  Yemen, Nigeria, Jordan and my country, Indonesia, have all experienced riots over fuel subsidy reforms. While limited public finances should leave no room for waste, blanket subsidies do exactly that: they squander spare resources, they are expensive and ineffective. One World Bank analysis notes that only an estimated 8 percent of the $409 billion spent on fossil fuel subsides throughout the developing world in 2010 went to the poorest 20 percent of the population. In seven African countries the richest 20 percent receive six times more in fuel subsidy benefits then the poorest because they consume more.

" A state that does not deliver ‘clean’ services will choke its engine of growth – a strong middle class – and creates a major obstacle for achieving shared prosperity.  "

Sri Mulyani Indrawati

Managing Director of the World Bank

In some places fuel prices are kept so low, they promote a vibrant shadow economy. In one oil-producing country, for example, an estimated $857 million is lost through fuel smuggling to higher priced markets—over $300 for every inhabitant.

The second is a trust issue, most poignant with the emerging middle class. At some level this is good news because when people are better off, they demand better services and they grow less tolerant of corruption and bad governance. But if their government isn’t delivering, they are less willing to pay taxes, invest or play by the rules. Citizens with the means to do so use services outside the state system, reducing the pressure for improvements that could raise living standards for all. Some analysts have also seen a connection between lower trust in the state and patron-client relationships, in which favored groups are looked after and rewarded at the expense of the whole. It can breed a vicious cycle in which lack of trust and inclusion reinforce each other and undermine efforts to strengthen institutions and improve the quality of service delivery. In other words a state who does not deliver ‘clean’ services will choke its engine of growth – a strong middle class – and creates a major obstacle for achieving shared prosperity.

Yet there are examples that show that citizens can improve governance. The “I paid a bribe” initiative which started in India is now active in a number of other developing countries. Users expose corruption with the aim to strengthen public accountability posting on a website that serves as a public shaming tool. They now can also report when they encounter an honest public servant.

At the World Bank, I am privileged to chair the Governance and Anticorruption Council—which tackles governance obstacles in the way of development goals. Many developing countries have turned to the Bank for advice and assistance in reforms. For example, in Mexico procurement costs accounted for 40 percent of the federal budget, around 10 percent of GDP. Lack of transparency also caused corruption to flourish. With Bank support, the government implemented a set of innovations. Over three years bidding for contracts by small businesses went up by 36 percent and the government saved about US$ 1 billion. The Bank has also worked on similarly innovative programs to make extractive industries more transparent or to use technology in India to improve the quality of maternal health care.

Yet more can be done. Our governance work concentrates on ensuring compliance and the financial probity of our projects. And as an institution we’ll continue to increase our focus on delivery on the ground, whether to the poorest or the middle class, whether through targeted safety nets or governance reforms. Because without results for all citizens delivered effectively and ‘clean’ we won’t be able to end extreme poverty nor to promote shared prosperity.