The Quality of Public Sector Management

and Economic Inequality

M. Khalid Nadeem Khan,

Instructor/Research Associate,
National Institute of Public Administration,
KARACHI

Syed Abu Ahmad Akif

Chief Instructor,
National Institute of Public Administration,
KARACHI

Introduction
Inequality, poverty, and social strife are not new to humankind. From the beginning of recorded
history, every society has had these problems. What is equally true is that members of various
human groups have tried to do something about them to blunt their sting and turn ill into good.
The scales in which human societies place themselves, and in which they desire balance among
their members, keep tipping one way or the other as equality turns toward inequality and back.
Any effort at social harmony requires understanding the reasons for these swings of the equality-
inequality balance. It is very important to appreciate that human inequality and inequity are not
the result of some natural process. Rather, the roots of these negative phenomena lie in
decisions and actions taken by individual members and collective institutions of society in
general, and by governments and influential persons in particular, which affect the distribution of
resources and the treatment of groups in positions of advantage or disadvantage.
Time and time again, numerous economic, political, and social factors have disrupted the pursuit
of egalitarian ideals. Distributional policies of government (and of other power groups) have a
major role in determining distributional outcomes. Governments influence the distribution of
resources not only through fiscal decisions but also through the quality of public sector
management, which plays a more significant role than just spending or collecting revenues.
Throughout history, inequality has been regarded as unfair and counterproductive. More often
than not, social upheavals, revolutions, and changes in government have been attributed to
inequality. Apart from the common aversion to it, inequality has a strong negative impact on
economic growth through various channels. High inequality pushes the poor to vote for
redistributive rather than growth-enhancing policies. Where voters cannot influence public policy,
in the absence of democratic dispensation, and mercantile classes relentlessly pursue growth-
enhancing policies, the result is ever-increasing economic and social disparity, which continues
despite a progressively larger pie, as the relative distribution either remains unaltered or favors
the rich even more (Alesina and Rodrik 1994, Persson and Tabellini 1994).
High inequality prevents the poor from investing in education (human capital development) and,
as a result, from pursuing most opportunities for gainful employment and profitable business. A
poor family that cannot invest in education and skill development only produces more poor (Galor
and Zeira 1993, Benabou 1996). The rich, too, may not invest in human capital so as to keep the
poor majority politically inactive and forestall their ability to exert pressure for better distribution
policies (Bourguignon and Verdier 2000). The consequence of these actions is a situation where
the state is captured by the rich and powerful. In this scenario, public administrators tend to serve
the objectives of elitist interest groups and their own objectives rather than pursuing the general
welfare (Keefer and Knack 2002). Thus, inequality neither comes about nor disappears on its
own. The vicious cycle of poverty and inequality is the direct result of state capture.
Once a society is divided on the basis of income and consumption levels, its political stability is
eroded and people start becoming dissatisfied with their economic status. In such a situation, a
consensus between groups with higher incomes and those with lower incomes becomes
increasingly difficult to achieve. Political instability hinders and diminishes foreign and domestic
investment as the risk of change in policy increases. In turn, low investment results in fewer
income opportunities, especially for the lower-income groups1; consequently, the developmental
potential is undermined. Societies with highly unequal distribution manifest certain unproductive—
if not disruptive—norms of behavior as social mistrust increases and government credibility
decreases. This results in a higher cost of doing business, which then hampers the frequency of
economic exchange. Because of these far-reaching consequences, inequality becomes a greater
concern for the public sector.
With the decision and actions of the public sector intricately linked with the levels of equality and
inequality, the quality of public sector institutions is vital for any social improvement or political
and economic development. Although this role of the public sector has been prevalent for
centuries, the debate on the efficiency and legitimacy of the public sector and its involvement in
business and nonbusiness activities has replaced discussion on the impact of the quality of public
sector management on the economic and social system. In the 1990s, 2 a number of studies
evaluating the impact of public institutions on the economy—especially on development
outcomes—emerged. Study after study demonstrated that the institutional settings determine the
rules of the game and therefore have an impact on the effectiveness and frequency of exchange
and production. Furthermore, an efficient and effective institutional structure is the backbone of a
sustainable social and economic structure.
Some institutions3 have a much greater role in determining a certain outcome than others. For
example, the police and the courts have significant roles in protecting life and property and
resolving disputes. Rodrik (2003) classifies institutions into five main categories: market-creating
institutions associated with property rights; market-regulating institutions creating social and
governance boundaries; market-stabilizing institutions providing macroeconomic stability;
institutions for social insurance; and market-legitimizing institutions for conflict management. This
classification covers all the routes through which an institutional structure can influence the
economic and social fabric.
With public sector institutions4 monitoring or regulating most of these institutions and their
functions, any weakness in the institutional structure of the public sector will necessarily result in
economic and social distortion. Fragile public sector management in transitional and developing
countries has demonstrated that the deterioration or unavailability of appropriate institutions
hinders the ability of these societies to develop socially and economically. The theoretical and
empirical literature supports these propositions.

1 ”High inequality reduces the pool of people with access to the resources—such as land or education—
needed to unleash their full productive potential. Thus a country deprives itself of the contributions the
poor could make to its economic and social development” (World Bank 2005).
2 The discussion and evaluation of this impact is not specific to the 1990s, but this decade is significant
because of its special attention to institutional weaknesses and their results.
3 A generally accepted definition of institutions is the one given by North (1981, pages 201–202): “a set of
rules, compliance procedures, and moral and ethical behavioural norms designed to constrain the
behaviour of individuals in the interests of maximizing the wealth or utility of principals.” Glaeser et al.
(2004) and Glaeser and Claudia (2004) stressed their role as “constraints” on the executive power and
their persistence in time—“durability”—in order to exert a powerful constraint.
4 Property rights are explained and protected by government institutions that have the constitutional right
to define property rights and the necessary powers to enforce these rights. However, there are situations
in which a community or other organized groups compete for or complement these functions, becoming
quasi-governmental institutions in the process. Most regulatory institutions are established and supported
by the state, and the state therefore has a direct bearing on the working of regulatory institutions. Thus,
we see that in spite of the theoretical independence of the monetary and fiscal structures, these two
institutions are controlled by the state. Similarly, the state also provides social security and balances
individual rights through dispute resolution mechanisms, i.e., the courts.

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This study raises the fundamental question, Can the quality of public sector management affect
economic inequality? While intuitive arguments have demonstrated and continue to support this
assertion, this study finds the answer to this question through a systematic methodology. Thus,
the contribution of this study is twofold: (i) it provides insights into the relationship between
governance and inequality; and (ii) it analyzes data for empirical evidence.
To achieve these two objectives and assess the impact of public sector management, this paper
identifies four dimensions of public sector management quality: government effectiveness,
regulatory burden, rule of law, and control of corruption.
The first dimension covers the effectiveness of the government system and measures how
competent public officials can accomplish its functions. It also embraces the answer to the
question, What is the quality of service delivery in a country?
The second dimension deals with the use of power by public officials, especially how this aspect
affects the functioning of the free market. Regulatory burden measures the incidence of “market-
unfriendly” policies such as price controls or inadequate bank supervision, as well as perceptions
of the burdens imposed by excessive regulation in areas such as foreign trade and business
development. Taken together, government effectiveness and regulatory burden measure the
ability of the public sector to formulate and implement sound policies.
The third dimension covers the “quality of contract enforcement,” the effectiveness of the police
and the courts, and the “likelihood of crime and violence”. Finally, control of corruption deals with
the overall quality of public sector management. This indicator measures the extent to which
powers of public office are exercised for private gain.
The paper is structured as follows. The next section reviews the literature to gather theoretical
and empirical insights into the relationship between governance and equality. The rest of the
paper deals with the empirical strategy, issues related to the data, the study results and
interpretation, and conclusions.

Review of the Literature

Many theories, based on both economic and noneconomic factors, have been proposed to
explain the process (of reducing inequality and improving the quality of governance) and to
identify and differentiate between the factors that can directly or indirectly result in economic
inequality. This review, however, focuses on the noneconomic explanations of economic
inequality and, more specifically, builds an argument on the basis of the institutional theme 5 to
find answers to the questions, Is there a relationship between the quality of public sector
management and economic inequality? If so, what are the channels through which an improved
quality public sector management affects economic inequality? The answers to these questions
require a basic understanding of the relationship between economic activity and public sector
management.

The importance of the role of state and the state functionaries dates back to Plato, or even
earlier, as Plato states in The Republic6:

5 The three common themes regarding the involvement of public administrative systems in economic
development are: institutional, neoclassic, and pluralist and Marxist-derived. The institutional view
maintains the position that market development is contingent on the establishment of institutional
structure, which provides a neutral regulatory environment for the operation of free markets. Proponents
of the neoclassic view hold that markets take care of everything and deregulation is necessary to ensure
economic development. The pluralist and Marxist-derived position asserts that markets and market-
related institutions are a product of social and political interests and conflicts. Interaction between these
interests and conflicts shapes the course of development.
6 Available at: http://classics.mit.edu/Plato/republic.html; accessed on 28 Nov, 2005.

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 but when the guardians of the laws and of the government are only seeming and not real
guardians, then see how they turn the State upside down; and on the other hand they
alone have the power of giving order and happiness to the State. We mean our guardians
to be true saviours and not the destroyers of the State....
While the boundaries between policy makers and implementers were not as well defined in
Plato’s time, even today it is widely recognized that the “guardians of the law and of the
government” (including both political representatives who formulate policies and public
functionaries who implement these policies) have a direct impact on the functioning of the state.
Furthermore, through their grip on the functions of the state, they affect the functioning of
economic life. Economic history is replete with both support and opposition for the involvement of
the state in economic affairs. In the period before the industrial revolution, the emphasis on the
state’s role as regulator and controller was a philosophical “absolute minimum.” Contrary to
popular belief, Adam Smith wrote in favor of a state role in economic activity: in part three of
Wealth of Nations he states: “the other works and institutions of this kind [public institutions and
public works] are chiefly those for facilitating the commerce of the society and those for the
instruction [education] of people.”
The industrial revolution brought the efficiency of the public sector management into sharp focus
as the demand for infrastructure rose sharply while red tape (largely inherited from the
monarchical regimes, which were distant from the people at large) hampered the pace of
industrial activity. The post-Depression popularity of Keynesian thoughts and post–Second World
War reconstruction efforts demonstrated that an efficient public sector was necessary for initiating
and maintaining a high pace of economic activity. As the issue became one of peripheral interest
to economists, political scientists took the lead in producing case studies. In 1970s and 1980s, a
reversal was seen with the rise of neoclassic political, and rational-choice analyses, which revived
the Smithian perspective7 (Krueger 1974, Colclough and Manor 1991).
This perspective essentially limits the involvement of the state in investment activities but has little
to do with the functioning and management of the public sector. The factoring of public sector
efficiency and its subsequent impact on the development and implementation of policy having
been disregarded—to the point of almost total exclusion from economic analyses ( especially in
development accounting)—has resulted in the failure of many development efforts.8
The rise of the new industrial states, especially the East Asian “tiger” countries, provides
evidence that a fast rate of industrial development is possible once public sector functionaries
pave the way through infrastructure development and systemic facilitation. The importance of an
efficient public sector has been realized and further underscored after the emergence of transition
economies and their varied development experiences.
In fact, the transition experience fueled a debate in which success stories began depicting
paradoxical results. On the one hand, the state was shown to be a benevolent leader of the
development process—an “omniscient social-welfare maximizer”—while, on the other hand, it
was also seen as a major obstacle to development as public administrators act in behalf of
politicians and other interest groups. This debate targets an altogether different question: What is
the impact of public policy on economic development?
The former position is supported by five arguments: 9

• Market failure resulting from externalities, missing markets, extensive public goods,
and information asymmetries;

7 Adam Smith’s views correspond to the standard laissez-faire position, where government intervention in
economic affairs is recognized as welfare-decreasing; however, government is allowed to provide critical
public goods to society, e g., defense.
8 The most obvious example is the structural adjustment program, which created more distortions rather
than removing impediments to higher growth and broad-based welfare; critics even blame the rampant
poverty in the 1990s on the structural adjustment programs.
9 For more details, see Stern (1989 and 1991).

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 • Redistribution concerns originating from poverty and prevalent inequality in societies;
• Provision of facilities such as education, health, law and order, dispute resolution
mechanisms, and housing;
• Paternalism: subsidies to the private sector for maintaining a social security system;
and
• Management of intergenerational concerns, e.g., acting to protect the rights of future
generations, as in environmental conservation and sustainable development.

These arguments strengthened when a new institutional approach was seen in the World Bank’s
(1991) World Development Report, under which institutional restructuring, public service reforms,
and establishment of regulatory frameworks to ensure competition, as well as legal and property
rights, were added to its market-friendly agenda for government. However, in 1997 the World
Development Report was dedicated to “The State in a Changing World.” This realization was
reinforced when Richard Barro pressed his path-breaking cross-country analysis of economic
growth.
While growth literature has taken another turn from exogenous growth to endogenous growth,
this theoretical redirection reinforces the institutional political economy and leads to the
conclusion that “institutional factors have a fundamental effect on rate of growth” (Rauch and
Evans 2000).10 The implications of “endogenous growth theory” are deeper than technological
shocks and learning effects, as these look straight into the heart of the problem by proposing a
growth perspective in which the impact of a variety of non-economic variables, especially state
operations, was given more weight. In one of the most significant contributions to this field, Barro
(1991) studied the negative impact of government consumption on growth rates.
Even though Barro’s approach provides an understanding of the issue, the proxy that he used
does not capture the quality of public sector management; rather it covers the fiscal management
ability of the government. It was the revisionist studies of the Republic of Korea, Singapore, and
Taipei, China that brought currency to the concept of a “developmental state” (Rauch and Evans
2000). Among others, Knack and Keefer (1995) found that country ratings by the International
Currency Risk Guide and Business and Environmental Risk Intelligence were significant
predictors of variations in gross development product (GDP) per capita in the data. Mauro (1995),
using ratings on “corruption” and “red tape” from Business International, found that variations in
these ratings across the countries provided a statistically significant explanation for variations in
the rate of investment (which is the single most significant factor determining the rate of economic
growth). The use of corruption and red-tape ratings was a step in the right direction, as both these
variables capture the quality of public sector management.
While all these studies estimate the impact of state functioning on economic growth, the debate
has not covered the impact of public policies and the quality of public sector management on
distributional outcomes. This is surprising, given the fact that a strong reason for state regulatory
and enabling initiatives is to reduce poverty levels and the ever-increasing distributional gap
between various groups of society.
From the very fact that the public sector has a redistribution and poverty alleviation responsibility,
we are obliged to conclude that the quality of public sector management has a consequential
impact on economic inequality. Another argument that supports this conclusion is the rule-making
and regulatory function of the public sector; it is widely appreciated that the quality of the rules of
the game in market-based economies directly affects economic performance (Hall and Jones
1999, Rodrik 1999 and 2003). Indeed, public sector institutions are the more influential factor in
development and distributional outcomes when compared with geography and openness of trade
(Rodrik, Subramanian, and Trebbi 2004).

10 For more details, see Lucas (1988), and Romer (1986, 1990, and 1994).

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Public sector institutions have the responsibility of ensuring equality of opportunity through equal
access to services like health, education, and legal services. After protection of life and liberty,
the sanctity of property rights is the most fundamental to any opportunity for business and
employment. Only when state institutions are able to provide protection for the property rights of
all individuals without discrimination will it be possible for all members of the society to invest their
funds and make efforts for a profitable business or gainful employment. However, if the property
rights of some groups are protected over and above similar rights of other groups (i.e., the rich
and powerful get their way when they are in unlawful possession of the property of the poor and
powerless), the state institutions begin to strengthen economic inequality, howsoever defended
(an unintended or unconscious outcome) and howsoever perceived. Groups with more protection
have protected assets and are therefore able to invest with greater security. As a result, their
share in the national income increases and the share of unprotected groups decreases. Closely
related with public sector institutions mandated to enforce property rights are institutions of
contract enforcement.
Since the public sector enjoys a monopoly over state power, it is only the public sector that can
enforce legal contracts when one or more parties to the contract fail to meet their obligations. In
the absence of a secure legal environment, where state authority is unwilling or unable to enforce
the contract, a premium has to be paid for gaining protection from the illegal demands of both
state and nonstate actors that increases the cost of doing business; as a result, fewer parties are
willing to enter into contracts.11 People will not invest “if property rights are not well defined and
enforced, or if they [the parties involved in the contracts] believe that the contracts they write will
not be honored or that courts of law will not be fair” (World Bank 2006). State institutions that
cannot enforce contractual obligations in general—and especially those contracts that relate to
economic development—need more safeguards and guarantees of independence from political
powers, any costs of which will be more than covered by the higher investments in a better
business climate.
The public sector not only enforces property and contract rights but also provides infrastructure,
regulatory, judicial, and facilitative services to business and society through efficient and honest
public functionaries in the police and judiciary, as well as social services (education, health, etc).
Societies that have established efficient public sector institutions that guarantee equality of
opportunity have enjoyed sustainable prosperity and long-term well-being. As the World Bank
(2006) concludes:
To take an extreme example, institutions were severely inequitable in slave societies,
such as Haiti or Barbados in the eighteenth century. Even though property rights in land
and people were well defined and even well enforced (although subject to potential slave
rebellions), most people had no property rights and were thus subject to expropriation by
others, particularly their masters. For 95 percent of society, there were no incentives to
engage in socially desirable activities. A similar, although somewhat less extreme,
example of inequitable institutions is South Africa under apartheid. Institutions there were
good for the whites but left 80 percent of the population without incentives or opportunities
to engage in economically productive activities (p. 107).
While protection of property rights is by no means sufficient to ensure the total absence of
inequality, it is nonetheless needed to curb economic inequality. The quality of public sector
management and accessibility of public services to all social groups (equitable distribution) is a
precondition for controlling poverty and inequality. The de facto status of public sector
management is more relevant in evaluating its impact on distributional outcomes.
Accordingly, this study employs four separate hypotheses covering the four dimensions of
government effectiveness, regulation quality, rule of law, and control of corruption.

11 Corporate finance is a difficult mode of financing in societies where either property rights institutions are
inefficient or the contract enforcement agencies (courts) are unable to efficiently accomplish their
functions; for more details, see La Porta et al. (1998).

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Government Effectiveness and Economic Inequality
The first channel through which the quality of public sector management affects distributional
outcomes is the “overall effectiveness” of the government. This “overall effectiveness” includes
the competence of public functionaries and the quality of services they deliver. The efficiency and
quality of services delivered by the public functionaries are crucial in determining the level of
equality or inequality. If the services are provided only to the rich and powerful or if the general
quality of the services (for the common people) is poor and the public sector is not efficient in
getting things done, this would naturally result in better income opportunities for the powerful, who
then become even more resourceful; in such a case, the income disparity increases. If the public
services are provided evenly and the quality of the services is good, income distribution improves
and, consequently, marginalized groups have greater chances of coming out of the poverty trap.
In addition, the extent to which the public sector is free from political pressure and the extent to
which policies remain internally consistent and predictable will also determine the ability of the
public sector to deliver public goods and services to all the sectors of the population. On the
contrary, if elite capture of the state prevails and the public sector serves the political and
economic elite, the public sector shall not be able to deliver public goods and services to all the
sectors of the population. Thus, the overall effectiveness of the public sector to formulate and
implement effective policies and deliver public goods is dependent on a complete accounting of
“inputs” into the public sector. Access to social services, especially education and health, is the
main determinant of life expectancy and employability. Any further improvement in policy
formulation aimed at an egalitarian distribution system must also include the provision of a just
taxation system and an efficient judicial system.
Hypothesis 1 (H1): As the quality of public services decreases and bureaucracy becomes
inefficient, some groups (with lower income) have less access to public services while other
groups (with higher income) proportionally enjoy more public services; in the long run, distribution
is skewed toward the rich and powerful.

Regulation Quality, Income Inequality, and Social Harmony

Regulation quality is the most influential instrument with respect to increases or decreases in
income inequality. In fact, it is by developing a set of regulations that the public sector establishes
the rules of the game. If the rules and regulations are unnecessary (overregulation) or favor a
certain group of individuals, then the absence of quality of opportunity with regard to entry into a
business creates two groups: one that can play in the given set of regulations, and another that
cannot. This division then determines the benefits that the given sets of individuals may derive
from the economic activity. Thus, if government policies are not market-friendly and employ
techniques like price controls or over- and under-regulation, there is a high possibility that
inequality will increase (Kaufmann, Kraay, and Mastruzzi 2005).
The most common example of policies antagonistic to the market is the creation of a monopoly by
the government or the distribution of permits to regulate market distribution. The resourceful who
are able to get permits at the cost of excluding others succeed in gaining benefits from the
monopoly. This exclusion shifts the balance of distribution of income and investment toward the
powerful, and the result is economic inequality.

Hypothesis 2 (H2): When government intervenes through market-unfriendly policies, low-income

groups have less chance of doing business or entering into gainful employment; consequently,
inequality increases.

Rule of Law, and Economic Inequality

The quality of contract enforcement is a significant determinant of investment. Economies in

which the rule of law is adequate have higher availability of finance and see greater amounts of
external finance pouring in; thus, investment grows rapidly (La Porta et al. 1998). The quality of

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contract enforcement incorporates not only efficiency of the enforcement system, i.e., the courts,
but also effectiveness of the police as well as the “likelihood of crime and violence.”

Researchers have pointed out that Anglo-Saxon “common law” supposedly delivers better
protection of property rights and a more limited and efficient state than the French “civil law” legal
systems (La Porta et al. 1998, 1999). In a panel study Barro (1996) finds a consistently positive
and significant effect of property rights on growth. Even though his study does not cover the
distribution of gains from economic growth, it is obvious that individuals and groups having
greater access to investment and other economic opportunities necessarily obtain the greater
share of gains from growth. Dollar and Kraay (2000) explore this dimension and conclude that
better rule of law raises real per capita income, as people spend less on private protection
strategies. Knack and Keefer (1995) prove that security of contract and property rights
significantly affect opportunities for investment. This obliges us to conclude that the rule of law
indirectly affects the generation and distribution of income.
If the rule of law is weak then there emerge two groups: one that can enforce its contracts, stand
against crime and violence, and invent private mechanisms for security, and another that is
unable to match the strength of the first group because of political powerlessness. This results in
the poor suffering from an inequality of opportunity for services, gainful employment, and
business investment. On the other hand, the politically influential and economically prosperous
face no competition and enjoy ample opportunities. This disparity gets further reinforced when the
politically influential are able to have public policy redesigned so as to obtain finance and other
resources and have public resources allocated to safeguard their interests at the cost of the
interests of powerless groups. This gives momentum to economic inequality, and the vicious
cycle of inequality keeps repeating and reinforcing itself.
Hypothesis 3 (H3): In the absence of rule of law, low-income groups either pay a higher cost for
dispute resolution or lose a major share of their investment and resources; consequently, in the
long run, economic disparity increases because of the higher cost of obtaining protection (for
property and contracts) and doing business.

Control of Corruption, and Economic Inequality

Corruption in the public sector is of two types: apparent and hidden. The first—petty corruption—
mostly comprises “small” monetary benefits obtained by public functionaries to fill gaps in income
or to meet routine aspirations; this, while appearing high in any general perception of social ills, is
not as dangerous as the second, or hidden, variety. It is this obscured corruption that is systemic
and “grand”; this corruption paralyzes the state’s operations and plays a vital part in the elite
capture of the state, wherein the policy formulation process is modified to benefit certain interest
groups. The presence of corruption is often a “manifestation of a lack of respect by both the
corrupter (typically a private citizen or firm) and the corrupted (typically a paid public functionary
or an elected office holder) for the rules which govern their interactions, and hence represents a
failure of governance” (Kaufmann, Kraay, and Mastruzzi 2005).
Corruption is the backbone of all disparities, as the resourceful are able to pay the highest bribes
or bring to bear the strongest influence through their political and economic standing; as a result,
the distribution and delivery of public services and the enforcement of regulations through the
courts and police are compromised. As an example we can consider a situation in which public
expenditures are diverted toward a certain region, group, or class because the public functionary
or elected office holder either has been successfully bribed or has some other personal objectives
to pursue. Whatever the reason behind this diversion, the result is conflict, social strife, and
continued deprivation of other areas, regions, or classes, which must suffer the consequences of
the exclusion for a long time. In fact, in the case of “grand corruption” all public administrative
structures become rent seeking and the power of the public office is exercised almost totally to
secure private gains.

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The welfare and distributional impact of endemic corruption in the public sector has long been a
matter of lively debate among economists. The question, Does corruption have a beneficial or
detrimental impact upon economy and public welfare? has been analyzed mainly in two models:
the classical model and the principal-agent model.

Public Corruption in the Classical Model. Corruption in the public sector has been considered
an efficiency-enhancing mechanism by some economists such as Bayley (1966), Huntington
(1968), Leff (1964), Morgan (1964), and Nye (1967). They argue that corruption overcomes
cumbersome regulations, excessive bureaucracy, or regulatory obstacles and therefore corrects
the slow pace of public administration. The efficiency argument does not take into consideration
the distributional or welfare consequences of the corrupting process. Merely expediting
bureaucratic process or overcoming regulatory hurdles is not an end in itself; the real questions
are: Who pays the bribe? and What does he or she get as a result? The efficiency-enhancing
conclusion is based on the assumption that after paying the bribe the corruptor completes the
project according to the conditions of the contract. However, this assumption is far from reality, as
the corruptor tries to escape as many conditions as he or she can and the result is low-quality
projects and even worse policies that those in place before the corruption process.
Through low project quality or ineffective public policy, it is ultimately the taxpayers who lose their
contribution to the state and forfeit the benefits of the social contract. The poor pay a greater
price, as they are deprived of public services and cannot get equal protection from law-enforcing
authorities. Myrdal (1968) and Rose-Ackerman (1978) oppose this view on the premise that once
public sector officials are bribed to speed up the process, they put in place more administrative
hurdles to maximize their return; this is similar to the mechanism by which monopolists hike the
price by creating artificial scarcity.
The distributional impact of corruption goes deeper, because it benefits only the two parties that
are directly involved in the corruption transaction process—the corruptor and the corrupted. On
the other hand, the corrupt transaction generates externalities, and, thus, the cost is paid by the
whole society, more specifically the poor and marginalized. While only a case-by-case,
transaction-by-transaction cost-benefit analysis can reveal the spillover impact of corruption by
public officials, the endemic nature of corruption obliges us to conclude that poor institutional
settings encourage corruption, which, in turn, provides the motivation for illegal decisions, wrong
implementation of policies, and simple opportunism. Thus, biased decision making at the
operation level and “state capture” at the policy level certainly make the distribution worse.
Public Corruption in the Principal-Agent Approach. Rose-Ackerman (1978), Jain (1998), and
Klitgaard (1988) apply the principal-agent (PA) approach to understand the impact of public
sector corruption. In the PA model the principal (government) creates rules and assigns tasks to
the agent (public functionary) so that he or she can provide services to the client (an ordinary
citizen). The agent, however, has informational advantages over the principal and thus has the
propensity to behave dishonestly (Besley and McLaren 1993).
The principal can make corruption endogenous to the model and take various actions to control
the agent’s behavior. But these actions may be ineffective (as they have often been shown to be)
and involve costs of detection, punishment, 12 and reform (downsizing), and thus the principal may
face the risk of market failure (Acemoglu and Verdier 2000). For example, it may not be possible
for the principal to write contracts contingent on the agent’s quality or contracts that specify the
agent’s level of effort (Furubotn and Richter 1998). Even paying the agent “information rent” (in
the form of a residual claim on the operation) is not a powerful incentive (Furubotn and Richter
1998), which is not to say that such a process will suffer from computational difficulties (Moe
1984). Similarly, appointing an auditor may also be fruitless, as there is scope for collusion
between the auditor and the agent.

12 For more details, see Klitgaard (1988), Kofman and Lawaree (1996), Laffont and Tirole (1993), Olsen and
Torsvik (1998), and Strausz (1995).

9
No matter what actions a principal takes, the burden of all actions falls on welfare and distribution.
For example, in tax payment, some clients may collude with the agent and evade tax by bribing;
as a result, other clients are likely to pay more tax, which now implicitly becomes the price of
honesty (Hart 1970). Moreover, problems of the agency relationship result in inappropriate
investment in public sector projects and ineffective policies (Frisch 1999 and Klitgaard 1988).
Whatever the case—whether the principal (government) is able to control the behavior of its
agents at a high cost or whether agents extract money from the clients (the public)—the cost is
diverted toward the poor13 and the distribution of income favors the powerful groups in the
society.

Hypothesis 4 (H4): When corruption is endemic in the public sector, the rich get the greater
share of income, evade taxes, and enjoy higher levels of public services, and, as a result,
disparity increases.

Empirical Strategy
The discussion so far illustrates the widening distribution gap resulting from decreasing efficiency
in the quality of public sector management. Testing this hypothesis longitudinally gives a better
picture as changes in the quality of public administration over time are better able to explain the
variation in income distribution (if any), and tracing the trajectory enables researchers to identify
significant factors. However, since little data are available—especially data on the quality of public
sector management—for analyzing the phenomenon in a time dimension, the study uses cross-
sectional data.14 Thus, the study tests the hypothesis: Can variations across countries in one
dimension of the quality of public sector management explain variations in economic inequality
across countries?
The study uses three techniques to test the hypotheses. First, the data are divided into five main
groups15 on the basis of gross national product (GNP) per capita: low income (GNP per capita of
$765 or less in 1995), lower-middle income ($766 to $3,035), upper-middle income ($3,036 to
$9,385), high-income Organization for Economic Cooperation and Development (OECD)
countries ($9,386 or more), and high-income non-OECD countries ($9,386 or more). Thereafter,
means across the groups are compared to test whether countries with high income inequality
have low values for the quality of public sector management indicators.
Then correlation (Pierson) test is applied to the data to measure the degree of correlation. The
two-tail test is employed to test the statistical significance of the correlation coefficients. This
technique essentially analyzes whether two variables are moving in the same direction (direct
relationship) or in the opposite direction (inverse relationship). The test also identifies the degree
of association; the value of the coefficient ranges from -1 to +1, where +1 shows perfect positive
correlation, -1 indicates perfect negative correlation, and a value tending toward +1 or -1 shows
strength of relationship.
Finally, univariate regressions are calculated and a scattergram is plotted to test the causality, as
the presence of correlation necessarily implies causality.

13 Many studies have shown that corruption functions as an indirect tax and is regressive in nature—the
poor pay more as a share of income than the rich. In addition, in a corrupt environment indirect taxes are
more depended upon than direct taxes (progressive in nature) and a higher share of indirect taxes shifts
the burden toward the lower-income groups. For more details, see Wei and Kaufmann (1999). Not in list
of references.
14 Indeed, the cross-section data changes the way a hypothesis under test is worded and tested. If one

uses time-series data the hypothesis will be worded thus: variation in variable X over time explains
variation in variable Y over time. However, when cross-section data are used, the same hypothesis
becomes: variation in variable X across sectors (countries, individuals, firms, etc.) can explain variation in
variable Y across sectors (countries, individuals, firms, etc.).
15 This classification is based on the World Bank’s classification of countries; for more details, see:
http://www.worldbank.org/depweb/english/beyond/global/classification.html

10
Data and Summary Statistics
The study uses three measures of inequality: Gini index for income or consumption, Gini index for
land distribution, and Gini index for the distribution of number of years of education. 16 The Gini
index measures the extent to which the distribution of assets in a given percentage of the
population within an economy deviates from a perfectly equal distribution. 17 A Gini index of zero
represents perfect equality, while an index of one implies perfect inequality. “Zero” and “one” are
theoretical possibilities, but in reality the value lies between the two numbers.
The first measure of inequality (Gini index for income or consumption) measures how much the
distribution of income or consumption within an economy deviates from a perfectly equal
distribution.18 To measure the distribution of land in a country, the Gini index of land distribution is
used; it captures the extent to which land distribution within an economy deviates from a perfectly
equal distribution. The third distribution variable covers the distribution of the number of years of
education across the population. A value of GI education closer to one shows that the distribution
of the years of education is skewed to a certain group of population, while a value closer to zero
implies the years of education are distributed equally.19
The quality of public sector management is measured from four points of view. 20 Government
effectiveness measures the competence of the bureaucracy and the quality of public service
delivery; regulatory burden covers the incidence of market-unfriendly policies; rule of law includes
the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime
and violence; and control of corruption measures the exercise of public power for private gain,
including both petty and grand corruption and state capture. All the four indices are based on data
collected through many surveys among country experts, exporters, and companies doing
business in countries. The indices have a value of -2.5 to +2.5, where -2.5 shows the lowest level
of quality of public sector management and +2.5 shows the highest level of quality, and figures in
between show a tendency toward a certain quality.
[Insert Table 1 here]
Table 1 shows the summary (mean, standard deviation, maximum and minimum values of the
indices) statistics of the data.

Results and Interpretation

Table 2 shows mean values of data (based on GNP per capita) divided into five categories based
on level of income. The second column shows that OECD and non-OECD countries possess low
Gini coefficients compared with other groups. Columns 6, 7, 8, and 9 (four dimensions of the
quality of public sector management) show that in the same group of countries, some members
possess high quality of public sector management. This trend intuitively supports the four
hypotheses that countries with efficient public sector institutions are able to keep economic

16 Data on inequality are from the World Development Report 2006.

1n n
17 =2 
The Gini coefficient is measured as: Gini  y −y
2 n y =
i1j =i
i j

18 For example, perfectly equal distribution of income means that one fourth of the income is distributed to
one fourth of the population, and so on.
19 For more details and interpretation, see Technical Notes in World Development Report 2006.
20 The quality of public sector management is evidently difficult to capture because of the complexity of the

phenomenon and its inter-linkages and interdependencies with political and cultural factors. However, the
indices developed by the World Bank researchers cover many dimensions of public sector quality, as their
use is increasing in the empirical research. For more details on methodology use and related issues to
indicators, see: http://info.worldbank.org/governance/kkz2004/q&a.htm

11
inequality at a lower level. This tendency is present in all the data. This is a crude measure 21 of
evidence in favor of or against the hypotheses; however, the data depict a pattern that supports
the hypotheses.
[Insert Table 2 here]
To further analyze the relationship systematically, correlation coefficients are calculated. Table 3
shows correlation coefficients and the level of significance. The correlation coefficients between
the Gini index and quality-of-governance variables show a negative relationship and all the
coefficients are highly statistically significant (at the 0.01 level). This negative relationship
explains that once the quality of public sector management improves, the distribution of income or
consumption inequality starts disappearing.
[Insert Table 3 here]
As is the case with the land Gini and four public sector management variables, the correlation
coefficients have a negative sign (i.e., they show an inverse relationship) but are statistically
insignificant. Column 4 shows a negative and statistically significant relationship—the number of
years of education are distributed more equally once the public sector is managed more
efficiently and public services are provided efficiently by the public sector. This supports the
theoretical conclusion that the public sector plays an important role in determining distributional
outcomes through the distribution of public services. Public policy processes that determine the
distribution of public services (education, health, law and order, courts, etc.) are important, as
they determine the future earning capacity of the people and thus also determine the distribution
of income.
As a whole, the two methods employed provide evidence of a meaningful relationship between
the variables under consideration. Finally, linear regression analysis is employed, one by one, to
test the hypotheses (formulated in the review of the literature) for all the economic inequality
variables.
Figure 1 shows a scatter plot of the income or consumption Gini index with four dimensions of the
quality of public sector institutions. The upper left corner shows that the Gini index has a negative
relationship with government effectiveness (coefficient of government effectiveness is -0.04 and
R2 is 0.14). The relationship is statistically significant, as most of the observations lie around the
regression line; the relationship is economically meaningful, as the higher the effectiveness of the
government, the lower is the income or consumption inequality. Thus, the regression results are
unable to reject H1. When the Gini index is regressed against regulation quality, the same
relationship is observed in the data. While the relationship is significant (coefficient is -0.03, R2 is
0.07), the relationship is not strong, as depicted by the low R 2 value.
[Insert figure 1 here]
The results show that rule of law significantly affects the distribution of income or consumption
(coefficient is -0.04 and R2 is 0.12). The relationship is meaningful, as it is shown that the
stronger the rule of law, the better able the people are to establish a business and live safe lives,
and all groups to benefit equally from public services. Thus, the study is unable to reject H3.
Figure 1 also shows that there is a visible pattern between control of corruption and inequality
(coefficient is -0.04 and R2 is 0.10); also seen is the fact that control of corruption in the public
sector can improve the distribution of income or consumption. This provides support for H4,
proving that in the presence of corrupt public functionaries, the powerless and poor groups have
to suffer more than the powerful and richer groups, and that, consequently, inequality increases.
When all the four management quality variables are regressed on the distribution of land, the
result is depicted in Figure 2: here it is seen that the quality of public sector institutions has a
negligible relationship with the distribution of land. The result is not difficult to interpret, as the

21 We call it a crude measure not only because the results are not consistent but also because of the non-
robust methodology behind it. However, the purpose is just to capture similarities, if any, in the data, which
are evident from the data.

12
distribution of land is the outcome of a long-term process and land title does not change very
often because of the current conditions in the public sector.22
[Insert figure 2 here]
Since economic inequality is the outcome of inequality of opportunity, and no higher inequality of
opportunity is observed than in the distribution of the years of schooling, this is the single most
important determinant of service provision23 and future success in life and economic activity. An
analysis of the relationship between the years of schooling and quality of public sector
management is essential. There is another important reason for this analysis: in most countries,
basic education is the responsibility of the public sector and the quality of the public sector is
directly depicted in the management of the education service. Figure 3 shows the relationship
between the distribution of the number of years of schooling and the four dimensions of public
sector management quality.
[Insert figure 3 here]
The upper left corner shows that there is a significant relationship between the two variables:
coefficient is -0.06 and R2 is 0.07. The coefficient has a high value and the results support H1. An
interpretation of the results shows that as government effectiveness increases, years of education
are distributed more evenly among the population. The upper right corner shows the same results
for regulation quality and education Gini, and therefore the study is unable to reject H2. The
regression line in the two lower figures shows that H3 and H4 cannot be rejected on the basis of
the evidence provided. In spite of the fact that the results are not totally unambiguous, it is
concluded that on the basis of the data available and the methodology adopted there appears to
be a significant relationship between the quality of public sector management and economic
inequality.

Conclusion
The impact of the state’s involvement in economic activity has long been a matter of heated
debate, with convincing arguments on both sides. However, growing concerns in the area of
market failure, such as externalities management, distributional concerns, and provision of social
services, have increasingly received the attention of policy makers. Among the areas where the
market has failed to provide a remedy is the distribution of economic assets and income. While it
is widely supported that the government is responsible for controlling (and alleviating) poverty, as
well as the growing inequality between and among socioeconomic groups, the issues covered
under the broad question, How does the quality of public sector management affect economic
inequality?, have not been addressed.

This study argues that the quality of public sector management itself determines the distributional
outcomes. As public policy evolves and is implemented by the public sector, any inherited or
acquired weaknesses in the policy process are reflected in the distribution of public services,
collection of taxes, and allocation of expenditures. Four hypotheses have been formulated with
regard to the routes through which public policy creates distributional distortions:

• As the quality of public services deteriorates and bureaucracy becomes inefficient,

some groups (generally, low-income) have decreasing access to public services
while other groups (from the high-income bracket) proportionally enjoy more public
services; this, in the long run, leads to an increase in inequality.

22 One reason of this inconclusive result is the unavailability of data for many countries— data are available
only for 58 countries (and most of the observations are from low-income, lower-middle-income, and OECD
countries.
23 The other important variable is health care, because this facility makes a major difference in future

achievement, life expectancy, and the ability to have a healthy life—all of which are closely related to
income and consumption patterns.

13
 • Excessive government intervention in markets through market-unfriendly policies
results in market weakness and the exclusion low income groups from businesses
and consequently inequality increases.
• Weak rule of law makes low-income groups vulnerable to law-and-order problems
and inefficient dispute resolution limits their ability to invest in and operate
businesses; thus, too, economic disparity widens.
• High rates of corruption in the public sector result in limited access to services with
the result that the poor pay a much higher price of corruption than the rich; the result
of this is high inequality.
Data on income or consumption inequality, land distribution inequality, and distribution of years of
educational attainment are used as proxies for inequality and the quality of public sector
management is measured from four different angles: overall public sector effectiveness, extent to
which public sector interferes unnecessarily in markets (regulation quality), rule of law, and
control of corruption in the public sector.
The relationship is tested by three methods: mean-comparison within data (divided on the bases
of income), Pierson correlation analysis, and univariate linear regression analysis. All the three
methods provide enough evidence to conclude that the quality of public sector management has
a strong bearing on economic inequality. These results, however, are significant in the case of
income or consumption inequality and education-years inequality, while in the case of land
distribution inequality the results lose significance. Variation in the level of inequality is explained
by variation in the quality of public sector management across geographical and national
boundaries.
The study addresses the question whether or not the quality of public sector management affects
economic inequality. Even though the results gathered by the study are not completely
unambiguous, on the basis of the data available and the methodology used in the study it can be
concluded that the quality of public sector institutions has a bearing on economic inequality.
The results support the four hypotheses formulated in the study. While two measures—income or
consumption inequality and distribution of years of schooling—are affected by the quality of public
sector management, the distribution of land does not appear to be so affected (by the quality of
public sector institutions).
All the same, in spite of the results of this study, more research is required on this issue,
particularly on the methods of analysis, model specification, and causality. Research is also
necessary on the channels through which the quality of public sector management affects
economic inequality. Richer measures of the pubic sector expenditure allocation framework need
to be developed. Furthermore, as these results conform to only a few studies dealing with the
impact of institutional settings of growth and development, the configuration of the appropriate
type of public sector management institutions, public policy formulation and implementation
processes, and poverty and inequality created by public sector need to be brought to the forefront
of development economics and the public sector reform agenda.

14
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 Tables and Figures
Table 1: Summary Statistics
Indicator Mean Std. Deviation Minimum Maximum N
Gini Coefficient 0.3881 0.1037 0.24 0.70 125
Land Gini 0.6050 0.1653 0.18 0.93 58
Education Gini 0.3526 0.2189 0.10 0.90 101
Government Effectiveness 7.484E-02 0.9914 -1.90 2.25 126
Regulation Quality 7.381E-02 0.9598 - 2.22 2.02 126
Rule of Law - 4.1587E-02 1.0002 - 1.66 1.98 126
Control of Corruption 1.008E-02 1.0363 - 1.49 2.53 126

Income Gini Education Government Regulation Rule of Control of

Group Coefficent Land Gini Gini Effectiveness Quality Law Corruption
High
0.4272 (18) 0.7838 (8) 0.2743 (14) 0.3050 (18) 0.2450 (18) 0.1461 (18) 0.1189 (18)
Middle
Low 0.3924 (46) 0.4919 (16) 0.5016 (38) -0.4879 (47) -0.4562 (47) -0.5870 (47) -0.5362 (47)
Low 0.3937 (35) 0.6647 (15) 0.3207 (28) -0.1131 (35) -1.6286E-02 (35) -0.2437 (35) -0.2309 (35)
Middle
Non-
0.3150 (4) 0.6200 (1) 0.1800 (3) 1.2500 (4) 1.2550 (4) 1.0800 (4) 1.1775 (4)
OECD
OECD 0.3514 (22) 0.5756 (18) 0.1772 (18) 1.1741 (22) 0.9945 (22) 1.0877 (22) 1.2591 (22)
All
Income N= 125 N= 58 N= 101 N= 126 N= 126 N=126 N= 126
Groups
Notes: N= number of observations; Figure in parentheses are the number of countries for which data is available.

Table 3: Pearson’s Bivariate Correlation Coefficient Statistics

Gini Education Government Regulation

Indicator Coefficient Land Gini Gini Effectiveness Quality Rule of Law
Gini Coefficient 1.000**
0.00 (125)
Land Gini 0.056 1.000**
0.680 (57) 0.00 (58)
Education Gini 0.258* -0.319* 1.000**
0.010 (100) 0.024 (50) 0.00 (101)
Government -0.371** -0.079 -0.270** 1.000**
Effectiveness
0.000 (125) 0.557 (58) 0.006 (101) 0.00 (126)
Regulation -0.267** -0.025 -0.203* 0.912** 1.000**
Quality
0.003 (125) 0.855 (58) 0.042 (101) 0.000 (126 0.00 (126)

Rule of Law -0.345** -0.084 -0.255** 0.973** 0.928** 1.000**

0.000 (125) 0.532 (58) 0.010 (101) 0.000 (126) 0.000 (126) 0.00 (126)
Control of -0.318** -0.034 -0.237* 0.969** 0.899** 0.972**
Corruption
0.000 (125) .0799 (58) 0.017 (101) 0.000 (126) 0.000 (126) 0.000 (126)

* Correlation is significant at the 0.05 level (2-tailed).

** Correlation is significant at the 0.01 level (2-tailed).
Note: Figures in parentheses are number of observations under the specific group.

19
 Figure 1

 
0.70 NAM 0.70 NAM
 
GUY GUY

   
LSO BWA LSO BWA
 
CAF 0.60
CAF
0.60  
  BRA  ZAF  BRA
 GRC BOL  GRC
BOL ZAF
ZWE ZWE
   
PRY  PAN PRY   PAN
 DOM CHN  DOM CHN

Gini Coefficent
Gini Coefficient
 ZMB  ZMB
 HTI
    HTI 
 NER  ARG CIV ARGNER  CIV
0.50 MWI EGY  0.50 MWI  EGY
MYS
MEX
 MEX MYS  
 PERFRA  FRAPER
 DNK  DNK
 
 MDG PHL COL     PHL
MDG COL
ITA  KEN CMR 
GNB CHL
LCA 
ITA
 CHLGNB
CMR KEN  LCA 
  
  IDN  URY SGP   IDN  URY SGP
 BDI VEN  JAM   BDI VEN  JAM
TKM  NGA  DEU  TKM NGA DEU
0.40 
GIN


KHM NIC
 SEN  THA TUN PRT 0.40  GIN SEN
GTM

KHM
TUN
NIC
 THA  
 GTM   MOZMLI
  JOR TTO    MOZ MLI
  JOR TTO  PRT
GMB BFA LKA
 MAR MRT USA GMB  MAR
BFA MRTLKA USA
TUR  NZL    TUR NZL

 
NPL
AZE  
MDA BEN MKD GHA    NPL
AZE
BEN
MDA MKD   GHA 
LAO  DZA TZA
VNM
INDECU  LVA IRL ESP  GBR 
LAO DZA

  VNM
TZA
ECU IND IRL
 ESP
LVA 

GBR

 YEM   HUN   CAN  YEM  HUN   CAN
TJK RUS   KOR
SLV AUS  TJK RUS   KOR
 SLV
AUS
 
 BGDALB POLISR 
IRN  CHE
FIN  BGD ALB
 + -0.03 *POL ISR  CHE
FIN IRN
0.30 
 EST
BLR
 KAZMNG    0.30 BLRGini EST Coefficent
KAZ 
UKR
= 0.39
 
KGZMNG
CRI 
regq
  
KGZUKR CRI LTU NLD
LUX    LTU NLD LUX
 Gini Coefficient

 
YUG
ROM
=BGR
 
SVN
0.39 + -0.04 * govef GEO
AUT  R-Square
 = 0.07
YUG ROM BGR SVN  GEO AUT

UZB PAK   NORCZE UZB PAK   NOR CZE
 ARM  SVK BEL  ARM  SVK
BEL
 
R-Square = 0.14
BIH  HRV
HND  JPN   SWE
TWN ETH BIH HRV
JPN SWE ETH HND
TWN

-2.00 -1.00 0.00 1.00 2.00 -2.00 -1.00 0.00 1.00 2.00

Government Effectiveness Regulation Quality

 
0.70 NAM 0.70 NAM
 
GUY GUY

   
LSO BWA LSO BWA
 
0.60
CAF CAF
 0.60 
  BRA  BRA 
 GRC BOL ZAF  BOL
GRC ZAF
ZWE ZWE
   
PRY PAN PRY PAN
DOM
CHN DOM CHN
Gini Coefficient

Gini Coefficient
 ZMB  ZMB
  HTI   HTI
 
NER ARG CIV  NER  ARG CIV
0.50  EGY
MWI  0.50 MWI  EGY 
  MEX MYS   MEX MYS
 PER FRA  FRAPER
 DNK
   DNK
 
   PHL MDG COL    PHL MDG COL
ITA CMR GNB
CHL   ITACMR CHL GNB  LCA
 KEN  LCA  KEN
  
  IDN  URY SGP    IDN URY SGP
 BDI VEN  JAM   BDIVEN JAM 
NGA
TKM     DEU  TKM
 NGA    DEU 
0.40  GIN KHM  NIC  SEN
THATUN
  0.40  KHM GIN SEN NIC
THA
  TUN 
GTM  MOZ MLI TTO
JOR PRT GTM
MOZ  MLI TTO JOR PRT 
GMB BFA  MAR
MRT LKA 
USA 

GMB  BFA  
LKAMAR
MRT USA
   TUR  NZL     TUR  NZL
  AZE
NPL
  MDA BEN
MKD  GHA   AZE
 MDA
  NPLMKD BEN GHA
LAO 
INDDZA VNM
TZA ECU LVA IRL ESP  GBR LAO
 VNM TZA
DZA
  IRL  ESP  GBR

YEM 
HUN   
CAN  IND  ECU LVA 
 
SLV    AUS   YEM HUN   CAN
TJK RUS   KOR
POLISR  FIN  TJK  RUS  KOR  SLV   AUS

BLR
 EST KAZ
BGD
ALB  IRN CHE  BGDALB POL ISR FINIRN  CHE
=MNG
0.30     0.30 KAZ BLR
EST MNG CRI  
KGZ
 UKRGini Coefficient CRI 0.39  * rol
-0.04
+LTU NLD
LUX KGZ
UKR LTU NLD
LUX
 YUG  ROM BGR SVN   GEO AUT
  
Gini Coefficient
YUG ROM BGR  * concor  GEO
= 0.39 + -0.03SVN AUT
UZB PAK CZE
NOR 
UZB
PAK 
NOR CZE
 ARM = 0.12  SVK
R-Square 

BEL 
R-SquareARM= 0.10 
SVK  
BEL 
BIH  HRV JPN  SWE ETH 
BIH 
HRV 
TWN
HND 
HND JPN
TWN SWE ETH

-1.00 0.00 1.00 2.00 -1.00 0.00 1.00 2.00

Rule of Law Control of Corruption

20
 Figure 2

  
PRY CZE PRY 
CZE
 
VEN
 VEN 
PER BRA  PER
ALB
ARG 
ARG ALBBRA
  
0.80 COL   
EST 
JORURY 
ESP USA
0.80
EST URY COL
JOR 
 
ESP
USA
  PRT  PRT
ITA NIC ITA 
NIC

TUN 
TUN 
POL POL
    
EGY HND  GBR 
EGY HND
 GBR
   DEU  CAN 

 DEU
 CAN

Land Gini
BGD GNB
MAR SVN

Land Gini
TUR BGD MAR
GNB
SVN
TUR
0.60   UGA 
JPN 
AUT
0.60
UGA  
 
 
GRC
BLR PAK
FRA

LVA NLD  PAK  FRA
GRC LVA AUTNLD
JPN
PHL BLR Land  = 0.61 + -0.00 * regq
Gini
 
Land Gini

VNM = 0.61 + -0.01 * govef  PHL

MWI PAN  VNM
 

 DNK
R-Square = 0.01
SEN 
CHE MWI
R-Square = 0.00 PAN
DNK
 SEN 
LSO  LUX LSO
CHE
 
  IDN THA ETH  THA LUX
ETH
NPL 
IRL IDN  NPL 

BFA  IRL
0.40 
BFA
LAO 0.40 
 LAO 
NAM  NAM
KOR  KOR 
SWE SWE
 
FIN FIN

0.20  0.20 
NER NER
-2.00 -1.00 0.00 1.00 2.00 -2.00 -1.00 0.00 1.00 2.00

Government Effectiveness Regulation Quality

   
PRY CZE PRY CZE
 
VEN 
VEN 
 PER PER
ALB BRA  
ALB BRA
ARG ARG
0.80    COL   
EST  URY
JOR 
0.80 EST  URYCOL
JOR 

ESP USA 
ESP USA
 
ITA  PRT 
ITA  PRT
NIC NIC
 
TUN   TUN
POL POL
     
EGY
HND  GBR HND  GBR
   DEU  CAN EGY CAN
    DEU 
Land Gini

Land Gini
BGD GNB MAR
TUR SVN BGD GNB MAR
TUR SVN
0.60   UGA   
JPN
 AUT
0.60   UGA  
JPN 
AUT
 GRC FRA LVA  GRC
FRA LVA 
BLR  PAK NLD PAK

BLR NLD
 PHL PHLLandGini = 0.61 + -0.01 * concor
 
VNM Land
 Gini = 0.61 + -0.01 * rol   VNM 
 MWI
DNK PAN
 SEN = 0.01  MWI DNK PAN= 0.00
R-Square 
R-Square  CHE 
SEN CHE
 LSO  LUX  LSO  
LUX

 THA ETH 
 THA ETH
IDN
NPL  IDN
NPL 
 IRL  IRL
BFA BFA
0.40  0.40 
LAO 
LAO 
NAM
  NAM
KOR  KOR 
SWE SWE
 
FIN FIN

0.20  0.20 
NER NER
-1.00 0.00 1.00 2.00 -1.00 0.00 1.00 2.00

Rule of Law Control of Corruption

21
 Figure 3


 BFA 
BFA
NER MLI 

NER

GIN   
MLI
SEN ETH GIN SEN 
ETH
0.80  
ZAF 0.80 ZAF
  
NPL BEN MAR    BEN
YEM
 YEM NPL MAR
PAK  
 CIV PAK 
CAF   
CIV

MOZ CAF MOZ
BGD 

Education Gini
HTI BGD  HTI

Education Gini
0.60 0.60
 
 
IND  IND
GTM  
NGA
LAO
MWI LAOGTM
NGA 
MWI 
 CMR EGY
CMR NICUGA EGY
NIC UGA
 GHA 

GHA 
HNDSLV HND SLV
 
0.40   
TZA 0.40 TZA 
DOM
KENBOL   
BRA
TUR NAM
 
DOM  TUR
KEN BOL
BRA
ZMB
 FRA CHN COL  ZMB FRA
CHN NAM
PRY 
 PRY  COL
   ECUMEX
THA    ECU THA MEX 
  IDNMDG 
 ESP   IDN MDG ESP
ZWE
 VEN PER  
CRI TWN ZWE   VEN PER
CRI TWN

KHM VNM PAN VNM KHM
PAN
 BLR  DEU


BLR 

DEU 
ITA  BIHLKA
  ARG
PHL  CHL
URY  
ITABIH
CHL 
PHL URY 
  
BEL ARG
 Education Gini  =0.35 LKA
+ -0.05 * regq BEL  LUX
0.20 GUY TJK MDAALB  ROM

BGR JOR
JAM POL 
TTO  LUX
CZE 0.20 TJK
GUY  MDAALB ROM JOR
JAM 
BGR
TTO
POL CZE
 Education GiniHUN JPN  SWE
= 0.35 + -0.06 * govef  R-SquareHUN  
AZE  RUS   ISR
EST SVK  FIN EST  =AZE 0.04   JPN  SWE
    =ARM
 R-Square
 AUT AUS
  RUS ARM  FIN ISRSVK AUS
 AUT
TKM KGZKAZ
UZB DNK
0.07 
IRL   USA
GBR
CAN
NLD
NOR TKM
UZB KAZ  DNK KGZ  IRL 
USA
 CAN
NOR
NLD
GBR
SVN SVN

-2.00 -1.00 0.00 1.00 2.00 -2.00 -1.00 0.00 1.00 2.00

Government Effectiveness Regulation Quality

 
 BFA  
BFA
NER 
MLI NER MLI
   
GIN 
SEN 
ETH GIN SEN ETH
0.80  0.80 
ZAF ZAF
   

YEM
 
NPL BEN MAR 
YEMNPLBEN MAR
 
PAK  PAK 
 CIV  CIV
CAF 
MOZ CAF MOZ
  

BGD BGD

Education Gini
Education Gini

0.60 HTI 0.60 HTI

 
 IND   IND
  GTM  
LAO
NGA GTM
NGA
LAO
   MWI  MWI
CMRUGA EGY CMR EGY
UGA
NIC NIC  
 GHA
 GHA HND
SLV
HND
SLV
 
TZA   0.40 TZA
 
0.40     BRA NAM  
 
KEN
BOL
DOM 
BRA
TUR

KEN DOMBOL
CHN
ZMB FRA TUR 
COL  ZMB
FRA
CHNNAM COL
PRY   PRY MEX
 MEX THA
ECU  THA
ECU
  IDN  
MDG    IDN MDG  
ESP
ZWE  VEN PER CRI TWNESP  ZWE
VEN
KHM VNM  PAN
PER CRI TWN

KHM VNM  PAN 
 BLR    PHL  DEU  URY  
BLR  PHL
BIH DEU  URY

ITA   BIH ARG CHL
 LKA


BEL LUX   
ITA
 CHL
ARG LKA  
BEL  LUX
0.20 GUY TJK  ALB 
MDA 
ROM
 
JAMHUN
Education BGR
Gini
JOR
TTO
= 0.35POL
+ -0.06 * rol CZE 0.20 GUY TJKMDA ALB JAM ROM
 
BGR
TTOPOL
JOR
 * concor CZE
 JPN     EST Education HUN Gini
= 0.35 + -0.05 JPN
  
 EST
 AZE  
SVK 
FIN SWE
AUS AZER-Square 
SVK FIN SWE
   AUS
R-Square
 RUS = 0.06 ISR   AUT     RUS ARM = 0.06 ISR AUT
 
TKM  ARM    USACAN
NLD TKM KAZKGZ    USA
 CAN
NLD
UZBKGZKAZ DNK IRLSVN GBRNOR UZB DNK IRLSVN GBR
NOR

-1.00 0.00 1.00 2.00 -1.00 0.00 1.00 2.00

Rule of Law Control of Corruption

22
 Appendix 1: Data
Income
Country Code Gini LandGini EduGini GOVEF REGQ ROL CONCOR
Group
1. Albania ALB LM 0.31 0.84 0.21 -0.36 -0.08 -0.80 -0.72
2. Algeria DZA LM 0.35 NA -0.46 -0.93 -0.73 -0.49
3. Argentina—urban ARG HM 0.51 0.83 0.22 -0.33 -0.81 -0.71 -0.44
4. Armenia ARM L 0.26 NA 0.13 -0.34 0.05 -0.58 -0.53
5. Australia AUS OECD 0.32 NA 0.15 1.95 1.62 1.82 2.02
6. Austria AUT OECD 0.28 0.59 0.14 1.76 1.41 1.76 2.10
7. Azerbaijan AZE L 0.36 NA 0.15 -0.81 -0.57 -0.85 -1.04
8. Bangladesh BGD L 0.31 0.62 0.62 -0.72 -1.15 -0.86 -1.09
9. Belarus BLR LM 0.30 0.56 0.25 -0.93 -1.78 -1.31 -0.91
10. Belgium BEL OECD 0.26 NA 0.22 1.71 1.25 1.47 1.53
11. Benin BEN L 0.36 NA 0.75 -0.39 -0.49 -0.47 -0.34
12. Bolivia BOL LM 0.58 NA 0.38 -0.63 0.05 -0.55 -0.78
13. Bosnia & Herzegovina BIH LM 0.25 NA 0.24 -0.54 -0.66 -0.76 -0.54
14. Botswana BWA HM 0.63 NA 0.83 0.96 0.73 0.86
15. Brazil BRA HM 0.59 0.85 0.39 0.02 0.19 -0.21 -0.15
16. Bulgaria BGR LM 0.28 NA 0.19 -0.08 0.60 0.05 -0.04
17. Burkina Faso BFA L 0.38 0.42 0.90 -0.52 -0.26 -0.62 -0.35
18. Burundi BDI L 0.42 NA -1.24 -1.35 -1.50 -1.16
19. Cambodia KHM L 0.40 NA 0.28 -0.87 -0.25 -0.98 -0.97
20. Cameroon CMR L 0.45 NA 0.50 -0.64 -0.71 -1.00 -0.78
21. Canada CAN OECD 0.33 0.64 0.13 1.96 1.57 1.75 1.99
22. Central African Rep. CAF L 0.61 NA 0.66 -1.65 -1.28 -1.44 -1.36
23. Côte d’Ivoire CIV L 0.51 NA 0.68 1.27 1.62 1.16 1.44
24. Chile CHL HM 0.45 NA 0.23 0.11 -0.45 -0.47 -0.51
25. China, People’s Rep. of CHN LM 0.54 NA 0.37 -0.18 -0.12 -0.70 -0.16
26. Colombia COL LM 0.46 0.80 0.36 0.49 0.67 0.57 0.78
27. Costa Rica CRI LM 0.29 NA 0.30 0.32 0.19 0.07 0.08
28. Croatia HRV HM 0.25 NA 0.63 0.97 0.69 0.30
29. Czech Rep. CZE HM 0.27 0.92 0.19 2.15 1.76 1.91 2.38
30. Denmark DNK OECD 0.47 0.51 0.11 -0.46 -0.28 -0.54 -0.50
31. Dominican Rep. DOM LM 0.54 NA 0.38 -0.85 -0.60 -0.71 -0.75
32. Ecuador ECU LM 0.34 NA 0.33 -0.20 -0.58 -0.02 -0.21
33. Egypt, Arab Rep. EGY LM 0.50 0.65 0.51 -0.22 0.56 -0.34 -0.39
34. El Salvador SLV LM 0.32 NA 0.45 0.99 1.61 0.91 0.82
35. Estonia EST HM 0.30 0.79 0.16 -0.96 -1.19 -1.00 -0.85
36. Ethiopia ETH L 0.25 0.47 0.83 2.06 1.79 1.97 2.53
37. Finland FIN OECD 0.31 0.27 0.15 1.42 0.91 1.33 1.44
38. France FRA OECD 0.48 0.58 0.37 -0.49 -0.15 -0.32 -0.61
39. Gambia, The GMB L 0.38 NA -0.80 -0.64 -0.87 -0.91
40. Georgia GEO L 0.28 NA 1.38 1.29 1.66 1.90
41. Germany DEU OECD 0.41 0.63 0.25 -0.17 -0.28 -0.16 -0.17
42. Ghana GHA L 0.36 NA 0.46 0.74 0.85 0.75 0.56
43. Greece GRC OECD 0.58 0.58 -0.87 -0.07 -0.96 -0.74
44. Guatemala GTM LM 0.39 NA 0.54 -0.93 -0.94 -1.09 -0.81
45. Guinea GIN L 0.40 NA 0.84 -1.25 -0.86 -1.26 -0.71
46. Guinea-Bissau GNB L 0.45 0.62 -0.20 -0.14 -0.48 -0.35

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47. Guyana GUY LM 0.68 NA 0.20 -1.90 -1.11 -1.66 -1.49
48. Haiti HTI L 0.52 NA 0.61 -0.68 -0.33 -0.61 -0.71
49. Honduras HND LM 0.24 0.66 0.45 0.68 1.22 0.85 0.65
50. Hungary HUN HM 0.33 NA 0.18 -0.04 -0.59 -0.09 -0.31
51. India IND L 0.34 NA 0.56 -0.36 -0.42 -0.91 -0.90
52. Indonesia IDN L 0.43 0.46 0.32 -0.66 -1.33 -0.83 -0.59
53. Iran IRN LM 0.31 NA 1.48 1.63 1.62 1.61
54. Ireland IRL OECD 0.35 0.44 0.11 0.98 0.69 0.77 0.79
55. Israel ISR NOECD 0.31 NA 0.14 0.58 0.97 0.74 0.66
56. Italy ITA OECD 0.45 0.73 0.23 -1.30 -0.83 -1.42 -1.01
57. Jamaica JAM LM 0.42 NA 0.19 0.13 0.15 -0.32 -0.52
58. Japan JPN OECD 0.25 0.59 0.17 1.21 1.04 1.39 1.19
59. Jordan JOR LM 0.39 0.78 0.21 0.23 0.13 0.30 0.35
60. Kazakhstan KAZ LM 0.30 NA 0.12 -0.63 -0.89 -0.98 -1.10
61. Kenya KEN L 0.44 NA 0.38 -0.81 -0.43 -0.98 -0.89
62. Korea, Rep. of KOR L 0.32 0.34 0.95 0.69 0.67 0.17
63. Kyrgyzstan KGZ L 0.29 NA 0.12 -0.83 -0.06 -1.04 -0.92
64. Lao PDR LAO L 0.35 0.39 0.53 -1.02 -1.24 -1.27 -1.15
65. Latvia LVA LM 0.34 0.58 0.60 1.02 0.48 0.23
66. Lesotho LSO L 0.63 0.49 -0.33 -0.26 -0.03 -0.05
67. Lithuania LTU LM 0.29 NA 0.70 1.16 0.60 0.36
68. Luxembourg LUX OECD 0.29 0.48 0.21 2.08 2.02 1.98 2.16
69. Macedonia FDR MKD LM 0.36 NA -0.17 -0.19 -0.44 -0.52
70. Madagascar MDG L 0.46 NA 0.31 -0.43 0.10 -0.30 -0.15
71. Malawi MWI L 0.50 0.52 0.52 -0.81 -0.57 -0.29 -0.83
72. Malaysia MYS HM 0.49 NA 0.99 0.44 0.52 0.29
73. Mali MLI L 0.39 NA 0.87 -0.29 -0.26 -0.34 -0.52
74. Mauritania MRT L 0.38 NA 0.22 0.04 -0.62 0.02
75. Mexico MEX HM 0.49 NA 0.34 -0.02 0.55 -0.26 -0.27
76. Moldova MDA L 0.36 NA 0.20 -0.73 -0.49 -0.65 -0.86
77. Mongolia MNG L 0.30 NA -0.46 0.18 0.18 -0.51
78. Morocco MAR LM 0.38 0.62 0.74 -0.03 -0.26 -0.05 -0.02
79. Mozambique MOZ L 0.39 NA 0.65 -0.39 -0.29 -0.60 -0.79
80. Namibia NAM LM 0.70 0.36 0.38 0.29 0.45 0.22 0.18
81. Nepal NPL L 0.36 0.45 0.74 -0.90 -0.60 -0.82 -0.61
82. Netherlands NLD OECD 0.29 0.57 0.13 2.00 1.67 1.78 2.08
83. New Zealand NZL OECD 0.37 NA 2.05 1.78 1.93 2.38
84. Nicaragua NIC L 0.40 0.72 0.49 -0.71 -0.15 -0.65 -0.34
85. Niger NER L 0.51 0.18 0.88 -0.87 -0.63 -0.92 -0.87
86. Nigeria NGA L 0.41 NA 0.53 -1.02 -1.26 -1.44 -1.11
87. Norway NOR OECD 0.27 NA 0.11 1.97 1.33 1.95 2.11
88. Pakistan PAK L 0.27 0.57 0.70 -0.57 -1.03 -0.78 -0.87
89. Panama PAN HM 0.55 0.52 0.27 0.01 0.22 -0.04 -0.06
90. Paraguay PRY LM 0.55 0.93 0.35 -1.07 -0.60 -1.09 -0.99
91. Peru PER LM 0.48 0.86 0.30 -0.58 0.17 -0.63 -0.35
92. Philippines PHL LM 0.46 0.55 0.24 -0.23 -0.06 -0.62 -0.55
93. Poland POL HM 0.31 0.69 0.19 0.47 0.64 0.51 0.16
94. Portugal PRT OECD 0.39 0.74 0.92 1.14 1.16 1.23

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95. Romania ROM LM 0.28 NA 0.21 -0.15 -0.06 -0.18 -0.25
96. Russian Federation RUS LM 0.32 NA 0.14 -0.21 -0.51 -0.70 -0.72
97. Senegal SEN L 0.40 0.50 0.83 -0.13 -0.31 -0.20 -0.40
98. Serbia & Montenegro YUG LM 0.28 NA -0.21 -0.72 -0.72 -0.48
99. Singapore SGP NOECD 0.43 NA 2.25 1.87 1.82 2.44
100. Slovak Rep SVK HM 0.26 NA 0.15 0.67 1.15 0.49 0.39
101. Slovenia SVN NOECD 0.28 0.62 0.10 1.02 0.89 0.93 0.97
102. South Africa ZAF HM 0.58 NA 0.79 0.74 0.44 0.32 0.48
103. Spain ESP OECD 0.35 0.77 0.31 1.29 1.13 1.12 1.45
104. Sri Lanka LKA LM 0.38 NA 0.23 -0.27 0.21 -0.03 -0.16
105. St. Lucia LCA HM 0.44 NA 0.19 0.46 0.75 0.29
106. Sweden SWE OECD 0.25 0.32 0.16 1.92 1.54 1.85 2.20
107. Switzerland CHE OECD 0.31 0.50 2.25 1.55 1.98 2.17
108. Taipei,China TWN NOECD 0.24 NA 0.30 1.15 1.29 0.83 0.64
109. Tajikistan TJK L 0.32 NA 0.20 -1.05 -1.16 -1.18 -1.11
110. Tanzania TZA L 0.35 NA 0.41 -0.37 -0.55 -0.49 -0.57
111. Thailand THA LM 0.40 0.47 0.33 0.38 -0.01 -0.05 -0.25
112. Trinidad & Tobago TTO HM 0.39 NA 0.19 0.47 0.61 0.17 0.02
113. Tunisia TUN LM 0.40 0.70 0.57 -0.22 0.24 0.29
114. Turkey TUR LM 0.37 0.61 0.38 0.01 -0.07 0.04 -0.23
115. Turkmenistan TKM L 0.41 NA 0.12 -1.37 -2.22 -1.43 -1.34
116. Uganda UGA L .. 0.59 0.50 -0.43 0.07 -0.79 -0.71
117. Ukraine UKR L 0.29 NA -0.67 -0.48 -0.83 -0.89
118. United Kingdom GBR OECD 0.34 0.66 0.11 1.85 1.62 1.71 2.06
119. United States USA OECD 0.38 0.76 0.13 1.80 1.22 1.58 1.83
120. Uruguay—urban URY HM 0.43 0.79 0.24 0.52 0.30 0.42 0.50
121. Uzbekistan UZB L 0.27 NA 0.11 -1.04 -2.10 -1.30 -1.21
122. Venezuela, RB de VEN HM 0.42 0.88 0.30 -0.96 -1.24 -1.10 -0.94
123. Viet Nam VNM L 0.35 0.53 0.28 -0.31 -0.57 -0.59 -0.74
124. Yemen, Rep. YEM L 0.33 NA 0.73 -0.84 -1.04 -1.11 -0.84
125. Zambia ZMB L 0.53 NA 0.37 -0.84 -0.49 -0.54 -0.74
126. Zimbabwe ZWE L 0.57 NA 0.30 -1.20 -2.15 -1.53 -1.01
GOVEF: Government effectiveness; REGQ: Regulation Quality, ROL; Rule of law, CONCOR: Control of
Corruption. For details on date and definitions see section on data.

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