Crisis to widen governance gulf between states

LONDON (Reuters) - The financial crisis will widen the gulf between countries in governance and corruption, a leading expert says, with some states hastening reforms but others using economic distress to justify doing nothing.

Daniel Kaufmann, a senior Brookings Institute scholar and former World Bank governance head, said he expected to see countries improving or deteriorating faster over the next year, depending on the quality of leadership.

Those with better governance and institutions would rebound from the downturn faster, he said.

"Among one group, reformists will promote change ... contrasting with those with weak leadership where the crisis is a useful excuse to put off reforms, resulting in worsening governments," he told Reuters in a telephone interview from Washington.

In Latin America, he said Colombia, Chile and Brazil were making strides in improving governance while Venezuela, Ecuador and Argentina were going the other way.

"In Africa ... you will have a growing divide between a troubled country like Kenya and Ghana, Rwanda and Liberia, which are improving," he said. "In the aftermath of the crisis in Europe, the Baltic states will probably emerge stronger -- and so may Bulgaria if the new government seizes the opportunity to reform -- but Russia may not."

In a normal year, the annual World Bank-backed Worldwide Governance Indicators, which Kaufmann still helps to compile, show roughly 5 percent of countries displaying a significant improvement or decline in the quality of governance.

The indicators, published last month, are closely watched by investors and ratings agencies.

"Due to the crisis, we may witness a jump, possibly a doubling," he said, meaning up to 10 percent of states would see a significant shift in one direction or another next year.

CRASH EXPOSES ROT

Kaufmann said the lesson of the 1997 Asian crisis was that countries with better governance would see a faster return of investment than those such as Indonesia with endemic problems which investors had been willing to overlook in the boom.

"When the crash happened, the rot ... was exposed and investors pulled out," he said. "That contrasted with countries such as Malaysia and South Korea with more robust institutions and better prepared to flexibly reform, thus resulting in less costly recessions and better recovery."

The huge variation in performance between ostensibly similar countries showed the importance of leadership, he said.

"You can have two countries almost next to each other with very similar economic and cultural circumstances but they can go into sharply different directions," he said. "Witness Poland versus Ukraine, the two Koreas or Romania versus Bulgaria in recent years."

Bulgaria has struggled with corruption but Kaufmann said he hoped last month's change of government would mark a turning point.

Developed countries had their own problems, he said, with the current crisis having its roots in banks gaining too much control over the systems designed to regulate them.

"In the U.S., a positive effect of the crisis has been to spearhead reforms in financial regulation, transparency and integrity," he said. "These -- if well implemented and provided they do not over-regulate and address political finance reform -- have the potential to be a positive by-product of the crisis."

In developing countries, he said investors who had previously not looked at broader human rights issues such as extrajudicial killings and other abuses were taking greater notice of them.

"This is ... due to increasing evidence that they are warning signs of broader concerns in the overall governance environment and investment climate," he said. "If human rights are not respected in a country with deficient rule of law, wouldn't an investor worry whether property rights will be protected?"

(Editing by Andrew Dobbie)