Brookings: Experts - Daniel Kaufmann

Trillions of Dollars in Oil, Gas and Mining Revenue Still Shrouded in Secrecy

Daniel Kaufmann — Mon, 20 May 2013 10:23:00 -0400

Editor's Note: This version references a past event held at the Brookings Institution. The original version can be found on the Huffington Post.

Opacity still prevails in how natural resources are managed. This conspires against economic development. The lives of over a billion citizens could be transformed if their governments managed their oil, gas and minerals in a more open, accountable manner. This emerges from the Resource Governance Index, released by the Revenue Watch Institute at an event at Brookings last week.

The Index measures the transparency and accountability in the oil, gas and mining sector of 58 countries. Together these nations produce 85 percent of the world’s oil, 90 percent of diamonds and 80 percent of copper, generating trillions of dollars annually. The in-depth analysis finds that over 80 percent of the countries fail to meet satisfactory standards in how their natural resources are governed. In these nations, opacity, corruption and weak processes keep citizens from fully benefiting from their countries’ resource wealth, revealing a significant ‘governance deficit’.

There is hope, however. Some countries prove it is possible to lift the veil of secrecy and meet higher standards of transparency and accountability. Eleven out of the 58 countries received satisfactory scores overall, including emerging economies in Latin America. By shedding light on reforming states as well as lessons and solutions, we can reject the tired notion of the deterministic ‘resource curse’.

Each country, from the highly ranked Norway, Brazil and United Kingdom to the poorly performing Turkmenistan and Iran, is judged on four criteria: legal framework, transparency levels, checks and balances, and the broader governance context. Most of the worst performers depend almost exclusively on revenues from natural resources as their main source of income, implying that transparency and accountability is largely missing where it is needed the most (Figure 1). And the Middle East and North Africa, the most resource-dependent region, is the worst performing.

Key American allies are among the poor performing countries. Saudi Arabia ranks 48th out of 58 with failing scores on all four components. Afghanistan, which has received billions in aid from the U.S. and sits atop an estimated $3 trillion of minerals, performs poorly. U.S. companies invest heavily in the oil sectors of poorly rated countries, Angola and Equatorial Guinea. At the same time, our study also finds that wealth is no guarantee for attaining openness and accountability in natural resources as illustrated by Qatar, ranked 54th out of 58.

In fact, there is room for improvement in every nation, including wealthy nations. Canada, the U.S. and Australia also need to ensure their multinational companies do not facilitate the opacity found in many countries where they operate.

Improved management of natural resources could make a major difference in the economic development of many countries. In Nigeria, oil revenues were 60 percent higher than total aid to sub-Saharan Africa in 2011. In Libya, the Central Bank’s $65 billion in reserves are quickly depleting to pay for the government’s deficit spending. Equatorial Guinea has a higher average per capita income than the U.K., yet three-fourths of its population lives under the poverty line.

The Index also assesses 45 state-owned oil and mining companies and 23 natural resource sovereign wealth funds according to their levels of transparency and accountability. Industry heavyweights Statoil, Pemex and Petrobras exhibit high rankings, while the national oil companies of Turkmenistan and Myanmar rank at the bottom. The sovereign wealth funds of Kuwait, Libya and Qatar, which hold an estimated $476 billion in total assets, score among the bottom five.

Improved governance in natural resources is arguably the development challenge of the decade. The stakes are high, so now is the time to act. The annual gathering of the Extractive Industries Transparency Initiative (EITI) is now starting in Sydney, Australia, and in a few weeks the G-8 is holding its summit in Lough Erne, U.K. Government, industry and civil society leaders have an opportunity to advance the reform agenda.

The analysis of our report points to some concrete reforms that are sorely needed, and where EITI and the G-8 could help propel the agenda forward. Specifically:

EITI adoption and G-8 support for full disclosure of extractive industry contracts. Further, the G-8 could encourage the multilateral development banks to incorporate the transparency of extractive industry contracts (in addition to revenues) as a component of their lending programs and technical assistance.
Building on the pioneering Lugar-Cardin provision in U.S. Dodd-Frank legislation and the newly minted agreement in the European Union (EU), the G-8 should endorse both home- and host-country mandatory disclosure standards in line with these new U.S. and EU regulations and support their implementation. In particular, Canada and Russia ought to adopt these standards and ensure that G-20 and emerging economies including Australia, Brazil, China, South Africa and Switzerland follow suit. EITI should also fully align itself with these disclosure standards, helping countries and companies report detailed revenues paid to governments.
Support the disclosure of the beneficial ownership of companies to disclose the real owners of these firms (thereby helping to mitigate corruption and tax evasion), and support a common, public registry to house this data.
Extend transparency and accountability standards to state-owned companies and natural resource funds.
Promote a standardized set of data and indicators as a baseline empirical framework of transparency, measuring and monitoring open, effective resource and revenue management throughout the ‘value chain,’ and commit new funding for the development of institutional resources to support the gathering, analysis and dissemination of key data in resource-rich countries.

Ultimately, the responsibility for improving governance rests mostly with each country, its leadership, companies and civil society. Yet these global initiatives can have a major catalytic effect in supporting reforms at the country level.

Authors

Daniel Kaufmann

Publication: The Huffington Post

Image Source: © Beawiharta Beawiharta / Reuters

Oil, Gas and Minerals for the Public Good: The Revenue Watch 2013 Resource Governance Index

Wed, 15 May 2013 10:00:00 -0400

Event Information

May 15, 2013
10:00 AM - 11:30 AM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Watch live streaming video from livefrombrookings at livestream.com

Trillions of dollars in resources lie buried in the backyards of many of the world’s poorest citizens. Oil, gas and minerals can, if managed effectively and accountably, stimulate economic development. Too often, however, secrecy, corruption and weak institutions obstruct this path. To advance the understanding of this challenge, the Revenue Watch Institute has produced the Resource Governance Index, a collection of research, rankings and analysis that measures the quality of governance in the oil, gas and mining sector of 58 countries. Together, these nations produce 85 percent of the world’s oil, 90 percent of its diamonds and 80 percent of its copper, generating trillions of dollars annually. The future of these countries, both developed and developing, depends on how well they manage their resources.

On May 15, Global Economy and Development at Brookings hosted a discussion on these concerns. Brookings Nonresident Senior Fellow Daniel Kaufmann, president of Revenue Watch, presented the index findings, followed by a panel discussion on resource governance with Carlos Pascual, special envoy and coordinator for International Affairs, Bureau of Energy Resources, U.S. State Department, and Brookings Senior Fellow George Ingram with the Global Economy and Development program. Brookings Visiting Fellow Tamar Manuelyan Atinc moderated the discussion.

Audio

Oil, Gas and Minerals for the Public Good: The Revenue Watch 2013 Resource Governance Index

Era of Big Oil Secrecy is Over

Daniel Kaufmann — Wed, 24 Apr 2013 15:49:00 -0400

Earlier this month, the European Union (EU) took a decisive step towards transparency: It agreed to mandate publicly-listed European companies as well as large private firms to disclose their payments to governments for oil, gas and mining projects. This transparency is crucial in the fight for better governance of resource-rich countries. It will empower citizens with information about the amount of money their governments receive, helping them to monitor how this money is ultimately used and to deter corruption.

Opacity has long ties with corruption, and both are detrimental to growth. Our research shows that countries that control corruption and improve governance can triple their incomes per capita in the long term - a 300% dividend. As seen in the figure, this good governance dividend also applies to countries rich in natural resources.

The benefits of transparency dwarf the cost of disclosure. Today about 40 percent of the 1.7 billion people in resource-rich countries live in poverty, making less than $2 a day. Such poverty in the midst of immense resource wealth is due to low standards of governance and transparency, a critical issue for which oil and mining companies are also responsible.

The EU rules are part of the international community’s response to the opacity challenge, and are modeled after U.S. rules the Securities and Exchange Commission (SEC) released last August to implement the Cardin-Lugar amendment of the 2010 Dodd-Frank Act.

This move towards mandatory disclosure in two of the world’s largest capital markets signals what European Commissioner Michel Barnier has called a “new era of transparency.”

BIG OIL BATTLES NEW RULES

The emergence of this new global standard, however, does not mean the campaign for revenue transparency is over. While the transparency train has clearly left the station, not everyone is on board. Major multinational oil companies have been trying to water down these requirements on both sides of the Atlantic. These companies have put their reputations in jeopardy by backing the American Petroleum Institute (API) in its lawsuit against the SEC to stop implementation of the U.S. rules. Now that the EU has joined the drive for disclosure, Big Oil faces a major problem in its assault on transparency.

The new EU disclosure deal undercuts a number of API’s arguments. API’s inflated estimates of compliance costs are now increasingly irrelevant, as major cross-listed companies, like Shell and BP, will have to comply with EU rules regardless of the lawsuit’s outcome. API’s claims that the SEC acted arbitrarily by adopting the U.S. rules - already questionable given that Congress mandated the rules and the SEC conducted an exhaustive public comment process during its rulemaking - are also undermined by the EU’s agreement to adopt very similar measures. The EU legislation will, in fact, encompass more than the U.S. rules as it covers large, privately held companies (and the timber sector), in addition to publicly listed companies.

And API’s argument that the rules cause competitive harm is even less compelling since the EU will apply analogous rules to companies under its jurisdiction, helping to level the playing field. Together, the U.S. and EU regulations will cover capital-markets listed companies, accounting for nearly 70 percent of the market capitalisation of extractive industry firms on the world’s most significant stock exchanges.

SECRECY DAMAGING REPUTATIONS

By continuing to support API’s lawsuit, companies are incurring significant costs defending opacity, not only pecuniary, but reputational as well. The public is becoming increasingly aware of their fight against transparency. While a few companies are taking some steps away from secrecy - Norway’s Statoil disavowed support for the API lawsuit - they are still the exception.

Shell, for instance, faced setbacks when Alan Detheridge, one of its former executives, openly criticized the company’s efforts to block U.S. and EU transparency, and the Dutch government pledged its support for strong EU rules consistent with U.S. law. The company has now started to change its tune, claiming it has supported mandatory reporting requirements all along - an assertion The Economist wryly noted contradicts Shell’s membership in API and refusal to disavow support for the U.S. lawsuit.

Oil companies should draw lessons from Shell’s mishaps, seizing the moment to actually “walk the talk” on transparency. Instead of litigating against transparency, companies should focus on complying with the U.S. and EU rules and enlist their lawyers to prepare for new reporting. Companies covered by the U.S. and EU rules should also join the global transparency movement to ensure these disclosure standards apply to all relevant companies. Obtaining a G8 commitment to mandatory disclosure at this year’s Summit would bring key countries like Canada into the fold. An effort to enact similar legislation in additional markets, including Australia and emerging Asian and South American economies, should follow.

The U.S.-EU legislative consensus on a global standard of transparency is a watershed moment for improving the governance of natural resources worldwide. Big Oil should not stand in the way. To restore their credibility and support good governance and development around the world, oil companies should publicly state their intent to comply with the new disclosure standards and urge API to drop its lawsuit.

Authors

Daniel Kaufmann

Publication: Reuters/TrustLaw

Image Source: © Beawiharta Beawiharta / Reuters

Rethinking the Fight Against Corruption

Daniel Kaufmann — Thu, 29 Nov 2012 09:31:00 -0500

Fighting corruption requires a new understanding of how the global problem has evolved, for it is bigger and broader than petty bribery or crooked deals in developing countries. Merely adopting a new anti-corruption law, creating another commission, or launching another 'campaign' will not get the job done. We can no longer fight corruption by simply fighting corruption alone.

Corruption is a symptom of a larger disease -- the failure of institutions and governance, resulting in poor management of revenues and resources and an absence of delivery of public goods and services. We must think beyond anti-corruption rhetoric and traditional tactics. We need to be more strategic and rigorous, identifying and addressing corruption's underlying causes and examining the weaknesses in key institutions and government policies and practices. We have to focus our efforts on the broader context of governance and accountability. Only then can we see the many other shapes and forms corruption can take and address this epidemic.

Of its many guises, legal corruption is a particularly pernicious one that gets insufficient attention. Legal corruption refers to efforts by companies and individuals to shape law or policies to their advantage, often done quasi-legally, via campaign finance, lobbying or exchange of favors to politicians, regulators and other government officials. It is dealings between venal politicians and powerful financial and industrial executives. In its more extreme form, legal corruption can lead to control of entire states, through the phenomenon dubbed 'state capture,' and result in enormous losses for societies.

In many developing countries, legal and illegal corruption coexists, and it has become commonplace for multinational oil and mining companies to collude with elite politicians to deprive citizens of the benefits of their natural resources. Nigeria lost $35 billion over the last 10 years through corruption and mismanagement of its oil industry. The evidence suggests -- and the people of these developing countries attest -- growth cannot sustain where corruption thrives.

The reach of legal corruption, however, is not limited to countries with weak governments. It has also enabled Wall Street investment banks to unduly influence financial oversight institutions, bringing the U.S. and the global economy to the brink four years ago, and in recent months allowed collusion between U.K. and possibly U.S. banks to fix the global interest rate for their benefit.

This kind of corruption is a complex, multidimensional problem that needs to be confronted at every level. If we, as an international community, are going to get at its core, we need to recognize that improving governmental institutions is key. Good governance only starts with elections and higher levels of transparency. Elections cannot be effective unless they are free, fair and clean, and complemented by real freedom of expression. Transparency with impunity will not bring forth justice or make governments accountable. Broader governance reforms require serious progress in rule of law to make any real, lasting impact. Equally important is a free press. While we have seen progress towards democracy in many parts of the world, roughly two-thirds does not have a fully free media and, in some countries, the movement is backwards.

As crucial is the management of the world's natural resources. Today, 700 million people, in about 60 countries, live in poverty though they sit atop billions of dollars in oil, gas and minerals. Such abject poverty in the midst of abundance is a call for action. The overwhelming majority of these citizens live in poorly governed countries -- those that rate low in corruption control, transparency and accountability. The governance of these resources and the wealth they generate will make or break the development of these nations, and the social, economic, political and security implications will be far and wide.

The future of these resource-rich countries no longer rests mainly on foreign aid but on the extent and effective use of the country's own resources and how they use them. For that to occur, a focused and concrete approach to improve governance and accountability is critical. Reshaping the fight against corruption into a smarter strategy that integrates the challenge of improving governance and institutions in both the public and private sphere is the way forward.

Authors

Daniel Kaufmann

Publication: The Huffington Post

Image Source: © Cathal McNaughton / Reuters

Poverty in the Midst of Abundance: Governance Matters for Overcoming the Resource Curse

Daniel Kaufmann — Thu, 13 Sep 2012 13:30:00 -0400

In 1990, almost 600 million people lived on less than $5 a day in resource-rich countries. Today, it is estimated that poverty has increased to about 700 million people. Among this population, close to 300 million live in dire poverty, surviving on $2 a day or less. The majority of the poor in resource-rich countries live in Africa, where 80 percent of citizens in extractive-intensive countries live on under $5 a day, and over 50 percent live on under $2 a day.

In many countries the failure to harness natural resource wealth towards national well-being is in large measure linked to a failure of national governance. Of the hundreds of millions of citizens living on under $2 a day in resource-rich nations, 85 percent live in very poorly governed countries – countries which, according to the updated Worldwide Governance Indicators (WGI), rate very poorly in corruption control and other governance dimensions.

The WGI organize and synthesize data reflecting the views and reports of tens of thousands of stakeholders worldwide, including respondents to household and firm surveys and experts from nongovernmental organizations, public sector agencies and providers of commercial business information. The newest WGI dataset being released is based on dozens of different data sources from over 30 organizations around the world, and aggregates the data from hundreds of disaggregated questions. The indicators cover over 200 countries between the mid-1990s and the present, thus also allowing observers to monitor country trends.

Governance has political, economic and institutional dimensions. The WGI project defines governance as the traditions and institutions by which authority in a country is exercised. This includes how governments are selected, monitored and replaced; the government’s capacity to effectively formulate and implement sound policies and provide public services; and the respect of citizens and the state for the institutions that govern economic and social interactions among them. This definition drives the six core indicators of governance measured by the WGI:

1. Voice and Accountability: captures perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association and a free media.

2. Political Stability and Absence of Violence/Terrorism: captures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism.

3. Government Effectiveness: captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.

4. Regulatory Quality: captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

5. Rule of Law: captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police and the courts, as well as the likelihood of crime and violence.

6. Control of Corruption: captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.

With this updated WGI dataset, we can assess trends over time and ask whether governance has improved in extractive-intensive countries. Reviewing the past 10 years of WGI data, we see in Figure 1 that governance, in various dimensions, on average has not improved in these countries. To the contrary, we observe a somewhat declining trend in Control of Corruption among extractive-rich countries, contrasting the (mildly) improving trend for the rest of the world (non-extractive countries). Similarly contrasting patterns are suggested by the data on other governance dimensions in the WGI, such as in Voice & Accountability and Rule of Law.

Thus, not only has the level of poverty in extractive countries risen, but governance has also deteriorated. Yet this trend – the average of the full sample of 54 extractive-rich countries – masks differences across countries. While there are many nations facing enormous governance challenges, there are countries that show that natural resources can be a blessing. For instance, in Figure 1 we see for a group of extractive-rich states, governance performance is not only satisfactory, but has been improving over the past decade.

In fact, the WGI data suggests that governance has improved in extractive-rich countries that have not yet attained stellar standards of governance. Examples of countries that have achieved significant improvements in one or more dimensions of governance since 2000 include Ghana, Liberia, Sierra Leone, Indonesia, Namibia and Colombia, among others. These countries contrast sharply with other resource-rich countries that have experienced significant deteriorations in at least some key dimensions of governance over the same past dozen years, including (among others) Syria, Azerbaijan, Venezuela, Mauritania and, over a longer time span, Zimbabwe.

And we know that governance matters. Past research has pointed to a very high payoff for governance reforms, which we have characterized as the ‘300 percent development dividend of good governance’. Improvements in governance (by one standard deviation) have been causally associated with about a three-fold increase in a country’s income per capita on average.

From the simple depiction in Figure 2 we see that high levels of corruption control are linked with higher income levels. It is noteworthy that this link applies both to resource-rich countries and others. In other words, an overall higher standard of governance matters for countries rich in natural resources at least as much as it matters to the rest of the world. High standards of governance and natural resources are not contradictory notions.

Yet particular attention to governance challenges is needed in extractive-rich countries, not only because of the particular governance and management problems associated with the industry, but also because most of these countries still struggle with national-level governance challenges. As we see in Figure 2, 55.6 percent of resource-rich countries rate poorly on corruption control (bottom third in corruption), while 33.3 percent rate in the average range (middle third).

For years, a central question for resource-rich countries has been whether they are destined to be cursed in terms of governance standards and thus development prospects, or whether it is possible to turn natural resource abundance into a blessing. In other words, is it the case that natural resources themselves result in worse institutions, or, is it that subpar governance and institutions result in worse natural resource management outcomes?

If the former is the case, namely that resources foster misgovernance, then extractive intensive countries are deterministically cursed. Fortunately, much of the literature and evidence point more strongly to the latter – that there is nothing predetermined about the resource curse. Instead, it seems that resources become a curse where governance and institutions are already weak.

Yet at the same time there is little room for complacency since the evidence also suggests that excessive dependency on natural resources can exacerbate governance challenges when they already exist. Concentrated natural resources can be a magnet for rent-capture, which in turn can contribute to: i) the elite capturing those rents and fighting to maintain control over them; ii) disincentives for regular political transitions; iii) instability more generally, as competing groups fight for control over resources; iv) ability by the elite to buy supporters and placate opponents by distributing resource rents, thus silencing opposition; v) unaccountability to citizens due to overreliance on extractive revenues rather than taxes, and, vi) macro-economic instability due to the ‘Dutch Disease’ (an overvalued exchange rate resulting from overreliance on extractive exports), and the instability of oil and mining revenues.

This is a daunting list of challenges, faced by many countries to varied extents, but the outcome is not predetermined. Countries that are led with integrity and that invest in good governance not only can mitigate the resource curse, but can turn it into a blessing. Highly industrialized countries like Norway are not the only the only illustrations of how resource abundance can be compatible with high governance standards; well-governed emerging countries, like Chile and Botswana, are also illustrative (as are those countries experiencing improved governance, highlighted above).

It is difficult to see the future. But we can suggest that whether the hundreds of millions mired in poverty in resource-rich countries will see their prospects deteriorate further, or instead improve, will depend on the quality of governance, and within it, the extent to which transparency, accountability and corruption control reforms take hold at the national level, as well as within the extractive industry in each country. Ultimately in these resource-rich countries, it is governance what will determine development success or failure.

Overcoming the resource curse is not only a major task for governments, but also for civil society and the private sector, both at the national and international levels. But multinational oil, gas and mining companies also bear an important responsibility in helping improve governance standards worldwide, as illustrated by the major debates surrounding the Dodd-Frank (Section 1504) natural resource disclosure rules (just passed by the SEC), as well as the pending EU disclosure rules. In short, collective action by key stakeholders will be essential.

Note: The updated Worldwide Governance Indicators (WGI), a joint research project between Brookings Institution and the World Bank, are now available on the new Brookings Development, Aid and Governance Indicators and at the World Bank. The WGI is prepared by Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi, who are responsible for views and errors. The poverty data utilized in this analysis was drawn from the paper by Kharas and Rogerson, and this article benefitted from the assistance from Natasha Ledlie and Veronika Penciakova.

Authors

Daniel Kaufmann

Image Source: © Handout . / Reuters

SEC Passes Natural Resource Transparency and Conflict Minerals Rules: The Glass is Fuller than Expected

Daniel Kaufmann and Veronika Penciakova — Tue, 28 Aug 2012 16:19:00 -0400

Over two years ago, Congress adopted Sections 1502 and 1504 of the Dodd-Frank Wall Street Financial Reform Act, which focuses on conflict minerals and natural resource transparency. However, the Securities and Exchange Commission (SEC) was tardy in issuing the implementing regulations, but it passed both rules this past Thursday— more than 450 days past its April 2011 deadline.

A lot is at stake for citizens in dozens of countries, for investors and for multinational companies. Section 1502 mandates that U.S. companies sourcing minerals from the Democratic Republic of Congo (DRC) and adjacent countries perform due diligence on the source and chain of custody of minerals and disclose whether they use conflict minerals.

Section 1504 requires publicly traded oil, gas and mining companies to make project-level disclosures of payments made to governments around the world for the purpose of commercial development of natural resources. The aim of both provisions is to enhance corporate and government accountability. Yet, vague rules that allow for exemptions or do not require reporting on critical details would easily undermine the objective of effective transparency.

Was the wait worth it? That, of course, depends on who you ask. The wait appears worth it in the case of rules on the disclosure of resource payments to foreign governments (Section 1504), while the results are somewhat mixed for rules mandating the disclosure of conflict minerals (Section 1502).

The SEC first voted on disclosure rules for conflict minerals (Section 1502). The mere fact that after such a long delay the agency finally voted in favor of these regulations constitutes a step forward. The intent of Section 1502 of Dodd-Frank (and thus of SEC) was not to mandate penalties for sourcing minerals from mines controlled by armed groups in conflict-afflicted regions. Instead it relies on the adverse reputational effect of such disclosure. Reputable companies would want to avoid having their name associated with armed conflict, human rights violations, slavery and rape. Yet, an important segment of the industry opposed such disclosures on the basis that compliance costs would be high and that disclosure would be ineffective in addressing instability in the region.

But following the SEC’s ruling on Section 1502, the glass is only half full because the industry managed to get some reprieve from full disclosure. For all companies there will be a two-year phase-in period, and for smaller companies a four-year phase-in period. Other companies, such as Wal-Mart and Target, will be exempted from disclosure because the SEC does not require disclosure for store brand products manufactured by third-party suppliers. Further, companies using recycled or scrap minerals would also avoid the disclosure rules.

Thus, while human rights advocates and the industry (with the exception of some firms which were not opposed to Section 1502) were generally at odds about the provision, they agreed that the outcome of the SEC ruling was mixed. Many in the industry are displeased that the rules were passed, but are pleased that there will be significant implementation delays and exemptions. Civil society and human right advocates are pleased that the SEC voted in favor of adopting rules but fear that the rules are relatively weak.

Both sides do agree that the disclosure alone will not solve the conflict in the eastern DRC; and human rights activists feel that the measures passed by the SEC may help mitigate conflict and deter human rights abuses, even though they believe broader governance reforms are needed. It remains to be seen how effective the actual implementation of these provisions will be and whether broader complementary measures to tackle misgovernance and conflict in the DRC will be implemented.

In contrast to the “glass half full” ruling on Section 1502, the Section 1504 ruling on natural resource payment disclosure represented a much fuller glass. The American Petroleum Institute (API), big oil and several other extractive industry companies had lobbied heavily against rules that would require project-level disclosure and in favor of various exemptions, including the so-called “tyrant veto”, which would exempt companies from disclosing payments in countries where payment disclosure was prohibited by local law.

In its ruling, the SEC rejected the “tyrant veto” exemption and exemptions in cases where contracts stipulate secrecy. Further, the SEC also mandated that companies file disclosures, rather than merely furnish them, which is important because the requirement to file enables investors to litigate in certain cases of false reporting. The SEC also specified that payments above $100,000 must be reported and disaggregated by category, rejecting the arguments put forth by the industry for a materiality approach or a threshold of $1 million.

A key question prior to the final ruling was how the SEC would define a “project”. Industry lobbyists pushed for a broad definition that would allow disclosures at as aggregate a level as possible. Some even tried to equate a project with all operations in a country. In its ruling, the SEC acknowledged that the term “project” is commonly understood by issuers and investors, and granted companies some latitude in defining what constitutes a project. But, thanks to the guidance issued by the SEC with the rules, the amount of discretion that companies will have is rather limited.

Specifically, in its guidance, the SEC rejected several project definitions that were proposed by industry stakeholders and strongly opposed by civil society. It clarified that a project cannot be defined at the country level or following criteria driven by geological basin, reporting unit or materiality thresholds. At the same time, the SEC indicated that for the purposes of the rule, the notion of “project” should be guided by the relevant contract (since the payments made by companies to the government are usually stipulated in the contract). Thus, the ruling demarcated reasonable boundaries around what constitutes a project. As a result, reporting is expected to take place at a rather detailed and disaggregated level.

Further, the SEC decision not to rule on a project definition may have been a clever move, both substantively and tactically. Substantively, giving companies latitude in defining a project rather than imposing a “one size fits all” definition may result in disclosure of payments for segments of the industry outside of exploration and production. Tactically, by sticking to the wording of the original Dodd-Frank law, the SEC may fend off a possible source of litigation by the industry (API).

However, the SEC’s clever ruling on the project definition may not dissuade the API from litigation. If they do decide to litigate, the industry body may opt to focus on the costs associated with implementing transparency rules, which they claim will be huge, particularly with regard to compliance costs and loss of competitiveness. In fact, in issuing the rules, the SEC itself did acknowledge that some of these costs to industry may not be trivial.

When discussing compliance costs, it is important to distinguish between the total costs of reporting and the additional costs resulting from the new disclosure requirements. The latter are particularly relevant in assessing the potential costs of 1504, and are likely to be much lower than some companies claim. Most companies already have extensive internal systems in place for recording payments, and already collect project level information to handle their current reporting requirements. Adjustments due to the new set of rules are thus likely to be relatively minor and could be done in a timely and cost-effective manner.

Several companies also highlighted concerns that other market participants could use information disclosed by issuers to derive trade secrets such as contract terms, data on reserves, or other confidential information. These arguments have been rebutted by outside analysis and advocates of transparency. The SEC did not give them credence either, noting that the statute covers the amount of payments, not the manner in which payments are determined or other contract terms.

Companies were also concerned that they would become less competitive relative to companies not subject to the reporting obligations under 1504. The American Petroleum Institute (API) and companies like ExxonMobil and Rio Tinto are concerned that by becoming more transparent they will lose contracts in countries where the government either legally prohibits disclosure or prefers to work with companies that are not subject to payment disclosure. In its ruling, the SEC rejected this flawed notion that implies that corrupt or opaque governments would drive the provision of exemptions from transparency of companies listed in the U.S.

Furthermore, the impact on competitiveness would be minimal in the numerous jurisdictions where payment information is already publicly available, partly as a result of increased participation by governments and companies in the voluntary disclosure framework under the Extractive Industry Transparency Initiative (EITI).

There is also a clear trend toward the globalization of mandatory disclosure of payments by extractive sector companies. The European Union is soon likely to adopt laws similar to those set forth by the U.S. Together, U.S. and EU regulations would cover the vast majority of listed natural resource companies in the world. Moreover, mandatory rules were already adopted by the Hong Kong Stock Exchange and discussions are ongoing in other financial centers in Asia.

More generally, it seems misplaced to equate, as API and some companies have tried to, competitiveness and the ability to keep payments secret. Yes, there are some companies in the world that benefit from rent-seeking, monopolistic behavior, bribery of foreign officials and tax avoidance or outright evasion.

But, as previously argued, private companies around the world, including in dynamic sectors in the U.S., compete on the basis of efficiency, entrepreneurship, and high technical and innovation standards. A truly competitive firm would have little to gain from secrecy; to the contrary, it would benefit from the level playing field created by high levels of transparency.

Over the past two years, the discussion of the potential costs of disclosure has been long and detailed. By contrast, there has been far less said about potential benefits. It is the case that the benefits of transparency are not easy to quantify. Yet, as we have noted before, a body of empirical work has found the benefits of transparency, good governance and corruption control to be quite large and to accrue to multiple stakeholders, including citizens, investors and competitive companies in the extractive sector. In their submissions to the SEC, some investors noted that new disclosure requirements would help them assess the risks faced by companies operating in resource-rich countries and thus possibly promote investment and capital formation.

In fact, our own data and research suggests that in the long run there is up to a 300 percent development to citizens dividend from increased transparency, accountability and improved governance. In particular, improved governance can contribute to a threefold rise in incomes and two-thirds decline in infant mortality.

Further, project-level disclosure will empower citizens to obtain information on how much their governments earn from natural resources, advocate for a fairer share of revenues, and verify government-published budget data. Once the data is disclosed and processed by analysts and civil society, citizens should also be able monitor the flow of money from the central government to regional and local governments, thus helping ensure that they are receiving what is promised. Finally, more transparency in dealings between companies and governments may help companies sidestep attempts by some government officials to engage in unethical activities.

More generally, it is also important to emphasize that extractive-intensive countries need not be subject to the resource curse. Countries with transparent and enlightened leadership, and with satisfactory standards of governance and corruption control (supported by good corporate governance practices among multinationals), can harness their natural resources to achieve robust and inclusive growth and development. As seen in figure 1, extractive-rich countries that do well in controlling corruption also have higher income levels, in contrast with poorly governed ones. The challenge in coming years is raising the governance standards of many resource-rich countries that are lagging in this area.

The robust implementation of the SEC rules on transparency in natural resources as mandated by Section 1504 of the Dodd-Frank Act will be an important step forward, but it will not be sufficient. In order to make extractive industry transparency a global norm, the EU and other financial centers need to follow the lead taken by the United States. Building on its success in promoting the U.S. rules on Section 1504 advocacy organizations, such as the Publish What You Pay Coalition and its main NGO members, as well as key investors, need to now fully focus on the passage of a similarly strong set of transparency rules in the European Union.

Engaging China on this issue will also be important. And extractive-rich countries around the world need to do their part, deepening their work on transparency through the EITI and other such mechanisms. And important dimensions of opacity that still prevail in natural resources, untouched by Dodd-Frank 1504, will need to be addressed separately, such as promoting contract transparency; tackling the challenge of obscure “beneficial ownership” (to ensure the public is aware of who the ultimate owners/beneficiaries are of natural resource extraction and exploration); and the further analysis and codification of the considerable payoff to transparency reforms.

The original Dodd-Frank Section 1504 and the SEC rulings are a huge step forward toward transparency and are likely to resonate worldwide. But much of the concrete work remains ahead.

Authors

Daniel Kaufmann
Veronika Penciakova

Image Source: David Lewis / Reuters

SEC’s Day of Reckoning on Transparency: Dodd-Frank Section 1504 on Disclosure of Natural Resource Revenues

Daniel Kaufmann — Tue, 21 Aug 2012 10:29:00 -0400

On August 22, following a very lengthy delay, the Securities and Exchange Commission (SEC) is finally issuing the detailed implementing rules on natural resource transparency in Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted by Congress in July 2010. Specifically, Section 1504 stipulated that companies in extractive industries listed in U.S. exchanges would be required to report payments made to governments around the world.

This may sound clear enough, but as often is the case the devil will be in the details. Tomorrow those details will be in the hands of the SEC and will determine whether ‘effective transparency’ is attained or continues to remain elusive. Namely the SEC will determine whether the information that needs to be disclosed by companies is sufficiently detailed, relevant and accessible, enabling effective monitoring and analysis by civil society, investors and government reformists.

Given the content of the 2-year-old Dodd-Frank legislation, the SEC has no choice but to mandate disclosure. However, effective disclosure is by no means guaranteed as the SEC could issue weak rules, rendering disclosure ineffective. Thanks to Dodd-Frank legislation mandating transparency, the main danger is no longer wholesale ‘transparency evasion’ by many companies, but the more nuanced risk of enabling ‘transparency elusion’ (or ‘transparency avoidance’) by companies that wish to skirt detailed disclosure, thereby masking possible misdeeds.

In fact, in the aftermath of the financial crisis and in the increasingly sophisticated legal and business environment of the 21st century, outright and explicit opposition to some form of disclosure by corporations is seen as increasingly costly, particularly from a reputation standpoint. Thus, tactics have shifted to an extent – as they previously did in the tax compliance field, when some corporations ceased focusing exclusively on tax evasion opting instead for tax elusion (or tax avoidance, eluding or avoiding taxes rather than just evading them).

But more concretely, how could the SEC possibly undermine the disclosure mandated by the Dodd-Frank Act in Section 1504, and permit ‘transparency elusion’ by corporations?

There are several ways this could take place watering down of the rules could take place, effectively enabling disclosure elusion: first, by ruling weakly and in favor of corporations who wish to elude disclosure by minimizing the level of detail required by companies to disclose on payments made to foreign governments. In particular, this would happen if the SEC fails to mandate companies to report disaggregated payments for each concession, lease or contract, and instead gives them latitude to either define themselves what constitutes a ‘project’, or, possibly worse, to allow reporting only at the aggregate country level (even though the latter is unlikely, since Dodd-Frank specifies that project-level disclosure should take place).

Second, the SEC would side in favor of companies that wish to avoid effective transparency by granting them significant exemptions from reporting payments for medium-scale projects, ranging from $75,000 to $750,000 (there is already consensus that it is reasonable to exempt very small projects, such as those below $25,000).

Third, although unlikely, the SEC could grant companies exemptions in not having to report payments made to opaque (and often authoritarian) governments with domestic laws that may ban disclosure (even though there is no evidence that companies would be hurt by disclosing payments for those settings).

Finally, some oil companies represented by the American Petroleum Institute (API) and supported by Shell and others, have opted for an additional tactic to elude transparency: threatening to litigate against the SEC irrespective of how it rules tomorrow. The threat has been an overt effort to influence and weaken tomorrow’s rule-making by the SEC, while acting on that threat after tomorrow would aim to further delay the implementation of the actual disclosure rules and to subsequently weaken the transparency rules themselves.

If the SEC issues weak rules on some of the above mentioned critical aspects, companies may be able to effectively skirt disclosing financial information, which in turn would jeopardize accountability to shareholder investors and would impair analysis of tax compliance, of potential diversion of funds away from government treasuries, and of possible corruption or fraud. There also lies the positive flip side: if the SEC issues strong and effective transparency rules and leaves little room for disclosure avoidance, then accountability to investors would be enhanced and a potent deterrent would be in place regarding tax evasion and tax elusion, as well as regarding bribery and corruption among companies and public officials.

Growing evidence suggests that the benefits of transparency are sizeable for various dimensions, including incomes per capita and other social and political stability gains for the host country citizens, as well as gains for countries in terms of investments, macro-economic (fiscal) stability, financial sector development, and control of corruption.

For instance, our own data and research from around the world suggests that in the long run, with increased transparency, accountability and improved governance, citizens could see up to a 300 percent development dividend from improved governance – i.e. their incomes per capita could triple, while infant mortality could decline by two-thirds. Furthermore, some studies by other authors suggest a positive impact of transparency specifically in the natural resources sector.

But how costly to the corporate sector would disclosure be? It would be naïve to suggest that every corporation would gain (or have no costs) from full disclosure, at least in the short term. This has little to do with the actual administrative expenses of data collection for disclosure, because the incremental cost for new data collection over what data the companies already collect for tax and internal purposes would be small.

Instead, the real reason that disclosure may be costly to some companies in the short term relates to a different strand of our research: there are two types of companies, those that focus on efficiency and innovation and can thrive in a competitive level-playing field, and those that derive gains from rent-seeking (and outright bribery), monopolistic behavior or tax avoidance. The latter group would have an interest in maintaining an opaque status quo and stand to lose from a more equitable environment resulting from effective transparency, while the former group would stand to gain, since the playing field would be leveled across all companies, benefitting the entrepreneurial and competitive firms.

Therefore not surprisingly, the corporate sector remains divided regarding these transparency rules. Some mining companies have come out publicly in favor of transparency, as have prominent investors and former top executives, while some of the big oil companies are strongly opposed to it. In fact, some companies such as the giant Statoil in Norway and Newmont Mining already disclose payments voluntarily.

Thus, if one assesses the transparency benefits against the legitimate company costs (not counting the private costs to some companies due to corrupt behavior), the net payoff of transparency could be very large. This not only applies to overall societal gains, but incipient evidence also suggests that the corporate sector as a whole would benefit from a transparent level playing field (even as some opaque companies may lose out in the short term). It is also noteworthy that highly reputable pro-market, pro-business competition publications such as The Economist and the Financial Times have written prominent editorials supporting tough and detailed rule making to attain effective disclosure by companies in the natural resources industries.

But the expected large net benefits of transparency do not necessarily mean that SEC will automatically rule effectively tomorrow. It is fresh in our collective memories that in terms of its overall mandate on financial sector supervision and regulatory oversight, over the past decade the SEC failed to perform and was held partly responsible for contributing to the global financial crisis. The SEC was seen as, at best, being afflicted by poor leadership and as an ineffective bystander while the excesses of financial overleveraging and financial deregulation occurred. At worse, it was seen as having been subject to regulatory capture by the corporate sector, ultimately leading to regulatory failure (while becoming further tainted by the Madoff fraud scandal).

While some efforts to improve the SEC have taken place in recent years, the jury is still out regarding its current effectiveness in issuing and implementing regulations. Further, in the specific case of issuing rules mandating disclosure to companies in oil, gas and mining, the SEC may be overly influenced by the lobbying efforts and litigation threats by some big oil companies, fronted by the API, who oppose effective transparency.

On the other hand as the SEC aims to improve its performance and reputation, it could end up issuing effective transparency regulations in all the key dimensions, pleasantly surprising observers and transparency advocates. A good ruling would have important repercussions worldwide, including in the European Union, where preparation of similar regulations are being debated and the lead already taken by the U.S. on revenue transparency is being closely watched before they finalize their legislation.

Yet even if the SEC were to issue a strong set of rules, its role in promoting revenue transparency would not cease the day after tomorrow. How effectively the SEC fends off challenges by big oil companies, and then implements its rules in the future will matter significantly as well.

Even effective SEC implementation will not suffice in itself. Financial centers around the world would need to follow suit, governments need to continue making progress in making transparent revenue payments, working with the Extractives Industry Transparency Initiative (EITI) and similar such programs, and civil society evidence-based monitoring and advocacy efforts need to expand further, through the initiatives of the Publish What You Pay (PWYP) coalition and its member organizations.

Finally, as information from companies begin to flow more freely and transparently, analysts in NGOs, think-tanks and academia would be encouraged to exploit more fully the ‘power of data’, to further learn about improving governance in natural resources, deter corrupt behavior, and benefit citizens and honest corporations worldwide.

Authors

Daniel Kaufmann

Aurora and the U.S. Obsession with Guns: Leadership Wanted to Fight Political Capture

Daniel Kaufmann — Mon, 23 Jul 2012 15:49:00 -0400

The terrifying massacre during last Thursday’s midnight premiere of “Dark Knight Rises” in Aurora, Colorado, is yet another reminder that guns kill many. It is also a reminder that American politicians have failed to act on gun control. Most other industrialized countries as well as emerging ones, and their citizens, understand that guns and semi-automatic assault weapons kill. And unlike the United States, they have passed laws controlling sale and use of these weapons.

Thus, consistent with the importance of evidence-based policy, let me analyze this issue by first presenting the table below on the enormous disparity in gun possession and homicide rates between the U.S. and other countries, then pointing to selected data provided primarily by the Brady Campaign to Prevent Gun Violence, and finally offering a concluding thought on political capture.

The Brady Campaign to Prevent Gun Violence reminds us that since 1968, when Martin Luther King and Robert Kennedy were assassinated, over one million people have been killed with guns in the United States. On average, almost 100,000 people in the United States are shot or killed with a gun annually. Since guns are not ubiquitous in many other industrialized countries, far fewer people die by gunshot than in the United States. In fact, the U.S. firearm homicide rate is about 20 times higher than in 22 other populous high-income countries combined, despite similar non-lethal crime and violence rates. Unsurprisingly then, they claim that in recent years, among 23 populous, high-income countries, 80 percent of all firearm deaths occurred in the United States.

Further, research they cite by Wiebe (2003) indicates that 94 percent of gun-related suicides would not occur had no guns been present. Since keeping a firearm at home increases the risk of homicide by a factor of three, it is not surprising that guns are more likely to raise the risk of injury than to confer protection. In fact, they claim that every year there are only about 200 legally justified self-defense homicides by private citizens.

In short, there appears to be substantial evidence that removing guns saves lives. Interestingly, while the rates of assault with knives and guns in the United States are similar, there are five times as many deaths from guns. And many of these lethal guns can be obtained in the U.S. without a background check. Close to one-half of gun acquisitions in the U.S. occur on the secondary market, and sales between individuals do not require a background check.

For instance, undercover sting operations found that 94 percent of licensed dealers at gun shows in Ohio, Tennessee, and Nevada completed sales to people who appeared to be criminals or straw purchasers, and 63 percent of private sellers at those gun shows sold guns to purchasers who stated they probably could not pass a background check. Furthermore, while lethal “assault weapons” (semi-automatic firearms) have no known civilian use benefits whatsoever, the ban on their use in the United States was lifted in 2004.

Police investigating the Aurora massacre have said that James Holmes, the alleged gunman, had three weapons purchased from stores in the Denver area over a span of two months: a Remington shotgun, a Smith & Wesson M&P assault rifle, and a Glock 40-caliber handgun. The semi-automatic assault rifle, which is a civilian version of the military’s M-16, is designed to hold large ammunition clips, and can fire 50 to 60 rounds per minute. Apparently, in Colorado, James Holmes was able to purchase online 3,000 rounds of handgun ammunition, 3,000 rounds for an assault rifle, and 350 shells for a shotgun without raising any suspicion or facing impediments.

Those are just some of the stark facts.

Yet again, there is a failure of leadership on the issue of gun control. Most U.S. politicians, including the presidential candidates, are keeping mum about gun control. At most they are expressing shock and regret about (yet another) senseless killing spree, this time in Aurora, and trying to provide comfort to grieving families.

Money in politics, and the capture of politicians by special interest groups, such as the National Rifle Association (NRA), continues unabated. The few politicians who dare to speak about the need for stricter gun control laws, such as Congresswoman Carolyn McCarthy, whose husband was killed by a deranged gunman, and Senator Dianne Feinstein, a longtime advocate of gun restrictions, are painfully aware of the fact that they (and other politicians who speak up) are targeted at re-election time by the NRA.

Another exception is Mayor Bloomberg, who is the co-chair of the coalition, Mayors Against Illegal Guns. He also supported New York’s ban on assault weapons and increased the mandatory minimum sentence for illegal possession of a loaded handgun in New York City. During his appearance on CBS’s “Face the Nation” yesterday, Bloomberg challenged Republic Presidential Candidate Mitt Romney and President Barack Obama to explicitly debate the issue and recognize that it is time for the country to do something about gun control. Bloomberg pointed out that in 2004, while Romney was the governor of Massachusetts, he banned assault weapons. However, most recently Romney has opposed all new gun control laws. Bloomberg also called out President Obama for avoiding the issue altogether since entering office, despite vowing three years ago to reinstitute a federal ban on assault weapons.

Leadership on this issue is urgently needed. Presidential candidates should engage in an open debate on this topic even in an election year. Most U.S. citizens are mindful that money will continue to speak loudly, muffling so many politicians that lack courage. This does not justify silence from the U.S. leaders on this paramount challenge.

Authors

Daniel Kaufmann

Image Source: Shannon Stapleton / Reuters

How Selective is Donor Aid? Governance and Corruption Matter and Donor Agencies Should Take Notice

Daniel Kaufmann and Veronika Penciakova — Tue, 17 Jul 2012 16:41:00 -0400

Over the years, bilateral and multilateral donors have become increasingly concerned about delivering more effective aid. The determinants of successes and failures in development assistance are varied and complex; yet, experience and analysis point to weak and corrupt institutions as important contributing factors to poor outcomes. Examples of failed projects due to mismanagement and corruption include the Morogoro Shoe Factory in Tanzania during the 1980s, and more recently, heath sector projects in India and the oil pipeline in Chad.

It is therefore important to ask whether donor aid has become more selective over the years. There certainly have been declarations and explicit writings about the need for greater selectivity, and some donors have implemented internal procedures to address the issue. But have these declarations and procedures resulted in increased sensitivity to misgovernance and corruption in recipient countries? In a forthcoming Brookings research report, we explore these and related questions.

Relying on the most up-to-date and comprehensive foreign aid dataset available from the OECD Development Assistance Committee (DAC), we explore the aid disbursement patterns of 41 donors (23 bilaterals and 18 multilaterals), and review whether since 1995 large groups of donors (bilaterals and multilaterals) have taken into consideration the extent of corruption and overall governance in recipient countries when allocating aid. Further, we explore whether there has been a rise in such governance selectivity over the past 15 years.

Our inquiry combines simple cross-tabulations with multivariate econometric analysis, controlling for such factors as population size and income per capita. In addition to reporting results for all donors on average, and for large groups of donors, we also construct donor-specific indexes that measure how vulnerable each dollar of aid is the corruption and misgovernance in recipient countries. We call these indexes the Corruption Vulnerability Aid Index (CVAI) and the Governance Vulnerability Aid Index (GVAI), respectively. These indexes are showcased in our forthcoming report, as well as in the interactive data platform we are launching today (the Development, Aid and Governance Indicators, or DAGI).

In our study, we first look at how much aid is going to the recipients with satisfactory, mediocre and unsatisfactory control of corruption. It appears that over the years a lion’s share of aid has been disbursed to countries facing serious corruption and governance challenges, such as Afghanistan, Iraq, Nigeria and the Democratic Republic of Congo.

Moreover, aid selectivity has tended to deteriorate, particularly in recent years. In the mid-1990s (1995-1998), countries on the two tail ends of governance performance (satisfactory and unsatisfactory corruption control) received nearly the same amount of aid (around $16 billion, or about 30 percent each of overall aid). But over time, the amount of aid going to each group diverged substantially. As we see in figure 1, in recent years (2008-2010) the most corrupt recipients received about $32.7 billion a year on average (43 percent of overall aid), while countries with satisfactory control of corruption, such as Botswana, Brazil, El Salvador, Ghana and South Africa, among others, received only $12.5 billion (16 percent of overall aid).

These selectivity trends are also confirmed by econometric tests. In fact, we find that the deterioration in selectivity over the past 15 years has been statistically significant. In recent years, significantly more aid has flowed to countries with subpar control of corruption and overall governance. Furthermore, the results suggest that both bilateral and multilateral donors have experienced deteriorating selectivity (the fall having been slightly higher for the bilaterals group on average).

In order to fully explore these apparent differences in governance selectivity across donors, we also construct two indexes (Corruption Vulnerability of Aid and Governance Vulnerability of Aid, CVAI and GVAI, respectively) that capture the vulnerability of development assistance to corruption and misgovernance in recipient countries.

We find that over the past 15 years, the vulnerability of aid among some donors has risen more sharply than for others. As a result, as we see in figure 2, aid disbursed by donors today, including European Union Institutions, Spain and the African Development Fund, while still relatively high, is somewhat less vulnerable than that disbursed by the United States and the Asian Development Bank Special Fund.

Specifically, the aid disbursed by the United States, on average, ends up in a recipient country with corruption in the 75th percentile rank of corruption (100 indicating the most corrupt country in the world). In comparison, aid from EU Institution is channeled toward countries that on average rate in the 65th percentile.

It may, however, be argued that some donors allocate aid to recipients with initially very low quality governance (fragile states, for instance), with the expectation that these countries will improve their governance performance. From this perspective, initially low levels of aid selectivity may not be inconsistent with eventual aid effectiveness. To test this claim, we assessed whether greater volumes of development assistance have a payoff in terms of improved governance performance, thus possibly resulting in reduced future donor vulnerability of aid.

Overall, we found that that aid to countries experiencing governance challenges does not result in improved governance in subsequent years. But, there is evidence that some bilateral aid channeled to lower-income countries and recipients with initially very low corruption control and governance ratings may contribute to improved control of corruption and overall governance in the long-term.

In particular, there is some evidence suggesting that several donors were better at targeting aid to reform-prone recipient countries, including the Netherlands, Norway, the United Kingdom, EU Institutions and the Global Fund to Fight AIDS, Tuberculosis and Malaria. On the other hand, for many donors— including the United States, the International Development Association (at the World Bank), Australia, France and Japan— aid did not appear to spur governance improvements. It should be noted, however, that these results are based on the past 15 years, and thus cannot be generalized for the longer term.

An overarching implication of our study is that the international aid community ought to take a serious look at the extent of aid selectivity with respect to governance and corruption. Aid selectivity matters for the fiduciary accountability of donor agencies since the aid they disburse may be subject to inordinate risks related to misgovernance. And, at least as importantly, it also matters for aid effectiveness. Aid funds channeled to projects where misgovernance and corruption prevail are more likely to fail.

Risk-taking is certainly part and parcel of development, and thus of development assistance. However, these risks need to be managed, and there needs to be greater emphasis placed on working with developing countries on programs and reforms that improve governance and corruption control. Many countries continue to struggle with governance reforms, despite having received significant volumes of aid over the years.

Some aid donors that are subjecting their governance and anti-corruption programs to internal or external evaluation are finding that these strategies and programs are less effective than initially hoped. Our findings regarding declining aid selectivity further heighten the need for donors to review their aid strategies, emphasizing afresh the governance challenges.

Over the years, in response to concerns about the detrimental impact of corruption on development, a number of donor aid agencies created units to investigate possible fraud and corruption in the projects they fund. Several of these investigative units have detected and investigated some corrupt projects (at the “micro” level).

However, by design, these units cannot be expected to address the “macro” challenge of systematic public sector misgovernance and corruption in recipient countries. In fact, these investigative units cannot even focus on the mismanagement of budgetary support aid provided by donor agencies, for instance.

Such “macro” governance challenges require a “macro” response, one which takes seriously the importance of aid selectivity (vis-à-vis countries, NGOs vs. government, central vs. local government, etc.), and addresses the challenge of utilizing development assistance to promote good governance and anti-corruption more effectively.

In this context, the new leadership in important donor aid agencies, such as the World Bank, AusAid (Australia’s Aid Agency) and JICA (Japan International Cooperation Agency) creates new opportunities to address these important and sensitive challenges afresh.

Authors

Daniel Kaufmann
Veronika Penciakova

Image Source: Adriane Ohanesian / Reuters

Development, Aid and Governance: Connecting the Empirical Dots

Daniel Kaufmann, Homi Kharas and Veronika Penciakova — Tue, 17 Jul 2012 17:58:00 -0400

In today’s discussions about global development often insufficient attention is paid to what we can learn from the data. What we can observe about trends over time, differences across countries, and relationships between various dimensions of development, such as how corruption impacts growth, is critical in helping us find solutions to some of today’s most pressing development challenges.

Anyone committed to evidence-based policy analysis needs to have access to data in an easy-to-manage form. Public access empowers students, experts, civil society advocates, and champions of reform within government who monitor development progress and promote further change.

It is in this spirit that we are launching the Development, Aid and Governance Indicators (DAGI), an interactive platform and databank that features indicators developed by scholars from the Brookings Global Economy and Development program. Some of these indicators on aid quality and governance have been developed in collaboration with partners (the Center for Global Development and The World Bank, respectively).

Our new interactive platform includes data on the following indicators:

Country Programmable Assistance (CPA), which measures the amount of foreign aid available to developing countries to implement projects and programs that contribute to long-term development;
Quality of Official Development Assistance (QuODA, produced with Center for Global Development), which assesses four dimensions of aid quality for each DAC donor country;
Vulnerability of Aid Indexes (VAI), which measure the risk that each dollar of development aid disbursed ends up in corrupt or misgoverned recipient countries;
Worldwide Governance Indicators (WGI, produced with the World Bank), which assess the quality of governance in economies on six dimensions of governance;
Middle Class measures, which provide historical estimates and forecasts of the number of people living in the middle class, and the consumption expenditure of this group
Poverty measures, which provide historical estimates and forecasts of the number of people living below a poverty line of $2 and $5 a day.

A number of commonly used and readily-available development variables— such as GDP per capita, maternal mortality ratios and primary school enrollment rates— have also been selected to increase the scope for analysis and to highlight the links between the indicators above and conventional development variables.

An important aim of this tool is to allow users to see and show, in interesting, powerful and graphic ways, how development indicators interact with each other, differ across countries, and change over time. Here are some examples of what can be done with this new interactive database:

You may be interested in seeing where the world’s poor might reside in 2025. In our baseline scenario we find that high growth and demographic change in dynamic middle income countries will help them make significant progress against poverty in the coming years. However, as we see in the world map, in fragile countries, concentrated mostly in Africa, poverty will remain a critical challenge. Consequently, the global poverty problem might increasingly become an Africa problem by 2025. This growing concentration of poverty in fragile developing countries will undoubtedly have important consequences for issues like foreign aid.

You may have been surprised by the upheavals in Tunisia, Egypt, Libya, Syria and elsewhere in the Middle East. Perhaps we would all have been less taken aback had we paid closer attention to the extremely low and deteriorating quality of governance in many countries in the region. The Worldwide Governance Indicators show that on the eve of the Arab Spring there was a growing democratic governance deficit in the countries where protests emerged. The column chart shows just how quickly democratic accountability and citizen voice deteriorated from already low levels in Tunisia between 2000 and 2010. If we look closely at other countries experiencing unrest, such as Egypt, Libya, Syria and Yemen, we observe the same trend over the past decade. It was in large measure this growing democratic governance deficit that spurred unrest in the Middle East.

If you are interested about the increasingly important role of mobile technology and social media in global events, aspects of this can be explored in our interactive databank. We often consider mobile technology and social media as resources in countries with a well-developed middle class. Yet, we saw the power of these tools during the Arab Spring in countries with relatively small middle-class populations, such as Egypt, Syria and Yemen. As we see from the graph, mobile technologies have also penetrated countries where the middle class is just now developing. We can probably therefore expect these types of technologies to play an important role in future events in developed and developing countries alike.

These examples are just a small sampling of the many questions that can be analyzed using new indicators available through the DAGI interactive platform and databank. Which donors allocate the greatest share of aid as country programmable assistance? How effective is the aid disbursed by the largest donors, and how vulnerable is it to corruption and misgovernance in recipient countries? Can significant changes in governance happen in the short term? Which countries are expected to experience the sharpest declines in poverty and greatest increases in the middle class in coming years? This new empirical tool enables any student, scholar, policymaker and advocate to ask these types of questions and explore possible answers by using the data. After all, as Lord Kelvin once said, “if you cannot measure it, you cannot improve it.”

Authors

Daniel Kaufmann
Homi Kharas
Veronika Penciakova

Latin America Economic Perspectives: Is there a Future for Financial and Commercial Integration in Latin America?

Fri, 20 Apr 2012 09:15:00 -0400

Event Information

April 20, 2012
9:15 AM - 11:30 AM EDT

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

After successfully weathering the global financial crisis, Latin America and the Caribbean have shown remarkable economic resilience despite facing major challenges that could derail growth and development. The region is falling behind its peers in emerging Asian nations, particularly in commercial integration, at a time when regional markets would offer a welcome counterpoint to growing Chinese influence.

On April 20, the Latin America Initiative at Brookings hosted a discussion on its biannual Brookings Latin America Economic Perspectives report (BLEP). The report analyzes the possibility of stronger financial and commercial ties between Latin American countries in order to profit from the region’s positive growth prospects and to shield the region from external economic shocks. Brookings Nonresident Senior Fellow Eduardo Levy-Yeyati presented the report, followed by a panel discussion featuring Jose de Gregorio, distinguished professor from the University of Chile; Santiago Levy, vice president of Sectors and Knowledge at the Inter-American Development Bank; Moisés Naím, senior fellow at the Carnegie Endowment for International Peace; and Alejandro Werner, director of Global business at BBVA Bancomer. Brookings Senior Fellow Daniel Kaufmann provided introductory remarks.

Participants

Panelists

Moderator: Alejandro Werner

Managing Director, Corporate Investment Banking
BBVA Bancomer

José de Gregorio

Distinguished Professor, Department of Economics
University of Chile

Santiago Levy

Nonresident Senior Fellow, The Brookings Institution
Vice President of Sectors and Knowledge, Inter-American Development Bank

Eduardo Levy-Yeyati

Nonresident Senior Fellow, The Brookings Institution
Professor, Universidad Torcuato di Tella

Moisés Naím

Senior Associate, International Economics Program
Carnegie Endowment for International Peace

Beyond the Global Financial Crisis: The Future of the U.S.-Latin American Economic Partnership

Thu, 05 Apr 2012 10:30:00 -0400

Event Information

April 5, 2012
10:30 AM - 12:00 PM EDT

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

From April 14 to 15, President Obama will join 34 heads of state and government in Cartagena, Colombia for the Sixth Summit of the Americas. The leaders will address this year’s theme, “Connecting the Americas: Partners for Prosperity,” which focuses on the role of physical integration and regional cooperation, as well as other key areas including poverty and inequality, citizen security, disasters and access to technology.

On April 5, in advance of the President Obama’s trip to the Summit, the Latin America Initiative at Brookings hosted Leonardo Martínez-Díaz, deputy assistant secretary for the Western Hemisphere at the U.S. Department of the Treasury, for an overview of key economic trends in Latin America and the Caribbean and an outline of the administration's economic policy priorities in the region. Following his opening remarks, Mauricio Mesquita Moreira, principal economist at the Inter-American Development Bank, joined the discussion. Brookings Senior Fellow Daniel Kaufmann will moderate the discussion.

Video

Audio

Beyond the Global Financial Crisis: The Future of the U.S.-Latin American Economic Partnership

Transcript

Transcript (.pdf)

Event Materials

20120405_latin_american_partnership_transcript_corrected

Participants

Moderator

Panelists

Leonardo Martínez-Díaz

Deputy Assistant Secretary for the Western Hemisphere
U.S. Department of the Treasury

Mauricio Mesquita Moreira

Principal Economist, Integration and Trade Sector
Inter-American Development Bank

Governance, Aid and Corruption in Transition: Taking State Capture Seriously

Daniel Kaufmann — Mon, 26 Mar 2012 12:43:00 -0400

Editor's Note: On March 25, 2012, Daniel Kaufmann spoke at the opening plenary session on Measurement & Consequences of Corruption at the Economic Research Forum’s 18th Annual Conference in Cairo, Egypt. In his presentation, Kaufmann discussed the deteriorating quality of governance in the Arab world that has been largely ignored by the international community, which has continued to provide increasing volumes of foreign aid to corrupt governments. Kaufmann outlines the topics discussed below, and you can download his Power Point slides here.

Evidence suggests that over the past decade, misgovernance in the Arab world was not only acute, but also worsened over time. Yet this poor and deteriorating quality of democratic governance was largely ignored by the international community, which continued to provide increasing volumes of foreign aid to governments whose standards of democratic voice and accountability were among the worst in the world (Figure 1). The strategies and lending practices of donors and International Finance Institutions’ (IFIs) were often supported by partial and uncritical assessments of country performance.

The data was clearly pointing to the large and growing democratic governance deficit over the last decade in almost all countries in the Arab world, as seen in figure 2 below (including Turkey as a benchmark comparator), even if we are mindful of the fact that there is some imprecision in any governance indicator.

But what about corruption? Does the evidence also show such weak control of corruption in the countries in the region?

On corruption, the picture is more complex. Among others, international measures of corruption are available from Transparency International (TI) and also as one of 6 indicators among the Worldwide Governance Indicators (WGI, shown in Figure 3 below for Control of Corruption). The performance across countries in the region has been rather mixed. Although a number of countries in the Gulf performed satisfactorily, many countries in the region (including Libya, Yemen, Syria, Iran, and Egypt) performed very poorly according to any of these indicators.

Like any other measure of governance, measures of corruption are also subject to imprecision. It is important to estimate and disclose the extent of imprecision in any of these measures. In the figure below, the confidence intervals are shown, and one corollary is that it is unwise to over-interpret small differences in scores or focus on identifying one ‘top’ or ‘bottom’ country.

Nonetheless, over the past 15 years substantial progress has been made in measuring corruption, particularly through the implementation of rigorous and specialized surveys of firms and individuals, and through a proliferation of different sources, often measuring different aspects of corruption, through different methods.

Yet measuring corruption still remains challenging because the act is often hidden and obscured from the public eye. One difficulty is in estimating corruption in authoritarian regimes, where reticence to report bribery and high level political corruption often prevails. In these authoritarian regimes corruption tends to occur at the top, directly committed by leaders and/or their families (spouse, in-law, son, abetted by their very close cronies).

This type of high-level corruption often remains out of the limelight, partly due to a lack of disclosure by the (often controlled) media in these countries. As a result, some estimates of corruption in some authoritarian regimes, such as Tunisia in the past, may have understated the actual extent of corruption.

Furthermore, there are particularly complex manifestations of corruption that are largely excluded from international corruption indices – making accurate measurement even more difficult. One important dimension which is missing from international corruption indices example is state capture and related aspects of ‘legal corruption’. State capture refers to the undue and often corrupt influence of the powerful elite to shape the institutions and policies, laws and regulations for their own benefit rather than for the public good.

Powerful economic groups among the elite are commonly associated with capture, but an autocrat’s family, an ethnic or religious sect and/or the military can also succeed in exerting such undue influence, or worse, outright capture. Prior to Arab Spring transition, monopolized top-down corruption — often committed by a ruler’s spouse, son or in-laws — was an instrument for the capture of the polity and economy, which is much different than the more decentralized nature of systemic corruption that prevails in a number of democracies. The negative consequences of state capture by the few are clear anywhere, and in much of the Arab world they have resulted in the political and economic exclusion of large segments of the population, such as the young, the impoverished peasants, and in some countries women as well.

While some progress in measuring state capture, more needs to be done, and particularly in terms of cross-country measures that would permit their integration into international corruption indices. This would also permit deeper monitoring of whether a country in transition is simply traversing from one type of (autocratic) capture to another (quasi-democratic) form of capture, or to a more successful system where both the polity and the economy are competitive and inclusive.

Lessons from past transition experiences suggest that merely doing getting rid of an autocratic leader does not automatically guarantee success. Countries in transition can go down the wrong path (such as Iran or Pakistan); muddle through with no meaningful reform for decades (some countries in Central Asia); evolve into “managed quasi-democracies” (Russia); or successfully consolidate democratic governance and largely avoid capture by the powerful few (Chile, Turkey, Indonesia, Central Europe).

What these examples teach us is that challenges of capture need to be taken seriously at early stages of the transition. The extent to which political and economic transitions evolve into increasingly captured economies (Ukraine) or competitive market economies (Central Europe) matters enormously for whether transitions succeed or not. Some countries in the Arab world are beginning to make their way through this process. The end result will partly depend on how they tackle corruption and address the risk of state capture by powerful vested interests.

This focus on capture has many implications, which are discussed in more detail in a brief article. International organizations, think tanks and experts ought not be afraid of frankly analyzing and openly disclosing – using constantly improving data — the challenges of governance and capture in these countries. The international community should adopt a new “business model” for partnering with countries in the region, allocating aid more selectively, focused increasingly outside of central governments while also promoting a more decentralized approach).

And to further the reforms to mitigate the specter of capture, there should also be concerted support for an integrated package of transparency-led reforms, as well as support competitive politics, for gender and youth inclusiveness, and for the competitive small and medium scale private sector. Such an ‘anti-capture’ reform package would provide momentum for much needed job creation and inclusive growth, which are key objectives during the transition and the subject of a book we will discuss at the Economic Research Forum 18th Annual Conference.

Authors

Daniel Kaufmann

Publication: Economic Research Forum

Finding a Path to Inclusive Growth in Arab Economies

Kemal Derviş, Hafez Ghanem, Daniel Kaufmann and Homi Kharas — Thu, 22 Mar 2012 12:21:00 -0400

“Bread, liberty, social justice” was the rallying cry of revolutionaries in Tahrir Square and elsewhere in the Arab world last year. Democracy and freedom were certainly key demands for young Arabs protesting in the streets, but they were not the only demands. They also cried for “bread” and “social justice”.

There are high expectations for the new governments of the Arab Spring countries to improve the quality of life for their citizens. Yet, debates in the newly-elected parliaments and legislatures barely touch on economic issues. Instead, these bodies are consumed with the new politics.

In Tunisia, the transition government has taken some steps to stabilize the economy and reached agreements with the International Monetary Fund and the World Bank to fund part of the transition costs. However, longer-term institutional and structural reforms are yet to be addressed. Egypt’s successive transition governments have so far not taken the necessary decisions to stop the hemorrhaging of international reserves or to restore economic growth. Egypt has lost two-thirds of its foreign reserves since January 2011, its budget deficit is at 10 percent of GDP, and the government is borrowing heavily from domestic banks, crowding out private businesses.

New governments in Arab Spring economies, starting with the government that will take power after the upcoming presidential elections in Egypt, may end up having electoral legitimacy yet they will inherit huge economic and social challenges, including high unemployment, poor and deteriorating public services, unsustainable budget deficits, low reserves and negative or low growth. These governments will have very little room for maneuver.

Unless the political transitions quickly create economic change, based on a national dialogue that generates a sustainable path to inclusive growth, these new governments will be caught up in a cycle of short-term economic crisis management that will satisfy no one. That would not be unusual. In our new book, After the Spring: Economic Transitions in the Arab World, we found that almost half of the 103 countries that experienced rapid democratization since 1960 had a worse economic situation five years after the beginning of their transition.

The Economic Research Forum, the largest network of economists working on the Middle East, is organizing its annual conference in Cairo next week. This is an excellent opportunity for continuing the conversation in the region about how to achieve a transition to economic prosperity and social justice, and to debate whether some of the successful experiences in other countries transitioning to democracy can be adapted to the Arab context.

Although Arab economies are quite different from each other, the type of transition they are facing has similarities. We suggest that a program for inclusive growth in the post-revolution Arab countries needs to focus on opportunities for young people, reforming public institutions, promoting a competitive private sector, and integrating with the rest of the world.

Nearly two-thirds of the Arab population is less than 30 years old and youth unemployment is 22 percent. The situation is even worse for young women whose unemployment rate is 28 percent. In the short term, governments can best hope to promote jobs by encouraging small businesses, by providing large-scale semi-skilled training like the successful Chile Joven program, and by job training and matching programs like the voucher program of the National Organization of Women in Jordan that has helped young women get jobs. In the medium term, education systems need reform to provide young men and women with the skills needed to compete in a globalized economy rather than the credentials needed to get a public sector job in an economy of privilege.

Arab public sectors also require a modernization of state institutions to deliver better services without unsustainable deficits and untargeted subsidies, cronyism and many public employment sinecures. Arab states have been captured by elites and have mainly benefitted a few well-connected private citizens. This must change and be replaced by a new culture of responsiveness to all citizens, freedom of information, audits to combat corruption, and reforms focusing on service delivery.

Despite notable exceptions, much of the private sector in many Arab economies is inefficient, operating in the shadow of a large public enterprise sector and over-regulated as well as rent seeking. The private sector is also synonymous with corruption in the minds of many citizens in the Arab world. An undeveloped financial sector that funnels savings to the government and large firms does not help. The result is that most Arab economies have failed to industrialize. Arab economies need a dynamic private sector where small enterprises can compete on an equal footing and where young men and women can find opportunities as entrepreneurs as well as employees. Hence, reforms need to include support to small and medium enterprises; credit for small businesses (and especially women); upholding property rights and the rule of law; developing infrastructure; simplifying regulatory frameworks; and reforming tax systems to encourage investment and job creation.

Arab economies also will need new regional and global strategies that can help integrate their economies with the rest of the world so that they can join the ranks of fast-growing emerging economies like Brazil, China, India and Turkey. There is clearly a need to promote non-oil exports and to make better use of the instruments offered by international and regional financial institutions to smooth the costs of transition over time. But there are limits to what external donors can do. Most can only provide loans, not grants, and these are of limited use to countries that are already highly indebted. Market access to the West exists, but firms cannot take advantage of it because of the lack of infrastructure, limited regional connectivity and border barriers. Before they can help, Western donors must see their trust re-established in the region. After all, they were large supporters of the previous regimes. So they would be well-advised to be selective and humble, and provide advice when it is asked for but leave space for an Arab dialogue that should determine each country’s future path.

The young men and women who led the Arab Spring have shown tremendous energy, resourcefulness and organizational abilities. They must now find common ground on an economic platform that is financially realistic and sustainable but delivers results in terms of bread, liberty and social justice. The dialogue among Arab economists next week is precisely what is needed to ensure that these countries join the scores of other countries that have prospered economically after the democratic revolutions of the last 50 years.

Authors

“Putinsanity”: The Reelection of Russia’s President Should Be a Wakeup Call to the World

Daniel Kaufmann — Mon, 05 Mar 2012 15:39:00 -0500

Vladimir Putin has been elected as president of Russia yet again. He already served as president twice between 2000 and 2008, and immediately thereafter eased himself into the very powerful premiership, awaiting his next term as president. Now Putin will begin yet another presidential term, expected to last six years, since the Russian constitution was amended to permit a longer presidency. If he seeks and wins reelection in 2018, Putin could be president until 2024 and effectively rule Russia for more than two decades and would have served longer than any Russian leader besides Stalin.

Many are talking about the reasons for Putin’s comfortable margin of victory. Some point to the preference among many Russians for a strongman leader, one that provides them with stability. Others may cry foul about fraud at the polls or about the “Putin-fatigue” that has set in among the urban elite.

Yet this should not obscure three larger issues of significance for Russia and the world that transcend the details of yesterday’s elections.

First, Russia’s governance standards have been declining rather markedly for about a decade. This deterioration and substandard governance can be seen in figure 1 for a number of dimensions of governance, as measured by the Worldwide Governance Indicators (WGI), and was discussed in a recent blog entry and conference presentation. In particular, consistent with increasing political repression (ostensibly in the name of "stability"), Russia has experienced a marked decline in voice & democratic accountability over the past decade.

The current presidential elections can be viewed in the context of a continuing decline in governance. The media and voters had to operate in a less-than-free political environment, where Putin exerted increasing control over the parliament and provinces, and where the emergence of any viable alternative was stymied.

In fact, Russia’s governance rates extremely poorly when compared to the rest of the world. In figure 2, the governance “composite”, a simple average of the six dimensions of WGI, are shown.

The rough composite index of governance shows that Russia fails to measure up to the governance of countries that have attained relatively high governance standard, including several post-socialist countries (now fully integrated into Europe) and South America.

By contrast, the presence of Ukraine— which has also recently experienced a decline in democratic governance[1] — or worse, Pakistan, in Russia’s governance cohort illustrates that there is a group of countries where good governance did not materialize during transition.

Second, for quite some time Russia has wrestled with endemic corruption, which has worsened over the past decade, as seen in figure 1 above. High levels of corruption pervade the executive, legislature, judiciary and private sector interactions with the public sector.

As seen in figure 3, for every type of bribery a very high proportion of enterprise managers report frequent bribery, comparable with rates in countries like Nigeria and Libya, and sharply contrasting the much lower frequency of bribery in many other countries.

Cronyism plays an important role in Russia and those close to Putin in the Kremlin have benefitted handsomely. One particular source of high-level bribery is public procurement since the most firms in Russia have to pay bribes to obtain contracts.

Furthermore, various forms of bribery have risen substantially. The extremely high levels of procurement bribery that pervade today result from an increasing trend over the past decade (figure 4).

Third, the troubling evolution of governance in Russia over the past decade should be a wakeup call for the world, which at times has been naïve about Russia’s and other transitions. Over two decades ago, the Soviet Union collapsed and a democratic era dawned in Russia and many former Soviet states.

But over the past decade the progress in democratic governance has been halting or in some cases reversing in many countries, including Russia.

These developments also carry a warning for the Arab world transition. Just because an old autocratic regime is discarded, the emergence of robust democratic institutions is by no means assured. I have written about this subject in this brief article.

Consider the case of Egypt. The demise of the Mubarak regime may indeed have been salutary, and a necessary precondition for a democratic transition. However, the events being played out also suggest that the dismissal of Mubarak and his government itself was insufficient to produce a robust democracy.

A broader perspective is useful. Of the scores of transitions to democracy that have occurred over the past 50 years, many have not been fully successful, resulting in either stagnation or reversals in democratic governance, as in the case of Russia

Democratic transitions are fragile and require constant vigilance, hard work and democratic institution-building for decades after the initial democratic episode. Short-term setbacks or even marked reversals are not uncommon.

The euphoria of the moment when an old autocratic regime is replaced, coupled with the political expediency of the international community, ought not to blur the analysis of how each transition is or is not progressing.

Yet a frank analysis of the lack of governance progress in a transitioning country ought not to rule out that positive developments may take place in governance-challenged settings such as Russia, Ukraine and Pakistan, or recent entrants to democratic transition in the Arab world.

At times the confluence of political and economic challenges influence positive changes and lead to reforms, and that may be the case in Russia at some point in the future. But progress toward good governance is far from certain in the near term, and would require political courage and the will to reverse recent troubling developments in governance.

1. The recent decline in democratic governance provoked a public rebuke by five European foreign ministers. The critical opinion article about Ukraine’s democratic slide was published yesterday by the New York Times and was written by the foreign ministers of Sweden, Britain, the Czech Republic, Poland and Germany.

Authors

Daniel Kaufmann

Conviction of Spain’s Superjudge: An Indictment of Spain’s Judiciary?

Daniel Kaufmann — Tue, 14 Feb 2012 13:23:00 -0500

The recent conviction (ostensibly for ordering jailhouse witetaps) of Baltasar Garzón, the Spanish judge who took on corrupt officials, despots, terrorists and human rights violators during the Franco regime, casts a dark shadow on Spain’s judiciary and hints at a political witch-hunt.

In October 1998, Judge Garzón catapulted to prominence when he broke with traditional international law and tried to extradite the former Chilean ruler Augusto Pinochet from the United Kingdom, where he was receiving medical treatment, to Spain. At the time Pinochet, like other former autocrats, was fully confident that as a former leader of a sovereign nation he was legally untouchable abroad, regardless of the crimes he had committed while in power. Through that legal challenge Garzón became a de facto architect of the principle of universal jurisdiction.

Judge Garzón has no small ego. He has taken activist stances on sensitive issues and sought publicity. This has not endeared him to Spain’s arch-conservative Supreme Tribunal nor other jurists and politicians in Spain, where he touched powerful vested interests by unearthing high-level political corruption and state-sponsored death squads. Further, professional and political envy at his national and international prominence (he has been dubbed the ‘Superjudge’) cannot be disregarded as a factor in his current predicament.

Garzón may also have made some errors of judgment, such as ordering wiretaps in a political corruption and money laundering case when the law was unclear on the permissibility of such action. According to Human Rights Watch he was not alone in approving these wiretaps, yet, he was singled out. Worse, even though he may have made some missteps, being convicted on criminal charges seems to be a wholly disproportionate sanction.

As reported by the New York Times, Reed Brody, counsel for Human Rights Watch, said the “accumulation of the cases against Judge Garzón” suggested “reprisal for his past actions against vested interests.” “Unfortunately,” he added, “it certainly looks like his enemies now got what they wanted.”

A travesty of justice appears to have been committed in Spain, with the fundamental principle of judicial independence becoming compromised. This may seem shocking and unlikely in a country like Spain, where impressive gains in governance and rule of law had been made in the post-Franco era. In fact, over the past few decades many countries in Latin America have looked up to and learned from Spain’s rule of law and judicial institutions, benefitting from considerable technical collaboration with jurists and legal experts in this area.

However, the evidence suggests that over the past decade something has changed in Spain’s governance, and not for the better. Shortly after judge Garzon tried to have Pinochet extradited in 2000 – over a decade after the Chilean dictator left power with immunity – Spain rated higher than Chile on the quality of its rule of law institutions according to the Worldwide Governance Indicators (WGI). By 2010 the countries’ respective positions had reversed, resulting from a decline in the quality of rule of law in Spain and a slight improvement in Chile (Figure 1).

Worse, by 2010 Spain’s performance on rule of law was mediocre by OECD standards. As we can see in Figure 2 Spain (ranked 29th) not only rated well below the Scandinavian countries, which rated among the best in the world, but it also rated below many of its peers, including New Zealand (5th), Canada (9th), Ireland (13th), Hong Kong (20th) and Malta (22nd), among others. There was nothing inexorable about a deteriorating rule of law -- each country featured in Figure 2, with the exception of Spain, exhibited some improvement in their rule of law over the past decade.

Spain’s quality of rule of law in 2010 was roughly at the level of Estonia (which improved markedly over the past decade), Cyprus, Bermuda, Guam and French Guyana. The declining and mediocre ratings for Spain may be symptomatic of a broader governance challenge. Among OECD countries Spain also rates near the bottom in government effectiveness, control of corruption and regulatory quality. In fact, it is a poignant irony that years after the contribution of Spain’s Judge Garzón in challenging Chile’s immunity to Pinochet, Spain rates below Chile in virtually all six WGI governance indicators. Deeper analysis is needed to unlock the factors behind such institutional decline in Spain over the past decade.

Arguably, Spain has ceased to be an example for Latin American countries to emulate. In fact, the powerful vested interests that persecuted Judge Garzón are a stark reminder that governance failings are not the exclusive domain of emerging and developing countries, but are all also too common in rich industrialized countries.

Further, the discussed current governance indicators are based on data from 2010. New data is not yet available, but given the current turn of events in the Garzón case, Spain’s rule of law ratings for 2011 and 2012 are unlikely to pick up.

Although serious damage has been inflicted to the Spanish judiciary, experience shows that it is possible to reverse course, even if in this case it may take some nudging from international institutions like the European Court of Human Rights (and the media likes of the Financial Times) supporting Spain’s own voices for change.

Authors

Daniel Kaufmann