Slow Crawl On Corruption

A long walk to freedom need not mean a slow crawl on combating corrupt government

BY PETER O’BRIEN*

The recent (May 12) London Summit on Anti-Corruption resulted in another small step in the right direction. About 40 countries were represented, along with a number of international sports associations and similar bodies that have come under scrutiny for corruption. No real agreements were made, but some initiatives were announced. The UK Government, which for the last several years has been concerned about that country’s poor reputation due to its role in money-laundering, confirmed its plans to establish a register (with retroactive force) of large property owners. The so-called Beneficial Owners Transparency Initiative will shortly be made law. Despite the efforts to persuade other significant countries to follow the same path, to date only 4 of the G20 countries have committed to ending the practice of Secret Company Ownership. The sports associations present (which did not include FIFA, perhaps because of its major meetings in Mexico the following day) agreed to launch, in 2017, an International Sport Integrity Partnership, though the details of this are still unclear.

La Suisse lave plus blanc

The London meeting sensibly sought to focus on a single dimension only of anti-corruption efforts, namely financial secrecy. It is now some 35 years since the Swiss campaigner, Jean Ziegler, published a fierce tract on money-laundering in his own country, “La Suisse lave plus blanc” (in English translation: “Switzerland Washes Whiter”) , and it was towards the end of the 1980s that activities against the international drug trade started to place priority on tracking down where and how the money had been used (especially through the efforts of the Financial Action Task Force, set up with the participation of both national and international institutions). Notwithstanding the flood of additional information (that will require very careful analysis) provided by the Panama Papers, this route remains a tough one.

There are at least three problems to overcome. First, and most important, the reluctance of countries ( and states/regions within them) to embrace full transparency. Put simply, that elusive animal, political will, is hard to manage. Second, the complexity of legal and other arguments relating to what should be the boundaries separating legitimate claims for privacy from claims designed to shroud illegal behavior. Third, the major practical difficulties in carrying out investigative work on the scale required. To date, no international body has been given the resources adequate to such a task.

Corruption vs. Money

Discussions of corruption and money often mix together issues that should be kept separate. Africa’s countries are faced with two challenges: the use of money to distort decisions (such as those involving public procurement) and the avoidance of payments that should be made to the State (leading to what is variously called the “shadow economy” or the “informal economy”). Both things make governance more difficult, and tend to impede economic growth. Both can lead to money laundering. And at least the former often involves foreign entities.

While the London Summit did not unfortunately shed much new light on these matters, the information made available again underlined how so many other countries are locked into the same battle. For instance, data referring to 2012 and covering 20 EU Member States show that best estimates of the size of the shadow economy in relation to GDP are quite alarming. Of the 20 countries measured, the lowest percentage (shadow to total GDP) was for Austria, at 7.6% while the highest was for Bulgaria (31.9%). The median figure, 15.5%, was for Slovakia, a striking finding given it is a country that for years has had only a single, and low, tax rate (meaning tax evasion might be expected to be small). Indeed, both Germany and Sweden have a shadow economy/legal economy ratio of around 14/15%. In other words: the advanced countries not only have a problem with aggressive corruption (that aimed at particular projects and programs) but also with the silent corruption of the shadow economy.

Governance & Incentives

The governance issues, not really examined in London, remain for Africa at the center of the problems. It is now a full 20 years since the then President of the World Bank declared that governance was the great obstacle to be overcome in the efforts towards development, and further declared that “the cancer of corruption” was the central issue in governance. Since then, it seems that little progress has been made. Or, to put it differently, the efforts of a political and technical nature have been neutralized by the growing sophistication (legal, technological and financial) in the criminal world.

The measures against money laundering operate from the premise that if criminals are faced with a high risk that they will never be able to enjoy the benefits of their actions, they will be much less inclined to behave badly. This is a fair line of policy to follow, yet so far the deterrent effect does not seem to have been too powerful. An opposite way of tackling things is to find ways of reducing the incentives to corrupt behavior to start with. Given that for Africa it is this which would seem to provide the best, if modest, hope for achieving home-grown policies against corruption, future efforts should be made along these lines.

No doubt many countries are already experimenting with their own tentative policies. It might be made worthwhile establishing simple information exchanges among countries about how they have designed and implemented such policies, and the results they are achieving. For some years, it has been normal to use an experimental approach towards assessing and improving various anti-poverty programs. It is perhaps now time to follow the same path with regard to anti-corruption.


* About the author: Peter OBrienPeter O’Brien is economics & trade advisor to Africa consulting boutique Pr1merio. With over 30 years’ international expertise in economic and financial analysis, trade negotiations, and deal making, Peter O’Brien has advised governments, NGOs, and private clients on economics, policy, and diplomacy matters. Peter has worked worked in all regions of Africa, providing advice to clients ranging from South African conglomerates to Ethiopian government ministries.  A native of Ireland, Peter is fluent in English, French, Spanish, Portuguese, Italian and German.

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Understanding the Context: AAF reviews U.N. Report “Measuring Corruption In Africa”

Understanding the Context: AAF’s Review of the U.N. Report entitled “Measuring Corruption In Africa: The International Dimension Matters”, by the United Nations Economic Commission For Africa, March 2016

 

By Peter O’Brien*

Economics and politics experience fashion changes at a pace that makes clothes designers envious. And, like the designers garments, some of “today’s problems” are resurrections of yesterday’s, cast in a different context. In the present decade, the buzzword across the globe has been “corruption”. It is thrown mostly at governments, though the already voluminous yet still rapidly mounting evidence of consistently corrupt practices by international firms, whether in finance or manufacturing, indicates that the private sector is at least as adept as anyone else, maybe more so.

In its Fourth Report on African GovernanceGovernance Review UNECA, the UNECA makes the invaluable contribution of seeking to stand back a little from the frenetic international competition in constructing corruption indices, from the “naming and shaming” game that has characterized recent years, and to place the issues in Africa within the political and institutional contexts of the countries of the continent. In so doing, UNECA performs a major service. As is often the case with significant studies, the Report is careful to begin at the beginning and immediately remind us of some basic truths.

The UN Convention Against Corruption does not attempt to define what it is. Why not? Because it is too polyvalent and evolving a phenomenon to make a single definition particularly useful. These features, polyvalence and rapid evolution, of corruption are especially striking in contemporary Africa, where transformations of the economic structure, the institutional landscape, the political environment, and the technological opportunities are such that any one-dimensional, static approach is condemned to irrelevance. This understanding, in turn, emphasizes that no “one size fits all” method will be of much use either in describing the challenges facing any particular African country nor in shaping the most helpful policies to meet those challenges.

The Report stresses that our expectations of how institutions and individuals should behave are altering very fast. This implies that to talk about “what is legal” is nowadays an outmoded way of grasping reality. Everybody is aware that the law permits all kinds of behavior that society at large does not sanction. The chasm between legality and ethics is large. In Africa, as elsewhere, civil society groups are seeking to close it while private enterprises in particular are using the law as refuge. African countries must use their own cultures and mechanisms to ensure that the law/ethics dichotomy does not worsen. This observation is especially pertinent when we reflect how in practice the international community is tackling corruption today.

The overwhelming emphasis seems to be on the design and implementation of tighter legal régimes, along with the use of technology and institutional structures to make corruption more difficult and/or costly to do. This is in essence a knee jerk reaction (KJR). Each time a gap is identified, and cases are found where corruption is occurring, a new KJR happens, with tighter laws, new procedures and so on. The game gets played at a higher level of sophistication, with higher financial and other resource costs, and presumably higher rewards for successful deception. It would seem that the KJR method has been adopted in the OECD context not only because of the technologically and legally sophisticated nature of most corruption there, but also because of the near collapse of ethical standards (indelibly described almost a decade ago by the Lebanese/French author, Amin Maalouf, in his now classic “Le Dérèglement du Monde”).

Does this approach make sense in the African context (or, for that matter, in other contexts)? The answer is probably yes and no. In certain instances the investment associated with a new KJR may pay off, in others not.  Yet it may also be possible to devise clever incentives, market based or otherwise, that encourage actors in Africa to behave in non-corrupt fashion. This is not so much a question of “rewarding honesty” as of highlighting the immense social and economic advantages, the stimulus to development, that can come from shaping an environment where all start to focus on the common good, as opposed to the individual gain. In policy terms, this is the kind of challenge that African countries may in fact have a comparative advantage in meeting.

The actors in corruption chains are many and varied. They encompass private and public bodies, profit making and not for profit institutions, local and international. Hence the governance challenges reach well beyond matters confined to governments. At one and the same time as African countries and institutions need to strengthen their capabilities, doubly so given the speeds of transformation across the continent, the numerous foreign groups operating in and with Africa need to reinforce the struggle against corruption rather than add to the problems. That reinforcement can come not only through the “passive” route of not deliberately creating corruption opportunities, but through the “active” channel of helping Africa to assess better its own special vulnerabilities and then find custom- made means of tackling them. As of now, we see plenty of “method mimicry” in which African countries import institutional methods used in OECD countries, as if the same sets of issues had to be solved. Some of this is useful – but it leaves plenty of territory uncharted.indices

Foreign private and public actors can both contribute. Overseas Development Assistance (ODA) exceeds 10% of GDP in 16 countries of the continent, while the Africa wide average is still as high as 2.7%. Whether that ODA Is bilateral or multilateral, whether it is project oriented or program oriented, the scope for improvement is large. Foreign companies, either those already present or new investors, must ensure that their business practices are much superior to what they have been. Non-profit associations must clean up their act. FIFA, an organization notorious for corruption, has a bad record in Africa. On 13 May it took the unprecedented step of electing a Senegalese lady, with no prior experience in the soccer world, as its new head of global oversight. Let us hope that this positive sign is a good omen for the future.

Just as there is a powerful international dimension to corruption in Africa, so there is an important segment which is cross border corruption (CBC). Given that the continent is seeking to bring together the numerous trading blocs and regional integration schemes into a single process, regulation and control of CBC will become increasingly significant. The Report demonstrates that, from a recent data base which has identified close to 1100 cases of CBC in the world, almost 24% of such cases occur in Africa. Most such cases involve appreciable amounts of money and, in all likelihood, serious economic impacts. They are in the realms of what the Report identifies as “Grand Corruption” and/or “State Capture”. No doubt the third category of “Petty Corruption” might contribute to CBC at the level of issuing licences or similar administrative measures. Nevertheless, CBC mainly relates to big issues.

The UNECA Report does not itself propose fresh measures of corruption. It steadfastly and sensibly refuses to engage in more compilation of indices. Indeed, it is at pains to underline the growing unease with many well-known measures. For instance, it notes that the inventor of the standard Corruption Perception Index, Johan Graf Lamsdorff, sought even as far back as 2009 to persuade Transparency International that the CPI was no longer especially helpful save as a means of ranking countries with regard to public sector related corruption.

Instead, UNECA shines the light on the need to examine policy towards corruption in the context of Africa’s complex patterns of development and its place in the world economy. This method requires plenty of hard work, with specific country analysis supplemented by attention to the CBC risks and the dangers of importing corruption through ODA, FDI and several other external channels. But that hard work will surely bring its rewards. It will be part of the ongoing struggle to create an encompassing and participatory development process in which the benefits of growth are far more equitably shared than has been the case till now. That process is one which can be sustainable, and will not be subject to the vagaries of fashion.

 

Peter OBrien* About the author: Peter O’Brien is economics & trade advisor to Africa consulting boutique Pr1merio. With over 30 years’ international expertise in economic and financial analysis, trade negotiations, and deal making, Peter O’Brien has advised governments, NGOs, and private clients on economics, policy, and diplomacy matters. Peter has worked worked in all regions of Africa, providing advice to clients ranging from South African conglomerates to Ethiopian government ministries.  A native of Ireland, Peter is fluent in English, French, Spanish, Portuguese, Italian and German.

Circles of Corruption: how does Africa stack up against the OECD?

Inside & Outside the Circles of Corruption

By Peter O’Brien, Pr1merio chief Economics & Trade advisor.

Many widely quoted assessments of corruption rank African countries poorly. These ratings are based mainly on indicators related to the ways in which business contracts, especially those involving government funds, are concluded. The suggestion is that resources are wasted due to mechanisms which award deals to groups that, in open and transparent systems, would not have qualified to obtain the contracts. While there is undoubtedly a very real problem, it’s important for Africa’s standing in the business world to understand the actual situation.

For comparison’s sake…

During the present decade, the avalanche of detailed information concerning corruption in OECD countries, and in particular Western Europe and the USA, has been enormous. A central feature of the stories uncovered has been the failure of administrative systems in those places – and a strongly associated feature has been the failure to resolve the problems. Some examples, drawn not from the financial sector (where the cases are so numerous that to describe them is now superfluous) but from industrial activities and projects, will illustrate the point.

Since mid-2015, and growing by the week, the question of environmental pollution caused by faking the results of admissions tests on diesel driven vehicles has rocked the automotive industry. What began as an investigation into Volkswagen has extended to several other global manufacturers. The investigations so far have underlined several things. First, companies themselves have broken their own ethical codes in order to secure some competitive advantage. Second, there clearly exists an unhealthy, cosy relationship between the auto firms and the entities that are supposed to test and certify vehicles as compliant with regulations. Third, the power of organized corporate lobbies has been sufficient to delay remedial action, and in the case of the EU promises to postpone it indefinitely. Fourth, industry elaborated codes of conduct rarely work. Fifth, financial penalties alone are unlikely to alter the structures of corruption.

In Germany, the finalization of the construction of the new airport for Berlin in now several years overdue. The delays, and the additional costs (reported to be above €5 million per day), have been variously attributed to weak negotiation and formulation of the initial contracts, inadequate monitoring mechanisms, collusion among constructors and suppliers, and straight kick-backs to several officials involved. In the UK, the award of government contracts to a company, G4S, to provide security services for the 2012 London Olympics, was found by parliamentary investigation to be grossly negligent. But subsequent to those findings, the same company has been given several other contracts, some of which are currently under new investigations.

Where does Africa stand?

Kofi AnnanSo where does Africa really figure in an imperfect world where corruption and fraud have since time immemorial been part of transactions wherever they take place? The response should probably be along the following lines.

To begin with, African firms, in the sense of companies created and driven by African indigenous capital, till now have very limited capacity to organize the large scale, multi-country manipulations found in the OECD. Put differently, African entities, private and public, are almost certainly far more reactors than primary actors in the game. This generalization applies equally to involvement in the scandals rocking so many of the self -created and self- perpetuating bodies purporting to govern many types of world sport. In soccer and in athletics, some African individuals and entities have hopped on to the gravy train – but the drivers are elsewhere. In other notoriously corrupt fields, such as cycling, Formula One racing or tennis, Africa has yet to play a notable role.

Given that, to date, African enterprises and institutions have not played a significant part in the monitoring and assessment operations supposed to prevent and correct abuses, there is likewise no evidence of weight to put Africa in the hot seat with respect to implementation of anti-fraud and anti-corruption in international cases.

The mention above of individual major projects in Germany and the UK, a reference that could readily be extended to more or less all OECD countries, further implies that Africa is by no means different from other places regarding the presence of  seriously deficient methods of project award and project management. The relative extent of problems is hard to judge, partly because the intensity of investigation required to discover some of the situations in the OECD is so great. In other words, it may be that the cases found in Africa are simply easier to identify.

Not so bad after all…?

What does all this mean? Certainly it does not mean either that we should weaken the effort to reduce fraud and corruption, or fail to pursue the necessary improvements in public administration, public finance management, and legal mechanisms. But it does suggest that, fortunately, the degree and sophistication of fraudulent and corrupt behavior can be contained. It has yet to reach the levels found in the OECD, and indeed most African countries and institutions do not have the wherewithal to undertake corruption on the scale observed elsewhere. Timely action now might well avoid future disasters.

A final point is the actual impact of fraud and corruption on economic performance. In the absence of many detailed enquiries, it is not easy to state with confidence if the impact is worse in African countries, or in some of them, than it is elsewhere. What does seem to be clear is that, up to the present, the bad cases in Africa have received relatively strong publicity. Since in today’s world image is everything, it might be time for some of Africa’s institutions, national, regional and continental, to devote resources to showing what Africa is doing to improve its own systems, and ensure it does not reach the position which some other regions of the world are in.