PSD Blog - The World Bank Group

Michela Wrong's turn at the World Bank

Michela Wrong, the author of It's Our Turn to Eat: The Story of a Kenyan Whistle-Blower and a former journalist at the Financial Times, has been making the rounds promoting her new book. It's Our Turn to Eat tells the story of John Githongo, a Kenyan anti-corruption crusader who was eventually forced into exile. Wrong has kindly to agreed to give a talk on June 29 at the World Bank, and I think this is an event not to be missed. 

For useful reviews of the book, check out Chris Blattman, the Financial Times, and the Economist. Also check out this recent interview with Wrong on NPR.   

Stocks vs. flows, or why governance reform is still on the agenda

I seem to have Dani Rodrik on my mind lately. In a new post yesterday he argues that the governance reform agenda is dead. Here is his logic:

There was a time when economists believed that institutional reform--improving governance--was a key ingredient in improving living standards in the developing world.  "Good governance" is surely a good thing in its own right.  But a lot of recent academic and policy research has focused of late on its instrumental value for growth. 

The argument is simple and appealing. Rich countries are those characterized by democracy, rule of law, political competition, and low levels of corruption.  So poor countries have to emulate them in all these respects if they want to get rich too.

Oddly, some of the most vociferous advocates of this view have apparently given up on it in the aftermath of the financial crisis. Not consciously, perhaps.  But a repudiation is implicit in the arguments that they now make about the central role of governance failures in the current crisis in the U.S.

A collective need to rebuild public trust

The global economic crisis revealed large scale fraud in the financial sector (witness the Madoff scandal, among others). Unsurprisingly, it  has prompted widespread decline in public trust in companies. The Financial Times / Harris Poll released last month suggests three-quarters of people in the US and Europe now have a worse opinion of business.

It is practically impossible for a single stakeholder on their own to effectively address the problems that contributed to this crisis: corruption, greed, a lack of transparency and leadership. Hence there is a case for collective action that enables companies to collaborate with competitors and/or stakeholders from the public and civil society sector to create and maintain fair market conditions. Recognizing this, the World Bank Institute is organizing an Executive Development Program Fighting Corruption through Collective Action in Today’s Competitive Marketplaces precisely on such joint approaches.

Dutch Disease vs. Nigerian Disease

Prior to the 1980s, it was believed that natural resource abundance would enable developing countries to make the transition from underdevelopment to industrial “take off”, just as it had done for countries such as Australia and the U.S (Rostow, 1961; Stages of Economic Growth). This view now stands challenged by a number of studies that demonstrate the existence of a “resource curse” – slower growth and poorer economic performance in natural resource rich countries.

The traditional explanation for the resource curse is the Dutch Disease or “deindustrialization”. That is, revenue from natural resources hurts traditional manufacturing through an increase in the exchange rate; also, resources such as labor and capital need to be moved from manufacturing to natural resource production. Most studies on the Dutch Disease stop here although the argument is far from complete.

Fighting corruption, one good idea at a time

Got a good idea about how the private sector can fight corruption? Now's your chance to share it. The World Bank Institute and friends are sponsoring two essay competitions on the topic, one for students and young professionals, and the other for practitioners. The title of the competition is Fighting Corruption through Collective Action in Today’s Competitive Marketplaces, and the deadline of April 30 is fast approaching, so get busy writing! The winners will be feted at a conference on the topic in June held by the World Bank Institute's Executive Development Program.

The other dirty secret on the banks' balance sheets

On 28 May 2005, Denis Christel Sassou Nguesso, son of the president of Republic of Congo, went shopping in Paris. He spent €2,375 in Dolce & Gabbana, followed by €6,700 in Aubercy Bottier, a high-end bootmaker. Less than three weeks later, on 14 June, he was back: another €4,250 on shoes at Aubercy and €1,450 at a designer handbag shop. A month later, on 15 July, he burned another €2,000 at Aubercy, apparently his favourite shoe shop at the time.

According to a new report from the NGO Global Witness, Nguesso managed to pay for all of this using Congo's oil funds, along with some help from the Bank of East Asia and a front company in Anguilla. In Undue Diligence: How banks do business with corrupt regimes, Global Witness takes a close look at the dark underbelly of international finance, pointing fingers at giants like Barclays, HSBC, Citibank, and Deutsche Bank. All of these banks stand accused of helping venal politicians steal wealth from their citizens. Given that the idea of self-regulation of the financial industry is now in tatters, it is perhaps an opportune moment to push for greater transparency in the management of the natural resource wealth of the world's poorest countries. 

Corruption and the private sector

I once did an internship at Transparency International (TI-USA, to be exact), so I was pleased to see that their next Global Corruption Report will be on Corruption and the Private Sector. Unfortunately, we'll have to wait until mid-2009 to find out more, since that's when it's slated to be published.   

Disclosure by Politicians

After 3 years in the making, the results of the research project that started as part of Doing Business and looks at transparency in government are out. The working paper, Disclosure by Politicians, a joint effort with Rafael La Porta (Dartmouth), Florencio Lopez-de-Silanes (EDHEC Business School) and Andrei Shleifer (Harvard), is the first to look at what disclosures are required by law, which of these are made public, in which countries someone actually checks whether the disclosures are made or not, and what penalties exist in the event of faulty or incomplete disclosures.

The findings can be summarized as follows: 1. public availability (when practiced) matters, while disclosure requirements that don't require public availability are of little consequence; 2 disclosure of income sources is more important than disclosure of magnitudes of assets, income, gifts, etc.; and 3. these impacts are greater in more democratic countries than in less democratic countries.

Can randomized evaluations defeat economic gangsters?

I just finished reading Economic Gangsters, an excellent little book that summarizes in popular form a lot of recent evaluation work on corruption and violence. (See earlier posts here and here.) Although the book covers a hodgepodge of topics, from witchcraft in Tanzania to smuggling in China, it is held together by a particular approach to international development - namely, a call for randomized evaluations or one of its close kin to assess the utility of development interventions. Authors Raymond Fisman and Edward Miguel put it rather bluntly when discussing the particular case of the Millennium Village Project:

We genuinely hope that the Sauri [millennium village] model proves to be the great innovation that solves the problem of global poverty...But a serious program evaluation is needed to understand how and why its successes did (or did not) take place. Otherwise, we'll have learned little, and Sauri and the other Millennium Villages will likely join the long list of well-intentioned but ultimately inconclusive (and quickly forgotten) attempts to make poverty history.

I agree with their critique, but I wonder in turn what the limits are to their approach when looking at the particular issue of corruption. As Fisman and Miguel point out in the book, randomized evaluations have been invaluable in judging the merits of certain types of interventions. They provide examples of two interventions in Busia, a district in Kenya. One intervention provided deworming pills for children, while another supplied textbooks to classrooms. Since both interventions were randomly assigned, researchers were able to figure out after the fact that the deworming pills did a good job of boosting school attendance, while the additional textbooks had at best a negligible effect. Fisman and Miguel maintain that a similar approach can be used to learn how to fight corruption.

Dani Kaufmann, anti-corruption expert and blogger

After more than two decades of service, Dani Kaufmann will be leaving the World Bank. If you didn't catch his farewell lecture last week, you can still see a video of it here. I highly recommend it - if ever you wondered whether someone could make a difference inside a large institution, this is it.

I'll leave Kaufmann's long list of achievements to others who know better than I. Instead, I'll just point out two things that grabbed my attention during his lecture. The first is that Kaufmann was introduced as being, among other things, "a pioneer in blogging" at the World Bank. If you haven't had a chance to read Governance Matters you've been missing out. (Also check out his personal blog, The Kaufmann Governance Post.)

Trading without Doha

Still upset about the failure of the latest round of Doha talks? Don't worry - there are still many ways to improve the outlook for international trade. You can take Simeon Djankov's advice over on the Doing Business blog and reduce the delays related to trade. Or, according to a new World Bank working paper, you could make trade more transparent. In Governance, Corruption, and Trade in the Asia Pacific Region, authors Kazutomo Abe and John S. Wilson estimate huge gains for trade and GDP due to reforms that improve transparency:

[T]he reforming economies in APEC stand to benefit significantly in regard to GDP and welfare gains with the type of reform we examine here. In particular, Vietnam could expect an increase in real GDP by more than 30 percent in Case 1. Russia, Philippines and Thailand’s GDP and welfare would rise substantially, as well. The benefits to Malaysia and China would be almost one year’s growth. The estimated global benefits here with transparency reform, US$406 billion in Case 1 and US$290 billion in Case 2 in the 2006 prices are larger than those reported in previous work on trade facilitation.

Combating corruption in Paraguay

Transparency International hosted an interesting interview with the new president of Paraguay, Fernando Lugo.

Transparency Watch: How do you plan to institutionalise the fight against corruption?

Fernando Lugo: First, as a basis, by auditing and establishing permanent controls by and within each of the government’s departments. Additionally, through the creation – which will be finalised at the appropriate time – of a National Anti-corruption Ministry, which will set the political and technical norms to elevate such a battle to the most institutionalised level possible.

Perhaps they should take a page from Kenya's book and work on creating a system of e-government to help combat corruption. Although Paraguay has only 4.3 internet users per 100 people compared to Kenya's 7.6, Paraguay ranks higher in terms of the e-government readiness index of the World Development Indicators.

Aid effectiveness and e-government

Last week saw an interesting videoconference at the World Bank on aid effectiveness and e-government (here are the schedule of events and a blog post from the new e-Development blog.) The event was a joint effort of GTZ and the World Bank e-Development Thematic Group. I'll spare you a summary of the introductory remarks other than to note that many of the speakers stressed the importance of e-government in reaching the goals set out by the Paris Declaration and recently evaluated and reiterated at the 3rd High Level Forum on Aid Affectiveness. Anyone who left after just these remarks would have learned little - the meat of the videoconference came when speakers from government agencies talked about their own on-the-ground attempts to utilize e-government.

Cooperation in anti-corruption initiatives

When the U.S. passed a law in 1977 called the Foreign Corrupt Practices Act, many American companies were not happy. The act made it punishable for American companies to bribe foreign officials. In contrast, many European countries allowed their companies to write off these payments when paying taxes. Rightly or wrongly, American companies complained that this would put them at an unfair disadvantage when competing abroad.

None of that really mattered, though, because few resources were ever put into enforcing the Foreign Corrupt Practices Act. It wasn't until many European countries changed their tune with the 1997 passage of the OECD Anti-Bribery Convention that an international anti-corruption regime became credible. And today the Wall Street Journal reports that the many OECD countries have gotten serious about dealing with corruption. The U.S. federal government was investigating over 80 companies last year, up from three in 2002. U.S. firms have been made to pay large fines in connection with bribery in Nigeria and Kazakhstan. The key, though, is that it is not the U.S. alone that is prosecuting bribery. Siemens AG was fined some 201 million euros for slush funds used for bribes. Perhaps now the developed world's calls for greater transparency will sound a little less hypocritical.

Economic detectives track down corruption

Just how far has the international development community come in its attitudes toward corruption? Here are classic lines from Samuel Huntington's 1968 opus Political Order in Changing Societies:

In terms of economic growth, the only thing worse than a society with a rigid, overcentralized, dishonest bureaucracy is one with a rigid, overcentralized, honest bureaucracy. A society which is relatively uncorrupt...may find a certain amount of corruption a welcome lubricant easing the path to modernization.

Nowadays, the work of organizations like Transparency International has made such attitudes seem heretical. Yet even the best efforts of organizations like Transparency International have yet to put a huge dent in corruption around the world, despite achievements such as passage of the OECD's Convention on Combating Bribery. Two economic detectives propose a new strategy for combating corruption in an article in the newest Foreign Policy entitled How Economics Can Defeat Corruption (subscription required).

Corruption in the water sector

Transparency International has just released its annual corruption report, and this year's focus is on corruption in the water sector. Undoubtedly, the 398-page tome will draw a lot of attention to what Transparency International makes clear is a crisis:

In developing countries, about 80 per cent of health problems can be linked back to inadequate water and sanitation, claiming the lives of nearly 1.8 million children every year and leading to the loss of an estimated 443 million school days for the children who suffer from water-related ailments.

The view from Russian business

If you want to learn about the real challenges faced by Russia, you could do worse then surveying its captains of industry. This is exactly what the New Economic School did earlier this year in cooperation with Vedomosti and the Ministry of Economic Development of the Russian Federation. The results appear in a report called Challenges 2020: The View from Russian Business. (An aside: One of the true success stories of private higher education in the transition countries is that of the New Economic School. If you're looking to hire a bright economist in the know about Russia, this is your go-to place.)

Bright Lights, Big City

A recent study by Mastercard indicates that many cities in emerging markets are moving up in the rankings of the Worldwide Centers of Commerce Index (Hat tip: FT). The index ranks 75 cities based on data that cover everything from the ease of doing business to livability. This is the second year Mastercard has produced this index, and London and New York are once again in the first two slots. However, China accounted for five of the cities that made it into the rankings, and India contributed another three. Latin America boasted seven cities in the rankings. Eastern Europe merited the inclusion of six cities, with Prague (pictured) ranked highest for that region.

Companies Prefer Russia to China?

An article today in Bloomberg covering the St. Petersburg International Economic Forum begins with the following lede:

Russia is the most promising market for foreign investment, surpassing China and India, even though corruption remains a “major concern,” according to a survey of international companies for the Russian government.

Count me among the unconvinced. Even if we assume the agency commissioned by the Russian government to carry out the survey was evenhanded, the methodology was clearly flawed. About 50 companies were polled, but they don’t look much like a random selection. The surveyed companies account for about 40 percent of FDI in Russia. Bias in the selection of companies makes it difficult to take anything meaningful from the data – other than that the companies that are already in Russia believe they should be there, despite the risk that corruption poses.

Oil, oil everywhere…

In just the last two days, two articles have pointed to growing pressure for greater state control of energy resources. In Brazil, the state-owned oil company Petrobras (subscription required) has been pressuring the country’s Congress to change the rules of the game to its benefit. Currently, foreign oil companies bid in auctions for exploration rights, paying a combination of an upfront fee and royalties on any discoveries. However, a huge discovery last year by Petrobras has upped the stakes. Petrobras wants to force all new explorations to be carried out as joint ventures, a la Venezuela and Nigeria.

A case in Russia is also pointing to continuing pressure for state control of the energy industry (subscription required). TNK-BP, a joint venture of British Petroleum and Russian-owned Alfa-Access-Renova, has seen a falling out between its foreign and Russian shareholders. The details of the case are truly convoluted, but the main contention is this: The shareholders of Alfa-Access-Renova would like to sell their shares to one of the state-owned oil companies, but they need to achieve a takeover of TNK-BP before handing the joint venture over.

When do enterprises prefer informal credit?

Could enterprises voluntarily choose to tap informal credit markets to avoid the additional scrutiny or even harassment that engaging with formal financial institutions might invite?

A recent paper, using firm-survey data for 29 countries, suggests so. Fourteen percent of firms in this sample rely exclusively on informal finance and the percentage goes up as corruption, complexity of taxation (but interestingly not tax rates) and property registration increase.

One way of fighting corruption

In 2003, the Brazilian government began to randomly audit municipalities regarding their use of federal funds and made the results public. A recent study compares municipalities audited before the 2004 municipal elections with those audited after the elections.

The authors find that municipalities audited after the elections have the same reelection rate for incumbents, regardless of the number of violations found. However, the municipalities audited before the elections have a much lower reelection rate when the incumbent was found to have more than one violation.

Public dissemination of the violations seems to be critical. The differences in reelection rates are only present in municipalities that have a local radio station.

Second wave of corruption campaign

The 1997 OECD anti-bribery convention, which follows in the footsteps of the 1977 U.S. Foreign Corrupt Practices Act, now includes 37 signatories, some of them non-OECD countries, which together account for 90 percent of the world's foreign direct investment. The Wall Street Journal writes in an editorial [subscription required]:

It wasn't long ago that bribery, a criminal offense at home, was considered an acceptable cost of doing business abroad in most OECD members. Germany and other countries even let companies write foreign bribes off their taxes.

But Cobus de Swardt, the new head of Transparency International (TI), remains skeptical.

Why Africa won't be the new Norway

Norway, the world's third largest oil exporter, passively invests a large portion of proceeds into a national pension fund.  "The future-generations fund," which is now worth $300 billion, invests into foreign assets only as a way to remove the temptation for politicians to spend money on pork-barrel projects. Can oil-rich African countries follow the Scandinavian path or are they destined to suffer under the resource course?

John Ghazvinian, the author of "Untapped: The Scramble for Africa's Oil," is pessimistic: "Between 1970 and 1993, countries without oil saw their economies grow four times faster than those of countries with oil."

And the vote is in…

Alexis Sampson and Michael Jarvis sum up this year's International Business Forum:

The lights dimmed in the Preston Auditorium and the tension rose as the results were calculated. Having generated and then prioritized host of recommendations over the course of the IBF, delegates voted to rank their final top ten. Despite the risky reliance on electronic voting machines, the system worked and the results were reassuringly conclusive.

Corruption and the bottom line - how to play the game (how to stay in the game)

Alexis Sampson and Michael Jarvis report on the topic of corruption from the second day of the World Bank's International Business Forum (IBF):

Can being tough on corruption benefit firms? Should firms actively pursue zero tolerance of bribery or corruption? "Absolutely," agreed expert panelists in an animated discussion yesterday at the IBF about the viability of businesses setting their own standards for corruption. In a strong assertion from a leading company in the notoriously corruption-ridden construction sector, Alberto de Armas of CEMEX said, "transparency leads to good practices, and good practices lead to less corruption," in his argument for the validity of diligent anti-corruption initiatives within a company.

Business and the rules of the game: from rule takers to rule makers?

Over the next two days, Alexis Sampson and Michael Jarvis, both from the World Bank Institute, will be your eyes and ears at the ongoing 12th International Business Forum (IBF) in Washington, DC. Here is their first post:

"The stakes for business are as enormous as they are complex," asserted Lenny Mendonca of McKinsey and Co. during this morning's opening session of the World Bank's IBF, "defining businesses' proper role will challenge business executives to adopt a new awareness of social problems in real time, even before they have fully emerged as critical issues in the public debate."

This was the challenge issued to the 300 leaders from 50 countries meeting here at the Bank today and tomorrow.

Business for governance and MDGs

On October 9 and 10, the 12th International Business Forum in Washington, DC will reflect on the role that businesses can and should play in shaping the regulation in the global business arena.

This year's focus is on two main issues: business action on climate change, and private sector's role in curbing corruption.

Participating companies include ABN AMRO, Britannia Industries, Cafédirect, CEMEX, MTV Brazil, Nestlé, Newmont Mining, SAP, Shell, Siemens. The World Bank Institute and InWEnt organize the conference.

Best targets for bribe-seekers

Two out of five firms in Africa and Latin America report having to make unofficial payments to "get things done." One in six is expected to present "a gift" when meeting with tax inspectors. The "Graft Index of Firm Transactions" (below) shows that African firms are three times more likely to be asked for money than their Latin American counterparts.

The index relies on hard data from 10,000 firms and their encounters with corruption in 33 countries. Authors Alvaro González, Ernesto López-Córdova and Elio Valladares found that firms in Africa pay higher bribes, as a percent of sales, than firms Latin America: 2.7 and 1.4 percent, respectively.

View their new paper with a recipe on how to reduce corruption in Africa by 85 percent here.  And don't forget to do your own analysis.

Zambian media puts screws on the government

Zambian Post, a daily, will now include a bimonthly supplement which will track the progress of PSD reform program.

The Private Sector Development News, as it is called, hopes to bring accountability to the government. To do so, it will regularly publish indicators that measure government performance over time. A weekly radio and TV program will follow.

Have a look at the first issue here.

Learning from corruption

Across infrastructure as a whole, governments and donors still account for around four-fifths of sector investment. In a new World Bank paper, Charles Kenny compiles experiences from over 20 years in reducing the development impact of corruption in the field in the areas of regulation, state-owned enterprise reform, planning and budgeting and project design.

Lesson one: "Anti-corruption measures, much like other regulation designed to minimize market or government failure, can carry higher costs than the economic benefit of the reduced corruption with which they are associated."

Corruption in India

Will the continuing integration of India into the world economy diminish or exacerbate graft? Ravi Ramaurti examines the effects of growth on emerging economies:

The Paradox is that even though India's faster growth in recent years is the result of fewer government controls, most India managers would tell you that corruption has increased, not decreased […]. The explanation is that faster growth has created new choke points at which politicians and bureaucrats can extract payments […]. Faster growth has also raised the economic cost to firms of delays in public approvals, giving officials that much more 'held-up' leverage over private investors.

Comic books from World Bank

Japanese-style comics meet World Bank propaganda with good reviews from BusinessWeek. It's "1 World Manga."

Rei, the teenaged orphan who wants to be a martial artist, and his companion, the animal spirit guide, learn through adventure about poverty, HIV/AIDS, global warming, girls' education and, of course, corruption.

SOX shows unique governance benefits

The critics of the Sarbanes-Oxley Act (SOX) say that the regulation has made the U.S. less competitive, causing an exodus of companies to less-regulated stock exchanges in London and Hong Kong. The authors of a new paper defy this common wisdom. They find that when firms' characteristics such as size and type are factored in, the listing gap disappears.

"Before you jump to the conclusion that this is evidence of New York losing market share, remember most of those firms wouldn't qualify for the listing in New York. It's apples and oranges" says George Karolyi, one of the co-authors.

In general, whether they list on the NYSE or NASDAQ, firms are subject to SEC oversight, they are exposed to class action lawsuits, and face additional monitoring by market participants, such as analysts and institutional investors.

Although there is a common belief that listing in London provides a certain level of good governance, firms […] in London generally need only comply with the governance rules of their home country [and] are subject to a "light touch" approach to regulation.

Do your own analysis

"If you want something done right, do it yourself" says an old adage. The team responsible for Enterprise Surveys has taken this concept deep to its heart when it created the new custom query tool.

Do Your Own Analysis lets you slice and dice firm-level, microeconomic data across 172 indicators from over 100 developing and developed countries. Best of all, each query produces a custom graph that's ready for cut and paste.

Clearly, doing homework will never be the same. Do Your Own Analysis, where were you two years ago?!

Half of OECD countries gets thumbs down

Transparency international released yesterday the third report on the progress of enforcing the OECD Anti-Bribery Convention, ratified by 37 countries. Brazil, Chile and Slovenia were added to the report this year.

The International Herald Tribune has a quick run-down on who's been good and bad.

GAAP for governments

Clare Lockhart, the founder of the Institute of State Effectiveness, calls, in an FT article for remodeling of government financial management system to resemble the private sector model:

The World Bank and its partners should turn their focus from corruption within World Bank-funded projects to financial systems as a whole.

The mechanism would be simple. States would be required to publish online an annual report setting out their income and expenditure, provide a balance sheet of assets and liabilities and outline which public assets had been sold to whom, at what price and through what process.

Unless state resources are firmly evaluated and monitored we should not be surprised if […] developing countries are subject to Enron-type collapse.

Ms. Lockhart and Ashraf Ghani, the former finance minister of Afghanistan, are the authors of a forthcoming book "The Framework: Fixing Failed States."

Finger pointing to fight corruption

Trace, a non-profit group specializing in curbing bribery, created BRIBEline. This new website is a hotline for collecting anonymous information on bribe requests by officials and governments around the world.

Suzanne Rich Folsom, director of the World Bank's Department of Institutional Integrity, emphasized the role of fear in curbing corruption. She hopes the BRIBEline will help lower the cost of doing business - an estimated $1 trillion is paid in bribes each year.

Update: BRIBEline proves popular.

Dirty business on the rise

Money-laundering flows exceed $1 trillion per year, finds a new KPMG survey. Forty-one banks, out of 224, said they were unable to track cross-border transactions.

The report estimates that the cost of compliance with anti-money-laundering (AML) requirements has risen by nearly 60 percent since 2004 – that's 20 percent more than banks had expected. As the expansion into emerging markets and transnational mergers continue, these costs are likely to grow.

Ted Truman estimates that the probability of conviction for money-laundering in the U.S. is at 6.5 percent. The AML veteran adds that even at 10 percent conviction rate, the returns to money launderers are high relative to the risk.

Business environment in Tajikistan: what's new?

Our second IFC report "Business Environment in Tajikistan as seen by Small and Medium Enterprises, 2006" spurred a new law designed to simplify licensing and registration requirements and promote the SME lending market.

So, is everything going well for Tajik SMEs? Unfortunately not. The positive changes highlighted above need to be strengthened and institutionalized. The inspection and licensing law need to be carefully implemented. Despite the reform, many laws exist only on paper. An example: most individual entrepreneurs need to register their business at start-up. Legally this is all they are required to do. Yet in practice, the registration bodies issue certificates with a limited one-year validity, forcing entrepreneurs to reregister every year and pay.

On the SME financing side, although the situation is improving with respect to 2002, there are still huge gaps to fill: only about one third of the SMEs needing funding obtain it from a bank or a microfinance organization. This is, to a great extent, due to unfavorable lending conditions such as an average real interest rate above 30%, loan duration of less than 1 year, and a collateral requirement of more than 100% of the principal amount.

There still are three problematic areas.

Life and death in Dushanbe, or the failure of regulation

In my last post I spoke about the potential harmful effects of a lack of proper regulation due to corruption. Unfortunately, just 2 weeks later we have a very sad proof of this - the death of 2 friends.

Let me tell you more about it. The streets of Dushanbe are famous for having 2 traffic police (the GAI) every 50 meters, especially along the main street, Rudaki Avenue. Traffic police are famous for stopping cars at any time and the reason is clear to everybody. All of this petty bribery would be acceptable, if they were at least maintaining a minimum safety level along the area they patrol. This is not the case - accidents are very frequent, cars drive at high speed in the streets … and people get KILLED at 11 pm in the centre of town by cars traveling 100 km/h. This is what happened to our 2 friends working in Dushanbe the night of June 21st, but it is not an isolated case. It is very sad … we are all very sad.

In a conference this week in Dushanbe, the Minister of Finance of Georgia, in describing the deep reforms undertaken by his country, told us that from one day to the next they eliminated the GAI, as they only represented a source of corruption: we are not asking that much of the Tajik Government … but it definitely is food for thought!!

Who's keeping Africa down: politicians or unfair trade structures?

Listen to four experts spar on what presents the biggest impediment to African development: poor governance or trade barriers.

Richard Cockett, the Economist's Africa Editor, quoting the Nigerian experience, said that political reform, not aid nor trade, is key to growth in the continent that is more deeply corrupt than any other part of the world.

Mike Gidney, from Fairtrade Foundation disagrees. He argues that corruption is not limited to Africa and pointing fingers at politicians has limited effectiveness: "politicians can't possibly generate the development impact that could be achieved through an increase in trade."

The debate, which included Kenyan filmmaker and activist June Arunga and professor Tunde Zack-Williams, took place on June 2 and was a part of the Hay Festival dubbed the 'Woodstock of the mind.'

Corruption: tracking vulnerabilities

In 2004, the cost of corruption was estimated at $1 trillion a year. John Bray, the author of a corruption survey included in the 2007 Transparency International report, authored a 'handbook' for private, international companies, in which he points out why and how to avoid the pitfalls of bribery.

The graph below shows a percentage of companies (350 surveyed) that believe they had lost business due to a competitor’s bribe over last 5 years:

With an even greater focus comes a recent 480-page-long World Bank publication which explores corruption vulnerability on a sector level through value chain analysis. The book hopes to be a tool for diagnosing this harmful phenomenon.

Corruption: venial extortion or a happy compromise?

Usually when we think about corruption we think that one side (i.e., the government official) is demanding, while the other (i.e., the citizen, the entrepreneur, the company) is forced to obey fearing the consequences.

In reality, the situation is not always so straightforward. There are cases in which corruption, the little kind ("petty corruption" as it is usually called), becomes part of the usual way of doing business and is the "preferred solution" for dealing with public officials. Take Tajikistan, my adoptive country of 12 months. Like many other countries, we see the following combination of factors: extremely low salary level for government officials, complex economic regulations that make compliance practically impossible, and, finally, low legal awareness among the general public.

Let's start with the first one. Government salaries in Tajikistan are well below the subsistence level and a public official, although formally employed, realistically cannot cope with the cost of living. For example: food for one person for one month is estimated to be 50 TJS (~15 USD), while on average, a public official's salary is 85 TJS (~25 USD). In this situation of "underemployment," government employees (from doctors to teachers) often hold a second job outside the public sector or resort to unofficial payments to supplement government wages.

SOX in India

Not everything that works in developed countries works in developing countries, but here is an example of the reverse – while the Sarbanes–Oxley (SOX) Act might not have had the expected impact in the U.S., similar reforms have had a positive impact in India, including on the share prices of Indian companies.

These governance reforms could have net benefits in a poor-governance country, like India, but net costs for companies that are already well-governed, like the U.S.

The state of corruption

Transparency International focused its newly-released Global Corruption Report 2007 on judicial systems:

There is […] a correlation between levels of judicial corruption and levels of economic growth since the expectation that contracts will be honored and disputes resolved fairly is vital to investors, and underpins sound business development and growth. An independent and impartial judiciary has important consequences for trade, investment and financial markets, as countries as diverse as China and Nigeria have learned.

This 400-page-long volume adds new country-specific case studies, compares Russia with Brazil as well as other emerging economies. John Bray's section on measuring the impact of corruption on international business shows that 40 percent of surveyed firms believe to have lost international business contracts due to competitor’s bribe.

Latin America not competitive?

The World Competitiveness Yearbook, which mixes statistical indicators and perception surveys ranking 55 countries on their competitiveness, was released last week. Published annually since 1989, this year's report includes predictions of the role that commodities, corporate taxation, and the emergence of the middleclass will have on the future competitiveness of countries.

While the U.S. ranked first, all major Latin American countries, with the exception of Chile and Colombia, slipped this year. Corruption, excessive red-tape, poor infrastructure, and health and education services were key grounds for lowering countries' competitiveness score.

The bottom billion

In his brand new book, Paul Collier calls for nonstandard solutions to fighting poverty, including "carefully calibrated" military intervention, for the 50 states who made little or no progress since decades.

How Georgia became the world's best reformer

Last Friday the Georgian leader, Zurab Nogaideli, explained what it takes to reform the business climate:

• A big effort to curb corruption. As a result Georgia had the biggest drop in corruption in all of Europe – last year in a survey 95 percent of Georgians reported not having to pay a bribe to receive public service
• Slashing the number of taxes from 22 to 7; a tax rate reduction from 60 to below 40 percent, which more than doubled the revenues. Further cutbacks in payroll and corporate taxes – all from a new single taxation authority – are scheduled for 2008
• Abolition of most tariffs, combined with a reduction in the time required to import goods from 52 to 4 days
• Eradication of 756 business licenses and permits. Additionally, government agencies must now process license applications in under 30-days. Starting a business now takes 3 days instead of 10
• Removal of restrictions on capital flows
• Lowering of the average time to resolve commercial disputes from over one year to 285 days

Mr. Nogaideli hoped to be able to report on big progress in improving internet penetration in Georgia by next year.

For an example of a country that will not be recognized for improvements to its business climate this year, click here.

Corruption champion at the World Bank

This week, as the world is searching for a solution to the corruption problem, Nuhu Ribadu, the head of Nigeria's Economic and Financial Crimes Commission, described corruption as the cause of the failure of leadership and failure of governance in the developing world.

When asked about role that foreign companies play in fostering corruption, he said:

I have seen multinationals and big oil companies play by the rules elsewhere, but behaving badly in Nigeria and Africa because of our collapsed systems. We have to insist ourselves on the rule of law and order; then everyone will behave.

Ribadu has secured more than 150 convictions and recovered over $5 billion stolen public funds.