Author Archives: Aleksandr Shkolnikov

Formalizing the Informals

Remembering Tarek Mohammed Bouazizi. Photo: www.foreignpolicy.com

with Marc Schleifer

On the December 6 edition of Marketplace Morning Report, Jeremy Hobson interviewed Robert Neuwirth, who discussed his new book Stealth of Nations. Neuwirth, a journalist and blogger, is seeking to shed light on a major issue often ignored in discussions on the state of the global economy – the informal sector.

In his book, Neuwirth does an excellent job chronicling the complex world of the informal economy: the tens of millions of traders, retail market vendors, entrepreneurs, and small-scale manufacturers who engage in economic activity in much of the developing world.

Yet, in telling the story of the informal sector, Neuwirth, as many others have done, misses the point. While widespread informality should be recognized, it is not a viable path to inclusive and sustainable economic growth.

Actually, the fact that informality is so widespread –according to several studies, as much as 60% of GDP is generated in the informal sector in some countries – is a real problem in today’s globalized economy.

World-renowned Peruvian economist Hernando de Soto has demonstrated the risks and shortcomings of informality, in countries as diverse as Peru, Tanzania, and Egypt.

Disconnected from formal economic institutions, informal market participants have no recourse when their rights are violated and have few prospects to expand their businesses or create jobs for others. Oftentimes, they are mired in what can be called “survival entrepreneurship,” with larger, negative consequences for their countries’ growth and development.

The real story of the informal sector is the story of Tarek Mohammed Bouazizi, a Tunisian fruit vendor whose self-immolation set off the Arab Spring protests. The one year anniversary of Bouazizi dousing himself with paint thinner and lighting a match, driven by frustration with barriers to economic self-sufficiency, is a reminder of the desperate and uncertain conditions in which many of the world’s entrepreneurs survive

As De Soto has shown, red tape, bureaucratic hurdles, and poor governance are the reason so many people are stuck in the informal sector and lack the incentives to join the formal economy. The World Bank’s Doing Business Database documents many of these barriers to formal economic activity.

Neuwirth’s emphasis on trying to decriminalize those in the informal sector should be lauded – efforts to crack down on informal traders or get them off the streets are unlikely to succeed.

But rather than “embracing” the informal sector, we should focus our efforts on improving the business climate and creating incentives for formalization. Registration, taxation, property rights, and licensing reforms, among others, can help informal entrepreneurs transition to small firms that can grow, innovate, create jobs, improve productivity, and take advantage of economies of scale.

In short, while Neuwirth and American Public Media are right to recognize the important contribution that informal entrepreneurs are making to their countries’ economies, this tells only half the story. A more complete view would recognize steps that can be taken to reduce informality, and the need to do so.

20 Years of Corruption

Traffic policeman stops driver

A traffic policeman stops a driver in Moscow. (RIA-Novosti)

As we reflect on the 20th anniversary of the collapse of the Soviet Union and the subsequent development of former Soviet republics as independent countries, the story of corruption is a difficult one to avoid.

Corruption, in many ways, became synonymous with the early years of transition. Over the years it has grown to be the defining feature of many of the today’s political and economic systems in the region. All this despite the increasing rhetoric about the need to fight it.

After the Fall: 20 Years of Post-Soviet Reform

Successful efforts to combat corruption are few, and even success stories sometimes have a dark side. It seems to cement its hold on economies despite many efforts to rid them of it. Yet, as I am constantly reminded by those in the region who continue to mount anti-corruption programs, it is important to stay optimistic.

There are several corruption lessons that can be learned from its evolution in the post-Soviet space.

First, it is that petty corruption is not OK. As transition in many of the countries got underway, the general public’s attitude towards petty corruption was somewhat accepting. It wasn’t seen as an issue if you had to pay a bribe to get your grades in school or to pay off a traffic police officer.

Yet experience has shown that it is difficult to separate such “petty” corruption from high-level corruption. As corruption permeates  the institutional fabric of society, it affects countries at all levels. From the practical standpoint, it is difficult to wave off corruption at some levels as acceptable and expect that it wouldn’t take place at other levels. And even small bribes can have really high costs.

Second, business can and should play an active role in fighting corruption. The business community is often seen as a facilitator of corruption, rather than a solution to it. Yet, while some companies bribe to get a competitive advantage, small and medium-sized companies are often victims of what is essentially extortion.

Small businesses and entrepreneurs don’t bribe to get a competitive advantage, they have to pay off to survive. This was true whether you were trying to run a business in Kyrgyzstan or in Ukraine. The challenge is capitalizing on the frustrations of business with corruption and mobilizing them for action.

Third, it is impossible to fight corruption in highly corrupt countries by simply punishing people for participating in it. While punishment as a means of deterrence is important, it is also important to focus on institutional dimensions of corruption: figuring out what allows corruption to occur in the first place and then reforming legal, regulatory, or political structures to change the incentives. Those who abuse public office can be removed, but when the whole system is built around corruption, there are no guarantees that the  next person won’t do the same .

And perhaps the most important lesson that unites all countries in the former Soviet space in regards to corruption is lack of protection for whistleblowers: those who decide to take up the fight against corruption and sound the alarm on illicit and unethical transactions. Global Integrity does a great job measuring this lack of protection. While the Magnitsky case has become perhaps the most famous one, there is no lack of stories from the region where accusers become the accused, or, in most cases, never report corruption at all due to threats to their personal safety.

The positive side of the growth of corruption in the region – if one can say so – is the increasing public frustration. Whereas ten or twenty years ago the public was willing to accept corruption as part of life, the new generation is increasingly vocal against it, even if not yet en masse. The growth of independent media, along with the growing costs of corruption, have played their part. Perhaps, over the next 20 years, civil society will be able to capitalize on changing attitudes and turn the tide.

This post is part of a series on the fall of the Soviet Union, the 20 years of reforms that followed, and the challenges that lie ahead.

Read all of the blogs in this series:

20 Years of Corruption

Democracy in Ukraine: 20 Years Later

Helping Business Find its Voice in the Former Soviet Union

Entrepreneurial Development in Russia

Democracy and the role of the Private Sector

Twenty Years After the USSR, Still Waiting for Freedom

Drawing corruption, democracy, and gender

Cartoon by Taufan Hidayatullah (Indonesia), winner in the democracy category

When we launched our first editorial cartoon contest earlier this year, we didn’t know what to expect. When the first submissions began to come in – we were excited. But we were really astounded when we had the final count – nearly 1,000 cartoons from 73 countries.

And it wasn’t just the quantity – the quality was outstanding as well! This combination created many challenges: try choosing 9 best cartoons out of 1,000. The judges panel did their work in selecting the finalists and the public has voted online. The winners in each category as well as their profiles are here.

Needless to say the judges – who include an anti-corruption activist and a Pulitzer-prize winning cartoonist – were impressed with the quality of submissions as much as we were.

Cartoon by Ilya Katz (Israel), winner in the corruption category

But there are many more cartoons than 9 winners in 3 categories. You can view many of the semi-finalists on our Flickr album (democracy, corruption, gender equality). You’ll see some general, recurring themes that are indeed universal.

Blind justice (in the corruption category) or recycled votes and puppet politicians (in the democracy category) stand out. Its hard not to notice unfairness that women deal with on a daily basis that permeates most of the cartoons in the gender category. I wish, however, there we more positive stories there.

Cartoon by Basir Ahmad Hamaid (Afghanistan), winner in the gender equality category

Yet, the fact that so many people from so many different countries relate to similar problems in a similar way is telling.

Too often in the development field we hear that “our countries are unique” and that “you don’t understand our problems.” What we learned through all this, however, is that as unlikely as it may seem, our countries have many things in common, even though they are all unique in many different ways.

Whither Democracy in Egypt?

Protestors stand off with police

Photo source: Asmaa Waguih/Reuters

Much has been written about the euphoria surrounding the ousting of Mubarak and the reality of making reforms work in the post-Mubarak era. The lesson that democracy is not built overnight is also frequently brought up.

The importance of institutions – not individuals – in shaping political and economic outcomes in Egypt, however, often escapes the headlines.

While many were fascinated with the trial of Mubarak (at one point televised live), in order to understand what’s really happening in the country one must look at the incentive structures that guide the behavior of decision-makers.

At a first glance, the recent news doesn’t quite make sense.  The Supreme Council of Armed Forces (SCAF), according to some reports, has tried more than 12,000 civilians in less than a year since Mubarak stepped down. Mubarak, on the other hand, initiated only around 2,000 trials of his civilian political opposition in military courts…over the entire course of his three decades in power.

While officials cite the emergency law for bringing so many people to trial in military courts, the legal basis of such reasoning is questioned by activists.

Yet a larger point looms behind the story: the military is not meeting the expectations for greater democracy, openness, and freedom that were in part the driving forces of public frustration expressed so loudly in Tahrir square. SCAF is jailing bloggers, civil society activists, and pro-democracy demonstrators.

There are reasons for that.

In their Foreign Affairs article, Jeff Martini and Julie Taylor address the incentives that drive the military’s decision-making and the reasons behind its “ambivalence toward democracy.”

While the military has pledged to move towards democracy and remain under civilian control over the longer term, its main priority, the authors argue, is not to build a full-fledged democracy in the country.

Instead, the goal is to pass power to a civilian government in order to avoid being blamed for Egypt’s ongoing socio-economic struggles. Image matters in Egypt, especially for the military. Moreover, in transitioning to a civilian government, a strong belief in democracy is not the guiding principle; that guiding principle is protecting its own “power and perks.”

One way the military has tried to maintain control of the political scene going forward has been to build influence in local governorships. Indeed, the number of governors related to former military or security officers has increased in the past few months. Governors are appointed, not elected, and may become a tool for distributing favors and building alliances that can withstand the test of time.

Yet, while reading about arrests of democracy activists may be discouraging, there are indeed reasons to be optimistic. As Martini and Taylor note, despite their careful attempts to control political institutions, “the generals may find that democracy, once unleashed, is difficult to control.”

Egyptian civil society has tasted the freedom and endless possibilities of democratic and economic reform over the past few months. I doubt they’ll be willing to let it go.

Corporate governance: Russia vs. the world

Photo via http://stephenfpeak.blogspot.com/

Corporate governance is a subject still grabbing the headlines, especially as the global economy continues to struggle in the wake of the financial crisis. In understanding corporate governance, it is important to keep in mind that the term itself has different meanings in different parts of the world.

During our early work in the Middle East, for instance, we found that there was no agreed-upon term for the concept of corporate governance in Arabic. This certainly complicated reforms, because unless people spoke English, they’d spend more time arguing about the proper meaning in Arabic rather than specific changes in how companies operate.

Simply put – how can you effect change if you are not sure what is it exactly you are trying to change? Luckily, the Middle East issue was eventually resolved, and a common term with a same meaning eventually took root.

In Russia, similarly, the concept of corporate governance is not exactly the same as we’ve come to know it in Western companies – where it’s focused on broad governance, risk management, and strategic planning. In fact, the Russian translation for governance is closer to “control” and “management” and experts often point out that corporate governance there gets into the daily management of enterprises much more so than in the West.

But beyond the perception and understanding of corporate governance, what is the state of it in Russia? How does it differ from the rest of the world? Has the country’s corporate governance climate improved since the financial crisis? What are some of the areas still lagging?

In a recently conducted interview with CIPE, four Russian corporate governance experts (Igor Belikov, Director of the Russian Institute of Directors; Mark Mobius, Executive Director of the Templeton Emerging Markets Group; Roger Munnings, Independent Director and Chairman of the Audit Committee, JFSC Sistema; and Vladimir Verbitsky
Deputy Director of the Russian Institute of Directors) provide their reflections on the state of governance practices in Russian enterprises.

They touch on some interesting issues, including conflicts between minority and majority shareholders, state participation in the corporate sector, and transparency in decision-making. For instance, Igor Belikov unpacks corporate governance challenges of Russia’s state-owned companies:

The main problems for state owned companies are at both the operational and board levels. At the operational level, the problem is inefficiency and rent extraction. At board level, there are problems when the board is not focused on achieving maximum benefit for the country’s population but on political aims or, worse, maximizing the benefit to individuals involved in governance and management.

Vladimir Verbitsky highlights the problem of selective use of corporate governance tools:

I think the main problem of corporate governance practices in Russian companies is the non-systemic and non-comprehensive nature of these practices. By “non-systemic” I mean the implementation of only certain governance practices from a model for a given company, rather than the use of as many international best practice components as possible.

Roger Munnings points out a key problem – a focus on individuals, not institutions:

Within many Russian companies, therefore, decision-making is “stove piped” to the General Director and personal relationships with the General Director can take precedence over structures, systems, or processes.

Want to know more about how Russia’s corporate governance practices differ from the rest of the world? You can read the article here.

Haiti’s unmet challenge of governance reform

Many of Haiti's rebuilding needs remain unmet. Photo via Freedom House.

The unprecedented media attention to Haiti’s recovery efforts following the 2010 earthquake quickly waned. This year’s presidential elections were a rather small blip on the media radar, and when Haiti did make the headlines, it was not necessarily for anything that would make its citizens proud.

Yet the situation in Haiti remains dire. Billions of dollars in aid have been committed and spent, but visible improvements in governance, lack of which was the main reason that the earthquake had such an impact, are just not there.

As to why – Paul Collier’s (the author of the Bottom Billion) overview of a new book by Paul Farmer on Haiti’s attempt to recover from the devastating earthquake provides some answers. In large part they boil down to the fact that history and culture matter in institutional change and improving governance is much more difficult than implementing a set of technical reforms.

It was unfortunate that Haiti had to have an election following the earthquake, which turned the attention away from rebuilding and governance improvements to political campaigning. Rife with fraud and corruption, the election further undermined the already weak trust citizens had in their government.

Similarly, proliferation of NGOs involved in all aspects of Haitian society created a double problem – NGOs themselves could not address challenges on the systematic level as the government should, yet their extensive work throughout the country undermined the ability of the government to perform its role (and this challenge in not unique to Haiti).

International aid agencies had also faced some difficulties on the ground, in part due to suspicion with which Haitian citizens treated such efforts for historical reason. The billions committed to reconstruction could not be effectively spent as the state lacked capacity and was rife with corruption, NGOs weren’t able to meet the task of large infrastructure projects on their own, and, most importantly, the chain of decision-making (and accountability) was simply not there. An effort to set up a commission to fill that decision-making void misfired – instead of bringing all the different parties together (donors, government, NGOs), the opposite happened.

Even though Haiti has been replaced in the headlines by other events – the job of rebuilding the country still seems to be at the very early stages. Much remains to be done. But Collier sees a way out, suggesting that we’ll begin to see real change in Haiti when “the governing elite will start to smell the opportunities of economic progress more strongly than the opportunities for public plunder.” This is what happened in Rwanda, perhaps this can happen in Haiti too.

Gender and corruption

Protesters demanding tougher anti-corruption legislation in India. Photo: Reuters

An interesting perspective from Africa on why men are more likely to engage in corruption (steal public funds) than women got me thinking – is corruption gender neutral?

Chr. Michelsen Institute’s Anti-Corruption Resource Center provides an excellent overview of various works on gender dimensions of corruption from many different perspectives. The arguments that women’s participation in politics leads to lower levels of corruption are counterbalanced by papers that call it a “myth in the making.

Empirical/experimental studies, such as this one comparing Indonesia, India, Australia and Singapore, provide some interesting insights as well: for the most part, there are no statistically significant differences in how women and men view corruption or behave in instances of bribe-giving and bribe-taking. One difference comes out in the bribe and punishment amounts – in India, for instance, men offer larger bribes than women, but in Indonesia, men levy higher punishment amounts for corruption than women. But these are just minor deviations.

Yet, while the attitudes toward corruption may be similar among men and women, women can be negatively affected by corruption to a greater degree. This follows not from some specific gender dimensions of corruption, but rather from broader institutional and cultural barriers to participation that women face in countries around the world (such as access to justice, schooling, or decision-making structures).  This Transparency International brief lays out numerous reasons for why corruption in the service delivery sector negatively affects women and girls more so than men.

It is an accepted wisdom within the anti-corruption community that corruption disproportionately affects the poor. In part, making the argument is instrumental in mobilizing the poor not to participate in corruption and seek ways to combat it in all forms. Perhaps, the fact that corruption disproportionately affects women can become a way to mobilize them to become a force in the anti-corruption movement.