Author Archives: Andrew Wilson

Fighting Kleptocracy

The world -- including global financial centers -- needs to come together to fight kleptocracy. (Photo: Wikimedia Commons)

The world — including global financial centers — needs to come together to fight kleptocracy. (Photo: Wikimedia Commons)

Corruption is often thought of as an individual problem where a corrupt official abuses his or her government position for personal gain. But what happens when an entire government, or the ruling class of an entire country, is engaged in corruption? When corruption becomes systematic and institutionalized, the damage is much greater – and the tools to fight it increasingly require international cooperation.

Two weeks ago the World Movement for Democracy held its eighth international conference in Seoul, Korea. Discussions of the corrosive effect corruption have on democratic renewal abounded throughout the conference. However, a discussion on kleptocracy chaired by the National Endowment for Democracy’s Carl Gershman brought out the enormous scale of illicit cash flows from kleptocratic governments, and the direct influence they can have on enabling authoritarian push-back was made clear. Presenters on the panel highlighted the need for both international coordination on efforts to improve investigation, journalism, and the tracking of money flows, and also support for in-country efforts to strengthen local watchdogs and activists.

From the CIPE perspective, we offered a strategy based on the old adage “follow the money”: to contend with and reduce capital flows from illicit gains we need to understand how such funds are siphoned off, how they move around the world, and what institutional responses we can promote to slow and stop them. Kleptocrats often use a mixture of state and private institutions to steal money, and then establish complex networks of shell companies and other fronts to launder funds. They then use global financial institutions to move “clean” money into markets where it can be securely invested.  A comprehensive strategy is needed to combat this complex crime at all levels.

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After 25 Years, Are Central and Eastern Europe’s Democracies in Danger?

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Romanians protest against President Basescu in January 2012. (Bogdan Cristel/Reuters)

Though some recent machinations remind us that democracy can be a fragile thing, one can observe with guarded optimism that the overall transformation of the Central and Eastern European region to market-oriented democracies has been relatively successful.  To understand where we are today, it’s important to look back to see how far Eastern Europe has come in 25 years.

Many take the Eastern European transitions for granted, noting the existence of market institutions and young democracies before World War II and subsequent Soviet domination, and characterizing the transition as a mere return to business as usual in the region.  This interpretation is flawed, as it fails to realize that what we historically took to be “market institutions” and “democratic practice” in the region prior to post-war communism were deeply flawed and often only skin-deep.

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A Business Agenda for Democracies

Andrew Wilson of CIPE speaks at the 7th Ministerial Meeting of the Community of Democracies in Ulaanbaatar, Mongolia.

Andrew Wilson of CIPE speaks at the 7th Ministerial Meeting of the Community of Democracies in Ulaanbaatar, Mongolia.

The seventh ministerial meeting for the Community of Democracies (CD) was held last month in Ulaanbaator, Mongolia. This year, for only the second time, the business community met as the Corporate Democracy Forum (CDF) to share its views with the CD ministerial, and CIPE was invited to participate.

The Community of Democracies is an intergovernmental coalition of over 100 democratic nations established by Polish Foreign Minister Bronislaw Geremek and U.S. Secretary of State Madeline Albright in 2000 to promote democratic rules and strengthen democratic norms and institutions.

In conducting its work the CD actively seeks input from a number of stakeholder groups including women, youth, parliamentarians, and civil society, who also gather during the ministerial meetings to provide their own viewpoints and recommendations on what the organization’s priorities should be and how to achieve its goals. The CDF represents the private sector’s voice in that discussion.

The overriding theme that dominated the CDF’s discussions was the concept of companies exercising a stronger sense of corporate citizenship, in which they recognize the broader role and leadership position they have within democracies as wealth creators, employers, taxpayers, and leaders.  For their part, governments need to encourage companies to take a stronger role, and welcome them in partnership.

Organized by the Mongolian Chamber of Commerce and Industry, the meeting highlighted steps that both the public and private sector can take to promote democracy through actions in three areas: improving public-private dialogue, promoting anti-corruption actions, and corporate social responsibility.

The CDF recognized that sustainable economic development must be based on private sector growth, and, as a stakeholder in this process, business requires an equal seat at the policy table. While sounding simple this task often requires a commitment from both sides of the dialogue that sometimes signals a change in the way things are done. Government officials have to get used to the idea of business as a policy partner, and businesspeople must be prepared to enter into dialogue in a thoughtful and constructive fashion.

Recognizing that the business community is not a monolith the CDF called on CD members to ensure inclusiveness by extending their dialogue to the broader business community including, national, regional, sectoral, and women’s business groups.

In terms of the fight against corruption, the CDF recognized that businesses are part of the “supply and demand” equation that allows corruption to flourish, and as such the business community has an obligation to lead through example. The CDF highlighted the work of programs such as the World economic Forum’s Partnering Against Corruption Initiative (PACI), and other efforts led by business associations and NGOs that seek to help companies improve ethical standards and implement anti-corruption initiatives. The CDF called on CD governments to encourage the establishment of such efforts.

In the field of corporate social responsibility, the meeting highlighted the important role business  has to play in promoting sustainable development. To this end, the CDF’s deliberations put the emphasis on private sector action in finding ways to support the implementation of all 10 Millennium Development Goals in a fashion that encourages sustainable and “green” development in transitional and aspiring democracies. As with the other topics for discussion, emphasis was placed on the need for effective public-private dialogue on how to achieve these goals.

The overall sense at the CDF was one that appreciated the opportunity the CD has extended to all the stakeholder groups to provide their input on a more visible and equal footing, showing that sustainable democracy is built on consensus and inclusion. It is a lesson other international inter-governmental bodies could more effectively learn.

Andrew Wilson is Regional Director for Eastern Europe & Eurasia and South Asia at CIPE.

Public-Private Dialogue and International Development

The Second Vice President of Afghanistan, Abdul Karim Khalili, addresses participants at a 2011 NBA launch event in Kabul.

In his article in the most recent  USAID Frontlines publication, Eric Postel, Assistant Administrator for Economic Growth, Education and Environment, gave CIPE a nice shout-out for its work in encouraging public-private dialogue. We appreciate the recognition, and the extent to which USAID has supported our efforts both past and present to improve public-private dialogue on economic policy.

Postel’s article is a broader piece that looks at the sum total of the agency’s efforts to promote economic growth and their impact. While cataloguing the work USAID does, from building infrastructure to the role technology plays in spurring growth, the thing that strikes me most is that there is no one silver bullet to promote economic reform and growth. Rather, development policies that deliver must embrace a wide range of activities that require both hard skills (shovel, mortar, and cell phone) and soft skills (advocacy and policy making).

For every business park that’s built we need to ensure that the infrastructure, both physical and regulatory, is present to ensure that enterprises can flourish. This is best done when governments and donors alike take the time to sit down with businesses to discuss their needs and priorities. But too often the business community is poorly prepared to engage in meaningful discussions, leading to frustrations all around.

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A Hippocratic oath: Competitive neutrality and SOEs

An abandoned former state-owned factory near Sofiya in the Bulgarian countryside, just one of many dotting the landscape as a legacy of inefficient state-owned enterprises. (Photo: Flickr user Gilgongo)

During the past decade, and especially since the financial crisis of 2008, governments have debated a variety of approaches to promoting economic growth, and State-Owned Enterprises (SOEs) have once again become a tool to focus resources on economic development.

For instance, in Russia we have witnessed the growth of “national champions” – state-owned firms that swept up private sector holdings in particular sectors (e.g. aerospace) in the hopes of jumpstarting competitive sectors, utilizing state resources and state-sponsored advantages.  Despite the widespread privatizations throughout the nineties, we have also seen resurgent state interest in maintaining or regaining its ownership role in a variety of sectors including water and energy.  Whether we like it or not, we must accept that in many emerging markets the state intends to continue participating in the economy as an owner, and views SOEs as a tool to direct development and provide services to all citizens.

This month the OECD released an excellent working paper working in economies where the state-owned sector plays a major role, “Competitive Neutrality and State Owned Enterprises: Challenges and Policy Options.”

This trend raises a few key questions regarding state-ownership: how does the state become a responsible owner and how do we guarantee accountability?  How does the presence of state-owned enterprises directly or indirectly effect the competitive environment in a country?  If state-owned enterprises squeeze out competition resulting efficiencies and growth, are they really serving the economic interests of their country?

At CIPE our partners around the world often complain that they are forced to compete in a “noncompetitive environment”, and when pressed they often identify state-owned competitors as the primary culprit.

The OECD has been active in addressing these issues through their Guidelines on Corporate Governance for State-Owned Enterprises, and more recently a new program on competitive neutrality of which the aforementioned paper is the first step of a multi-year effort.

The OECD recognizes and applauds that many state-owned firms are corporatizing and becoming more efficient, but point out that the advantages they gain by incumbency can crowd new market entrants out through SOE domination of markets and their ability to effect costs and pricing.  These effects may be deliberate or unintended side-effects of the structure of the SOE activity, but in either case they must be recognized and addressed to allow for competition and growth.

The report also points out that tax breaks and other hidden subsidies also allow SOEs to gain unfair advantages over new market entrants, and may also encourage ongoing inefficiencies within the SOE.

The authors of the report have identify a number of policies that can be adopted by countries to help them address the potential impact of SOEs on competition, analyzing the legislative and administrative environment for SOEs and promoting greater transparency and accountability in determining their costs in private sector terms.  Policy adjustments can then be made to level the playing field for the private sector.  In cases where an uncompetitive environment is deliberately mandated, the authors concede that the only solution can be advocacy to reverse the policies.

By promoting improved corporate governance in SOEs and understanding their cost structures and politically-maintained advantages, policymakers can begin to create an environment in which SOEs are more accountable and private business can advocate for a fairer playing field.

By promoting the concept of Competitive Neutrality, the OECD seems to be asking governments and their state-owned firms to take the Hippocratic oath to “do no harm” when it comes to private sector growth.  It will be interesting to watch how this debate unfolds in the coming years, the OECD’s paper is a terrific start to this debate, one in which I hope CIPE and partners will participate.

Closing the reality gap: Fighting corruption through regulatory reform

At CIPE's September 2010 conference in Moscow. Hopefully one of the last few times that Russian businesses will have to go in circles on corruption. (Photo: CIPE)

In Transparency International’s most recent Corruption Perceptions Index, Russia has fallen to 154th place, tied with Laos, Guinea-Bissau, and Tajikistan. Russia’s leaders know that this situation is incompatible with their aim of building a more modern, innovative and diversified country. On the national level, the problem is not one of awareness. It is a lack of consensus on how to fight corruption.

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Moldova’s National Business Agenda on the march

Veaceslav Negruta

Veaceslav Negruta, Finance Minister of Moldova addressing the audience at the National Business Agenda roll out event in Chisinau, Moldova. (Photo: Institute for Development and Social Initiatives Viitorul)

On May 21 a network of 32 business associations and chambers in Moldova rolled out their second National Business Agenda effort supported by CIPE.  In contrast to their first effort, the advocacy environment for Moldova has changed radically with the election of a pro-reform government.  While the doors of government are now open for private sector input – Moldovan President Ghimpu delivered opening remarks, and the Minister of Finance, the Chair of the Parliamentary Budget and Finance Committee, and the Governor of the Central Bank were all in attendance – it’s clear that many challenges and hurdles remain ahead for both the reform government and the business community.

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