Likewise, Nigeria was also warned by him and FIFA, after the country’s president, Goodluck Jonathan, indicated that their national soccer team would be banned from international soccer games for two years, following their poor showing in South Africa and corruption allegations.  Blatter and FIFA quickly sprung to action to counter such possible suspension by the Nigerian authorities (and FIFA ignored the corruption allegations). Blatter went public and confidently told a press conference that FIFA had already taken “all necessary steps”.

The Nigerian authorities quickly retracted their ban threat, since Blatter and FIFA had threatened a retaliatory ban threat of their own, which would have also left out from international competition their under-20 women squad as well as their football clubs competing in Africa…

It is a matter of debate and controversy as to whether Blatter and FIFA ought to have such vast powers over soccer matters within a country.  Domestic political interference in sports can have a number of negative manifestations and consequences, and thus excesses ought to be kept in check.  Yet it is time that we accept that sports like soccer transcend the narrow realm of sports, and do have major political and economic ramifications. The notion of apolitical soccer is an oxymoron. Furthermore, even if FIFA’s intervention at times may be salutary when reverses and egregiously political decision, such interventions do constitute a challenge to the sovereignty of countries.  Thus, the issue is not so clear cut, with pros and cons.

What ought not be a matter for debate is that resolute action needs to be taken when corruption may be involved.  FIFA does not have a satisfactory track record on this issue, and in the case of Nigeria that was not a concern for FIFA, even though it may have been a concern among some in the top leadership of the country. Blatter and FIFA appeared to be merely interested in protecting their own turf and interests.

But even less of a debate ought to take place regarding FIFA ensuring that their policies are not subject to egregious double standards.  Even if one were to accept that there may be benefits from FIFA’s power to suspend countries from international soccer when domestic political interference in soccer takes place, there has to be a level playing field.

Blatter and FIFA were quick to publicly condemn the interference in France and in Nigeria (and in the past it suspended Greece, and came close to do so with Portugal and Poland, for instance).  But at least so far the silence by Blatter is deafening regarding the blatant abuses that the North Korean government is subjecting its national soccer coach and players (here for details).  There are already serious questions about the safety of the coach, who has been sent to a construction site, after being expelled from the Party and excoriated and demoted in public in a most humiliating manner (as well as the soccer players, who were forced into very public Stalinist ‘confessions’ to incriminate the coach).   This is an extension of the well known human rights abuse practices of this totalitarian regime, where in the past some athletes were sent to prison camps.  North Korea is the worst governed country in the world, period (even if there are a handful which are close, see here).

It should be a no brainer that if FIFA came close to suspending Nigeria and France (and it actually suspended Greece in the past), it ought to summarily suspend North Korea, a few times over.  Yet not even a public statement of concern has emerged from Blatter of other high FIFA officials yet, let alone decisive action (apparently FIFA is still quietly studying the situation).  Such delays and silence makes one wonder whether FIFA is much more reticent to act when it involves human right abuses on its soccer players and coaches by a totalitarian regime than when there is political debate in a democracy where FIFA has vast commercial interests and/or their political power is at stake.  Whatever the reason for such double standard, it is has no justification, and FIFA ought to act resolutely now, without further delays or excuses.

At a broader level, the ongoing North Korean saga puts a spotlight on the serious problems and dangers of professional sports in totalitarian countries.  More attention is required in their national sports system and how it affects the lives led by talented athletes from a very ripe age, which often constitute an extreme case of politicization of sports and its athletes.  And much more emphasis needs to be given to how to better protect these athletes from abuse (or worse) when they do not perform up to the expectations of their Supreme Leaders, as it has just taken place in North Korea, and also takes place in other authoritarian states.

International sports organizations such as the IOC and FIFA ought to be have much stricter standards regarding flagrant political abuses in countries like North Korea (and a dozen others) than whether a vibrant democracy like France has a political debate or not over the performance of its national team.  To take a tough stance on North Korea and a handful of other totalitarian states where athletes are subject to abuse would be an opportunity for FIFA now, since it may start the process of reversing its tarnished image on this and other governance dimensions.

The 2,500 page long Dodd-Frank Financial Regulatory Reform Bill has passed through the United States Senate. The bill will now be signed into law by President Barack Obama.  It signals a halt to the deregulatory process that the U.S. financial system has experienced for almost fifteen years.

The bill promises to strengthen consumer protection. In principle, it raises bank capital requirements, requires more collateral and margin requirements, enables a regulator to act against a very large and risky bank, and more.

These are overdue reforms. Warts and all, and considering the political realities of legislative deals, having this bill is better than continuation of the regulatory vacuum.  But it is not a comprehensive systemic solution. This watered down bill will not effectively reverse the massive financial deregulation that took place, nor will it fully assure that the financial system will be effectively supervised and regulated so to avoid another systemic crisis…

  Despite the length of the document, the regulatory reforms in this bill are vague.  Congress was reluctant to specify clear and detailed regulatory code into the bill. This means that the detailed homework in defining, detailing and interpreting the broad regulations is being passed on to the regulators.

Regulators will have enormous latitude and discretion in specifying these regulatory details, and in interpreting them during implementation.  And the notion of ‘regulator’ ought to be viewed broadly here, since they also include senior political appointees in government, such as the Treasury secretary, who will wield enormous influence in the regulatory reshaping, interpretation and implementation.

If recent history and our empirical work are any guide, such latitude and discretion handed to regulators and politicians in government can be very costly because of the likelihood of regulatory (or ‘state’) capture by powerful financial institutions.  Recent debates on this financial reform bill tend to focus on technical aspects, largely ignoring the politically sensitive issues surrounding the power of money and influence in politics with its perverse effect on financial regulation and its implementation.

Thus, I ask: how will politicians and regulators in government have the wherewithal to withstand pressures from Wall Street enabling them to make timely and tough decisions to break a very large bank (when the risk to the systemic so warrants)?  And even if a regulator dares to do so, how will it be implemented given the international ramifications of such an action? 

We should not totally rule out that some regulators may carry out appropriate actions at times.  But we should also be mindful that the vested interests in a system captured by ‘money-in-politics’ would tend to bias decision-making against such timely and tough regulatory actions. Congress did not dare to look into this thorny issue of money in politics and its corrupting influence on political and regulatory decisions.

  In this context, errors of omission in this bill are noteworthy.  Freddie Mac and Fannie Mae, the quasi-public housing finance behemoths that important culprits in the financial crisis, have been spared. Yet again, lawmakers carefully avoided addressing these institutions, which in the past have exerted undue financial largesse on politicians to influence them so that they could operate in a financially irresponsible fashion. 

More broadly and understandably, given the interests of lawmakers and political realities, the bill is silent on the pervasive and pernicious role of money in politics influencing the whole regulatory system. Furthermore, the bill does not clearly re-erect a wall between traditional deposit banks and investment banking, which prevailed since the Glass-Steagall Act was enacted in 1933 until it was repealed in 1999.

Not that the U.S. is alone in facing challenges in regulatory reforms.  Progress on this front is even more questionable abroad: witness the time lags, lack of coordination and consensus on regulatory reforms among EU members, the U.K., the IMF and the Financial Stability Board (FSB).

The disarray in much of the continent across much of the Atlantic on these matters is also important for the effectiveness of the just passed U.S. regulatory reforms themselves.  This is because a modicum of coordination and harmonization across international financial centers is required for financial institutions not to shop around more lenient regulatory regimes.  It may be years until Europe gets its act concretely together on this. 

Worse, the way the Basel Accord is being watered down right now as a direct result of  lobbying pressure by banks is likely to further erode the impact of the U.S. Regulatory Reform Bill on U.S. banks, since the Basel international supervisory rules may end up mattering more to all banks, including the US-based ones.

Thus, daunting challenges remain and need to be addressed head on, otherwise this Bill will not substantially enhance the stability of the financial system or alter the behavior of financial institutions in a meaninful fashion.

Paradoxically, this Bill may end up having a tangible impact on oil and gas companies. In fact, in ending on a positive note, let me focus on a little noticed side initiative within this bill which nonetheless is of high relevance for global development and anti-corruption efforts.  There is a resource transparency provision in the bill spearheaded by Senators Lugar and Cardin (supported by many others).

The provision mandates oil, gas and mining companies registered with the Securities and Exchange Commission (SEC) to publicly disclose the tax and revenue payments made to any government and requires that they disclose how they ensure that their payments do not fund armed groups in some countries. The information disclosed by these companies will be independently audited.

Even if this initiative is an obscure aside for many, this is in fact a commendable provision to enhance transparency in the extractive industries and in many resource-rich governments. 

There are two priorities next on this important front.  First, transparency provisions ought to apply about full disclosure of the contracts signed between industry and governments as well.  Too often the terms of such contracts are not disclosed (let alone subject to public debate prior to their signing), which impairs the effective analysis of the disclosed data on revenues paid by oil and gas companies to governments.  

Second, in the near future these mandated transparency reforms in the extractive industries ought to also be rolled out to security exchanges in financial centers in London, Frankfurt and elsewhere.

FIFA’s Monopoly and their obsolete Corporate Governance

 FIFA was founded in 1904 as a non-governmental and ostensible democratic organization concerned with the “good of the game.” Today not only is FIFA the only international body governing soccer, but its “product” is in extremely high demand and basically lacks close substitutes.

For instance, when FIFA recently objected to French and Nigerian government leaders interfering in the affairs of their respective national teams, both governments had little choice but to relent as their respective soccer associations were faced with sanctions and possible suspension by FIFA.  It would be political suicide for a country leader to be associated with sanctions against or the expulsion of a national soccer team, particularly since the public is strongly invested in the sport and influential private groups have strong financial interests in it.

A contrast between the development aid industry and FIFA is telling. Nowadays, emerging economies can choose between various multilateral development banks (MDBs) or bilateral aid donors based on which offers the most convenient financing terms.  Furthermore, development finance often has substitutes, such as foreign direct investment, trade and the country’s own reserves, thus their demand is more elastic.  Therefore, compared with access to international soccer, there is much more competition on the supply side of development finance, and there is a more elastic demand for such aid product. Developing countries therefore generally have far more bargaining power in negotiating with an aid institution than with FIFA, which is a monopoly in a market with very inelastic demand.

FIFA’s monopoly over international soccer, and the inelastic demand for its product, allow the organization to wield inordinate political and market power. This permits FIFA to extract immense rents from countries. In recent years, FIFA has generated revenues averaging about US$1 billion per year, with an additional US$ 3 billion generated in the year when the World Cup is held.  Most of its revenue is generated through their control over television and marketing rights for games.  FIFA extracts very large rents from countries hosting the World Cup while host nations foot the bill.  FIFA does not even pay taxes to host countries for in-country revenue; it demands, and pliantly receives, tax-exempt “diplomatic” status.

FIFA’s monopoly power in international soccer is also mirrored by its own outmoded and autocratic internal governance structure. FIFA has no term limits for committee members or its president. Since its inception, over a century ago, FIFA has only had eight presidents, their tenure averaging over 13 years each.[1] Further, key decisions, such as choosing the World Cup host, are made by very small FIFA committees rather than the general council. Ultimately, a select “club of old insiders” wields disproportionate influence.

While development aid institutions still need substantial reforms[2], it would be highly unrealistic nowadays for an international development agency, like the World Bank, to blatantly infringe on the national sovereignty of its member states by mandating them to make luxury infrastructure investments with their own national resources, subsequently extract the revenue flows from such investments. But this is what FIFA is effectively doing.

FIFA’s statutes impact sovereignty.  FIFA’s Statute generally prohibits country members from taking soccer-related contracts and disputes involving associations, club members, player and officials to their national courts of law. FIFA can impose serious sanctions on members violating their provisions.

FIFA imposes a large development costs on host countries. FIFA’s effort to bring the World Cup to Africa is laudable and is likely to generate some socio-political and reputational benefits for South Africa.  But, the costs for the host nation are huge, since FIFA mandates infrastructure investments but does not equally share the funding burden — far from it, in fact.  This is particularly troubling in the current World Cup, since South Africa faces enormous development challenges.  Of course, FIFA often is not the only culprit resulting in lavish expenditures at the expense of development:  it is not uncommon that some politicians in host countries would also favor extravagant investments, due to political payoffs or venality.

The total cost for South Africa in infrastructural investments in stadiums, roads and other projects is estimated to top about US$ 6 billion. For example, five new stadiums cost South Africa well over US$1.3 billion, significantly more than was originally envisaged.  Although the government and local people encouraged renovating existing stadiums, FIFA nixed this idea in favor of building new stadiums in locations with better views and away from poor neighborhoods. Take the existing stadium in Cape Town Township, which could have been renovated for a mere 5 percent (an estimated $30 million) of the actual cost to build the brand new Green Point stadium (US$600 million).

Similarly, a brand new stadium capable of seating well over 40,000 people was built in the small city of Nelspruit at a cost of US$ 137 million, where many of its  residents lack access to running water and there is not even a professional soccer team in town.[3]

The World Cup has boosted tourism. But with FIFA’s hospitality agents monopolizing most of the bookings, South Africa will get minimal tourism revenues.  Tourism services were granted by FIFA through a no-bid, sole source contract to Switzerland-based Match AG, where the nephew of FIFA’s president has an interest. Construction was also expected to provide a major boost in employment, but that has not been sustained.

A token fraction of FIFA’s estimated US$3 billion World Cup revenues may be given to South Africa after the games, yet it would barely make a dent to the billions already spent by the country.  FIFA will channel another share of their billions in revenues into many national soccer associations around the world, but mostly the money will not benefit local communities; instead it may serve as influence-wielding funding to secure support in maintaining FIFA’s corporate governance status quo.

Transparency

FIFA also faces transparency challenges both on the field and off the field.  On the field, referee errors during this World Cup have once again increased calls for technological assistance to refereeing, particularly through instant replays. Off the field, the lack of transparency in FIFA’s procurement and bidding has given rise to numerous scandals.

Calls for instant replays. Controversies over referee errors and questionable goals are not unique to this World Cup. However, the availability and use of modern technology can often reduce and double check referee errors. For example, modern technology in the form of an instant replay on the stadium’s big screen exposed the egregious referee mistakes during the England-Germany and Mexico-Argentina matches on June 27.

Although spectators and players tried to bring the error to the referee’s attention, long-standing FIFA rules state that referees cannot rely on technology to make decisions.  FIFA officials promptly ensured that no more replays were shown on the big screen for the remainder of the World Cup.

Off the field, lack of transparency in procurement and bidding has given rise to corruption scandals. Last year, a Swiss investigation concluded that FIFA employees received kickbacks from a Swiss sports marketing company ISL/ISMM.  The company was suspected of securing television rights to international sporting events, including the World Cup, by engaging in corporate bribery. One of the officials implicated was a FIFA executive committee member who received bribes totaling over $150,000.[4] There is also evidence that a lack of transparency and bribery featured in preparations for this year’s World Cup.  A recent report alleges that there was a lack of competitive bidding for stadium construction contracts and price-fixing for materials, both of which resulted in inflated construction costs.[5]

Selected Recommendations

 National political leaders, civil society and the media are key “actors” in breaking the FIFA’s monopoly and their obsolete corporate governance logjam:  

– Politically-induced FIFA reforms. A concerted challenge to FIFA’s monopoly powers by the highest political officials in member countries is warranted, supported by the country’s opposition parties and civil society.  With the support of the broad base of soccer aficionados who are becoming increasingly aware of how FIFA operates, national political leaders should take on the organization’s governance challenges (existing vested interests by some national politicians notwithstanding).  In a few months, the selection for the national venues for the 2018 and 2022 World Cups will jointly take place.  The political leadership of these future World Cup host countries may join Brazil, the 2014 host, in drawing other countries and FIFA to the re-negotiation table in an effort to establish a new and more equitable international soccer order.

– A more active monitoring role by the media and civil society: Mainstream media outlets around the world have been largely silent regarding FIFA’s glaring shortcomings. This is partly due to vested financial interests and the fear of alienating powerful constituencies. Yet, there is a significant segment of the media industry (including internet-based) that is not subject to the same pressures and can play a more active role in investigating and disseminating information on weak governance and reform options, further sensitizing citizens at large as well as influential shapers of policy.  The media should also play a more active role in holding their country politicians accountable in their investment decisions and payments to FIFA, and should further collaborate with civil society organizations that could do more to hold governments and FIFA more accountable regarding investment and financial decision surrounding a World Cup.

FIFA could actively work to reform and consider the following concrete suggestions:

FIFA should not undermine host country development objectives: Currently, host countries bear exorbitant preparation costs for World Cups, which are particularly onerous for emerging and developing economies.

– FIFA should refrain from mandating “white elephant”  investment projects, deter countries from embarking on wasteful investments (at times favored by some national politicians), and encourage host countries to engage in cost-savings and upgrades of existing infrastructure.

– FIFA’s financial contribution for World Cup preparations by host nations should be vastly larger, particularly in emerging economies and developing countries.

– Revenue-sharing arrangements should be revamped to increase the paltry share currently received by the host nation.

– Innovations in private sector initiatives and Public-Private Partnership (PPP) Infrastructure investments ought to be encouraged and explored much more actively in emerging economies.

FIFA should increase transparency on the field: While FIFA President Sepp Blatter has hinted at reconsidering his long-held opposition to changing the outmoded referee system, following the worldwide outcry over the England-Germany and Argentina-Mexico games, suspicions linger that FIFA’s ‘concession’ may simply reside in adding more referees in the sidelines, rather than introducing new, accurate, and transparency-enhancing technology.

– FIFA could allow instant replays for contested goals. If instant replay technology is too expensive to implement worldwide, for starters it ought to be used at large international tournaments, like the World Cup.

FIFA should improve transparency in procurement:

– FIFA should replace its sole sourcing procurement with a high-tech public procurement portal for all soccer-related contracts, and likewise the host country ought to have an e-procurement portal, which includes all preparatory investments as well.  Procurement contracts would be subject to competitive bidding, banning sole sourcing contracts above a minimum amount.  These reforms would result in large cost savings for countries and deter conflicts of interest and corruption.

– It should also institute a hotline for reporting alleged improprieties. To promote and protect impropriety reporting, FIFA and the host nation should have in place stringent whistle-blower protection policies.

– FIFA should institute a public debarment system for corrupt firms, similar to that already under implementation by various MDBs such as the World Bank, where companies found engaging in corruption are publicly banned from bidding.

FIFA should improve their own corporate governance and transparency:

– FIFA should institute public disclosure requirements for the assets and incomes of FIFA officials and their relatives and those of the national soccer associations.

– FIFA should institute term limits for committee members and its president and limit the number of committees that representatives can be on. Furthermore, FIFA’s congress should transparently vote on important items, such as the World Cup host country, rather than leave the decision to a small committee.

This Sunday evening, the world will have a new soccer champion. The colorful vuvuzelas will quiet down as spectators after a festive night. The World Cup fervor will be on hold until 2014.  Both South Africa’s President Zuma and Brazil’s President of Lula will attend this Sunday closing ceremony and final game, for the passing of the baton from this World Cup event to the next.

By the next World Cup, in 2014, President Lula would have long been replaced by a new president of Brazil who will lead the nation at their Cup, consistent with their democratic principles that also govern South Africa.  But unless crucial reforms are implemented soon, such democratic transfers of power will remain absent at FIFA.  Before 2014, it is imperative for FIFA to draw from such good examples of national leadership and governance to help FIFA reform, and for it to be governed as a 21st century global institution, one that becomes a real partner of sovereign nations pursuing development objectives.

[2] Such as in how transparently and competitively their heads are selected (as with FIFA)

[3] If no sizable regular audience is in attendance in the Nelspruit stadium following the Cup, then the ‘unit cost’ of this investment could end amounting to US$34 m. per game played.  Similarly, even if some sports events take place in the Green Point stadium in Cape Town, the unit costs is likely to end up being very high and the rate of return highly negative.  And so on.

[4] Other examples of corruption allegations exist, some recent.  Last week allegations surfaced against the Football Federation of Australia (FFA) over its bid to host the 2022 World Cup to the effect of alleged attempts by FFA officials to buy the votes of FIFA’s executive committee members. Further, allegedly the FFA also attempted to influence FIFA Vice President Jack Warner by paying for his national team, Trinidad and Tobago, to fly to Cyprus.

[5] For detailed information on possible conflicts of interest in the 2010 World Cup refer to Herzenberg, Collette, ed. Player and referee: Conflicting interests and the 2010 FIFA World Cup, Institute for Security Studies, April 2010

Note: this article was co-authored by Daniel Kaufmann and Veronika Penciakova (also at the Brookings Institution), and is an Op-ed in the Brookings homepage.

Well, not quite, as it turns out, if judging by the results from an analysis of the Group competition stage that has just concluded in the football World Cup currently taking place in beautiful South Africa.

A total of 32 teams qualified for the World Cup.  They were divided into 8 groups of 4 countries each, competed against each other, playing 3 games each, for a maximum of 9 points.  The top 2 teams in each group are now advancing to the next stage of 16.  Eight games will take place over the next 4 days, starting on Saturday with Uruguay playing South Korea, and then later in the day Ghana plays against the US.  And on Sunday Germany plays England in the earlier match, and so on until this coming Tuesday.  The winner in each one of these 8 games advances to the Cup’s quarter finals, and so on…

Unless the group stage that has just concluded turns out to be a major anomaly, the instant analysis we have made of the performance of these 32 teams in this Group stage casts serious doubt on the FIFA rankings of teams.  FIFA ranks over 200 country teams; its latest ranking was in late May shortly before the World Cup.

In these FIFA rankings at the outset of this World Cup, Brazil were naturally at the top, followed closely by Spain in 2nd place.  Italy was 5th, France was 9th, Russia 11th, Egypt 12th, Greece 13th, USA 14th, Serbia 15th.  Of these, neither Russia nor Egypt even made it through the preliminary qualifiers to the World Cup (so they were absent from the Cup’s Group stage).  Italy, automatically qualified for being the defending World Champion and (kind of) played in the Group stage.  But not only it failed to advance beyond the Cup’s Group stage; it finished last in its group. For good measure, highly ranked (by FIFA, that is) France failed miserably as well, and Serbia did not advance either.

In sharp contrast, countries ranked lower by FIFA, like Chile (18th), Paraguay (ranked 31st!), Ghana (32nd!), Slovakia (34th!), Japan (45th!!) and South Korea (47th!!), are all advancing to the next stage of the World Cup, having been successful in the Group stage of this football competition.

So if you were making bets on performance so far on the basis of FIFA rankings, you would not be faring well.  In fact, some interesting results emerge from a simple and instant statistical analysis just done based on the number of points accumulated by each team in the Group stage of the competition.

1.  FIFA’s ranking prior to the World Cup has little power in explaining the number of points accumulated by each one of the 32 teams; in fact FIFA’s rankings only explain about 15% of the variation in total points across all teams.

2.  If you were betting on two teams which were 12 positions apart in the FIFA ranking prior to the Cup’s start (say the difference between the 13th and the 25th in FIFA ranking), the number of additional points accumulated by the team ranked much higher would have amounted to less than half (on average).

3.  In sharp contrast, the region of origin of the country seems to do much better (twice as well as the FIFA ranking) in explaining how many points each team accumulated.  FIFA ranking totally over-estimates the disappointing performance of Africa (by over 1.5 points!), and of the big European soccer powers (almost 1 point).

4.  Conversely, FIFA rankings would have seriously under-estimated the number of points that surprising Asia would have accumulated in its 3 games (by almost a point, and even more so we focused on ‘globalized’ Asia, e.g. without North Korea).  To an extent, FIFA rankings also under-estimated the US performance so far (by half a point).

5.  By far the biggest outlier is another region altogether, however:  South America, which FIFA’s rankings would have predicted that they would have accumulated a middling 4.5 points on average.   Instead, all 5 South American teams (Brazil, Argentina, Chile, Paraguay and Uruguay) have succeeded in advancing beyond the group stage, accumulating an average per team of almost 7 points.  FIFA rankings would have resulted in under-estimating each South American country’s points total by almost 2.5 points!

6.  Contrary to convention, a very large economy (with very large financial and human resources) does not seem to explain how countries have fared in the group stage so far.

7.  Instead, the quality of governance of a country (rule of law, corruption control, voice and accountability, etc., for which we use the WGI) does explain performance in the group stage.  A country with relatively good governance could have accumulated almost 2 points more than a country with relatively poor quality of governance (difference of 2 standard deviations).

From this perspective, perhaps then it is not such a surprise that North Korea, Italy, Greece, France, Nigeria, Cameroon, Honduras and Cote d’Ivoire are going home early.  [Of course this is not airtight: the well governed Swiss and Danes are also going home, for instance, perhaps victims of some European contagion...].

Obviously much more data and analysis is needed to ascertain robustness of these results and to see whether they are likely to apply more generally.  And a country highly ranked by FIFA (or by anybody else for that matter) may well be the eventual winner of the World Cup, but that is no great feat.   At a practical level the World Cup results so far raise serious questions about the usefulness of the existing FIFA rankings.  A revamp is called for.

And at the metaphorical level, it suggests that this football game is pregnant with much larger messages.  Sheer size or economic might in itself does not assure that the country is highly successful in soccer.

Governance matters, and below the lofty national level as well: some teams, such as Ghana, Chile, South Korea, the Netherlands, Japan and the US, thanks to good governance and leadership, have managed to subscribe to the motto that ‘the whole can be much more than the sum of its parts’, contrasting teams like Italy, France and Cameroon, where they have shown how much less the whole can be than the sum of its parts when misgovernance is rife.

South American ascent, European descent, African disappointment, unexpected Asian surprise.  A broader metaphor as well?

Update, Saturday June 26th, the day the knockout stage started.  Uruguay beat South Korea 2-1, continuing the Latin American ascent and stellar performance so far from all 5 South American teams (from COMNEBOL), while FIFA’s 47th-ranked South Korea represented Asia rather well in this match among the remaining 16 teams.  Then Ghana, ranked 32nd by FIFA, won 2-1 against the United States (ranked 14th).  Ghana was the only African country that had made it pass the World Cup’s Group stage to this early knockout stage.  It now proudly moves on to the quarter finals, when it will play Uruguay (ranked 16th by FIFA).  The challenge to FIFA’s world soccer rankings continues.

Update 2, Sunday June 27th, the second day of the knockout stage. A day that may become history in soccer, and finally force FIFA to reform and jump aboard the 21st century.  What takes place on Sunday is so important that it deserves its own blog entry (here).

In ancient Greece, a volcano eruption was a sign of divine disapproval.  It is unclear whether modern Greece has taken notice.

For better of worse, unlike Greece, there was no ancient BP.  Oily conglomerates have only become more important than nations in recent times.  It is thus hard to tell whether an extraordinarily active hurricane summer season (expected to be upon us imminently) can be interpreted as sign of disapproval from above.

There is growing consensus that unless the pace of progress quickens, the world will be unable to achieve the majority of the Millennium Development Goals in five years.  But the devil is in the details:  does the pace of progress need to quicken everywhere, and similarly across all MDGs?  And what does progress depend on?…

Last week the Belgian agency for Development Cooperation convened its 2010 “States General” Conference, which focused on the MDGs.  In the keynote address at the Conference I emphasized the achievements and challenges in meeting targets, and focused on governance as a constraint to accelerated progress.

The key issues I focused on in the Conference presentation are summarized below.*

First, where do we stand on the MDGs?   On average the world has made progress in meeting targets, but such progress has been very uneven.

Some countries and regions are succeeding, while others are stagnating. On balance, the world as a whole appears to be currently on track to halve absolute poverty by 2015.  However, such average progress is in large measure due to dramatic poverty reduction in China.

In 1990, over half of the population in East Asia, South Asia and sub-Saharan Africa lived in extreme poverty.  In recent times, only 17 percent, or 22 percent if China were excluded, of the East Asian population  lives on less than $1.25 a day.

But, in sub-Saharan Africa and South Asia 51 percent and 40 percent of the population (respectively) still lived below the $1.25 a day poverty line recently (Figure 1).   Even more striking, even though there are always debates about the accuracy of these figures (and there is a lag in reporting), over 70 percent of the population in the two regions appear to still live on under $2 a day.

While the world’s progress on average, largely driven by a few countries, is certainly laudable, 1.4 billion people continued to live on under $1.25 a day and 2.6 billion lived on under $2 a day in recent times.  Even in East Asia, where the largest reduction in extreme poverty has been achieved, 337 million live below the $1.25 poverty line.

Achievement is within reach on some MDGs, but is out of reach on others. In addition to being on track to halve poverty, the world (but not necessarily all regions) is on track to achieve gender equality in primary education and to halve the number of people living without access to clean water.

On other goals the world has made less progress. For instance, maternal mortality ratios were expected to be reduced by three-quarters, from 480 deaths per 100,000 live births to one hundred and twenty by 2015. By 2005, the maternal mortality remained nearly constant at 450 deaths. Similarly, the share of the population without access to sanitation was expected to be 28 percent, but by 2005 virtually half of the population remained without access (Table 1).

In the years since data on most indicators was last collected the world experienced a surge in food prices and a global economic recession. Both circumstances have negatively affected progress on MDGs.  The rise in food prices is estimated to have increased the number of chronically hungry people by 75 million to a worldwide total of nearly one billion, while the recession has contributed to the impoverishment of tens of more millions.

Considering that progress on MDGs has been uneven across regions and targets, and also the quality of governance is highly variable across countries, it is important to focus on the links between governance and the MDGs.  This is also warranted because governance has not received its due  attention in the programs to support and monitor progress of the MDGs.

Governance does matter for MDGs. Our past research suggests that when governance improves, from, say, the extremely low levels of a country like Afghanistan for instance, to the subpar (yet not bottom ranked) levels of Kenya (or from the subpar levels of Kenya to the many countries in the middle group of the worldwide governance indicators, such as India, or from the middling levels of India, to the satisfatory levels of Botswana), infant mortality on average declines by almost two-thirds, and incomes rise almost three-fold in the long run.  Subpar quality of governance in many countries can be a major constraint to progress on the MDGs (Figure 2).

Non-traditional dimensions of governance also affect the MDGs. Improvements in public sector financial management alone will not ensure good governance and progress on goals. Non-traditional (for many donors) aspects of governance, such as freedom of the press and human rights, also influence development. The strong relationship between poverty and gender rights is particularly striking.

Considering the slow progress on gender-related goals, much more attention ought to be paid to gender rights (Figure 3).  Research shows that female empowerment, education and income help reduce child and maternal mortality rates. Press freedom also impacts development (also in Figure 3, below).

Thus aid is necessary, but alone is far from sufficient. Research has shown that aid can be effective when there is satisfactory governance in the recipient country, or at least governance is steadily improving.  Studies have found that, among others, primary school enrollment and child mortality outcomes are also conditioned by governance. Thus, increasing aid will not ensure progress on the MDGs.  Investment in areas that impede the effective allocation and efficient use of funds, such as governance, may also make sense.

Governance is not only paramount for recipient countries, but it is also a key factor among the richer donor countries and their aid agencies.

Honoring Aid Commitments is Important. Meeting the MDGs is not only ambitious, it is also costly. Therefore in 2000, donors pledged to increase foreign aid to 0.7 percent of their Gross National Income (GNI). By 2008, donors provided only 0.3 percent of GNI on average, and only a fraction of this is channeled to the poorer countries.

The allocation of aid is also crucial. Providing governments with aid to increase health expenditure may improve child mortality rates, but only if the money is efficiently and transparently allocated.

Further, additional funds provided directly to MDG-related sectors, such as to cover health costs in urban settings, which many aid donors provide for,  may not always be as effective as providing some additional funding to neglected sectors, such as infrastructure or governance, which constrain progress for development in general, and for attaining those very health-related and other MDGs in particular.

In other instances communities may be more effective at implementing projects than central governments, particularly where high-level corruption is pervasive.   Under these circumstances donors should consider channeling aid to communities rather than central government agencies.  More generally, aid needs to be more selectively provided, so to enhance its effectiveness.

Development aid is not an island. The recent financial crisis has shone a spotlight on the impact of economic policies of industrialized countries on the rest of the world.  The recession has resulted in the impoverishment of millions more people in developing countries.  Responsible governance and policies in industrialized countries matter for development and the MDGs at least as much as donor aid itself.

Additionally, continued agricultural subsidies in industrialized countries continue to hamper the expansion of trade, employment and growth in many developing countries. These economic policies ought to be better integrated into development aid strategies by donors.  Further, greater attention should be paid to the important role of the private sector in meeting the MDGs.  Like governance and infrastructure, the role of the private sector has also been neglected in the MDGs.

In 2000, the international community committed itself to achieving eight lofty goals.  While the upcoming September UN Summit on the MDGs will surely highlight some of the partial successes in meeting the MDGs in some settings, there also ought to be an honest and transparent focus on the many setbacks in many settings around the world, and a frank assessment as to the reasons for such setbacks.

The evidence suggests that the uneven progress in MDGs is related to major differences in the quality of governance across nations.  Furthermore, there are dimensions of governance, such as gender rights and media freedoms, that may have been subject to particular neglect.  Yet more generally, as stated, in the recent past governance has not received the attention it deserves in the context of the MDGs.

Focus on governance by the international community is not the ‘politically correct’ thing to do, and, further, many leaders prefer to be mute about this challenge because they know that there is misgovernance in their midst.  Yet this merely helps to explain, not justify, inaction on this front.  In the next stage, emphasis on key governance dimensions, including corruption, inequality, media freedoms and gender rights, is required to help address major hurdles to progress.

Politically difficult decisions and decisive leadership are necessary, but by paying greater attention to governance, to improved aid selectivity and allocation, by targeting neglected sectors, and by supporting a larger role for the private sector, many MDGs may still be within reach for most.

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*Note:  This entry is a synthesis of the presentation I gave last week at the Conference in Brussels referred to above.  An expanded version, co-written with Veronika Penciakova, has been subsequently posted here as a Commentary piece  at the Brookings website.   This blog entry draws from the joint piece.

In our research article, entitled ‘Does Grease Money Speed Up the Wheels of Commerce’, based on surveys of thousands of multinational and domestic firms around the world, we found that the answer is No — if bureaucrats have control in determining the extent of regulatory burden and red tape delay so to extract bribes.

We found that on average firms that bribe waste more, not less, management time dealing with bureaucrats that firms that say No to bribery, and that firms that bribe also face a higher, not lower, cost of capital. Thus we rejected the dominance of the ‘efficient grease hypothesis’, suggesting that, on average, bribery was ’sand in the wheels of commerce’ instead …

We therefore concluded that the business community can benefit from laws and collective initiatives strengthening its ability to say No to bribery.  This is consistent with the main tenet of the current ‘Schumpeter’ article in The Economist, which states that ‘Saying No to corruption makes commercial as well as ethical sense’.

But it is important to emphasize the importance of collective initiatives, because our findings are also consistent with the fact that many (though not all) firms operating in corrupt environments can still find that individually it may ‘pay’ for them to bribe, often when that is the way that others do business in the same industry and country.

At the end of the day, it comes down to a cost-benefit calculation by each firm.  Ongoing research, to be detailed in a future blog entry, suggests that such costs and benefits from the bribing vs. not bribing decision varies greatly across countries and types of firms.  What the upbeat article in The Economist does not address is the fact that still nowadays, for many firms, in many settings, saying ‘Yes’ to bribery is still commonplace and it still makes some commercial sense from their (cost-benefit) perspective.

Granted, with recent data we estimate that the majority of firms around the world refrain from bribing for procurement bid awards, for instance.  But the average share of firms that frequently bribe in a given country is still very large, about one-third (though it varies a lot; the share is much smaller among the Nordics than for Greece or Italy, for instance).

Better enforcement of foreign anti-bribery laws and convention is important so to collectively raise such cost for all multinationals.  The Economist article welcomes improvements in enforcement in the US and the UK.  Such recent progress is worth noting, even though there are still lingering questions about ambivalence on how determined is the UK in this area.

More generally, even if the recent tougher enforcement in the US and hopefully in the UK is  sustained over time, a much more resolute enforcement of the OECD foreign bribery convention is still needed across many other important and wavering OECD members.  Collective action matters.

Further, a significant reduction in bribery by the corporate sector to public officials around the world cannot come about through legal initiatives such as the (original, US-based) FCPA and the OECD foreign bribery convention on their own.  This is particularly the case where there are weaknesses of enforcing such laws at the national level, or even if enforced, where the penalties for bribing are not large.

Thus, to substantially raise the cost of bribery for a firm, other measures are also needed.  Unfortunately voluntary industry agreements on some general anti-bribery principles, or manuals on internal codes of ethical conduct, are not it.  Instead, for many firms nowadays raising the reputational cost is what actually matters the most, as in the recent case of IKEA in Russia, among others.

That is why the role of the media is so important in investigating and prominently featuring important cases of corporate corruption.  And also that is why one ought to welcome  the new agreement by the multilateral development banks (the MDBs, namely the World Bank, the African, Asian and Inter-American Development Banks, and the EBRD) to cross-debar firms found to have engaged in bribery or corruption on projects they have funded.

But cross-debarment is insufficient, it has to be publicly disclosed, without delays or exceptions or special dispensation to powerful conglomerates.  There has been some progress in making debarment of many firms public among some MDBs (such as the World Bank), but further public disclosure across the board is still pending.

Transparency, by affecting the reputational cost of the firm, is key.

Right now I am committing the heresy of focusing on the link between corruption and budget deficits in industrialized countries.  After all, even if politically incorrect to admit it, there are a number of rich countries where corruption is widespread, in a variety of forms, illegal and ‘legal’, political and financial.

I explore the mechanisms by which corruption can affect the public finances of a nation, and then the extent to which corruption matters in explaining a rich country’s fiscal deficit.   As it turns out, it matters aplenty.

The Wall Street Journal picked up on this work, and used it in their cover page article on Greece.   A brief version of my research article is here at Brookings, and also reproduce in full in this entry here below as well…

“Can Corruption Adversely Affect Public Finances in Industrialized Countries?”

A number of studies have shown that corruption hinders development around the world. Such findings have elevated governance, alongside macroeconomic discipline and openness, as a determinant of growth and economic development. Less focus has been paid to possible links between corruption and macroeconomic outcomes.

Some research in past decades has focused on the political economy of macroeconomic policymaking, and some papers have suggested that corruption can affect a country’s public expenditures.  But, because studies generally view governance and macroeconomic policies as separate determinants of growth and development, there has been less research on the possible links between the two factors.  This is particularly the case in the industrialized world, where the challenges of governance and corruption tend to be underestimated.

Departing from traditional “developing country” focused studies of corruption, I ask whether corruption may adversely affect public finances in industrialized countries.  With recent data, I explore the link between corruption (and other governance variables) and the public budget deficit of industrialized countries.

Such inquiry is motivated by the simple observation that, contrary to popular belief, there are significant differences in the extent of corruption and in the quality of governance among industrialized countries.  Further, it is also well known that there are large differences in the budgetary balances (ranging from large surpluses to large deficits) of industrialized nations, even among countries within common zones or “coordinating” bodies, such at the EU and the OECD.

First I ask the a priori question:  Through which channels could corruption affect the public finances of a country?

In a forthcoming paper, I detail a number of such mechanisms, some of which are drawn from the existing literature:

1.  Corruption lowers tax revenues: Public resource mobilization can be impaired through tax evasion and creative tax avoidance schemes. Additionally, corruption opportunities provide an incentive to make (or at least keep) the tax code unduly complex, and subject to many discretionary exemptions.

Further, corruption renders the tax collection institutions less effective and efficient.  And, corruption can affect customs administrations, even if this particular challenge is more pervasive in countries which are not rich.

2.  Corruption increases public expenditures:  Corruption may be associated with bloated bureaucracies, excessive and less productive public investments, and an inefficient composition of expenditures.  For example, large wage bills may overshadow operations and maintenance expenditures.  To maximize lucrative rent-seeking, decisions can be skewed toward large capital investments at the expense of labor-intensive ones, for instance.

3.  Corruption affects public sector debt and financial sector risk:  Where corruption exists and transparency is lacking, decisions regarding the composition of public debt may be more risky, and debt servicing may become more expensive for the national treasury (and may unduly reward outside private counterparts).

More generally, misgovernance, as well fraud and corruption, in financial instruments can jeopardize the whole financial system.   As I have written previously, some of this corruption may not be strictly illegal, such as the subtler forms of capture of the financial sector regulatory or policy regime (which we labeled as state capture).

When the financial system falters, private liabilities may become public, as occurred during the U.S. bailout of Wall Street.  These bailouts indirectly affected the fiscal balance through the rise in public liabilities and directly affected it through the stimulus packages that aimed to mitigate the recessionary impact of the financial crisis.

4.  Corrupt data matters for a fiscal crisis: The more a country distorts, hides and delays disclosure of the true status of its financial and national statistics, the more likely this will introduce destabilizing uncertainty into financial markets, and the higher the probability that a financial and fiscal crisis may result.  Accurate and early disclosure of a country’s financial and economic situation is crucial for ensuring that remedial measures are enacted.

A faltering country may enact necessary reforms on its own once its situation is disclosed.   However, even if a national government is unprepared to take the necessary remedial steps, the international market and/or neighboring countries and international institutions may pressure it to resolve budding fiscal crises in a timely manner.

5.  The underground economy affects the fiscal balance: Public misgovernance may also be associated with a larger unofficial (or shadow) economy.  A large shadow economy reduces tax revenues, as alluded to in the first item. F urther, large unofficial economies shrink the tax base and may force higher official tax rates, which in turn may feed into the vicious cycle of expanding shadow economies and high statutory taxes (which often go uncollected).  Also, a large underground economy hampers growth, FDI, exports and overall productivity, all of which further reduce overall tax revenues.

6.  Corruption affects productivity, competitiveness (including in exports) and growth:  Corruption impairs productivity, competitiveness and growth more generally, through mechanisms other than the underground economy.  Specifically, corruption increases the cost of doing business and results in lower efficiency of investments and business decisions.  In fact, I find a very close relationship between corruption in a country and its global competitiveness index.  If productivity, exports and growth are impaired, so are the country’s public finances.

It is expected that corruption, through the aforementioned six mechanisms, is linked to defective public finances and high fiscal deficits. The extent to which any of these mechanisms may dominate the rest is difficult to determine, and likely varies from country to country. Nonetheless, as a whole, these mechanisms are hypothesized to significantly influence industrialized countries’ fiscal balances.

What are the main findings?  Utilizing governance and budgetary data from over 35 industrialized countries, and controlling for other factors, I find that:

1.  Industrialized countries vary in their ability to control corruption. According to the Worldwide Governance Indicators (WGI), by the end of 2008 Finland ranked number one for controlling corruption (with a rating of 2.3 out of a maximum of 2.5),  while the Netherlands ranked 7th (rating of 2.2), the U.K. ranked 16th (rating of 1.8), the U.S. ranked 18th (rating of 1.5). Spain ranked 31st (rating of 1.2), Portugal ranked 36th (rating of 1.1) and Greece ranked 82nd (rating of 0.1).

Thus, the difference between Greece and Spain, or the difference between Spain and the Netherlands, is one standard deviation, and the difference between Greece and the top ranked Finland exceeds two standard deviations, a vast difference.

2.  There is a strong relationship between corruption and fiscal deficits in industrialized countries. An improvement by one standard deviation in corruption control in 2005 is associated with about a 3.5 percentage point reduction in the average fiscal deficit between 2006 and 2009 (controlling for other factors), while a larger improvement in corruption control, by two standard deviations, is associated with a seven percentage point reduction in the fiscal deficit (see the chart below for the simple correlation).

.                                                                               .

3. “Legal Corruption,” or state capture (which also varies substantially among industrialized countries), is also significantly associated higher fiscal deficits. The econometric estimates suggest that the impact of lowering the extent of legal corruption (and capture) on the fiscal deficit is very similar to that of lowering traditional forms of corruption.

4. Membership in the Eurozone does not guarantee a lower fiscal deficit. Controlling for many factors, including governance and income levels, I do not find evidence that belonging to the Eurozone helped countries improve their fiscal position in recent years. In fact, there is no evidence that being a member of the Eurozone results in convergence toward higher levels of governance and corruption control either.

Likewise, being an OECD member also does not appear to guarantee an improved fiscal situation. By contrast, being an oil producing nation does help the country’s fiscal stance (naturally, yet there are obvious exceptions in countries such as Venezuela, which are not included in this study).

A number of implications emerge from this analysis—all of which are discussed in detail in a forthcoming paper. Here I highlight the following:

First, an increased focus on the challenges of corruption—in its legal and illegal manifestations— in industrialized countries is long overdue. Corruption is far from an exclusive problem afflicting some poor countries.

Second, more analysis is needed how governance failures and corruption affect macroeconomic and financial outcomes. The proximate determinants of macroeconomic and financial instability may be technical, economic and financial in nature. But political and governance dimensions can distort the design and implementation of such macroeconomic policies in fundamental ways, both in the short and long term.

Third, and as a logical corollary, countries where macroeconomic instability and misgovernance coexist may need to map the particular channels through which corruption affects public finances in that country, and subsequently implement a strategy for improving those key governance dimensions.

I outlined above six main channels (and a number of subcomponents in each) through which misgovernance and corruption can affect a country’s public finances. The first set (taxes and expenditures in particular) exemplifies the direct links between corruption and the fiscal deficit, while the latter channels are more indirect, but not necessarily less important. The specific diagnosis for which channels matter the most, and whether legal or illegal forms of corruption and capture dominate, ought to be country-specific, since they will be different in Greece, Italy or the U.S., for instance.

Finally, global governance bodies, such as the EU, the G-20 and the IMF may need to pay more attention to enhancing incentives that encourage their member states to improve both their governance and fiscal standing. Required improvements include the production and disclosure of transparent, timely and unaltered data on public finances, economic activities and prices, as well as further dissemination and use of governance indicators.

International Financial Institutions, such as the International Monetary Fund (IMF), need to refocus (as they did a decade ago) on the serious challenges of corruption that afflict a number of its borrowers, undermining the country’s macroeconomic stability.   Also, these global institutions ought to review afresh the distortive tax, public expenditure and public indebtedness regimes in many countries and their links to subpar governance and corruption.

Merely focusing on crisis coordination and externally funded bailouts, or demanding statutory tax hikes—rather than expanding the tax base and cutting “pork”—is unlikely to lead to sustained improvements.

Global economic and financial institutions increasingly shy away from addressing governance and corruption issues.   This can be explained by the political sensitivities associated with these, as well as the perverse incentives for many government leaders to mask such problems in their midst. Yet the cost of preventive inaction on governance issues is enormous and far beyond the confines of the misgoverned country, as illustrated in recent financial crises.

All with limited success, other than getting some articles published in journals and a sprinkle of accolades from a few development specialists.  The skepticism tended to be exponentially higher in rich industrialized countries than in developing and post-transition countries.

That started to change a bit at the outset of the financial crisis, yet the few of us who were writing about corruption and capture in Wall Street, and the perverse role played by money in politics, were vastly outnumbered by those providing technocratic explanations of the crisis — whether misunderstanding of risk, low interest rates, leverage ratios, or macro-economic imbalances.  Few were asking probing questions as to the extent to which such technocratic factors were driven by politics, including various forms of capture.  In the interim, more has been written about this, yet skepticism remains regarding non-technocratic explanations…

Today an unorthodox blog entry in the Baltimore City Paper mentions the previous work on capture (identifying me as ‘the Brookings guy’…), suggesting that it does apply not just to the Wall Street (or US generally), but also to Baltimore.   In his ‘Crash Course’ blog, The blogger, Edward Ericson Jr. aims at writing (by his own admission) ‘annoyingly didactic musings on the financial meltdown’.

In his blog entry today he picked up on the whole issue of corruption because he saw the lead Wall Street Journal (WSJ) story today on the link between corruption and macro-economic stability, which focused on Greece.  That WSJ piece discusses my ongoing research which suggests that among industrialized countries, those with higher levels of (legal and illegal) corruption are likely to exhibit a much higher fiscal deficit than those with very low levels of corruption, the difference in their budgetary balance being in the order of 7-to-8 percentage points of GDP.  In the coming days I will be having more detailed entries  on this.

For now I wanted to emphasize instead on an aspect that the City Paper ‘Crash Course’ article focuses on, namely the claim I make that an obsession with ordinary measures of corruption (e.g. coarse forms of bribery) has been counterproductive, hiding the true extent of corruption in many industrialized countries (including the US, Greece and others).  Such corruption in rich countries may take subtler forms than in Equatorial Guinea (and not always strictly illegal), but nonetheless they are enormously costly for society and the world’s welfare, as witnessed in the aftermath of the Wall Street debacle.

Which leads to the last, and most important, reason to write about this today:  Obama going all out to push for Wall Street Reform.  Many of us (millions, in fact) received his letter on this issue today in our email inbox.  I reproduce it in full below for those who did not receive it and are interested.   The battle lines are already drawn, as they were during the health care reform debate, between those vested interests that oppose regulating the banks, versus those that see some modicum of reform as essential for future financial stability and protecting the vulnerable.

Coincidentally, today the Securities and Exchange Commission (SEC) accused Goldman Sachs of mortgage-related securities fraud in the lead up to the financial crisis.  This stunning development (with an SEC daring to sue Goldman!) is now to weigh heavily on the financial reform debate.

Let us mince no words:  the proposed reform package is far from ideal, even if vastly superior to ‘business as usual’ inaction.  A major missing pillar of the financial reform package refers to regulating money in politics, including campaign finance, which nowadays still abets capture.  The US Supreme Court took a step backwards in their 5-4 split decision in late January in the Case of Citizens United v. Federal Election Commission, which further enable corporations to exert undue influence on the state and its policies, laws and regulations through political funding.  These issues will have to be revisited at some point in the future if the US is to make inroads on its own quality of governance and regain world class status.

But for now, adopting the proposed package of Wall Street reforms would constitute an auspicious start.

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President Obama letter received today, April 16, 2010:

Daniel –

It has now been well over a year since the near collapse of our entire financial system that cost the nation more than 8 million jobs. To this day, hard-working families struggle to make ends meet.

We’ve made strides — businesses are starting to hire, Americans are finding jobs, and neighbors who had given up looking are returning to the job market with new hope. But the flaws in our financial system that led to this crisis remain unresolved.

Wall Street titans still recklessly speculate with borrowed money. Big banks and credit card companies stack the deck to earn millions while far too many middle-class families, who have done everything right, can barely pay their bills or save for a better future.

We cannot delay action any longer. It is time to hold the big banks accountable to the people they serve, establish the strongest consumer protections in our nation’s history — and ensure that taxpayers will never again be forced to bail out big banks because they are “too big to fail.”

That is what Wall Street reform will achieve, why I am so committed to making it happen, and why I’m asking for your help today.

Please stand with me to show your support for Wall Street reform.

We know that without enforceable, commonsense rules to check abuse and protect families, markets are not truly free. Wall Street reform will foster a strong and vibrant financial sector so that businesses can get loans; families can afford mortgages; entrepreneurs can find the capital to start a new company, sell a new product, or offer a new service.

Consumer financial protections are currently spread across seven different government agencies. Wall Street reform will create one single Consumer Financial Protection Agency — tasked with preventing predatory practices and making sure you get the clear information, not fine print, needed to avoid ballooning mortgage payments or credit card rate hikes.

Reform will provide crucial new oversight, give shareholders a say on salaries and bonuses, and create new tools to break up failing financial firms so that taxpayers aren’t forced into another unfair bailout. And reform will keep our economy secure by ensuring that no single firm can bring down the whole financial system.

With so much at stake, it is not surprising that allies of the big banks and Wall Street lenders have already launched a multi-million-dollar ad campaign to fight these changes. Arm-twisting lobbyists are already storming Capitol Hill, seeking to undermine the strong bipartisan foundation of reform with loopholes and exemptions for the most egregious abusers of consumers.

I won’t accept anything short of the full protection that our citizens deserve and our economy needs. It’s a fight worth having, and it is a fight we can win — if we stand up and speak out together.

So I’m asking you to join me, starting today, by adding your name as a strong supporter of Wall Street reform:

http://my.barackobama.com/StandForWallStreetReform

Thank you,

President Barack Obama

In fact, crime and corruption do not always co-exist, share the same determinants, or respond to the same strategies and measures. A corrupt and authoritarian police state can control common crime, as in North Korea. Conversely, common crime can be a challenge to countries with satisfactory anti-corruption track records, like Chile.

Crime rates tend to be higher where there is high unemployment, high socio-economic inequality, and lax gun laws.

Corruption thrives where civil liberties, free press, transparency, and contestable politics are absent…

A functioning rule-of-law matters for controlling both crime and corruption, but again differences emerge: an independent judiciary is crucial for combating political corruption; an effective police is important for fighting petty corruption as well as common crime.

There are also differences between the determinants of common crime and organized crime, since the latter does relate to corruption more closely—for instance, drug traffickers and underground arms dealers thrive in collusion with corrupt authorities in weak states.

Unfortunately, most of the research on corruption focuses on developing countries. When corruption indices measure cruder forms of corruption, such as bribery, they mask one of the most serious governance challenges facing countries like the United States today—so-called legal corruption and state capture by powerful corporations.

For evidence of this, one need only look at the the undue influence exerted by Wall Street and mortgage giants over regulations leading up to the financial crisisu exerted by Wall Street and mortgage giants over regulations leading up to the financial crisis, or by giant carmakers over automobile safety regulators.  Indeed, research suggests that the extent of legal corruption and state capture in the United States is very high when compared with most countries in the world, and higher than any other industrialized OECD country.

Thus, contrary to popular notions, both developing and rich countries face corruption challenges, although their form may differ. The strategies to combat different manifestations of crime and corruption will differ from each other, and must be tailored to country context.

To combat common crime, it is important to focus on shared socio-economic progress and reduced unemployment among the youth, police effectiveness, and effectively banning guns in civilian hands. To address legal corruption and state capture, reforms in transparency, as well as restrictions on corporate political finance and lobbying is needed.

Yet crime and corruption do share one important aspect in common. To address them, and to be prepared to take on powerful vested interests, and address the challenges of money in politics, political will, leadership, and integrity are required at the top.