Yet, what is not so well known is how the Dodd-Frank Act extends beyond Wall Street and even the rest of the United States. There are two provisions in it that are intended to promote transparency and governance in natural resources in countries outside the United States…

Section 1504 is the more general provision on transparency. It 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.

The more specific Section 1502 requires that companies that use minerals from the Democratic Republic of Congo (DRC) and adjoining countries disclose whether such minerals are sourced from areas in conflict within that region, so to provide information as to whether the payments made by such companies may be funding armed groups in those areas…

While few would publicly argue against promoting transparency generally, it is no secret that these provisions have generated much discussion and controversy. This matters for how the provisions will be implemented in practice. Thus, it is important to seriously debate all sides of the issues surrounding these two provisions, including the criticisms leveled against them.

For instance, it is important to discuss whether Section 1504 — which mandates transparency requirements in oil, gas and mining-related payments to governments — does not impose new and enormous (multi-billion) costs of compliance, which may create a major competitive disadvantage on companies.

Further, do project payment disclosures really mean revealing trade secrets? If there are costs, how do they stack up against the benefits from transparency and disclosure in natural resources? And on the other hand, what are the benefits to transparency? How can greater transparency help improve the management of natural resources in a way that contributes to economic development and increase accountability?

As indicated, Section 1502 is aimed at cutting off financing to armed groups who have profited from trade in minerals and use this money to finance their operations. The issues of compliance costs and competitive disadvantage are also concerns for some parties with regard to this section on conflict minerals.

There are also additional questions that merit debate, such as assessing the potential benefits from denying armed groups from being financed by companies purchasing minerals and the reduction in violence and human rights abuses, versus the potential for disruption in trade on minerals from the DRC and adjoining countries. This may inflict undue “collateral damage” on some mineral-extracting areas that are not conflict-ridden.

On the other hand, these costs should be weighed against the costs of continued trade in conflict minerals. How high are these costs? And what are some benefits for companies and the DRC in developing a clean minerals trade?

These and many other relevant and related issues will be debated in a public event this coming Tuesday, December 13, at the National Press Club in Washington, D.C.   We at Brookings along with Global Witness will host a discussion to examine these two provisions in the Dodd-Frank Act.

Leading experts from civil society in the United States and Africa, the private sector, the financial sector and think tanks will participate in an interactive panel setting to review the priority issues surrounding each provision.

Representative Jim McDermott (D-Wash.), will provide the opening remarks while Senator Ben Cardin (D-Md.) will give the closing remarks. And Reverend Jim Wallis of Sojourners will also be speaking during the lunch break. The panels will provide ample room for debate among the panelists and between the panelists and the audience, aiming at bringing out the key issues from all sides.

Given the importance of these initiatives and the ongoing discussions on their implementation details, we expect a lively debate.

Analysts have focused on the immediate and narrow concern of how the SEC and Citigroup will respond to this challenge and on second-guessing what may satisfy Judge Rakoff. Three options exist: the agency could renegotiate a deal with the bank for a higher settlement and insert vague (and non-incriminating) language hinting at the bank’s culpability; it could allow the case to go to trial; or it could appeal the Judge’s decision. Some even suggest that the ruling may result in the SEC pursuing more cases administratively in the future…

Rather than adding to these ongoing media and expert analyses on the immediate response of the SEC and Citigroup to Judge Rakoff’s ruling, we* take a broader perspective. SEC v. Citigroup can be seen in the context of the intimate relationship between the agency and the powerful banks it regulates, one which has prevailed for years and weakened the regulatory power of the SEC.

The financial crisis and subsequent call for reform provided ample opportunity to tackle such undue influence and regulatory capture. Regulatory capture occurs when the regulatory evidence is unduly influenced by the interests of regulated entities. At the beginning of the new administration and during the early stages of the Dodd-Frank reform bill preparation, a rebalancing of power between the weakened regulator and powerful financial institutions was expected.

Yet, once the bill was adopted reality began to sink in. The reform bill failed to directly address the problem of banks that were too big to fail, and left crucial implementation matters to the discretion of weak regulatory agencies such as the SEC. It seemed that power shifted back from Washington to Wall Street again.

Rakoff’s challenge of the SEC exposes yet another example of how old power balances that favor financial institutions remain alive and well. The main question is not how the SEC can reword its settlement with Citigroup to satisfy judge Rakoff, but rather whether the judge’s ruling will serve as a wake-up call to the weak regulatory regime governing behavior of financial institutions and prompt concrete changes to the rules of the game.

The SEC has a history of regulatory capture

Whether covert or overt, elements of regulatory capture have been evident for some time. In the decade leading up to the financial crisis, deregulation in the U.S. financial sector weakened regulatory agencies. More generally, seven years ago I codified the extent of “state capture” and “legal corruption” through a survey of enterprises in over 100 countries. The extent of capture afflicting the U.S. was very high; it not only rated well below other industrialized countries, but found itself among the bottom half worldwide (figure 1). But at that peak time of financial exuberance and deregulation, there was little appetite to take such data seriously.

It got even worse. These data were collected months before an infamous meeting between bankers and the SEC that took place in April 2004 in New York City when the SEC readily agreed to significantly relax its regulatory stance vis a vis the largest investment banks, allowing them to amass massive amounts of debt. In return, once the agency would set up its supervisory program, the banks would submit to SEC reviews and restrictions on excessively risky activities. Yet the SEC’s supervisory hired only seven people to examine companies with combined assets of more than $4 trillion and completed no inspections after 2007.

Furthermore, preceding the financial crisis the SEC became aware that Bernard Madoff, who had served on the commission’s advisory committee and had been previously reported for securities violations, was mismanaging his customers’ funds in the tens of billions of dollars. Yet the agency failed to probe deeper and unmask his Ponzi scheme. The SEC also neglected to take action against financier R. Allen Stanford, who swindled investors out of $8 billion, although allegations of fraud and possible money laundering had been levied against him in the past.

Expectations of change were not realized

The onset of the financial crisis revealed the weakness of the financial sector and the extent to which regulators had been captured. It spurred public outrage and calls for change. When the new administration entered office it brought with it a clear appreciation for the problem of capture. As early as 2007, then Senator Obama during a major address on the ills of the financial sector at Nasdaq in New York recognized that “turning a blind eye to cronyism in our midst put us all in jeopardy” and that “we [were] going to have to adapt our institutions to a new world.”

Over three years later, regulatory reforms were adopted through the Dodd-Frank bill, which, at least on paper, signaled a move in the right direction toward stronger regulations and the potential for somewhat reduced capture. Yet, recent events are exposing weaknesses in the Dodd-Frank bill. The bill failed to address crucial implementation details and was vague in some regulatory matters, leaving discretion in the hands of weak regulators. Since the mid-term congressional elections last year, lobbyists for large financial institutions and their allies in Congress have been working hard to keep, as intact as possible, the deregulated status quo that prevailed prior to the financial crisis and the subsequent Dodd-Frank bill.

It is now evident that if not for the Federal Reserve Boards’ lack of transparency in supporting large banks during the crisis, the Dodd-Frank bill may have had a better chance at addressing the undue influence and systemic risk posed by these large financial institutions. The extent to which large banks teetered on the edge of collapse in 2008 and 2009 has only now come to light. This week, Bloomberg revealed that by March 2009 the Federal Reserve had secretly provided nearly $7.8 trillion in emergency funds to rescue the financial system, dwarfing the publicly known $700 billion Troubled Asset Relief Program (TARP). The trouble with this secret bailout is not the Fed’s emergency actions, but rather that the information remained so closely guarded for so long and that the Fed fought against its disclosure.

This secrecy may have been initially warranted to prevent further panic and a run on the banks, but the lack of transparency in the medium-term had a significant impact on regulatory reform. Had the information been disclosed earlier, including to members of Congress and the public, the evidence of systemic risk posed by large banks may have persuaded some to adopt a tougher Dodd-Frank bill. A stronger bill may have more directly addressed the problem of large banks, and in this context, further empowered regulatory agencies such as the SEC. In fact, had the details of the Fed’s bailout been disclosed, there may have been more support in Congress to break up the biggest banks. Lobbyists for the largest recipients of Fed funds made a winning case that such a breakup would punish “successful” institutions.

Regulatory capture of the SEC today impacts enforcement

The close ties between banks and the SEC is symptomatic of the sector’s influence over the regulator. A study by the Project on Government Oversight found that in the past five years, 219 former SEC employees filed nearly 800 disclosure statements for representing their clients’ dealings with the agency, and of these, about half (403) were filed by people who worked for the SEC’s enforcement division. Because former employees are only required to file such disclosures for two years after leaving the SEC, these figures only capture the most recent instances. Even the regulator’s top enforcement official has moved back and forth between the Justice Department, Deutsche Bank and the SEC.

Such close ties may ultimately affect enforcement. An internal investigation found that a former SEC official blocked the agency’s investigation of R. Allen Stanford for nearly seven years, and then went on to work for him. More recently, the SEC’s head enforcement official was investigated (but cleared) after Citigroup hired his former boss to participate in its defense against charges unrelated to the case before Judge Rakoff. Negotiations between the parties resulted in the charges against two executives being reduced. In an open investigation, the SEC’s inspector general is looking into allegations that the frequent hiring of former SEC attorneys by a particular firm has contributed to the agency’s failure to take appropriate actions against it.

One impact of such capture has been weak enforcement. While the SEC can take companies to court, extract civil penalties and bring contempt charges for repeat violations, the agency has only given ‘slaps on the wrist’ to those firms involved in the financial crisis. Instead, it has preferred to settle out of court with big banks. These settlements allow banks to merely pledge to desist from breaching antifraud laws again and pay penalties, which are typically not very onerous, considering the bank’s breach and benefits they derived, without ever having to admit to any wrongdoing.

Following Judge Rakoff’s ruling, the SEC defended its practice of settling out of court by arguing that settlements deter future bad behavior because they make firms pledge to improve business practices and impose monetary penalties. The agency suggested that were it required to extract an admission of guilt, more institutions would take cases to court. This would tie up limited SEC resources and force the regulator to pursue fewer cases. This line of defense relies on two flawed assumptions – that current settlements deter future violations and that a lower caseload would weaken incentives to comply with regulations.

Firms will opt to fully abide by the law (or not) depending on economic incentives – i.e. whether the benefits of abiding by the law significantly outweigh the costs. Currently, the costs imposed by the SEC are low. Pledges are virtually costless, and the penalties imposed by the SEC are small relative to the profits of these large institutions and the benefits they derive from improper behavior. Furthermore, the SEC has shied away from closely monitoring the Banks’ compliance progress, and has done little to impose high penalties for failure to comply with pledges made by banks.

Citigroup is a prime example. It is accused of negligence in the loss of $700 million of investor money, and agreed to pay $285 million, which is less than 8 percent of the bank’s profits in just the third-quarter of 2011 alone. Moreover, because these settlements do not require companies to admit guilt, the bank is further shielded from investors taking them to civil court, and the Justice Department is in less of a position to press criminal charges against executives.

A New York Times analysis found that over the past 15 years, at least 51 cases have involved recidivism by 19 Wall Street firms. In many of these cases, the SEC could bring contempt of court charges, but it has not done so in at least 10 years. Most major banks are repeat violators. Bank of America, for instance, has four violations for purposeful or negligent fraud in interstate commerce, and four for purposeful fraud by securities firms since 1998. During the same period, Citigroup amassed five violations for purposeful or negligent fraud in interstate commerce, and three violations for purposeful fraud by securities firms. None of these past cases were even mentioned in the SEC’s charges against Citigroup in the case before Judge Rakoff, and no contempt of court charges have been made against the bank.

Finally, the SEC should be in a position to welcome a somewhat lower caseload if the cases it more forcefully pursues do substantially increase the cost of non-compliance. If any corporate firm has a somewhat lower probability of being investigated, but faces a substantially higher cost if probed, it will be far less likely to violate regulations because the expected costs associated with illicit behavior increases. Increased costs, in the form of higher penalties, investor lawsuits and possible jail time for executives, would serve as a strong deterrent. Currently, no executives have been successfully prosecuted for actions leading up to the financial crisis. This is in sharp contrast to the aftermath of the Savings and Loan (S&L) crisis of the 1990s when of more than 1,100 cases were sent to the Department of Justice for prosecution, resulting in 800 bank officials going to jail.

Taking on very large firms and raising the costs of violating the law are not impossible tasks. It can be done. In fact, in 2008 American and European authorities went after Siemens, a German multinational company, for making large amounts of dubious payments globally. By 2010 Siemens had paid out nearly US$3.4 billion in investigations, back taxes and fines to end the probe. Fines to authorities in the United States and Europe cost the firm US$1.6 billion. In addition, in German court one senior manager and two executives were found guilty of wrongdoing and were fined and sentenced to probation.

Conclusions and Implications

Focusing only on the minimum the SEC can do to settle with Citigroup and to satisfy the specific challenge presented by judge Rakoff misses the much larger picture. The judge’s ruling brings to light, once more, the extent to which a regulatory agency may have been subject to capture and undue influence by financial institutions and also raises the possibility of challenging the current status quo. Selectively, let us suggest five areas that warrant attention:

1.  The debate on how to stem the undue influence of big banks should be revisited, and a spectrum of more stringent measures, even including the breakup of the biggest banks, ought to be seriously considered. Revolving door policies ought to be revisited and cooling off periods should be extended, especially for persons occupying sensitive positions that are particularly vulnerable to capture.

2.  The public ought to take stock of and debate the implementation and application of regulations by the SEC under the Dodd-Frank, focusing on how the bill is faring and codifying the interests and arguments behind the efforts by financial institutions and lobbyists to delay or water down implementation of relevant aspects of the bill.

3.  The cost of violating securities laws ought to increase substantially. Simply raising the monetary out-of-court settlement with no admission of guilt will not alter the incentive structure. Rather, the SEC and others should not avoid contempt of court challenges for recidivist banks. More generally, banks should end up in civil court more frequently; settlements should include admissions of guilt and allow the market and private sector to challenge illicit behavior by banks; financial settlements with the SEC should be larger by a multiple factor; and the Department of Justice should work closely with the SEC to obtain the necessary information to pursue criminal cases. The Congress should also seriously consider the recent request by SEC Chairperson Mary Schapiro to allow the agency to levy larger fines against securities law violators.

4.  Like Judge Rakoff’s decision, the extent to which all judges exercise their due responsibility by not merely rubber-stamping unfair out of court settlements that unduly benefit one party to the detriment of the social good and broader systemic risks, should be reviewed and publicized.

5.  In a transparent and evidence-based manner, an in-depth review should be undertaken to discern whether the Department of Justice has been overly weak in failing to pursue criminal cases against senior bank executives. More generally, there should be increased transparency and disclosure regarding information in the financial sector, including on the Fed’s actions, as well as increased public debate on how campaign finance and lobbying contributions affect voting records in Congress and on politicians’ undue influence in implementing the regulatory regime and their agencies.

These tougher transparency, regulatory and enforcement incentives would further raise the costs of violating securities laws because companies would face the added risk of investor lawsuits, and possible criminal prosecutions by the Justice Department against executives.

If Judge Rakoff’s ruling will set a precedent is unclear, and it depends greatly on the White House, Congress, the SEC, other judges, civil society and reformists in the private sector to seize this opportunity and to address the persistent and costly phenomena of capture.

*Article co-authored with Veronika Penciakova and originally posted by Brookings.

And it raised questions about building safety in this geographical area, which is not known to be earthquake prone.  Thus it has not been subject to the more stringent building codes that apply in places like California, not to speak about the large stock of very old structures which exists in the East Coast… 

In looking for an upside to the earthquake, other than the relief in realizing that there were no major injuries or damage, some may quip that the earthquake can be salutary, since Washington was in dire need of being shaken and rattled.  The problem with this argument is that the timing was off, since politicians are in recess and mostly far away, so they would have hardly noticed.  In fact, newswires, Facebook and Twitter were abuzz reporting just after the earthquake struck that the Capitol building had been evacuated.  But that should not have been difficult, at least in terms of evacuating the VIPs, since they were not around.

It is no secret that nowadays it is politicians who in the eyes of both voters and entrepreneurs are being regarded in particularly poor light.  Recently I wrote about this here, so will not repeat it, except for providing a summary graph showing how the US Congress is viewed by firm managers nowadays, compared with yesteryear, and also compared with other countries.  The picture is dire regarding the view on the U.S. Congress today, and starkly contrasts the view by firms of their Parliaments in other countries (seen in this chart, picked up by the Economist). 

But let us face it:  today’s earthquake is unlikely to make any difference to this view on a dysfunctional US Congress; the required shake-up is obviously much more fundamental, and political rather than geological in nature. 

Yet could it be that the earthquake may have had an effect, either way, on the stock market?   A brief look at what transpired at the New York Stock Exchange may, or may not, suffice.  At 1.48pm earlier today, August 23rd, a couple of minutes before the earthquake struck,  the level of the Dow Industrials Average (DJIA) stood at 11,063.  Right after the earthquake hit, the Dow dips slightly, but to quickly recover and then climb substantially, to end at 11,177 by closing time at 4 o’clock. 

Consequently, the Dow closed over 100 points (a full percentage point) above the pre-earthquake level merely a couple of hours earlier.  In short, the stock market rose quickly in the aftermath of the earthquake. 

Concluding from such simple empirical observation that earthquakes can help the stock market obviously belongs to the ’ridiculous statement’ list, or the ridiculist.

But nowadays I do not stand out pointing to this causal link, however ludicrous.  Add this assertion to the mix of statements about the economy that we have heard in recent weeks from politicians, merely stating that ’earthquake helped the stock market’ (based on the above evidence), while it may make it to the ridiculous list, it would not rate near the top in the ‘Politician Statements on the Economy Ridiculist’.

The competition for the top slot in the Economic Ridiculist has been fierce among politicians lately. Take for instance the claim that Bernanke’s monetary policies at the Fed are ‘treasonous’, reflecting not just disrespect for Shakespeare but an utter misunderstanding of economics, finance, and the Fed’s performance (which has been good).  Or the myriad of statements about the failure of the expenditure stimulis implemented by the US Treasury (they actually worked, more is needed).

Or the statements about the salutary effects of not raising the debt ceiling, reflecting ignorance about the distinction between stocks and flows, and between past IOUs and future expenditures.  Or the irresponsible call for major budgetary expenditure cuts as soon as possible, thereby increasing the likelihood of a recession.  Or the notion that egregious tax loopholes for oil companies need to be protected, and justifying it with the misleading claim that they can make a difference in increasing aggregate demand at the macro-economic level.

One can go on and on regarding basic economic and financial fallacies that prevail nowadays.  I merely wanted to illustrate the anti-intellectual and anti-knowledge environment that seems to have taken hold of the political discourse in Washington, adversely affecting policy-making and market sentiment.  This matters enormously, since it is already having dire consequences for the US economy and potentially for the world at large.

Paradoxically, in today’s globalized world, in contrast with the US (and with some countries in Europe), many emerging regions exhibit much improved macro-economic management than in the past, reflecting learning from experience, improved know-how and global dissemination of such know-how, graduate education in top schools abroad and at home, and, importantly (outside of the US), increased deference to technocrats on difficult economic and financial matters.

Take for instance Latin America, and countries like Chile, Uruguay, Brazil, Colombia, Costa Rica, among others.  Politicians increasingly understand the importance of relying on evidence, some modicum of science and expertise, and thus on technocrats, even if some macro-economic issues are obviously still subject to political and technical debates.  These countries also pay close attention to the financial markets, which do provide an important signal when deviation from common economic sense takes place among politicians and policy-makers.

Irrespective of ideological affiliation, nowadays in many Latin American countries politicians do understand that there is no room for ’voodoo’, or ‘supply side’ or any other extreme ’fundamentalist’ construct for economic policy.  In many of these countries any remaining divide regarding macro-economic policy does not follow an ideological divide, but is strictly generational instead.

Misunderstanding on the basics of economic policy was part of a certain political class two generations older than the current policy-makers in power.  The younger generation not only understands well the analytical and practical aspects of macro-economic policy-making, but the approaches taken are common to both (left- and right-of center) sides of the ideological spectrum.  And it is rare (though it can still happen) that politicians irresponsibly try to undermine a serious head of a Central Bank or a Minister of Finance who is technocratically carrying out her or his job steering the economy. 

It may be revealing for some members of the US Congress to undertake a study tour to some countries in Latin America.

By July 2009, Congressional approval ratings declined to just 32 percent. Just prior to the debt-ceiling debate three weeks ago, they stood at 18 percent. These poll figures contradict Gallup’s expectation that there would be a surge in Congress’ popularity following the 2010 midterm elections. It had been suggested that Congress’ ratings may rise since that had been observed following some prior midterm elections.  But not quite…

It may come as no surprise if the next Gallup poll, expected to come out in mid-August, shows Congress’ approval ratings hitting an all time low. Another poll, conducted by Rasmussen more recently, reported a few days ago that only 6 percent of U.S. voters rated Congress’ performance as good or excellent, a new low in their poll. Their previous monthly low was last month— only 8 percent of U.S. voters rated Congress as good or excellent.

These polls speak to the dim view that voters have of how well Congress has been doing its job in general— not just related to the debt ceiling paralysis. Since this picture, based on the views of citizens and voters is not unknown to many in Washington, there is no need to belabor it further.

What is less recognized in the U.S. is the extent to which the private sector holds a dim view of Congress, and how this contrasts with how the private sector views the effectiveness of parliaments in other countries.

From our large worldwide governance databank that include dozens of sources, we can draw from one particular source first, namely a large survey of enterprises around the world. The World Economic Forum conducts annual surveys of over 10,000 private sector executives in over 130 countries. A simple analysis of the reports of those enterprises suggests how abysmally low the U.S. private sector their Congress (first column, Figure 1).

   If one compares the ratings for the U.S. Congress (lowest by far of any institution in the U.S.) with that of other institutions, we find that U.S. respondents do not have a dim view of the whole public sector or of simply any public institution. In Figure 1, we see the large gap in how the private sector views Congress as compared with either the police or the judiciary.

We also see in Figure 1 how differently the private sector in other countries views their own parliaments.  In 2010, executives in India, Germany, the UK, Canada and Sweden, among dozens of other countries, reported that their Parliaments function much more effectively than U.S. executives.  It is also noteworthy that these ratings do not differ substantially across OECD countries, including the U.S., for institutions other than their parliaments.  It is not a generalized dim view of the U.S. private sector regarding public sector performance.  It is about their Congress.

    Moreover, in countries like Germany, Canada and Sweden, there has been a positive trend in private sector confidence in their legislative body, which contrasts with the U.S.’s downward trend (Figure 2). If we only look at the U.S., we see that today’s dismal ratings of Congress’ performance need not be the case given data from previous years. In fact, the private sector’s assessment of Congress’s effectiveness was much higher in 2002, but has steadily declined. By the time the 2011 data is available, it is highly likely that the downward trend regarding the views on the U.S. Congress will continue.

In fact, more broadly, our Worldwide Governance Indicators (WGI) point to the fact that for some time the U.S. has been far from a model country in governance. At the start of the past decade, there were 15 countries around the world with better governance on average than the U.S. By the end of the decade, there were over 25 countries with better governance than the U.S. Such subpar performance in general on governance performance can be attributed in part to the performance of Congress.

A dysfunctional U.S. Congress may be the talk of the town and the world today. But empirical evidence suggests that it need not be the case. Other U.S. public institutions are performing much better in the eyes of the public and the private sector. Parliaments in other countries are doing well and improving over time, which shows that legislatures can be effective. The U.S. Congress itself has seen much better days. The American people and the world are hoping that Congress can rise to the task at hand given the urgent need to raise the debt ceiling in order to avoid the threat of another global economic and financial crisis.

And the forum’s co-chair, Brazilian Minister of Foreign Affairs Antonio Patriota, also stressed that through such multilateral cooperation the OGP could play a role in stimulating innovation, improving the quality of public services and contributing to national efforts in governmental transparency.  Throughout the forum, governmental and non-governmental representatives from around the world emphasized the important role that civil society organizations can play in encouraging openness, empowering citizens and promoting change through their own transparency initiatives.

The OGP Forum was an auspicious start to an ambitious project. However, achieving global transparency remains long and challenging, and only over time will the concrete contribution of this initiative be seen.   Yet, this inaugural forum showcased exciting initiatives and raised important questions, such as how to effectively build networks of governments, foster cooperation with civil society organizations, identify targeted reforms and use technology to foster a transparent environment.

Many governments have already made great strides in promoting transparency: For example, Brazil is now disseminating information on government spending and fund transfers data through their Transparency Portal;  the U.S. has embarked on efforts to publicly account for Recovery Act spending; and Kenya has published its national census, government expenditure and parliamentary proceedings data through its new Open Data Portal.

Civil society actors around the world are working to further the transparency agenda in diverse ways.  India’s NGO MKSS combats graft stemming from the implementation of the National Rural Employment Guarantee Act by painting employment and building material costs on walls outside of construction projects in rural areas.  Ushaidi Kenya maps citizen reports of acts of violence, while Chile’s innovative Ciudadano Inteligente promotes transparency and active citizen participation through new web technologies.

The OGP offers an opportunity for governments from around the world to share best practices in transparency reforms and the inclusion of both governmental and non-governmental participants facilitates collaboration between key stakeholders. Civil society organizations could continue to nudge governments toward increased transparency, as well as complement and reinforce ongoing reforms by disseminating information to the public and monitoring implementation. For instance, in Slovakia, the Fair-Play Alliance’s Z Nasich Dani (From Our Taxes) new online tool, which discloses the names the individuals behind companies who do business with the government, is complementary to the Slovak government’s online publication of public service contracts by allowing citizens to dig deeper into the relationship between companies and the state.

The OGP is also working to identify the transparency reforms to promote. The OGP used four criteria (fiscal transparency, access to information, senior official disclosure and citizen engagement) to identify around 80 eligible countries, but it is no secret that each country finds itself at a different level of openness.  Although it is noteworthy that the criteria extended beyond the existence of e-government to encompass deeper forms of transparency, the OGP will still need to strike a balance between emphasizing country-led solutions while encouraging deeper reforms and discouraging “open government” rhetorical window-dressing.

It is reasonable to expect very different paths; some countries may initially focus reforms in “high-risk” sectors, such as in the extractive sector in resource-rich countries, while others may focus first on engaging the citizenry in the policymaking process.  Either way, it is important to attain broad consensus regarding what constitutes concrete progress, versus mere pronouncements or decrees on paper only.

The important role of transparency reforms in combating corruption was the subject of a specialized panel at the OGP forum. For transparency to have more substantial impact on anti-corruption and development, deeper reforms may be needed. For instance, publishing official statistics and general budget data online can be a first step, but one ought not declare “premature victory” after tackling such generic “low hanging fruits.”

Indeed, well implemented freedom of information laws or well disseminated budgetary and procurement details at the project and municipal level can be expected to have larger effects.  Furthermore, there can be large payoffs to tackling the more politically difficult reforms, such as transparency in the drafting of laws and in policymaking, campaign finance, lobbying, the disclosure of officials’ assets, and fully disclosing which powerful private sector and media executives the leaders of government meet regularly with.

New technologies are only part of the answer. Twenty-first century technology has simplified and accelerated information dissemination and has lead to a new set of cost-effective and interactive tools that make it easier for the public to engage with the data. Many existing open data platforms can easily be adapted to visualize different datasets at a relatively low cost. For instance, the United States and Kenya now use the same platform to publish their government data. However, as the open government agenda evolves, there is the risk of becoming hypnotized by technological wizardry at the expense of the availability, timeliness and accuracy of the most relevant types of information.

In this context, civil society groups, think tanks and researchers may play a role in reviewing the quality of information and data being disclosed (or withheld), in monitoring and analyzing information citizens deem the most relevant, and in constructing and disseminating user-friendly worldwide transparency and governance databases.   Yet we also need to be mindful that country context matters. Online tools may be helpful in many situations, but in others putting information on a wall or disseminating it through community radio or a mobile text message may be a more effective in reaching people.

   Research and experience suggest that there are links between transparency, combating corruption and more robust democratic institutions. The OGP represents an opportunity to further the openness agenda by bringing governmental and non-governmental partners together to share experiences that could inform and complement the implementation of transparency reforms at home.  Last week’s OGP kick-off forum was a positive step toward global transparency.

But it was a first step.  Significant work lies ahead in the months to come.  The first order of business is to get the OGP formally and concretely off the ground.  Led by their founding country members (Brazil, Indonesia, Mexico, Norway, Philippines, South Africa, the United Kingdom and the United States – and hopefully India decides to rejoin), the OGP is expected to be formally launched by country leaders during the upcoming United Nations meetings in late September in New York.  In parallel, the critical role of civil society needs to be concretely detailed, and governments from eligible countries have to formally join the OGP and be prepared to make transparency reform commitments that can be mutually reinforced and monitored.

[This post was jointly authored with Veronika Penciakova and originally published as a Brookings Commentary]

Thus, throughout his visit, Obama may confront issues far removed from Latin America.  Fittingly, or ironically, Latin America has not been a priority for U.S. foreign policy in recent years. From a national security standpoint, there are a few exceptions, such as two important countries Obama will not visit, namely Colombia and Mexico, where narco-violence has attracted U.S. focus.  Yet, that almost sums up the extent of U.S. foreign policy priorities vis-à-vis the continent so far…

But, this presidential visit ought not go to waste. President Obama chose Chile, not the Brazil powerhouse, or Argentina (a G-20 member that Obama will not visit), to publicly address the Latin America region.  On the world stage, Chile, which is not in the G-20, is considered a modest country.  In this regard, one can draw similarities to Obama choosing Ghana over Kenya or Nigeria for his address to Sub-Saharan Africa when he visited that region.

Obama will undoubtedly go through the motions and raise issues that the US and Chile have been working on for some time, including training, intellectual property rights, narcotics control, innovation, visa waivers, and the Trans-Pacific Partnership (TPP) trade negotiations with Asian partners.  Obama would be well-advised not to insist on signing a specific nuclear power agreement with Chile in this most-sensitive of times, considering the current events in Japan.  More generally, in light of the current reality in Chile, and the major crises unfolding around the world, Obama may want to deviate some from his official script.

For starters, departing from practices by some in the past, Obama should treat Latin Americans in general, and the Chilean leadership and people as equals,   After all, in spite of the superpower gap, Chile and the U.S. exhibit some striking similarities in their achievements and challenges.  For example, Chile is no longer a developing country, but rather a successful emerging economy and a full-fledged member of the OECD.  While Chile’s accession to the club of industrialized nations is recent, this commonality brings into stark relief another similarity between both countries:  both the U.S. and Chile share a similar quality of governance in most dimensions, as we see in Figure 1.

For instance, among over 210 economies around the world, on Government Effectiveness, Chile ranks 31^st and the U.S. 24^th; on Regulatory Quality, Chile rates 14^th and the U.S. 23^rd; and on Control of Corruption, Chile rates 23^rd in the world and the U.S. 32^nd.  On Voice and Democratic Accountability, the United States rates somewhat above Chile, while the converse is true for Political Stability/Absence of Major Violence/Terror.   Both countries have serious challenges regarding security and safety.  In Chile, this is due to high levels of common crime stemming partly from inequality. In the United States, the high homicide rate is partly due to ubiquitous availability and use of guns, which puts at risk high level politicians.

The fact that the United States’ quality of governance is not superior to that of Chile ought to be seen as evidence of Chile’s progress over the past couple of decades, and as a sobering reminder to the U.S. that it is not a model country on governance.  Model countries, such as Scandinavian economies and New Zealand, should serve as symbols for Chile and the U.S. of what is attainable.

Besides governance, Chile and the United States have commonalities and differences. Both countries have relatively deficient educational systems in dire need of bold reform (though even more so in Chile). Over the past decade, Chile has done much better than the U.S. in macro-economic management, sustaining fiscal stability and maintaining the integrity of its financial sector.  Conversely, Chile has much to learn from the U.S. regarding technological innovation.

Another common trait is self confidence.  Polls suggest that citizens in Chile, Israel and the U.S. tend to have very high self-esteem, while people in Japan, South Korea and Switzerland tend to be very humble.  Not surprisingly, the current heads of state of Chile and the U.S. also exhibit very high levels of self-confidence. On the one hand, such high self-esteem can create a blind spot to personal and countrywide challenges and shortcomings—both leaders have had low poll ratings recently.  On the other hand, such self-confidence, if coupled with boldness and risk-taking, can be a positive force for reform, as witnessed with Obama’s push for health care and financial reform last year and Piñera’s handling of the miners’ rescue.

Undoubtedly, in President Obama’s major public address to Latin America that will take place in Santiago, he will praise Chile’s performance. He would be wise to steer clear of condescending comments on the country and region, and instead focus on the shared achievements and challenges facing the U.S. and Chile.  To avoid meddling in internal politics, Obama should not apportion credit for Chile’s achievements to either the current (right-of-center) or past (left-of-center) governments. All Chileans, and every (post-Pinochet) leader, deserves credit for the country’s institutional and growth performance.

The fact is, in contrast to the destructive squabbling between Democrats and Republicans that dominate Washington politics, Chilean politicians, from all parties, even if they disagree on emphasis and details, have shared for years a common agenda on maintaining sound financial and macro-economic policies, sustaining robust growth and poverty alleviation and expanding social safety nets, open markets and good governance.

In his message to the region, Obama should focus on the region’s major constraint to future progress and social peace: glaring inequality.  He should not waste this opportunity by speaking lengthily on the obvious (to Latin Americans) virtues of democracy and protection of human rights.  With the exception of Cuba, and notwithstanding the challenges in a few countries like Venezuela and Nicaragua, these are not contentious issues for most every citizen or leader in the region.

The traditional political approach to inequality focuses on inequality of income, access to productive jobs and educational opportunities. It would behoove Obama to suggest that an underlying determinant of economic inequality is political inequality.  In Latin America, there is an enormous divide between the powerful elites and the rest of the citizenry.  The former wield disproportionate political influence in shaping the laws, regulations and policies—what we have dubbed as “state capture,”—and such excessive presence of “elites and business in government” has been a driver of economic inequality.

It would be a bold step for Obama to take a fresh approach to inequality and frankly talk about political inequality, vested interests and undue influence of corporate elites. These are particularly sensitive issues not only in Latin America (even in Chile, the otherwise “stellar performer”), but also in the U.S. Not only has economic inequality grown recently in the U.S., but the challenges of undue political influence and money-in-politics have become increasingly damaging, as Obama well knows. By taking this opportunity and talking frankly about economic and political inequality, Obama could move away from what otherwise may be just another public address, into a transformative message on shared achievements and shortcomings and the need for serious political reforms in Latin America and the U.S.

When U.S. presidents travel to countries in an emerging region, with their vast entourage of officials and executives, it is typical to see a focus on partnership agreements (and on vague grandiose pronouncements).  Obama’s trip to Latin America may be no exception, as illustrated by so many writings on specific ‘transactional’ agreements that may be signed on the visit.

But it is important to keep in mind that such bilateral transactional approach should not come at the expense of a commitment to to a few economic and policy fundamentals in the US:  establishing truly open markets (to goods, services, ideas and people) into the U.S., prudent fiscal policies to attain macro-economic stability, and making the financial sector more resilient, so to strive towards sustained growth in the U.S.  A pledge by Obama on these fronts, which would entail tackling domestic undue influence by protectionist, as well as Wall Street, vested interests, is likely to have more of a concrete impact on Latin America than signature of any bilateral transaction or particular partnership with a country in the region.

So far the miners appear to be in remarkable good shape following their long ordeal.  The second miner to emerge, Mario Sepulveda, showcased his well known histrionics as he surfaced euphorically.  And the lone Bolivian miner in the group, Carlos Mamani, has just emerged in high spirits in the Phoenix rescue capsule, and has also been warmly embraced by his loved ones, and by the Chilean President, Sebastian Piñera.

Even if some of the miners that are yet to be rescued may not be in perfect health, it is reasonable to expect now that a successful rescue will take place for all miners over the next 24 hours, in a truly impressive operation (who are the miners, and how are they rescued — is here).  The resourceful miners, their relatives, the government and its leadership, as well as many expert workers from Chile and abroad, deserve enormous and shared credit in this remarkable tale of survival, ingenuity, and rescue.

This episode has not only galvanized one nation, but the world.  In times when uplifting news are a rare commodity, such a concentrated challenge (in terms of location and critical moments) are a boon to the media around the world — particularly when the miners plight, and the scope of the rescue challenge, is unprecedented.

Hundreds of media outlets converged to the barren desert to broadcast the rescue to all corners of the world.  The images of the first rescued miners emerging from the Phoenixrocket-like rescue capsule are riveting to me, and I surmise, to the estimated 1 billion people around the world that are watching this uplifting saga unfold in live TV.  The rescue is being shown live throughout the night in mining countries around the world, among others.

Last time that Chile got such worldwide attention was early in the year when a monster earthquake, coupled by a tsunami, struck the south of the country.  While the outcome of the current episode is uplifting, contrasting the tragic loss of hundreds of lives due to the tsunami and earthquake, both episodes have highlighted the strength of governance in Chile.

The successful rescue of the 33 miners that is taking place today in Chile (on the 10/13/10, which adds to 33…) is no ‘Chilean Miracle’.  It is not the result from an action from high above, but instead it comes from those heroic people well below ground level, and many indefatigable others at ground level — an act of people, of leaders, of their good governance.

But this ought not surprise.  It is not an anomaly or a fluke.  For years, Chile has been rated atop the emerging economies of the world in terms of its quality of governance, demonstrating the seachange that has taken place since the troubled Pinochet era of over two decades ago.   In fact, for over five years already Chile’s rating in governance has been superior to that of a number of rich industrialized economies, the country placing around the top 30 countries in the world (see figure below, from the data just released on the WGI).

GOVERNANCE INDICATORS, CHILE 2009 (WGI)

[In Percentile Rank among 213 countries, 100 = best country in the world]

There are competing definitions for what constitutes good governance. Now is not the time to engage in academic semantics (instead details can be found here).

Instead, basking in the pride of this special moment, I indulge by offering an informal and simple definition that I floated during the recent soccer World Cup: good governance takes place when the whole exceeds the sum of its parts.  When leadership, teamwork, and a selfless collaborative spirit (with humor) among people result in something so special — which would not be possible through countless disparate initiatives.

How to channel such good governance (and the vast political capital that the President now has) so to address head on some major pending challenges in Chile, such as the ongoing earthquake reconstruction, high inequality, labor policies and education reform, are issues for the day after tomorrow, and beyond.  But today we are mesmerized by this daunting rescue of the 33 miners, which reminds us of the art of the possible.

Now Liu Xia, the wife of Liu Xiaobo, may have been placed under house arrest, according to a rights group and to a reported posting by her on Twitter.  Her virtual house arrest took place after her return from visiting her husband in prison, following word of Xiaobo winning the Nobel.  That he would be allowed to leave jail to attend the prize ceremony and collect the prize was thought to be unlikely.  Now it is even unclear whether she will be able to collect her husband’s prize.

After it became known by some that Liu Xiaobo had been awarded the Peace Prize on Friday, a gathering of bloggers took place in Beijing, which was broken up by police and over a dozen people were detained.  But most people in China were unaware of the fact that the Nobel Prize for Peace was awarded to Liu Xiaobo, since the Central Propaganda Department issued orders across China banning reporting of the news.

Meanwhile, today Iran’s security services captured and arrested two foreigners, after an interview with the son of Sakineh Mohammadi-Ashtiani, the woman that faces death for alleged adultery.  Ashtiani may still be stoned to death by the authorities, or put to death through other means, and her case has sparked protests worldwide.

While such news disappoint many, they do not shock.  Both countries share major deficits in their adherence of human rights, citizen voice, and democratic accountability.  Yet there are differences.   China’s governance performance is  more complex and multi-faceted than Iran’s.   China is a much bigger puzzle.

In brief, the Worldwide Governance Indicators (WGI) we have just released provide the similarities and differences, by focusing on six dimensions of governance, measured with data up to the end of 2009.

In terms of the ’Voice & Accountability’ dimension, both China and Iran rate very poorly, well within the bottom 20 countries worldwide, as seen in first set of twin bars in the chart below (for each governance dimension, the bar rating China is atop that of Iran, and the rating is expressed in percentile rank worldwide, among over 200 countries).

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Yet while Iran’s performance is very poor in every dimension of governance, that is certainly not the case for China.  The performance of China in Government Effectiveness, for instance, is stellar among emerging ecomomies, while it has also made strides in terms of its quality of their Regulatory and Legal regimes.  By contrast, Iran rates among the bottom ten countries in the world on their quality of regulations, for instance.

Indeed, Iran performs poorly in the political, economic and institutional dimensions of governance.  China performs poorly in political governance, contrasting progress in economic governance (while significant challenges still remain on corruption control).

The economic damage to Iran from its wholesale subpar performance on governance is likely to be felt in the near term, not merely in the medium to  longer run.

By contrast, given the more complex (or mixed) performance of governance by China, it is more likely to affect its medium term economic prospects instead (even though the government’s reaction to the peace prize award attests to its own sensitivities and insecurities on this governance dimension at present).

But in due course, their rapid growth may taper off  if no governance reforms are implemented in the dimensions where its performance is subpar, such as human rights, voice and democratic accountability.

Without spin or political correctness, let me distill in brief some of the key messages the emerge from a review of the new data:..

1.  The world continues to under-perform on governance:  Serious governance challenges persist in every region of the world, at all income levels and in every dimension of governance:  voice and accountability, political stability/no violence, government effectiveness, regulatory quality, rule of law and corruption control.

2. The largest and most powerful economies in the world do not exhibit model governance or corruption control: Whether reviewing the performance of countries belonging to the G-2 (US and China), the G-8 or G-20, large and powerful world economies do not generally excel in any of the key dimensions of governance measured by the WGI.  Instead, the Nordic countries and New Zealand consistently exhibit the highest standards of governance across all indicators, including anti-corruption.

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3. But high quality governance is not limited to wealthy countries: Over 30 developing and emerging economies have higher governance and anti-corruption scores than industrialized countries like Italy or Greece, for instance.

4.  Where there is commitment to reform, significant improvements in governance can and do occur: Over the past dozen years, numerous countries from every region have experienced significant improvements in many dimensions of governance.  We identify such countries.

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5.  Yet, on average the world has not significantly improved in the quality of governance: Improvements in governance in some countries are balanced by declines in others and stagnation in many more.  Furthermore, some countries have also experienced reversals in governance performance over the past dozen years – following initial improvements in governance, some countries subsequently experience deteriorations (and viceversa).

6.  Good governance has a very high payoff: Industrialized countries with higher levels of corruption (as measured by the WGI), have higher budget deficits, suggesting that corruption is associated with financial stability in wealthy countries.  Further, our research indicates that in developing and emerging economies, better governance can significantly reduce poverty and raise living standards.

It is high time to take a deeper look in-house, in richer and poorer countries, and in national and global institutions.  Something is amiss.

But what if the quality of governance around the world has really been improving lately, including in the key wealthy nations, as well as developing countries generally?…

If such upward trend was clear, that would constitute good news for development, for MDG prospects, and for the world’s financial stability.

It is time to review the state of governance around the world to find out about this and related questions.  Tomorrow we will release a the new set of the Worldwide Governance Indicators (WGI), covering the 1996-2009 period for over 200 countries, as well as a new companion analytical report and a brief.   The key six dimensions of governance we measure are:  voice & accountability, political stability/violence, government effectiveness, regulatory quality, rule of law, and control of corruption.

Some of the findings may not be what some traditionally expect.  I will write about it, and all the data and joint work on this with my former World Bank colleagues will be found at www.govindicators.org