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.

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.

……………………………………………………………………………………………….

*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.

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.

…………………………………………………..

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

On Wednesday, March 31, international donors are convening at the United Nations to discuss Haiti’s long-term reconstruction plans and to make assistance pledges.  The publicly disseminated Action Plan for Reconstruction and National Development of Haiti, produced by the government of Haiti with inputs from the U.N., European Commission, the World Bank, Inter-American Development Bank and civil society, has assessed Haiti’s reconstruction needs over the next three years at $11.5 billion.

The full Post-Disaster Needs Assessment (PDNA), produced by a collaborative effort involving 300 Haitian and international experts weeks ago, and on which the Haitian government’s Action Plan is based, has yet to be fully disclosed to the public, although it is expected to be presented at the donor conference…

Ultimately, a final commitment that is well below US$ 100 billion would not only restrict the Bank’s ability to lend to Latin American and Caribbean countries at its current very high levels, but it could also be interpreted as a vote of no confidence on its leader, Luis Alberto Moreno from Colombia (even if government shareholders are now tightening the purse strings anyway, in the aftermath of the financial crisis).  All of the focus on capital increase commitments and their perceived value on the IaDB’s leadership will draw even more attention and prominence at the Cancun meeting since it will take place against the backdrop of the impending decision of whether to renew Mr. Moreno’s term for another five years when it expires in a few months.

Yet, a crucial issue that will get much less attention at the annual meeting than it deserves is transparency, of course.  Let us hope that it gets at least some attention at this weekend’s meeting.

Transparency has never been one of the IaDB’s strong points, in fact. The standards of public disclosure and access to information about basic financial information of the Bank, the projects it funds, and its dealings with its client countries has been generally low. But there are four reasons why the issue of enhanced transparency should get some prominence in Cancun.

First, enhanced transparency should get some attention at the IaDB meeting because of the controversy regarding the requested capital increase from the member countries and the reckless financial losses by the Bank’s treasury last year. As a result, some member governments may demand commitments to some internal transparency reforms by the Bank leadership before pledging capital.

Second, at their own headquarters a few blocks away in downtown Washington, DC, the World Bank has just adopted a new disclosure policy, following years of internal debate, work and consultation.

Whether due to the customary competition among financial aid institutions or as a result of pressure from overlapping shareholder governments, regional development banks tend to follow suit after reforms at the World Bank take place.

In fact, some work toward a new disclosure policy is already taking place at the Asian Development Bank. Even the IMF, historically a secretive organization, has been making some strides regarding its own disclosure standards.  And some developing countries already have higher standards of disclosure than the development banks.

At the World Bank, the challenge of implementing this new disclosure policy still lies ahead. And its new transparency policy has some drawbacks, such as the ability by member governments to veto public disclosure of important documents and information. But by having moved away from excessive confidentiality to a policy of presumption of disclosure, the World Bank has taken a transparency leap forward compared with its previous standards — at least in paper.  As usual, the devil will be in the implementation details, but the World Bank is now far ahead the IaDB in terms of disclosure.

Third, in the coming years, the IaDB will have to step up its work on supporting many Latin American countries on their own institutional reforms related to improved governance, anti-corruption and transparency. The region is falling behind others in this respect, and neglecting this dimension would be costly.

While the Latin American region has made inroads in terms of macro-economic policies over the past decade, as we observe in the chart below, on average Latin America has fallen behind the industrializing countries in East Asia, as well as the former Eastern European socialist countries (now part of the new Europe), in terms of key dimensions of governance. Yet to be credible in these important areas of pending reforms, the IaDB will need to implement transparency reforms – the example starts at home.

And the fourth reason for enhanced transparency is Haiti. The vast aid package that Haiti will require is already the subject of much homework and debate among donors who will congregate at the UN in New York for a major meeting on March 31st. Some bilateral aid donors will demand satisfactory transparency and accountability from the Haiti side before making firm commitments. As important, however, will be to observe the initiatives that donors themselves take regarding making its own programs and funding details in Haiti much more transparent than customary.

The Inter-American Development Bank covets having some leadership role in the Haiti reconstruction effort. To consolidate such a role in the eyes of the rest of the donor community, it can’t afford to stay far behind in terms of its own transparency.

For these reasons, it may make sense for the Inter-American Development Bank to publicly commit this weekend to the design of a far-reaching disclosure policy, one which could build on (and even improve upon) the World Bank’s and which would be consistent with modern transparency standards in such organizations.

In particular, the IaDB ought to pledge working toward very concrete mechanisms for access to detailed financial and technical data on all its projects. And it could pledge to make its operations in Haiti as an early model test case of the broader and deeper transparency policies and disclosure measures to come.

For good measure, the IaDB may also wish to disclose the price tag of the Cancun meeting.

* IaDB en castellano es el BID, o Banco Interamericano de Desarrollo.

[Note:  this is a cross-posting from the Upfront blog at Brookings, here].

Traducción del artículo “Natural Disasters, National Diligence: The Chilean Earthquake in Perspective”, por D. Kaufmann y J. Tessada,  publicado en la página web de The Brookings Institution, el 5 de Marzo de 2010 (link).  El artículo en inglés también se encuentra en este espacio blog (here)…

El terremoto que afectó a Chile en la madrugada del 27 de Febrero nos ha entregado imágenes de profunda destrucción.  Además, la cobertura de los medios de prensa, a nivel internacional, ha mostrado escenas de saqueo y de ataques incendiarios ocurridos en los días y horas inmediatamente después del terremoto.

En Chile, la crítica a la respuesta del gobierno es generalizada. Muchos se preguntan cuántas muertes y daño se hubieran podido prevenir, si la respuesta del gobierno y los esfuerzos de rescate ante este terremoto hubiesen tenido la rapidez y eficiencia necesaria, y por qué el orden público se perdió luego de ocurrido el terremoto.

Las críticas se han enfocado en la inhabilidad de las autoridades centrales en enviar una alerta de maremoto a las localidades costeras, en la tardía y tímida reacción al desorden en las zonas más devastadas del sur de Chile (que es donde ha ocurrido la mayor parte de los saqueos), y la demora en el envío de materiales y víveres más esenciales.  [Aquí testimonio de un inocente sobreviviente del tsunami, en Iloca]

Nosotros sugerimos que cuando uno mira la magnitud del desastre natural y las características de gobernabilidad[1] de Chile en comparación a otros eventos, uno encuentra que a pesar de los serios errores el país ha respondido relativamente bien. En este artículo identificamos algunos errores en la reacción frente al terremoto, los cuales constituyen también oportunidades de reforma y mejora para Chile.

Desastres Naturales y su Costo en Vidas

La información entregada por el gobierno hasta el 5 de Marzo mencionaba 279 víctimas identificadas, pero el número final probablemente sea varios centenares mayor dado que existen víctimas no identificadas y la cantidad de gente desaparecida. Aún así, es muy poco probable que las víctimas lleguen a contarse por millares. Sin embargo, la muerte de cientos de compatriotas es profundamente dolorosa y enluta a un número aún mayor.

Pero debemos recordar que el reciente terremoto en Chile es mundialmente el quinto más poderoso en más de cien años, con una magnitud de 8,8 grados. Esto lo coloca en la infame lista de los mega-terremotos, lo que significa que fue cientos de veces más poderoso que otros terremotos que han ocurrido cerca de zonas pobladas en los últimos años, con la excepción de los terremotos ocurridos en Indonesia en los años 2004 y 2005.  [Monitoría Sísmica aquí]

Aún tenemos frescas en nuestras mentes las imágenes de destrucción en Haití, donde un terremoto de magnitud 7,0 causó la muerte de más de 220.000 personas. Más lejanos son los recuerdos de los terremotos de Pakistán el año 2005 (magnitud 7,6 y 86.000 muertos), México en 1985 (magnitud 8,0 y 9.500 muertos), Japón en 1995 (magnitud 6,9 y 5.502 muertos), Armenia en 1988 (magnitud 6,8 y 25.000 muertos), Turquía en 1999 (magnitud 7,6 y 17.118 muertos), o el caso algo más reciente, y dramático, de China el año 2008 (magnitud 7,9 y 87.587 muertos), entre otros. El número de víctimas en estos casos supera con creces la del reciente terremoto, como se puede ver en la Tabla 1 al fin de esta columna.

La pregunta de fondo entonces es por qué en Chile el número de víctimas no es mayor. El hipocentro del mega terremoto chileno fue relativamente profundo, ayudando a reducir en la superficie el efecto de la gran energía liberada. Pero no sólo el terremoto tuvo una larga duración, sino también el epicentro estuvo localizado cerca de zonas altamente pobladas. El resultado de esto es que al área afectada fue extensa, abarcando desde el sur de Chile donde está la segunda ciudad más grande del país, Concepción, hasta la capital Santiago en la zona central e incluso zonas más al norte.

Adicionalmente, el terremoto no solamente causó destrucción en la superficie, sino también generó un maremoto y una larga secuencia de réplicas, algunas de ellas de magnitud superior a 6,0.

Sin duda no es ningún consuelo para los que viven en Chile, pero si un desastre natural de esta magnitud hubiera ocurrido en prácticamente cualquier otro lugar del mundo uno hubiera esperado un número mayor de víctimas.

El Impacto del Terremoto: La Gobernabilidad Es Fundamental

La buena calidad de gobernabilidad de Chile tiene un rol importante en la baja cantidad de víctimas. Dos dimensiones de gobernabilidad son particularmente relevantes: la eficacia del gobierno (la eficiencia del sector público) y el control de la corrupción. A lo largo de los años diversas instituciones chilenas han sido eficientes en el diseño y adopción de mejores códigos de construcción y edificación, que han sido revisados con el tiempo, reflejando la experiencia de terremotos previos, las innovaciones tecnológicas en prevención y el mayor nivel de riqueza del país (en parte también relacionado a los buenos niveles de gobernabilidad).

Igualmente importante es el hecho que se supervisa y exige la aplicación de estas normas. Los medios han dado a conocer al mundo el caso de un edificio de departamentos que colapsó en Concepción y de otro en Santiago que fue declarado inhabitable por estar inclinado como la Torre de Pisa. Lo esencial es que estos ejemplos indican que las violaciones de los códigos (y potencialmente la corrupción) son probablemente casos individualizados y no sistemáticos.

Naturalmente, muchas estructuras tienen daños, especialmente, aunque no exclusivamente, construcciones de mayor antigüedad. Es cierto que hay una gran cantidad de gente damnificada o sin hogar en las zonas cercanas al epicentro, pero el número total de casas no fue diezmado y el número de víctimas ocasionado por colapsos de edificaciones no es enorme. De hecho, buena parte de las víctimas del terremoto habrían sido causadas por el maremoto.

Sin lugar a dudas, y como ha sido el caso después de otros terremotos, se obtendrán muchas lecciones al evaluar los daños y los códigos de construcción serán mejorados, pero el sistema existente en esta área si funcionó. 

Aún más, y a diferencia de los efectos devastadores que tuvo la corrupción en el sector de la construcción en otras ciudades afectadas por terremotos como en los casos de Turquía (donde muchos edificios residenciales nuevos colapsaron) y China (donde escuelas llenas de alumnos colapsaron), los bajos niveles de corrupción imperantes en Chile, en conjunto con instituciones efectivas, ayudan a entender la razón por la cual los códigos fueron efectivamente implementados.

Esta conclusión no es específica a los casos particulares que mencionamos, de hecho la evidencia empírica, como la presentada en el estudio de Kahn sobre los efectos de desastres naturales (publicación), sugiere que gobernabilidad y control de la corrupción son determinantes de la cantidad de víctimas. Una mirada a los terremotos más recientes, como se ve en la Tabla 1 al fin de este artículo, y a indicadores de gobernabilidad (medida como eficacia del gobierno y control de la corrupción) apuntan en esa dirección, tal como se ve en la Figura 1 aquí.

                                              . 

La Respuesta del Gobierno: Errores y el “Test de Gobernabilidad”

La preparación para enfrentar terremotos, simulacros incluidos, es parte integral de la educación de adultos y niños en Chile. Pero hubo serios errores en la respuesta inmediata a la crisis.

Primero, la alerta de maremoto fue manejada inadecuadamente por la unidad de la Armada responsable que no logró coordinarse con la Oficina Nacional de Emergencia (ONEMI). Pero incluso si la amenaza de un maremoto se hubiera identificado inicialmente por los organismos encargados, lo que de todas maneras no ocurrió, es poco probable que la información hubiera sido traspasada a tiempo a las autoridades locales. La razón es simple, el sistema de alarma descansa en el uso de teléfonos e internet, y estos estaban desconectados por la caída del suministro eléctrico.

Segundo, el gobierno reaccionó lentamente en la distribución de artículos esenciales a las ciudades sureñas más afectadas, en parte porque sin electricidad no podía evaluar las necesidades locales.

Tercero, enfrentado al dilema de enviar las fuerzas armadas para asistir en las tareas de ayuda y en la mantención del orden el gobierno titubeó, demorando la decisión –en parte por cálculo político y por una sensibilidad al uso de la fuerza a raíz de la experiencia durante el régimen militar. Los saqueos y los incendios si ocurrieron, y la prensa reportó ampliamente aquéllos incidentes.

Después de los retrasos durante los primeros días, el gobierno central, mejor organizado, con más información y mayor decisión, ha hecho fluir la ayuda hacia las zonas afectadas, entregando provisiones de emergencia y restaurando el orden público.

Estos errores, aunque serios, también deben ser puestos en perspectiva. La perfección es imposible de alcanzar en una situación de crisis de esta magnitud y complejidad, con miles de decisiones críticas que deben ser tomadas de manera coordinada por un gran número de personeros geográficamente separados en un breve período.

Por ejemplo, equivocaciones más serias ocurrieron en Estados Unidos durante la respuesta al Huracán Katrina en Nueva Orleans. Más de 1.800 personas murieron y decenas de miles quedaron atrapadas por días peligrosamente en sus hogares inundados, estadios y centros de convenciones. Los saqueos, la violencia y el desorden aparecieron y duraron hasta el tardío arribo, casi una semana después, de 40.000 tropas para asegurar el orden. 

Hoy en día la ciudad tiene apenas dos tercios de su población antes del huracán. Esta cadena de equivocaciones ocurrió en un país con un gobierno que es generalmente eficaz. Pero también serios errores se cometieron en la evaluación y mantención de las defensas fluviales antiguas, la evacuación de los habitantes, en el acopio de provisiones y víveres antes del huracán, y en la coordinación de las tareas de rescate y recuperación después del huracán.

Como podemos ver en la Figura 1 (arriba), Estados Unidos tiene altos niveles de control de corrupción; aunque en Estados Unidos, Nueva Orleans no era conocida como un gran ejemplo de probidad. Una conclusión de esta breve comparación entre Chile y Estados Unidos es que errores serios ante crisis ocasionadas por desastres naturales no son necesariamente signo de subdesarrollo. Tampoco lo son los disturbios.

El verdadero “test de la gobernabilidad” reside en la habilidad y flexibilidad de las instituciones para enfrentar y corregir los errores. Aún es temprano para tener los primeros análisis cuando aún se está en medio de la operación de rescate y ayuda en Chile. Sin embargo, la evidencia ya es promisoria y consistente con buena gobernabilidad: se han reconocido errores, que están siendo corregidos y se han potenciado las capacidades ya existentes. El resultado es la recuperación de cierta calma al aumentar la ayuda y asegurar el orden.

Otro componente crucial del test de gobernabilidad, son las reacciones e iniciativas a nivel local. Los esfuerzos heroicos de personeros de los gobiernos locales, líderes locales y pobladores a menudo no llaman la atención de las cámaras de la misma manera que un edificio en llamas, una tienda saqueada o una construcción derruida. Estos esfuerzos terminan muchas veces siendo anónimos y desconocidos, pero son fundamentales complementando y, a veces, sustituyendo los esfuerzos del gobierno central. Un excelente ejemplo de estos esfuerzos son los casos de oficiales locales en poblados costeros, que megáfono en mano lograron impartir las instrucciones de evacuación inmediatamente después del terremoto, reemplazando de esta manera el “sofisticado” sistema de alarma.

Desafíos de Gobernabilidad para Chile

En estos momentos es claro que la prioridad debe ser el envío expedito de ayuda, de manera decidida, coordinada y focalizada. Sin embargo, es importante empezar a planificar para la fase de reconstrucción.   

Relativamente hablando, Chile está en buena posición para este desafío por sus buenos niveles de gobernabilidad. En clara diferencia con Haití, no requerirá de un enorme programa de ayuda internacional (aún cuando requerirá de ayuda técnica y de equipamiento focalizada de otros países), ni tampoco requerirá la creación de grandes instituciones nuevas (particularmente, no serán necesarias instituciones manejadas por extranjeros).

La resistente economía chilena y un desempeño macroeconómico estelar, garantizan la existencia de espacio para financiar un esfuerzo de reconstrucción,  que requerirá miles de millones de dólares sin tener que depender excesivamente de financiamiento a través de deuda (o de fuentes inflacionarias). Aún más, se espera que el dinámico sector privado juegue un rol fundamental.

Durante la reconstrucción será importante aplicar las lecciones aprendidas durante este terremoto, tales como la necesidad de mejorar el sistema de alerta de maremoto, asegurar suficiente respaldo en caso de fallas en electricidad y establecer un sistema de comunicación de emergencia, y determinando ubicaciones a lo largo del país para recursos humanos y depósitos de materiales.

También puede requerirse aplicar las lecciones acerca de los estándares para ciertas edificaciones, como reforzamiento de estructuras antiguas y hospitales. Y el moderno y transparente sistema de compras y licitación del Estado será testeado por la magnitud y la urgencia de los proyectos de infraestructura que serán requeridos. También se requerirá de medidas, y fiscalización de de la sociedad civil, para atenuar el riesgo de captura por parte de firmas poderosas, el cual se incrementa cuando hay aumentan el número de contratos más atractivos.

Hay desafíos más generales también que deben ser atendidos. Entre las instituciones, tanto Carabineros como las fuerzas armadas necesitan algunas reformas y modernización. Y medidas que generen al menos un mínimo de descentralización deberían ser consideradas dada la experiencia reciente.

Aún más generalmente, los saqueos y ataques incendiarios son un poderoso recordatorio de que existen tensiones que pueden ser explosivas, inherentes a una sociedad con alta desigualdad. De hecho, los niveles de criminalidad aparecían dentro de la lista de prioridades en cuanto a desafíos de gobernabilidad, lo que responde en parte a la necesidad de profesionalizar aún más a Carabineros, a la desigualdad social y económica y a los bajos niveles de empleo entre los más pobres. Los enormes procesos de reconstrucción y de generación de empleo que se necesitarán en el sur de Chile ofrecen una oportunidad para intentar responder a estos desafíos pendientes.

De hecho, un desastre natural tan trágico como éste puede transformarse en oportunidades para que Chile emerja tanto o más fuerte que antes. Un buen liderazgo es y será crucial.

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Many are wondering whether numerous deaths and severe destruction could have been prevented; whether the government’s emergency response and rescue to this natural disaster was speedy and effective; and why law and order broke down in the earthquake’s aftermath.

Criticism has focused on the failure by the central authorities to alert coastal populations of the impending tsunami, its delayed and timid reaction to unrest in the most devastated region in the south (where most of the looting has taken place), and its slow initial distribution of essential supplies.

By providing a comparative perspective that considers both the magnitude of the natural disaster and Chile’s governance characteristics, we suggest that in spite of some important mistakes Chile has thus far fared relatively well. We identify selected shortcomings, which present an opportunity for further reform and progress in Chile.

Natural Disasters and the Death Toll

As of March 5, the Chilean government had confirmed 279 identified victims, although the death toll is likely to increase by the hundreds considering many have not yet been identified or are deemed missing. Yet the death toll is highly unlikely to reach thousands. Nonetheless, the tragic death of hundreds of people is enormously saddening and brings grief to many others.

Yet, the Chilean earthquake was the fifth strongest quake for over a hundred years, measuring 8.8 on the Richter scale. This propels it to the nefarious elite “mega-earthquake” league, which means that it was hundreds of times stronger than other earthquakes near populated areas in recent years, with the exception of the 2004/5 Indonesian earthquakes. [Global Seismic Monitoring here]

Fresh in our minds are the images of recent disaster in Haiti, with an earthquake magnitude of 7.0 and a death toll of over 220,000 people. More distant are the memories of earthquakes in Pakistan in 2005 (magnitude of 7.6; 86,000 dead), Mexico in 1985 (8.0; 9,500), Japan in 1995 (6.9, 5,502), Armenia in 1988 (6.8; 25,000), Turkey in 1999 (7.6; 17,118), or more recently the infamous earthquake in China in 2008, (7.9; 87,587), among many others.  The death toll in these cases far surpasses that of Chile, as seen in the Table at the bottom of this article.

The real question then is why the death toll in Chile is not vastly larger. Chile’s mega-earthquake was relatively deep, which may have partially mitigated its monstrous force at the surface.  Not only did the earth shake for a long time, but the earthquake’s epicenter was also very close to several highly populated centers.

As a result, a vast area was affected—from the south where Chile’s second largest city, Concepción, lays very near the epicenter, to Santiago at the country’s center and further north.  And additionally, not only did the earthquake cause massive surface destruction, it also triggered a tsunami and numerous and severe aftershocks (often exceeding a magnitude of 6).

It may be of little consolation for those in Chile, but when a natural disaster of this magnitude hits, the number of expected deaths would have been vastly higher in most other countries.

Earthquake’s Impact: Governance Matters

Chile’s good governance played a significant role in limiting the death toll resulting from this earthquake. In particular, two dimensions of governance stand out—government effectiveness (the efficacy of the public sector), and control of corruption. Over the years, Chile’s effective institutions succeeded in designing and adopting better building codes, which have been periodically upgraded, to take into account previous earthquake experience, innovations in preventative technologies and the country’s growing wealth (made possible in part by good governance).

Equally noteworthy is that these building codes are enforced. The media has brought to international public knowledge a new high-rise that has collapsed in Concepción and an apartment building near Santiago that has been rendered inhabitable since it is leaning more than the Tower of Pisa.

Notably though, these examples indicate that non-compliance with building codes (and possibly corruption) is likely individualized, rather than systemic. Naturally, there are many damaged structures, particularly (but not exclusively) those built long ago.  Even though there are many people close to the epicenter who are now homeless, the overall stock of houses was not decimated and the number of fatalities due to buildings collapsing was limited. In fact, a very large portion of deaths resulted from the tsunami instead.

Undoubtedly, as with past earthquakes, lessons will be drawn from damage assessments and building codes will be improved; but overall the existing system did work. In contrast with the devastating effects that corruption in the construction sector had on the cities affected by the earthquakes in Turkey (where many new residential buildings collapsed) and China (where many schools full of pupils collapsed), the low levels of corruption in Chile, coupled with effective institutions, help explain why building codes were largely enforced.

More broadly, empirical evidence, such as that presented by an academic article by Mathew Kahn on natural disasters, suggests that among other factors, governance and corruption control are determinants of the death tolls. A review of recent earthquakes, as shown in the more detailed Table at the bottom of the article, and of the quality of governance (in terms of governance effectiveness and control of corruption) is also suggestive, as depicted in this Chart here, exhibiting two of the WGI’s Governance Indicators for some countries.

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Government’s Response: Pitfalls and the “Governance Test”

Advance planning for earthquakes, including training drills, is an integral part of adult and child education in Chile. In terms of immediate crisis response, however, serious mistakes occurred.

First, the tsunami alert was mishandled apparently by a responsible unit in the Navy, which failed to coordinate with the national emergency office. Even if the tsunami threat would have been identified in a timely fashion by the responsible authorities (which it was not), it is unlikely that the information would have been relayed in time to the affected localities. This is because the warning system relied on the internet and telephony, both of which were disabled during the power grid failure.

Second, the government was initially slow in dispersing essential supplies to the most afflicted cities in the south, partly due to its inability to assess local needs as a result of the power failure.

Third, the government hesitated and delayed the deployment of the army to assist in the relief effort and to maintain law and order—partly as a result of narrow political calculations and latent sensitivity to the use of armed force given the memories of the Pinochet regime. Looting and arson did take place in some localities, while the press widely reported those incidents that did occur.

After these initial delays in the first few days, the central government, armed with better organization, more information and increased decisiveness has streamed help into affected areas, providing emergency supplies and restoring law and order.

The mistakes made, while not trivial, need also to be put into perspective. Perfection is wholly unrealistic in any crisis situation of this magnitude and complexity, where thousands of critical decisions and steps need to be taken in a coordinated fashion by many officials in disparate locations and in a very short period of time.

For instance, more serious blunders occurred during the U.S. response to 2005 Hurricane Katrina in New Orleans. Over 1,800 people died and tens of thousands were perilously stranded in their flooded homes, stadiums and convention centers for days. Looting, violence and disorder erupted and lasted nearly a week until 40,000 troops arrived belatedly to restore law and order. Today the city has only about two-thirds its pre-Katrina population.

This serious string of mishaps took place in a country with a generally effective government. Serious mistakes were made regarding the evaluation and maintenance of the old levees, the evacuation of citizens, availability of sufficient stocks of supplies before the hurricane, and in the coordination of rescue and recovery efforts in its aftermath.

As we observe in the chart, the U.S. also exhibits high levels of control of corruption; although within U.S. cities, New Orleans has not historically been known for excelling in probity. A corollary of this comparison between Chile and the U.S. is that a serious mistake by the government in times of a sudden crisis brought by a natural disaster is not a symptom of underdevelopment. Neither is the eruption of riots.

The real “governance test” is the ability and flexibility of a country’s institutions to address and contain crisis, which does include learning and acting quickly to address and correct mistakes.

In the ongoing rescue and relief operation in Chile, it is obviously too early to have a definitive assessment, but the evidence is already encouraging, and consistent with good governance:  while building on its strengths, the government has already acknowledged mistakes made and has been moving decisively to correct them. As a result, some modicum of calm is being restored as relief efforts are broadened and order is restored.

Another crucial component of the “governance test” is the local-level response. The heroic efforts by many local government officials, community leaders and villagers often do not entice the TV cameras the same way that a building ablaze, a looted store, or a collapsed structure does.

Those good deeds may go largely untold and uncounted (as of yet), but they do play a key role in complementing, and at times, supplanting the central government’s efforts.  A powerful example was the life-saving efforts by local officers in some coastal towns who blared evacuation instructions through bullhorns once the earthquake struck, supplanting the failed “sophisticated” tsunami alert from the center.

Some Governance Implications for Chile

Clearly right now the priority ought to be the continued expediting of the relief effort in a decisive, well-coordinated and targeted fashion. Yet, it is important to start planning for the reconstruction phase as well.

Relatively speaking, Chile will be well positioned for that challenge given its high level of governance. In sharp contrast to Haiti, it will not require a massive international aid effort (although it will require targeted technical and equipment support from other countries), nor will it require the inception of major new institutions (and particularly no foreign-driven institution will be needed).

And while the reconstruction funding needs will be very large, in many billions of dollars, Chile’s resilient economy and stellar macroeconomic discipline gives it substantial headroom to fund this reconstruction without excessive reliance on debt (or inflationary) financing. Further, the dynamic private sector is expected to play a pivotal role.

In the reconstruction effort, it will be important to apply the lessons learned and mistakes made during this earthquake, such as in improving the tsunami warning system, ensuring sufficient backup power and establishing emergency communication systems, and designating strategic locations for crucial human resources and supply stocks around the country.

Applying lessons regarding standards for some types of construction, such as in the reinforcement of older structures and hospitals, may be required as well.  And Chile’s modern and transparent procurement system will now be put through a major test given the scope and urgency of the upcoming infrastructure investments that will be required.  Yet measures will need to be in place, including particular monitoring from civil society, so to mitigate the risk of capture by powerful private firms, a risk whenever there is a surge in large lucrative contracts.

There are also broader challenges that will need to be addressed. Among institutions, the police and the army may need to be reformed and modernized. A move toward some modicum of decentralization and devolution of central authority ought to be considered in light of this experience.

And more generally, the looting and arson is a potent reminder of the potentially explosive socio-economic tensions inherent in an unequal society. In fact, among pre-earthquake governance challenges in Chile, consistently common crime would top the list, which in part is due to an insufficiently professionalized police force, and in part the result of socio-economic inequalities and under-employment among the poor.  The massive investment and job creation effort that will be needed in Chile’s south may offer a unique opportunity to also tackle these pending challenges.

Indeed, a tragic natural disaster such as this can also become an opportunity for Chile to emerge even stronger and more equal. Leadership is, and will be, key.

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Note:  This entry originates from a Brookings Op Ed Commentary article, written jointly with Jose Tessada, also at Brookings.

Este artículo esta en castellano (aquí).   This article is also in spanish (here).

Country 1: Its approach to industrialization has relied heavily on a very large public sector that accounts for well over 40 percent of GDP, and on aid financing from richer countries. The country has no fiscal discipline, running a deficit exceeding 13 percent of GDP. Rather, leaders have focused more on ensuring adequate compensation for civil servants and providing a generous social safety net, including retirement at a young age. And transparency and integrity have not been a top priority, contributing to high corruption. This financial mis-governance has resulted recently in the downgrading of their sovereign risk ratings by commercial risk rating agencies.

Country 2: Like Country 1, it also has had numerous governments from the left-of-center; but in contrast, it pays attention to good governance, anti-corruption, and integrity. The state owns some of the country’s large corporations and commercial banks. It has also focused on improvements in health, education and poverty alleviation. Further, fiscal discipline is prioritized more highly than in Country 1 (even if that is not saying much). Consistent with its strategy, the country instituted a very aggressive and generous fiscal stimulus plan during the global crisis, which amounted to over 2 percent of GDP…

Country 3: Like Country 2 (but unlike Country 1), it emphasizes governance and integrity. But unlike the other countries, it promotes free trade, openness, competition, FDI and global competitiveness, as well as private ownership (including pensions and schools). It pursues a very conservative macroeconomic policy—in fact fiscal responsibility is enshrined in law. Moody’s, the commercial risk-rating agency, upgraded its sovereign debt ratings last year in the midst of a global financial crisis…

There are two ways to classify these three countries. One option is to classify them by their ideology-in-government: the first two countries pursue left-of-center polices, while the third pursues policies that are right-of-center. The second option is to classify these three countries according to their institutional quality/governance: while the second and third countries have good governance, the first has weak governance.

So, which countries are we depicting here? The first is Greece, and both the second and the third are actually the same country—Chile—during the past two decades.

Greece’s deteriorating performance on governance is depicted here, while Chile’s performance, compared with Greece, is depicted below. The results motivate us to challenge conventional wisdom about global development and governance. Let us focus briefly on six particular myths:

Myth 1: Initial conditions and external factors determine governance outcomes. Wrong. The contrast between Greece and Chile demonstrates the importance of domestic factors and cautions against exaggerating external factors and initial conditions. Greece’s history, its location, EU membership and aid received all provide favorable initial and external conditions for the emergence of strong institutions. In contrast, Chile’s geographical location and geological faults (and not belonging to the EU), points to less auspicious initial and external conditions.

Yet, Chile has stronger governance and thus pursues better policies. More generally there is growing evidence that concurrent domestic factors are highly significant determinants of country success, initial conditions, history, and external factors notwithstanding. Unfortunately, historical and cultural determinism, as well as external factors, are often used to excuse countries’ failures. Similarly, many continue to believe that large (and often indiscriminate) infusions of external financial assistance will make help countries achieve development outcomes and sustained growth.

Myth 2: Economic ideology still matters. Not very much. The riddle about Chile at the outset may have suggested the existence of two countries (originally in the FT) pursuing different economic policies. However, Chile is an example of one country simultaneously implementing market-led strategies, macro-economic discipline, and progressive social policies with a substantial state role. In Chile nowadays, basic principles of good governance dominate tired ideological divides.

For two decades, left-of-center governments in Chile have successfully implemented hard-nosed and conservative economic reforms, coupled with strong social programs and poverty alleviation, showing that we can transcend ideological divides. There is a consensus among the recent generation that macroeconomic stability, economic efficiency, poverty alleviation and good governance are not substitutes for each other but can be integrated together, and that they are key to achieving sustained growth and development. Disagreement about details on the role of the state vis-à-vis social programs and some regulations may persist across the main political coalitions, but they do so at the margin.

Myth 3: In today’s globalized world, states no longer matter; the focus ought to be on regions and global institutions. At least not for a while. Both Greece and Chile illustrate the dangers of focusing excessively on global and regional governance at the expense of national-level governance. Also, they illustrate that regional generalizations are misleading. Denmark and Greece may both be members of the EU, but they are light-years apart in terms of governance, for instance. Likewise, generalizations about Latin America are not telling.

Myth 4: The quality of a country’s governance is not as important as other factors in determining its long-term success. Wrong. The evidence to the contrary is substantial; including the research work that has been done showing that improved governance is a crucial and causal determinant of sustained growth and socio-economic development. We have found that on average there is about a 300 percent development dividend for good governance: a country that substantially improves, say, the effectiveness of its government, rule of law, and/or corruption control, can expect a tripling of its per capita income in the long run. In the case of Chile, for example, such tripling in per capita income, and enormous reduction in poverty, has taken place over a couple of decades.

Myth 5: Good governance is a luxury good. Not at all. Higher incomes or financial resources cannot ”buy” good governance. The contrast between Greece and Chile also shows that a country’s membership to the ”rich” nations club is not an assurance of sustaining good governance, or of high integrity and strong leadership. Conversely, mis-governance and corruption are not synonymous with emerging and developing economies. There is enormous variation in the quality of governance across neighboring emerging economies and developing countries.

Myth 6: One fights corruption by “fighting corruption:” creating more Anti-Corruption Commissions and redrafting laws and regulations. Not really. Many Anti-Corruption (A-C) strategies are ill advised, focusing on A-C campaigns, new A-C commission, and redrafted A-C laws (which lack enforcement). Instead, as in Chile, the focus ought to be on improving institutions and governance more generally, both on the supply side (e.g. procurement, civil service, financial management) and on the demand side (democratic accountability and integrity of elections, free press, civil society and private sector involvement). Notably, while Chile’s efforts have contributed to its low-level corruption (see chart comparison with Greece), it lacks an A-C Commission. Good governance is not embedded in particular anti-corruption commissions (there is none), rather it is embedded in the core institutions of the state.

Challenging these myths about governance and growth result in a few reflections.

The good news is that no country is a prisoner of its history—yes, history, culture and external factors do matter, but they are not the main determinants of country success. Having strong leadership, good governance, and adequate reforms makes a huge difference.

The challenging news is that while countries may not be prisoners of their past, they do have to be active stewards of their future, which implies hard and continuous efforts to improve institutions, governance, civil society activism, transparency, and leadership. These are not merely technocratic solutions but deeply political phenomena.

Lastly, let us conclude with a reminder of the ”Chilean Miracle,” a common description of Chile’s achievements. Over the past decade, Chile’s poverty rate has declined from 44 percent of the population living below the poverty line to 12 percent. The country just joined the ranks of the OECD. It routinely ranks in the top 20-30 countries in the world, not only in terms of governance and anticorruption but also in global competitiveness, contrasting Greece, for instance, whose global competitiveness index ranking has deteriorated from 47^th in 2006, to 71^st in 2009 among 134 countries ranked in 2009 by the World Economic Forum.

And in terms of corruption control, for instance, Greece rank position in last year’s WGI was 82, while Chile’s was 28 (out of 208 countries we measure).  Surely there are challenges ahead in Chile, but these enormous accomplishments are real. Yet describing them as a “miracle” is misleading; they are after all not acts of God, but of the people and their leaders.

And on a somber note, the tragic earthquake in Chile over this weekend brings these issues to the forefront. The catastrophic mega-earthquake, of a magnitude of 8.8 on the Richter scale (or hundreds of times more powerful than other major earthquakes over the past 20 years, and the fifth most powerful since records have been kept) may have taken the lives of about a 1,000 people. Every single death is painful; yet, if this figure roughly stands it would constitute a very tiny fraction of the numbers that perished in recent and less powerful earthquakes elsewhere. This is not a “miracle” either.  Chile’s good governance has made a difference.

While imperfect, this institutional environment is homegrown resulting from hard work. And Chile will not require a massive international aid rescue effort. Greece will.

Note: this entry is an abridged version of the opening keynote presentation that I gave at the “Policy Forum Armenia’s Conference on Armenia-Diaspora relations”, held at the Cosmos Club in Washington, D.C., last night, Sunday February 28th, 2010.