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

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

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

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

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

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

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

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

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

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.

“Dear Diego:  It is high time that we critics say sorry, and thank you.  We misjudged your appointment as coach.  We believed that the 78-year-old president of Argentina’s soccer federation, had lost reason in asking you, a fading icon without a coaching badge, to lead it through this World Cup.  Well, so much for [our] so-called expertise.  You liberate the team, play to its strengths, attack, attack, attack… And you also liberate us.  When your team rips apart the caution of opponents, we feel like children who all want to be attackers.  [Your] enthusiasm reminds us that soccer is a simple game. Your team has superior attacking skills, so let it play to its nature…  Genius, playing to your own rules.

You know, but probably do not care, that only two men have won the World Cup as a player and a coach. Mário Zagallo for Brazil…  Franz Beckenbauer captained Germany to the title in 1974, and was its manager in 1990… [Like you], Beckenbauer had no background on the sideline.

[I]t’s time to say mea culpa, and mean it.” …

What’s the big deal here?   Thousands of letters are written to famous people every day, some more outrageous than others.

Well, this ‘Letter’ appeared as a prominent column in the New York Times, penned by no other than the NYT’s own noted soccer writer Rob Hughes.  Within hours of  his very public apology to Maradona in the NYT, Maradona’s national soccer team was in tatters, having been trashed 4-0 by Germany in the worst defeat in a World Cup game in 36 years.

For starters, the New York Times column should obviously qualify as the worst-timed piece of writing during this World Cup in South Africa (and arguably in any Cup).  That is the easy part; the writer would not have published such an outrageous piece one day later.

The NYT article would also qualify atop the ‘chutzpah‘ index, since the NYT writer represents himself as the voice for all football critics.  Not once he used ’I' in his own piece, instead writes as ‘We critics’ in his Letter full of hyperbole.  And it is as if the writer, though a soccer pundit, did not realize that Argentina, before its game against Germany, had not yet met its match and been truly tested in this World Cup, having played against weaker teams that were ranked so much lower in the soccer world standings. Argentina beating weaker teams can easily result from the brilliance of key players; in spite of the failings of a coach.

That was certainly the case regarding the 3 games Argentina played against weak teams in his Group at the Cup, easily qualifying to play Mexico in the round-of-16, when Argentina also benefitted from a glaring offside goal that the referee could not annul because the video replay (which FIFA bans from being an input to the ref’s decision!) exposed to all in the stadium, including the ref, that the goal was invalid by a mile. Such was Argentina’s over-hyped trajectory at the South Africa World Cup, prior to meeting its (German) match.  On that flimsy basis we were all served the NYT Letter of Apology to Maradona.

But there is a much deeper problem.  The Letter betrays ignorance regarding what it takes to be a great soccer coach, and the importance of good governance, at both the institutional and national level, to attain lofty results in soccer.

The misleading comparison with the great Franz Beckenbauer illustrates one key failing of the Letter. Beckenbauer may not have had formal coaching credentials when he became the manager (coach) of Germany’s national team in 1990, but he was already known as a brilliant tactician on the field. Beckenbauer the player had invented the football role of the attacker sweeper, or libero. As a manager of the German national team and of various well known soccer clubs he accumulated a number of championship trophies. Both as a player and coach he exhibited work ethic and discipline. These virtues sharply contrast Beckenbauer with Maradona.

Maradona disastrous coaching trajectory in past years is well known.  Prior to being asked to coach the national team preparing for the South Africa World Cup, he had tried to coach two club teams in Argentina, winning 3 games out of 23 (with one of the teams folding altogether).  He had started coaching right after being banned from soccer for over a year following the World Cup in the U.S. in 1994, due to his (recurrent) doping.

During the qualifying stage prior to the current World Cup in South Africa, Maradona’s team nearly failed to make it to the World Cup, in spite of playing against so many less talented South American teams.  The stories surrounding his work ethic and lack of discipline as a coach are also well known, and, together with his repeated bouts with drugs and alcohol, provide a very poor example to millions of soccer youth who know what a gifted player he was in the past.

Simply stated, good governance at the institutional level, whether for a soccer team or another organization, is the ability of the team to attain results where the whole exceeds the sum of its parts. In the ongoing soccer World Cup, countries like Ghana, Uruguay, Paraguay and arguably South Korea, Japan, Slovakia, the U.S. and Chile, may belong to this group, among others:  their achievements are not mainly due to numerous world stars in their team, but their teamwork instead.

Italy, England, France and some African teams (other than Ghana and South Africa) clearly belong to the group where the ‘whole-is-much-less-than-the-sum-of-its-parts’, and now I would also add Argentina and Brazil to that group. The quality of the coach, via the team’s strategy, tactics, and discipline, is critical in determining whether the whole exceeds or not the sum of its parts.

Yesterday’s lopsided Germany-Argentina game was a case study of contrasts in teamwork, preparation, and discipline. The defensive breakdowns by Argentina were egregious, contrasting the effectiveness of the German’s defense. And Germany not only showed how potent (and often exciting) its offense can be, but it exhibited such discipline that it was not caught offside a single time, while Argentina had 5 offsides!   The superior collective physical fitness preparation of Germany was also in clear evidence.

Good governance at the organizational level (which gets reflected in the quality and effectiveness of the manager-coach) tends to be correlated with good governance at the national level (even if not hand-in-hand in every case).  Countries like the Netherlands and Germany are among the best governed in the world, while Uruguay (alongside Chile) is atop governance ratings in Latin America.

Countries like Argentina, Nigeria, Greece and Italy have much poorer standards of national governance. No wonder that the quality of governance at the national level often better explains success in soccer than the country’s size (economy, population).  Uruguay, a country with less than 4 million people, and Netherlands, with only 16 million, both advancing to the semi-finals, illustrate the point.

Instead of a New York Times letter of apology to Maradona, what is needed is the exact opposite: a letter of apology to the millions of devoted Argentinian and world soccer fans (including truly yours), who admire the superb quality of Argentinian players. Due to misgovernance, these great players were not guided to play at the standards of cohesion, superb physical training, and discipline required to compete with the powerhouses at the World Cup.

Subpar governance extending beyond the coach in the Argentinian case is exemplified by the fact that Maradona yesterday had the gall to declare right after the debacle with Germany that he will consider his own future as the national team coach, betraying a complete failure of accountability by himself, by the Argentinian national soccer federation, and beyond.

Last, but not least, a serious open letter regarding Argentina at the World Cup should make clear to the current generation of young soccer players and fans that, irrespective of Maradona’s fantastic playing skills decades ago, his antics in recent and not-so-recent years are anathema to what a role model in sports ought to be, and ultimately they do result in personal and team failure.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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President Obama letter received today, April 16, 2010:

Daniel –

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

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

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

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

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

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

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

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

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

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

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

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

http://my.barackobama.com/StandForWallStreetReform

Thank you,

President Barack Obama

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

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

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

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

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

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

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

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

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

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

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…

All this takes place exactly as another peaceful and democratic transfer of power is about to take place.  The epicenter is a mere 70 miles or so from the major coastal city of Valparaiso, the seat of Parliament, where the Presidents in Chile pass the baton.  President Michelle Bachelet leaves with 84% popularity, and President Sebastian Piñera takes the oath of office, with high expectations and enormous reconstruction and social challenges ahead.  He is the first democratically elected right-of-center President in the past 50 years in Chile.

Meanwhile, the peaceful proceedings of this transition in power continue apace, and exactly according to schedule, whether the earth is shaking or not.  Visiting heads of state and dignitaries, many of whom are not used to earthquakes, appear to be much more rattled (and pale) than local citizens and officials.

Notable people and institutions.

.

[*Postcript:  Late in the day of Thursday, March 11th, the original magnitude of the large tremor that took place minutes before the transfer of power was revised downwards from 7.2 to 6.9.  Either way, its strength rivaled the Haiti earthquake.  It was followed by 3 large aftershocks shortly thereafter.  Apparently one person died, of a heart attack. For a worldwide seismic monitor map, depicting a the strength of earhquakes, click here.  For a photo gallery on the Chile earthquakes, here]

[In Spanish / En Castellano, traducido mecanicamente por computadora, aqui]