Yet they have stirred up controversy. As is often the case with provisions that aim at changing the rules of the game, Sections 1502 and 1504 have pitted stakeholders that support their passage and full implementation against the interests of those that wish to water them down or greatly delay their implementation. Last Tuesday, Brookings and Global Witness hosted an event at the National Press Club to examine the debate surrounding these two provisions*…

Representative Jim McDermott kicked off the event by explaining that passing Sections 1502 and 1504 is only half the battle. The eventual effectiveness of these provisions largely depends on how the final rules are written and implemented. If well implemented, they could contribute to increased transparency, empower citizens to capture the gains from natural resource wealth and deny financing to dangerous armed groups in the Democratic Republic of Congo and the surrounding countries…

However, if opponents of these rules succeed in sufficiently watering them down, many of these gains will not be attained. With this in mind, panelists and participants from civil society, the private sector, financial sector and think tanks discussed the benefits, potential costs and implementation challenges of Sections 1502 and 1504.

The first part of the discussion, moderated by Simon Taylor from Global Witness, focused on the costs and benefits of Section 1504, which requires U.S. companies in extractive industries to report project-level payments made to foreign governments. Isabel Munilla from Publish What You Pay (PWYP) emphasized that with detailed information, citizens, civil society organizations and NGOs will be able to monitor corporate and government interactions, hold both groups accountable, and ensure that natural resource wealth contributes positively to local development and livelihoods. Daniel Kaufmann pointed out that data and research from around the world suggests that in the long run, with increased transparency and accountability, citizens could see up to a 300 percent development dividend from improved governance – i.e. their incomes per capita could triple.

Bennett Freeman from Calvert Investments suggested that transparent companies attract more investors because disclosure clarifies investment risks. And Laurel Green from Rio Tinto also supported implementation of these disclosure reforms, pointing out that such transparency can be a competitive advantage since firms can provide host governments with clear evidence of how they contribute to government revenues and communities. Yet not all companies may view such transparency reforms to their advantage. From an economic incentive standpoint, Kaufmann highlighted that, as with practically every rule, Section 1504 also means that there will be winners and losers. Companies that focus on efficiency and innovation stand to benefit, while those that derive gains from rent-seeking, monopolistic behavior or tax avoidance would have an interest in maintaining an opaque status quo.

Some large companies and industry associations that are opposed to the disclosure rule in Section 1504, such as Shell and the American Petroleum Institute, have suggested that project level disclosure will be very costly, position publicly traded firms at a competitive disadvantage, and possibly face in-country discrimination in places with lack of disclosure. There was discussion during the panel suggesting that these claims may be exaggerated.  The reality is that companies already have systems in place to track revenues and payments. In fact, even though Section 1504 is not under implementation yet, some large corporations— like Rio Tinto, Statoil and Newmont Mining, among others— already disclose payments in every country of operation. Further, as reported by some companies that are already disclosing, there does not appear to be compelling evidence that companies will face major penalties by non-transparent governments.

Some companies are also concerned that competitors could use disclosed information to their advantage. First, the information that should be disclosed does not appear to fall under the proprietary trade secrets category. Furthermore, since the rules cover all companies listed on the U.S. stock exchange, major companies like Shell, Exxon and BP are covered, as are some state-owned ones, like Petrobras and Petrochina. Last, and not least, disclosure requirements along the lines of Section 1504 are already being drafted in the European Union, and consideration of similar rules is also taking place in South Korea and Hong Kong, which would widen the network of companies covered and further level the playing field. If anything, firms listed in the U.S. can get a head start on those companies not yet covered by disclosure requirements.

Since it will be virtually impossible to roll back Section 1504 on transparency in natural resources as well as difficult for companies to oppose transparency from a public relations perspective, the strategy by companies opposed to disclosure has been to lobby for watering down the eventual rules issued by the Securities and Exchange Commission and to delay the effective implementation of the rules. The most important component in watering down such provisions would be to make disclosure a requirement merely at the aggregate country-level rather than at the project-level. This loss of this crucial detail would greatly reduce the impact of the measure. All the panelists during this session, including those from the private sector, argued in favor of detailed project-level disclosure.

In the second session, panelists and participants discussed Section 1502, which requires companies that source minerals from Congo-DRC and adjacent countries to disclose whether they use conflict minerals. The rule relies on the adverse reputational impact of such disclosure rather than mandating penalties for actually sourcing minerals from conflict-afflicted regions where militias may be benefitting from this trade. No reputable company wants their product associated with armed conflict, human rights violations, slavery and rape. Yet again there are some companies that support these reforms, while others oppose them.

Corinna Gilfillan from Global Witness, Delly Sesete from CREDDHO in the DRC, and several participants in the audience from the DRC region emphasized that although Section 1502 will not itself end conflict in Congo, it could hold companies accountable for sourcing from mines controlled by militias. The U.N. Group of Experts on Congo has already found that since the signing of the Dodd-Frank bill, there has been a reduction in the portion of mined minerals that is funding the conflict. By denying financing to the armed groups that perpetuate violence in the region, the provision can contribute to increased stability and improved human rights.

As with Section 1504, some companies are claiming that implementation costs associated with conflict minerals in Section 1502 will be very high. There are numerous estimates of these costs, ranging from the SEC’s estimate of $71.2 million to the National Association of Manufacturers’ (NAM) estimate of $9-$16 billion. Recent estimates produced independently by the Claigan Environmental consulting firm and presented by Bruce Calder during this panel suggest that costs to the industry are expected to be less than $815 million.

In fact, some proactive companies (both domestic and foreign) are already showing that tracking supply chains is both practically and financial feasible. Sandy Merber from General Electric and Tim Mohin from AMD discussed how pooling industry resources could help offset individual firm costs. The Electronics Industry Citizenship Coalition and the Global e-Sustainability Initiative have partnered with firms to develop the “Conflict Free Smelters Program“, which allows companies performing due diligence to trace their mineral supply chain down to the smelters who are certified as being either conflict free or not. Efforts are being made to now certify smelters in the DRC region under this program to help preserve access to the international markets for impoverished artisanal miners. Yet the companies that have already taken the lead in tracking the supply chain are a minority, and thus they are bearing a disproportionate share of the cost for so doing. Once the rules are issued and regulations implemented, this cost would be spread among a larger universe of firms.

There are concerns among some in the DRC that Section 1502 will have negative unintended consequences on citizens in the region. They suggest that the disclosure requirements are driving firms out of the DRC, citing falling mineral trade as evidence. Yet Section 1502, which has not yet even been implemented, cannot solely be blamed. Since April 2010, when the DRC-government-imposed six-month minerals embargo ended, trade in minerals has been on the rise. Sesete argued that much of the talk of unintended consequences was akin to fear mongering. He and others have pointed out that the mineral trade in that region is a relatively recent activity and citizens had (and continue to have) other sources to support their livelihoods. Further, he emphasized that the benefits of increased security and reduced violence and instability are too great to dismiss Section 1502 outright.

In the end, as pointed out by Mark Taylor from FAFO, the ability of Sections 1502 and 1504 to achieve their goals depends heavily on effective implementation. The final rules on these two provisions have yet to be released by the SEC. Therefore, the uncertainty surrounding the final rules has contributed to speculations on the cost (both to companies and countries) of implementation. The sooner these regulations come out and the clearer the standards they set are, the greater chance these provisions will have in maximizing the benefits to global transparency, accountability and governance.

As Senator Ben Cardin reminded the audience during his closing presentation, the importance of Sections 1502 and 1504 transcends U.S. companies and Central Africa. Indeed, while the SEC should carefully weigh potential benefits and costs in the implementation of Section 1502 and 1504, the balance should be in favor of transparency.

And the importance of leadership should not be ignored: these specific disclosures in Dodd-Frank will signal that the U.S. is taking the lead globally on these important aspects, potentially nudging other key financial centers to do likewise and thus benefiting governance, security and human rights in many corners of the world.

* On December 13, Brookings and Global Witness hosted The Transparency, Conflict Minerals and Natural Resources: What You Don’t Know About Dodd-Frank, an event examining Sections 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The agenda and full transcript can be found here.  This article was co-authored with Veronika Penciakova and originally published in the Brookings website.

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

Section 1504 is the more general provision on transparency. It mandates oil, gas and mining companies registered with the Securities and Exchange Commission (SEC) to publicly disclose the tax and revenue payments made to any government.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The SEC has a history of regulatory capture

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

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

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

Expectations of change were not realized

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

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

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

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

Regulatory capture of the SEC today impacts enforcement

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

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

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

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

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

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

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

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

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

Conclusions and Implications

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

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

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

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

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

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

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

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

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

Earlier this summer, President Obama welcomed one day apart Gabonese President Ali Bongo and Nigerian President Goodluck Jonathan to the White House.  Both countries share in common significant oil wealth, weak public institutions, and a large proportion of the population living in poverty.

Nigeria is ahead of the laggard Gabon in terms of developing democratic institutions, and has made inroads compared with its misgoverned authoritarian regims in past decades, even though it still faces considerable governance challenges, such as corruption (including in some provinces) and violence…

Then, shortly after President Obama welcomed these two African leaders to to the White House, First Lady Michelle Obama embarked on her second official solo trip, this time to South Africa.

While oil geopolitics played a role in the U.S. president’s agenda, the heightened emphasis on sub-Saharan Africa, and especially on its economic progress, is in stark contrast to how the region was cast in the past. For decades Sub-Saharan Africa (SSA) was inappropriately cast by many in the West as a wholesale “basket case”; an abjectly poor, economically stagnant region.

We rejected such an “afro-pessimist” view in the past.  Yet over the past year or so the pendulum may have swung to the other extreme. The region’s overall performance in recent years – featuring economic growth and reductions in poverty and child mortality rates, among other achievements – had many heralding Africa’s “new dawn”. 

And now, in light of the ongoing famine in Somalia, a failed state, the conflict in Sudan and Chad, and the brazen act of terror that just took place against the UN headquarters in Abuja, the Nigerian capital, the holdover afro-pessimists may attempt a resurgence of their view of doom for the continent.

Now we take exception to both extremes.  Our analysis* suggests that progress in a number of African countries has been laudable, yet one should be wary of premature exuberance and shy away of overly rosy assessments and  declarations that some official aid organizations tend to disseminate nowadays, abstaining from touching on critical pending challenges in governance and corruption.

The high variance in governance and development performance across the SSA warrants focusing on country specifics, moving past regional averages and mere comparisons with a troubled  past.  Indeed, contrasting the performance of African countries with that of other emerging economies provides added insight into the challenges facing the continent.

Africa is a Diverse Continent

Too often sub-Saharan Africa has been viewed as a singular unit rather than a conglomeration of 48 individual countries. While income per capita in the region grew at an average rate of 2.1 percent annually over the last decade, per capita growth rates ranged from -6.0 percent in Zimbabwe and -4.1 percent in Eritrea to 15.3 percent in oil-rich Equatorial Guinea, 7.7 percent in oil-rich Angola and 6.2 percent in Sierra Leone. A high variation across countries in Africa is also evident on a variety of other economic and governance indicators.

Radelet (2010) explores cross-country differences by distinguishing between groups of countries based on economic performance, classifying SSA into four groups – emerging (17 countries, such as Ghana and Ethiopia), threshold (six countries, such as Liberia and Benin), oil exporting (nine countries, such as Angola and Congo) and other, which we re-label as fragile (16 countries, such as Somalia and Zimbabwe) [1].

According to Radelet, countries in the emerging category have experienced economic growth and poverty reduction since the mid-1990s, while threshold countries have seen similar, though less dramatic, economic changes. Oil exporters have experienced uneven and volatile progress, and fragile countries have seen few economic improvements.

On average, incomes per capita among Radelet’s group of 17 emerging SSA economies grew at 3.2 percent annually over the last decade. Growth in emerging economies outpaced threshold (1.7 percent growth) and fragile (-0.5 percent growth) countries, though not oil producing ones (4.5 percent). However, it is important to note that even among this elite group of emerging countries there is a high variance in both economic and governance performance [2].

Since research has shown that the quality of governance impacts long-term growth and development, it is particularly important to emphasize governance alongside short-term economic performance. We have reviewed the performance of SSA countries on a broad range of governance indicators, including voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption from the Worldwide Governance Indicators, and political rights, civil liberties and press freedom from Freedom House.

We find that the 17 emerging economies category can be split into at least two groups – those that we label as performing emergers, which have had adequate growth rates and relatively satisfactory levels of governance, and the quasi-performing emergers (Ethiopia, Rwanda, Uganda and Zambia), which have exhibited adequate per capita income growth in recent years but where governance performance remains subpar.

The quality of governance across countries in the region differs considerably, and even among the “emerging” group of countries in SSA we observe substantial variation in voice and democratic accountability (Figure 1 below). On average the group we label performing emergers rates in the top half of all developing countries; by contrast, the group of quasi-performing emergers rates in the bottom half of all developing countries on this important governance dimension.

To illustrate, among the 17 emerging SSA economies some stellar countries like Mauritius and South Africa (performing emergers) exhibit voice and democratic accountability on par with Slovakia and Brazil, while countries like Rwanda and Ethiopia (quasi-performing emergers) are on par with Afghanistan and Azerbaijan. Further, according to Freedom House, while the 13 performing countries among the emergers have either a free (39 percent) or at least a partly free press (61 percent), with the exception of Uganda (partly free), the press in “quasi-performing” countries is rated as un-free.

While it may be tempting to generalize and hail sub-Saharan Africa’s “new dawn” (or as “old doom revisited” by some naysayers), it may be more accurate to hail it as:  a dawn of a select few performing emergers with strong growth and good governance. This group represents only a quarter of the region’s countries and a fifth of its population.

Cross-Regional Benchmarking Provides Insights

We have noted that several SSA countries have seen improvements in social and economic indicators over the past decade. But benchmarking against other developing countries and regions provides additional perspective.

Some sub-Saharan African countries exhibit strong economic performance relative to countries in other regions, though several do not. Over the last five years, average per capita incomes in SSA grew slower than in any other developing region (2.3 percent growth).

On the one hand, the growth performance of SSA’s performing emergers (3 percent growth) was on par with the regional average for all countries in Latin America (2.9 percent growth) and with the new European Union countries (3.2 percent growth). On the other hand, countries in SSA’s “threshold” (2.2 percent growth) and “fragile” (0.2 percent growth) groups performed well below these groups and on par with countries that were either generally misgoverned or harder hit by the recent global financial crisis.

A similar pattern emerges when comparing governance across world regions. As Figure 2 suggests, the extent of control of corruption among performing SSA economies is similar to that of countries in Latin America and the Caribbean (LAC), but below the levels of East Asian newly industrialized countries and newly acceded EU countries. Quasi-performing emerging economies of SSA display governance levels similar to those of developing East Asian countries, and threshold and fragile countries have governance levels on par with South Asia and Former Soviet Union economies. Notably, SSA oil producers have the weakest control of corruption among any of these groups (Figure 2).

Our assessment of economic and governance progress in SSA countries points to both encouraging and sobering news. About a quarter of the region’s economies are performing well relative to their neighbors as well as their competitors worldwide in areas such as growth and governance. Yet the majority of sub-Saharan African countries are still lagging behind, in growth, voice and democratic accountability, control of corruption and other important dimensions of governance (including political stability, rule of law and government effectiveness).

A key question is how to foster continued progress in performing countries and promote growth-and development-enhancing change in non-performing ones. Rather than providing a long list of recommendations—which would be futile given diversity of the countries— we put forth some principles to spur a discussion on priorities for reform.

Focus on Targeted Proposals

The challenges facing many African countries are complex, ranging from low productivity to high unemployment and from an underdeveloped middle class to poor health outcomes. It is often tempting to draw up a long list of reforms trying to tackle each one. But, not every sectoral constraint is best addressed through an isolated intervention, and resources, political capital, and institutional capacity are limited. Each country also has its own first-order priorities. Therefore, a country should focus on key reforms that are mostly likely to have the largest impact at every stage. While recognizing the importance of other areas, we focus on governance, which affects all economic sectors and is central to achieving sustainable development.

Fundamental and proximate causes of underdevelopment differ. The numerous causes of underdevelopment in SSA can be divided into two categories: proximate and fundamental. For instance, many countries in the region lack a strong middleclass, which may hinder domestic savings and investment. While it is impossible to “inject” a middle class into Africa, it is possible to foster its development by tackling the underlying constraints that hinder its growth.

A fundamental cause of underdevelopment is poor governance. Research shows that good governance fosters sustained growth in the longer term through domestic and foreign investment, private sector development, improved public sector management and sectoral development. Additionally, voice and accountability, political stability, corruption control and rule of law are crucial for equitable growth and middle class development. The latter are often identified as key constraints to progress in sub-Saharan Africa.  But in fact they represent proximate causes.

Governance has a large development dividend. Through various channels improvements in governance may spur progress in areas that are currently hindering development in sub-Saharan Africa and other regions.

•  Improved governance facilitates incomes growth.  Previous research suggests that there is a large development dividend to improved governance. In the long run, on average incomes could rise three-fold if the very weak control of corruption in Zimbabwe was improved to those of Senegal, or then from those of Senegal to the middling levels of countries like Botswana.

In this Motion Chart (Figure 3, linked here, and play button will activate motion over time) the positive relationship between control of corruption and income per capita over time can be seen. Improvements in other aspects of governance, including political stability and rule of law have similar effects on incomes, and causality has been found to run from improved governance to higher incomes (rather than the other way around).

• Voice and democratic accountability promote equitable and sustained growth. Recent events in and around the region have highlighted the importance of voice and accountability. Countries in North Africa that experienced high growth in recent years, such as Tunisia and Egypt, have recently experienced social unrest and undergone regime change.

Instability in the Arab region has stemmed from popular dissatisfaction with the governance deficit, highly inequitable growth, unproductive or non-existent job prospects and corrupt institutions. While the realities and challenges of SSA differ some from those of the Arab world (and North Africa), many countries in SSA still face a large democratic governance deficit and corrupt institutions, even within the emerging group (Figure 1 above). The risk of unrest is real in a number of SSA countries.

Such social unrest and prolonged civil wars also undermine economic and social development. Research has shown that conflicts reduce growth rates, even during post-war recovery, and have a severe negative impact on human health. In fact, nearly half of Radelet’s fragile economies can be considered conflict or post-conflict countries.

•  Good governance promotes competitiveness and investments. Numerous studies have found a positive relationship between private investment and high regulatory quality and control of corruption. Weak regulations and high corruption create uncertainties in the economy and may discourage investment and result in ineffective allocation of resources and a diversion of funds. Other components of good governance are also strongly connected to private sector growth. As Figure 4 indicates, countries with stronger rule of law are more competitive.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unfortunately, bureaucratic or administrative corruption is far from being the most damaging type of corruption for a country, or internationally.  High level political corruption, and within it, the particular form we have called ‘State Capture’, can be far more damaging where it is prevalent.  We have been emphasizing the problem of state capture (the undue influence of the corporate elite in shaping the rules of the game) for well over a dozen years, including in countries like Russia and Ukraine (here), and also in the financial sector of the US (here), leading up to the recent Wall Street-induced global financial crisis…

But the challenge of state capture is tougher to quantify (though feasible).  More importantly, similar powerful vested interests that are at play in capturing the institutions (regulations, policies, laws) of the state also tend to discourage an open and frank debate on it.  This is particularly the case in official circles, among domestic and international elites.   In light of the Wall Street debacle, and the detailed insider accounts of what transpired before, during and after the crisis, it has been more difficult to mask the challenge of regulatory and state capture.

There is still a particular dimension of state capture which still goes relatively unrecognized as such, however.  This is the capture of one state’s foreign policies vis-a-vis autocratic countries through the undue influence by multinationals and lobbyists doing the bidding to favor a lenient treatment of the autocratic regimes.  In short, state capture in the international arena, or international state capture.

The current Libya crisis is exposing this type of capture.  It is becoming increasingly evident that for many years a number of US-based powerful multinational oil companies have been very pro-active in trying to influence US foreign policy towards Qaddafi.  Highly paid US consultants and lobbyists, including academics and former ambassadors have been recruited to burnish the image of Qaddafi in US official circles, to lobby favoring pro-Libya policies, to emphasize the commercial interests in that country, and to laud the ‘stability’ of Libya.

Obviously, concern for the totalitarian nature of the regime and the human rights abuses did not feature prominently in their work (to put it mildly).  Further, the now well known ‘revolving door’ in the US between the lobbying firms, the regulators, and the regulated within an industry seems to have also been extended to the US-Libya case.  For instance, according to a media report, the founding chairman of the lobbying group called US-Libya Business Association (USLBA) went on to a position of influence (regarding energy issues) in the US State Department.

All this, and much more, including the role of other lobbying and consultant firms, and the list of oil companies behind this effort, is described in detail in a recent report in The Huffington Post (here), and another one in Mother Jones (here). The first article also contains the now off site web-based brochure by the USLBA lobbyists, as well as excerpts from a diplomatic cable from the US embassy officials in Tripoli, released by WikiLeaks.  And the second article focuses on another lobbying association, called USA*Engage, with members such as Halliburton and oil giants, and their article suggests that they have currently been lobbying currently against the US imposing sanctions on Libya.

The Qaddafi debacle is still being painfully played out, and this evolving process is likely to expose further information and dire lessons.  And the details given by the reporting in the Huffington Post and in Mother Jones warrant outside scrutiny, given the sensitive nature of the allegations on the role of multinationals, lobbyists, and officials.  Nonetheless, at a broader level, it may not be premature to suggest that Qaddafi’s Libya may become a case study in international state capture, where effective lobbying and commercial interests (alongside the fight against terror) unduly influenced US foreign policy in a direction that paid little attention to the nefarious aspects of an autocratic leader who engaged in gross human rights violations and denied socio-economic development of its people.

It is particularly important to expose and openly debate these issues at this juncture, not only given Qaddafi’s debacle, but also in the context of the increasingly permissive ‘money-in-politics’ corporate environment in the U.S. in the aftermath of the troubling recent landmark Supreme Court decision on Citizen United vs. the Federal Electoral Commission which is likely to enable large corporations to become even more influential in policy.

Qaddafi’s Libya may also become a case study of the fallacy that Diplomacy and Development go hand in hand.  In reality, often they have opposed each other, with Diplomacy’ winning the upper hand.  Of course the challenge of international state capture is not unique to the United States.  For instance, as hinted in my previous post on the case of Qaddafi’s Libya, the case of the UK is rather similar.

Touching on the ‘Faustian Bargain’ where global commercial oil interests tend to dwarf human rights and development concerns, in this video interview I discussed briefly these issues a few days ago, here.

Six years ago, the consultancy Controls Risk Group, labeled Qaddafi as a “charismatic dictator” and stated that “politically, Libya is a stable country. There is currently no viable challenge to Gadhafi’s leadership. The security risk to business in Libya is very low…by far the greatest risk to foreign companies operating in Libya is its business environment.”At the same time, CNN, citing another global risk assessment report, wrote that “while the terrorist threat in Iraq has increased, Libya is among the safest places to do business…Gadhafi’s North African state…ranks with Scandinavia and much of Eastern Europe as being relatively safe from terrorism, organized crime and political violence.”

A year ago, BBC reported that “Libya [was seeing] ‘limited improvements in human rights.”  A mere four months ago the Export Development for Canada (EDC) agency stated that “external threats to Libyan regime stability are negligible and the Libyan security services have been generally effective at containing the threats posed by Islamic extremist groups.”

And only a month ago, The Economist Intelligence Unit wrote about the absence of immediate domestic threats to Qaddafi’s rule, stating that “he has been in power for over 40 years and will continue to be careful to balance the competing power structures within the political hierarchy…There is at present little immediate threat to the ruling elite. Political power will remain vested in the Libyan leader…”

Much will be said about the diplomatic “Faustian bargain” struck by Western powers with Libya; about how the West turned a blind eye to domestic repression and human rights abuses in order to secure access to oil and to co-opt Qaddafi away from terrorism. The events in Libya and throughout the region demonstrate that there is a need for an honest review of the increasingly discredited notion that “Diplomacy and Development” seamlessly go hand in hand in foreign assistance.

Yet, similar attention will need to be paid to revamping how political risk is assessed. It is not just until recently that political risk in Libya was considered low. While Western officials turned a “political blind eye” to the abuses and excesses of Libya’s leader and his sons and cronies, most analysts simply turned the spotlight away from the country (and those still looking at Libya got it wrong).

This problem is suggested in Figure 1, which shows the results of a Google Ngram search on the share of the selected words which appear in books and scholarly writings every year. Libya’s leader, Qaddafi was definitely in the analyst spotlight during the terror-related period of the mid-to-late ’80s, but since then interest in the leader waned. For instance, in recent times, Zimbabwe’s woeful head of state, Mugabe, has garnered over twice as much interest as Qaddafi. While Mugabe is another example of disastrous and callous leadership, it would be difficult to make the case that he is twice as powerful, dangerous or (human-rights) abusive as Qaddafi.

Clearly, in addition to governments and investors, many analysts also dropped the ball on Libya. In this context, it is also noteworthy how little attention was paid by officials, the media and pundits to Qaddafi’s mental health; at most there were mere mentions that he was “eccentric.” Implicit in the traditional Faustian bargain between the West and despots like Qaddafi has been the belief that while human right abuses are regrettable, they do not fundamentally affect or alter the West’s “geo-oil” diplomatic objectives, nor are they necessarily very detrimental to economic development.

In light of recent events in the Mideast, potently illustrated by Egypt and Libya, this notion ought to be challenged, since both political stability and development are being undermined precisely in countries with large democratic and human rights deficits. The countries’ citizens have understood this clearly for some time, and many see the West as being complicit. Of course, the West is not alone in sharing the blame; in May 2010, Libya was elected by 155 U.N. member governments to the U.N.’s Human Rights Council. Two months later Libya asked the U.N. to close its Human Rights Council office in Libya.

Consequently, even from a self-interested foreign policy perspective, the West will need to pay closer attention to democratic and human rights deficits in countries where they persist. It is telling to trace with data Libya’s democratic and human rights deficit and corruption control over the past dozen years, during the period it enjoyed “kid-glove treatment” from Western powers.

Libya’s abysmal performance on voice and democratic accountability is depicted in Figure 2, with the country rating among the bottom 10 countries in the world by 2009, after having experienced deterioration in its already poor performance. A similar deterioration occurred in the country’s control of corruption. Libya’s poor performance contrasts the experience of many other countries, like Ghana, whose performance has improved over the period and who nowadays ranks in the top half of the world on both dimensions.

The ICT-driven social network revolution, the importance of activist global TV networks like CNN and Al Jazeera, and the rise of bottom-up collective action have significantly increased the effectiveness and reduced the costs of “people’s insurrections” against illegitimate regimes which exhibit a major deficit in democratic governance and corruption control.

Moving forward, political risk analysis and foreign aid agencies will need to pay closer attention to the importance of democratic governance factors, including civil liberties, human rights and corruption, in affecting political stability in a country—even where the repressive authoritarian machine is seen a priori as capable of brutal crackdowns against its people.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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