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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FIFA’s Monopoly and their obsolete Corporate Governance

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

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

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

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

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

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

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

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

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

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

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

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

Transparency

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

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

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

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

Selected Recommendations

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

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

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

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

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

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

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

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

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

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

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

FIFA should improve transparency in procurement:

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

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

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

FIFA should improve their own corporate governance and transparency:

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

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

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

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

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

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

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

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

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

“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.

The reason why June 27th, 2010 will be important for soccer history is that today was the day when FIFA’s (the world’s soccer governing body) resistance to the introduction of existing technology to aid referees lost any remaining credibility.  Each one of the two games played today featured a huge mistake by a referee, costing England a bona-fide goal in the first game, and awarding a non-goal to Argentina in the second.  In each case the use of technology would have taken care of that mistake instantly, fairly, and without much controversy.

England and Germany have had a major soccer rivalry for decades.  Controversy in a World Cup game regarding a crucial referee call did not start today.  At the World Cup game 44 years ago, held on July 30th, 1966, England and West Germany were tied 2-2 after 90 minutes of regulation time.  Eleven minutes into extra time, the English striker Geoff Hurst shot at the German goal.  The ball hit the underside of the cross-bar, bounced down, and it was cleared.  It was ruled a goal, as the linesman indicated to the referee that the ball had crossed the goal line.

England went on to win the game and their only World Cup 4-2.  For a long time controversy raged about that ‘Wembley Goal‘ (or the ‘ghost goal’) as to whether the goal had crossed the line or not.  In recent years, with the advent of modern technology, a study indicated that in fact it was not a goal; the ball had failed to clear the goal line by 6 centimeters.

In today’s 2010 World Cup game knockout stage game between England and Germany the opposite took place.  Psychology may have played a role.  The ‘Wembley Goal’ grainy video and controversy is likely to be inscribed in the memory of every referee.  Thus, whether consciously or not, referees, being human, are likely to err on the side of not risking another history-making ‘ghost goal’.  When such bias is applied with excessive zeal, the opposite type of error is likely, as it just took place today: a ‘denied goal’ that should have been legitimately awarded instead.

England was down 2-1 in the first half, Lampard shot hit the underside of the cross-bar, the ball bounced back, and the German goalie quickly cleared it.  The referee ruled that the ball had not crossed the goal line and thus an equalizer goal was not awarded to England.  The slow motion, zoomed, and instant video replays available nowadays to so many millions showed that the ball had crossed the goal line by an enormous margin, in fact, betraying the extent of human fallibility.

Thus, with respect to today’s game, there is no controversy about whether it was a goal or not.  Thanks to technology, which FIFA refuses to use (just like they have failed to review the flawed FIFA ranking system), we all know without a shred of doubt that it was a goal.

Instead, the controversy is about whether the outcome of the game would have been different if the correct call would have been made.  Even within England’s team they disagree about this; their (current, but unlikely to be future) coach Fabio Capello thinks so, while some English players strongly disagree, frankly stating that their performance was not up to par (not only in this loss to Germany by 4-1, but throughout this World Cup).  The other controversy is about FIFA’s non-use of technology, of course.

As if this was not enough, the Argentina-Mexico game a few hours later today produced another ghastly mistake, when the referee and the linesman did not call for a clear off-side by Argentina’s Carlos Tevez (who had received yet another beautiful pass from Leo Messi), who converted a gorgeously illegal goal, which nonetheless stood.  Again, seeing the video replay leaves everybody aghast, given the extent of the offside position by Tevez (not centimeters but meters!).   Argentina may have won their game no matter what, but it was another huge referee blunder and thus tainted their victory.

All four countries involved in today’s two games also featured at the World Cup 24 years ago.  On June 22nd, 1986, in Mexico City, it was the World Cup’s quarter-final game that went into the history books when Maradona scored helped by the ‘Hand of God’ in Argentina’s game against England.   That was his first goal in that game.  His second goal in that match has been regarded as the ‘goal of the century’.  Argentina beat England 2-1 in that famous game, and went on to become world champions by beating West Germany in the final.

Today, June 27, 2010, Maradona, as the the coach of the Argentinian team, benefited from the ‘On-side of God’ because of the uncalled off-side against Mexico.  And England was penalized and Germany given a the gift of the ‘Goal-line of God’ in their game. These huge refereeing mistakes were instantly exposed by technology used by everybody, except for FIFA.

During the group stage of this World Cup there were other such mistakes, as when the US was denied a legitimate (and potentially winning) goal in their tie against Slovenia, or when Chile had a player expelled for a foul he never committed, or when Brazil’s Luis Fabiano scored through a play where in fact he did not handle the ball with his hand once, but twice in one magically illegal play!

In the coming months and years there will be much debate as to what technology to use to aid referees do a better job.  Placing an electronic chip in the ball is one option, another is to have instant video replays as in American Football in the US, for instance.  Not unlike the progress of the integration of technology into many traditional fields (including governance), by the 2018 World Cup, and even possibly by the 2014 Cup in Brazil, some form of technology support can be expected, even though a mere two days ago FIFA reiterated their decision against it.

But that reiteration of FIFA’s old fashioned stance was just before June 27.

What took place today, June 27th, 2010, is game-changing, and the public’s outcry and demand from important (afflicted) country officials may be impossible for FIFA to resist for very long.  June 27 may even become the ‘Instant Replay in Soccer’ Day, or IRiS Day.

There is much more at stake than lowering the rate of referee mistakes.  It is about much more transparency and accountability in the world of soccer, about improved governance by FIFA, and about doing away with suspicions of subtle or coarse match fixing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

……………………………………………………………………………………………….

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

.                                                                               .

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

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

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

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

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

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

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

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

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

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

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

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

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…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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