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Myth #4: From Crisis to Regulating (or Transparenting instead?)
By Kaufmann | April 11, 2008 2 Comments »
Recall the downfall of Enron, WorldCom, Parmalat and others, in the aftermath of the vast corporate corruption scandals a few years back. Then we witnessed a push for tightening the corporate regulatory framework in the US (through SOX). It is naïve to argue now that it makes sense to return to the pre-Enron and pre-SOX regulatory framework. Or to continue to argue for self-regulation as the panacea, since there is a built-in incentive for it to have insufficient bite. But one view holds that the regulatory pendulum may have swung too far, corporate regulations having become excessive and particularly burdensome for smaller companies. Now we are in a different type of financial crisis, related to the complex world of sub-prime mortgage derivatives and also due to unscrupulous lending practices. From various quarters there are calls for more regulations.
Because of the major systemic risk implications of actions by a single financial institution (and other such ‘externalities’), when it comes to financial markets it is silly to argue in favor of a fully unregulated sector. Rather than aiming at ‘zero or minimal’, there is a non-trivial set of regulations which are essential to safeguard the integrity of a financial sector, while promoting competition and a dynamic private sector. Which particular additional regulations may be needed right now is being debated by other experts…
More generally, however, rather than rushing to regulating (as a knee-jerk political reactions to the crisis, or other interventionist reasons), in my view it is important to carefully weigh the costs and benefits of each measure to tighten regulations, carefully prioritizing on what is central (rather than ‘christmas tree lists’), following an understanding of the real causes of the crisis. Further, and related to such understanding of the crisis, there should be focus on banking and financial sector reforms that result in a higher degree of transparency. We wrote about this a decade ago. And a similar argument applies nowadays for the debate about sovereign wealth funds: focusing on improving transparency may be preferrable to unbridled controls and regulations.
When looking away from the financial sector, and also focusing on emerging economies, the regulatory agenda becomes even clearer: it is counterproductive to push for further regulation of the enterprise sector generally, or particularly after a crisis or scandal (say, due to a corruption case). In fact a politically expedient rush to over-regulate typically results in more corruption, and in a further deterioration of the investment climate.
Instead, a much more effective substitute to over-regulating, often under-emphasized, is transparency – in the economic, financial, institutional, and political spheres. In recent times a growing literature has emerged, which include indicators and empirical analysis, on the positive impact of transparency reforms (link here to our survey paper and initial empirics). This argument about transparency is not merely based on abstractions, or only on cross-country empirical analysis. Very concretely, some countries and institutions in various places around the globe, like Mexico, are making progress, showing that transparency reforms can make a difference.
Yet it is also clear that much more concrete action is needed from governments, parliaments, the private sector (including multinationals), donor aid agencies and multilateral Banks, and the NGO and civil society sector. Drawing from the ongoing reform experience, and from previous presentations I have made, let me suggest here a ‘top 10’ list of transparency-related reforms in a development context (in no particular order, an excluding the pending agenda for further transparency within development aid institutions themselves):
1. Public disclosure of assets and incomes of country leadership and political candidates, public officials, legislators and other politicians, judges, and their dependents
2. Public disclosure of political campaign contributions by individuals and firms, and also of campaign expenditures
3. Public disclosure of parliamentary votes, without exceptions
4. Effective implementation of conflict of interest laws, separating business, politics, legislation, and government, and adopting clear and simple ‘lobby’ laws
5. Publicly listing (and barring) firms that have bribed in public procurement
6. Effective implementation (not just adoption) of Freedom of Information (FOI) Laws, providing real and user-friendly access to citizenry to government information
7. Adoption and implementation of Fiscal and Financial transparency codes and mechanisms, such as the ROSC Fiscal Transparency mechanism under the IMF, and related initiatives ensuring full transparency (including web-based) of budgetary allocations
8. Effective implementation of dedicated transparency mechanisms for natural resource rich countries and their private sector extractive industry counterpart, such as the Extractive Industry Transparency Initiative (EITI, and its extensions, including EITI++) and the Publish What you Pay (PWYP) campaign
9. Adoption of full e*procurement transparent web-based competition for public sector projects, as well as other e*governance IT-based transparency tools (for customs modernization, and also through mobile telephony, etc)
10. Carrying out periodic in-depth country diagnostic surveys on governance for key institutions, monitoring, analyzing and transparently disclosing to the public the progress and challenges, and providing a key input to reforms
While working in some countries I have shared this ‘top 10′ transparency list during policy brainstorming sessions with analysts, public officials, academics and civil society. And I asked them to rate their own country on each measure. Their own ratings have been low on average, pointing to how much more room for progress was needed. Of course it is unrealistic to aim overnight for perfectionism across the full transparency reform spectrum. Yet it is also clear that partial reform, or obsession with a single measure, is likely to have a small effect only, compared with the larger impact of a combined set of three or four well prioritized and intertwined transparency reforms. And lets keep in mind that some of these transparency reforms may mean having to adopt a few additional rules mandating disclosure or access to information. Yet such rules or laws are of a different nature than those counterproductive controlling regulations that increase red tape and bureaucratic opacity.
Indeed, as the expression goes, ‘sunshine is the best disinfectant’. And while there are sun rays in so many places, sunshine is often absent. More transparency is necessary. But it is insufficient on its own. In many countries, rule of law and media institutions need to be strengthened as well. Transparency reform without media freedoms will not guarantee real access to information to the citizenry, subverting the objective of holding government accountable. Also, achieving a bit more transparency, but in an environment of continuing impunity, does not change incentives to improve governance and deter corruption in many places — thus the equal case for strong rule of law institutions, complementing transparency.
Witness as an illustration what is transpiring nowadays in the UK. In spite of high levels of national transparency in general, and a vibrant free press, at the end of last year the UK government ordered the scrapping of the high profile criminal bribery probe of the BAE-Saudi arms deal case. However, in a development that stunned many cynical observers, following a complaint brought up by two very small NGOs, the London High Court has just now issued a stinging legal rebuke to the UK government, pointing in the strongest words to the illegality of such political meddling by the executive and by foreign parties, and calling for the Serious Fraud Office (SFO) to revisit the scrapping of the bribery case. Let us stay tuned to what the ultimate outcome (and fallout) of this BAE case may be; this is far from over. But this example exemplifies the importance of an independent judiciary, alongside high levels of transparency and a free press. Yet again, the culprit in this case is certainly not because of a ’missing’ regulation.
More generally, and focusing on emerging economies, in complementing a drive to enhance transparency, we may want to keep in mind that improving rule of law is about strengthening institutional capacity and about independent and fair justice, as well as about rights protection and enforcement. It is not about over-regulating by fiat.
Topics: Aid Effectiveness, Corruption, Measurement Frontiers, Public Financial Management, Public-Private Linkages, Rule of Law, Transparency | | 2 Comments
April 15th, 2008 at 9:39 am
A “transparancy revolution” is what Daniel Kaufmann might well be promoting indeed. The 10 top reform items in this aspect are most correct and with rationale. Regulative reppression in developing (or countries in transition) states, especially those in SE Europe as Bulgaria, Romania etc. feed on some rest-overwhelming-totalitarian state Patronage however. Look at the “small” oligarchs which have captured the stumbling new democracies at this side. Or even infltrated state institutions and the quasi-political system. Conflicts of interests, partisanships and nepotism (of most exotic nature), manipulative campaigns of “independent” media, shape an environment of most unpredictable and dangerous kind. The change to “more sun” over the muddy waters arround seeme less probable without a “third party” resolute involvement in this process of fight against corruption. In so far this “party” is a new international commnity engaged morally with a collapcing world of poverty and rising uncertainties. Government only – especially those of semi-ruined or failed national states (as on the Balkans) are not up to this appeal of Kaufmann. A new system of glocal control over fraud, corrupt patronages and networks of extortion seem to us of high demand. Certainly this is not and should not be a matter of sheer overregulating. Corruption is even more fluid in a global world. We need some softer paternalism of a new kind that might back the change to more transparacy. Looking directly to the sun with no sunglasses might be another disaster… and return to a new dark age of the Balkans.
April 17th, 2008 at 9:30 am
Indeed, transparency and effective regulation are superior to excessive regulation, which not only causes inefficiencies but can serve as an incentive and a cover for corruption. I’m glad to see that your top ten recommendations cover transparency across both public and private sectors. Let me share an example of the power of transparency from the experience of the Center for International Private Enterprise.
After the Administrative Simplification Law was passed in Peru in 1989, the Institute for Liberty and Democracy (ILD, led by Hernando De Soto) mounted a campaign to ensure the new law would be observed. ILD collected complaints from citizens regarding incidents of bureaucrats’ noncompliance with the law. If the authorities still failed to comply after prompting, cases were referred to a televised Administrative Simplification Tribunal, chaired by the president of Peru. That got bureaucrats’ attention–and hundreds of procedures were simplified concerning international commerce, issuance of passports, marriage certificates, and other requirements.