Wednesday, August 13, 2008

Corruption Phase Two - TJN in the American Interest

The latest edition of the American Interest carries a long article about corruption by TJN's director John Christensen co-written by TJN consultant Nicholas Shaxson and Raymond Baker, director of Global Financial Integrity in Washington (and author of the groundbreaking book Capitalism's Achilles Heel). We highly recommend our new article - but then we would, wouldn't we?

This article comes at the leading edge of a significant mood shift in international debates about corruption. Note, for example, new developments at the United Nations and in the IMF, even in the last few weeks, which we described in yesterday's blog. The full article isn't available online without a subscription, so you'll have to buy a hard copy to read it in full. But some key paragraphs will give you a feel for our arguments:

It took long enough for corruption to be accepted in the field of international development: it was rarely mentioned before the 1990s. Part of the problem was a bias towards things that could be easily measured - which effectively ruled out corruption as a serious field of enquiry. In addition, as the article explains:

"To this bias was soon added what can only be called a condescending deference to newly independent countries: It was considered impolite, as well as unhelpful to certain parochial institutional interests, to delve too deeply into untoward behavior by the elites of newly sovereign and proud countries. "

All sorts of bogus justifications were given publicly for tolerating corruption: one of the most corrosive was that corruption "greased the wheels" of international trade and allowed deals to get done. This argument, thankfully, has largely fallen by the wayside - but similar arguments remain to plague us: take, for example, last year's dishonest, ideologically-driven survey of tax havens by The Economist magazine (we demolished it here and here and here) which argued that tax havens oil the wheels of the international economy - all but ignoring how they foster crime, market-rigging, tax evasion, traditional forms of corruption, and so on.

Now, thankfully - in a push for which Berlin-based Transparency International must take much credit - corruption is firmly on the international agenda as a central, if not the central, obstacle to development in many countries. But our new article in The American Interest argues that the time has now come - using a phrase coined by the crime-fighting former Paris-based magistrate Eva Joly - for a Phase Two in the battle against corruption. It involves expanding our understanding of what corruption is. In this respect, Transparency International is now only in an intermediate position: as we have long argued - its famous Corruption Perceptions Index (CPI) is symptomatic of the old school. As our article explains:

"(The CPI) draws heavily on opinion within the business community. While it does provide an invaluable ranking for investors trying to assess country risk, it is of little use to the citizens of oil-rich Nigeria, for example, to be informed by the CPI that their country is among the world’s most corrupt. Nigerians and others like them want to know where their money has gone."

How should we progress from here? Our article raises a number of crucial issues: why, we ask, are kleptocrats like Nigeria's late former President Sani Abacha, or the former Kenyan president Daniel Arap Moi, considered the only part of the corruption equation? They diverted vast hauls into their pockets through shell companies, secret trusts and other evasive structures, notably in Switzerland and the UK. What about those British and Swiss bankers who harboured the stolen funds? Or the lawyers who created and maintained those structures? And what of the jurisdictions themselves? Transparency International's CPI ranks the UK and Switzerland as among the world's "cleanest." Really?

"The task is not just to recognize the importance of a “supply side” to corruption, involving bribegivers as well as bribe-takers; it is also about dramatically expanding our understanding of what the supply side has come to include in a rapidly changing, globalizing world. Only after our understanding has caught up with reality will we be able to adequately answer a question that has long puzzled economists: Why does so much money flow from poor countries to rich ones when, for both rational and ethical reasons, it ought to flow the other way?"

In other words, it is necessary to entirely rethink the geography of corruption (for a fuller exploration of this issue, look here, for John Christensen's seminal piece Mirror, Mirror, on the Wall, Who's the most Corrupt of All?).

We also think it's important to go right back to basics and revisit the very definitions of corruption used by TI, the World Bank, and others.

In essence, there are two major dimensions to corruption. One concerns individuals and individual behaviour, and this is basically captured by the traditional definition such as TI's "the misuse of entrusted power for private gain." But there is another aspect to corruption - the systemic aspect - which is not captured by this definition. It might help to think of this in terms of a line of hungry people queueing up for bread. First, disrupt the line - say with a firehose - and people will get angry but the chances are that order will eventually reassert itself. But there is a second, much more damaging, way to harm the queue - and that is when people start pushing in at the front. A little bit of this may be smartly dealt with - but once it gets out of hand, a free-for-all develops, at which stage there is no easy way to rebuild it. In the first instance, the line was simply disrupted; in the second instance, it was corrupted. This is a systemic issue - what matters here is not so much individual behaviour, as people's perceptions of others' behaviour. Once people get to the stage where everyone starts to think "only a fool would hold back" (as has become the case with tax dodging) then you have the conditions for a systemic problem. This is a much bigger, more difficult, aspect of corruption. We need a definition that will address both aspects of corruption.

So our article continues:

"Beyond scaling up our perspective to the global level, we also need to pay attention to systems and processes, not just individuals. And we need to include consequences, not just methods. Corruption always involves narrow interests abusing the common good. It always includes insiders using guarded information operating with impunity. And it always corrodes institutions, worsens absolute poverty and inequality, and ultimately undermines faith in the rules and systems that are supposed to promote the public interest. Thus, a better basic definition of corruption would go something like this:

Corruption is the abuse of public interest and the undermining of public confidence in the integrity of rules, systems and institutions that promote the public interest.

This definition is not limited to developing country kleptocrats and rogue officials, but makes room for a much broader array of actors and their facilitating activities. It also suggests a rubric for rich and poor to find common cause in fighting this global scourge. That said, it helps to use the noun “corruption” sparingly and instead to emphasize the verb “to corrupt.” Using the verb shifts our focus away from situations, people, isolated acts and finger-wagging, and toward examining underlying systems, relationships and processes. Markets and governments are built on trust, and the undermining of trust is arguably the greatest danger that confronts global markets today."

One consequence of redefining corruption will be that tax evasion will be recognised as a form of corruption. As our blog yesterday confirmed, we have been pushing for (and the UN is taking notice of) the idea that tax evasion should constitute an act of corruption under the UN Convention Against Corruption (UNCAC.)

All of this, we note, transcends the old left-right ideological divide. In the United States, Republicans as well as Democrats are backing the Stop Tax Haven Abuse Act, and you don't have to have any ideological positions to be horrified by some of the abuses being perpetrated in the offshore world. This is one of the several reasons our article mentions as underpinning a current sea change in global attitudes about corruption and the problem of tax abuse and offshore. Our article finishes like this:

"Of course, it won’t be easy. Powerful vested interests have a lot to lose from cleaning up the current state of global capitalism. But the rest of us have even more to lose if we don’t. If global capitalism cannot be rendered essentially fair, then it is unlikely to be sustainable in a world where formerly marginalized people are rapidly emerging from eons of political ignorance and passivity. We either join together to fix this problem, or it will surely “fix” us."

Makes sense to us. But then it would, wouldn't it?


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