Arab Protestors Demand an End to Corruption, But Transparency Reforms Face Cultural, Legal and Policy ChallengesPublished May 17, 2011 in Arabic Knowledge@Wharton
Widespread unrest in the Middle East has focused world attention on demands for political reform and the dangers of gross economic inequalities. Meanwhile, global media have extensively covered the violent confrontations between protestors and government forces in the streets of a number of Arab countries. Seemingly lost in the clamor is one of the main thrusts behind the protests -- the demand for an end to corruption.
In Qatar's capital of Doha, a small group of law enforcement officials, policy makers, corporate compliance officers and academics organized by the U.S. Department of Commerce, the Organization for Economic Cooperation and Development and the UN Development Program, met in May to discuss how to combat regional corruption. It is no easy task, participants agreed, partly because there are various forms of corruption occurring within the public and private sectors in the Arab world, and partly because of a number of cultural, political and law enforcement challenges that have prevented needed reforms.
"In the region there's a really close relationship between the ruling elite and the business elite," said Wharton legal studies and business ethics professor Philip Nichols, who addressed the conference. "So one aspect of controlling corruption in this region is drawing lines, and creating some kind of distinction between a person's role here and there, and a cultural recognition that the responsibility to govern is distinct from the responsibility to take care of your friends and family."
The scale of the problem is illustrated in a January report done by D.C.-based advocacy group Global Financial Integrity, said Ahmed Sakr Ashour, a professor of management at Egypt's Alexandria University. The report noted that four of the top 10 countries in the world for illicit financial flows -- including monies for bribery and tax evasion -- were Gulf nations. All of the outflow amounts, Ashour added, were measured in the hundreds of billions.
Despite the challenges that were noted, systemic corruption is not an irreversible state, Nichols added. "In the past we studied Hong Kong, which was once a very corrupt economy, and we studied Singapore, which was once a very corrupt economy, and now both are among the cleanest, least corrupt countries in the world."
Corruption Thwarts Progress
With its sweeping development plans to prepare for hosting the 2022 World Cup, and billions already invested in social institutions and educational programs, Doha serves as a prime example of the ambitious vision that resource-rich Gulf countries have for economic progress. But even the best-laid plans can be stifled by continued corruption, Nichols said. "It absolutely precludes economic development. It's impossible to have sustainable economic development and corruption."
One key reason that is so, Nichols said, is that corruption undercuts and thwarts the business of legitimate companies. "In a corrupt system, a producer must use its resources to produce a good bribe. The producer who makes the worst product wins, because that producer is able to use more of its resources to produce a good bribe. In a corrupt system, therefore, it is impossible for good products to win, and bad products are always chosen. So in South Korea, the financial system collapsed because they only made bad loans. In Istanbul, there are houses that fall down during earthquakes because the constructor paid the building inspector rather than spending money on building a good building."
With the revolutions in Tunisia and Egypt still slowly burning, violent protests on the streets of Syria and Yemen, and all-out war in Libya, attendees alluded to the role corruption concerns sparked unrest. These concerns have been borne out by a number of financial revelations -- just this month, Swiss officials froze another US$466 million in assets belonging to 14 Egyptians, including former president Hosni Mubarak. "A common denominator of the upheavals is that people are calling for an end and a limit to corruption in the system and various sectors," Ashour said. "People are demanding more integrity and accountability in the system."
Ashour echoed Nichols' perspective on the economic damage caused by corruption, stating that the evidence of corruption's effects was contrary to a traditional belief in the region that some corruption was good for economic development, as it greases the engine of investment and doing business. "Equality cannot be achieved unless corruption is constrained and constricted," he said.
Ashour's presentation included figures from a report released in January by D.C.-based advocacy group Global Financial Integrity. Based on World Bank and IMF data, the group looked at an eight-year-period, from 2000 to 2008, to determine illicit money flows -- including monies for bribery and tax evasion -- from the world's developing countries.
The Middle East and North Africa (MENA) region features prominently in its report: MENA contributed the second largest percent of illicit financial flows in the world, and it showed the largest increase of real growth of illicit flows by regions in the period. What shocked Ashour the most, he said, was that four of the top ten countries in the world for illicit financial flows were from the Gulf. With US$$302 billion, Saudi Arabia was fourth overall, followed by the United Arab Emirates (sixth, US$276 billion) Kuwait (seventh, US$242 billion) and Qatar (ninth, US$138 billion).
Such figures illustrate short-term thinking, Nichols said. "If a business plans on existing longer than one transaction, then the costs imposed by corruption or by unethical practices very much outweigh the benefits accrued by those practices," he said. "There is the cost of harm to relationships. There was a recent study about the hundreds of millions of dollars not going into Brazil because transnational companies just don't want to get involved in corrupt relationships. [There are questions] whether Russia shouldn't be in BRIC, whether it should be BIC, and the primary reason why people don't want to go to Russia is because of corruption."
Policing Is Not Enough
While that risk was difficult to measure, Nichols added the obvious and more quantifiable risk of corruption was breaking the law and facing criminal penalties, particularly for transnational companies.
But attendees raised the point that authorities in the Middle East had to understand that law enforcement and corruption penalties by themselves would not curb corruption in their societies. "The private-public partnership is crucial to fighting corruption," said Julia Pilgrim, a crime prevention and criminal justice officer with the United Nation's Office on Drugs and Crime. "As we've seen in the Middle East, corruption has the power to shake the very foundations of society."
In the 2010 ranking of country corruption by advocacy group Transparency International, Qatar placed 19th among the cleanest countries in the world, ahead of the United Kingdom, and first among all Arab countries.
But H.E. Ali Al Marri, Qatar's Attorney General, acknowledged that more was needed. "We have never pretended that we are over this -- we know we are still at the beginning of combating corruption," Al Marri told attendees. "We are educating people on what is corruption, who is a corrupt person. We are creating awareness here, because corrupt people long have been seen as clever, using their intellect to gain money. We must reverse this, so they are seen as stealing money of others."
Nichols agreed that wasta -- the Arabic term for being connected -- sometimes shielded corrupt businessmen and government officials in the region from public sanction for their dealings. "But to the extent it's not happening in courts, it's happening somewhere else, and you can do that when you're 300,000 people," he noted. "But when a country becomes integrated into the large community, eventually if there is going to be actual governance, it is going to have to go through a more impersonal mechanism.
Pilgrim added that public and private entities could work together to implement checks and balances that could avert corrupt practices. On the public side, that meant investment in education and public integrity measures, and strengthening compliance monitoring and prosecution of corruption, she said. Private companies, she said, could invest in their supply chains. As larger companies often have better defined anti-corruption practices and policies, she said, there could be sharing of knowledge and resources with their smaller partners.
There is a strong case for governments to provide protections for businesses, and for companies to avoid corrupt practices, said Jermyn Brooks, chair of the business advisory board for Transparency International. "What businesses want is predictability," he said. "You cannot operate on the basis of changing laws and government strategies. [Still], laws are an important framework, but no more than that. We need companies to take their commitments against corruption seriously."
Invest In Compliance, Or Lose
Olajobi Makinawa, head of anti-corruption initiatives with the United Nations Global Compact, said from her experience, multinational corporations in the region were at the forefront of instituting anti-corruption business practices. "It is the SMEs that are lagging behind," she said. Investors, Makinawa added, should press companies about their measures to prevent corruption. "They need to make it an investment issue."
Brooks said regional companies that wanted to improve their anti-corruption measures should focus on two principles: Restricting payment of bribes, and clearly stating their business principles. Brooks did allow for the hesitancy of some companies to take such a stance, since there is the perception that it could make them uncompetitive in a corrupt market. "It is the prisoner's dilemma, if I don't do it, my competition will," Brooks noted, adding the solution was to broaden participation in such measures. "It requires collective action, with more companies joining a common commitment to fight corruption, so that companies are not fighting with each other."
Brooks suggested that companies regularly divulge their anti-corruption measures, including any actions taken against employees, and allow for monitoring by third party organizations. His advice to regional governments, though, was to continue efforts to simplify bureaucracies. "If you have complicated rules for businesses, the more incentives you give for companies to override the official structures," he said.
Nichols suggested that the region consider whistle blowing measures, and providing protection for employees that speak out against corruption. "There is always tension between accountability and efficiency," he said. "Whistle blowing allows the spreading out of accountability."
Some companies in the region have measures to safeguard against corruption. Nadeem Anwer, regional compliance officer for Siemens, detailed a list of measures the multinational technology firm has to guard against corruption. Senior executives are vetted before they are hired, every revenue stream is placed under regular review, a whistle blower hotline, and internal review teams are just some of the measures Anwer outlined. "Either you invest in your own compliance program, or end up paying lots of fines, and losing market reputation," Anwer said.
Inam Siddiqui, general counsel for MEA General Electric Energy Services, said his firm's approach to fight corruption was based on three steps -- prevention, detection and response. "The real way to prevent corruption is having the right culture," Siddiqui said. In that regard, he said, the company decided to focus on educating and monitoring leadership in the office. "Most people look to their superior to determine what kind of behavior is acceptable," he said.
Even with the efforts of individual companies and governments, the magnitude of systemic corruption in the Middle East leaves many concerns. Nichols addressed just how effective anti-corruption efforts would be in a region that views issues, such as conflict of interest, in a different light than in the West.
"It makes a lot of sense to work with a party with whom you have a strong, trusting relationship," Nichols says. "It lowers your transaction costs, you don't have to go through the process of investigating them, or building that relationship. But it's clear that has reached its limits, in much of the world, and here. There's a much weaker argument, when one talks about the global industry, that one can only work with one's affine. We know that the most productive large transnational businesses don't do that. They do the opposite of that. So it's somewhat specious to apply that argument to everything. It patently doesn't make business sense.
"To argue that this is a cultural thing too, that this is how business is done here, also doesn't stand up. The last few months have been a testament that most people here, maybe not the ruling elite, but most people here don't think that's how business should be done, and are angry that's how business is done. So it's clearly not deeply rooted in a cultural context. It may be the practice of a few people, though, who want to claim it's a cultural practice."
The generous spending Gulf countries lavish on their citizens and into social development programs -- such as Saudi Arabia's March announcement to spend over US$1 trillion on social spending -- also brings corruption risks, Nichols added. "It probably papers over some of the misallocations that are occurring. But it actually makes things scarier, because it means that things can get really bad before there's some kind of fault. For a country like Bahrain, with a tiny native population -- you can dole out money for them for a long time. But when the source of that money receives a jolt, and something bad happens, it's going to expose an incredibly fragile system, in which the kind of solid, sustainable growth that a well-functioning market could've provided, just isn't there."
"Corruption is an incredibly complex phenomenon, which manifests itself differently in every single place," Nichols added. "Sometimes the perception that efforts to control corruption are failing, is actually a realization that a poorly designed effort to control corruption isn't succeeding."