“I have good news; we are all by ourselves.” With this ironic phrase, Daniel Kaufmann, director of global governance for the World Bank, calls attention to Latin America’s failure to make progress on issues of transparency and the control of corruption. Kaufmann, an expert on economic development, spoke with Universia-Knowledge at Wharton during the Wharton Global Alumni Forum, which took place for the first time in Santiago, Chile, in early July. Speaking at the forum, Kaufmann suggested that good governance can lead to significant improvements in the standard of living of people in developing countries. In addition, Kaufmann noted that a corruption scandal as serious as the one facing the government of Brazilian president Lula da Silva is also an opportunity for local leadership to react with firmness and demonstrate the effectiveness of its institutions.
According to Kaufmann, it is extremely important to have a global perspective on the challenges created by corruption and a lack of ethics and transparency. “You have to make it clear that every country in the world, even the best countries, must deal with a certain number of corruption scandals. For example, last year Norway experienced a serious situation with its state-owned oil company. There were payoffs of millions and millions of dollars for contracts in the Middle East,” Kaufmann says.
When it comes to dealing with corruption, he emphasizes that the strength and quality of the response are what counts. Especially important is the way a county reacts when a scandal occurs. For example, two weeks ago South African President Thabo Mbeki publicly dismissed his ally and possible successor, former vice-president Jacob Zuma, on corruption charges. “From the viewpoint of foreign investors, the image of that country improved because of the way local institutional leaders reacted.”
For quite some time, the way companies react to crisis has been a topic of concern in the corporate world, Kaufmann says. Consider, for example, the case of Tylenol, the American pain medication. In 1982, seven people died in the Chicago, Ill., area after taking cyanide-laced extra-strength Tylenol capsules. Within days, its manufacturer, Johnson & Johnson, suffered a collapse in its share prices. The company took drastic measures to deal with the crisis. It recalled 31 million bottles of Tylenol and then re-launched the product later in tamper-proof packaging. “Months later, the market value of J&J shares was above what it was before the scandal. This is a roundabout way of making the main point: From the viewpoint of markets, whether there is an accident or a corruption scandal, the first thing to do is to figure out if something deeper is happening. The second thing is to figure out how to react to that.”
Transparency Is Profitable
According to the World Bank, improvements in governance lead to better standards of living. Kaufmann says that there are two factors involved in this.
First, you have to confront the myth known as the “institutional pessimists.” By that, he means “those academics and institutional experts who say that, rather than focus on what is quick and easy, you can change the ‘macro’ factors, the big picture. For example, to lower hyperinflation, if you make enough moves, you can do that in weeks. However, they say that you need generations to bring about institutional transformations and better governance.” Kaufmann agrees that institutional changes cannot occur within weeks. “But we have demonstrated (with the World Bank’s new report on governance) that within a period of six to eight years, very significant institutional change can take place. That’s what we are seeing with the countries of the ‘New Europe’ (Eastern Europe).”
Second, there is “the development dividend from good governance.” According to Kaufmann, a country of the ‘New Europe’ that improves its control of corruption or the quality of its rule of law can enjoy long-term per capita growth of 300%. From a level of $5,000 per capita, it can reach $15,000. “I am not saying that the countries of Eastern Europe will triple their incomes within six to eight years, but if they continue along this path, they will do so eventually.” Singapore, he says, provides a good example. “With its per capita income of $25,000, it is highly ranked in most indicators, except ‘fundamental freedoms’ and ‘democratic competency,’ because it is still a protected democracy. So, you have to imagine where they can wind up if they focus on those weak points.”
The Current Moment Is an Opportunity
When it comes to the latest governance indicator of the World Bank, which includes 209 countries over the period from 1996 to 2004, the great majority of Latin American countries rank below the 100th position, in ‘Governmental Effectiveness,’ ‘Rule of Law,’ and ‘Control of Corruption.’ The World Bank assigns colors to countries, such as yellow (Brazil and Mexico), and red, which is lower (Argentina, Venezuela, and others). The big exception is Chile (light green), which means that country is among the top 25 places in ‘Control of Corruption’ and it is ranked twelfth for ‘Regulatory Quality.’
Kaufmann says that regional powers such as Brazil and Mexico can all too easily feel self-satisfied because they are not ‘red.’ However, they should also ask themselves, “To be a world power, how can we wind up being ‘green’?” Kaufmann says that the main message is ‘Latin America, Awake!’ “The globalization train is leaving us behind. Look what is happening in the Asian tigers, Estonia and the Baltic countries.”
According to Kaufmann, the window of opportunity for taking politically difficult measures is much more likely to exist when there is a very serious debate about corruption. “If the perception is that everything is very good, then why spend political capital on convincing legislators and private-sector groups to take specific measures that can obviously affect them? However, during periods of scandal, it becomes possible for leadership, both in the public and private sector, to say: ‘Why not take advantage of this opportunity?’ Obviously, this is a general observation. Whether this is the right time or not is a topic of discussion in every country.”
Kaufmann warns that even Chile cannot afford the luxury of becoming complacent about its progress in governance, given the current debate about contracts awarded by public companies to members of the governing group of political parties. Beyond that, three years ago, there was a controversy over payments of additional fees to officials of the Ministry of Public Works. Whether the country is above or below the world average is not the point. “When something like this starts happening every week, you have to wonder if there is something more systemic. If it involves individuals, obviously you have to remove the little cancer cell from the outset. But you cannot let foreign investors get the impression that Chile has become a country that is corrupt and has a low standard of governance.”
When it comes to corruption, “Chile is not bad, but it has to be more concerned about transparency,” Kaufmann adds. “There are no payoffs here, but direct awards (of contracts with state-owned companies) must be just as transparent as contracts within the private sector, even if they are for small amounts [of money.]”
Chileans have to be honest; in this regard, there are many emerging countries that are more advanced than Chile. One example is Mexico, “where the challenge of corruption is much greater than in Chile. However, in that country, if an applicant is denied access to information, or he claims to have obtained incomplete information, instead of having to wait, he can turn to the recently created Federal Institute for Access to Public Information (IFAI).”
The good news, Kaufmann says, is that “Chile is facing the same challenges as any developed country. Although this is the same kind of questioning that takes place in Europe and the United States, it would be a big mistake to become self-satisfied, or to rest on its laurels.”
A Shared Responsibility
Kaufmann warns that we also have to look at what is happening in the private sector. “When there is an ethical problem in awarding contracts, or in contributions to a political campaign, is that merely a weakness in the public sector? In English, we say, ‘it takes two to tango.’ In other words, there is a shared responsibility.”
In that respect, the World Bank has made a major innovation, according to Kaufmann. “I believe it is the only institution that does this, and other governments and institutions should do likewise.” As Kaufmann explains it, the World Bank has an investigation division composed of more than 50 specialists who detect if there has been corruption in any of the projects backed by World Bank funding. In such a case, the companies involved are put on a black list, and they cannot apply for subsidies again. “Nevertheless, the most important thing is that this is public information, available on our web page. Nowadays, more than 150 companies are listed from all parts of the world. From the moment this information becomes public, no other respected institution or company is going to want to do business with them.”
A modern corporate sector should support and demand measures for providing more information of this sort, Kaufmann argues. “Trade unions and chambers of commerce should have their own lists and codes of ethics. For example, in the case of contributions to political campaigns, the business sector has to make the information available, so that it is transparent.” It is not that the business community favors transparency or that we are placing the blame entirely on the public sector. “I have made it very clear that it is a shared responsibility. It is not a question of one sector accusing the other, but of sitting down at the table and saying that we are all jointly responsible.”