The Doing Business Gate: Let’s not throw the baby out with the bathwater

It’s been quite a few years now that I have been teaching hundreds of students on the limitations of governance indicators, especially the ‘big data’ ones. As someone who was educated first as a scientist and only later as a social scientist, I have never quite felt comfortable with data that I did not collect myself. It seems like a day doesn’t go by without an NGO announcing a new index or a corporate consultancy selling some miracle forecast. Yet primary data collection in the field of governance is extremely scarce: because of problems with conceptualization, the overly ambitious goal of comparing countries by the hundreds rather than the tenths, and, therefore, the inability to meet the real costs of quality data production. Consequently, as governance scholars, we work mostly with the equivalent of ‘derivatives’ in finance. Somebody packed some smaller packages which in their turn, like Russian dolls, contain some others that nobody knows where they come from and what exactly they contain. These are then standardized, normalized and messed with until they deliver what people want. Refined calculations try to separate the statistical noise from the content and find noise often stronger. Moreover, index authors omit the fact that the content itself is not based on facts, but rather on human judgement influenced by ideology or severely constrained by a limited opportunity to make direct observations.

In this sad landscape Doing Business was somewhat of an exception. Many of its elements – like how many days it takes to get electricity installed when you open a company – were entirely fact-based, unambiguous, and actionable. Doing Business served to incentivize reforms of the best kind – to remove the barriers that gatekeepers create to collect supplementary informal taxes on firms and bribes to themselves. This is precisely why Doing Business was created.  It offered an entire generation clear guideposts for emulating successful economies.

For our purposes as corruption scholars, Doing Business was also a valuable instrument, together with fiscal transparency and a few other fact-based tools which stood far above a mass of indexes made up of derivatives. For instance, the time it takes to pay taxes or to import and export goods influences the degree of corruption. This is why we included them in our composite Index for Public Integrity (IPI) among the determinants of corruption opportunities. It sounds intuitive that governments that do not make people queue to pay taxes or grant import-export permits selectively do better on both integrity and performance. We published evidence to this effect. Such evidence would not have been possible had not the World Bank collected the data in the first place.

In this context, the Wilmer Hale auditors’ report – which found that the top management of the World Bank pressured the research team of Doing Business to change post factum the methodology and manipulate rankings to make some big funders (or potential big funders) of the likes of China or Saudi Arabia look better – is a severe blow to the credibility of the indicators. It is also a blow to the hope that we can have transparent and fact-based indicators in general. If one can manipulate such simple things (e.g. adding Hong Kong data to that of mainland China), what is the difference with the non-transparent corruption risk estimates? Why invest in data collection if the treatment of data cannot be trusted? And if the World Bank does not have the financial resources to fund such an exercise and guarantee its impartiality, who does? No similar data collection exists, although a variety of foundations, each according to its own ideology, produce indicators on the quality of bureaucracy or freedom from regulation.

Anticorruption is a political endeavour and having the World Bank or any other intergovernmental organization where the board is formed by the countries it is supposed to monitor engage in this exercise is bound to be problematic. So far, the World Bank had shown itself through the excellence of its research, if not by the efficiency of its anticorruption programs. But now it has become problematic not just for the Bank, but for everybody using these scores: academics, reformers, journalists. We are not able to trust these figures anymore and yet we are unable to replace them – at least not on such a scale. The evidence of gaming and manipulation is older than this scandal, and the countries which required political intervention do surprisingly well in other rankings, too.

And yet we should not discard fact-based indicators and return to derivatives just because of this incident. We should see the value of the fact that this is a public audit and a public confession. We should encourage the World Bank and the International Monetary Fund to rid themselves of the managers involved and to reform their research so that political intervention is no longer possible, rather than abandoning it. This means including external stakeholders in some permanent oversight capacity, from design to final reporting – academics, think-tanks, and experts from civil society. Had such scores been produced in partnership with big business associations, or civil society coalitions, then the intervention could not have taken place. Strong countries which perform poorly are always tempted to intervene. When I launched the first IPI at OECD the first country who dispatched an emissary was China – to politely question why instead of Facebook users (where China does badly, since it is forbidden) we cannot use their government-controlled channel. I told them equally politely that we include the number of people associated through social media in our Enlightened Citizens indicator as a proxy for the citizenry capacity to rally against the government if needed– so I could hardly follow their suggestion. I think we parted in mutual respect- but then I have never sought financing from China.

Killing Doing Business altogether, while allowing all the derivative indexes to carry on (by the way, many included Doing Business, but as nobody knows what’s inside they will just let it drop as if nothing had been) strikes me as a step back. It is true that nearly the entire team was compromised insofar as they had to comply and did not blow the whistle in a timely manner. No doubt the entire governance research will need to be reorganized, under a different culture and perhaps external leadership, not just an external board. The practice of having research teams led by external academics is not new in international organizations and it has always worked well. Clearly, it makes political intervention more remote.

While we all wait to see what the Bank will do next (and IMF, where one of the main managers incriminated, Kristalina Georgieva, has a leading position) we also need to do something to continue our work, while keeping the trust of the many who use the actionable indicators that we create.

Already this week, the IPI will remove the countries suspected or proven of political intervention altogether, especially since suspicion exists this is not the only rating where foul play existed. Starting next Monday we shall remove China, Saudi Arabia, the United Arab Emirates, and Azerbaijan from the IPI. We shall keep them in our De facto Transparency Index (T-Index), where the web-based evidence is collected directly by us and verifiable by every reader, who also has a feedback form to report problems.

Furthermore, for the future editions of the IPI, we shall use the T-index to replace the parts which relied on Doing Business. This is both a gain and a loss; a gain, since T-index is the first direct measure of computer-mediated transparency for over 100 countries, and a loss, since we have nothing to replace the time one pays taxes or exports, which we know are significant and need improvement in so many countries.

We need to remind ourselves and others that trust is the most valuable currency: and we should all do our bit to preserve or regain it in order to continue to offer real and accurate maps for those who navigate the difficult waters of governance reform.

Alina Mungiu-Pippidi is a Professor of Democracy Studies at Hertie School in Berlin. Together with her research teams, she created the data repositories and fact-based governance indicators on www.europam.eu , www.opentender.eu,  and www.againstcorruption.eu, aside from the Index for Public Integrity.

 

Will the current crisis enable better governance, or hinder it?

The forecast of good governance on this page, the first one ever of its kind (hence it should be seen as work in progress), has come out at the very beginnings of an unprecedented destabilizing crisis for this century. It is fair to ask oneself therefore how the prognoses here will be affected.

Many positive things exist in crises such as the current one. Among others, we can count more global solidarity, more understanding of inequities of globalization and structural inequalities, and more acknowledgment of insufficient progress in recent years in delivering equal treatment and opportunity. Ethical universalism is an unfinished business even in the most advanced democracies, and there is more awareness of that than before. However, violence and anarchy are on the rise mostly in free societies, which have done the most to enable ethical universalism, and where democratic avenues to solve grievances do exist. Partisanship has crossed any limits of acceptable behavior and has become really problematic sectarianism. The center is squeezed, and civilization and civility with it.

What our science tells us is that political instability does not breed good governance, however: it’s not merit which triumphs when violence is on the rise.

It is perhaps more likely that Mr. Trump will lose elections: however, the reform-minded President Macron may also go, too, as it showed in local elections this year, and the main profiteer is the right-wing party of Madame Le Pen. The Chinese whistleblowers of the Coronavirus have not been promoted to top party hierarchy in the ministry of health: instead, they are dead and China represses Hong Kong freedom fighters with little hindrance from the international community. This is not surprising, as on some days it seems that the countries where democracy has been born and evolved ever since, even if not to perfection- US and UK- are more problematic than Russia, China, Turkey and North Korea. In the latter countries, where there is no consultation at all, nobody storms public buildings and statues whose fate should be decided by all inhabitants of a city after debate, not just angry groups. The very essential feature enabling such behavior in democratic countries- freedom and the consequent lack of fear from repression- is taken for granted increasingly. In previous times when this happened, the rights of citizenry suffered, because the absence of violence of every kind is indispensable for liberal democracies to be able to ensure rights. Populists will have an easier time rallying people around law and order if equality promoters equally promote violence and unilateralism. The most productive approach to fighting corruption as a main curtailer of individual rights might suffer in such a context.

The first amendment to the forecast is that the more political violence grows, the less positive predictions come true and more countries come under threat of losing what they have acquired, the good governance fundamentals: freedom of thought, equality before the law and the capacity to mediate between different interests through debate and limited terms popularly elected office.

The second amendment refers to the important role of technology. While in recent years we have seen intense mobilization against social media because it enables the worst social groups’ instincts- groupthink, mobbing, selective exposure, scapegoating, trolling and harassment- our research group has continued to defend it as a force for good. Social media enable people to monitor their government, to rally and protest, and such collective action is indispensable for good governance. Research has shown, however, that social media algorithms promote aggressivity online because it sells more advertising, and groups such as the Yellow Vest are profiting from it. While we are very proud to live in an era on unprecedented technological development we see daily that this does little to deter people from endorsing identity politics, and the resulting collectivism and intergroup conflict. None of these help ethical universalism, a society where everybody is treated fairly and equally, with no difference due to particular characteristics of ethnicity, race, gender, sexual orientation, or any other difference. Technology helps only if it remains a force for enlightenment- hence our component of public integrity index, enlightened citizens, those endowed with Internet household connections and associated with others through social media. We still have a strong association between their numbers and the quality of governance. But will this correlation hold if trolls and mobs become stronger than ethical universalism promoters on the Internet? In our forecast we have seen progress over the last ten years on both sides- governments have become more digital, and citizens have become better at participating. This development has resulted in mostly incremental progress so far- indeed, there is no substantial case based on digital progress alone, not even Estonia, although the progress of cases like Brazil or North Macedonia is based in part on digitalization. While we are still believers in what technology can do for good governance and solving collective action problems, technology has to stay a force for civilization and dialogue if it is to fulfill its potential.

So far, threats for good governance overshadow opportunities from the current crisis. But this Is not over and the jury is out still.

The Good Governance of the Corona Crisis

The years since 1989, the previous threshold crossed by the contemporary world have seen unprecedented stress on good governance, with the adoption of international conventions and treaties, disclosures like Panama Papers and spectacular enforcement of the older American Foreign Corrupt Practice Act. But during this interval the world largely stagnated on the quality of governance. If anything, governance in top income countries declined slightly, and in less affluent countries stayed the same. Only a handful of countries registered significant progress- those good governance ‘achievers’ that I covered with an international team of researchers in several books and articles, and which are less than a dozen across continents.

It is very significant in these days’ debate to monitor the performance of these countries in the fight with the epidemic and to compare them with their income and regional counterparts, and why not, with older good governance achievers, like US, UK or Scandinavian countries. Of some, everybody heard in the past two weeks, even if not researching anticorruption: South Korea and Taiwan. These two democracies handled the Corona crisis brilliantly, acted swiftly on evidence to prevent the spread of the virus, learned from previous epidemics and summoned e-government, technology (apps to trace contacts) and the excellent relation between state and citizens, based on transparency and trust.

In Latin America, the good governance achievers have the lowest fatality rates. By Easter 2020, Chile with 1.1% and Costa Rica with 0.5% clearly stood out compared to Nicaragua’s 11.1%, Bolivia’s 8.2%, Mexico’s 6.6%, Honduras’ 6.3, the Dominican Republic 5.6%, Brazil’s  5.7% and Ecuador with 4.7%. Uruguay also did well. Africa was still at the very beginning, but already you could see that Tunisia, who is among the very recent countries which started on the good governance path (see map) has been handling the situation better than its neighbors.

It is more difficult to judge in Europe, the land of the oldest good governance achievers, but there it also seems that many countries which have improved their governance in the last thirty years- Estonia, Georgia, the Czech Republic, Portugal- handled the crisis better than ‘old achievers’- countries like France or UK.

This highlights a previously neglected issue- that the equilibrium representing good governance, the state-society balance that we capture in the Index for Public Integrity, needs to be sustained over time and should not be taken for granted. Indeed, the John Hopkins University-EUI who  estimated UK and US far better prepared than Germany or South Korea should revisit their criteria and allow a larger role for political leadership. Also, would it not be nice to include Taiwan in the 195 countries GHS index, as clearly its governance was superior to many and so some lessons could be learned from there? Poor leadership (as well as a good one) matters. It can enable or deter collective action needed in such times, and both these old good governance achievers showed that, leading to loss of lives. From the “old achievers”, Germany confirmed the most, with a low fatality rate (compared to the other West European countries) owing a lot to the same non-populist, solid social contract, where the state acts on evidence and broad consultation, the citizens trust it to do so and the public and private sector, as well as different branches of government cooperate well. Still, Germany did not react as swiftly as either Korea or Taiwan, who had more cases after China originally, but managed to curtail the spread from very early on. Or Iceland, the marginal European island which made a prime minister resign in half a day after it turned out his family’s money was invested offshore and tested all skiers returning in one flight from Ischgl, an Austrian virus hotspot.

The more a government is able to draw on trust and technology, the swifter and more effective the response. Taiwan merged its national health insurance data with customs and immigration databases to create real-time alerts to help identify vulnerable populations. Iceland made an app which created a log of where the user had been to enable contact-tracing – sharing it with authorities being done on a voluntary basis, unlike Korea where quarantined people have to use it. Countries which used e-government tools to lower red tape and electronic means of payment to increase tax collection and diminish the unaccountable money volume- like Estonia or Uruguay- found it easier to handle the crisis. They had been already reducing personal contacts and paperwork between government and its citizens.

Acting rapidly on the evidence to prevent corruption, with the help of both responsible and critical citizens is also the essence of successful anticorruption: what you do after the outbreak already matters less, because it cannot be so effective even in the best of circumstances, that few countries enjoy anyway (like great impartial prosecutors and effective courts). The countries which had managed to build control of corruption successfully in recent times were thus far more prepared for this crisis even than those advanced countries which had received it as a heritage from their ancestors. Good governance needs current practice, but also returns dividends, as we could see during this pandemic.

China

China’s control of corruption is well below its human development capacity. Despite some improvements on e-government and administrative simplification, and some effort to implement conflict of interest for officials, its performance is dragged down by very low fiscal transparency and the severely restricted ability of the citizens to denounce corruption and misgovernment. As the 2020 coronavirus crisis showed, China underperforms due to lack of transparency and empowerment of its own human resources within the public sector and civil society.

Multi-Nationals and Corruption Systems: The Case of Siemens

Scholars tend to agree and evidence has shown that domestic businesses adapt to the local type of corruption, but little is known whether large multinational corporations also adapt to the local forms of corruption. Institutionalist theories of corruption and of international political economy would suggest that this would be the case, but the hypothesis has not, to our knowledge, been systematically tested. This paper, drawing on investigative materials about the activities of one such multinational, the German corporation Siemens AG, examines how it used corruption and bribery to advance its business around the world. We extrapolate from the logic of four “syndromes of corruption”, as Michael Johnston terms them, to develop specific hypotheses about the kind of behavior multinational corporations would be expected to exhibit when doing business in each of the four kinds of syndromes. We examine and compare Siemens’ activities in the United States, Italy, Russia and China. We find that Siemens did adapt to the local corruption form (or “syndrome”) and used, among others, different types of intermediaries to approach the local elites. The evidence from these case studies supports the institutionalist argument that multinationals distinguish between corrupt environments and further supports the argument that there exist different types, or syndromes, of corruption.

Multi-Nationals and Corruption Systems: The Case of Siemens

Scholars tend to agree and evidence has shown that domestic businesses adapt to the local type of corruption, but little is known whether large multinational corporations also adapt to the local forms of corruption. Institutionalist theories of corruption and of international political economy would suggest that this would be the case, but the hypothesis has not, to our knowledge, been systematically tested. This paper, drawing on investigative materials about the activities of one such multinational, the German corporation Siemens AG, examines how it used corruption and bribery to advance its business around the world. We extrapolate from the logic of four “syndromes of corruption”, as Michael Johnston terms them, to develop specific hypotheses about the kind of behavior multinational corporations would be expected to exhibit when doing business in each of the four kinds of syndromes. We examine and compare Siemens’ activities in the United States, Italy, Russia and China. We find that Siemens did adapt to the local corruption form (or “syndrome”) and used, among others, different types of intermediaries to approach the local elites. The evidence from these case studies supports the institutionalist argument that multinationals distinguish between corrupt environments and further supports the argument that there exist different types, or syndromes, of corruption.

Democracy in Decline

What is the state of global democracy? According to renowned democracy expert Professor Larry Diamond who spoke last week at Berlin’s Hertie School of Governance , democracy around the world continues to decline largely because of a lack of good governance.

During the event, chaired by ERCAS Director Alina Mungiu-Pippidi, Professor Diamond presented evidence that between 2005 and 2014, Freedom House scores (assessments of political rights and civil liberties, both of which are reported every year by the organisation) consistently declined. While 5 new democracies (Fiji, Kosovo, Madagascar, Maldives, Solomon Islands) were added to the global tally, the overall trend is shifting away from democracy.

Diamond highlighted the breakdown of democracy in Russia, Nigeria, Venezuela, Philippines, Pakistan, Bangladesh, Thailand and Kenya. In Africa, 25 nations declined in their Freedom House scores, 11 improved, and democracy overall on the continent eroded. He argued that the situation in Venezuela is continuing to deteriorate, and pointed to the incipient populist authoritarian leadership in Bolivia and Ecuador as further cause for alarm.

Shifting focus to the Middle East, Diamond looked at what he dubbed an “Arab Freeze”, arguing that the hope of the Arab Spring has in fact failed to deliver democratic gains, with the exception of Tunisia where democracy is slowly taking hold.

Why have so many democracies broken down? Diamond argues that in all instances there is a weak rule of law coupled with executive abuse of power. Many fragile or failed democracies are also quite complicated countries; they are quite ethnically or religiously or linguistically diverse.  If, as Diamond pointed out, effective institutions are not developed and if broad and inclusive political coalitions are not developed, the results (for example in Ukraine) can be disastrous. Poor economic performance can also have a detrimental effect on democracy, but Diamond argues that government performance and perception of legitimacy by citizens is sometimes as or more important than mere economic success.

With many established democracies mired in legislative deadlock, and authoritarian countries gaining global influence, there seems to be little hope of inspiring new democracies. The rise of China for example as a global economic power could have negative impacts on leaders of non-democratic states who could argue that authoritarianism has produced good economic results. On a slightly more upbeat note, Diamond did point out that there is a real possibility (even in China) of economic success leading to more citizen demands for democracy. When these happen in countries that are already high-functioning, there is a a hope for democracy taking hold.

ERCAS Hosts Berlin ECFR Scorecard Launch

ERCAS and the Hertie School of Governance hosted the European Council on Foreign Relations (ECFR) for the Berlin launch of the 2014 edition of their annual European foreign policy scorecard. ERCAS Director Professor Alina Mungiu-Pippidi introduced the event by discussing inadequate European maneuvering vis-à-vis Ukraine.

Professor Mungiu-Pippidi evoked the work of ERCAS with Ukrainian civil society coalition CHESNO and the recurrent question on the lips of young anti-corruption activists there: how many Orange revolutions does it take to get to the EU? “We have to consider what we can offer people who buy into the European normative discourse,” she said. “Nothing is more dangerous than to give the go ahead to people when you know there is no cavalry to back them up, and real politik will decide in the end. You can have one Orange revolution per week then and it’s still insufficient.”

The scorecard grades European foreign policy performance in 66 different areas: relations with the US, China, Russia, Wider Europe, Middle East/North Africa, as well as European performance in crisis management and multilateral institutions. Individual countries are also singled out as “leaders” or “slackers” depending on whether or not they help or hinder Europe’s overall interests. One impetus for starting the scorecard was to prompt a wider discussion about European foreign policy, beyond usual policy circles, and to track progress after the Lisbon treaty, however, as editorial director Hans Kundani noted, the “leaders” and “slackers” section provokes more debate than the rest of the scorecard.

On balance how effective was European foreign policy in 2013? ECFR gives Europe a B- average for relations with most regions, except Russia and claims “Foreign policy is back on the agenda.”  ECFR highlighted foreign policy successes last year in Iran and Kosovo as well as relative failures in Syria and worsening relations with Russia, and ranked France and the UK amongst the “leaders” and Germany and Greece amongst the “slackers.”

Much of the discussion in Berlin focused on Germany’s foreign policy role in the Ukraine and why the country found itself this year atop the list of “slackers”. The scorecard noted the federal elections last year as well as the fact that Germany undermined European attempts to reduce dependence on Russian oil as key reasons why it failed to impress this year.

To read more about the ECFR scorecard or do download a copy, please click here: http://www.ecfr.eu/scorecard/2014