With rigorous economic research and practical policy solutions, we focus on the issues and institutions that are critical to global development. Explore our core themes and topics to learn more about our work.
In timely and incisive analysis, our experts parse the latest development news and devise practical solutions to new and emerging challenges. Our events convene the top thinkers and doers in global development.
What impact does corruption have on development, and what’s the best way to stamp it out? Some in the media would have you believe that large amounts of public money are being pocketed by corrupt officials, and that the only way to stop it is to cut foreign aid budgets. Meanwhile, aid agencies and others argue that foreign aid is necessary to save lives. How do we square these?
In a new book called Results, Not Receipts: Counting the Right Things in Aid and Corruption, CGD senior fellow Charles Kenny offers a way to strengthen the case for aid and reduce corruption at the same time: focus on outcomes, rather than inputs.
Director of Technology and Development and Senior Fellow
“If you get a road built to quality . . . and you’ve ended up with a price that seems right for the cost of building that road, there’s no money left over there to fuel corruption,” Kenny explains in this week’s podcast. On the other hand, he says, if you don’t monitor the outcome of your project, it becomes very easy for contractors to cut corners.
Focusing on outcomes also helps donors and agencies demonstrate impact. “When you focus very heavily on receipts, all you have to show your voter is a bunch of paper,” Kenny tells me. “I want to see the healthy kid, I want to see the kid who’s been educated. . . . If we can deliver that, I think we make the case for aid much stronger.”
CGD and Brookings recently co-hosted Former Finance Minister of Nigeria and Distinguished Fellow Ngozi Okonjo-Iweala to discuss her new book, Fighting Corruption is Dangerous: The Story Behind the Headlines. The book is part memoir, part how-to, as she draws on her years of experience as Nigeria’s Finance Minister to describe the dangers of fighting corruption and how best to do it. I drew four main takeaways from our conversation: you cannot fight alone; institutional systems are critical for transparency and accountability; international institutions should step up; and don’t underestimate the personal dimension.
You cannot fight alone; you need to build consensus
In order to effectively fight corruption, you need a coalition of support at all levels of government. From the top, it is important that your country’s leader supports anti-corruption efforts. Okonjo-Iweala emphasizes that the backing of both presidents with whom she worked was important in lending her efforts the necessary legitimacy and support to effectively fight corruption. She also notes that she had a supportive team working with her who had the same values and principles—and therefore worked diligently to implement the policies to prevent corruption.
We need systems
In addition to needing the support of the leader and your team, government-wide support is necessary in fighting corruption. Strong institutional systems are important for increasing transparency, conducting objective analysis of evidence, setting the rules of the game, and punishing those who break the rules. Some important institutions include: a strong, transparent and non-corruptible judicial system; a technical system to manage money and thwart corruption; and a strong executive office/leader that supports anti-corruption work. As she said in response to a question, “people are people everywhere.” What determines their behavior is the strength of the systems and institutions under which they operate.
How international institutions can help
Okonjo-Iweala is clear that corruption must be fought by those inside the country, but she recognizes that country partners and donor agencies can play an important role. Because of her experience both at the World Bank and in the Nigerian government, Okonjo-Iweala is in the perfect position to offer advice on how international institutions can best support in-country anti-corruption efforts. She advises that international institutions cannot be lazy, they need to spend the time and effort learning about the societies in which they are working to best understand how the systems actually function. Only then will they be prepared to offer effective solutions. Additionally, multilateral institutions such as the World Bank and IMF are primed to help with institution-building but they need to better signal their long-term commitment to fighting corruption. The fight against corruption is a marathon and development partners need to signal that they will be there to support beyond the three-year program or five-year project.
Fighting corruption is dangerous
The title of Ngozi’s book is not a marketing gimmick. The most moving part of her session was when she described the ordeal of her mother who had been kidnapped in reaction to Ngozi’s efforts to fight corruption. Alongside, she and many other campaigners against corruption have faced physical threats, mental intimidation, and character assassination—now aided and abetted by fake news and the power of social media. Even when a battle is won, there are long lasting scars on the individual and on their family. And when whistle blowers or anti-corruption officials have to flee for their safety, the international community that was encouraging them to move faster is often the slowest to offer a safe refuge. The most sobering lesson from this book: don’t underestimate the personal dimension of fighting this global scourge.
The Sustainable Development Goals (SDGs) include a target to “significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime” (Target 16.4). However, there is no globally agreed upon definition for “illicit financial flows” (IFFs). My new CGD paper looks at why there is so much disagreement and confusion over this term.
Sandwiched between gun running, stolen assets, and organised crime in the Global Goals, it is clear that the core idea of illicit financial flows is concerned with “dirty money” that crosses international borders—one common formulation is money that is “illegally earned, transferred, and/or utilized.” This includes the proceeds of crime and corruption: illegal trade, embezzlement, bribes and kick-backs, terrorist finance, and misreported transactions that evade tariffs or taxes. In countries with foreign exchange controls, movements of money dodging currency controls would also fall under the definition. The idea of illicit financial flows is important because it highlights that crime and corruption are not just the problem of the country where they happen, but of the countries that allow their financial systems, goods trade or real estate markets to be used as getaway vehicles for ill-gotten loot.
Figure 1. Core concept of illicit financial flows
All of this seems relatively clear (although difficult to measure—such financial flows are obscured and hidden by design). However a case has also been made, for example, by coalitions such as the Global Alliance for Tax Justice and the Global Financial Transparency Coalition that illicit financial flows should be defined more broadly in relation to breaking some line of moral acceptability.
In practice this argument does not aim to draw up a list of morally acceptable and unacceptable things that people could do with their money (which would of course be impossible), but is focused on a particular issue; that “tax avoidance” should be included within the IFFs definition. This would bracket legally compliant taxpayer behaviour into a single category with criminal and corrupt money flows.
I argue that this broad approach is not coherent, and undermines the rule of law.
Grey areas on tax planning and tax evasion: not really so grey
One argument for taking the broad approach, which is often seen as compelling is the idea that there is a large “grey zone” reflecting an absence of clear defining lines between legal tax planning and tax evasion. Transfer pricing and trade misinvoicing are often highlighted as representing this overlapping practice. This is usually illustrated with big estimates, such as that trade misinvoicing drains $800 billion (USD) annually from developing countries, or that it is responsible for $50 billion of illicit flows from Africa.
While there are of course real legal uncertainties and enforcement failures, it is becoming clear that these issues are not well represented by adding up gaps and mismatches in trade data, which often do not reflect misinvoicing at all. Even more fundamentally it is a mischaracterisation to interpret “misinvoicing” as an example of the same kind of thing as legitimate questions over transfer pricing. On the one hand is customs fraud and smuggling, which is a channel for illicit financial flows, and on the other there are ordinary questions over determining acceptable “arms-length” prices for subsidiaries of a multinational corporations to charge between themselves.
For example, a report by Olivier Longchamp and Nathalie Perrot of the Swiss NGO Public Eye provides a good outline of how commodity price manipulation can be used as a means to enable illicit (i.e., illegal) financial flows. They map out several different arrangements between trading companies, “politically exposed persons,” and state-owned enterprises to transfer bribes and kickbacks by misreporting the value of commodity trades (the diagram below is only the simplest of a series).
It is sometimes argued that excluding legal tax planning or resulting “misalignment” from the definition of illicit financial flows means excluding multinational corporations from the scope. However, this is not true, instead it draws the line between corporations acting lawfully and acting in ways that break the law or that abet crime and corruption.
The Swiss Eye report highlights cases such as abuse of the Iraq Oil for Food program involving Glenclore, Vitol making payments to individuals close to the President of Congo-Brazzaville, Glencore (again) over-billing ore from Kazakhstan and paying commissions to a close advisor of the president, and Alcoa’s involvement in trade price manipulation in order to make side payments to a minister in Bahrein. Other cases such as Siemens historic bribe paying and Operation Car Wash in Brazil (involving many companies including Petrobras and Odebrecht) are also well known.
Another recent report The Plunder Route to Panama by the African Investigative Publishing Collective highlights how international financial centres (including London) become the end point for resources plundered through corrupt deals involving politicians and well-connected people. The South African Centre for Investigative Journalism amaBhungane has tirelessly investigated the use of manipulated contracts and misreported payments to deliver kickbacks and embezzle funds from public enterprises in South Africa. In the UK, Lord Peter Hain called for the government to seek a criminal investigation into whether HSBC and Standard Chartered banks facilitated the illicit transfers from South Africa.
There is perhaps a fear that multinational tax avoidance will fall off the international development agenda altogether if it is not included in the SDGs under target 16.4. But there is a better place for considering the tax affairs of multinational corporations in the global goals. That is under target 17.1: strengthening domestic resource mobilization. Rich countries should consider how their tax rules and treaties, the development of international tax norms, and the conduct of multinational corporations may support or undermine tax collection in developing countries.
Strengthening the consistency of international tax rules and the administration of tax law so that they are neither weakly enforced, nor capricious and predatory would be positive for citizens, businesses, and public budgets, and is good for both inward investors and host countries. Bundling everything under a weakly specified and easily sensationalised category of “illicit financial flows” undermines trust, understanding, and the ability to have constructive conversations about how to do this.
The flood of excitement around private investment supporting public provision of services shows no sign of receding in capital cities from Washington to Harare to Phnom Penh. Public-Private Partnership (PPP) models continue to proliferate, backed by multilateral development banks (MDBs) old and new: the Asian Infrastructure Investment Bank and BRICS’ New Development Bank have joined the list of champions. But the volume of PPPs in developing countries has stagnated since the global financial crisis, and they won’t deliver unless they are designed and implemented well. Making more and better public-private investments will take a far greater commitment to transparency from participants in the deals. Financiers—MDBs in particular—should take the lead.
PPPs have a mixed record: alongside successes, we’ve seen overpriced, under-utilized projects that have burdened the taxpayer at little or no benefit to the country. That’s in part because the deals are immensely complex to design—beyond physical infrastructure, they often involve contract terms around input prices, service prices and quality, regulation, land, and employment, for example. And because of the scale and complexity it is unsurprising that some of these projects involve more than the whiff of corruption.
Because transparency provides valuable information to investors, learning opportunities to government and assurance to citizens, it is widely accepted that principles for PPP development should enshrine transparency. The good news is that there are models that exist that we can learn from and that MDBs are well placed to champion.
Amongst information that it suggests should be routinely disclosed:
Financial information: financing structure, estimates, and actual revenues (limited by contract type), and forecast and actual equity return (limited by structure and contract type)
Government support: guarantees, grants, land, rights, payments for service, and others
Tariffs: tariff methodology and review and regulation
Performance: actual performance against targets, actual penalties against contract provisions, independent engineer or auditor report, and user feedback and surveys
Contract termination: termination provisions and handover provisions
Renegotiations or changes: details of changes, impact of change on cost, fiscal commitments and contingent liabilities, risk allocation, tariff or payment, and services or levels of service
Maintenance and provision of information: list of reports, documents, and other information the private provider should maintain and submit to authority, website and displays at site, timelines for submission and disclosure, and penalties for non-submission
While the list has limitations as Motoko Aizawa among others has detailed (not least inadequate coverage of information pertaining to non-financial risks), it is a helpful start. Project financiers could take a lead in pushing towards routine disclosure of this information. That’s not least because financiers have both the leverage to push for transparency and a self-interest in seeing it. They are at risk if unpublished provisions mandate politically toxic or financially unsustainable conditions on governments or the public, they have much to benefit if the number and sustainability of deals increases thanks to better design and greater public confidence.
A role for development finance institutions
And, amongst financiers—both MDBs and their private sector financing divisions—with their mandate to support broad-based development, should be leading efforts towards transparency (as the institutions themselves frequently suggest). That’s both for the benefits that would accrue to their client countries as well as the greater confidence it should provide to their own shareholders.
One model of a development finance institution (DFI) leading on standards for better private investment is the Equator Principles, spearheaded by the International Finance Corporation. These are a financial industry benchmark for determining, assessing and managing environmental and social risk in project finance. 92 Equator Principles Financial Institutions (EPFIs) in 37 countries have officially adopted the EP, covering over 70 percent of international Project Finance debt in emerging markets. Similarly, the IFC along with other DFIs could develop, implement, and promote routine disclosure Principles for PPPs—the Four P’s or P4s, perhaps.
As critics of EITI and other transparency initiatives point out, transparency alone does not assure good governance of projects. And the Equator Principles are voluntary, with compliance not always easy to gauge—there is no enforcement mechanism. MDBs and DFIs would need to work with civil society and governments to ensure PPP transparency is accompanied by greater accountability. But transparency is a first step—and it is past time for the development banks to practice what they preach on the issue.
Events are in tremendous flux in Zimbabwe after the non-coup committed by the military last week and the resignation of President Robert Mugabe on November 21. The immediate focus of negotiators has been on finding a peaceful exit for Mugabe and some kind of inclusive authority to get the country to elections.
Yet, it’s also not too early for the international community to start considering constructive steps to help the country get through the inevitable transition and back on a path to democracy and prosperity. Here are a few ways:
Technical support for a timely and credible election. After losing a referendum in 2000 and the presidential election in 2008, the ruling ZANU-PF has manipulated and distorted the electoral system to the point that it can no longer deliver a fair result. Elections have long been scheduled to be held by August 2018, but the country likely needs time to overhaul its flawed voting system and to align its laws with the 2013 constitution, if it hopes to have a truly free and fair poll. Objective technical support from the outside, including with the voter roll and data systems, could give opposition candidates confidence in the poll and boost the integrity of the outcome.
Set benchmarks for ending sanctions. The United States, Canada, Australia, and the EU all have sanctions in place on targeted individuals who are responsible for undermining democracy and the rule of law in Zimbabwe. The US Treasury currently lists 209 individuals and entities that are subject to US financial sanctions. Once Mugabe is out of power and a transition is genuinely underway, these programs should begin a review of the benchmarks for cancellation.
Debt restructuring. Zimbabwe owes more than $9 billion to international creditors, including more than $1 billion in arrears to the World Bank. Resolving the arrears overhang is a precondition for new lending—and any eventual economic recovery. A bailout plan presented by the authorities in Lima in 2015 was far too premature. But the plan nonetheless provided the skeleton for a roadmap. Clear and careful triggers for arrears clearance and eventual lending (rather than an embarrassing whitewash) could provide momentum for reforms in a manner that the US and other shareholders could get behind.
Private investment. While aid and debt relief will be necessary, the real investment that’s going to drive Zimbabwe’s revival of its farms and factories will come from private capital. Zimbabwe’s allies could help to facilitate diaspora investment back home and use agencies like OPIC and the CDC to catalyze and crowd in private investment. For the US, this is especially relevant in the electricity sector where Zimbabwe will need a major overhaul and the Power Africa tools are ready to contribute.
A land ownership audit. Agriculture is still the backbone of the economy, a source of employment, and the foundation of the banking sector. Land is a highly-charged political issue, but dealing with who-owns-what and issues of fairness and efficiency cannot be avoided if the country hopes to move forward. Some kind of external platform, perhaps hosted by the UN, could start that process with an objective accounting and audit of land ownership.
Support for a formal justice and healing process. Zimbabweans will eventually need some mechanism for dealing with past injustices and atrocities. This might be like South Africa’s Truth and Reconciliation Commission, which offered amnesty in exchange for open testimony, or some other arrangement suited to Zimbabwe’s circumstances.
Zimbabwe’s future is, as it should be, in the hand of its own people. But the country has friends around the world and cannot thrive isolated from the rest of the world. The international community has a crucial part to play in supporting Zimbabweans to recover from their national trauma and realize their own ambitions.