G20 and the Uncomfortable Truth: corruption

The G20 countries overall manage 80 percent of world trade and more than 85 percent of the world economy. Two-third of the world’s population lives in G20 countries and three quarters of the world trade. This group of countries is indeed small enough to make a decision but big enough to make a difference worldwide.

This year leaders in Brisbane reaffirmed their goal of improving the GDP of G20 economies and agreed to expand their economies by at least 2.1% within four years, adding $2 trillion to global economies—a feat which could create millions of jobs. This is a very ambitious target considering the economic crisis in some of the G20 countries and slowdown in emerging markets. 

How this can be achieved is an important question. It is not clear what action could be taken within G20 countries in coordination with each other. There is even talk that the countries will monitor each other’s actions to ensure that there is no negative impact overall. Each country will have their own plans at the end; however, the worldwide mechanisms to be implemented include getting millions of women into the workforce, increasing trade, and implementing an Anti-Corruption Working Plan.

It is widely agreed that there are many impediments to economic developments that prevent countries from reaching their targets. What are the leaders of these major economies actually concerned about when it comes to the growth of their economies specifically, and for the global economy at a larger scale? To name a few, inefficient education and health care systems, lack of infrastructure, ineffective tax regimes, and political instability come to mind. There are obstacles that also have a huge impact on the social development of the world population, such as poverty, climate change, women’s participation in the workforce, and corruption. 

Of these very crucial subjects affecting the daily lives of the people, corruption seemed to be the uncomfortable truth on the table for a long time. Corruption is not nice, of course, and it still feels awkward to raise these issues in any official conversation in many parts of the world.

Change in perspective

Our understanding of what the important factors are for creating the conditions for sustainable economic development and the role of corruption has remarkably changed in the last 20 years. 

It was not so long ago that a discussion about corruption at intergovernmental platform or even at international financial institutions was considered a taboo. This issue was not a popular subject in international meetings and has not been mentioned widely in organizational policy papers. Even though it was impossible to not to notice that corruption was widespread in many parts of the world, the developmental community simply chose to see it as a side issue.

However, since the early 1990s, there has been a considerable change in thinking within the international community and at the financial institutions about the role of corruption in the developmental process and economic growth. The primary reasons for this significant change vary in different geographical areas. 

The fall of central planning economies in the late 1980s and the assistance to these countries by the international community in order to make a successful transition to market economies was one of the triggering points for this change. 

The enactment of the very first kind of extraterritorial laws was The Foreign Corrupt Practices Act of 1977, or FCPA, in the United States. Punishing foreign bribery was an important factor in eventual changes towards corruption. With the urging of the US government, this law opened up a way for international conventions such as OECD and UNCAC. OECD countries finally forbid the citizens of their member countries from bribing abroad and were forced to enact legislation in that regard.

Also the pace of globalization and its supporting technologies had a clear impact on the increase in transparency and people’s demand for openness and greater scrutiny. Witnessing the major corruption scandals from all over the world made it obvious for people and the corruption is a fact that can no longer be swept under the rug.

Another remarkable factor was the establishment of Transparency International (TI), the global organization fighting against corruption worldwide of which I am proud to be part.  With TI’s well-known Corruption Perceptions Index, it was clear that some countries were able to be more successful than others in tackling it. TI’s successful work on anticorruption initiatives got the attention of the public and created a discourse on the specific issues of battling corruption.

With other international organizations such as the World Bank and the IMF joining TI on anti-corruption issues, the subject of corruption was finally made more visible.

How corruption could damage economic development

As the approach to dealing with corruption has changed in the last few decades, so has our perception of corruption. Corruption used to be considered as some sort of tax for doing business, accelerating transactions and easing the life of a business person.

Nowadays, corruption has become a legitimate concern for the development community. Countries wishing to maintain their presence in the global economy and compete in an increasingly complex world cannot succeed unless they used scarce resources effectively. 

Corruption undermines government’s productivity and, therefore, limits the ability of the state to invest in areas such as education, infrastructure and health. In countries where there is a widespread corruption, people will be less willing to pay taxes and thus governments’ revenue will be undermined, with the end effect of damaging the public finances. In short, as more money flows into corruption, less money is available for the people because of a lack of resources.

Where ever corruption is endemic, it hinders the investment climate, undermines development and innovation. While starting a new business, if a business has to deal with corrupt officials to obtain permits and licenses accompanied with other obstacles, they will simply take their ideas to less corrupt countries. Corruption works as a barrier to entry into the market or a factor in contributing to the early departure; in either case, economic growth is negatively affected. 

The uncertainty of an investment climate will be fostered by the corruption factor as well. As bribes are unpredictable and random, corruption cannot be built into the cost of structure of business like taxes can. Corruption will bring an additional financial burden on businesses, thereby undermining their international competitiveness.

Similar to a contagious disease, corruption also creates inequality in society. As corruption excludes poor people from public services and perpetuates poverty, it worsens the distribution of income and injustice for providing basic services such as healthcare and education.

Last but not least, corruption itself helps the spread of crime. Corruption feeds other crimes, eventually creating an environment where mafia-like organizations could flourish. Money laundering is often used for a tool for other crimes as trafficking, drug smuggling, etc. Therefore, one can conclude that a crime prone environment encourages more people to become corrupt, creating a vicious cycle that will affect the investment climate and overall economic growth. 

Corruption gets on the G20 agenda

Considering these damaging effects of corruption to the global economy, the G20 agenda on anticorruption was realized by establishing the Anti-Corruption Working Group (ACWG) in the 2010 Summit in Toronto. In 2010, the ACWG began to work on a two-year action plan. The second action plan was agreed on in 2012 for the period of 2013-2014 and addressed many of the challenges related to the issue of corruption. 

With the adoption of the 2015-2016 Anti-Corruption Working Plan at the Brisbane Summit of 2014, we finally see that tackling corruption has become a much stronger issue among the G20’s goal of generating inclusive growth and establishing a cleaner, safer, more sustainable economic framework. In their Communique, the leaders described corruption as “a key barrier to growth, discouraging foreign investment, with the effects of increasing the cost and risk of doing business, distorting the allocation of government resources and reducing public confidence in government institutions.” 

The fact that annual cost of bribery is estimated by the World Bank to be USD$ 1 trillion is already striking. Taking into account of the cost of corruption amounts to more than 5% of global GDP (US 2.6 trillion), it is about time for the issue of corruption to be tackled at the G20 leaders’ table on economic growth and international trade. 

Anti-Corruption Action Plan adopted in Brisbane

The Anti-Corruption Implementation Plan is a very detailed document with concrete action items that could work as a road map for any country targeting to curtail corruption.

The most important item at 2014 Brisbane meeting was the beneficial ownership principles. Bringing countries as diverse as Australia, China, Turkey, Russia, the US, Indonesia and the UK to an agreement on an issue as sensitive as beneficial ownership and for member nations to pass laws compelling corporations to identify who owns and controls them (the “beneficial owners”) is indeed a big step. Determined diplomatic efforts from some of the G8 countries and campaigning from civil society organizations were to be seen. Transparency International wrote an open letter to the leaders, stating, “We want G20 countries to publish the list of the real owners of the secret companies.”

According to the 2015-2016 Anti-Corruption Working Plan, G20 countries will take concrete action to implement the G20 High-Level Principles on Beneficial Ownership Transparency. According to the World Bank in 2001, three-quarters of the companies involved in corporate fraud cases used shell companies to avoid paying tax. As the amount of the corruption sought to be concealed in these cases was estimated as $US 56.4 billion, the beneficial ownership issue is indeed the core of a bigger problem.

The principles states that “Countries should ensure that law enforcement, tax authorities and other competent authorities have access to information in a timely manner to follow dirty money trails.” However, as an effective mechanism, beneficial ownership principles fall short of demanding that these persons and entities be known to the public by being identified by public registers. 

The Plan also highlighted what it calls “high risk sectors” where certain sectors are particularly vulnerable to some unique corruption risks and challenges. Addressing the risk of corruption in the extraction sector and other high risk areas such as customs, fisheries and primary forestry, and construction, the Plan proposes that “G20 countries commit to taking practical action... by identifying and developing international best practices and promoting collective action initiatives.” 

Recognizing that bribery imposes a heavy price on both international business and society as a whole, the Plan states that “G20 countries commit to lead by example in combating bribery, including by active participation with the OECD Working Group on Bribery with a view to exploring possible adherence to the OECD Anti-bribery Convention”. 

Public sector transparency and integrity has been part of the Plan from beginning. Concrete action on the issues such as public procurement, open data, whistleblower protections, immunity for public officials, and assets declarations are required from G20 countries, as these can have a significant negative impact on economic growth and development and considered essential for cross-border trade and investment.

International cooperation is seen another important part of the Plan for combating corruption. Considering the fact that “in the globalized environment, many corrupt persons through increasingly sophisticated methods seek to exploit international borders to avoid prosecution, or to hide and enjoy the proceeds of corruption” international cooperation, including denial of entry, recovery of assets, and assistance in civil and administrative procedures appears to be some of the methods that must be used by G20 countries. Hence, there is a special focus for G20 members to approach the anti-corruption fight globally as well as within cooperation with each other.

Private sector transparency and integrity is also a focus of the G20 Plan. It has been highlighted that G20 countries cannot fight corruption alone, and partnership with the private sector is an important goal to reduce corruption. Governments are expected to set up facilities with anti-corruption education and training for business, with a particular focus on SMEs. The Plan also addresses on the private sector to adopt transparent and accountable standards of corporate behavior. 

Very uncomfortable indeed

Succeeding Australia, Turkey is the new leader of G20 for 2015 and responsible for implementing the 2015-2016 Anti-Corruption Working Plan. When it was first announced that Turkey’s leadership would be required for the implementation of the Plan, it was quite a surprise for some people in Turkey and perceived with some irony considering the current environment.

Turkey has seen the biggest fall in Transparency International’s 2014 Corruption Perception Index, a well-known annual survey that ranks close to 180 countries according to the perceived level of corruption in each country. Since the inception of the CPI, Turkey has always had its problems with fighting against corruption, with scores hovering around the 40s for the last 20 years. The country has made some progress during the candidacy of the European Union membership when it took some actions such as signing the international conventions of the OECD and UNCAC, and enacting laws such as The Right to Access to Information. A sudden drop in Turkey’s score of 5 points and its change in position in the 2014 CPI ranking by moving down 11 places was very dramatic, especially considering the other countries following Turkey with drop of 4 points were China, Angola, Malawi and Rwanda. The fact is that when a country falls under 50 out of 100, it is deemed as high risk country for investment decisions, and it could have a long lasting effect on Turkey.

For the people witnessing Turkey’s huge corruption scandals of December 17th and 25th involving politicians and senior officials for the last 1.5 years and Turkey’s poor handling of the situation, this dramatic decline is not surprising at all. The country is also rapidly deteriorating on the issues of freedom of expression, human rights, freedom of media and independence of judiciary for the last two years already.

The Anti-Corruption Working Plan that Turkey is supposed to lead for implementation is actually highlighting the areas the country has been hesitant to take any action for a long time. Issues such as public procurement, asset declarations, immunities for politicians and public officials are the high risky areas which need to be worked on are and waiting to be solved over the next couple of decades. These issues came up one by one on the agenda during the last year’s corruption scandals. 

The first question is if Turkey can effectively lead the Anti-Corruption Working Group and fulfill the action items as required by the Plan. As the technical capacity of Turkish bureaucrats is not an issue at all, the next question is if Turkey will implement any of these actions in its own land while preparing specific action points for the rest of the G20 countries.

Corruption seems to be a very uncomfortable truth once again.