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Private Sector Development

Follow the Money: Corruption and Graft Punish the Poor, Undermine Development, and Corrode Honest Governance

Christopher Colford's picture



Follow the money, and you’ll find out how and why corruption has become "Public Enemy Number Onefor those who are promoting global development – as crony capitalists in the private sector connive with corrupt officials in the public sector to short-circuit sound business practices, reward self-interested insiders, subvert the broad public interest, and undermine the ideals of good governance.

This week’s gathering of the third-ever conference of the International Corruption Hunters Alliance (ICHA) – a global network of prosecutors, lawyers, detectives, forensic accountants and policymakers who track down illegal and unethical financial practices – will underscore the continuing drain on development imposed by public-sector graft, private-sector lawbreaking, and the worldwide flow of illicit funds from sinister financial transactions.

Monday morning’s opening plenary session at the World Bank Group’s headquarters in Washington – headlined by Prince William, the Duke of Cambridge and heir to the British throne, along with Bank Group President Jim Yong Kim – began a week that should help focus worldwide attention on the way that systematic corruption enriches lawbreakers, undermines respect for the rule of law, thwarts good-governance efforts and drains scarce resources from effective development.

The three-day conference should also raise public awareness of the vigorous international action that has been mobilized in recent years, as corruption-related concerns have risen to a leading position on the global diplomatic agenda.

Inspired by then-World Bank President James D. Wolfensohn’s landmark “cancer of corruption” speech at the 1996 Annual Meetings, global action has been steadily gaining momentum – through such channels as the G20 leaders’ working group to tighten policies and procedures; the Financial Action Task Force’s standard-setting vigilance; the OECD’s Anti-Bribery Convention and its continuing monitoring of corruption’s toll; and civil-society organizations’ diligent watchdog efforts to ensure that development dollars will go, not toward graft, but toward the places where aid is desperately needed.

This week’s events at the Bank Group – focusing on the theme of “Ending Impunity,” and pivoting around International Anti-Corruption Day, which the United Nations has designated as this Tuesday – are timed to coincide with the launch of the OECD’s latest Foreign Bribery Report

The World Bank Group continues to champion the anticorruption ideal and good-governance standards: by enforcing a “zero tolerance” policy for corruption, closely tracking furtive patterns of suspicious financial flows, and working with law-enforcement officials worldwide to track down assets that have been looted and hidden by kleptocratic regimes. This week’s conference is organized by the Integrity Vice Presidency – which coordinates the Bank Group-wide effort to expunge all corrupt or unethical practices – with the support of such Bank Group units as the Governance Global Practice and the Stolen Assets Recovery Initiative.

A New Model to Chip Away at the Infrastructure Financing Gap: Brazil Leads the Way

Cara Santos Pianesi's picture



Infrastructure bottlenecks have created seemingly perpetual traffic jams in and around São Paulo. Photo credit: Marcelo Camargo/ABr.

There’s a lot of time for innovative thought when you’re stuck in traffic in São Paulo.
 
Perhaps that’s why, in the words for Deborah L. Wetzel, World Bank Country Director for Brazil, “São Paulo has continuously innovated to overcome its infrastructure bottlenecks, often becoming a model to other states in Brazil.”
 
With a loan signed last month between the state and Banco Santander, and insured by the Multilateral Investment Guarantee Agency (MIGA), the state is at the vanguard of infrastructure financing.
 
Forty-one million people use the state’s transportation networks. While the network is one of the most developed and modern in Brazil, it is still insufficient for the state’s needs.

The State of São Paulo has sought to address the situation for some time, and the World Bank has played an important role through lending and technical assistance. An important component of this work is the São Paulo State Sustainable Transport Project that aims to rehabilitate roads in several key corridors and to reconstruct two bridges.

Yet, with a total cost estimated at $729 million, this project has faced a major financing hurdle. In September 2013, the World Bank approved a $300-million loan toward the initiative. But with growing demand for loans from Brazil’s poorest states, the bank was unable to commit additional funds. The State of São Paulo itself committed $129 million. That left a shortfall of $300 million.

How was the state going to mobilize these funds at a cost that would be acceptable to taxpayers?

A partnership with MIGA was a natural answer. In addition to political risk insurance, MIGA provides credit-enhancement products that protect commercial lenders against non-payment by a sovereign, sub-sovereign or state-owned enterprise.

In an unprecedented move, the State of São Paulo bid out the project to commercial banks with a requirement that their loans be backed by MIGA’s credit-enhancement instrument.

The result:  MIGA issued guarantees to Banco Santander on a $300-million loan. With MIGA’s credit enhancement, the cost of the commercial loan was lower, and the length of the loan was longer, than São Paulo could have achieved on its own. The additional financing will be used to increase the scope of the project’s activities.

It’s Everybody’s Business – So Make Social Issues Strategic: The Private Sector’s Stake in Fighting Gender-Based Violence

Christopher Colford's picture

If you’re in the private sector, and if you somehow imagine that social issues don’t have anything to do with your business, then you’d better think again. The dollars-and-cents costs of chronic social problems and dysfunctional behavior have a direct impact on private-sector productivity and profitability.

As Harvard Business School professor Michael Porter told a World Bank Group audience not long ago, explaining his theory of “creating shared value”: If business leaders are serious about ensuring future private-sector-led growth – and about the long-range stability of the economy – then the corporate sector had better prioritize pro-active steps to address serious social issues as a significant part of their strategy.

Social issues might not readily rise to the top of corporate leaders’ in-boxes, since many hard-headed businessmen – and I use the suffix “men” advisedly – might presume that “soft” human concerns aren’t central to day-to-day business operations. Yet the painful human toll inflicted by social dysfunction is everybody’s business. Corporate executives who truly aim to fulfill a positive leadership role in society, to which they so often aspire rhetorically, have a duty to raise their voices about the many kinds of social trauma that impede socioeconomic progress.

If a sense of social responsibility isn’t enough to get corporate leaders thinking pro-actively, they should at least consider their business’ long-term enlightened self-interest. A workforce that’s de-motivated or demoralized – or, worse, physically injured or emotionally abused – will suffer lower morale and higher absenteeism, will trigger higher health-care costs, will be distracted from seizing new business opportunities, and will fall short of fulfilling its full productive potential. That economic reality should spur the private sector to take constructive, preventive action.

An event on Wednesday at the World Bank Group will offer a reminder of how one vicious form of extreme antisocial behaviorviolence against women and girls – acts as a drag on society, a drain on the economy and an impediment to achieving every development priority. The 2 p.m. event in the J Building auditorium will launch a new World Bank Group report – the “Violence Against Women and Girls Resource Guide” – that surveys a wide range of analyses on the human suffering and social pain caused by gender-based violence.

Jointly sponsored by the Bank Group, the Inter-American Development Bank and the Global Women’s Institute based at George Washington University, the afternoon event will follow a morning panel discussion – at 10 a.m. in GWU’s Jack Morton Auditorium – featuring the authors of a landmark series of analyses of gender-based violence in The Lancet, the UK's pre-eminent medical journal.

Recognizing gender-based violence as a medical and public-health emergency – and reinforcing the World Health Organization’s recent declaration that gender-based violence is a global threat “of epidemic proportions” – The Lancet’s special edition is blunt about the grim toll of violence that deliberately victimizes women and girls: “Every day, millions of women and girls worldwide experience violence. This abuse takes many forms, including intimate physical and sexual partner violence, female genital mutilation, child and forced marriage, sex trafficking, and rape.”

Strawberries, Chocolate and Skill Gaps

Priyam Saraf's picture


Technological changes and globalization have transformed the kind of skills required of workers in many sectors of the economy.  Yet, with employment opportunities becoming more fluid, it has also become harder to predict the skill content of next year’s jobs than it was when Korea, Malaysia and Singapore industrialized through industrial and training policies.

It is in this context that skill gaps have entered public discourse. Employers around the world routinely report large skill gaps and warn of dire consequences for industrial competitiveness if they are not filled. Governments, from India to the United States, have taken up this call.
 
How do employers identify these "skill gaps"? What does this mean for skills delivery systems around the world? These questions were recently discussed at a conference at the World Bank Group in Washington on "New Growth Strategies." Here are some thoughts we presented to kick off that discussion.
 
That the skills gap narrative has become so prominent in recent years does not sit well, for five reasons.
 
  • First, as the 2013 World Development Report reminds us, the world is overflowing with educated workers, many of whom are unemployed or underemployed.
  • Second, the wage returns to secondary education have been falling in many countries. Secondary attainment is the education level most critical to the performance of production tasks in most internationally tradable sectors.
  • Third, vocationally trained workers often do not find jobs.
  • Fourth, employers often don’t act as if there is a skill gap: In many internationally competing sectors, they do not cast a wide net in search of skilled workers, and retention rates are low.
  • Fifth, the high-employment tradable sectors are not very education-intensive. In most economies, workers in agriculture, fishing, forestry, textiles, garments, furniture, food processing and leather-goods production are among their country’s least educated.

 
So, why does this cacophony over skills gaps arise and how can we design skill-development systems that are robust to it? 
 
The confusion arises because we have perverse incentives in place. When we ask employers to identify skill gaps, we do not usually ask them to bear, or even consider, the cost of training workers. This is much like asking them whether they prefer strawberries or strawberries covered in chocolate, without asking them to pay extra for the chocolate.  They therefore routinely report a crippling shortage of chocolate. Yet, behind this strange exercise, there are some industries that are actually seriously skill constrained and there are other industries that are not skill constrained. The way we ask the question simply does not induce them to differentiate themselves.

Credit for All: Increasing Women's Access to Finance

Nisha Nicole Arekapudi's picture
Financial inclusion is important for accelerating economic growth, reducing income inequality, and decreasing poverty rates. Unfortunately, women face more difficulty than men in access to credit, limiting the development of their full market potential and hindering economic gain and entrepreneurship. Discriminatory practices in the granting of credit may mean that qualified applicants do not have the same opportunity to receive credit simply due to their gender.

Inclusive Growth as the Path Toward Sustainable Development: A New Initiative on 'Equality of Opportunity in Global Prosperity'

Elaine R.E. Panter's picture

The correlation is simple: Job creation is the hinge connecting the three pivotal elements of economic development: living standards, productivity gains, and social cohesion. Promoting access to the labor market for all, including traditionally marginalized groups, is therefore paramount to achieving real, sustainable growth.
 
Following the success story of "Women, Business and the Law," which focuses on legislative gender discrimination and its impact on the economy, the World Bank Group is now launching a new initiative that will develop a set of indicators measuring discriminatory legislation on the basis of racial and ethnic origin, religion and sexual orientation. The project was presented externally for the first time on November 11 by Federica Saliola, Program Manager and Task Team Leader of the project, speaking at Sexual Orientation and Gender Identity & Development: International Human and Economic Development, LGBT Rights and Related Fields conference, organized by The Williams Institute at UCLA.
 
In her speech, Ms. Saliola reminded the audience that, despite the rapid growth in emerging economies, not all sectors of society have benefitted equally, income inequality has risen, and 1 billion people are still left under the poverty line. In the coming three years, the new project will thus expand the knowledge base of laws, regulations and institutions that discriminate against ethnic, racial, religious and sexual minorities and will collect data across a number of economies covered by the Global Indicators Group. 

Fostering Private Sector Development in Fragile States: A Piece of Cake?

Steve Utterwulghe's picture
Private sector development (PSD) plays a crucial role in post-conflict economic development and poverty alleviation. Fragile states, however, face major challenges, such as difficult access to finance, power and markets; poor infrastructure; high levels of corruption; and a lack of transparency in the regulatory environment. 

The private sector has demonstrated its resilience in the face of conflict and fragility, operating at the informal level and delivering services that are traditionally the mandate of public institutions. However, in post-conflict situations, PSD can have predatory aspects, thriving on the institutional and regulatory vacuum that prevails. The private sector will need to create 90 percent of jobs worldwide to meet the international community’s antipoverty goals, so pro-poor and pro-growth strategies need to focus on strengthening the positive aspects of PSD, even while tackling its negative aspects.

On World Energy Day, Applauding an Energy Breakthrough: Innovation Through Successful 'Industrial Policy'

Christopher Colford's picture

At a moment when good economic news is in short supply, this week’s observance of World Energy Day provides a chance to celebrate some positive news – positive, at least, from the viewpoint of the world's developed economies, which have lately been struggling to recover from prolonged stagnation.

The recent plunge in global energy prices was a major factor informing a World Energy Day forum on “The Green Side of Energy Security” – convened in Washington on Wednesday by the European Union Delegation to the United States. The plummeting cost of energy, thanks in part to vast increases in oil and natural-gas supplies, is now poised to give advanced economies a much-needed additional stimulus. That's helping dispel some of the gloom that pervaded the economic forecasts at the recent Annual Meetings of the World Bank Group and International Monetary Fund. 

Moreover, the current global glut of oil and natural gas also highlights the success of a far-sighted innovation program that has helped strengthen productivity in the energy sector. The success of the 40-year-long U.S. program to create more effective methods of oil and natural-gas production has has transformed the global energy landscape. If those new production methods can be responsibly carried out, in compliance with strict environmental safeguards – and, granted, that’s a big “if” – then the economy will buy some extra time as it seeks to make the transition away from fossil fuels and toward cleaner, greener, more sustainable sources of energy.  

The initiative's technological breakthrough epitomizes the creativity that public-private cooperation can unleash when governments and industries, working together, patiently invest to strengthen productivity in specifically targeted industries and sectors.

The worldwide price of crude oil has fallen about 25 percent – from more than $110 a barrel in midsummer to about $80 a barrel this week – thanks to a combination of reduced demand (due to sluggish economic activity in many industrialized countries) and vastly increased oil and natural-gas production. Despite the geopolitical tensions now afflicting several major oil-producing regions, large new supplies of oil and natural gas are projected to continue arriving on the market, maintaining downward pressure on energy prices.

Much of the increased supply has its origin in North America – where “the revolution in American shale gas and ‘tight oil’ is real,” according to energy-policy scholar and historian Daniel Yergin. Writing in the Financial Times this week, Yergin noted that “U.S. crude-oil output is up almost 80 percent since 2008, supplying an extra 3.9 million barrels a day. . . . Canadian oil sands have added another 1 million barrels a day to North American supply over the same period.”

The energy revolution is poised to deliver a powerful, positive economic impact: As industries and consumers pay less for oil and natural gas, they’ll receive the equivalent of a tax cut – with Yergin estimating its benefit at about $160 billion a year, just for the U.S. economy. Such a stimulus, if it helps buoy economic activity in Europe as well, will boost economies that have been mired in what threatens to become long-term “secular stagnation.”

For motorists who are now paying less at the gasoline pump – and for home-heating-oil and natural-gas consumers who are awaiting their first chilly-season heating bills – the oil-price plunge and natural-gas glut may seem like an economic deus ex machina.

Step by step, consider how this process delivered today's energy abundance.

There: We actually said the fateful phrase: "industrial policy."

That always-somewhat-ambiguous term, "industrial policy," may have fallen out of political favor nowadays -- but there's no real reason to shrink from the idea, even though it's currently fashionable to use a euphemism like "innovation initiative" or "competitiveness strategy."

It's true, as skeptics suggest, that it's difficult to get industrial policy right. Public-private investment programs can be complex to design and sustain: In this case, it took about 40 years of experimentation and evolution to achieve the energy program's goals. Yet, when this initiative was launched in the energy-starved 1970s, various approaches to industrial policy were being vigorously pursued by many economies, large and small. (Yes, even the United States -- and even under conservative governments, as illustrated by the Ford Administration's pursuit of this program.) Put in its historical context, this example of 1970s-style industrial policy succeeded in delivering, at last, its long-promised payoff in productivity.

Piloted during the Ford Administration and ramped-up during the Carter Administration, this effort hailed from an era when repeated oil shocks were raising fears that the industrialized world would be threatened by oil-rich countries’ production cuts and price increases. Pragmatic R&D efforts on alternative oil-production methods were methodically pursued by the U.S. Department of Energy (DOE) and the U.S. Bureau of Mines, drawing on crucial technological insights from the taxpayer-supported network of national research laboratories.

Once that initial government-funded research had laid the foundation for new technologies and techniques, the private sector stepped in and played its indispensable part. A public-private partnership through the Gas Research Institute helped perfect the new techniques, while pro-innovation tax policies granted favorable federal tax treatment for investors’ R&D commitment to the energy sector. A champion of the new technologies, George P. Mitchell, evangelized for hydraulic fracturing and horizontal drilling, even when skeptics scoffed. Researchers at the Breakthrough Institute assert: “Where Mitchell proved invaluable was [in] engaging the work of government researchers and piecing together different federally-developed technologies to develop a commercial product.” 

Delivering Solutions for Growth: Promoting Competitiveness and Innovation through Activist Strategies

Christopher Colford's picture



After all the gloom, there’s a glimmer of hope on the horizon.

Front-loading the impact of its double-barreled motto, “Global Challenges, Global Solutions,” the Annual Meetings season may have finally gotten the grim “challenges” part over and done with. This week – starting at 9 a.m. on Tuesday, livestreaming via “World Bank Live” from the Bank’s Preston Auditorium – we’re about to explore one of the most promising solutions now inspiring the development community: the pro-growth, pro-jobs Competitive Industries and Innovation Program (CIIP).

The competitiveness conference will brighten the mood after last week’s barrage of bad news, which seemed relentless throughout the week as downbeat economic and geopolitical forecasts dominated the debate at the Annual Meetings of the World Bank Group and the International Monetary Fund. From Jim Kim’s exhortation that the world’s inadequate response to the ebola crisis must be strengthened, to Christine Lagarde’s stern warning of an “uneven and brittle” era of “prolonged subpar growth [with] excessive and rising inequality,” there was plenty of disheartening data. Lagarde offered a deflating new coinage: "the New Mediocre."

The sobering numbers within the IMF’s new World Economic Outlook underscored the sense that the global economy (and especially its wealthier countries) may indeed be stuck in an era of “secular stagnation.” So did the conclusion by Financial Times economic scholar Martin Wolf that the once-buoyant, now-humbled leaders of the global economy are in “an extraordinary state” of not just a gnawing malaise but a ‘managed depression’.” 

As if all that weren’t dispiriting enough, the news late in the week that the world’s leading financial regulators were holding an unprecedented “stress test” of their crisis-response system – to analyze whether its newly strengthened safeguards can indeed protect against the risk of another cross-border crash of the financial system – made some skeptics wonder, “What do those guys know that we don’t know?”

Amid all the dreary news about the futile quest for elusive growth and the imbalanced rewards in a class-skewed society, one could be forgiven for feeling downcast. Yet Largarde’s rallying cry – “With the risk of mediocrity, we cannot afford complacency” – should remind optimists that we mustn’t let momentary doubts induce a drift toward the do-nothing paralysis of laissez-faire. An array of nuanced, pro-active strategies can help revive growth and jump-start job creation – and the World Bank Group conference this week will bring together some of the world’s leading economic-policy scholars to explore those strategies.

The “New Growth Strategies” conference – on Tuesday, October 14 and Wednesday, October 15 – will explain and expand upon the pro-growth thinking that undergirds the Competitive Industries approach. Targeting investment at the sector and industry levels to strengthen productivity and unlock new job creation, a wide range of analytical, investment and advisory projects are already under way – in both low-income and middle-income countries – through the Competitive Industries and Innovation Program (CIIP), which is convening the conference.

Capping the Bank-Fund Annual Meetings: Chiding Ethics Lapses, a Spokesman for an Even Higher Authority

Christopher Colford's picture



Amid the week-long procession of buttoned-down, business-suited speakers who commanded the stage during the Annual Meetings week of the World Bank and International Monetary Fund, the most thought-provoking comments may have come from someone who was not outfitted in business attire at all – but who was instead wearing a clerical collar.

It seemed fitting that the remarks by (some might say) the week’s most authoritative participant occurred on a Sunday morning, at an hour when many Washingtonians habitually heed an authority even more elevated than the Bank and the Fund. The major attraction at the IMF’s day-long “Future of Finance” conference was the Archbishop of Canterbury, Justin Welby, whose stature lent a special gravitas to the already-serious tone of the Fund forum’s focus on scrupulous ethics as a bedrock principle of sound capitalism.

On a panel with some of the titans of worldly finance – including the leaders of the IMF and the Bank of England – only someone of Welby’s ecclesiastical renown could have stolen the show. Although he did his down-to-earth best to try to avoid upstaging his fellow panelists – quipping, “I feel rather like a lion in a den of Daniels at the moment . . . slightly nerve-wracking” – the leader of the worldwide Anglican Communion was clearly the marquee draw for the throng that packed the Jack Morton Auditorium, spilled beyond the extra overflow rooms and jammed the adjoining corridors.

Citing the need for “heroism in the classic sense” to overcomethe spirit of “recklessness” that recently pervaded much of the financial industry, Welby called for a return to “ethical and worthwhile banking.” He urged everyone working in finance to aim to “leave a mark on the world that contributes to human flourishing.”

Welby – himself a former financier, who traded derivatives and futures before he joined the clergy – recounted the misgivings of the mournful bankers whom he had interviewed while serving as a member of the U.K.’s Banking Standards Commission in the wake of the 2008 financial crash. Welby recalled the lamentations of a deeply penitent banker who had been “broken by the experience” of leading his bank to ruin: In retrospect, reasoned the banker, “you can either have a big bank that’s simple, or a small bank that’s complex, [but] you cannot have a big complex bank and run it properly. . . . If only we had kept things simple.”

Welby’s call for the highest standards of conduct in the financial sector was matched by the exhortations of his fellow panelists – including IMF Managing Director Christine Lagarde, who reminded the audience that every financier must see himself or herself as “a custodian of the public good.” Lagarde's message was underscored by Bank of England Governor Mark Carney – who also leads the global Financial Stability Board – who deplored the pre-crash “disembodiment and detachment of finance” from the rest of the economy.

Only by upholding the most exacting ethical standards, said Largarde and Carney, can financiers rebuild public confidence in the financial sector – confidence that, in Lagarde's words, “builds over time and dies overnight.”

The regrets voiced by the panel’s private-sector financiers contributed to the panel’s almost confessional tone.

“If we can’t get the basic incentives right, it’ll be hard to get the right outcomes,” said Philipp Hildebrand, who had served as a senior central-bank official during the financial crisis before returning to the private sector. He reflected that “with wrong incentives, you end up with a wrong business model,” which in turn attracts “the wrong kind of people” who are prone to take excessive risks. Thus he underscored the need for “a personal transformation” within the spirit of every business leader.

Putting an even sharper point on the source of the problem, longtime financier Kok-Song Ng regretted that “a virus entered the system” in the years leading up to the crash, as financial firms deliberately recruited profit-driven “mercenaries” to run their trading desks. Those firms ignored the explosive risks being taken by their hired-gun traders, because they succumbed to “the great temptations for those in ‘the money world’ to want to make a quick buck” no matter how dangerous their tactics might be.

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