Among the benefits of democracy, some of the most pleasing are the open exchange of ideas, the encouragement of creativity and citizenship, and of course freedom. These all have intrinsic value in addition to supporting social and economic development. Yet there are other benefits, as the Economist points out, that don’t always catch attention despite their tremendous importance: “Crying for Freedom.”

Democracies do a superior job of averting disasters, such as famines (Sen). They don’t always have higher growth rates but they have less volatile growth (Rodrik). Controlling volatility matters because an economy can be destroyed faster than it can be built, as the sad example of Zimbabwe most recently shows us.

Democracies do better at controlling corruption. They are certainly not immune, and corruption scandals become very visible in the presence of free media and other mechanisms of accountability. Authoritarian governments are arguably more dependent on corruption to retain power, but do a better job of sweeping it under the rug.

Finally, democracies are better for political stability, as they provide an orderly mechanism for the transfer of power. Building on this point, one can think of democracy as fundamentally a system for handling conflicts. Conflicts, though rarely pleasant, are best handled through honest, open methods in the context of individual rights, rule of law, and good governance – all hallmarks of functioning democracies.

My colleague Alex Shkolnikov and make some of the same points in our paper “Democratic Governance and the Quality of Growth,” where we acknowledge that democracy does not always provide the quickest route to the most efficient economic policies. Democracies, however, are remarkably adaptable. Through accountability and the open exchange of information, they are more likely to arrive at effective, legitimate, and sustainable economic policies.

“Democratic Governance and the Quality of Growth” clarifies the sometimes perplexing relationships between democratization, economic reform, and growth. Other related questions are explored in the wealth of video presentations and readings at www.democracythatdelivers.com.

The outcomes of the systemic transition in Central and Eastern Europe are undoubtedly impressive but vary greatly, and even the most successful countries continue to struggle with corruption, delayed reforms of key economic sectors, and disillusionment and lingering nostalgia among their populations. In order for the region’s democracies to deliver growth and prosperity, their democratic and market institutions must become more representative and inclusive so that a genuine public-private dialogue can lead to concrete reforms. Local civil societies and business communities are crucial agents of this process, providing grassroots input into policymaking and bringing substance to the region’s democratic development.

These are the points I bring up with my colleague Anna Nadgrodkiewicz in our recent paper published in the Caucasian Review of International Affairs.

The continuing absence of even a single democratic regime in the Arab world is a striking anomaly—the principal exception to the global- ization of democracy. Why is there no Arab democracy? Indeed, why is it the case that among the sixteen independent Arab states of the Middle East and coastal North Africa, Lebanon is the only one to have ever been a democracy?

Is it culture? Religion? Oil-dependence? Diamond argues that none of these factors matter.

He does point out that economic factors play into the lack of democracies in the region.  Although it has nothing to do with economic development levels – they are up to par with other democracies around the world – economic structures do matter:

In these systems, the state is large, centralized, and repressive. It may support any number of bloated bureaucracies as de facto jobs programs meant to buy political peace with government paychecks. Civil society is weak and coopted. And what passes for the market economy is severely distorted. Real entrepreneurship is scarcely evident, since most people in “business” service the state or its oil sector, or otherwise feed off government contracts or represent foreign companies.

Read the full article on the Journal of Democracy website.

CIPE often hears from its partner organizations in the field how difficult it can be to get the local business community to support their work monetarily. This is a particular problem for groups that work to bring more people into the business community, focusing on encouraging youth and women to become entrepreneurs. One of CIPE’s partners in Nepal, Samriddhi, The Prosperity Foundation, found a simple and cheap way to start raising money within their local community for their work with youth, while at the same time building a brand for the organization.

Samriddhi’s logo is a pot. It was an image pulled from the local Buddhist practices, symbolizing prosperity. When Samriddhi had trouble getting the business community involved in its projects with youth entrepreneurs, they went to their board with a simple fundraising solution – piggy banks. Samriddhi got a local potter to make several of the terracotta pots with slits in the top and Samriddhi’s logo imprinted on the front. Board members then put these pots on their front desks to solicit donations from customers. The pot links recognition to Samriddhi’s logo and reinforces the ties between entrepreneurship and prosperity. Other businesses have now asked Samriddhi for their own prosperity pots – and Samriddhi’s budget continues to grow.

Samriddhi is CIPE’s partner of the month for February. Each month, starting this month, CIPE will pick one current partner to highlight in blogs, updates, and tweets. It is not a contest. Selections do not receive any reward or compensation.

It was so astonishing to see the high enthusiasm amongst participants who spent three days  developing business ideas, conducting SWOT analysis, developing a marketing strategy, and preparing financial viability plans.  For more, take a look at this video:

Bhutan – self-proclaimed “Kingdom of the Thunder Dragon,” one of the world’s newest democracies, and a country fairly high up on the ‘mysterious’ chart. Bhutan has been hidden away from the world nearly since its founding. The establishment of a parliament, the coronation of a new king, and the first-ever elections for the country’s leadership all took place in late 2008. Gradually, Bhutan is becoming more accessible, from an economic perspective, to the world. And yet, even this early in its founding, problems that we see throughout the South Asian region are starting to creep in.

One of the most surprising (to me, at least) is corruption. An early goal of the new king and parliament is to reduce petty corruption throughout the country. Bhutan has approximately 23,000 businesses scattered from Thimphu to Bumthang, and many of these microlevel entrepreneurs already face the demands of tax inspectors with too much discretion. Many of the business owners, while in possession of a basic education, lack formal knowledge or training in accounting or bookkeeping. Bhutan has a strong tradition of oral history, which leads to weak record-keeping, an element easily exploited by local bureaucrats on the make. Additionally, the government writ large has little experience in creating legislation, which leads to a variety of loopholes in tax legislation that leaves local officials a great deal of leeway in establishing a business’ tax liability.

Particularly interesting is the level of recognition of corrupt practices in the country. Shopkeepers say there’s some corruption, but not a great deal. Government officials indicate there is nearly none. To hear the local media tell it, Bhutan’s corruption could put Afghanistan to shame. But there’s a larger problem on the horizon. As citizens in a developing democracy, the Bhutanese people need to believe in the power of representation, rule of law, and market forces. A steady increase in corruption could undermine the people’s faith in their new system of governance. It’s a race against the clock. Here’s hoping Bhutan can overcome the pressures of the outside world in time.

Speaking of development approaches that work.  Check out remarks by Greg Lebedev on dilemmas of development assistance and why institutional reform, rather than humanitarian assistance, is key to long-term sustainable development and poverty eradication.

Rather than wait for power’s devolution from Baghdad to provinces, many council members undertook study and analysis of Law 21, which outlines the power of provincial councils.  Previously supported in election campaign training by the International Republican Institute (IRI), council members turned again to the Institute for assistance in understanding their new jobs and the scope of their statutory powers.  Through 2009, Iraq’s newest class of elected officials lost little time in asserting their rights in local control over budgets, contracts and development projects.An example of the development of democratic government close to the Iraqi people can be found in Salahaddin, where the council removed the provincial governor for incompetence and lack of integrity.  The Salahaddin Provincial Council action was challenged, in court, and the council’s actions were upheld.   A similar move, involving censure of the governor, is underway in Babil.

The Babil Provincial Council has gone on to pass revenue enhancement measures such as tourism fees and introduced new regulations and rules on health care licensing.  The council in Wassit passed legislation to subsidize better health care for low income people.  The Muthanna Provincial Council initiated two major water plant projects to provide clean water to the citizens of their province.  IRI governance training has found itself working in “real-time” with Anbar provincial officials on local economic development of its natural gas fields, recommending provincial council members there interact with and draw from the knowledge of Kurdish natural resource civil servants as a guide.

In December 2009, the Basra Council decreed that all contracts for municipal services for more than $2 million would be awarded only to foreign companies, after a spate of embarrassing cases of graft and mismanagement by local municipal companies came to light.  The Basra Council entered 2010 with an established process of meeting with outside banking and investment interests in order to develop economic growth opportunities for the province.  IRI recently completed training and consultations in the fields of banking reform, investment and international trade in order to create a more hospitable local economic environment.

In Basra’s anti-corruption activities mentioned above, a youth-oriented civil society organization trained by IRI held a series of workshops on government accountability, generating coverage in local media.  The story in al-Basra al-Jadeeda highlighted the workshop series, urging local decision-makers to find solutions for problems in the province.  It was shortly after the newspaper report, citing issues of corruption with local contractors, that the Basra Provincial Council announced that only foreign firms would be eligible for larger municipal contracts.

One year ago, Iraq’s provincial councils embarked on a path of democratic governance and have quickly worked to deliver on promises made by them (and democracy) to the public.  Success of the provincial councils increases the likelihood that systemic reform can move Iraq further along its national path to democracy.

Small firms exist outside the U.S. – such as the 93 percent of India’s workforce is in the informal sector, where they’re primarily self- or family-employed on a farm or other family business. In Cairo (Egypt), CIPE and the Federation of Economic Development Associations are working to help the smallest and perhaps most ubiquitous of entrepreneurs bring their voice into public debate: street vendors. Although small firms certainly exist everywhere, they aren’t everywhere able to play the same vital role they play in the U.S., and they certainly don’t everywhere grow to replace large companies on a regular basis.

The role of small firms in an economy is at the heart of the latest Economic Reform Feature Service article, “Good Capitalism, Bad Capitalism: What is a market economy and how can it deliver?” by Robert E. Litan, Ph.D. Out of the roughly 188 countries that officially recognize the right to private property, very few of them emphasize the role of small firms or entrepreneurs. The important role of entrepreneurs and institutions that protect and encourage them are hallmarks of entrepreneurial capitalism, one of the four typologies of capitalism Litan offers to analyze the differences between those 188 capitalist economies.

Besides entrepreneurial capitalism, there’s big-firm capitalism, where large organizations dominate including corporations and unions; state-guided capitalism, where the state heavily influences investment such as in a few key developing economies including Singapore; and oligarchic capitalism, where a small group of elites made up of political leaders and private-sector cronies prioritizes centralized power rather than widespread, sustainable economic growth. Elements of all four can exist in any capitalist economy; the prevalence of one or another, Litan argues, is the key determinant between widespread growth, economic sclerosis, or rampant inequality. Most small firms in the world struggle under oligarchic economies, unable to provide the level of vibrancy and renewal as they do in the U.S.

Inspired by Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, co-written by Litan, William Baumol, and Carl Schramm, the article argues for renewed emphasis on the role of entrepreneurs and small firms in the economy, especially after the 2008-9 financial crisis and recession. Nearly half the Fortune 500 started during a bear market or recession. The turmoil has opened up vital questions that should bring greater attention to the role that smaller firms – you might call them ‘Main Street Firms’ -  have always played in leading the way out of crisis, as well as oligarchy.

Article-at-a-glance:

• The traditional approach to studying economic growth overlooks the importance of individuals and individual firms.
• Market economies are not monolithic – there are four different types of capitalism (oligarchic, state-guided, big-firm, and entrepreneurial), each with different features and implications for growth.
• Entrepreneurial capitalism is the most effective driver of economic growth because it provides opportunities for new firms to innovate and create new markets.

Download the full article in PDF or watch Robert E. Litan presenting the remarks from which it was composed.

Those tasked with enforcing the law were cited as the worst aggressors: nearly 25% of Afghans reported having to pay at least one bribe to policy and provincial officials.  Judges, prosecutors, and members of the national government were not far behind, with 10 to 20% of those surveyed reportedly paying those officials bribes.  What is more, the report found the average bribe to ring up at $160.  With Afghanistan’s GDP per capita amounting to $425, the average bribe could account for some 40% of per capita output.

While the report outlines specific steps the Afghan government could take to fight corruption, what remains is a disturbing account of the institutional factors facilitating systems of bribery.  Some of the last persons or institutions a rural citizen (3/4 of the population live outside urban areas) would go to with a report of corruption would be the army, courts, prosecutors, or members of the local municipal council.  Afghan citizens must be able to know that they can rely on their institutions of governance to squelch the supply-and-demand cycle of corruption.

After all, CG is about ethics, disclosure, transparency, accountability, responsibility, etc. And while few would question the need for responsibility and accountability in any firm, when it comes to issues like disclosure and transparency, sometimes the need is less obvious to those in closely held firms. Who are they supposed to be open with? Yet the truth is that unresolved conflicts, lack of delegation, lack of documentation, and lack of inclusive decision-making processes are real weaknesses for family firms. Succession planning is about more than anointing the next in charge; it’s about establishing institutional processes within the firm and about fostering management skills as part of a continuous learning and growth effort. If such skills have not been fostered and exercised prior to a management turnover, the learning curve is steep and treacherous.

Corporate governance is an area where CIPE has really been a leader—first by focusing on CG long before it was fashionable and also by recognizing its importance beyond a narrow range of firms. Our partners in Eastern Europe were a big part of building our approach to CG as far back as the late ‘80s and early ‘90s, long before anyone had heard of Enron or various banking crises. Their leadership, and that of the late Marek Hessel from Czech Republic, lives on in the ongoing work of CIPE partners around the world.

One example right here in Philippines is the work of the Institute of Corporate Directors on publicly traded companies. Using a standard measure grounded in OECD principles of shareholder rights and roles, equitable treatment of shareholders, disclosure, transparency, and board responsibility, ICD has helped many firms meet compliance standards and then move beyond compliant box-ticking to deliver breakthrough performance results. Average CG scores have increased here from an average 53% to average 72% in just three years, and ICD is really hitting its stride in changing attitudes and actions as CG is becoming an accepted standard practice here.

Just on arrival here in the Philippines, it doesn’t take long to see that, even as an active democracy, Philippines nonetheless faces serious challenges. The issues appear front and center in the daily papers and link directly to the issues CIPE addresses: corruption, governance, and access to information, among others. On the first day of our partner meeting, one of the presentations was from Melinda de Jesus, who has worked for years on press freedom issues in the Philippines. While the media is quite free, it faces real dangers in bringing some sensitive stories to the public. Late last year, several journalists were killed covering elections, and their deaths were not isolated cases of assaults on journalists. The Center for Media Freedom and Responsibility works to both protect journalists and to improve their capabilities to report more in depth, moving beyond the “who, what, and when” to delve into the why and how, particularly in covering intransigent issues such as corruption. By contrast, partners working on such issues in Burma have no freedom of press expression at all; theirs is a daily struggle to gain and convey information.

The efforts of these groups to grapple with such difficult issues and their willingness to be at the forefront of tackling them is inspiring. This afternoon we turn our focus to impact—how to measure and communicate it in order to build recognition and support for partner efforts. Stay tuned for more updates from the field on success stories as we see that even seemingly quixotic quests can bring about significant changes.

While many of these arguments are well-founded and carry a good share of analytical gravitas, they can also perpetuate rigid political categorization that obscures a deeper understanding of regional political dynamics.

Take Islamists: when various Islamic political groups (moderate, militant, salafist) are lumped into one category of opposition, their differences become erased and they lose their agency as potential actors for reform. What happens in the case of Morocco where moderate Islamists comprise the only true democratic party in parliament and “secular democrats” have all but vanished?

In fact, throughout the Middle East and North Africa, most secular democrats have either been co-opted or lost their historical constituencies due to out-dated ideologies. Furthermore, Islamists and socialist parties (the secular democrats of decades past) are no longer diametrically opposed but, in several countries, have worked together either in parliamentary opposition (Yemen) or in governing at the local level (Morocco).

The specter of Islamists coming to power and imposing strict Islamic law is an overblown fear shared primarily by secular-oriented regime supporters who employ a variety of repressive measures to stifle the Islamist opposition. Moderate Islamists have put aside unrealistic dreams of shariah and focused on Islamic values of justice—translating them into notions of transparency and good governance, and becoming desirable governing partners for parties of many different stripes.

By relying on rigid and broad categorizations, one would fail to see that Islamists might be the most natural anti-corruption partners in certain contexts, or that today’s true Arab democrats are not all “secular” and that most secular elites are anything but “democrats.”

The Hawkamah Institute for Corporate Governance, Standard & Poor’s, and the Credit Rating and Information Services of India Ltd recently launched its Environment, Social and Governance (ESG) index initiative, the first of its kind in the Middle East & North Africa region. The International Finance Corporation (IFC) is helping develop the index, which aims to encourage responsible and sustainable investment practices by measuring the environmental, social and corporate governance performance of hundreds of listed companies in the region. It aims to help about 600 listed companies in 11 countries to better understand environmentally and socially responsible investment practices, and the importance of implementing sound corporate governance.

The index will cover the United Arab Emirates, Saudi Arabia, Qatar, Bahrain, Oman, Kuwait, Jordan, Egypt, Morocco, and Tunisia. The project also intends to strengthen and promote environmentally-sustainable and socially-responsible businesses, which will create greater awareness and adoption of ESG practices by companies as well as increase available financing options. Hawkamah noted that financial performance indicators have traditionally marked investment decisions, while the index aims to provide the market and investors with a tool focusing on non-financial indicators that are fundamental in assessing the sustainability of a company’s future performance. The IFC added that the absences of credible and standardized data about business practices relating to social and environmental concerns is a key barrier limiting the flow of socially-responsible investing funds to the region.

In 2008, Transparency International noted that Turkey showed a significant reduction in perceived levels of corruption, moving from 66^th to 58^th out of 180 countries in transparency rakings.  However, there is still work to be done.  In the private sector realm, the power of financial markets to persuade companies to meet corporate governance standards or risk public criticism, lawsuits or a sell-off in their shares is still relatively weak.  There also remains a high degree of cross-ownership between companies, particularly family-owned companies in Turkey. Controlling shareholders often play a leading role in the management and strategic direction of company groups, which has the potential to lead to abuse in situations, for example, where controlling shareholders impose commercial conditions that go against minority shareholders and the interests of the company as a whole.  

In recognition of this, COGAT launched a new governance guide for family companies in Turkey on January 21, 2010.  This publication is clearly meeting a demand and is immediately relevant in the context of the pending corporate governance requirements in Turkey’s revised commercial code, as well as a new government initiative to encourage IPOs among Turkey’s smaller companies.  The launch of this guide, developed in partnership with CIPE, was one of a series of corporate governance events organized by COGAT this month.  The guide is currently available in Turkish and will be available in English within the next couple of months.

In this Feature Service article, Rahel Weldeab, second place winner of the 2009 CIPE International Essay Competition talks about the importance of fostering a sense of citizenship among Eritrea’s youth. She says, “Active citizenship on the part of the youth ensures that their voices are heard; such participation develops and strengthens the opportunities for young people to learn their rights and responsibilities.”

Article at a Glance

• Citizenship is not innate; it needs to be taught and cultivated in young people through civic education and leadership training.

• Citizenship includes both rights and responsibilities; for youth to become active citizens, they need to be given a voice in decision-making processes that affect them.

• In order for young people to develop a sense of citizenship, they must first realize the positive role they can play through active civic participation.

Google’s announcement has unleashed a firestorm of debate, claims, and counter-claims from the companies involved as well as netizens around the world.  Chinese officials have stated that perhaps Google is just not prepared to compete in the Chinese market, contrary to the fact that Google has gone from a 15% to 30% search share over the past five years all the while having to jump through more regulatory hoops than its domestic search rival Baidu.  Perhaps most tellingly is the reaction in the real world – citizens have been leaving flowers and wreaths at the entrance to Google’s China headquarters, mourning the loss of their limited freedoms.

Business analysts seem to be split so far as to whether this is a good decision for Google or it will hurt their business in the long run.  Although China is a huge market, it does not contribute much to Google’s bottom line (less than 2%), and it seems as if these latest bold intrusions and the crackdown on Facebook, Twitter, and YouTube forced the company to choose between its mission, “to organize the world’s information and make it universally accessible and useful”, and Chinese government demands.

On another, perhaps not to serendipitous note, the world’s other emerging economic heavyweight India, touted its own media freedoms and independent transparent legal system that ensures stability and equal treatment of corporate entities under the rule of law in the Wall Street Journal.

A street market in Yemen. (photo: CIPE)

Now that Yemen is front and center in the minds of U.S. national security experts and the American public alike, it’s time for a serious reassessment of our military and development assistance to the poorest nation in the Middle East. U.S. assistance strategy in Yemen should take into consideration the wide range of factors that threaten Yemen’s already tenuous political and economic stability.

In an article for the Center for American Progress, I argue that to avoid further deterioration, the right government and civil institutions must be in place to ensure a process where the rights of citizens are respected and the building blocks for a better economic future are clearly being put in place. The U.S. and the international community need to develop a more comprehensive approach to stabilizing Yemen that would include increasing assistance to the following three sectors: local governance, anti-corruption, and economic reform. This kind of integrated approach to development is the only sustainable way forward in Yemen. And this perspective echoes President Barack Obama’s global vision—as stated in his Cairo and Accra speeches—to connect and coordinate efforts to stem security threats, foster economic growth, and create resilient political institutions around the world.

Of course, foreign assistance is just one side of the equation. The other side is the Yemeni leadership—or more specifically—what Yemeni leaders can deliver. Change from the inside—among leaders in the government, the private sector, civil society, and the media—is imperative to demonstrate real commitment and stem the downward spiral. There are reformists in each of these sectors that command respect in their communities and are finding ways to push for change where openings exist. While U.S. military engagement may take on a more public face in Yemen, our task is to find ways to support these new leaders without undercutting their legitimacy. Ultimately, the responsibility rests not with the U.S. and the international community, but rather with the Yemenis themselves.