Likewise, Nigeria was also warned by him and FIFA, after the country’s president, Goodluck Jonathan, indicated that their national soccer team would be banned from international soccer games for two years, following their poor showing in South Africa and corruption allegations.  Blatter and FIFA quickly sprung to action to counter such possible suspension by the Nigerian authorities (and FIFA ignored the corruption allegations). Blatter went public and confidently told a press conference that FIFA had already taken “all necessary steps”.

The Nigerian authorities quickly retracted their ban threat, since Blatter and FIFA had threatened a retaliatory ban threat of their own, which would have also left out from international competition their under-20 women squad as well as their football clubs competing in Africa…

It is a matter of debate and controversy as to whether Blatter and FIFA ought to have such vast powers over soccer matters within a country.  Domestic political interference in sports can have a number of negative manifestations and consequences, and thus excesses ought to be kept in check.  Yet it is time that we accept that sports like soccer transcend the narrow realm of sports, and do have major political and economic ramifications. The notion of apolitical soccer is an oxymoron. Furthermore, even if FIFA’s intervention at times may be salutary when reverses and egregiously political decision, such interventions do constitute a challenge to the sovereignty of countries.  Thus, the issue is not so clear cut, with pros and cons.

What ought not be a matter for debate is that resolute action needs to be taken when corruption may be involved.  FIFA does not have a satisfactory track record on this issue, and in the case of Nigeria that was not a concern for FIFA, even though it may have been a concern among some in the top leadership of the country. Blatter and FIFA appeared to be merely interested in protecting their own turf and interests.

But even less of a debate ought to take place regarding FIFA ensuring that their policies are not subject to egregious double standards.  Even if one were to accept that there may be benefits from FIFA’s power to suspend countries from international soccer when domestic political interference in soccer takes place, there has to be a level playing field.

Blatter and FIFA were quick to publicly condemn the interference in France and in Nigeria (and in the past it suspended Greece, and came close to do so with Portugal and Poland, for instance).  But at least so far the silence by Blatter is deafening regarding the blatant abuses that the North Korean government is subjecting its national soccer coach and players (here for details).  There are already serious questions about the safety of the coach, who has been sent to a construction site, after being expelled from the Party and excoriated and demoted in public in a most humiliating manner (as well as the soccer players, who were forced into very public Stalinist ‘confessions’ to incriminate the coach).   This is an extension of the well known human rights abuse practices of this totalitarian regime, where in the past some athletes were sent to prison camps.  North Korea is the worst governed country in the world, period (even if there are a handful which are close, see here).

It should be a no brainer that if FIFA came close to suspending Nigeria and France (and it actually suspended Greece in the past), it ought to summarily suspend North Korea, a few times over.  Yet not even a public statement of concern has emerged from Blatter of other high FIFA officials yet, let alone decisive action (apparently FIFA is still quietly studying the situation).  Such delays and silence makes one wonder whether FIFA is much more reticent to act when it involves human right abuses on its soccer players and coaches by a totalitarian regime than when there is political debate in a democracy where FIFA has vast commercial interests and/or their political power is at stake.  Whatever the reason for such double standard, it is has no justification, and FIFA ought to act resolutely now, without further delays or excuses.

At a broader level, the ongoing North Korean saga puts a spotlight on the serious problems and dangers of professional sports in totalitarian countries.  More attention is required in their national sports system and how it affects the lives led by talented athletes from a very ripe age, which often constitute an extreme case of politicization of sports and its athletes.  And much more emphasis needs to be given to how to better protect these athletes from abuse (or worse) when they do not perform up to the expectations of their Supreme Leaders, as it has just taken place in North Korea, and also takes place in other authoritarian states.

International sports organizations such as the IOC and FIFA ought to be have much stricter standards regarding flagrant political abuses in countries like North Korea (and a dozen others) than whether a vibrant democracy like France has a political debate or not over the performance of its national team.  To take a tough stance on North Korea and a handful of other totalitarian states where athletes are subject to abuse would be an opportunity for FIFA now, since it may start the process of reversing its tarnished image on this and other governance dimensions.

The 2,500 page long Dodd-Frank Financial Regulatory Reform Bill has passed through the United States Senate. The bill will now be signed into law by President Barack Obama.  It signals a halt to the deregulatory process that the U.S. financial system has experienced for almost fifteen years.

The bill promises to strengthen consumer protection. In principle, it raises bank capital requirements, requires more collateral and margin requirements, enables a regulator to act against a very large and risky bank, and more.

These are overdue reforms. Warts and all, and considering the political realities of legislative deals, having this bill is better than continuation of the regulatory vacuum.  But it is not a comprehensive systemic solution. This watered down bill will not effectively reverse the massive financial deregulation that took place, nor will it fully assure that the financial system will be effectively supervised and regulated so to avoid another systemic crisis…

  Despite the length of the document, the regulatory reforms in this bill are vague.  Congress was reluctant to specify clear and detailed regulatory code into the bill. This means that the detailed homework in defining, detailing and interpreting the broad regulations is being passed on to the regulators.

Regulators will have enormous latitude and discretion in specifying these regulatory details, and in interpreting them during implementation.  And the notion of ‘regulator’ ought to be viewed broadly here, since they also include senior political appointees in government, such as the Treasury secretary, who will wield enormous influence in the regulatory reshaping, interpretation and implementation.

If recent history and our empirical work are any guide, such latitude and discretion handed to regulators and politicians in government can be very costly because of the likelihood of regulatory (or ‘state’) capture by powerful financial institutions.  Recent debates on this financial reform bill tend to focus on technical aspects, largely ignoring the politically sensitive issues surrounding the power of money and influence in politics with its perverse effect on financial regulation and its implementation.

Thus, I ask: how will politicians and regulators in government have the wherewithal to withstand pressures from Wall Street enabling them to make timely and tough decisions to break a very large bank (when the risk to the systemic so warrants)?  And even if a regulator dares to do so, how will it be implemented given the international ramifications of such an action? 

We should not totally rule out that some regulators may carry out appropriate actions at times.  But we should also be mindful that the vested interests in a system captured by ‘money-in-politics’ would tend to bias decision-making against such timely and tough regulatory actions. Congress did not dare to look into this thorny issue of money in politics and its corrupting influence on political and regulatory decisions.

  In this context, errors of omission in this bill are noteworthy.  Freddie Mac and Fannie Mae, the quasi-public housing finance behemoths that important culprits in the financial crisis, have been spared. Yet again, lawmakers carefully avoided addressing these institutions, which in the past have exerted undue financial largesse on politicians to influence them so that they could operate in a financially irresponsible fashion. 

More broadly and understandably, given the interests of lawmakers and political realities, the bill is silent on the pervasive and pernicious role of money in politics influencing the whole regulatory system. Furthermore, the bill does not clearly re-erect a wall between traditional deposit banks and investment banking, which prevailed since the Glass-Steagall Act was enacted in 1933 until it was repealed in 1999.

Not that the U.S. is alone in facing challenges in regulatory reforms.  Progress on this front is even more questionable abroad: witness the time lags, lack of coordination and consensus on regulatory reforms among EU members, the U.K., the IMF and the Financial Stability Board (FSB).

The disarray in much of the continent across much of the Atlantic on these matters is also important for the effectiveness of the just passed U.S. regulatory reforms themselves.  This is because a modicum of coordination and harmonization across international financial centers is required for financial institutions not to shop around more lenient regulatory regimes.  It may be years until Europe gets its act concretely together on this. 

Worse, the way the Basel Accord is being watered down right now as a direct result of  lobbying pressure by banks is likely to further erode the impact of the U.S. Regulatory Reform Bill on U.S. banks, since the Basel international supervisory rules may end up mattering more to all banks, including the US-based ones.

Thus, daunting challenges remain and need to be addressed head on, otherwise this Bill will not substantially enhance the stability of the financial system or alter the behavior of financial institutions in a meaninful fashion.

Paradoxically, this Bill may end up having a tangible impact on oil and gas companies. In fact, in ending on a positive note, let me focus on a little noticed side initiative within this bill which nonetheless is of high relevance for global development and anti-corruption efforts.  There is a resource transparency provision in the bill spearheaded by Senators Lugar and Cardin (supported by many others).

The provision mandates oil, gas and mining companies registered with the Securities and Exchange Commission (SEC) to publicly disclose the tax and revenue payments made to any government and requires that they disclose how they ensure that their payments do not fund armed groups in some countries. The information disclosed by these companies will be independently audited.

Even if this initiative is an obscure aside for many, this is in fact a commendable provision to enhance transparency in the extractive industries and in many resource-rich governments. 

There are two priorities next on this important front.  First, transparency provisions ought to apply about full disclosure of the contracts signed between industry and governments as well.  Too often the terms of such contracts are not disclosed (let alone subject to public debate prior to their signing), which impairs the effective analysis of the disclosed data on revenues paid by oil and gas companies to governments.  

Second, in the near future these mandated transparency reforms in the extractive industries ought to also be rolled out to security exchanges in financial centers in London, Frankfurt and elsewhere.

FIFA’s Monopoly and their obsolete Corporate Governance

 FIFA was founded in 1904 as a non-governmental and ostensible democratic organization concerned with the “good of the game.” Today not only is FIFA the only international body governing soccer, but its “product” is in extremely high demand and basically lacks close substitutes.

For instance, when FIFA recently objected to French and Nigerian government leaders interfering in the affairs of their respective national teams, both governments had little choice but to relent as their respective soccer associations were faced with sanctions and possible suspension by FIFA.  It would be political suicide for a country leader to be associated with sanctions against or the expulsion of a national soccer team, particularly since the public is strongly invested in the sport and influential private groups have strong financial interests in it.

A contrast between the development aid industry and FIFA is telling. Nowadays, emerging economies can choose between various multilateral development banks (MDBs) or bilateral aid donors based on which offers the most convenient financing terms.  Furthermore, development finance often has substitutes, such as foreign direct investment, trade and the country’s own reserves, thus their demand is more elastic.  Therefore, compared with access to international soccer, there is much more competition on the supply side of development finance, and there is a more elastic demand for such aid product. Developing countries therefore generally have far more bargaining power in negotiating with an aid institution than with FIFA, which is a monopoly in a market with very inelastic demand.

FIFA’s monopoly over international soccer, and the inelastic demand for its product, allow the organization to wield inordinate political and market power. This permits FIFA to extract immense rents from countries. In recent years, FIFA has generated revenues averaging about US$1 billion per year, with an additional US$ 3 billion generated in the year when the World Cup is held.  Most of its revenue is generated through their control over television and marketing rights for games.  FIFA extracts very large rents from countries hosting the World Cup while host nations foot the bill.  FIFA does not even pay taxes to host countries for in-country revenue; it demands, and pliantly receives, tax-exempt “diplomatic” status.

FIFA’s monopoly power in international soccer is also mirrored by its own outmoded and autocratic internal governance structure. FIFA has no term limits for committee members or its president. Since its inception, over a century ago, FIFA has only had eight presidents, their tenure averaging over 13 years each.[1] Further, key decisions, such as choosing the World Cup host, are made by very small FIFA committees rather than the general council. Ultimately, a select “club of old insiders” wields disproportionate influence.

While development aid institutions still need substantial reforms[2], it would be highly unrealistic nowadays for an international development agency, like the World Bank, to blatantly infringe on the national sovereignty of its member states by mandating them to make luxury infrastructure investments with their own national resources, subsequently extract the revenue flows from such investments. But this is what FIFA is effectively doing.

FIFA’s statutes impact sovereignty.  FIFA’s Statute generally prohibits country members from taking soccer-related contracts and disputes involving associations, club members, player and officials to their national courts of law. FIFA can impose serious sanctions on members violating their provisions.

FIFA imposes a large development costs on host countries. FIFA’s effort to bring the World Cup to Africa is laudable and is likely to generate some socio-political and reputational benefits for South Africa.  But, the costs for the host nation are huge, since FIFA mandates infrastructure investments but does not equally share the funding burden — far from it, in fact.  This is particularly troubling in the current World Cup, since South Africa faces enormous development challenges.  Of course, FIFA often is not the only culprit resulting in lavish expenditures at the expense of development:  it is not uncommon that some politicians in host countries would also favor extravagant investments, due to political payoffs or venality.

The total cost for South Africa in infrastructural investments in stadiums, roads and other projects is estimated to top about US$ 6 billion. For example, five new stadiums cost South Africa well over US$1.3 billion, significantly more than was originally envisaged.  Although the government and local people encouraged renovating existing stadiums, FIFA nixed this idea in favor of building new stadiums in locations with better views and away from poor neighborhoods. Take the existing stadium in Cape Town Township, which could have been renovated for a mere 5 percent (an estimated $30 million) of the actual cost to build the brand new Green Point stadium (US$600 million).

Similarly, a brand new stadium capable of seating well over 40,000 people was built in the small city of Nelspruit at a cost of US$ 137 million, where many of its  residents lack access to running water and there is not even a professional soccer team in town.[3]

The World Cup has boosted tourism. But with FIFA’s hospitality agents monopolizing most of the bookings, South Africa will get minimal tourism revenues.  Tourism services were granted by FIFA through a no-bid, sole source contract to Switzerland-based Match AG, where the nephew of FIFA’s president has an interest. Construction was also expected to provide a major boost in employment, but that has not been sustained.

A token fraction of FIFA’s estimated US$3 billion World Cup revenues may be given to South Africa after the games, yet it would barely make a dent to the billions already spent by the country.  FIFA will channel another share of their billions in revenues into many national soccer associations around the world, but mostly the money will not benefit local communities; instead it may serve as influence-wielding funding to secure support in maintaining FIFA’s corporate governance status quo.

Transparency

FIFA also faces transparency challenges both on the field and off the field.  On the field, referee errors during this World Cup have once again increased calls for technological assistance to refereeing, particularly through instant replays. Off the field, the lack of transparency in FIFA’s procurement and bidding has given rise to numerous scandals.

Calls for instant replays. Controversies over referee errors and questionable goals are not unique to this World Cup. However, the availability and use of modern technology can often reduce and double check referee errors. For example, modern technology in the form of an instant replay on the stadium’s big screen exposed the egregious referee mistakes during the England-Germany and Mexico-Argentina matches on June 27.

Although spectators and players tried to bring the error to the referee’s attention, long-standing FIFA rules state that referees cannot rely on technology to make decisions.  FIFA officials promptly ensured that no more replays were shown on the big screen for the remainder of the World Cup.

Off the field, lack of transparency in procurement and bidding has given rise to corruption scandals. Last year, a Swiss investigation concluded that FIFA employees received kickbacks from a Swiss sports marketing company ISL/ISMM.  The company was suspected of securing television rights to international sporting events, including the World Cup, by engaging in corporate bribery. One of the officials implicated was a FIFA executive committee member who received bribes totaling over $150,000.[4] There is also evidence that a lack of transparency and bribery featured in preparations for this year’s World Cup.  A recent report alleges that there was a lack of competitive bidding for stadium construction contracts and price-fixing for materials, both of which resulted in inflated construction costs.[5]

Selected Recommendations

 National political leaders, civil society and the media are key “actors” in breaking the FIFA’s monopoly and their obsolete corporate governance logjam:  

– Politically-induced FIFA reforms. A concerted challenge to FIFA’s monopoly powers by the highest political officials in member countries is warranted, supported by the country’s opposition parties and civil society.  With the support of the broad base of soccer aficionados who are becoming increasingly aware of how FIFA operates, national political leaders should take on the organization’s governance challenges (existing vested interests by some national politicians notwithstanding).  In a few months, the selection for the national venues for the 2018 and 2022 World Cups will jointly take place.  The political leadership of these future World Cup host countries may join Brazil, the 2014 host, in drawing other countries and FIFA to the re-negotiation table in an effort to establish a new and more equitable international soccer order.

– A more active monitoring role by the media and civil society: Mainstream media outlets around the world have been largely silent regarding FIFA’s glaring shortcomings. This is partly due to vested financial interests and the fear of alienating powerful constituencies. Yet, there is a significant segment of the media industry (including internet-based) that is not subject to the same pressures and can play a more active role in investigating and disseminating information on weak governance and reform options, further sensitizing citizens at large as well as influential shapers of policy.  The media should also play a more active role in holding their country politicians accountable in their investment decisions and payments to FIFA, and should further collaborate with civil society organizations that could do more to hold governments and FIFA more accountable regarding investment and financial decision surrounding a World Cup.

FIFA could actively work to reform and consider the following concrete suggestions:

FIFA should not undermine host country development objectives: Currently, host countries bear exorbitant preparation costs for World Cups, which are particularly onerous for emerging and developing economies.

– FIFA should refrain from mandating “white elephant”  investment projects, deter countries from embarking on wasteful investments (at times favored by some national politicians), and encourage host countries to engage in cost-savings and upgrades of existing infrastructure.

– FIFA’s financial contribution for World Cup preparations by host nations should be vastly larger, particularly in emerging economies and developing countries.

– Revenue-sharing arrangements should be revamped to increase the paltry share currently received by the host nation.

– Innovations in private sector initiatives and Public-Private Partnership (PPP) Infrastructure investments ought to be encouraged and explored much more actively in emerging economies.

FIFA should increase transparency on the field: While FIFA President Sepp Blatter has hinted at reconsidering his long-held opposition to changing the outmoded referee system, following the worldwide outcry over the England-Germany and Argentina-Mexico games, suspicions linger that FIFA’s ‘concession’ may simply reside in adding more referees in the sidelines, rather than introducing new, accurate, and transparency-enhancing technology.

– FIFA could allow instant replays for contested goals. If instant replay technology is too expensive to implement worldwide, for starters it ought to be used at large international tournaments, like the World Cup.

FIFA should improve transparency in procurement:

– FIFA should replace its sole sourcing procurement with a high-tech public procurement portal for all soccer-related contracts, and likewise the host country ought to have an e-procurement portal, which includes all preparatory investments as well.  Procurement contracts would be subject to competitive bidding, banning sole sourcing contracts above a minimum amount.  These reforms would result in large cost savings for countries and deter conflicts of interest and corruption.

– It should also institute a hotline for reporting alleged improprieties. To promote and protect impropriety reporting, FIFA and the host nation should have in place stringent whistle-blower protection policies.

– FIFA should institute a public debarment system for corrupt firms, similar to that already under implementation by various MDBs such as the World Bank, where companies found engaging in corruption are publicly banned from bidding.

FIFA should improve their own corporate governance and transparency:

– FIFA should institute public disclosure requirements for the assets and incomes of FIFA officials and their relatives and those of the national soccer associations.

– FIFA should institute term limits for committee members and its president and limit the number of committees that representatives can be on. Furthermore, FIFA’s congress should transparently vote on important items, such as the World Cup host country, rather than leave the decision to a small committee.

This Sunday evening, the world will have a new soccer champion. The colorful vuvuzelas will quiet down as spectators after a festive night. The World Cup fervor will be on hold until 2014.  Both South Africa’s President Zuma and Brazil’s President of Lula will attend this Sunday closing ceremony and final game, for the passing of the baton from this World Cup event to the next.

By the next World Cup, in 2014, President Lula would have long been replaced by a new president of Brazil who will lead the nation at their Cup, consistent with their democratic principles that also govern South Africa.  But unless crucial reforms are implemented soon, such democratic transfers of power will remain absent at FIFA.  Before 2014, it is imperative for FIFA to draw from such good examples of national leadership and governance to help FIFA reform, and for it to be governed as a 21st century global institution, one that becomes a real partner of sovereign nations pursuing development objectives.

[2] Such as in how transparently and competitively their heads are selected (as with FIFA)

[3] If no sizable regular audience is in attendance in the Nelspruit stadium following the Cup, then the ‘unit cost’ of this investment could end amounting to US$34 m. per game played.  Similarly, even if some sports events take place in the Green Point stadium in Cape Town, the unit costs is likely to end up being very high and the rate of return highly negative.  And so on.

[4] Other examples of corruption allegations exist, some recent.  Last week allegations surfaced against the Football Federation of Australia (FFA) over its bid to host the 2022 World Cup to the effect of alleged attempts by FFA officials to buy the votes of FIFA’s executive committee members. Further, allegedly the FFA also attempted to influence FIFA Vice President Jack Warner by paying for his national team, Trinidad and Tobago, to fly to Cyprus.

[5] For detailed information on possible conflicts of interest in the 2010 World Cup refer to Herzenberg, Collette, ed. Player and referee: Conflicting interests and the 2010 FIFA World Cup, Institute for Security Studies, April 2010

Note: this article was co-authored by Daniel Kaufmann and Veronika Penciakova (also at the Brookings Institution), and is an Op-ed in the Brookings homepage.

“Dear Diego:  It is high time that we critics say sorry, and thank you.  We misjudged your appointment as coach.  We believed that the 78-year-old president of Argentina’s soccer federation, had lost reason in asking you, a fading icon without a coaching badge, to lead it through this World Cup.  Well, so much for [our] so-called expertise.  You liberate the team, play to its strengths, attack, attack, attack… And you also liberate us.  When your team rips apart the caution of opponents, we feel like children who all want to be attackers.  [Your] enthusiasm reminds us that soccer is a simple game. Your team has superior attacking skills, so let it play to its nature…  Genius, playing to your own rules.

You know, but probably do not care, that only two men have won the World Cup as a player and a coach. Mário Zagallo for Brazil…  Franz Beckenbauer captained Germany to the title in 1974, and was its manager in 1990… [Like you], Beckenbauer had no background on the sideline.

[I]t’s time to say mea culpa, and mean it.” …

What’s the big deal here?   Thousands of letters are written to famous people every day, some more outrageous than others.

Well, this ‘Letter’ appeared as a prominent column in the New York Times, penned by no other than the NYT’s own noted soccer writer Rob Hughes.  Within hours of  his very public apology to Maradona in the NYT, Maradona’s national soccer team was in tatters, having been trashed 4-0 by Germany in the worst defeat in a World Cup game in 36 years.

For starters, the New York Times column should obviously qualify as the worst-timed piece of writing during this World Cup in South Africa (and arguably in any Cup).  That is the easy part; the writer would not have published such an outrageous piece one day later.

The NYT article would also qualify atop the ‘chutzpah‘ index, since the NYT writer represents himself as the voice for all football critics.  Not once he used ’I' in his own piece, instead writes as ‘We critics’ in his Letter full of hyperbole.  And it is as if the writer, though a soccer pundit, did not realize that Argentina, before its game against Germany, had not yet met its match and been truly tested in this World Cup, having played against weaker teams that were ranked so much lower in the soccer world standings. Argentina beating weaker teams can easily result from the brilliance of key players; in spite of the failings of a coach.

That was certainly the case regarding the 3 games Argentina played against weak teams in his Group at the Cup, easily qualifying to play Mexico in the round-of-16, when Argentina also benefitted from a glaring offside goal that the referee could not annul because the video replay (which FIFA bans from being an input to the ref’s decision!) exposed to all in the stadium, including the ref, that the goal was invalid by a mile. Such was Argentina’s over-hyped trajectory at the South Africa World Cup, prior to meeting its (German) match.  On that flimsy basis we were all served the NYT Letter of Apology to Maradona.

But there is a much deeper problem.  The Letter betrays ignorance regarding what it takes to be a great soccer coach, and the importance of good governance, at both the institutional and national level, to attain lofty results in soccer.

The misleading comparison with the great Franz Beckenbauer illustrates one key failing of the Letter. Beckenbauer may not have had formal coaching credentials when he became the manager (coach) of Germany’s national team in 1990, but he was already known as a brilliant tactician on the field. Beckenbauer the player had invented the football role of the attacker sweeper, or libero. As a manager of the German national team and of various well known soccer clubs he accumulated a number of championship trophies. Both as a player and coach he exhibited work ethic and discipline. These virtues sharply contrast Beckenbauer with Maradona.

Maradona disastrous coaching trajectory in past years is well known.  Prior to being asked to coach the national team preparing for the South Africa World Cup, he had tried to coach two club teams in Argentina, winning 3 games out of 23 (with one of the teams folding altogether).  He had started coaching right after being banned from soccer for over a year following the World Cup in the U.S. in 1994, due to his (recurrent) doping.

During the qualifying stage prior to the current World Cup in South Africa, Maradona’s team nearly failed to make it to the World Cup, in spite of playing against so many less talented South American teams.  The stories surrounding his work ethic and lack of discipline as a coach are also well known, and, together with his repeated bouts with drugs and alcohol, provide a very poor example to millions of soccer youth who know what a gifted player he was in the past.

Simply stated, good governance at the institutional level, whether for a soccer team or another organization, is the ability of the team to attain results where the whole exceeds the sum of its parts. In the ongoing soccer World Cup, countries like Ghana, Uruguay, Paraguay and arguably South Korea, Japan, Slovakia, the U.S. and Chile, may belong to this group, among others:  their achievements are not mainly due to numerous world stars in their team, but their teamwork instead.

Italy, England, France and some African teams (other than Ghana and South Africa) clearly belong to the group where the ‘whole-is-much-less-than-the-sum-of-its-parts’, and now I would also add Argentina and Brazil to that group. The quality of the coach, via the team’s strategy, tactics, and discipline, is critical in determining whether the whole exceeds or not the sum of its parts.

Yesterday’s lopsided Germany-Argentina game was a case study of contrasts in teamwork, preparation, and discipline. The defensive breakdowns by Argentina were egregious, contrasting the effectiveness of the German’s defense. And Germany not only showed how potent (and often exciting) its offense can be, but it exhibited such discipline that it was not caught offside a single time, while Argentina had 5 offsides!   The superior collective physical fitness preparation of Germany was also in clear evidence.

Good governance at the organizational level (which gets reflected in the quality and effectiveness of the manager-coach) tends to be correlated with good governance at the national level (even if not hand-in-hand in every case).  Countries like the Netherlands and Germany are among the best governed in the world, while Uruguay (alongside Chile) is atop governance ratings in Latin America.

Countries like Argentina, Nigeria, Greece and Italy have much poorer standards of national governance. No wonder that the quality of governance at the national level often better explains success in soccer than the country’s size (economy, population).  Uruguay, a country with less than 4 million people, and Netherlands, with only 16 million, both advancing to the semi-finals, illustrate the point.

Instead of a New York Times letter of apology to Maradona, what is needed is the exact opposite: a letter of apology to the millions of devoted Argentinian and world soccer fans (including truly yours), who admire the superb quality of Argentinian players. Due to misgovernance, these great players were not guided to play at the standards of cohesion, superb physical training, and discipline required to compete with the powerhouses at the World Cup.

Subpar governance extending beyond the coach in the Argentinian case is exemplified by the fact that Maradona yesterday had the gall to declare right after the debacle with Germany that he will consider his own future as the national team coach, betraying a complete failure of accountability by himself, by the Argentinian national soccer federation, and beyond.

Last, but not least, a serious open letter regarding Argentina at the World Cup should make clear to the current generation of young soccer players and fans that, irrespective of Maradona’s fantastic playing skills decades ago, his antics in recent and not-so-recent years are anathema to what a role model in sports ought to be, and ultimately they do result in personal and team failure.

The reason why June 27th, 2010 will be important for soccer history is that today was the day when FIFA’s (the world’s soccer governing body) resistance to the introduction of existing technology to aid referees lost any remaining credibility.  Each one of the two games played today featured a huge mistake by a referee, costing England a bona-fide goal in the first game, and awarding a non-goal to Argentina in the second.  In each case the use of technology would have taken care of that mistake instantly, fairly, and without much controversy.

England and Germany have had a major soccer rivalry for decades.  Controversy in a World Cup game regarding a crucial referee call did not start today.  At the World Cup game 44 years ago, held on July 30th, 1966, England and West Germany were tied 2-2 after 90 minutes of regulation time.  Eleven minutes into extra time, the English striker Geoff Hurst shot at the German goal.  The ball hit the underside of the cross-bar, bounced down, and it was cleared.  It was ruled a goal, as the linesman indicated to the referee that the ball had crossed the goal line.

England went on to win the game and their only World Cup 4-2.  For a long time controversy raged about that ‘Wembley Goal‘ (or the ‘ghost goal’) as to whether the goal had crossed the line or not.  In recent years, with the advent of modern technology, a study indicated that in fact it was not a goal; the ball had failed to clear the goal line by 6 centimeters.

In today’s 2010 World Cup game knockout stage game between England and Germany the opposite took place.  Psychology may have played a role.  The ‘Wembley Goal’ grainy video and controversy is likely to be inscribed in the memory of every referee.  Thus, whether consciously or not, referees, being human, are likely to err on the side of not risking another history-making ‘ghost goal’.  When such bias is applied with excessive zeal, the opposite type of error is likely, as it just took place today: a ‘denied goal’ that should have been legitimately awarded instead.

England was down 2-1 in the first half, Lampard shot hit the underside of the cross-bar, the ball bounced back, and the German goalie quickly cleared it.  The referee ruled that the ball had not crossed the goal line and thus an equalizer goal was not awarded to England.  The slow motion, zoomed, and instant video replays available nowadays to so many millions showed that the ball had crossed the goal line by an enormous margin, in fact, betraying the extent of human fallibility.

Thus, with respect to today’s game, there is no controversy about whether it was a goal or not.  Thanks to technology, which FIFA refuses to use (just like they have failed to review the flawed FIFA ranking system), we all know without a shred of doubt that it was a goal.

Instead, the controversy is about whether the outcome of the game would have been different if the correct call would have been made.  Even within England’s team they disagree about this; their (current, but unlikely to be future) coach Fabio Capello thinks so, while some English players strongly disagree, frankly stating that their performance was not up to par (not only in this loss to Germany by 4-1, but throughout this World Cup).  The other controversy is about FIFA’s non-use of technology, of course.

As if this was not enough, the Argentina-Mexico game a few hours later today produced another ghastly mistake, when the referee and the linesman did not call for a clear off-side by Argentina’s Carlos Tevez (who had received yet another beautiful pass from Leo Messi), who converted a gorgeously illegal goal, which nonetheless stood.  Again, seeing the video replay leaves everybody aghast, given the extent of the offside position by Tevez (not centimeters but meters!).   Argentina may have won their game no matter what, but it was another huge referee blunder and thus tainted their victory.

All four countries involved in today’s two games also featured at the World Cup 24 years ago.  On June 22nd, 1986, in Mexico City, it was the World Cup’s quarter-final game that went into the history books when Maradona scored helped by the ‘Hand of God’ in Argentina’s game against England.   That was his first goal in that game.  His second goal in that match has been regarded as the ‘goal of the century’.  Argentina beat England 2-1 in that famous game, and went on to become world champions by beating West Germany in the final.

Today, June 27, 2010, Maradona, as the the coach of the Argentinian team, benefited from the ‘On-side of God’ because of the uncalled off-side against Mexico.  And England was penalized and Germany given a the gift of the ‘Goal-line of God’ in their game. These huge refereeing mistakes were instantly exposed by technology used by everybody, except for FIFA.

During the group stage of this World Cup there were other such mistakes, as when the US was denied a legitimate (and potentially winning) goal in their tie against Slovenia, or when Chile had a player expelled for a foul he never committed, or when Brazil’s Luis Fabiano scored through a play where in fact he did not handle the ball with his hand once, but twice in one magically illegal play!

In the coming months and years there will be much debate as to what technology to use to aid referees do a better job.  Placing an electronic chip in the ball is one option, another is to have instant video replays as in American Football in the US, for instance.  Not unlike the progress of the integration of technology into many traditional fields (including governance), by the 2018 World Cup, and even possibly by the 2014 Cup in Brazil, some form of technology support can be expected, even though a mere two days ago FIFA reiterated their decision against it.

But that reiteration of FIFA’s old fashioned stance was just before June 27.

What took place today, June 27th, 2010, is game-changing, and the public’s outcry and demand from important (afflicted) country officials may be impossible for FIFA to resist for very long.  June 27 may even become the ‘Instant Replay in Soccer’ Day, or IRiS Day.

There is much more at stake than lowering the rate of referee mistakes.  It is about much more transparency and accountability in the world of soccer, about improved governance by FIFA, and about doing away with suspicions of subtle or coarse match fixing.

Well, not quite, as it turns out, if judging by the results from an analysis of the Group competition stage that has just concluded in the football World Cup currently taking place in beautiful South Africa.

A total of 32 teams qualified for the World Cup.  They were divided into 8 groups of 4 countries each, competed against each other, playing 3 games each, for a maximum of 9 points.  The top 2 teams in each group are now advancing to the next stage of 16.  Eight games will take place over the next 4 days, starting on Saturday with Uruguay playing South Korea, and then later in the day Ghana plays against the US.  And on Sunday Germany plays England in the earlier match, and so on until this coming Tuesday.  The winner in each one of these 8 games advances to the Cup’s quarter finals, and so on…

Unless the group stage that has just concluded turns out to be a major anomaly, the instant analysis we have made of the performance of these 32 teams in this Group stage casts serious doubt on the FIFA rankings of teams.  FIFA ranks over 200 country teams; its latest ranking was in late May shortly before the World Cup.

In these FIFA rankings at the outset of this World Cup, Brazil were naturally at the top, followed closely by Spain in 2nd place.  Italy was 5th, France was 9th, Russia 11th, Egypt 12th, Greece 13th, USA 14th, Serbia 15th.  Of these, neither Russia nor Egypt even made it through the preliminary qualifiers to the World Cup (so they were absent from the Cup’s Group stage).  Italy, automatically qualified for being the defending World Champion and (kind of) played in the Group stage.  But not only it failed to advance beyond the Cup’s Group stage; it finished last in its group. For good measure, highly ranked (by FIFA, that is) France failed miserably as well, and Serbia did not advance either.

In sharp contrast, countries ranked lower by FIFA, like Chile (18th), Paraguay (ranked 31st!), Ghana (32nd!), Slovakia (34th!), Japan (45th!!) and South Korea (47th!!), are all advancing to the next stage of the World Cup, having been successful in the Group stage of this football competition.

So if you were making bets on performance so far on the basis of FIFA rankings, you would not be faring well.  In fact, some interesting results emerge from a simple and instant statistical analysis just done based on the number of points accumulated by each team in the Group stage of the competition.

1.  FIFA’s ranking prior to the World Cup has little power in explaining the number of points accumulated by each one of the 32 teams; in fact FIFA’s rankings only explain about 15% of the variation in total points across all teams.

2.  If you were betting on two teams which were 12 positions apart in the FIFA ranking prior to the Cup’s start (say the difference between the 13th and the 25th in FIFA ranking), the number of additional points accumulated by the team ranked much higher would have amounted to less than half (on average).

3.  In sharp contrast, the region of origin of the country seems to do much better (twice as well as the FIFA ranking) in explaining how many points each team accumulated.  FIFA ranking totally over-estimates the disappointing performance of Africa (by over 1.5 points!), and of the big European soccer powers (almost 1 point).

4.  Conversely, FIFA rankings would have seriously under-estimated the number of points that surprising Asia would have accumulated in its 3 games (by almost a point, and even more so we focused on ‘globalized’ Asia, e.g. without North Korea).  To an extent, FIFA rankings also under-estimated the US performance so far (by half a point).

5.  By far the biggest outlier is another region altogether, however:  South America, which FIFA’s rankings would have predicted that they would have accumulated a middling 4.5 points on average.   Instead, all 5 South American teams (Brazil, Argentina, Chile, Paraguay and Uruguay) have succeeded in advancing beyond the group stage, accumulating an average per team of almost 7 points.  FIFA rankings would have resulted in under-estimating each South American country’s points total by almost 2.5 points!

6.  Contrary to convention, a very large economy (with very large financial and human resources) does not seem to explain how countries have fared in the group stage so far.

7.  Instead, the quality of governance of a country (rule of law, corruption control, voice and accountability, etc., for which we use the WGI) does explain performance in the group stage.  A country with relatively good governance could have accumulated almost 2 points more than a country with relatively poor quality of governance (difference of 2 standard deviations).

From this perspective, perhaps then it is not such a surprise that North Korea, Italy, Greece, France, Nigeria, Cameroon, Honduras and Cote d’Ivoire are going home early.  [Of course this is not airtight: the well governed Swiss and Danes are also going home, for instance, perhaps victims of some European contagion...].

Obviously much more data and analysis is needed to ascertain robustness of these results and to see whether they are likely to apply more generally.  And a country highly ranked by FIFA (or by anybody else for that matter) may well be the eventual winner of the World Cup, but that is no great feat.   At a practical level the World Cup results so far raise serious questions about the usefulness of the existing FIFA rankings.  A revamp is called for.

And at the metaphorical level, it suggests that this football game is pregnant with much larger messages.  Sheer size or economic might in itself does not assure that the country is highly successful in soccer.

Governance matters, and below the lofty national level as well: some teams, such as Ghana, Chile, South Korea, the Netherlands, Japan and the US, thanks to good governance and leadership, have managed to subscribe to the motto that ‘the whole can be much more than the sum of its parts’, contrasting teams like Italy, France and Cameroon, where they have shown how much less the whole can be than the sum of its parts when misgovernance is rife.

South American ascent, European descent, African disappointment, unexpected Asian surprise.  A broader metaphor as well?

Update, Saturday June 26th, the day the knockout stage started.  Uruguay beat South Korea 2-1, continuing the Latin American ascent and stellar performance so far from all 5 South American teams (from COMNEBOL), while FIFA’s 47th-ranked South Korea represented Asia rather well in this match among the remaining 16 teams.  Then Ghana, ranked 32nd by FIFA, won 2-1 against the United States (ranked 14th).  Ghana was the only African country that had made it pass the World Cup’s Group stage to this early knockout stage.  It now proudly moves on to the quarter finals, when it will play Uruguay (ranked 16th by FIFA).  The challenge to FIFA’s world soccer rankings continues.

Update 2, Sunday June 27th, the second day of the knockout stage. A day that may become history in soccer, and finally force FIFA to reform and jump aboard the 21st century.  What takes place on Sunday is so important that it deserves its own blog entry (here).

I am thinking about the very same day in the World Cup exactly 48 years ago:  on June 16th, 1962, Chile beat Yugoslavia and earned 3rd place in that World Cup hosted by Chile.  I still have vivid memories as a kid from that historical encounter, including the Eladio Rojas goal in the very last play of the game.  I was in attendance with my father and brother.  Chile’s performance in that World Cup surprised pundits, since it did not have well known players.  Their special team spirit (and being hosts) did help…

Today, June 16th 2010, Chile’s inaugural game at the World Cup in South Africa also ended with a 1-0 victory, this time against Honduras.  This time I saw the game via the internet.  It may not be a mind-boggling coincidence that Chile won by the same score on these two games played on a June 16th.  Except for the fact that since that victory in 1962 Chile had never won a single World Cup game until today!  It was a 13-game winless streak.  Today the spell was broken.

Now onto more substance about the evolution of soccer: historically, the 1962 World Cup is an important turning point, since it marks the advent of modern defensive strategies in soccer.  Until that World Cup, the average scoring had always exceeded 3 goals per game.  In the 1962 World Cup, the goal scoring dropped significantly below 3 goals, to 2.78 goals per game, never to recover.

Defensive strategies have further taken hold.  Nowadays we would be satisfied if we were witnessing ‘a mere’ 2.78 goals per game.  In the seven World Cups between 1980 and 2006, the average had already dropped further to only 2.53 goals per game.

Wait, it gets worse.  So far, during this initial phase of the current World Cup in South Africa, the average scoring has been an abysmally low 1.56 goals per game!   One can blame the temperature, altitude in some venues, nervous initial stage, noisy vuvuzelas, the new Jabulani ball, the uneven pitch, and the like, but to this observer, those are unlikely to cut the mustard.   For one thing, average scoring in the initial stages do not tend to be abnormally low.  Expect a possible pick up on goals scored in later games, but not much.

And the new Jabulani ball was expected to increase, not lower, scoring in each game.  Perhaps we ought not rule out a miscalculation by the ball designers and by FIFA officials, if it turns out that the unpredictability of the ball plays more havoc for a striker’s accuracy than for the goalie trying to handle it.

I think more emphasis should be given to globalization as a reason for lower scoring results.  The globalization of soccer players (where they play, where they become naturalized), as well as the globalization of soccer coaching and their coaches, and of technology (permitting viewing in detail everything an opponent team has done), as well as the globalization of defensive strategies, may have brought about much lower scoring games.

What does it all mean for Chile’s next World Cup game, against the great spoilers of this tournament, Switzerland — which today beat Spain also by a 1-0 score?   If we believe in astrology for a prediction, then let us travel back to the 1962 World Cup again, when in the memorable opening game of that tournament, Chile beat Switzerland 3-1.

Will that same 3-1 very score be repeated in the current Chile-Switzerland game in South Africa?  Or, if we take a more statistical approach accounting for the defensive nature of games nowadays, perhaps Chile will win again, as in today’s game with Honduras, 1-0?  Either way, I am playing around with wishful thinking and coincidences, not with sophisticated models.

In fact, neutral observers and odd makers will dismiss either one of those two predictions as unscientific and partisan, and claim instead that Switzerland is the favorite, not Chile, based on their stunning win over Spain today.

Indeed, I am partisan.  So I say to them: not so fast.  After all, few expected the achievement of Chile not only in successfully hosting the World Cup in 1962, but also in earning 3rd place, which then it also took place shortly after a devastating earthquake had struck.

In ancient Greece, a volcano eruption was a sign of divine disapproval.  It is unclear whether modern Greece has taken notice.

For better of worse, unlike Greece, there was no ancient BP.  Oily conglomerates have only become more important than nations in recent times.  It is thus hard to tell whether an extraordinarily active hurricane summer season (expected to be upon us imminently) can be interpreted as sign of disapproval from above.

There is growing consensus that unless the pace of progress quickens, the world will be unable to achieve the majority of the Millennium Development Goals in five years.  But the devil is in the details:  does the pace of progress need to quicken everywhere, and similarly across all MDGs?  And what does progress depend on?…

Last week the Belgian agency for Development Cooperation convened its 2010 “States General” Conference, which focused on the MDGs.  In the keynote address at the Conference I emphasized the achievements and challenges in meeting targets, and focused on governance as a constraint to accelerated progress.

The key issues I focused on in the Conference presentation are summarized below.*

First, where do we stand on the MDGs?   On average the world has made progress in meeting targets, but such progress has been very uneven.

Some countries and regions are succeeding, while others are stagnating. On balance, the world as a whole appears to be currently on track to halve absolute poverty by 2015.  However, such average progress is in large measure due to dramatic poverty reduction in China.

In 1990, over half of the population in East Asia, South Asia and sub-Saharan Africa lived in extreme poverty.  In recent times, only 17 percent, or 22 percent if China were excluded, of the East Asian population  lives on less than $1.25 a day.

But, in sub-Saharan Africa and South Asia 51 percent and 40 percent of the population (respectively) still lived below the $1.25 a day poverty line recently (Figure 1).   Even more striking, even though there are always debates about the accuracy of these figures (and there is a lag in reporting), over 70 percent of the population in the two regions appear to still live on under $2 a day.

While the world’s progress on average, largely driven by a few countries, is certainly laudable, 1.4 billion people continued to live on under $1.25 a day and 2.6 billion lived on under $2 a day in recent times.  Even in East Asia, where the largest reduction in extreme poverty has been achieved, 337 million live below the $1.25 poverty line.

Achievement is within reach on some MDGs, but is out of reach on others. In addition to being on track to halve poverty, the world (but not necessarily all regions) is on track to achieve gender equality in primary education and to halve the number of people living without access to clean water.

On other goals the world has made less progress. For instance, maternal mortality ratios were expected to be reduced by three-quarters, from 480 deaths per 100,000 live births to one hundred and twenty by 2015. By 2005, the maternal mortality remained nearly constant at 450 deaths. Similarly, the share of the population without access to sanitation was expected to be 28 percent, but by 2005 virtually half of the population remained without access (Table 1).

In the years since data on most indicators was last collected the world experienced a surge in food prices and a global economic recession. Both circumstances have negatively affected progress on MDGs.  The rise in food prices is estimated to have increased the number of chronically hungry people by 75 million to a worldwide total of nearly one billion, while the recession has contributed to the impoverishment of tens of more millions.

Considering that progress on MDGs has been uneven across regions and targets, and also the quality of governance is highly variable across countries, it is important to focus on the links between governance and the MDGs.  This is also warranted because governance has not received its due  attention in the programs to support and monitor progress of the MDGs.

Governance does matter for MDGs. Our past research suggests that when governance improves, from, say, the extremely low levels of a country like Afghanistan for instance, to the subpar (yet not bottom ranked) levels of Kenya (or from the subpar levels of Kenya to the many countries in the middle group of the worldwide governance indicators, such as India, or from the middling levels of India, to the satisfatory levels of Botswana), infant mortality on average declines by almost two-thirds, and incomes rise almost three-fold in the long run.  Subpar quality of governance in many countries can be a major constraint to progress on the MDGs (Figure 2).

Non-traditional dimensions of governance also affect the MDGs. Improvements in public sector financial management alone will not ensure good governance and progress on goals. Non-traditional (for many donors) aspects of governance, such as freedom of the press and human rights, also influence development. The strong relationship between poverty and gender rights is particularly striking.

Considering the slow progress on gender-related goals, much more attention ought to be paid to gender rights (Figure 3).  Research shows that female empowerment, education and income help reduce child and maternal mortality rates. Press freedom also impacts development (also in Figure 3, below).

Thus aid is necessary, but alone is far from sufficient. Research has shown that aid can be effective when there is satisfactory governance in the recipient country, or at least governance is steadily improving.  Studies have found that, among others, primary school enrollment and child mortality outcomes are also conditioned by governance. Thus, increasing aid will not ensure progress on the MDGs.  Investment in areas that impede the effective allocation and efficient use of funds, such as governance, may also make sense.

Governance is not only paramount for recipient countries, but it is also a key factor among the richer donor countries and their aid agencies.

Honoring Aid Commitments is Important. Meeting the MDGs is not only ambitious, it is also costly. Therefore in 2000, donors pledged to increase foreign aid to 0.7 percent of their Gross National Income (GNI). By 2008, donors provided only 0.3 percent of GNI on average, and only a fraction of this is channeled to the poorer countries.

The allocation of aid is also crucial. Providing governments with aid to increase health expenditure may improve child mortality rates, but only if the money is efficiently and transparently allocated.

Further, additional funds provided directly to MDG-related sectors, such as to cover health costs in urban settings, which many aid donors provide for,  may not always be as effective as providing some additional funding to neglected sectors, such as infrastructure or governance, which constrain progress for development in general, and for attaining those very health-related and other MDGs in particular.

In other instances communities may be more effective at implementing projects than central governments, particularly where high-level corruption is pervasive.   Under these circumstances donors should consider channeling aid to communities rather than central government agencies.  More generally, aid needs to be more selectively provided, so to enhance its effectiveness.

Development aid is not an island. The recent financial crisis has shone a spotlight on the impact of economic policies of industrialized countries on the rest of the world.  The recession has resulted in the impoverishment of millions more people in developing countries.  Responsible governance and policies in industrialized countries matter for development and the MDGs at least as much as donor aid itself.

Additionally, continued agricultural subsidies in industrialized countries continue to hamper the expansion of trade, employment and growth in many developing countries. These economic policies ought to be better integrated into development aid strategies by donors.  Further, greater attention should be paid to the important role of the private sector in meeting the MDGs.  Like governance and infrastructure, the role of the private sector has also been neglected in the MDGs.

In 2000, the international community committed itself to achieving eight lofty goals.  While the upcoming September UN Summit on the MDGs will surely highlight some of the partial successes in meeting the MDGs in some settings, there also ought to be an honest and transparent focus on the many setbacks in many settings around the world, and a frank assessment as to the reasons for such setbacks.

The evidence suggests that the uneven progress in MDGs is related to major differences in the quality of governance across nations.  Furthermore, there are dimensions of governance, such as gender rights and media freedoms, that may have been subject to particular neglect.  Yet more generally, as stated, in the recent past governance has not received the attention it deserves in the context of the MDGs.

Focus on governance by the international community is not the ‘politically correct’ thing to do, and, further, many leaders prefer to be mute about this challenge because they know that there is misgovernance in their midst.  Yet this merely helps to explain, not justify, inaction on this front.  In the next stage, emphasis on key governance dimensions, including corruption, inequality, media freedoms and gender rights, is required to help address major hurdles to progress.

Politically difficult decisions and decisive leadership are necessary, but by paying greater attention to governance, to improved aid selectivity and allocation, by targeting neglected sectors, and by supporting a larger role for the private sector, many MDGs may still be within reach for most.

……………………………………………………………………………………………….

*Note:  This entry is a synthesis of the presentation I gave last week at the Conference in Brussels referred to above.  An expanded version, co-written with Veronika Penciakova, has been subsequently posted here as a Commentary piece  at the Brookings website.   This blog entry draws from the joint piece.

In our research article, entitled ‘Does Grease Money Speed Up the Wheels of Commerce’, based on surveys of thousands of multinational and domestic firms around the world, we found that the answer is No — if bureaucrats have control in determining the extent of regulatory burden and red tape delay so to extract bribes.

We found that on average firms that bribe waste more, not less, management time dealing with bureaucrats that firms that say No to bribery, and that firms that bribe also face a higher, not lower, cost of capital. Thus we rejected the dominance of the ‘efficient grease hypothesis’, suggesting that, on average, bribery was ’sand in the wheels of commerce’ instead …

We therefore concluded that the business community can benefit from laws and collective initiatives strengthening its ability to say No to bribery.  This is consistent with the main tenet of the current ‘Schumpeter’ article in The Economist, which states that ‘Saying No to corruption makes commercial as well as ethical sense’.

But it is important to emphasize the importance of collective initiatives, because our findings are also consistent with the fact that many (though not all) firms operating in corrupt environments can still find that individually it may ‘pay’ for them to bribe, often when that is the way that others do business in the same industry and country.

At the end of the day, it comes down to a cost-benefit calculation by each firm.  Ongoing research, to be detailed in a future blog entry, suggests that such costs and benefits from the bribing vs. not bribing decision varies greatly across countries and types of firms.  What the upbeat article in The Economist does not address is the fact that still nowadays, for many firms, in many settings, saying ‘Yes’ to bribery is still commonplace and it still makes some commercial sense from their (cost-benefit) perspective.

Granted, with recent data we estimate that the majority of firms around the world refrain from bribing for procurement bid awards, for instance.  But the average share of firms that frequently bribe in a given country is still very large, about one-third (though it varies a lot; the share is much smaller among the Nordics than for Greece or Italy, for instance).

Better enforcement of foreign anti-bribery laws and convention is important so to collectively raise such cost for all multinationals.  The Economist article welcomes improvements in enforcement in the US and the UK.  Such recent progress is worth noting, even though there are still lingering questions about ambivalence on how determined is the UK in this area.

More generally, even if the recent tougher enforcement in the US and hopefully in the UK is  sustained over time, a much more resolute enforcement of the OECD foreign bribery convention is still needed across many other important and wavering OECD members.  Collective action matters.

Further, a significant reduction in bribery by the corporate sector to public officials around the world cannot come about through legal initiatives such as the (original, US-based) FCPA and the OECD foreign bribery convention on their own.  This is particularly the case where there are weaknesses of enforcing such laws at the national level, or even if enforced, where the penalties for bribing are not large.

Thus, to substantially raise the cost of bribery for a firm, other measures are also needed.  Unfortunately voluntary industry agreements on some general anti-bribery principles, or manuals on internal codes of ethical conduct, are not it.  Instead, for many firms nowadays raising the reputational cost is what actually matters the most, as in the recent case of IKEA in Russia, among others.

That is why the role of the media is so important in investigating and prominently featuring important cases of corporate corruption.  And also that is why one ought to welcome  the new agreement by the multilateral development banks (the MDBs, namely the World Bank, the African, Asian and Inter-American Development Banks, and the EBRD) to cross-debar firms found to have engaged in bribery or corruption on projects they have funded.

But cross-debarment is insufficient, it has to be publicly disclosed, without delays or exceptions or special dispensation to powerful conglomerates.  There has been some progress in making debarment of many firms public among some MDBs (such as the World Bank), but further public disclosure across the board is still pending.

Transparency, by affecting the reputational cost of the firm, is key.