Gabriela Ramos, Special Counsellor to the OECD Secretary-General and Sherpa to the G20
In 2016, surprisingly for many, Oxford Dictionaries chose as their Word of the Year “post-truth”, an adjective defined as: “relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief”. This runs contrary to the main tenet of the OECD, the “house of best practices” whose works and analysis depend on high quality statistics and solid empirical evidence. So how did we get here, and what does it means for our democracies?
As the OECD’s G20 Sherpa, I witnessed the evolution of what was originally a financial crisis into an economic crisis, and more recently, after eight years of low growth and very slow recovery, into a political crisis defined by the lack of trust of people in the institutions that we built over so many decades. It is also clear that the values of openness, mutual assistance, and international integration on which the OECD was founded are being questioned.
One reason for this is that while we have told “the truth and nothing but the truth”, we have not told “the whole truth”. Like people gradually enclosing themselves in media silos and social networks that only give them news and views they are comfortable with, we have been happy to rely on economic models that work with comfortingly quantitative facts on GDP, income per capita, trade flows, resource allocation, productivity, and the like. These standard economic models did not anticipate the level of discontent that was created by the skewed outcomes that they were delivering, and that have prevailed for so many years.
Our “truths” did not capture very relevant dimensions that inform people’s decisions (including recent political decisions), and particularly those that are intangible or non- measurable concepts. This is why such important issues as justice, trust or social cohesion were just ignored in the models. Indeed, neoliberal economics taught us that people are rational, and that they will always take the best decisions according to the information they have to maximize utility. And that accumulation of rational decisions will deliver the best outcome on the aggregates. In this model there is no room for emotions or for concepts like fairness or resentment.
Populism, the backlash against globalisation, call it what you will, recognises these emotions. We should do so too, especially since we actually have the data and facts that gave rise to these feelings in the first place. I am referring to the increased inequalities of income and outcomes that almost all the OECD economies experienced even before the crisis and that the crisis made worse.
If we go beyond averages and GDP per capita and look at the distributional impact of our economic decisions for instance, the picture is devastating. Up to 40 percent of people in the lowest tenth of the income distribution in OECD countries (and 60% in my own country, Mexico) have not seen their situation improve in the last decades. On top of that, lower income groups accumulate disadvantages, as their initial condition does not allow them to access quality education and health care or fulfilling jobs, while their children are facing a sombre future with less chance of improving their lot. At the OECD we have confirmed this. Our data show that if you are born into a family whose parents did not reach higher education, you have four times less chance of reaching middle school. You may encounter more health problems, and have less fulfilling jobs and lower wages. You are trapped in a vicious circle of deprivation.
Even the loosely-defined middle classes in OECD countries are fearful for their future and that of their children. They too feel betrayed and are angry that despite working hard, saving and doing everything else that was supposed to guarantee a good life, they see the fruits of success being captured by a tiny elite while they are left behind. No wonder they are attracted to solutions that resonate with their emotions and seem to give them some hope.
What should an organisation like the OECD, committed to evidence-based policy advice, do in this context? First, we must speak out when there is a deliberate misrepresentation of the facts and realities. Even if the people delivering these lies are not aware of it, it does not discharge them from the responsibility to check the evidence. Presenting a view that is based on lies by omission or on purpose should be recognised as such and not go unchallenged in the “post-truth” environment.
Second, instead of defending our selection of facts, recognise that they were also biased, and that in many instances they represented preconceived notions of how the economy functions that have been proven wrong. To rebuild trust in the facts we produce to explain social and economic phenomena, we must ensure that they really represent the whole reality and provide workable solutions. We may need to start, as the Chief Statistician of the OECD has said, “to measure what we treasure and not treasure what we measure”.
Most of all we need to understand that economic challenges are not just economic. That is why the OECD’s New Approaches to Economic Challenges (NAEC) initiative promotes a multi-dimensional view of people’s well- being, with tangible and intangible elements (including emotions and perceptions) all worthy of consideration. The NAEC agenda is ambitious, calling for a new growth narrative that recognises the complexity of human behaviour and institutions, and calls on sociology, psychology, biology, history, and other disciplines to help write this narrative and build better models to inform economic decisions.
We thought there was only one truth, and we promoted it without considering that it may have had faults. We defined reality in certain ways and ignored critics to the models. We strongly, and mistakenly, believed markets were the whole answer.
I think that as economists and policymakers, we should remember that in The Wealth of Nations, Adam Smith was drawing conclusions from not just the methodology, but also the ethics and psychology he explored in The Theory of Moral Sentiments. We may need to enrich our models to ensure that the outcomes respond to people expectations, and help us to recover the most important ingredient in our societies, which is trust.
French daily Le Figaro recently included Gabriela Ramos in a feature on “The New Untouchables”, four women leading the fight against corruption and for democracy (in French)
Integrity can significantly boost inclusive growth and sustainable development, by assuring fair and efficient resource allocation, stimulating competition and investment, and fostering innovation. Curbing bribery of public officials and promoting responsible business conduct is important to create a level playing field for companies and to create equitable market conditions and an investment climate that provides fertile ground for business development, competition and innovation. For the public interest to prevail in policy making, accountability and integrity in revenue collection, public finance management and service delivery are crucial and encourage equality and prosperity of societies.
International Anti-corruption Day provides an occasion to zoom in on one factor within this debate that remains particularly unexplored: corruption and the capture of public policies by special interest groups. There is increasing evidence that voters feel disillusioned about political integrity and the intertwinement of elite networks across sectors in society. Indeed, less visible but equally or more harmful than corruption scandals is the influence of narrow interests on public decision making for their own profit. Lobbyists walk a thin line between sharing information, agenda setting and undue influence. Special interest groups inform, influence and sometimes tweak laws, policies and regulations through formal advisory boards and informal networks. Rules for the financing of political parties and electoral campaigns can be stretched and bent, which contributes to the erosion of the already alarming low trust levels in government and public institutions. Similarly, leaks on offshore tax evasion or former public officials taking up lucrative posts and board memberships in banks and multinationals have dented the reputation of elected politicians, established firms and respected countries.
The public sentiment runs deep. Over half of the citizens in developed countries distrust their government and a yawning trust gap is emerging between the elite and mass populations. Among the key factors cited by citizens to explain the prevailing distrust are “wrong incentives driving policies” and “corruption/fraud”. While levels of trust in government are low, trust in political parties is even lower. In addition, over half of the global population share the belief that their country’s government is either largely or entirely run by a few big entities acting in their own best interests.
Undue influence of narrow interest dogs public investments and infrastructure, public procurement, governance of state-owned enterprises and even trade policy. Economic growth is at stake and the toll on society is already significant. The close ties between the government, financial regulators and the financial sector, exemplified by “job carrousels”, have been widely linked to the 2008 financial and economic crisis. Moreover, ill-inspired filibustering unnecessarily delays policy reforms on tax, trade or market liberalisation. Biased policy decisions may greatly affect trade restrictions that modify the outlook of an entire sector or industry, and can hinder the diffusion of new technologies or the chances of new industry players. Corruption also leads directly to the misallocation of resources in government spending. Crossing the line towards favouritism and bribery in public procurement creates unequal access to information and government contracts, which distorts competition and market access.
Building on two decades of OECD experience in these risk areas, the new Recommendation on Public Integrity is particularly timely, as it presents a holistic approach to boost integrity in government and in society. The Recommendation promotes a risk-based approach with emphasis in promoting a cultural change. So what does this mean in practice?
It means creating a public integrity system that is built on 3 pillars. The first pillar is the system: creating a coherent and interconnected set of integrity policies and anti-corruption tools that are coordinated and avoid overlaps and gaps. Second, this integrity system needs to rely on effective accountability, building on risk based controls and real responsibility for integrity violations. This also implies transparency, open government, as was highlighted during the OECD Global Forum on Public Governance, and active participation by civil society in the public decision-making process. The third pillar of an integrity system provides for cultivating a culture of integrity. Here we refer to the recruitment, training and promotion of values of the individuals in an organisation. The intention is to appeal to the intrinsic motivation of individuals. One way of doing this is through awareness raising and educational campaigns aimed at changing values.
The 2017 OECD Global Anti-Corruption & Integrity Forum, to be held on 30 -31 March will debate and shape strategies to shield policy making from undue influence and corruption and help secure sustainable inclusive growth. It is a truly global multi-stakeholder event, involving the public and private sectors, civil society, and academia. Sectoral case studies and good practice examples from countries worldwide will further enrich the debates. The Forum will provide a platform to present new evidence and insights, to advance policies and programmes, and to strengthen commitments and partnerships for integrity-based politics and decision making.
Registration for the 2017 Global Anti-Corruption & Integrity Forum is now open.
Click here to register.
Rolf Alter @raltergov Director, Public Governance and Territorial Development Directorate
It’s hard to imagine government doing its job well without a commitment to basic levels of integrity. Imagine if every administrative process required a bribe to this official or that to accomplish it. Or imagine seeing your tax money wasted on lavish buildings or useless infrastructure because of collusion between public officials and private investors.
And what about the effects you can’t see but end up paying for: the very useful bridge that cost 50% more than it should have due to bribes, skimming and inefficiencies (not to mention potential quality issues); or a screwdriver with a 300% mark-up and other overpriced items buried in a defence contractor’s invoice? These are all examples of waste and abuse of hard-earned citizens’ wages made possible by breaches of integrity. Beyond monetary costs, there is also a steep price to be paid in lost trust and cohesion, both essential to reducing transaction costs and making our societies function.
Without a culture of integrity, democratic processes themselves become endangered. In every society there are individuals, families, organisations and even institutions that try to distort political processes and circumvent commercial rules and regulations. The role of a culture of integrity is, in part, to ensure the integrity of our democratic processes. It means having the controls in place to prevent narrow interests from “gaming” the essential fairness of political and business processes.
The OECD takes a holistic approach that considers all of the risk areas in which corruption takes place, as well as all of the actors, activities and transactions that need to be protected. Through our evidence-based approach, we are able to provide policy support that gives countries tools to help in the fight against corruption. In this role, the OECD partners with the G20, studying the relationship between corruption and economic growth, elaborating whistle blower protection frameworks, public sector integrity frameworks and more.
The risk of corruption is strongest in the case of government-led projects on infrastructure. In 2013, OECD countries spent close to $1.35 trillion in public investment, representing 3.1% of OECD GDP and 15.6% of total investment (public and private). The cost of corruption and mismanagement has been estimated to contribute to 10-30% of large infrastructure budgets. Indeed, the majority of cases brought under the OECD Anti-bribery Convention concern public procurement. The OECD Integrity Framework for Public Investment is a new tool (forthcoming) that can help governments to identify vulnerabilities and the potential points of entry of corruption in infrastructure projects.
There are concrete steps that can be taken in achieving a culture of integrity—and the OECD’s Directorate for Public Governance & Territorial Development (GOV) is accompanying many countries in this process. It requires coherent efforts to update standards and to provide guidance to public and private stakeholders. It also requires countries to anticipate risks and apply tailored countermeasures. These are all areas where governance and good policy make the difference by helping to bring about systemic change, rather than after-the-fact measures that risk overreaction and the undermining of credibility.
But good policies need to have teeth, in other words, monitoring and enforcement. A country may have campaign spending rules and even an oversight committee in place, but little or no enforcement. Underfunding enforcement is one of the ways that policies can be undermined by special interests. Policies must impose clear rules and meaningful penalties to ensure fair and democratic processes.
To achieve this, GOV works with countries to adopt a whole-of-society approach. That means all stakeholders, public, private and civil society, must work together to make it happen. If that sounds ambitious, it is. Fortunately, the OECD has processes that are helping countries take important strides in ensuring basic fairness in their political processes and public investment practices.
Today we publish the next article of a summer series in which Kimberley Botwright of the OECD Public Affairs and Communications Directorate looks at OECD work through a Shakespearean lens.
When the ghost of the old King of Denmark appears at the beginning of Hamlet, Horatio, once doubtful of ghosts, decides, “This bodes some strange eruption to our state.” In a second (private) appearance to young Prince Hamlet, the ghost King reveals an unvoiced injustice; he was murdered by his brother, (Hamlet’s uncle), who has now married the Queen and claimed the royal title.
As the play unfolds we realise that adultery, fratricide, fathers spying on sons, friends spying on friends, bribery, trickery, and murder are the hallmarks of this society. The only major character that does not display some corrupt tendency is Ophelia, Hamlet’s one-time beloved girlfriend. A pure soul in an impure world, society necessarily destroys her; she goes mad and commits suicide. The church is still prepared to bury her though, (despite suicide traditionally preventing burial on hallowed ground), because she’s from a rich family.
Fortunately, today we don’t need to the appearance of ghosts to make us aware of “some foul play.” The OECD’s CleanGovBiz initiative, launched in 2011, is designed to help governments, business and civil society build integrity and combat corruption. This is done through knowledge sharing events as well as a multi-pronged Toolkit, which brings together relevant work on 18 policy areas from across different OECD departments. Users are provided with priority checklists, implementation guidance, good practice examples, as well as access to tools elaborated by international and civil society organisations.
The tricky part about corruption is that it is not always obvious or easy to detect. Hamlet is all too aware of the difference between outward appearance and inward reality; “That one may smile and smile and be a villain.” Polonius, Ophelia’s father, notes, “’Tis too much proved – that with devotion’s visage / And pious action we do sugar o’er / The devil himself.” Sharp detection is needed to identify all sorts of double-dealing. The OECD offers tools such as a Money Laundering Awareness Handbook.
It is inferred early on in the play that upon Hamlet’s decisions “depends the safety and health of this whole state.” Tools to set healthy governance standards as well as secure effective prevention are critical. Examples include OECD Guidelines for Multinational Enterprises, lobbying principles or Public Sector Integrity Reviews, the latter helping to identify and review areas in government vulnerable to misconduct fraud and corruption.
Follow-up tools are needed to ensure robust prosecution and recovery; when Hamlet’s uncle meditates on his devious actions he wonders whether he can repent but keep his stolen assets (the Queen and the title); “May one be pardoned and retain th’offence? / In the corrupt currents of this world / Offence’s gilded hand may shove by justice, / And oft ’tis seen the wicked prize itself / Buys out the law.” Asset recovery is an important part of the corruption limitation, as is criminalising bribery.
Hamlet’s uncle eventually bribes the Prince’s friends to assist in an assassination plot; but Hamlet suspects their treachery long-before, describing Rosencrantz as a sponge, “that soaks up the king’s countenance, his rewards, his authorities.” Current estimates show that over $1 trillion in bribes are paid annually. The OECD’s Anti-Bribery Convention has established legally binding standards to criminalise the bribery of foreign public officials in business transactions.
Hamlet didn’t have a CleanGovBiz Toolkit and as the play progresses he becomes increasingly pessimistic about society’s integrity, telling Polonius, “Ay, sir: to be honest, as this world goes, is to be one man picked out of two thousand.” When Rosencrantz jokes that “the world’s grown honest”, Hamlet replies, “Then doomsday is near.” Despairing of the rot in human nature he asks Ophelia, “Are you honest?” and then cries, “Get thee to a nunnery. Why wouldst thou be a breeder of sinners?” Never mind that he had formerly promised her, “Doubt truth to be a liar / But never doubt I love.” Even Hamlet is inconsistent in the morally corrupt world that encircles him: he murders four people.
Just before the final disastrous scene where the remaining characters all kill each other, Hamlet converses with a gravedigger and asks him how long it takes a body to rot. The reply sums up society, “I’faith, if he be not rotten before he die – as we have many pocky corpses now-a-days…” Corruption corrodes society; leading to suspicion, deception, violence, and death, or “carnal, bloody and unnatural acts.”
If Hamlet’s end doesn’t convince you, modern estimates suggest that corruption causes a 5% to 10% waste of US Medicare and Medicaid annual budgets; a 10% average increase in the cost of doing business; and 20% to 40% of official development assistance to be stolen. Child mortality rates in countries with high levels of corruption are about one third higher than in countries with low corruption, whilst student dropout rates are five times as high.
Corruption also leads to the breakdown of that flighty yet vital thing we call trust in society. As the OECD tells us, we fight corruption because it “corrodes public trust, undermines the rule of law and ultimately delegitimises the state.” The cost of mistrust is high. The OECD Secretary General has stated in his 2013 Strategic Orientations, “Without strong, smart and trusted institutions our efforts to implement and deliver better policies for better lives will be undermined.” No wonder OECD Forum 2013 was all about Jobs Equality and Trust, where a different Prince reminded us; “If you think about it, 100 does not always equal 100. There is a considerable difference between a group of 100 people full of self-confidence, with trust in each other and good basic skills, and a group of 100 people with low self-esteem, a lack of trust and poor basic skills.” Can we (re)build trust?
When integrity crumbles, trust disappears, society spirals downward and “The rest is silence.”
Today we publish the second of a summer series in which Kimberley Botwright of the OECD Public Affairs and Communications Directorate looks at OECD work through a Shakespearean lens.
Sixteenth century Venice was a global centre of merchant capitalism, and The Merchant of Venice offers an excellent examination of human behaviour and its effects on financial markets. The point of this article is not to dwell on the appalling anti-Semitism of the period, but rather on the story of the hapless eponymous character and his reckless friend.
With the majority of his wealth at sea, Antonio uses credit to leverage capital to lend to his friend Bassanio (“Try what my credit can in Venice do”). Bassanio requires funding to seduce the wealthy heiress Portia. On Bassanio’s behalf, Antonio borrows 3,000 ducats for a three-month period from Shylock, who offers a 0% interest rate but takes the promise of one pound (around half a kilo) of Antonio’s flesh as collateral.
By Act 3, the audience discovers that Antonio’s ships have sunk, leading to a catastrophic devaluation of his net worth. To redeem his losses, he must pay the gruesome corporeal price under the terms of a notarized contract:
“Hath all his ventures failed? What, not one hit? From Tripolis, from Mexico and England, / From Lisbon, Barbary and India? And not one vessel scape the dreadful touch of merchant-marring rocks?”
Antonio is significantly over-leveraged and he overconfidently manages risk, based on an uncritical acceptance of the present. If only he’d read the OECD’s Future Global Shocks: Improving Risk Governance! He would have learned that disruptive events, such as a cargo ship sinking, can destabilise critical supply systems and have far-reaching economic effects.
He might also have learnt something about financial crises: “Arguably, financial crises both occur more frequently and produce more severe monetary damage than other types of risks described. There is a concern that the tools for risk analysis have not worked as well.” It goes on to emphasise that financial crises involve human, non-malicious choices and their re-occurrence should encourage us to search for new approaches to economic challenges and models “that use data on how agents actually behave.”
Bassanio provides an illustration of the erratic behaviour of individuals in financial markets. His justification for borrowing money from Antonio is based on the logic that if one shoots and loses an arrow, one should promptly shoot another in the same direction, in order to find out where the first went – not the most rational of approaches, seeing as it is very likely your second arrow will go the same way as the first. In short, Bassanio throws good money after bad.
Since the financial crisis, traditional economic models have become increasingly criticised for being blind to herd behaviour, network effects or information asymmetries and irrational action. Agent-based models (ABM) provide an alternative modelling approach. They focus on possible interactions between agents according to certain behaviour rules, running millions of simulations to approximate the millions of potential interactions between actors, gaining a better insight into possible outcomes of the complex system. In complex systems such as debt markets or financial institutions, shocks can be caused by external pressures (ships sinking) or internal (erratic individuals). It is therefore important to understand these systems at both the macro and micro-level.
Another important human aspect of financial systems is trust and expectations. Towards the end of the play, Antonio is dragged to court, with Shylock demanding his pound of flesh. While the presiding Duke of Venice initially proposes that Shylock might assume certain losses and forgive part of Antonio’s debt, “Forgive a moiety of the principal, / Glancing an eye of pity on his losses”, this raises deep concerns:
“It must not be; there is no power in Venice
Can alter a decree established.
‘Twill be recorded for a precedent,
And many an error by the same example
Will rush into the state. It cannot be.”
A major fall-out of the financial crisis was the possible creation of “moral hazard”, the expectation, or guarantee, that public authorities will bail out uninsured and unsecured creditors of systemically important bank debt. When such guarantees are perceived, behaviour incentives may be distorted.
As two OECD papers on implicit guarantees and banking in a challenging environment make clear, solutions for our modern day financial dilemmas lie in internationally coordinated responses. For example, the first paper suggests that an effective cross-border EU bank failure resolution network would lower the value (and danger) of implicit sovereign guarantees. The second notes that as banks deleverage and assets become renationalised, a European Banking Union would sever the link between weak sovereigns and weak banks.
But knowing what to do and doing it are two different things, as the quick-witted heiress Portia reminds us; “If to do were as easy as to know what were good to do…”