Corruption leads to unrest: but how?

It sounds perfectly intuitive that there'd be a link between corruption and the risk of popular unrest. But just how and why?

Here's a concrete example, related to worker safety -- a common plight in emerging markets: In China, for instance, corruption seems to lead to under-par worker safety, which in turns leads to local unrest, which in turn could one day take a more radical, durable, or national form:

Some analysts believe corruption is partly to blame—that many companies use their political relationships to circumvent safety oversight and regulations. New research provides backing for this claim, demonstrating a strong link between worker deaths from accidents and the political connectedness of corporate executives. 

We studied all publicly traded Chinese companies in safety-regulated industries, including petroleum and natural gas extraction, mining, chemicals manufacture, and construction—a total of 276 firms. We added up the annual fatalities in each firm from 2008 to 2011, using company-reported statistics, government data, and press reports. After examining the employment histories of the firms’ top (C-suite-equivalent) leaders, we defined a company as “connected” if at least one executive previously held a high-level government post. 

Our results showed that on average, the rate of worker deaths is five times greater at connected companies than at similar companies that lack political connections. The finding that connected companies have much worse records was remarkably consistent from year to year. Moreover, deaths per 10,000 workers rose by almost 10, on average, during the year following the arrival of a connected executive at a previously unconnected firm, and fell by 6.4 during the year following a connected executive’s departure.

LatAm CEOs are the best

The Harvard Business Review looks at which CEOs are most effective. Turns out the Chinese and Japanese don't do so well, but Brazilians and Mexicans are oustanding:

China has been the growth miracle of the past decade, so you might expect CEOs there to have done very well. We find that the opposite is true: Among the 3,143 CEOs we analyzed, the average rank of Chinese executives was 176 places lower than the average rank of U.S. executives. Only three Chinese companies’ CEOs made the top 100, though 17% of all the executives studied were from China. The Chinese leaders we asked about this discrepancy theorized that as the country’s companies become more innovation-focused, their performance will improve. 

Likewise, the average rank of Japanese CEOs was 562 places lower than that of their U.S. counterparts, although this is not a big surprise, since Japan’s economy has struggled for many years. On the whole, U.S. CEOs did not shine either, despite holding six of the top 10 slots. Their average rank was 215 places lower than Latin American CEOs’, 140 places lower than Indian CEOs’, and 137 places lower than British CEOs’. Continental European and U.S. CEOs ranked about the same. U.S. CEOs have not been as competitive on a global scale as one might think. 

One bright spot is Brazil, whose CEOs make up only 4.5% of the total sample but 9% of the top 100. They include Roger Agnelli of Vale (#4) and Embraer’s Maurício Botelho (#11). Botelho took over the state-owned company in 1995, when it was reporting losses of around $300 million a year, and over the next 12 years, built it into a world-class competitor. (Interestingly, Brazil is also overrepresented in the bottom 100, suggesting that companies from that country play a high-risk, high-reward game.) Another standout is Mexico, whose average CEO ranked 108 places higher than the average U.S. CEO.

Confidence at the top

One of the first things you learn when analyzing autocratic regimes is that the central leader often has less power than you'd expect. In order to survive against a popular mass that probably doesn't share his taste for luxury trips to Monaco, a dictator will at least need to guarantee himself the support of his peers and surrounding elite members. This often comes through cajoling and allowing a certain degree of corruption to go on without meddling from the top.

That's why I was so surprised to read of King Abdullah of Jordan attacking so openly his closest family members. He must feel very confident of his reign, and I'm not sure why:

Abdullah is defensive about charges that his family reaches for special privileges. In our conversations, he lashed out against relatives whose behavior he sees as a liability to Hashemite rule. “Look at some of my brothers. They believe that they’re princes, but my cousins are more princes than my brothers, and their in‑laws are like—oh my God,” he said. “I’m always having to stop members of my family from putting lights on their guard cars. I arrest members of my family and take their cars away from them and cut off their fuel rations and make them stop at traffic lights. I’m trying to be that example.”

How Khamenei will choose

It's clear Ayatollah Khamenei will have a decisive influence on who runs Iran next (unless the whole system changes, which could also happen). But how will he decide on his favorite candidate? One interesting and underestimated factor may be how well he expects the person will be able to get along with his own successor, as Meir Javedanfar notes:

Someone whom Mojtaba Khamenei can work with. These days Mojtaba Khamenei who some believe could be a successor to his father Ayatollah Khamenei is increasingly becoming involved in running the affairs of his father as well as the affairs of the office of the supreme leader. There is also the question of his possible grooming (if Khamenei chooses him as his successor). It would be important that the next president will facilitate this process.

Stop thinking (that everyone's a nerd like you)

Nerdy people like you and me (yes, if you're reading this blog, you probably fall into that category too) tend to think that everyone's just as nerdy, or at least well informed and interested in global affairs as we would like to be ourselves. This is clearly a form of projection bias, and for that reason a reality check is sometimes in order. I got one by reading these few sentences from Nassim Taleb's great essay, Antifragile:

My intellectual world was shattered as if everything I had studied was not just useless but a well-organized scam--as follows. When I first became a derivatives or "volatility" professional (I specialized in nonlinearities), I focused on exchange rates, a field in which I was embedded for several years. I had to cohabit with foreign exchange traders--people who were not involved in technical instruments as I was; their job simply consisted of buying and selling currencies. Money changing is a very old profession with a long tradition and craft; recall the story of Jesus Christ and the money changers. Coming to this from a highly polished Ivy League environment, I was in for a bit of a shock. You would think that the people who specialized in foreign exchange understood economics, geopolitics, mathematics, the future price of currencies, differentials between prices in countries. Or that they read assiduously the economics reports published in glossy papers by various institutes. You might also imagine cosmopolitan fellows who wear ascots at the opera on Saturday night, make wine sommeliers nervous, and take tango lessons on Wednesday afternoons. Or spoke intelligible English. None of that. 

My first day on the job was an astounding discovery of the real world. The population in foreign exchange was at the time mostly composed of New Jersey/Brooklyn Italian fellows. Those were street, very street people who had started in the back office of banks doing wire transfers, and when the market expanded, even exploded, with the growth of commerce and the free-floating of currencies, they developed into traders and became prominent in the business. And prosperous. 

My first conversation with an expert was with a fellow called B. Something-that-ends-with-a-vowel dressed in a handmade Brioni suit. I was told that he was the biggest Swiss franc trader in the world, a legend in his day--he had predicted the big dollar collapse in the 1980s and controlled huge positions. But a short conversation with him revealed that he could not place Switzerland on the map--foolish as I was, I thought he was Swiss Italian, yet he did not know there were Italian-speaking people in Switzerland. He had never been there. When I saw that he was not the exception I started freaking out watching all these years of education evaporating in front of my eyes. That very same day I stopped reading economic reports.

Social cohesion: you had it all wrong so far

Seth Kaplan over at the ever-great Global Dashboard makes an innovative and critical distinction regarding the significance of different types of social cohesion to economic development, particularly in fragile states. I must admit I'd never heard about it put this way:

What the development community fails to understand is that there are two distinct types of social cohesion, and it only focuses on one. 

“Vertical social cohesion” looks at levels of inequity on the assumption that substantial differences in income are both inherently unfair and damaging to the wellbeing of societies. 

“Horizontal social cohesion,” on the other hands, looks at how strong is the “social glue” that ties people to each other on the assumption that feelings of togetherness matter more both to the wellbeing of individuals and to the long-term health of a society. 

The development field has no way to grasp the importance of the latter because it does not fit within the paradigm of how development is supposed to work as understood by donors. It has nothing to do with economics, technical training, and governance indicators. It cannot be improved with vaccines, a school building program, or investments in agriculture. And it certainly cannot be measured and tracked over time. 

Vertical social cohesion fits nicely with the liberal ethos that most people in the field know. Horizontal social cohesion is much more likely to matter to conservatives, but few of these play an active role in any part of the aid industry. As a result, many things that matter to making states work better—including nation building, religion, and informal institutions—gets short shrift. 

But these things are tremendously important, especially in the early stages of development when formal state institutions are weak, and unable to play an important role in economic and political governance. 

The countries most successful at promoting development and reducing poverty have been horizontally social cohesive, not vertically so, because of how important this is when governments do not work well. Places like China, Vietnam, Indonesia, and the rest of East Asia have improved the lives of over a billion poor people over the past two generations not because they had “good governance,” progressive taxes, or followed a certain policy playbook, but because they had the social glue that lubricated business and encouraged leaders to focus on inclusive development.

Why does Central Asia matter?

You might ask why Central Asia matters. In fact there's a good chance you wouldn't ask because the region is probably simply not on your mind map. But here's part of the answer:

For centuries Central Asia was in the backwater of global political and economic attention, tales of “Great Games” and “Silk Roads” notwithstanding. However, interest in Central Asia from outside the region has been on the rise in recent years: Central Asia’s energy resources are of great importance to its neighbours in Europe and Asia. In addition, China wants a peaceful backyard, while Russia considers Central Asia part of its historical economic and regional interests and draws heavily on Central Asia migrants. Turkey is attracted by the common Turkic heritage of the region. Iran shares language and cultural ties with the Tajik people. The Central Asia’s Islamic tradition connects it with the Middle East and other Islamic countries. And now NATO countries rely on Central Asia for transit of their nonlethal military supplies in their engagement in Afghanistan. 

There is wide agreement that economic prosperity and political stability in Central Asia is critical not only for the 60-plus million inhabitants of the region, but also for Central Asia’s neighbours, since Central Asia serves as a strategically important land bridge between Europe and Asia.

The Russophile investor. Russophile, but investor above all

Spontaneously, one might expect Ukraine's more Russophile politicians and businessmen to lean towards Moscow's proposed Customs Union than towards a more difficult integration with the nearly-hostile European Union. But here's an interesting and counter-intuitive argument to explain why that might actually not be the case, deep down, behind the facades of post-Soviet kinship posturing:

"Akhmetov and other Ukrainian businessmen need to expand into the European Union and they need access to western capital," says U.S.-born Ukrainian analyst Ivan Lozowy. "They know that if Ukraine joins the Customs Union, they will be transformed from big fish in their own pond into minnows in a Russian sea, and their assets will become prey for Russian businesses."

Remember, businessmen think with their wallets. So follow the money.

China, the new Saudi Arabia?

Could parts of China be increasingly looking like Saudi Arabia? That's what a recent ECFR study seems to indicate:

China’s supply of cheap exports was made possible by a deep well of migrant  labour guaranteed by the hukou system, which ties the social rights of  peasants to their birthplace, and puts them at a disadvantage in the cities  to which they migrate for work. The result is that a city such as Guangzhou  (formerly known as Canton), the largest in Guangdong, has become like Saudi Arabia: it has a GDP per capita on a par with a middle-income country, but academics estimate that only three million of the 15 million people who work in Guangzhou every day are officially registered inhabitants. The rest have had no rights to housing, education, or healthcare and live on subsistence  wages. In Saudi Arabia the cheap migrant labourers are attracted by the oil wealth; but in Guangdong the labourers are the sources as well as the byproduct of the wealth. Reform of these conditions is painfully slow.

Davos 2013: PM Medvedev reacts to our Scenarios for the Russian Federation (January 2013)

The World Economic Forum's Annual Meeting in Davos this year opened with Russian Prime Minister Dmitry Medvedev directly addressing the Scenarios for the Russian Federation (full report PDF), which my Strategic Foresight colleagues and I produced throughout the course of 2012.

The reception of these scenarios was exceptional, as each of them was found to be both subtle enough to be realistic and just gloomy enough to require policy reaction.

As PM Medvedev put it:

"All three scenarios are important and dear to us because they are negative," he said. "And that is a powerful warning."

At the same time, Deputy Prime Minister Dvorkovich stated:

"it is good that the scenarios are not good enough, because they make us think,” he stressed. “This is a good challenge for the Russian government, a reason for thinking about what is being done wrong, what must be changed"

You can read about the scenarios at a glance by clicking on the sidebar.

A brief summary of the overall report can also be found in this op-ed a colleague and I penned for the Financial Times.

Our argument is very simple:

The Russian economy has had a great run over the past decade, as evidenced by its seven-fold increase in GDP per capita between 2000 and 2011 and the ensuing consumption boom that has spurred investment in sectors ranging from information technology to retail. Yet despite this impressive growth story, the factors that underpinned Russia’s economic development over the past ten years are fraught with growing uncertainty. 

As the World Economic Forum’s Scenarios for the Russian Federation published highlights, Russia’s economy has grown substantially over the past years, but it has also grown increasingly fragile.The country has missed an opportunity to use the large energy windfalls of the past decade to reform its institutional environment and make itself more resilient to future shocks by nurturing a dynamic and diversified economic base.

My personal focus throughout this study was on the growing difficulties a changing global energy landscape is creating for Russia's energy revenues and hence for the country's overall economic prospects.

As illustrated in the below graph, it seems Russia has little to gain from straight-line projections of today's energy headlines. In fact if the country is ever going to turn itself around, it will need to seize untapped opportunities ranging from Asian LNG to downstream acquisitions. (Note that there are tentative signs of some such steps being taken already.)

All in all, if you're looking for an overview of the strengths and weaknesses of the Russian economy and how they might evolve in the coming 20 years, the Forum's report is a great place to start your investigation.

I hope you enjoy it and look forward to your thoughts and comments.