How can countries support innovative approaches to facilitating access to and usage of formal financial services among low-income and other marginalized groups while mitigating the risk of misuse within the financial sector?

As part of the Brookings Financial and Digital Inclusion Project (FDIP), the FDIP team recently hosted a roundtable to examine this central question. The objective of the roundtable was to identify and discuss salient challenges and opportunities for financial services providers, government entities, and consumers with respect to balancing anti-money laundering/countering the financing of terrorism (AML/CFT) compliance — a critical component of financial integrity and stability — with inclusive financial access and growth.

We explore several key questions and themes that emerged from the roundtable below.

Do areas of synergy exist between financial inclusion and AML/CFT efforts?

• AML/CFT requirements and financial inclusion have sometimes been perceived as being in tension with one another — for example, stringent “know your customer” (KYC) requirements associated with AML processes can restrict formal financial access among marginalized groups who are unable to fulfill the KYC documentation requirements. However, the objectives of AML/CFT (ensuring stability and integrity within the financial sector) and financial inclusion (providing access to and promoting usage of a broad range of appropriate, affordable financial services) can be mutually reinforcing.
• By moving individuals from the shadow economy into the formal financial system, greater opportunities emerge for introducing underserved populations to a broad suite of formal financial services, and ensuring those services are accompanied by suitable consumer protections. Thus, financial inclusion, financial integrity, and financial stability can act as complementary objectives.
• The 2012 Declaration of the Ministers and Representatives of the Financial Action Task Force (FATF) recognized financial exclusion as a money laundering and terrorist financing risk in approving FATF’s 2012-2020 Mandate. This mandate affirmed FATF’s 2011 guidance on AML and terrorist financing measures and financial inclusion, which stated that “[i]t is acknowledged at the same time that financial exclusion works against effective AML/CFT policies. Indeed the prevalence of a large informal, unregulated and undocumented economy negatively affects AML/CFT efforts and the integrity of the financial system. Informal, unregulated and undocumented financial services and a pervasive cash economy can generate significant money laundering and terrorist financing risks and negatively affect AML/CFT preventive, detection and investigation/prosecution efforts.”

What are key challenges and concerns with respect to balancing financial inclusion with financial integrity?

• Awareness of financial inclusion issues is not universal among individuals who work in the regulatory, compliance, and law enforcement spheres of the financial ecosystem. Engagement among these groups is critical for promoting knowledge-sharing with respect to financial integrity and inclusion.
• Although FATF and other standard-setting bodies (SSBs) have increasingly adopted recommendations favoring proportionate, risk-based approaches to AML/CFT (as evidenced by the 2013 FATF Guidance on Financial Inclusion), regulators often pursue more conservative approaches than SSB guidelines recommend. These conservative approaches may constrain access to and usage of formal financial services among marginalized groups.
• Combating the potential use of low-value transfers within countries and across borders for terrorist financing purposes is a salient concern for the law enforcement community when considering proportionate AML/CFT approaches.

How does the digital component fit into these issues?

• As its name suggests, FDIP is interested in exploring the evolving role of digital technology within the financial services ecosystem. As discussed in the 2015 FDIP Report, digitization of financial services can be more cost-effective for public and private sector providers to manage and safer for consumers than carrying or storing cash.
• For example, a 2013 report found that the Mexican government saved about $1.3 billion annually by centralizing and digitizing payments for wages, pensions, and social transfers. A 2014 report by the World Bank Development Research Group, the Better Than Cash Alliance, and the Bill & Melinda Gates Foundation highlighted several countries, including South Africa, where disbursing social transfers electronically cost significantly less than manual cash disbursement.
• Digital financial services can also promote women’s economic empowerment, as these services are often more private and convenient to access than traveling to a “brick and mortar” financial service provider. Given that as of 2014 there was a 9 percentage point gap between the number of men and women with accounts in developing economies (with women disproportionately excluded from account ownership), facilitating access to formal financial services among the 42 percent of women globally who do not have an account will be a major factor in advancing financial inclusion.
• With respect to financial integrity in particular, digital identification mechanisms such as biometric IDs can help lower access barriers to financial services while ensuring that providers have the information they need to promote security and stability in the financial ecosystem. In its June 2011 guidance, FATF recognized the use of non-documentary methods of identification verification — for example, a signed declaration from a community leader coupled with a photo taken by a mobile phone — for advancing access to formal financial services among underserved groups.
• The Aadhaar initiative in India, which the FDIP team referenced in a previous post, is currently the largest biometric identification program in the world. The unique 12-digit ID enables individuals to meet KYC requirements and has been used as a financial account among those who do not have an account with a financial institution. Another innovative digital initiative is underway in Tanzania, where the government is working in concert with mobile carrier Tigo and UNICEF to provide birth certificates via mobile phones.

What are critical questions and areas of opportunity for fostering financial inclusion and integrity moving forward?

• How can regulators and providers ensure sufficient privacy protections are in place for customers when advancing financial inclusion efforts, particularly through digital channels?
• Through what mechanisms can government entities and non-government financial services providers best mitigate the risks of centralizing sensitive customer data?
• Could an industry utility that facilitates a common solution to AML systems serve as a feasible solution for harmonizing standards?
• What is the proper role of private solutions in the AML/CFT and financial inclusion spaces?
• Could identification verification applications be developed using blockchain technology?
• In what ways can social networks be leveraged with respect to digital identity initiatives and financial inclusion?

On Friday, June 3, S&P Global Ratings announced that it would not downgrade South Africa’s credit rating to junk, letting South Africa breathe a sigh of relief. The outlook, however, remained negative. While some experts were confident that the rating would not be cut, most continued to warn that future economic or political turmoil could spark a downgrade later this year. The South African Treasury agreed, but remained positive releasing a statement saying:

Government is aware that the next six months are critical and there is a need to step up the implementation [of measures to boost the economy] … The benefit of this decision is that South Africa is given more time to demonstrate further concrete implementation of reforms that are underway.

South Africa, whose current rating stands at BBB- (one level above junk), has been facing weak economic growth—at 1 percent—over past months. The International Monetary Fund has given a 2016 growth forecast of 0.6 percent. Many feared that a downgrade could have pushed the country into a recession. Borrowing by the government would have also become more expensive, especially as it tackles a 3.2 percent of GDP budget deficit for the 2016-2017 fiscal year.

Other credit ratings agencies also are concerned with South Africa’s economic performance. Last month, Moody’s Investors Service ranked the country two levels above junk but on review for a potential downgrade, while Fitch Ratings is reviewing its current stable outlook and BBB- rating.

For South African Finance Minister Pravin Gordhan’s thoughts on the South African economy, see the April 14 Africa Growth Initiative event, “Building social cohesion and an inclusive economy: A conversation with South African Finance Minister Pravin Gordhan.”

This week, the Extraordinary African Chambers—located in Dakar and established in collaboration with the African Union—sentenced former Chadian President Hissène Habré to life in prison. Habré seized power in 1982, overthrowing then President Goukouni Oueddei. He fled to Senegal in 1990 after being ousted by current Chadian President Idriss Deby. After he fled to Senegal, the African Union called on Senegal to prosecute Habré. In 2013, the Extraordinary African Chamber was created with the sole aim to prosecute Habré. The Habré trial is the first trial of a former African head of state in another African country.

Habré faced a long list of charges including crimes against humanity, rape, sexual slavery, and ordering killings while in power. According to Chad’s Truth Commission,  Habré’s government murdered 40,000 people during his eight-year reign. At the trial, 102 witnesses, victims, and experts testified to the horrifying nature of Habré’s rule. His reign of terror was largely enabled by Western countries, notably France and the United States. In fact, on Sunday, U.S. Secretary of State John Kerry admitted to his country’s involvement in enabling of Habré’s crimes. He was provided with weapons and money in order to assist in the fight against former Libyan leader Moammar Gadhafi. Said resources were then used against Chadian citizens.

Also this week, Simone Gbagbo, former Ivorian first lady, is being tried in Côte d’Ivoire’s highest court— la Cour d’Assises—for crimes against humanity. She also faces similar charges at the International Criminal Court though the Ivoirian authorities have not reacted to the arrest warrant issued in 2012. In March 2015, Simone Gbabgo was sentenced to 20 years in jail for undermining state security as she was found guilty of distributing arms to pro-Laurent Gbagbo militia during the 2010 post-electoral violence that left 3000 dead. Her husband is currently on trial in The Hague for the atrocities committed in the 2010 post-election period.

On Monday, May 30, South African chemical and energy company Sasol Ltd announced that Mozambique’s ongoing debt crisis and continuing low global gas prices would not slow down its Mozambican gas project. The company expressed confidence in a $1.4 billion processing facility upgrade stating that the costs will be made up through future gas revenues. In explaining Sasol’s decision to increase the capacity of its facility by 8 percent, John Sichinga, senior vice president of Sasol’s exploration and production unit, stated, “There is no shortage of demand … There’s a power pool and all the countries of the region are short of power.” In addition, last week, Sasol began drilling the first of 12 new planned wells in the country.

On the other hand, on Monday The Wall Street Journal published an article examining how these low gas prices are stagnating much-hoped-for growth in East African countries like Tanzania and Mozambique as low prices prevent oil companies from truly getting started. Now, firms that flocked to promising areas of growth around these industries are downsizing or moving out, rents are dropping, and layoffs are frequent. Sasol’s Sichinga remains positive, though, emphasizing, "We are in Mozambique for the long haul. We will ride the waves, the downturns, and the upturns."

In his wide-ranging interview with The New York Times, Republican presidential nominee Donald J. Trump stressed the importance of fighting ISIS while declaring “we are going to take care of this country first before we worry about everybody else in the world.” For counterterrorism (and I would argue for security in general), such thinking is dangerously wrong-headed: Fighting ISIS and stopping other foreign terrorist threats to the U.S. homeland requires close alliances and deep engagement abroad.

Allies may also have better access to a terrorist stronghold due to geography or historic ties. Saudi Arabia, Turkey, and Jordan are within easy bombing range of ISIS’ core: the U.S. homeland is not. Although military action against ISIS’ core in Iraq and Syria is vital, it is often quiet global intelligence cooperation that does much of the day-to-day counterterrorism lifting. Given the geographic span of ISIS operations, it is not realistic for the United States to have strong unilateral capabilities in every possible country where the terrorists might operate and use as a base for anti-U.S. operations. Foreign governments fill this gap, acting as a force multiplier for the United States. Shortly after 9/11, the United States was working with over 100 countries on counterterrorism; several years into the war on terror a senior CIA official testified that virtually every capture or killing of a suspected terrorist outside Iraq involved at least some help from a foreign intelligence service. 

Many allies have skilled intelligence services, and they also use their police and their domestic intelligence services to gather information. These services of course know local languages and are culturally aware. They can also take advantage of the law in their efforts to disrupt terrorism: Terrorism, after all, is a crime. Allies, particularly less savory ones, use a government’s coercive power as well. Although people automatically think torture, governments at times threaten to jail a relative of a suspected terrorist or withhold a business permit or the right to attend university. These seemingly mundane threats are something that the United States cannot do outside its own borders. 

Many of the most basic homeland security tasks do not begin or end with the homeland.

Given these advantages, the primary role of U.S. intelligence is to cajole and strengthen allies, not replace them. The United States might provide technical assistance, as many U.S. allies are far weaker in this area. In addition, U.S. intelligence often acts as a conductor of global liaison services. In 2010, al-Qaida of the Arabian Peninsula tried to bomb two cargo planes as they approached the United States. Efforts to disrupt the plot involved not only the United States and Yemen, but also the countries in transit, including Qatar, the United Arab Emirates, Germany, and the United Kingdom. And Saudi Arabia provided a key intelligence tip. 

Many of the most basic homeland security tasks do not begin or end with the homeland. Foreign governments provide information on terrorist suspects, and there is considerable cooperation on those who might travel to the United States. Much of the screening to hinder terrorist travel and operations is done “over there,” not in the United States.

Our world is too small, and terrorists too global, to think of U.S. security narrowly. If we want to fight ISIS and other foes, we need allies. That doesn’t mean we should do whatever our allies want or support them unconditionally. But we must recognize that if we expect them to help America fight its enemies, we must stand by them as well.

Editors’ Note: Donald Trump has exposed the tension between democracy and liberal values—similar to the Arab Spring, writes Shadi Hamid. This piece originally appeared on The Atlantic.

When I was living in the Middle East, politics always felt existential, in a way that I suppose I could never fully understand. After all, I could always leave (as my relatives in Egypt were fond of reminding me). But it was easy enough to sense it. Here, in the era of Arab revolt, elections really had consequences. Politics wasn’t about policy; it was about a battle over the very meaning and purpose of the nation-state. These were the things that mattered more than anything else, in part because they were impossible to measure or quantify.

The primary divide in most Arab countries was between Islamists and non-Islamists. The latter, especially those of a more secular bent, feared that Islamist rule, however “democratic” it might be, would alter the nature of their countries beyond recognition. It wouldn’t just affect their governments or their laws, but how they lived, what they wore, and how they raised their sons and daughters.

Perhaps more than at any other time, millions of Americans are getting a sense, however mild in comparison, of what it might feel like to lose your country—or at least think about losing your country—because of what people decide to do in the privacy of the voting booth. It still remains (somewhat) unlikely that Donald Trump, the now presumptive Republican nominee, can win a general election. Regardless of the final outcome, however, the billionaire’s rise offers up a powerful—and frightening—reminder that liberal democracy, even where it’s most entrenched, is a fragile thing.

* * *

When I hear my friends debating how, exactly, so many of their fellow citizens could support someone like Trump, it reminds me a bit of Egypt. In my forthcoming book, I relay a telling conversation I had four years ago, which has stayed with me since. A few days after the country’s first post-revolutionary elections concluded in January 2012, I visited my great aunt in her extravagant flat in the posh Cairo suburb of Heliopolis. She was in a state of shock, but worse than that was the confusion. It was one thing for the Muslim Brotherhood, long Egypt’s largest opposition group, to win close to 40 percent of the vote, but how could 28 percent of Egyptians vote for ultraconservative Salafi parties, which believed in the strict implementation of Islamic law?

Like most Egyptians, she personally knew Brotherhood members even if she didn’t quite like them, but she hadn’t had much experience with Salafis and seemed totally unaware that they had extended their reach deep into Egyptian society. She realized, perhaps for the first time, that the country she had thought was hers for the better part of 70 years would never quite be the same. It hadn’t really even been hers to begin with.

What if voters don’t want to be liberal and vote accordingly?

What my aunt feared was that Egypt would become an “illiberal democracy,” a term popularized by Fareed Zakaria in his 2003 book The Future of Freedom, but one that’s still difficult for Americans to fundamentally relate to. In the American experience, democracy and liberalism seemed to go hand in hand, to such an extent that democracy really just became shorthand for “liberal democracy.”

As Richard Youngs writes in his excellent study of non-Western democracy, liberalism and democracy have historically been “rival notions and not bedfellows.” Liberalism is about non-negotiable personal rights and freedoms. Democracy, while requiring some basic protection of rights to allow for meaningful competition, is more about popular sovereignty, popular will, and accountability and responsiveness to the voting public. Which, of course, raises the question: What if voters don’t want to be liberal and vote accordingly?

* * *

When the stakes are high, there is more to lose, and if there is more to lose, those on the losing end of a ballot box have powerful incentives to play “spoiler.” Fortunately, in the post-Civil War United States, the stakes have never reached what political scientist Barry Weingast calls the “threshold” at which citizens decide to defend themselves through extra-constitutional means, including by appealing for the military to take sides. This, in part, is why (good) constitutions are so important: They lower the stakes, reassuring citizens that even if their preferred party loses the election, it’s still just that—an election.

Donald Trump, or more specifically what he represents, calls some of these assumptions into question. Trump himself isn’t quite an Islamist, but he is a proponent of a kind of “illiberal democracy,” even if he himself may not be familiar with the term. Drawing on a wellspring of white nativism and machismo, candidate Trump has regularly made demeaning statements about entire groups of people, including African-Americans, Mexicans, and women. His commitment to the protections enshrined in U.S. constitution are questionable, at best, and if we assume the worst, downright frightening (the difficulty with Trump is that he’s not precise with words, so it’s sometimes hard to make sense of what he’s saying). He has expressed support for registering Muslims in a database, elaborating that they could “sign up at different places.” When a reporter asked how this was different from requiring Jews to register in Nazi Germany, Trump said “you tell me,” prompting The Atlantic’s David Graham to note that “it’s hard to remember a time when a supposedly mainstream candidate had no interest in differentiating ideas he’s endorsed from those of the Nazis.” Trump, for good measure, has also refused to disavow President Franklin D. Roosevelt’s internment of Japanese-Americans.

The U.S. Constitution includes robust civil-liberties protections, enshrined in the Bill of Rights. But these protections are not unlimited. Contrary to popular belief, majorities—if they’re large enough—can, in fact, do nearly anything they want, even in established democracies. It’s only really a question of how high the majoritarian bar is. In the United States, two-thirds of Congress and 75 percent of the states can amend or repeal articles of the Constitution. They could theoretically pass a constitutional amendment banning abortion. In countries like Egypt, Tunisia, and Turkey, where alcohol is currently legal and relatively easy to find, the issue of alcohol consumption is a touchstone for endless “what if” hypothesizing. Yet, Prohibition happened not in any of those countries but in America, with large majorities in the Senate and House of Representatives as well as 46 of 48 states backing the 18th Amendment (of course, banning alcohol in the U.S. wasn’t justified on primarily scriptural grounds, while in Muslim-majority countries, prohibition is seen as fulfilling an explicitly Quranic directive).

In other words, built-in constraints and constitutional “guarantees” aren’t enough on their own to preclude illiberal outcomes. What Americans really depend on, then, is a shared political culture and the ideas and ideals that undergird it. As James Fallows notes, “Liberal democracies like ours depend on rules but also on norms—on the assumption that you’ll go so far, but no further, to advance your political ends.” But all it apparently takes is one man with charisma and an unusually perceptive understanding of the human psyche to change that. There are norms against politicians suggesting that minorities should have special identification cards. There are norms against saying you want to kill the families of terrorists. There are norms against encouraging your supporters to use violence against their political opponents. It’s not entirely clear why you don’t do or say these things (because Trump clearly has), but you just don’t. The very fact that Trump has made such frightening comments on national television—without any corresponding “disqualification” or decline in popular support—has already undermined these longstanding norms.

The United States has had demagogues before, but they rarely make for viable presidential candidates. This is democracy’s blessing as well as its curse: that people you really don’t like—people who you think might threaten the Republic—can actually win. In the specific context of the Republican nomination, Trump opponents basically called for prioritizing good outcomes over democratic ones. They continued to search for possible paths to denying Trump the nomination, despite the fact that, barring acts of God, he was certain to win the popular vote and a plurality of delegates in the primaries.

Even if Trump reached the magic number of 1,237 delegates, which would normally settle the matter, there were those who still seemed intent on scouring the rulebooks, parliamentary procedure, and delegate details in the hope of averting disaster. Democratic norms, the thinking goes, are great in normal contexts, but sometimes the stakes are simply too high to let democratic outcomes stand. As the columnist Walter Shapiro wrote, “[W]ith the threat of the first takeover of a modern political party by an authoritarian who traffics in racism and exudes contempt for the First Amendment ... [t]here would be nothing anti-democratic about GOP leaders using every mechanism in their power to stop Trump.” Nate Silver pointed out that “technically [Republicans would] be able to deny Trump the nomination even if he had a delegate majority by changing the rules at the last minute.” They could still theoretically do something like this, even after Trump’s decisive victory in Indiana. The Republican Party is not a country, and the party can disregard the preferences of primary voters if it so chooses, but elite pacts and back-room negotiations would seem decidedly antiquated during an unusually populist moment in American politics.

[T]here will no doubt be a temptation to defy or otherwise undermine a democratically elected Trump.

This particular debate in some ways mirrors arguments over the tensions between democracy and liberalism, a debate that will only intensify if Trump gains ground on Hillary Clinton in the coming months. It is probably time to err on the side of imagination, since party elites and pundits failed to imagine the unthinkable once already. What if Trump actually wins the presidency? How would we as Americans deal with an outcome that at least some of us see as a potential danger to our Constitution as well as our livelihoods?

If Donald Trump wins, he would have, whether we liked it or not, a democratic mandate. Once in power, he might moderate his rhetoric and policies (yet another data point in the debate over the “inclusion-moderation hypothesis”), rendering at least some of this discussion moot. Yet it’s also possible that, facing a growing terrorist threat and a sputtering economy, more and more Americans might, like their newly elected president, dispense with the norms of reasonable conduct and support extreme measures. Still, a President Trump would be a legitimate president, having been freely and fairly elected by enough Americans. He would be, as much as it pains me to say it, our president. Still, there will no doubt be a temptation to defy or otherwise undermine a democratically elected Trump. For those of us who study the Middle East, the idea of not respecting democratic outcomes is business as usual, but I never thought it would be up for debate in the United States.

* * *

“Deep state” is a phrase that’s used to describe the constellation of autonomous and self-perpetuating institutions, namely the judiciary, military, and security services, which operate outside the glare of the public and are immune to the electorate’s whims. This deep state, acting as the guardian of national identity, puts limits on what elected politicians can hope to accomplish. The deep state was responsible for four coups in Turkey, the most recent of which deposed the country’s first-ever democratically elected Islamist prime minister in 1997.

It would be difficult for Americans to think about their own government—or “regime”—in such terms. The U.S. military is subject to civilian control, while Supreme Court justices, though unelected and appointed to life terms, are nominated by the president and confirmed by the Senate. It is possible, however, to imagine a president so reckless as to activate state institutions against him or her, in a way that makes the notion of an American deep state more meaningful and relevant.

Former CIA Director Michael Hayden ignited some speculative debate when he said that the military “would refuse to act” if ordered by a President Trump to take actions that were clearly illegal, such as killing the families of terrorists. Moreover, he said, military commanders are “required not to follow an unlawful order.” Even short of flagrant illegality, the military can still do what it’s done, at times, with nearly every sitting president. Peter Feaver, a leading expert on civil-military relations, notes that “the historical record is replete with cases of the military shirking—withholding information and options, slow-rolling, end-runs to Congress and the media, inflating cost estimates, etc.—to thwart civilian policies they deem to be unwise.” Considering, however, that Trump would likely be more “unwise” than most past presidents, such tensions could intensify well beyond what America’s political system is accustomed to.

"[C]oup”...is not a word that Americans should ever get used to hearing in everyday political discourse.

One can also easily imagine left-of-center (and right-of-center) civil servants in the Departments of State and Defense working against the president from within to mitigate his effectiveness and even his authority. This would be good, insofar as Americans wouldn’t want their president doing things that were crazy, illegal, or both. But it would still raise difficult questions about democratic legitimacy and how far an elected president can pursue his preferred policies, especially when it comes to issues that aren’t clear-cut. If the military refused to obey orders, however justified their refusal, then it could very well erode norms against military intervention in domestic politics. In response to Hayden’s comments, host Bill Maher joked that the former CIA director was floating “a coup.” This is not a word that Americans should ever get used to hearing in everyday political discourse. The norm against “coups” is a powerful one, which explains why American analysts (if not the U.S. government) are generally uncomfortable with military coups in foreign countries. No one teaches us that military coups are bad. Rather, it’s something we absorb in the process of being American. It goes without saying, so it’s rarely said.

Recently, a few friends (who work on Middle East issues) and I had an interesting although ultimately frightening conversation, as Trump extended his delegate lead over Ted Cruz. Sometimes it’s useful to game out worst-case scenarios, however unlikely they might seem. We tried imagining a dystopian future and came up with internment camps, (threats of) military coups, and pro-Trump militias. Soon enough, the last didn’t seem nearly so farfetched, with volunteers offering to provide security at Trump rallies (for Trump supporters).

* * *

It is hard to imagine such things because, despite a long, low-intensity war on terrorism, America hasn’t faced a large-scale terrorist attack on the homeland since September 11, 2001. Democratic systems produce self-perpetuating norms, because they are accountable to a voting public. It’s this very responsiveness, though, that can be a source of vulnerability, if enough citizens, in the grip of fear, decide to prioritize “security” over liberty. As the legal scholar Christopher Kutz writes in the suggestively titled article “How Norms Die,” democracy can be “at the same time both fertile and toxic: fertile as a source of humanitarian values and institutions, but toxic to the very institutions it cultivates.”

This is something we can measure. As Daniel Bush observed, after analyzing Pew survey data from 2002 to 2014: “During each campaign season, respondents reported having a higher negative impression of Muslim Americans than in non-election years.” This is a bit more mild than the link between elections and religious riots in India. As the historian of religions Michael Cook notes, “There is no doubt that Hindu nationalist politicians believe that communal riots can get out the Hindu vote for them. ... Under the right conditions the communal riot is a winning [electoral] strategy.”

Norm shifting of an even more dangerous kind than India’s can happen rather quickly in countries where democracy is not yet consolidated. For example, millions of Egyptians who demanded freedom and democracy in 2011 turned seemingly against it in less than two and half years, supporting not just a return to authoritarian rule but the August 14, 2013 massacre of more than 800 protesters—what Human Rights Watch calls the “worst mass killing in [Egypt’s] modern history.”

The kinds of shifts that occur in established democracies are less nefarious, but they can happen just the same. Torture is a good example. Kutz calls the spread of global norms against torture “one of the most impressive successes of the post-war period.” Yet, in the United States, these norms began to erode after the attacks of September 11th. Soon enough, torture—or what some were now euphemistically calling “enhanced interrogation”—came to enjoy broad support among the American public. The lesson again is clear. However strong they may first appear, norms, particularly those relating to national security, are more fragile than we might like to think. Once their sanctity is undermined by authority figures (whether presidents or presidential candidates), others can judge that what was once considered shameful is now not just socially tolerated but also necessary, good, and just. This is why “political correctness”—even if it seems irritating and is sometimes abused to restrict reasonable debate—still represents a public good: It makes us think twice about saying things that might contribute to the erosion of liberal and democratic norms.

[N]orms, particularly those relating to national security, are more fragile than we might like to think.

We have now reached a point where current or former presidential candidates from both parties have flirted with the idea of internment camps (former Democratic candidate Wesley Clark has called for “segregating” radicalized Muslims who are “disloyal to the United States”). In a series of incidents that have received less attention, a Tennessee State Representative called for using state institutions, in this case the National Guard, to “round up” Syrian refugees. Meanwhile, the mayor of Roanoke, Virginia, called for suspending assistance to refugees, but went further in an official statement on government letterhead. “I’m reminded,” he wrote, “that President Franklin D. Roosevelt felt compelled to sequester Japanese foreign nationals after the bombing of Pearl Harbor, and it appears that the threat of harm to America from ISIS now is just as real and serious as that from our enemies then.”

No less than Supreme Court justice Antonin Scalia believed that it could happen here. On this, he is on strong ground, since it has, of course, already happened. In 1944, the Supreme Court upheld Roosevelt’s internment of Japanese-Americans in Korematsu v. United States. While Scalia said that the decision was “wrong,” he also issued a warning in his blunt style: “You are kidding yourself if you think the same thing will not happen again.”

The norm against internment has been undermined, even though Americans do not face anything close to the threat presented by the Nazis and Japan during World War II. Which raises the question of what a plurality, or even a majority, of Americans might be willing to support if they had to confront a threat that was truly existential. We Americans are not, today, at war, at least not in the normal sense. I hope to God that we never will be again. But we might be. And this is where Scalia’s words that day were perhaps most chilling, in part because he was right. Evoking the Latin expression inter arma enim silent leges, he reminded the audience that “in times of war, the laws fall silent.” All we will have then are the things we still believe in—our norms. But, by then, they might not be enough.

On 15 May the Dominican Republic held its most complex elections since 1994. On this occasion, not only were the president and vice president elected, but also all the members of the lower house, the Chamber of Deputies, and the Senate, as well as local authorities.

There were no surprises. Danilo Medina, of the governing Partido de la Liberación Dominicana (PLD), was re-elected by a large margin, and all indications are that he was also able to conserve his party’s majority in both houses of Congress. We say “all indications are” because the election was beset by irregularities (well-documented by the OAS observer mission); and these irregularities have triggered a serious post-electoral crisis that has yet to be fully resolved.

Medina’s re-election confirms the infallibility of the rule (in place in Latin America since 1978) that every president who reforms the Constitution to keep himself in power has achieved his objective. The only exception was Hipólito Mejía, former president of the Dominican Republic, who amended the Constitution in 2002 to seek a second term, but then failed to get re-elected. This defeat opened the door for the return of Leonel Fernández (also of the PLD), who had already governed from 1996 to 2000, and who won the 2004 election and then (benefitting from Mejía’s reform) got himself re-elected in 2008. Once in office, Fernández reformed the Constitution in 2010 (moving from allowing consecutive re-election to allowing unlimited re-election but with alternating rather than consecutive terms). President Medina amended the Constitution once again, in 2015, on an expeditious basis (within 15 days) to re-enact consecutive re-election and to run again in the elections just held on 15 May. No other country in Latin America has amended the constitutional provision on re-election so many times in such a short period, four times in 21 years. 

Continuity of the PLD for the fourth consecutive term 

With this clear-cut triumph by Medina (he garnered 61.74 per cent of the votes, leading the second-place challenger Luis Abinader, of the recently-formed Partido Revolucionario Moderno (PRM), by more than 25 points), the PLD has now won the presidency for the fourth time in a row, with a total (at the end of this new term) of 16 years in power without interruption. Never before under democratic rules of the game had the same party won four times in a row in the Dominican Republic. 

If we exclude the special cases of the PRI in Mexico (prior to 2000) and the Partido Colorado (in Paraguay), from 1978 to date only four parties or coalitions have won four consecutive presidential contests in the region: Chavismo in Venezuela, which has been in power for 17 years (now in the midst of a profound crisis that could lead to Maduro’s early exit); Brazil’s Workers’ Party (PT), which so far (we’ll see what comes of the trial of Rousseff by the Senate that is about to get under way) has been in power for 13 years; ARENA in El Salvador (which governed without interruption from 1989 to 2009 with presidents Cristiani, Sol, Flores, and Saca); and the Concertación in Chile (from 1990 to 2010, with presidents Aylwin, Frey, Lagos, and Bachelet in her first term). 

Reasons for the victory

What are the reasons that explain Medina’s landslide victory after three consecutive terms of the PLD in office?

In my opinion, a combination of personal, political, and socioeconomic reasons explain this outcome. As to the personal reason, one should highlight the great popularity of President Medina. With approval ratings greater than 70 per cent, he enjoys high levels of popular support, much more than any other Latin American president.

In terms of the political reasons, one should note the advantage that any Latin American president has when seeking consecutive re-election: the enormous concentration of power by the PLD in all areas of the State, accentuated political clientelism, and above all, an opposition that has not figured out a strategy for removing the PLD from power. Mention should also be made of the marked lack of fairness in the electoral contest and the abusive use of state resources in favor of the governing party.

The third important reason that explains Medina’s easy re-election is to be found in the economy. With 7 per cent growth and inflation at 2.5 per cent, the Dominican Republic is one of the two best-performing economies in the region (the other is Panama). This growth stands in stark contrast to a Latin America which (according to World Bank projections) will see negative growth of -0.6 per cent this year. It is also more than 2 percentage points greater than the average growth rate for the countries of Central America.

Challenges

Yet Medina’s second term, despite the strong support he received at the polls, is not problem-free. On the contrary, he faces major challenges, including having the results of the 15 May elections accepted by the opposition so that his legitimacy and, above all, that of the PLD legislators and mayors, will not be called into question.

Improving the quality of democracy is another major challenge. The Dominican Republic is part of the group of countries (according to The Economist) that has a flawed democracy, characterized by marked institutional weakness and high levels of citizen insecurity and corruption. 

Moreover, profound and urgent changes are needed in the political–electoral system aimed at improving the quality and integrity of the electoral process to avoid having to suffer similar problems in future elections. 

In the electoral sphere, the OAS report recommends that it is important to separate voting for members of the lower house from voting for senators. It is also important to provide for fairer electoral competition. This requires adequate regulation of the use of state resources (to keep the party in power from enjoying unfair advantages), strengthening the levels of transparency, oversight, control of political financing (establishing, among other measures, ceilings for campaign spending and limits on private financing), as well as assuring more equal access to the media. 

As regards the political system, the priority includes introducing thorough changes in the party system aimed at modernizing the parties, institutionalizing them and improving their levels of internal democracy. Another priority is ensuring effective gender parity in politics. 

These political–electoral changes need to be supplemented by adequate modernization and strengthening of the electoral organs (JCE - Central Elections Board and the TSE - Superior Electoral Tribunal), ensuring that they are made up of very qualified professionals of renowned prestige, who are totally independent of the political parties. In the area of the economy, despite the current positive macroeconomic outlook, the situation is far from ideal. 40 per cent of the population lives in poverty due to the economy’s serious difficulty generating quality employment (due to its growth model). To this we must add the need to solve the main limitation that the economy has faced for some time, i.e., scarce energy and high energy prices. 

In my opinion, this fourth consecutive victory consolidates the PLD as the predominant party in the Dominican political system (with the risk of becoming a hegemonic party). The PRD, which until recently was the main opposition party under the now-deceased Peña Gómez, weakened by its constant internal strife and divisions, ended up allying with the PLD in this election and won just over 5 per cent of the votes. The other major historical party, the PRSC, of deceased former president Joaquín Balaguer (which allied with the PRM in this election) also obtained few votes; its numbers similar to the PRD’s. The big question is what will happen in the coming years with the recently formed PRM and the leadership of Abinader, in particular, if both he and the party will be able to become consolidated as the main opposition force. 

One will also have to see whether Medina and the PLD have the capacity to steer clear of the attrition and crisis that generally affects “long governments” under a single party or coalition in the region, especially during the curse of the second consecutive term. Of the four “long governments” mentioned above, two, the PT in Brazil and chavismo in Venezuela, are currently experiencing serious crises that could lead to an early end of the terms of presidents Dilma Rousseff and Nicolás Maduro. 

In summary, during his second term Medina should implement an ambitious agenda of reforms. In politics, the priority includes modernizing and strengthening democratic institutions, adopting a law on political parties, and transforming the judiciary and the police to fight insecurity and corruption head on. In economic and social policy, the focus should be on maintaining high growth rates but correcting the serious prevailing inequalities and distortions with the objective of creating quality jobs and thereby reducing the high levels of poverty.

This piece was originally published by International IDEA. 

Editor's Note: With the latest coup attempt in Turkey, Turkish democracy survived a major test, and the country turned from the edge of a precipice. writes Kemal Kirisci. But Turkey’s democracy has also taken a severe blow. This article was originally published in The National Interest.

The history of Turkish politics is littered with coups and coup attempts that have occurred in roughly ten-year intervals. It is almost a genetic defect.

• The nascent Turkish democracy experienced its first coup in 1960 when it was barely into its tenth year—led by a group of left-wing “young officers,” who had also forced the General Staff into its ranks. Administrative authority was returned to civilians in October 1961, after having cost the lives of the then-Prime Minister, Adnan Menderes, the Minister of Foreign Affairs, Fatin Rüştü Zorlu, and the Minister of Finance, Hasan Polatkan.
• The second military intervention took place in 1971 against the government of Süleyman Demirel—this time around, though, through a “coup by memorandum.” The military issued to the prime minister an ultimatum—to step aside and be replaced by a technocratic cabinet.
• Less than ten years later, in the midst of endemic violence between left- and right-wing radical groups, the military's top brass carried out another intervention. This was bloodier than the previous two interventions, costing hundreds of lives and leading to massive human-rights violations. After rubberstamping a suffocating constitution on the country, the military handed the government over to a semblance of a democratically-elected government in 1983.
• Surprisingly, Turkey broke this pattern of ten-yearly military interventions, and civilian authority continued until 1997, when there was what was termed a “post-modern coup.” The army rolled out a convoy of tanks into the streets of Ankara, and in a repeat of the coup of 1971, demanded the resignation of the coalition government led by Necmettin Erbakan.
• The next coup occurred a decade later (almost to the day) in April 2007, when the Chief of Staff staged an “e-coup” by posting a set of demands on its website. The coup was a reaction against a long list of democratic reforms that were introduced as a part of the leadership’s pro-EU agenda and were seen as a departure from the staunchly secularist, restrictive mode of governance. Bolstered by the public support for these reforms, however, the incumbent Justice and Development Party (AKP) led by Recep Tayyip Erdoğan, now the current president of Turkey, successfully withstood the “e-coup,” and for the first time, pushed the military back “into the barracks”.

The latest coup attempt—which took place on Friday, July 15—has widely been attributed to a large Gülenist faction within the military and the judiciary that circumvented the established chain of command and held the high command hostage. Gülenists are the followers of the Islamic scholar Fethullah Gülen, who leads a worldwide movement that claims to advocate a moderate form of Sunni Islam with an emphasis on tolerance and interfaith dialogue. Formerly allies with Erdoğan, the Gülenists were blamed for spearheading the corruption scandal in December 2013 that engulfed several government officials, ministers and people in Erdoğan’s intimate circle. Since then, Gülen and Erdoğan have been locked in a power struggle.

Back from the brink

Turkish democracy survived a major test, and Turkey turned from the edge of a precipice. The credit for the coup’s defeat goes to the Turkish people, who heeded Erdoğan’s call to resist this intervention “by any means possible and necessary" and filled the squares. TV reports were filled with eye-to-eye, tense, agitated confrontations between civilians and armed soldiers on the two bridges that connect the Asian and European sides of Istanbul. Public restraint and sobriety helped to prevent escalation of violence. There were nevertheless senseless causalities resulting from fire opened by the mutineers and especially attacks mounted on the parliament building as well as the Headquarters of the General Staff. It could have been a lot worse.

Erdoğan needs to rise above a majoritarian understanding of democracy and do justice to the aspirations of a public that heeded his call by pouring into the streets and squares to defeat the coup attempt.

Clearly, Turkey’s democracy has taken a severe blow—cushioned only by the unequivocal stance of the opposition leaders and the media against the coup. Once again, the nation managed to break this pattern of ten-year coups. This offers the country a matchless opportunity for reconciliation. Granted, Erdoğan has had an exceptionally rough weekend and his frustration with those responsible for or implicated in the coup is understandable. He is correct in calling “for their punishment under the full force of the law of the land.” It will, however, now be critical that he ensure that the rule of law is upheld and rises to the challenge of winning the hearts and minds across a deeply polarized nation. He has the tools for it in his repertoire and had successfully wielded them in the past—especially between 2003 and 2011, when he served as prime minister. In hindsight, this period is often referred to as AKP’s “golden age,” when the economy boomed, democracy excelled, and Turkey was touted as a model for those Muslim-majority countries aspiring to transform themselves into liberal democracies.

As he steers the country from the brink of civil war, Erdoğan needs to rise above a majoritarian understanding of democracy and do justice to the aspirations of a public that heeded his call by pouring into the streets and squares to defeat the coup attempt. This is the least that the Turkish public deserves. This would also be a move in the right direction for Turkey’s neighborhood, which desperately needs a respite from the turmoil resulting from the war in Syria, the instability in Iraq, Russia’s territorial ambitions and now Brexit. This is the moment when a stable, democratic, transparent, accountable and prosperous Turkey needs to come to the fore on the world-stage. The United States needs it too. As much as the White House declared its faith in the strength of Turkey’s democracy and its support for the elected leadership, there is a clear chance for forging closer cooperation between the two countries. The first step in cooperation should be in bringing to justice the perpetrators of this coup, followed by measures to enhance Turkey’s capacity to address and manage the many challenges facing Turkey and its neighborhood.

ACOs have to assess both the opportunities and the challenges in pursuing risk based payment arrangements. However, there are key strategies ACOs can adopt to help with the transition to greater financial accountability, and higher levels of performance. On July 16^th, our ACO Learning Network hosted a webinar that explored critical success factors and barriers, as well as potential lessons for ACOs to increase their risk-bearing capacity.

Different Payment Models Pose Unique Challenges

Drawing upon an issue brief authored with colleagues from the American Academy of Actuaries, Greger Vigen highlighted some of the actuarial concerns inherent in various risk-based payment models. For example, when organizations undertake one-sided or “bonus only” shared savings arrangements, the arrangement should create incentives that are adequately aligned across the system to reward physicians that are providing not just cost-efficient, but also high-value, care. They must also find ways to create additional non-financial support when the size of provider shared savings is minimal. Both one-sided and two-sided shared savings models can lead to complex calculations in determining the true amount of savings resulting from the arrangement. Organizations undertaking bundled or episode-based payments must clearly determine what is included in specific bundles in order to justify assuming risk for those services.  Although partial capitation lends itself to an increased level of risk by creating strong incentives to reduce inefficiencies in certain parts of the system, such arrangements create effects on areas not covered by the partial capitation arrangement. Finally, by virtue of the increased risk level, global payment arrangements raise solvency considerations for organizations and require significant investment in infrastructure (or use resources from aligned partners) to manage utilization and facilitate appropriate organizational culture change. As programs move forward, there may be a combination of approaches used, including broad risk sharing or partial capitation arrangements between buyer and provider organizations. At the same time, more focused initiative may be used between the provider organization and the provider partners, such as bundled payments or partial capitation to certain providers. 

Critical Elements of High Performing Systems

Regardless of which risk-type arrangements ACOs choose to pursue, there are some critical elements that most high-performing systems share. According to Vigen, high-performing systems typically use a highly analytic process to understand their performance over time, rely on financial committees that are clear and “blunt” about the organization’s financial state, have in place multiple targeted financial initiatives, use payment reform to show how expenses could reduce revenue across multiple specific cases, have advanced clinical reporting systems, develop strong partnerships within and outside the organization to transform care, and use “next generation” analytic tools from outside organizations. Vigen contends that, in order to succeed at true transformation, organizations must develop initiatives aimed specifically at financial results, to supplement other initiatives designed to simply improve quality.  Building around these initiatives provides targeted results that can effectively engage and utilize actuaries. Actuaries and other external partners can help ACOs to more fully address financial issues and develop a framework for the prioritization and allocation of resources that identifies which existing processes to discontinue and which new processes to initiate.

Jim Whisler, a Principal at Deloitte Consulting, added that there are a number of opportunities to realize savings, many of which can be achieved through reducing variation. He emphasized that ACOs should take advantage of “low hanging fruit” that decrease utilization and optimize costs, such as ensuring appropriate use of generic and specialty pharmaceuticals, reducing inpatient stays, increasing use of ambulatory surgery center (ASC), and understanding appropriate use of lab, radiation, MRI, and CT scans. Savings and gain sharing can also vary between the different providers—primary care, specialists, and hospitals.  Ultimately, actuaries and clinical staff alike must be able to analyze data and pinpoint the true drivers of variation.

Effective Strategies Can Yield Significant Cost and Quality Improvements

In order to shed more light on how these strategies can be deployed in health systems, Bart Wald, Chief Executive for Physicians Services at Providence Health and Services, discussed the approaches that he undertook as President and CEO of Physician Associates of the Greater San Gabriel Valley, an IPA in California. Unlike compensation in most IPAs, which often relies either on fee-for-service (FFS) or capitation, Physician Associates, developed a system that uses a combination of both payment models. While capitation has traditionally been used more for primary care physicians (PCPs) than specialists, Dr. Wald emphasized that developing financial incentives for specialists was critical to effectively engaging them.  In his mind, specialists must be integrated and engaged in order to create a truly effective model. The IPA also created a “peer satisfaction” bonus program, in which PCPs and specialists rate each other and those attaining the highest ratings are given an additional bonus payment. The ratings are also posted on the web to increase transparency, and impact physician behaviors. In addition to engaging specialists, Physician Associates made sure to integrate hospitalists into the care team and incorporate social services and mental health staff.

The IPA was able to further transform care by building a population health infrastructure that directed funds towards ambulatory care management, patient-centered medical home (PCMH) development, complex care centers and disease management programs for vulnerable patients. They have also focused on improving the collection and sharing of patient data to better manage generic drug utilization, prescribing and adherence; track and attempt to minimize care received by patients outside of the physician network; and ensure effective continuity of care across the system. In summary, Dr. Wald stressed a number of factors for succeeding at risk-sharing—engaged practice members, adequate physician incentives to improve care performed in the outpatient setting, hospitalists and outpatient coordination on referrals, more advanced pharmacy management, extended disease registries, and integration between physicians and hospitals that includes joint expense management and other synergies. These interventions have resulted in a noticeable improvement in quality of care and led Physician Associates to run at a price and expense advantage below IPAs using a purely FFS payment model.

Dr. Wald also discussed an example of how hospitals are attempting to improve performance through creative partnerships with medical staff using a joint venture limited liability corporation between Providence Health Systems California and local physicians to reduce the occurrences of specific clinical conditions, such as hospital acquired complications, readmissions, and sepsis mortality. These physicians participate in a shared savings model.

Successful Risk-Sharing Arrangements Take Time

While the interventions described above may work and possibly work very well, truly effective risk-sharing design is an iterative process. Organizations must be nimble and able to adapt and modify tactics as necessary. As Greger Vigen emphasized, payment reform can be used as a tactic at the provider level in additional to a broad strategy or vision between provider and buyer.

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• Issue Brief: Improving the Medicare ACO Program

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The Brookings Institution and the American Enterprise Institute (AEI) collaborated to ask: if you were to redesign Medicare without spending more money, what would you keep and what would you change? A new report on a Center for Healthcare Decisions program provided insight into the public’s willingness to restructure Medicare in the face of tightening budget constraints. Using an interactive, computer-based system, program participants faced the challenge of making Medicare more responsive to the needs of current and future beneficiaries.

Were participants willing to accept limits on their choice of provider or reduced coverage of low-value medical care? Would they accept the need for greater personal responsibility in their use of health services? Would they agree that Medicare should adopt other policies to promote fiscal responsibility?

Watch event video.

Stock buybacks are an important explanation for both the concentration of income among the richest households and the disappearance of middle-class employment opportunities in the United States over the past three decades. Over this period, corporate resource-allocation at many, if not most, major U.S. business corporations has transitioned from “retain-and-reinvest” to “downsize-and-distribute,” says William Lazonick in a new paper.

Under retain-and-reinvest, the corporation retains earnings and reinvests them in the productive capabilities embodied in its labor force. Under downsize-and-distribute, the corporation lays off experienced, and often more expensive, workers, and distributes corporate cash to shareholders. Lazonick’s research suggests that, with its downsize-and-distribute resource-allocation regime, the “buyback corporation” is in large part responsible for a national economy characterized by income inequity, employment instability, and diminished innovative capability.

Lazonick also challenges many of the notions associated with maximizing shareholder value, an ideology that has come to dominate corporate America. Lazonick calls for a decrease, or even a ban, in stock buybacks so companies will be able to use these funds to finance capital expenditures but more importantly to attract, train, retain, and motivate its career employees. And some of the funds made available by a buyback ban can even flow to the government, he argues, as tax revenues for investments in infrastructure and human knowledge that can underpin the next generation of innovation.  

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• Download the paper

In our latest 21st Century Capitalism initiative paper, "What must corporate directors do? Maximizing shareholder value versus creating value through team production," author Margaret M. Blair explores how the share value maximization norm (or the “short-termism” malady) came to dominate, why it is wrong, and why the “team production” approach provides a better basis for governing corporations over the long term.

Blair reviews the legal and economic theories behind the share-value maximization norm, and then lays out a theory of corporate law building on the economics of team production. Blair demonstrates how the team production theory recognizes that creating wealth for society as a whole requires recognizing the importance of all of the participants in a corporate enterprise, and making sure that all share in the expanding pie so that they continue to collaborate to create wealth.

Arguing that the corporate form itself helps solve the team production problem, Blair details five features which distinguish corporations from other organizational forms:

1. Legal personality
2. Limited liability
3. Transferable shares
4. Management under a Board of Directors
5. Indefinite existence

Blair concludes that these five characteristics are all problematic from a principal-agent point of view where shareholders are principals. However, the team production theory makes sense out of these arrangements. This theory provides a rationale for the role of corporate directors consistent with the role that boards of directors historically understood themselves to play: balancing competing interests so the whole organization stays productive.

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• Download the paper

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In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, a far-reaching and still-controversial piece of legislation that was intended to reduce the odds of a repeat of the worst financial crisis in generations.  Five years later, is it working as hoped? Did it go too far—or not far enough? Are there parts that should be revisited? What remains on the U.S. and global financial-stability to-do list? 

On July 8, the Hutchins Center on Fiscal and Monetary Policy hosted a conversation with Treasury Secretary Jack Lew to address those and other questions about financial stability and the economy.

 Follow the conversation at @BrookingsEcon or #DoddFrank

Video

• Dodd-Frank at 5: A conversation with Treasury Secretary Jacob J. Lew
• Secretary Jack Lew on Dodd Frank
• Secretary Jack Lew on the $10 bill
• Secretary Jack Lew on Greece
• Secretary Jack Lew on China

Audio

• Dodd-Frank at 5: A conversation with Treasury Secretary Jacob J. Lew

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20150708_dodd_frank_lew_transcript

In 2005, billionaire hedge fund manager Eddie Lampert acquired a large portion of Sears Holdings, the parent company of Sears and Kmart, among other brands. In 2008, Lampert reorganized the company into 30 autonomous business units that would operate like independent businesses, with their own IT contracts, marketing officers, and most importantly, annual financial statements. The idea was that having each unit compete for resources would drive better decision-making and boost profits overall. The exact opposite happened. The divisions turned against one another, making decisions that benefited their divisions at the expense of others. In the year after Lampert’s acquisition of Sears, the company thrived, but two years later, profits tanked, the share price plummeted, and hundreds of stores were closed. As Jillian Popadak explains in a new paper about corporate culture and firm value, erosion of corporate culture may be to blame.

It’s not the case that decentralization is always bad—some large technology companies take this approach—but in Sears’s case, the reorganization changed the norms and culture for employees, dis-incentivizing collaboration at the expense of the overall firm. Popadak notes that former Sears employees speak to this: they said the change created a “warring-tribes culture” that lacked cooperation, and “the result was confusing to the customer.” Media accounts tell a similar story. Accounts detail managers cutting floor staff to save money, intense rivalries over the space in the weekly circular, resulting in nonsense product combinations, and a paltry one percent investment in capital expenditures. Popadak argues this is an example of how important implicit norms can be when they are working to create value at the company. When the explicit emphasis on performance was introduced, it “overpowered the implicit values to collaborate, satisfy the customer, and not act selfishly.”

How can you tell if a firm’s culture creates long-term value, or even measure something so seemingly unquantifiable? Popadak argues that while corporate governance measures are designed to change the explicit rules at a company, the culture is a set of implicit rules that govern employee behavior: the expectations employees have about what it takes to be successful at the firm. In her paper, Popadak collected millions of reviews from job sites like Glassdoor.com, Payscale.com, and CareerBliss.com by year and firm, and then used the text of the reviews to create measures of firm culture based on six categories: adaptability, collaboration, customer-orientation, detail-orientation, results-orientation, and integrity. She then assessed how these measures changed when a firm underwent a governance change.

Popadak writes of this graphic, “The figure shows that firms with stronger shareholder governance exhibited statistically significant increases in results-orientation but decreases in customer-orientation, integrity, and collaboration in the year following the governance change.” In the short term, a move to results-orientation boosts sales growth and payout in the short term, but in the long term, there are “significant declines in intangible value, customer satisfaction and brand value.” Ultimately, Popadak concludes that sacrificing corporate culture for short-term payoff may not be worth it.

The leaked information in the Panama Papers from the law firm Mossack Fonseca has captured the headlines for weeks and will continue to do so as further names are exposed. The scandal has placed Panama in the limelight and provided an unprecedented glimpse into the world of hidden money and tax avoidance. To understand its broader context, it is vital that we distinguish between legal corruption, like that exposed by the Panama Papers, and illegal corruption, like that exposed by the Unaoil scandal. Governments must seize the moment to take decisive action against both.  

The U.S., the U.K., and a range of other countries will announce commitments to combat corruption at the Anti-Corruption Summit on May 12, championed by Prime Minister David Cameron as a game-changing event. The question is whether these commitments will deliver concrete actions that target the most costly kinds of corruption that flourish globally today.  

Unfortunately, the world often engages in “summitry” filled with communiques, calls for coordination and exchanging information, or creating another toothless generic initiative, which offer media and photo opportunities that fulfill particular political objectives for some leaders. Let us see if it’s different this time.

Mossack Fonseca, and its home country Panama, are just a couple nodes in the vast and complex set of “enablers” of corruption and tax evasion around the world.     

For those seeking secret shelters and corporate shells, the mighty U.S. (which unsurprisingly doesn’t feature much in the Panama Papers) is one of the world’s most appealing destinations: Setting up a shell corporation in Delaware, for instance, requires less background information than obtaining a driver’s license. As seen in the chart below, this opacity, coupled with the size of the U.S. as a haven, means that it has been ranked the third most secretive jurisdiction among close to 100 assessed by the Financial Secrecy Index. Panama is 13th.

Figure 1: Financial Secrecy Index 2015 (Select jurisdictions, from the Tax Justice Network)

Source: The Tax Justice Network’s Financial Secrecy Index http://www.financialsecrecyindex.com/introduction/fsi-2015-results

This graph depicts the top 40 worst performing jurisdictions as well as four select better performing jurisdictions (right of dashed line). The Index combines a qualitative secrecy score based on 15 indicators and a quantitative measure of a jurisdiction's share in global financial services exports. 

And the U.K. is an important enabler of corruption: It has stood by as its offshore jurisdictions and protectorates operate as safe havens for illicit wealth, which the Panama Papers make clear. The British Virgin Islands, for example, were the favored location for thousands of shell companies set up by Mossack Fonseca.  

The Panama Papers speak only indirectly to core aspects of today’s global corruption challenge, which are neither about Panama nor taxes. We ought to view the resulting scandals in a broader light, and recognize the immense, complex webs of corruption that increasingly link economic and political elites around the globe.

Grand corruption

The most powerful figures who engage in high-level or “grand” corruption are hardly running scared following the Panama leak. These figures include kleptocrat leaders as well as oligarchs who wield enormous influence on government affairs. Often, these players interact and collude, forming high-powered public-private networks that make the traditional notion of corruption as an illegal transaction between two parties look like child’s play.

Corruption in these elite networks far transcends the unethical behavior of the typical tax avoider, as it involves the abuse of power to accumulate power and assets, often via the direct plunder of public resources, asset stripping, or large-scale bribery. The multi-billion-dollar scandal embroiling the Brazilian oil giant Petrobras illustrates the complexity of colluding networks, and how grand such corruption can inflict political and economic damage of historical proportions on a country. 

The oil sector provides many more illustrations of grand corruption. Few company officials may have been more relieved by the Panama Papers leak than those at Unaoil, whose own scandal had just erupted. Unaoil is an “enabler” company incorporated in Monaco that bribed and influenced government officials in various countries on behalf of multinational companies vying for lucrative procurement contracts. While overshadowed by the Panama leaks, the Unaoil case is at least as emblematic of the challenges in tackling global corruption. For instance, it shows the deeply ingrained practice of Iraqi government officials seeking bribes for the award of contracts and the willingness of companies to provide them.

Corrupt elites, including those embroiled in the Unaoil scandal, often use structures like shell corporations and tax havens (along with real estate and other investments) to hide their ill-gotten funds. However, even if the Panama Papers leak prompts more scrutiny on illicit financial flows and the reform of these opaque financial structures, grand corruption will continue in many locations.  It is noteworthy that the political fallout has been concentrated in relatively well-governed countries that do have accountability and anti-corruption systems in place, as illustrated by the resignations of the prime minister of Iceland, the industry minister of Spain, and the head of Chile’s Transparency International chapter. 

In sharp contrast, President Vladimir Putin brushed off the leaked Russian information as a Western anti-Putin conspiracy; in China, discussion and dissemination were muffled by media censorship; and, in Azerbaijan, exposure of details on President Aliyev’s family mining interests will hardly dent his hold on power. While reforms leading from the Panama leaks will hopefully deter tax dodgers and unethical corporations and individuals from hiding dirty assets, powerful corrupt leaders will continue to enjoy impunity.

Legal corruption and state capture   

The Panama Papers shed a sliver of light on the type of corruption that is perhaps most damaging and difficult to tackle: legal corruption and state capture. Around the world, powerful economic and political elites unduly influence laws and policies, shaping the rules of the game for their own benefit, or what has been called the “privatization of public policy and lawmaking.” This generates huge rents for the elite, increases their power, and exacerbates a country’s political and economic inequality.

Resource-rich countries provide many illustrations. In Angola, the Democratic Republic of Congo, Nigeria, and Venezuela, for example, political elites have used state-owned resource companies to serve patronage agendas, often—though not exclusively—through legal means.

In many industrialized countries, an example of state capture is the tax system itself. It is in the interest of elites to safeguard a worldwide network of secret offshore companies and tax havens as places to hide wealth—whether acquired legitimately or illicitly. The evidence on tax avoidance from the U.S. is telling: According to Zucman, since the 1950s the effective rate of corporate tax has decreased from 45 to 15 percent, whereas the nominal rate has only decreased from 50 to 35 percent. And U.S. companies make full use of foreign tax havens: According to a new Oxfam report, the top 50 American multinationals reported in 2008 that 43 percent of their foreign earnings came from five tax havens, accounting for only 4 percent of the companies’ foreign workforces. Further, Bourguignon reports that federal tax rates on the richest Americans fell by 15 percent between 1970 and 2004.

Risks of legal corruption in the U.S. run high because private money can so easily sway public affairs. Following the 2010 Citizen United ruling by the Supreme Court, private funds from deep pockets increasingly dominate the conduct of electoral campaigns. The avenues for private money to influence public officials may widen further, if forms of bribery traditionally considered illegal become legalized. A forthcoming Supreme Court decision could make it legal for public officials to receive gifts and other benefits from private individuals (potentially overturning the corruption conviction of a former Virginia governor for doing exactly that).  

Upfront, there are no easy solutions, especially because powerful decision-makers benefit from this status quo. But there is the opportunity, and public pressure, to reform.  As mentioned, the cause of tackling corruption often attracts token gestures, and David Cameron’s announcement of a new global anti-corruption agency could be at high risk of falling into this category. Rather, countries like the U.S. and U.K. must take firm action to reform their own practices, and push for the same from their partners such as the U.K. crown dependencies and overseas territories, the European Union and G20 members, and the recipients of overseas aid.

First, take legal corruption and state capture seriously. 

Transparency can be one game changer, especially if it addresses the channels of influence through which policy becomes “privatized.” Disclosures of campaign finance contributions, conflicts of interests, assets held by (and tax returns filed by) politicians and public officials, and parliamentary deliberations and votes can all discourage abuse and reveal hidden networks at play. Encouragingly, the Organisation for Economic Co-operation and Development (OECD) recently issued their first salvo, the report “Financing Democracy,” focusing on a few selected case studies, and as a next step it should be empowered to develop standards and carry out assessments on political finance for all OECD countries.

Transparency will only help if citizens can actively scrutinize and engage with their governments. Civic space is under attack in many jurisdictions, with activists and journalists facing intimidation, prosecution, or worse. Securing rights of expression and assembly should be the business of any international actor concerned with anti-corruption or economic governance. For instance, when considering funding requests from governments with weak records on protecting civil society—like Angola and Azerbaijan—the World Bank and International Monetary Fund as well as donors like the U.S. should prioritize civic accountability as well as broader transparency reforms.

Furthermore, grand corruption will not decline without more effective prosecutions and other sanctions that target bribe-takers, as well as the facilitators and middlemen of corruption, be they lawyers, accountants, or fixers like Unaoil. Of course, law enforcement authorities should also remain vigilant against bribe-paying companies; and governments—including OECD members implementing to varying degrees the OECD foreign bribery convention—would do well to emulate the active enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) in this regard. But bribe-takers and facilitators have not faced sufficient scrutiny and sanction.

Second, get rid of shadowy corners.

Lessons yielded by recent events from the 2008 financial crisis to the Panama Papers suggest that major global players should not allow large corners of the global economy to escape scrutiny. The U.S. and the U.K. (with its offshores), should heed the calls for dismantling secrecy and tax havens. Seeds of effort, such as the U.S. government’s decision to require banks to know the identities of the individuals behind shell companies, are now coming to light, but broader efforts, including legislation, will also be required.  

Beneficial ownership transparency should become standard operating procedure, with governments following the example of the U.K., the Netherlands, and others in setting up public registries, and joining the movement toward a global registry. In the case of resource-rich countries, establishing sector-specific registries may be the right place to start. This practice is now mandated by the Extractive Industries Transparency Initiative.

Within the extractive sector, home country governments should subject commodity traders to payment disclosure requirements when doing business with governments and state-owned companies. Governments of countries like Switzerland, the U.K., and Singapore that are home to corporate actors shoulder significant responsibility, especially in the current era of low commodity prices, when traders are entering into profitable new deals with cash-strapped resource-producing countries. Shining light in dark corners like these will render them less susceptible to abuse.

Third, prioritize transparency and scrutiny when public resources are allocated.

Whenever a government allocates resources for exploitation, it ought to do so in a fully transparent fashion. The Open Contracting Partnership has made great strides in defining a gold standard for such reporting, including guidance on issues such as open data, corporate identifiers, and beneficial ownership reporting.

Natural Resource Governance Institute research on oil and mining sector corruption shows that multiple types of high-value allocations require scrutiny and contract disclosure. These include the allocation of exploration and production licenses, but also on export, import, or transport rights, which have been associated with corruption in countries such as Indonesia, the Republic of Congo, and Ukraine. And most of the oil sector cases prosecuted under the U.S. FCPA have arisen around the award of service contracts, a segment of the oil industry where the Unaoil and Petrobras scandals also took place. Transparency should be the default setting for any transactions that allocate public resources. Further scrutiny is also needed on the abuse of (mis-)managed exchange rate regimes that generates rents for the few and creates major economic distortions, such as currently in Nigeria, Venezuela, and Egypt.

Concrete impact will also require a major attack on impunity since transparency and freedom of expression are necessary, but insufficient. And governments including those of the U.S. and the U.K. should adopt reforms to address legal corruption and various forms of opacity—whether addressing the capture by money in politics or the “dark corners” among oil traders headquartered in Geneva and London. 

An ambitious commitment to tackling corruption and impunity is not only needed now, but demanded by societies, as events in Brazil and elsewhere show. This is a potentially “game-changing” global moment to make real progress.  

This piece is also available in Spanish and French. 

In the marijuana reform conversation, one of the grandest boogeymen is “Big Marijuana.” Reform advocates, opponents of marijuana legalization, patients, consumers, media, and many others worry openly that the marijuana industry will consolidate into a corporate beast and a bad market actor reminiscent of Big Tobacco companies.

In a paper released earlier this month entitled, “Worry about bad marijuana—not Big Marijuana,” Jonathan Rauch and I engage the likelihood and risks of the emergence of such a corporate entity. Although the paper makes several points, we begin with a discussion of exactly what “Big Marijuana” means. What we find is that the concept is tossed around so frequently, assigned to so many different types of market actors, that it has ultimately lost meaning.

Often, the term is used to describe any large corporate entity or consolidation effort within the marijuana industry. In reality, standard corporate consolidation or the existence of large companies in an industry are basic aspects in capitalism. What’s more there are huge differences between marijuana industry actors today and Big Tobacco companies of the middle of the 20^th century—in terms of size, scope, and market power to name a few. It should be expected that an industry that is young, fractured, and rapidly maturing will endure periods of consolidation and in the process, large and successful corporate entities will emerge. One should not assume, however, that such behaviors are sinister, suspect, or intent on engaging in immoral or illegal activities.

Nor should one assume that only large corporate entities can engage in bad behaviors. They surely can, but other market actors may as well. The policy conversation around marijuana industry structure often holds Big Marijuana up as the actor who will bring problems for enforcement, diversion, sale to minors, sale to problem users, etc. The reality is that a marijuana entity of any size can behave in many of those behaviors. The problem with an unending focus on industry structure or corporate size is that policymakers and regulators can give a pass to smaller actors who may engage in the types of behaviors people inside and outside of industry seek to avoid—those same types of behaviors we saw from the tobacco industry.

We argue there is a more sensible, safer step forward that begins with a simple premise. There are certain outcomes that the marijuana industry must avoid, and policy and regulation should preferably ban, but at least disincentivize those outcomes. We mention a few in the paper: antisocial marketing (marketing to children or problem users), regulatory capture, outcomes that hurt medical marijuana patients, and increasing barriers to entry and corporate crowd out—but others like diversion, illegal sales, and more must (and do) concern policy makers. In some cases, certain behaviors are more likely to come from larger corporate entities, but many behaviors can happen, independent of firm size.

There are a variety of ways to avoid some of these outcomes beyond a focus on firm size and corporate consolidation. Some of those options are highlighted by the RAND Corporation’s Drug Policy Research Center. In “Options and Issues Regarding Marijuana Legalization,” the authors argue a shift away from the corporate model—either through the use of non-profit entities or government operation of whole portions of the market (supply, retail, or both) can have real benefit. These approaches can allow regulators greater control over negative market actions and induce incentives focused on public health and good governance, rather than profit maximization. Those arguments are quite convincing, but as states continue to construct medical and recreational marijuana programs using the corporate model, it is important to consider policy approaches within that existing framework.

Thus, we recommend that regulators and policy makers not primarily focus on firm size, corporate consolidation, or the corporatization of the marijuana industry. Instead, they should work to avoid specific outcomes they see as unwanted or bad and pass laws, promulgate regulations, conduct information and education campaigns, and take whatever actions are necessary to stop them in their tracks. At the end of the day, one thing is clear: no one wants “Bad Marijuana” regardless of whether it comes from Big, Small, or Otherwise-Sized Marijuana.

Click through to read the full report, “Worry about bad marijuana—not Big Marijuana.”

Click through to watch the public event and paper release “Big Marijuana: How corporations and lobbies will shape the legalization landscape.”

Major changes in geopolitics, political economy, and energy markets are altering the global energy landscape. A potential nuclear deal with Iran has raised the possibility of new supplies coming online, and ongoing political gridlock in Iraq has hampered the country’s ability to expand supply. The U.S. energy boom is increasingly viewed as a long-term phenomenon, while a prolonged crisis in Ukraine threatens to impact Russian gas supplies to Europe.

How will the political developments in Iraq and Iran affect oil supply? What will be the impact of the Ukraine crisis on Europe, Russia, and China? How will these shifts help shape the energy markets of tomorrow?

Read the paper online: Brookings Doha Energy Report 2014

The 2014 Doha Energy Forum convened prominent industry experts and policymakers from Asia, the Middle East, Europe, and the United States for an in-depth dialogue on the rapidly changing global energy landscape. Based on the Forum’s plenary and roundtable sessions, this paper from the Brookings’ Doha Center and Energy Security Initiative reflects much of the discussion and debate around these changes. It also outlines the complexity of today’s energy markets and the geopolitical factors that set them in motion.

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Nearly two years after ousting President Muhammad Morsi, Egypt’s military continues to crack down on the Muslim Brotherhood. Much like during Egypt’s 1952-54 political transition, the recent interactions between the powerful armed state bureaucracy and the influential religious organization have had a major impact on the country’s political trajectory. In both instances, the military and Muslim Brotherhood initially cooperated before ultimately clashing violently. How has each entity determined what approach to take toward the other? What does a continued imbalance in civil-military relations mean for Egypt’s future?

In a new Brookings Doha Center Analysis Paper, Omar Ashour examines the legacies and patterns of cooperation and conflict between the leaderships of Egypt’s military and the Muslim Brotherhood. Relying on extensive field research, he analyzes how each entity has made its critical decisions regarding the other by applying various decision-making models. Ashour considers the impact of cost-benefit analysis, organizational dynamics, factional disputes, and psychological factors to gain a deep understanding of the leaders’ motives.

Read "Collusion to Crackdown: Islamist-Military Relations in Egypt"

Ashour concludes that Egypt's prospects for social stability and economic recovery will remain bleak if the relationship between the military and the Muslim Brotherhood is not redefined within institutional, democratic rules of political competition. He argues that Egypt’s military should embrace a balanced civil-military relationship to realize broad, long-term benefits and avoid otherwise inevitable and costly clashes with segments of Egyptian society. As for the Muslim Brotherhood, Ashour recommends that it reevaluate its recent decisions and work to develop a sustained, solid, and cross-ideological civilian front that can pressure the military to leave politics and allow for democratization.

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From the rapid fall in oil prices to the conflicts that have threatened key energy sources and transit routes in the Middle East and North Africa, the global energy landscape has shifted dramatically over the past year. The change of a single number – the price of a barrel of crude oil – can carry profound implications for government policies and company decisions around the world, from efforts at subsidy reform to shale oil extraction. Understanding the interplay between key geopolitical events and energy markets remains crucial.

Has Asian consumers’ growing dependence on Middle Eastern energy supplies prompted greater interest in providing for the region’s security? How will new sources and new transit routes reshape the global LNG and natural gas landscape? What has been the impact of falling energy prices on unconventional production and investment in renewable energy resources?

At the fourth annual Brookings Doha Energy Forum, experts and policymakers from around the globe met to discuss the key global energy trends. In broad plenary sessions and focused roundtable discussions, industry leaders from the Middle East, Europe, Asia, and the United States wrestled with these and other questions. The findings of these many conversations are reflected in this report, jointly prepared by the Brookings Doha Center and the Energy Security and Climate Initiative.

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