International Economic Cooperation in Troubled Times: A Call for Strong Action by the G20

International Economic Cooperation in Troubled Times: A Call for Strong Action by the G20

Axel Berger,
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Uri Dadush,
Bruegel and OCP Policy Centre
Andreas Freytag,
Friedrich-Schiller-University Jena
Simon J. Evenett,
University of St. Galen
Christian von Haldenwang,
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Ricardo Meléndez-Ortiz,
International Centre for Trade and Sustainable Development (ICTSD)
Raul Ochoa,
Argentine Council on Foreign Relations (CARI)
Agustin Redonda,
Council on Economic Policies (CEP)
Karl P. Sauvant,
Columbia Center on Sustainable Investment (CCSI) and International Centre for Trade and Sustainable Development (ICTSD)

The leaders of the G20 will meet on 30 November and 1 December in Buenos Aires for their annual summit. They need to acknowledge that the last two years have been characterized by strong headwinds for the world economy. This time, however, it is not a mixture of poor macroeconomic policies and bad business decisions – as in 2008 when they met in Washington for their first summit – that endangers the well-being of billions of citizens around the globe. This time the threat stems from deliberate political decisions, in particular on trade.

The danger emerges from an unholy trinity of insufficiencies in the trade book to address persistent trade distorting practices in major players, primarily with respect to a revival of mercantilist ideas, populist governments championing economic nationalism and uncompetitive advantages of State Owned Enterprises (SOEs). The climate of cooperation has given way to beggar-thy-neighbor-policies on trade, investment and tax. The G20 trade ministers’ meeting in mid-September in Mar del Plata concluded with a plea to modernize the World Trade Organisation (WTO), however, without providing guidance where this path of reform should lead to. In fact, G20 countries differ substantially with regard to the main deficiencies of the system and in turn solutions for reform. Individual governments know the virtues of the multilateral economic order, praise it if it appears appropriate and at the same time act against this order by pursuing narrow national interests. Whether or not such actions are responses to other countries’ actions, they contribute to an erosion of the multilateral order.

The G20 summit in Buenos Aires presents an eleventh hour opportunity to stop or at least mitigate these destructive forces, by taking strong action in favor of an open and rules-based system multilateral cooperation on trade, investment and tax matters.

Key reforms on trade

Unmistakable evidence demonstrates that G20 members routinely violate their “no protectionism” pledge. The scale of trade affected should concern senior officials: by March 2018 over 80{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of G20 goods exports competed against trade distortions implemented since November 2008 that were still in force.

Concerns that the current G20 approach does not address the full range of policy intervention that distort 21st century commerce should be addressed by leaders taking two steps: expanding the scope of the G20 protectionist pledge and calling for upgraded monitoring that goes beyond conventional barriers to trade and doubles down on efforts to track new barriers across all sectors of the economy, including the services sector. Rather than engaging in another fruitless debate about what constitutes protectionism, an approach based on the principle of non-discrimination should be pursued that condemns any protectionist policy intervention.

That said, while overwhelming evidence establishes that overall nations gain from trade, there are disruptions through trade that need to be addressed. While many gain from trade, import surges have sometimes undermined the economic viability of whole communities.

Gradualism in trade liberalization combined with preemptive measures to strengthen competitiveness, can help mitigate such trade adjustment costs. Displaced workers are best helped using generally applied safety nets, not those specific to trade, as trade shocks are only a part of the economic uncertainty affecting workers. International coordination is required to support an open and predictable trading system under the World Trade Organization (WTO), as the greatest future source of trade shocks could be protectionism, not trade liberalization.

In addition, there are major challenges for the governance of the digital economy and digital trade. Rule-making processes currently in course, such as those at the WTO, need strengthening. Such attention also needs to effectively address the risks of a widening digital divide in particular in the Global South. The G20 is best placed to provide direction for global governance actions that address the multifaceted relationship between digital technologies and trade, the digital divide, and the incorporation in rule-making and implementation of distributive ledger technologies and artificial intelligence, among other strategic trade related issues. These issues comprise international cooperation, digital connectivity and the need for liberalization and facilitation of trade in goods and services.

The G20 should reaffirm the facilitating role of the WTO in global governance on digitally-enabled trade, and suggest a WTO Facility on Digitally-Enabled Trade as a focal point to initiate information-sharing, cooperation, and coordination among international agencies related to digitally-enabled trade. A strengthening of aid for trade and other forms of technical assistance to low income countries is key to bridge the digital divide.

Cooperation in tax matters is crucial

The world is facing a new round of international tax competition that may result in a ruinous race to the bottom, undermining the fiscal capacity of states to respond to global challenges and to implement the Agenda 2030 for Sustainable Development. G20 leaders must take action to strengthen multilateral and cooperative approaches to taxation, curtail harmful tax competition and protect their own tax base as well as that of developing countries.

Governments use tax expenditures to boost investment, innovation and employment. However, these schemes are largely opaque, costly and often ineffective in reaching their stated goals. In order to improve the performance of these tools, first, G20 governments should increase transparency on tax benefits. G20 members should for example take the lead on this with frequent and comprehensive tax expenditure reports. Second, G20 governments should improve the design of tax incentives with the aim of minimizing the generation of windfall profits and negative spillover effects within and across (in particular, on poorer) countries. Third, G20 governments should phase out tax expenditures that are environmentally harmful, including tax incentives for fossil fuels and other schemes that promote an unsustainable use of natural resources.

Fourth, a priority of the international community is how to best address the tax challenges of digitalization within the current framework of international taxation. G20 leaders need to work towards a joint framework of value creation in the context of digital business models and to promote international agreements on the treatment of economic activities based on digitalization, rather than engaging in short-sighted unilateral action and protectionist policies.

Investment policy reforms

It is of paramount importance that the G20 pay attention to the mounting challenges facing the international investment regime, a regime that regulates an activity that is more important than trade in delivering goods and services to foreign markets and integrating these markets.

This is all the more important because international investment is crucial to advance sustainable development, especially in developing countries. For both immediate and long-term reasons, investment policies should, therefore, be a core item on the agenda of the G20. The G20 should therefore continue its important work on international investment policy reform and initiate steps to operationalize the Guiding Principles for Global Investment Policymaking adopted during the Chinese G20 presidency in 2016. Also, the G20 should support ongoing WTO discussions on investment facilitation, suggesting that investment facilitation discussions should not only aim at facilitating more FDI, but sustainable FDI. The deliberation of a set of Guiding Principles for Global Investment Facilitation may provide overall guidance for the discussions starting on investment facilitation at the WTO.

Long-run Perspective

We realize that a number of these proposals, submitted by the T20 Task Force on Trade, Investment and Tax Cooperation to the G20, require actions that go beyond Argentina’s Presidency. However, they are in line with the desirability that international trade, investment and tax issues constitute a core item on the agenda of the G20. It is up to the G20, which describes itself as the premier forum for international economic cooperation, to take the lead in advancing these reforms.

This article is based on the policy proposals put forward to the G20 by the T20 Task Force on Trade, Investment and Tax Cooperation which brings together more than 100 researchers from nearly 80 think thanks and universities representing 14 G20 countries. The Task Force is co-chaired by Axel Berger, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), Christian von Haldenwang, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), Raul Ochoa, Argentine Council on Foreign Relations (CARI), and Ricardo Meléndez-Ortiz, International Centre for Trade and Sustainable Development (ICTSD).

Photo credit: G20 Argentina on Visual Hunt / CC BY-NC-SA

Photo credit: G20 Argentina on VisualHunt / CC BY-NC-SA

Can Think Tanks Save The World – And Should They?

Can Think Tanks Save The World – And Should They?

In mid-September, Buenos Aires hosted an interesting and innovative event, organized by a variety of think tanks: the Think20 Summit. A total of about one thousand participants from almost 70 countries dealt with the topics of the G20 summit, which will take place in Buenos Aires at the end of November. The Argentine government has made the future of work, sustainable food supply, infrastructure and gender justice its priorities.

To understand what happened in Buenos Aires, you need a brief introduction to the T20. It is a group of, rather informally organised, scientists and consultants who have produced dozens of discussion papers in a total of 10 task forces, which in turn deliver economic policy advice not only in written form but also by communicating to the G20.

The T20 also has an official governing body that automatically includes think tanks from the host country. University members, large institutes such as the German Development Institute in Bonn and the Kiel Institute for the World Economy, the Brookings Institution in Washington, the South African Institute for International Affairs in Johannesburg, small consultancies, political foundations and others form the T20 which include experts on foreign trade, monetary policy, gender research, aging research, urban studies, labour market research and climate research. The discussion papers and a communiqué containing the 20 policy proposals can be downloaded from this website.

This column is not intended to bother the reader with the proposals. Rather, the question is whether – and to what extent – this type of organization of think tanks can accomplish anything meaningful around summit diplomacy (of this special kind) and if it makes solving the problems of mankind easier? In this regard, it helps to take a look at the habits of the G20.

The G20 is a group of 20 industrial and emerging economies with at least one representative from each continent, corresponding in its organizational structure to the G7 or G8 respectively. The respective host sets the agenda, organises a series of mid-level ministerial meetings, ministerial meetings and a G20 leaders’ summit. The host country is free to choose the agenda.

Obviously, agendas are largely based on the needs of the respective host country governments. However, these needs have not always emerged from real economic necessities, but have also depended on whether the government can merge the domestic agenda with the broader G20 agenda. This process, in part, risks considerable ineffectiveness and arbitrariness of summit agendas and communiqués. If the G20 had a secretariat, the situation would probably be better. However, concerns would inevitably arise on the independence of such a secretariat as well as its potential to become a somewhat cumbersome bureaucracy.

In a sense, the informality of the T20 does the job. The working groups are put together in such a way that, on the one hand, they take up the priorities of the respective G20 host – this year Argentina – and, on the other hand, continue to treat the topics deemed relevant, even if they are given little priority by the G20 host. This will consolidate and sustain the agenda of the G20 process because the T20 is now recognized in the political process – unlike in the public; there is still some catching up to do here. The T20 could thus support the respective future hosts in the selection of topics, at least indirectly. It must not happen too directly, because then the independence of the T20 process might be jeopardized.

This independence from the political process and the breadth of expertise from very different – even political – contexts are the conditions that make the T20 such a successful contributor to the economic policy discourse. It ensures different methodological approaches and political positions that need to be reconciled in the discussion papers.

The broad areas of expertise within the T20 facilitates the deliverance of economic policy measures that improve the situation of broad segments of the global population. One must not be naïve: Carefully drafted policy papers will not be easy to sell to elected politicians (even beyond Pennsylvania Avenue). Nevertheless, ideas that mature over years and are illuminated from many angles, empirically tested and validated in this way, are the currency of think tanks. By skillfully combining expertise and smart publishing strategies, the T20 can not only reach the politicians at the summit, but may also help shape public debate. The first target for this year was not completely missed, the T20 communiqué was handed over to the Argentine President Macri on September 17th, however it still lacks public discussion.

Nevertheless, the T20 summit in Buenos Aires came to a positive conclusion. The summit organizers have succeeded in bringing together a large number of professionals from very different fields into a fruitful and informative exchange. The result of this summit and the previous work is something to be proud of. It is not expected that the recommendations will be included in the final document of the G20 summit; but at least the burden of proof has been slightly shifted towards the governments.

This column was originally published on WirtschaftsWoche in German, on 21 September 2018.

Photo credit: G20 Argentina on Visual huntCC BY

Can Davos stop the spiral of protectionism?

Can Davos stop the spiral of protectionism?

Authors: Andreas Freytag, Matthias Bauer und Philipp Lamprecht

Last week, the annual meeting of the World Economic Forum (WEF) took place in Davos under the theme: “Creating a shared future in a fractured world”. Several thousand decision-makers gathered to discuss the future issues of humanity. No decisions were made. But, as always, the forum provided impetus for the global political agenda.

This year’s event has seen a lot of talk about free trade and protectionism at Davos, partly triggered by the latest US protectionist measures against solar panels, coming primarily from China, as well as washing machines. Indeed, the market for solar panels is heavily distorted by subsidies from the Chinese government, which has caused a lot of trouble for German solar manufacturers. For washing machines, however, this applies only to a lesser extent – if at all. The issue here seems to be rather a lack of quality of American products. Overall, these measures by the US negatively impact on both the economic freedom and the purchasing power of American citizens.

Of course, protectionism may indeed come with positive effects for some domestic manufacturers. In this context, President Trump is quoted saying that the US is now making its own products again. And, for the short term, there may actually be a few new jobs in the US if more solar panels and washing machines are produced there.

The flip side of this coin is the loss of the American consumer’s purchasing power as washing machines and solar panels become more expensive. This will result in less demand for other US products and services, which, in turn, leads to job losses in other US industries, let alone retaliation measures imposed by other governments, which are common in the domain of international economic ‘diplomacy’. The problem is that one cannot predict the total job losses, nor the specific sectors affected. Neither is it possible to allocate the losses directly to certain protectionist measures. Unfortunately, as soon as US jobs in other industries come under pressure the President is likely to invent new scapegoats. It is thus the American consumers and, in turn, workers who will pay for Trump’s policies – one way or another.

US Secretary of Commerce Ross goes even further than Trump in choosing a harsher rhetoric than the President. In Davos, he spoke openly of American troops to be sent into a trade war. This conveys his personal, and fundamental, misconceptions about the essential meaning of free trade, i.e. that free trade is a peace project, increasing the individual liberties, especially of the poorest parts of the population. It goes without saying, that both are rather unimportant to the current American government.

As one could have expected, Germany’s acting Chancellor Merkel saw things very differently. In Davos, she asked explicitly whether “we” had learned from history. She left open who this comment was meant for but continued to campaign for openness and rules-based conflict resolution. At the opening of the forum, Indian Prime Minister Modi also warned of the end of globalization and repeatedly – albeit indirectly – pointed to its importance for peace.

The Canadian Prime Minister Justin Trudeau, whose country is now joining the Trans-Pacific Partnership (TPP) in addition to the European-Canadian Regional Trade Agreement (CETA), has been acting in a similar way. It was Trudeau who advocated an even broader Trans-Pacific Partnership (now CPTPP). Both projects will take place without the US, and both are likely to be welfare enhancing and a crucial part of future economic diplomacy. Prime Minister Trudeau has also made it clear that the door will never be “completely closed” for the US.

The US President had the last word at this year’s World Economic Forum – despite having mocked the entire event the year before. His speech, however, left the impression that the President failed to address the opportunities of cooperation in defining the future rules of globalization. Rather than proposing an encompassing and inspirational analysis, or strategy focusing on the current challenges of globalization, Trump’s intervention was of promotional character merely aimed at pitching the US as a “great” destination for investment and doing business. Similarly, it’s been awkward listening to how much the world has to gain from trading with the US at Davos, only to see Trump lash out against “very, very unfair” practices of the EU shortly after.

Meanwhile, business is learning to live with Trump. Having met with fifteen European business leaders who joined him over dinner, Trump announced that he made “new friends” at Davos. Indeed, industry bosses were fast to laud Trump for his policies of tax cut and deregulation, which, after all, have primarily been a project of his fellows in the Republican party. However, it remains to be seen how deep this newly found friendship actually goes. Trump’s anti-EU remarks on the weekend might lead up to a first test.

Overall, it is not of particular importance what the American President said at Davos, as speeches made at Davos generally have a short life span.Last year, Chinese President Xi Jinping launched a free-trade appeal to the world and praised China as the future’s role model concerning commerce, economic openness and the free exchange of goods and services. One year later, China’s free trade spirits have lost steam. The speech of the US President in Davos is likely to chip away too.

The actual trade policies and, importantly, the countermeasures invented by the governments concerned (China or the EU), are of much greater importance. If there really were to be a trade war without the involvement of the World Trade Organization (WTO) as a mediator, the damage for its participants, but also the entire world economy, would be significantly higher than the benefits in the long term.

However, the tumult that Trump causes also has an upside: the advocates of a peaceful and open world move closer together. Even the opponents of globalization, who protested in Davos in recent years, have become quieter. Either they think they are adequately represented by President Trump, or they are reconsidering their position against the background of the unpleasant noise and the side effects of a protectionist program.

In this respect, the World Economic Forum may indeed bring a number of benefits. It can help rational actors – and these are, with few prominent exceptions, probably most participants of the forum – to not only publicly promote open markets, but also open (or maintain) the communication channels to reasonable politicians and officials in the US and elsewhere. In that sense, the forum can actually contribute to stopping the spiral of protectionism.

Photo credit: World Economic Forum on VisualHunt / CC BY-NC-SA

What to expect from the 11th WTO Ministerial Conference in Buenos Aires?

What to expect from the 11th WTO Ministerial Conference in Buenos Aires?

|Blog by: Andreas FreytagPhilipp Lamprecht and Matthias Bauer

Buenos Aires is going to host this year’s Ministerial Conference of the World Trade Organization (WTO). Commencing next Sunday, the 11th Ministerial does not come with a lot of fuss. The WTO has, at best, played only a minor role in international negotiations of further trade and investment liberalization in recent years. At any rate expectations for this year’s ministerial are modest.

Recent years have largely witnessed bilateral or regional negotiations. No signs emerged for big multilateral pushes towards further tariff elimination rounds, let alone the tackling of non-tariff trade barriers or regulatory cooperation in services and modern manufacturing industries.

We are likely to see a continuation of bilateral endeavors, particularly between most already industrialized countries and some emerging market powerhouses. Developing countries had and still have a say at WTO level, but have been given little consideration in the past and are likely to continue to play at the sidelines in the future.

Nevertheless, 2017 already delivered some success stories for the WTO. The trade facilitation agreement (TFA), sealed in Bali in 2013, entered into force in February 2017. Two-thirds of the WTO’s member countries already ratified it. In addition to the TFA, changes in the rules on intellectual property (the TRIPS agreement) took effect in January 2017, aiming to facilitate trade in licensed products for developing countries.

In this respect, WTO Director-General Roberto Azevêdo can indeed open the Buenos Aires Ministerial with some tailwind. At the same time, however, a number of political difficulties prevail for the key negotiation issues of this year’s summit; specifically, policy proposals to facilitate agricultural trade and to increase food security for developing countries. For example, at the recent Marrakech meeting, the European Union (EU) issued a joint statement together with members of the Cairns group of agricultural exporters highlighting the need for a new discipline on trade distorting domestic support. However, to date conflicting interests on this priority issue still divide the governments of WTO member states.

In Europe, Eurochambers and some national business associations have launched an initiative to discuss small and medium-sized enterprises (SMEs). Access to foreign markets requires compliance with complex foreign regulations and standards, which requires highly specialized administrative staff and contacts to (occasionally restive) customs and regulatory bodies. Very often SMEs do not have these resources putting them at a systematic comparative disadvantage to larger firms including multinational corporations (MNCs). Having in mind that trade barriers and regulatory heterogeneity constitute a subsidy of big business, regulations, transparency and greater alignment of standards are at the heart of the initiative. Given that SMEs, after all, account for high levels of employment in all WTO member countries, this initiative is absolutely justified, and we consider it likely that the SME initiative becomes a success story.

Noting that we will not necessarily see big breakthroughs and more promising results than those of the past two conferences (Bali 2013 and Nairobi 2015), WTO Director Azevêdo is actually expecting some significant advances in the talks about agriculture.

One reason for our somewhat pessimistic projection lies in the critical attitudes of the current US administration to international trade in general and the WTO in particular. Talking of ‘bad deals’ and the need for ‘Buy America’ policies, US President Trump has repeatedly expressed his antipathy to the WTO. Of course, this is nonsense from an economics point of view, but – even in the Western hemisphere of the 21st century –, it still comes with significant political weight. Stubbornness of the US on proposals to further dismantle trade-distorting measures – even on a small scale – is likely to prevent any substantial coordinated and codified progress.

In that regard, it is particularly worrisome that other major WTO players such as the EU and China are largely self-absorbed with internal and regional political affairs. Apart from some formal lip service paid to the WTO, the administrations of the two parties are highly unlikely to pull the thick strings to further liberalize trade at a multilateral level, let alone the willingness to facilitate a revitalization of the Doha Round (to commemorate: launched in 2001).

In that sense, however, the EU could at least thoroughly reconsider the extent to which it continues to rely on US approval for new trade policy initiatives. In his recent speech, Germany’s Foreign Minister Gabriel openly pointed out that the EU could only rely to a limited extent on the US on global policy issues.

For the EU (but also China), the obvious trade policy conclusion would be to take the multilateral initiative to a new level. It would imply taking courageous steps in agricultural trade – particularly in light of the recent EU-Africa summit that took place just a week ago.

For the EU, a genuine and honest commitment to a global multilateral liberalization of markets for food and agricultural commodities would require making honest, ambitious, detailed and codified proposals for market opening and the elimination of national subsidies.

Such a commitment could come as a unilateral initiative, in the sense that developing countries themselves do not have to open the markets further in the next five years or so, with phase-out schedules applied over a period of 10-20 years afterwards. Admittedly, this is far from efficient in light of substantial public financial resources transferred to farmers and agricultural companies. It would also come with lower economic benefits over time, knowing that productivity increases in agriculture are driven mainly by import competition. However, even if such an initiative could find consensus, it is unlikely to pop-up two days before the start of the Ministerial.

To sum up: the governments of some WTO Member States (primarily the US) do not want to take an initiative, while EU governments probably cannot take the lead because of its internal political struggles around the reorganization of core European institutions.

The governments of some emerging markets, such as India or China, could take the lead. They should be able to see and communicate a huge national interest of their countries in multilateral trade liberalization. The notion, however, that their governments could drive OECD members forward with courageous initiatives is as attractive as it is unrealistic.

The WTO is therefore very likely to continue to take only very, very small steps after Buenos Aires. The most promising way out of its numerous blockades would be a fundamental procedural reorientation of the WTO, namely the departure from the rule that each member country must ratify and recognize all constituent parts of the agreements (single undertaking).

It is time for governments to think about putting together minimum packages, with voluntary accession to some pillars of the agreements. Following the mechanisms of competitive liberalization, it is much more likely to arrive at much better outcomes for many rather than no outcomes for all. We cannot expect these considerations to rank high on next week’s agenda for negotiations, but the reorganization of the WTO might become the topic to go for at the 12th WTO Ministerial in 2018.

Photo by World Trade Organization on VisualHunt / CC BY-SA

What can the private sector do to bring down corruption?

What can the private sector do to bring down corruption?

Corruption is a far-reaching problem in all corners of the world. It even occurs in countries that, according to Transparency International, are largely free of corruption. While it is the exception in Scandinavia and other OECD countries, it is commonplace in many developing countries. South Africa’s problems with “state capture” are a case in point.

Researchers distinguish between two types of corruption:

  • Petty corruption refers to the daily, very small-scale, bribery of officials, police officers or customs officers; for example, to gain a foreign visa faster, avoid a speeding ticket or accelerate the importation of a consignment. This form of corruption seems comparably easy to combat. One option is to increase the wages of potential bribe takers; another option is to threaten potential bribe takers with harsh punishment.
  • On the other hand, Grand corruption refers to the behaviour of the elites in a country. It involves large sums paid, for example, by a foreign company to members of the government or their dummy companies or partners in order to obtain government contracts, to privatize or to obtain a license to mine raw materials. This form of corruption is much more dangerous than its small-scale counterpart as it affects the decision makers of a society. If they do not want to fight against corruption, corruption will endure. This has a cascading effect, for as long as there is grand corruption, small-scale corruption cannot be prevented.

Almost all empirical studies show that corruption reduces the wealth of a society; confidence within society shrinks, investment decreases, and economic growth slows. Normally, corruption acts like sand in the gears of an economy. These problems appear to be afflicting South Africa now. However, there are isolated examples where corruption acts like a lubricant. This phenomenon occurs whenever governance is so bad that administrative processes without corruption don’t work at all. Nevertheless, such a country as a whole would be better off with a more ethical government and less corruption.

In individual economic terms, corruption can even have a positive effect. This is especially true for foreign companies that want to export or invest in the affected country. It may be worthwhile for them to bribe individual members of the government directly or indirectly. The damage to the population is to the benefit of the foreign company. In some countries, it even seems that without corruption business is impossible. Sadly, this seems to have become the case in South Africa, as a succession of foreign companies has been caught up in the Gupta-gate saga.

The OECD countries therefore decided to ban their national businesses from engaging in corrupt behaviour abroad. That sounds obvious – but was not always so. A few years ago, corruption payments abroad could be officially declared as deductible expenses in many countries. This is no longer tolerated. Instead, grand corruption is prosecuted. In the United States, authorities are tracking companies (traded on American stock exchanges) that commit grand corruption in third countries.

More recently the German company, SAP, whose subsidiary in South Africa was shaken by a grand corruption case, learned what it is like to be taken to task by the Americans . According to the press, employees of this branch paid a commission, or a bribe, to CAD House to obtain a lucrative commission from the state-owned transportation company, Transnet, and other South African state-owned enterprises. CAD House is linked to the Gupta family, known in South Africa for numerous corruption cases and their proximity to President Jacob Zuma.

This case can have significant consequences for SAP in the US as it faces penalties and so-called “balance sheet monitoring”, in which the company will be strictly controlled by the Ministry of Justice and, in the event of further transgression, can be excluded from the American market.

This poses a (moral) dilemma for foreign companies that want to be active in South Africa, but also in other corruption prone countries. The fundamental problem is that corruption is difficult to avoid, and companies must either operate in a grey area or forego business.

In addition, there is a prisoner’s dilemma for governments in OECD countries. Too rigorous tracking of their own businesses reduces export earnings and thus the number of jobs at home and tax revenues. Against this background, German companies complain that the German government interprets the rules of corruption too strictly, compared to other OECD countries.

It cannot be completely ruled out that the United States, in the case of SAP, is motivated by other factors, such as the desire to obstruct a competitor of American software companies.

What could be a solution to this dilemma? SAP responded with an interesting answer. In addition to the usual labour law measures against the employees in question, SAP decided that it will not pay the entire sales commissions of public sector contracts in countries that score less than 50 out of a possible 100 points in the Transparency International Ranking.

This is a strong signal that could lead to sales shortfalls on the one hand, but can also make governments more active against corruption on the other hand. This gives practical meaning to weak CPI scores. It would be desirable for other companies to follow suit.

Although the problem of grand corruption cannot be solved this way, it is a step in the right direction. Especially when it comes to products or services with high demand and high appreciation by the actual users, a certain pressure can be built up. Even the publication of an index puts pressure on corrupt governments. As with the case of SAP the direct application by large multinational companies can only increase this pressure.

The original article was published in German on WiWo-online, November 3, 2017

Image: By amadeusm (Created by amadeusm) [Public domain], via Wikimedia Commons