Development Channel

2015 is shaping up to be the anti-corruption year for Latin America. After resigning last week in the face of a growing corruption scandal, Guatemalan President Pérez Molina now faces trial and potentially jail. Investigations into government corruption have disrupted politics as usual in Brazil, Chile, and Mexico, while scandals continue to unfold in Argentina and Panama. The Dickens quote "it was the best of times, it was the worst of times” is perhaps too dramatic, but differences in how the cases are playing out across the region are quite striking. In Brazil and Guatemala, wide-ranging investigations have led to prosecutions and convictions of many of the nations’ most connected political and economic elites. In contrast, in Mexico, President Peña Nieto, the first lady, and the finance minister were recently cleared of conflict of interest allegations, and in Chile, President Bachelet’s son, Sebastián Dávalos, has so far evaded criminal charges in an influence-peddling scheme. The divergent outcomes are due in part to the differing nature of the alleged crimes. In Brazil and Guatemala, officials are charged with embezzling public funds. Through the use of wiretaps, email monitoring, and financial forensics, Brazilian prosecutors traced the flows of hundreds of millions of dollars that private companies overcharged the state-led energy company Petrobras for construction and service work, and then distributed among themselves and into political party coffers. And the Guatemalan president and the vice president are accused of running a customs fraud operation, pocketing tens of millions of dollars in import duties. The Chilean and Mexican cases on the other hand are about profiting from political access. In Chile, Caval, a company half-owned by Bachelet’s daughter-in-law, received a $10 million loan from Andronico Luksic through his Bank of Chile the day after Bachelet was reelected president. Her daughter-in-law and son then used the money to flip real estate, using insider information to buy land that was expected to quickly soar in value when the local government reclassified it for commercial development—reaping $5 million in profit. In Mexico, the president, first lady, and finance minister purchased homes from Grupo Higa, a construction conglomerate awarded hundreds of millions of dollars in public works contracts. The alleged links in both cases between favorable financial terms and political favors—and wrongdoing—are more difficult to prove than the embezzlement schemes. The divergent outcomes also reflect the importance of independent and tenacious prosecutors. Brazilian attorney general Rodrigo Janot and his team have gone after dozens of high profile suspects, including Eduardo Cunha, head of Brazil’s lower house of Congress; construction magnate Marcelo Odebrecht; and former President Lula da Silva, despite pushback from many economic and political leaders (President Rousseff has repeatedly supported the investigations). The enterprising Guatemalan attorney general Thelma Aldana has found a sophisticated and willing partner in the UN-backed and independent International Commission against Impunity in Guatemala (CICIG), using its ten years of experience building corruption cases to take on the nation’s highest ranking officials. This hasn’t been the case with Chile’s and Mexico’s more halting and limited prosecutorial investigations. In Chile, prosecutors have been slow in advancing the case against the Bachelet family, hindered by Dávalos ordering his computer erased before leaving the presidential offices at La Moneda. No whistleblowers have come forward; his former coworkers maintain their silence. In Mexico, the federal comptroller, an office created by and reporting to the president, led the investigation and limited its scope from the beginning. The comptroller cleared the president, the first lady, and the finance minister after determining that the property transactions pre-dated the administration and contract terms weren’t changed once they took office. In finance minister Videgaray’s case, the comptroller further decided that the intent to purchase (which occurred before he assumed his current office) mattered more than the signing and notarizing of documents. The investigation revealed the actual closing occurred months later and the cashing of the check didn’t happen until a few days before the Wall Street Journal broke the story. As Latin American nations work to break out of the middle-income trap, and struggle to grow in the face of global economic headwinds, the ability to take on corruption will increasingly matter. Corruption favors connections over quality, stifles entrepreneurship, and scares away foreign direct investment. This seems to be a lesson two of Latin America’s most open economies have yet to learn.

CFR’s Civil Society, Markets, and Democracy (CSMD) Program highlights noteworthy events and articles each Friday in “This Week in Markets and Democracy.” Anti-Corruption Conference Coincides with Malaysian Corruption Scandal With prescient timing, Transparency International is holding its biennial International Anti-Corruption Conference (IACC) this week in Malaysia as a massive corruption scandal unfolds. Prime Minister Najib Razak (who pulled out of his planned IACC keynote speech) faces public pressure to step down after government investigations into a collapsing state-run investment fund uncovered $630 million in transfers to Najib’s personal bank account. Najib and his supporters claim the money in question was a political donation from an unnamed Arab benefactor for his 2013 election campaign, but few Malaysian citizens are convinced. Last weekend, the Malaysian pro-democracy group Bersih led tens of thousands in protest, calling for the prime minister’s resignation. Najib denies wrongdoing and vows to remain in power. Transparency International board chair José Ugaz called out the prime minister in his opening remarks at IACC, linking Malaysia’s progress against corruption to his answering questions about the funds. Migration Crisis Calls EU Borders into Question Beyond the grave humanitarian implications, Europe’s migrant and refugee crisis could threaten European Union (EU) unity. Starting on Tuesday, Hungary blocked migrants from traveling on trains to Germany and Austria by requiring them to show documentation—undermining the EU’s passport-free travel (a right for EU citizens and a pillar of the single market system). British Prime Minister David Cameron signaled on Wednesday that the UK will limit border crossings as well, in advance of a planned 2017 referendum on whether Britain will remain in the EU. German Chancellor Angela Merkel, in contrast, defended Europe’s open border policy. This week she called on other EU countries to share the burden in accepting more refugees as Germany announced it expects 800,000 migrants and asylum seekers this year—the largest influx in its post-war history. EU officials now plan to meet in Brussels on September 14 for an emergency session in attempt to forge a coordinated response. If unable to agree on rules for who is permitted to stay and where they can settle, deeper EU integration and plans for a political union could falter. Lebanon and Iraq: Public Service Failures Reveal Weak Governance In Lebanon and Iraq, protests over failing government services are morphing into broader calls against political ineptitude, graft, and sectarian-based patronage. Disgust with Beirut’s garbage-filled streets, due in part to the corrupt process of awarding collections contracts, has ignited deeper frustrations with Lebanon’s political gridlock and stagnant growth. So far, demonstrators have overcome historic partisan divides to unite in demands for the environment minister’s resignation and for greater government accountability. In Iraq too, initial frustration with basic public services is expanding to challenge the political system. Power outages during a record heat wave led to broader protests over corruption, sectarianism, and incompetence. The reforms Iraqi Prime Minister Haider al-Abadi announced in response were met with skepticism—many citizens distrust the political establishment and its capacity for change. Migrant and Refugee Crisis: What We Are Reading… Carnegie Europe’s Judy Dempsey asked eleven leading Europe experts–including former Swedish Prime Minister Carl Bildt and Thomson Reuters European Affairs Editor Paul Taylor–if now is the time to pursue a European political union. Quartz questions why Arab governments are not doing more to resettle Syrian refugees, helping shoulder the burden facing their war-torn neighbors. The Washington Post argues that Europe’s travails are drawing attention away from a larger crisis in the Middle East. Iraq, Jordan, Lebanon, and Turkey have received the vast majority of an estimated four million Syrian refuges, posing risks for wider political and economic destabilization. The Conversation provides an explainer of The Dublin Rules and the “Schengen area” at the heart of European debates over which states have responsibility for migrant protection, and whether migrants have the right to move within the EU to seek asylum. In a special section covering the crisis, The Atlantic shows in three charts where asylum seekers are coming from, where they are heading, and which countries are granting asylum to first-time applicants. A CFR Backgrounder on Europe’s Migration Crisis explains conditions refugees and migrants face, the EU response, and proposals for managing the crisis.

CFR’s Civil Society, Markets, and Democracy (CSMD) Program highlights noteworthy events and articles each Friday in “This Week in Markets and Democracy.”  International Anticorruption Efforts Seem to be Working in Guatemala A far-reaching battle against government corruption is unfolding in Guatemala. Prosecutors have uncovered a widespread customs bribery ring through the use of wiretaps, email interceptions, close monitoring of individuals, and financial analyses. They accuse government officials of siphoning off tens of millions of dollars in import duties. Evidence suggests that the fraud’s biggest beneficiaries have been Vice President Roxana Baldetti (who resigned and is awaiting trial), and President Otto Pérez Molina, who so far is resisting demands for his resignation. Whether now or later, it is quite likely both will face jail time—a first for this nation and all of Latin America. These investigations should hearten international anticorruption fighters, showing that international efforts can make a difference even in places with weak institutions and long legacies of graft and impunity. Leading the charge is the International Commission against Impunity in Guatemala, or CICIG. Founded in 2006, CICIG is a UN-funded independent prosecutor’s office (the United States has contributed some $25 million since its formation) dedicated to strengthening Guatemala’s judicial and security institutions. In this latest and most ambitious case, CICIG’s head, Colombian-born prosecutor Iván Velásquez Gómez, has worked closely alongside the Guatemalan public prosecutor’s office, bolstering their investigations into government corruption. CICIG’s success has led to calls by citizens of El Salvador and Honduras for their own version of the organization. How Democratic Are Snap Elections in Turkey and Greece? In the past week, both the Greek and Turkish governments have called snap elections. With ruling Syriza party ranks split over heavy austerity measures, Greek Prime Minister Alexis Tsipras resigned and called for new elections September 20th. In Turkey, where the neighboring Syrian war and Kurdish insurgency threaten stability, President Recep Tayyip Erdogan called parliamentary elections for November, and designated his hand-picked successor, Ahmet Davutoglu, as interim Prime Minister to oversee the vote. Scholars tout the benefits of this parliamentary electoral mechanism, enabling leaders to avoid gridlock or a lame duck administration (both perils of presidential electoral regimes). Yet politicians use these elections strategically—dictating the schedule to maintain their political advantage at times in ways that do little to further democratic inclusion or legitimacy. In Greece, Tsipras looks to shuffle his coalition, abandoning the anti-austerity platform that brought him to power last February. The quick turnaround leaves little time for other parties to form a government or rally around voter opposition voiced in a July referendum. Meanwhile, Erdogan is betting that early elections will bolster his power after the Justice and Development Party (AKP) lost its parliamentary majority in June and Davutoglu failed to form a coalition. (Opponents charge the move was an attempt to thwart them from forming their own alliance). In both places the leaders are following the democratic rules, yet invite debate over their democratic legitimacy. While shoring up support through early voting may be preferable to an imminent “no” vote, leaders can also manipulate snap elections to extend power in times of political and economic crisis. AGOA’s Challenges Rooted in Structural Weakness U.S. and African officials met this week in Gabon to flesh out what Congress’s ten-year extension of the African Growth and Opportunity Act (AGOA) can mean. Since AGOA began in 2000, duty-free market access for thirty-nine sub-Saharan African countries has boosted U.S.-bound exports fourfold to over $26 billion. Yet to truly increase African global competitiveness, a renewed AGOA pact will need to grapple with the economies’ structural challenges. Commodities dominate African trade—oil comprises nearly 90 percent of AGOA exports. The trade deal won’t move Brent crude prices. Another source of exports, agriculture, has yet to modernize—the majority of sub-Saharan African jobs remain in low-productivity farm work. And the United States is reluctant to provide market access—the newly-authorized AGOA provides more technical assistance for agriculture but does little to eliminate tariffs and quotas for African sugar and cotton producers. The U.S. and African officials could and should focus on helping get goods to market. Sporadic electricity, bad roads, silted ports, and general transportation costs are up to ten times higher in sub-Saharan Africa than in Asian economies, eliminating the upside of large and affordable labor forces. For example, slow logistics and customs procedures keep Ethiopia’s growing coffee and flower industries from reaching their full potential. Though total U.S.–Africa trade increased during AGOA’s first fifteen years, the $26 billion represents just a small fraction of U.S. imports. And the vast majority of non-oil imports came from South Africa. Unless agriculture, infrastructure, and structural barriers are tackled, AGOA won’t make a significant difference for Africa’s companies, workers, and broader economies.