Emerging Markets

Labor Standards Three Years After Rana Plaza Three years after Bangladesh’s Rana Plaza garment factory collapse killed or injured over 3,000 people, labor rights remain tenuous. In the wake of the disaster apparel brands, suppliers, and the Bangladeshi government created the Alliance for Bangladesh Worker Safety, a partnership to improve conditions by setting standards and increasing inspections. The Alliance has worked with factories to build emergency exits, install fire hydrants, and rewire electrical systems. It has also blacklisted the worst offenders. Yet it only encompasses those operating under formal contracts. Over half of the nation’s 7,000 factories work in the informal economy. Here, the Bangladeshi government doesn’t enforce Alliance standards, leaving these workers vulnerable. Attacks on the Press Undercut Democracy The world became more difficult and dangerous for journalists in 2015. In Turkey, President Recep Tayyip Erdoğan seized several newspapers and jailed journalists. In Egypt, the government criminalized reporting that contradicts its own information. In Mexico, dozens of cases of murdered reporters remained unsolved. Even in established democracies the press came under attack. In France the government gained new internet and phone surveillance powers, and in Poland the government expanded control over state-owned media. A new Freedom House report finds that only thirteen percent of the world’s population lives in nations with a “free press”—where journalists can report political news without violence, intimidation, or state meddling. This undermining of the fourth estate mirrors that of democracy more generally, which has declined for the tenth consecutive year according to Freedom House. Haiti’s Election Troubles Continue Haiti missed an April 24 deadline to hold its long-delayed presidential runoff election and current political infighting could push a vote off until October. The country’s newly-appointed Provisional Electoral Council (CEP) says it needs more time to verify last year’s first round vote. The United States and others in the international community strongly oppose the delays, citing no evidence of alleged fraud. Haiti’s electoral chaos leaves an interim government in charge as the country faces an El Niño-induced drought and food crisis—its worst in over a decade—affecting over one million Haitian citizens.

The following is a guest post by Naomi Egel, research associate in the International Institutions and Global Governance program. As a member of the BRICS, a leader in African peacekeeping, and an aspiring UN Security Council permanent member, South Africa plays a significant role in global governance and aspires to a greater role. To better understand the factors driving South African foreign policy—including both aspirations and limitations—the International Institutions and Global Governance program held a workshop in Cape Town on March 1, 2016, in conjunction with the South African Institute of International Affairs. Five takeaways stand out: 1. South Africa is still invested in the BRICS group (composed of Brazil, Russia, India, China, and South Africa) and sees it as a powerful mechanism to advance its national interests. Although it pursues multilateral foreign policy through a variety of venues, South Africa is arguably more invested in the BRICS grouping than any of the other four members, and sees this as the most promising path to boost its international standing, address transnational challenges, and reform existing global governance structures. Even if the BRICS cannot offer a fully-fledged alternative to the current world order, the group is a powerful symbol of developing countries’ frustration with the status quo. However, South Africa’s focus on challenging the existing international power structure adds additional strain to the U.S.-South African relationship—while often ignoring the two countries’ mutual interests. 2. South Africa’s search for alternatives to the current world order reflects a desire for more equitable global institutions and a counterweight to still-dominant Western powers. South Africans have long felt excluded from decision-making in international organizations and are seeking to increase the representation and weight of developing countries (led, of course, by South Africa) in such bodies. In this regard, the BRICS are seen as providing a powerful challenge to the Western-dominated world order. Many South Africans are confident that the BRICS’ New Development Bank will demonstrate that rising powers are capable of delivering tangible results by bypassing Western-dominated institutions like the World Bank. When it comes to the UN Security Council, in contrast, South Africa aspires not to replace the institution but to become one of its permanent, veto-wielding members. 3. Domestic challenges remain the primary focus for South Africa’s government, impeding its ability to articulate a coherent foreign policy vision. South Africa’s significant domestic challenges—including massive inequality, high unemployment, grinding poverty, and corruption—pose serious barriers to the country’s ability to achieve its foreign policy objectives and, more fundamentally, threaten internal social stability. The governing African National Congress (which has held power since the end of apartheid in 1994) is internally divided, and President Zuma has faced repeated calls for his impeachment. On March 31, the Constitutional Court further undermined his legitimacy by ruling that he had violated the constitution in refusing to repay taxpayer money spent renovating his private home. The country’s struggles to live up to its own post-liberation expectations are eroding South Africa’s moral authority to serve as a mediator in African conflicts and to promote alternatives to the Western-led world order. 4. Policy uncertainty, including the constantly changing regulatory environment, discourages private sector growth and investment in South Africa. South Africa’s efforts to strengthen its economy by attracting foreign direct investment and building domestic investment capacity are undermined by unclear and rapidly changing laws and regulations. The combination of government frustration with private sector noncompliance and private sector uncertainty regarding requirements for complying with government regulations generate significant economic waste and inefficiency. Erratic leadership has contributed to incoherent policymaking—and markets have responded negatively. A glaring episode in this regard was President Zuma’s peremptory decision in December 2015 to sack Nhlanhla Nene, the well-respected finance minister and replace him with the inexperienced but loyal David van Rooyen, only to replace the latter several days later (in the face of public outcry) with the experienced former finance minister Pravin Gordhan—but then offer only lukewarm support for Gordhan. 5. Since the end of apartheid, South Africa has become a stabilizing but inconsistent leader on the continent. It will continue to be a major presence in regional peacekeeping. Although South Africa is scaling back its involvement in peacekeeping operations from Darfur to the Democratic Republic of the Congo, this is not a full-scale withdrawal. The country remains anxious to be seen as the continent’s natural leader. Moreover, South Africa is aware that leadership in African peacekeeping is a crucial justification in its bid for a permanent UN Security Council seat. At the same time, continental leadership is a central component of South Africa’s power on the global stage. In sum, South Africa’s ability to achieve its aspirations on the global stage will depend not only on how it navigates relations with existing and other emerging powers, but also on its ability to get its own house in order. To learn more, read the full report: “South Africa: An Emerging Power in a Changing World”

This post features a conversation with Audrey Choi, chief executive officer of Morgan Stanley’s Institute for Sustainable Investing and managing director of its Global Sustainable Finance Group. Choi talks about the evolving $20 trillion sector, including important U.S. policy changes and her thoughts on where sustainable investing is headed. 1) What does sustainable investing mean, and how has it evolved in recent years? There has been an evolution in sustainable investing over the past five to ten years in both definition and practice. Investors have moved away from predominately avoiding—or divesting from—industries and companies considered harmful toward taking a more proactive approach as well. They are pursuing positive social and environmental impact while also expecting competitive financial returns. Traditionally, there was a tendency to divide investing and philanthropy, using the first to build wealth and the other to make a positive social difference. Sustainable investing, which includes values-based, environmental, social, and governance (ESG) integration, thematic investing, and impact investing approaches, allows investors to align their values or mission with their investment portfolio. Another shift has been the increase in research addressing the misconception that doing good requires a financial trade-off. Harvard University and Brookings compared a portfolio of companies that performed poorly on sustainability with a portfolio of companies that performed very well on the same issues. One dollar in the low performance portfolio grew to $14.46 between 1993 and 2014. The same dollar in the high performance portfolio rose to $28.36 over the same period. And at Morgan Stanley’s Institute for Sustainable Investing, we examined ten thousand mutual funds across seven years of performance, comparing sustainable to traditional investing strategies. We found that 64 percent of the time, sustainable strategies performed either the same, or slightly better, than traditional ones. Meanwhile, volatility for those strategies was the same, or slightly less, 64 percent of the time. Finally, the University of Oxford conducted a meta-analysis of over two hundred studies and found that incorporating ESG business practices resulted in better operational performance, lower cost of capital, and better stock price performance. We’re also seeing a shift in how sustainability factors into stock and company valuations. More and more investors and analysts are asking how to incorporate ESG into existing models of valuation. Whether a multinational company disposes of waste responsibly, monitors its water usage, and recycles increasingly matters. Sustainability efforts are more than corporate reports—they are considerations that can be materially relevant to core business practices and results. 2) How is “sustainability” measured, and what counts as sustainable investing? We take the broad view that sustainable investing encompasses both financial sustainability and environmental and social sustainability. As part of the sustainable investing evolution, there has been a great deal of work in the field to better understand the type of sustainability considerations that can have both real business and investment impact. The United Nations Principles for Responsible Investment (UNPRI) and the Sustainable Accounting Standards Board (SASB) are two important examples of increasingly-recognized bodies developing standards and frameworks for measuring and reporting on sustainability. UNPRI has not only established what responsible investment should entail, but as a membership organization, it is a platform for signatories (asset managers, owners, and service providers) to express their commitment to a more sustainable global financial system. And SASB has created standards for ESG considerations across eighty industries, helping public corporations disclose material issues to investors.  As part of its standard-setting work, SASB found that climate change alone affects seventy-two of seventy-nine industries—each in specific and different ways. That’s 93 percent of the capital markets, or $33.8 trillion dollars. 3) How does sustainable investing compare to philanthropy or development aid, through NGOs and others? Are there some areas that should be left to private donors rather than investors? Ultimately, driving large-scale positive social and environmental change requires government, philanthropy, and investment dollars to work in common cause. Tax dollars and philanthropy alone are not sufficient to fix the world’s problems. Private investment can play a crucial role in filling that gap. Still, sustainable investing should not be seen as a replacement to philanthropy. Indeed, there are critical situations when philanthropy and government aid should be the first resort, such as when an immediate response is required, as in humanitarian efforts and disaster relief. Aid is critical in these instances where financial returns, cannot, or should not, be expected. But governments and philanthropies also play critical roles as catalytic investors. They provide the visionary risk capital to enable discovery and innovation, setting the stage for future markets. For example, microfinance began as a donor-led space, eventually growing to a robust field where private sector investment has enabled scale and reach. 4) What are the U.S. rules and regulations that have helped, or hindered, sustainable investing? In the U.S. context, one of the most important recent changes was the revision to U.S. Department of Labor guidance around ESG investing for Employee Retirement Income Security Act (ERISA) plans, announced late last year by Secretary Thomas Perez. Employee retirement plans, such as pension funds or 401(k)s, are bound by the ERISA, which sets a fiduciary duty, or legal obligation, for managers to act in the interest of plan participants. In October 2015, Secretary Perez and the Department of Labor issued a clarification that “environmental, social, and governance factors may have a direct relationship to the economic and financial value of an investment.”  Rather than an external and separate consideration, ESG factors could now be considered relevant in evaluating an investment’s economic qualities. This clarification went a long way in addressing the perception that ESG consideration might be at odds with fulfilling fiduciary duty. Globally, another important development was the Paris Climate Conference (COP21) agreement that set binding targets to limit global emissions. It sent a clear signal of change that may open new conversations on ESG and sustainable investing, as well as the inclusion of climate change-related risk as a material financial consideration. 5) Looking ahead, what is the outlook for sustainable investing, in the short and long term? Within ten to fifteen years, we believe sustainable investing should be perceived as a redundant term. Sustainability considerations will be a part of a best-in-class investing thesis, rather than being a separate analysis. Just as political and cyber risk has become a core part of the risk and return analysis, so too do we believe that sustainability factors will become a core part of risk and return analysis. There has already been impressive growth in the field. In 2012, the U.S. Sustainable Investing Forum reported one out of every nine dollars invested in the United States had some type of sustainable mandate to it. From 2012 to 2014, that figure grew by 76 percent to one out of every six dollars. Though the starting point was small, we are seeing rapid growth, with more than $20 trillion dollars now invested in the sector globally. Another driver of change in sustainable investing is the influence of millennials. Compared to other generations, millennials are three times as likely to pick an employer based on their ESG performance. They are also twice as likely to check product packaging for sustainable sourcing information before they choose a product. And this philosophy carries over to their investing decisions. Millennials are twice as likely to check a mutual fund or equity investment and choose it because of sustainability, and twice as likely to divest—or walk away—because of objectionable corporate activity. As this generation is set to inherit more than $30 trillion in the United States over the next thirty to forty years, it will be significant how they integrate their sustainability priorities into their investment decisions going forward.  

As Civil Society, Markets, and Democracy (CSMD) heads into spring break, here is what we will be reading. “This Week in Markets and Democracy” will return, relaxed and refreshed, on Friday, April 8. A new RAND study says corruption costs the European Union over a trillion U.S. dollars (€990 billion) every year—eight times higher than previously thought. The study’s authors, Marco Hafner and Jirka Taylor, recommend ways to stave off some of these losses, including better member-state monitoring, a new investigatory office, and an EU-wide procurement system. U.S. elections in 2012 and 2014 ranked the worst out of any long-established democracy, according to a new report from the Electoral Integrity Project. The United States scored particularly poorly on electoral registration and campaign finance. 90 percent of African trade is by sea, more than any other region in the world. The Economist argues its inefficient and poorly-managed ports fuel corruption. Anne-Marie Slaughter and Elmira Bayrasli write for Project Syndicate on how entrepreneurship is a powerful, but underused, diplomacy tool. They say policymakers should look to entrepreneurs to power development and to help find new solutions to big problems, such as climate change and migration. Writing for Just Security, Human Rights Watch’s Eileen Donahoe argues that by focusing on states, existing human rights institutions are ignoring how other actors defend or violate those rights. Technology accentuates this shift.

The UK’s Modern Slavery Act now requires companies to report efforts to prevent human trafficking and slavery in the making of every part and every process of production, from headquarters down to individual suppliers along production chains. In the United States, the Dodd Frank Act’s disclosure rules for conflict minerals hold mining and technology companies to similar standards. But surveys and reports show companies still fail to monitor their suppliers, let alone prevent abuses. To comply with these laws, multinationals must investigate the origin of each chip, stitch, or mineral in its products, and workers’ treatment at each stage. Many do not for two reasons: Supply chains have become more geographically dispersed. Today products are mostly made across countries rather than within them. A Ford Fusion sold in a U.S. dealer’s lot counts parts from 234 suppliers in 32 countries. An iPhone brings together minerals from Mongolia and pieces manufactured in Korea and Taiwan before assembly in China. To follow their intricate production chains, companies must inspect labor practices on each factory floor, farm, or mine in every country, from raw materials to manufactured parts to fabrication. Subcontracting of subcontracting. Agreements between brands and suppliers can be just the start. After a factory signs a contract, they often subcontract to smaller firms that subcontract to even smaller ones. The demands of fast fashion in particular mean that suppliers routinely farm out large contracts to dozens of not just smaller factories, but also networks of sewers, finishers, and embroiderers working in their own homes. These workshops don’t have government permits and often lack basic sanitation, ventilation, and lighting. They demand long hours and deny paid maternity leave. One study of Bangladesh’s apparel industry found that out of 7,000 producers, about half are informal subcontractors. These realities make it difficult for corporations to monitor working conditions. Even well-known multinationals struggle. After long hours and low pay drove desperate Chinese iPhone makers to suicide, Apple started publishing yearly reports on labor rights in its factories. Four years later, these reports show worker conditions are still unsafe, and hours often exceed two to three times the legal limit. Nestlé grapples with child labor in Ivory Coast cocoa suppliers, even after adopting measures to address the problem. Some of Nestlé’s suppliers in Thailand use slaves to catch fishmeal that ends up in the brand’s pet food, and it buys coffee beans from plantations in Brazil that may rely on slave labor. Still, there are success stories. Intel now maps its entire electronics supply chain, tracing metals it buys in China and Russia to African smelters. Working with other electronics brands, Intel helps smelters in the Democratic Republic of Congo identify conflict-free sources, enabling them to support often poor tantalum miners without funding the nation’s violent militias. And for corporations looking to improve their practices, help exists. Outside auditors can map supply chains, identifying risks and violations. Many non-governmental organizations (NGOs) partner with companies to spread awareness and educate local governments on what counts as abuse and how workers can report cases so that the company can respond. Others design and deploy technologies, including text messaging and social media analysis, to help companies pinpoint labor violations. The UK and U.S. laws set important guidelines for today’s global factories, though the response so far shows these laws are just the first step. To be successful, legal norms need to proliferate, moving beyond industrialized nations to emerging economies where workers rights are often most tenuous. And they need to be internalized by companies, becoming a part of everyday practices and operations.

Corruption dominates Mexico’s headlines: helicopter rides for officials’ family members, housing deals from favored government contractors, the still unexplained disappearance of 43 students, and a drug lord escaping a maximum-security prison, for the second time. In a recent survey, Mexicans listed corruption as the country’s top problem, ahead of security and the economy. In absolute terms corruption eats away at Mexico’s growth. The think tank IMCO estimates the costs at $53 billion, or five percent of GDP. It increases the costs of doing business, with bribes for permits and government contracts tacking on up to ten percent according to Transparency International. And business owners face an uneven playing field—65 percent report that on at least one occasion a competitor offered a bribe or tapped personal relationships to win new business. By undercutting the market, corruption stifles excellence, deters investment, and hinders growth. Corruption also distorts public spending. Studies show corrupt public officials direct funds to projects more amenable to personal enrichment than those that offer the highest public returns. This means they overweight spending on (often shoddy) infrastructure and underfund education, health, and other human capital building services—the very skills needed for a twenty-first century economy and society. Lastly, corruption delegitimizes the state and undercuts democracy. The belief by two-thirds of Mexican citizens that their taxes line the pockets of officials fuels the informal sector and limits the collection of government revenue necessary to provide public services: education, healthcare, and basic safety. And it threatens Mexico’s democratic gains. When citizens know about corruption and nothing is done—as is the case in Mexico, where impunity reigns—voter turnout falls. The 2012 Pact for Mexico promised to combat the scourge. Yet while energy, finance, education, and telecommunication reforms moved forward, anticorruption efforts languished. Initial PRI proposals in the Senate did little to change the status quo, giving a new anticorruption body no autonomy or prosecutorial powers. The proposal that eventually reached the Chamber of Deputies failed to gain support from the PAN or PRD and was abandoned. In 2014, as Mexicans mourned the loss of 43 students in Guerrero and consumed pictures of the first lady’s $7 million dollar abode, owned by contractor Grupo Higa (a similar if smaller house purchased for the finance minister would appear four weeks later), the PAN sent its own anticorruption bill to Congress. Written in conjunction with civil society groups, it proposed a new National Anticorruption System, created a new Court of Administrative Justice, strengthened the Federal Superior Audit Office, and increased Congress’s role through appointment oversight for the new anticorruption officials. Supported by the three main political parties and a majority of states, the president signed the constitutional reform into law last spring. Lawmakers now need to hash out the details in secondary legislation by May. Civil society groups are pushing their own version of the implementing laws through a citizen-led Ley 3de3 initiative (allowed under the recent political reforms). The bill would require public officials to disclose their tax statements, assets, and potential conflicts of interest. It would also explicitly and legally define corruption—encompassing bribes, using political influence for personal gain, and misusing public funds among other actions, and it would increase the investigatory, prosecutorial, and sanctioning power of the new National Anticorruption System. The proposal needs 100,000 signatures for Congress to consider it; its advocates are hoping to get several times more than that to force it onto the agenda. A challenge for Mexico is moving beyond Twitter, Facebook, and Periscope to express society’s mounting frustrations. And that is the potential of Ley 3de3—to change the country’s anticorruption institutions and create tools for future reformers to take on bad behavior.

—Johannesburg, March 6 South Africa is in the grips of its most serious economic and political crisis since 1994, when the country elected its first post-apartheid government under Nelson Mandela. The African National Congress (ANC), which has ruled the country since its liberation, is on the defensive. Younger South Africans—many born into freedom—are disillusioned by the ANC’s failure to deliver broad-based prosperity in what has become the world’s most unequal nation, in terms of per capita income. Most worrisome, President Jacob Zuma’s government has taken an authoritarian and corrupt turn—at the very moment the country needs bold and honest leadership. Given its strong institutions—including an independent Constitutional Court, an office of the Public Protector, and a free press—South Africa is in no immediate danger of becoming a failed state. But weak governance is preventing it from making critical policy choices and public investments to improve social welfare and realize Mandela’s dream of a multiracial “rainbow nation.” It is also undercutting South Africa’s capacity to lead both in Africa and on the global stage. South Africa’s economy is in the doldrums. Growth is less than one percent—a fraction of the 6-7 percent the country needs to meet its development goals. Some of this is beyond the government’s control. A historic drought has hit the nation’s agricultural sector hard. More damaging has been the collapse in global commodity prices, driven by China’s slowdown, which has grounded South Africa’s once high-flying economy. The country’s currency, the rand, has lost sixty percent of its value against the dollar since 2011. But other wounds are self-inflicted. Or, more to the point, Zuma-inflicted. Last December the president rattled financial markets by abruptly firing a competent finance minister and replacing him with a political hack. Investors panicked. The Johannesburg Stock Exchange banking index shed 13.5 percent of its value overnight. Five days later, Zuma shifted again, appointing a third finance minister, the respected Pravin Gordhan. But the damage—both economic and reputational—had been done. Gordhan has restored some confidence, submitting a credible budget last month. But markets remain jittery, and Zuma’s rent-seeking cronies have their long knives out for the finance minister. In recent days Moody’s, Fitch, and other rating agencies have warned that South African bonds may be downgraded to “junk” status. That would force South Africa into the arms of the International Monetary Fund—a humiliating prospect for the sovereignty-proud ANC. This week Gordhan is jetting off to London and New York, in the hopes of allaying investor fears. The economic crisis—and the belt-tightening it will require—could not come at a worse time. To achieve long-term prosperity and political stability, South Africa must tap the potential of its vast, marginalized, and overwhelmingly black underclass. That implies investing in the country’s education, health care, and infrastructure. Many of those left behind today blame the previous generation—even Mandela himself—for failing to fundamentally transform the structure of the South African economy, which continues to benefit whites and well-connected mixed-race and black citizens, while masses live in squalor. Officially, the unemployment rate is 25%—likely a conservative estimate. Unsurprisingly, frustration is boiling over. In 2014, massive labor strikes cost the country an estimated $500 million. Students at the nation’s universities are also restless. Last October the United Against Corruption movement launched the “#FeesMustFall” campaign, to protest rising education costs. Two months later, the same group launched a “#ZumaMustFall” hashtag. Other student groups have launched violent, at times racially-tinged protests. On the political left, the ANC is being challenged by the radical Economic Freedom Fighters party, led by Julius Malema, former head of the ANC’s youth league. But more serious electoral competition comes from the right. The Democratic Alliance (DA), long dominated by white and mixed-race South Africans, is expanding its national appeal, choosing its first black leader, Mmusi Maimane, in September. While its support still pales compared to the ANC’s, it anticipates significant victories in the August municipal elections, perhaps even capturing the mayoralty of Johannesburg. (It already controls Cape Town’s city hall.) Meanwhile, the ANC has descended into a “civil war” pitting Zuma supporters against those who fear that the unpopular and erratic leader will destroy the party’s prospects for retaining the presidency when his second (and final) term expires in 2019. South Africa’s economic and political turmoil is also undercutting its foreign policy. Since the end of apartheid, South Africa has exerted an international influence beyond its economic weight, in the United Nations, in Africa, and (more recently), within the Group of 20. Under Mandela, the country advanced the vision of a more just—that is, multipolar, multilateral, and egalitarian—world order. Mandela’s successor, Thabo Mbeki, championed an “African Renaissance.” He helped engineer a transition from the tired Organization of African Unity to the more dynamic African Union, as well as the launch of a New Partnership for Africa’s Development. At the same time, Mbeki understood the need to balance developing world solidarity with close relations with the traditional Western powers. Zuma, by contrast, has adopted a reckless anti-Western—and anti-American—stance. Indeed, South Africa has entered the dark realm of conspiracy theory: In mid-February, the ANC’s secretary general, Gwede Mantashe, accused the United States of planning “regime change” in South Africa. Seeking an economic lifeline and geopolitical muscle, Zuma has increasingly hitched his wagon to the BRICS group, a coalition of major emerging powers composed of Brazil, Russia, India, China, and South Africa itself. South African officials regard the BRICS’ New Development Bank as a new source of investment financing—without the pesky conditionality of the Bretton Woods institutions. Politically, Zuma celebrates the BRICS as a platform to rail against and challenge the Western-dominated order. It is unlikely that the BRICS will deliver on Zuma’s high expectations for financial resources and global clout. The New Development Bank remains a work in progress—and in any event is unlikely to write South Africa blank checks. More broadly, each of the BRICS (with the exception of India) is struggling economically: Brazil is in full-blown recession, Russia is stagnant, and China is experiencing a significant slowdown. Nor are the BRICS likely to constitute an enduring political counterweight to the West, given the heterogeneity of the coalition, which includes three messy democracies and two authoritarian states. Zuma’s effort to cozy up to both China and Russia (including his new BFF Vladimir Putin), undercuts South Africa’s continuing claim to pursue a “moral” foreign policy. At the same time, neither Beijing nor Moscow supports South Africa’s long-held ambition to obtain a permanent seat on the UN Security Council—a prospect that grows increasingly dim every day, as the nation drifts in the economic doldrums. Ultimately, South Africa’s claims to a prominent global role will depend less on its diplomatic alignments than on its domestic choices. That means getting its house in order, by improving the quality of its governance. In South Africa, as in the United States, foreign policy begins at home.

International Investigations Take Over as Domestic Malaysian Justice Fails New evidence shows that transfers from troubled state investment fund 1MDB into Malaysian Prime Minister Najib Razak’s personal bank accounts may top $1 billion—$300 million higher than previously thought. Yet Malaysian authorities continue to clear him of wrongdoing. The attorney general’s office ended its case, saying it found no evidence of graft, and Parliament is delaying a long-awaited investigatory report on the fund. The government has also shut down a Malaysian news site reporting on corruption and threatened harsh punishments for journalists who leak “official secrets”—a thinly-veiled warning to would-be whistleblowers. Less politically malleable are international authorities who continue to probe the cross-border case. Singapore recently seized a “large number” of related bank accounts. Criminal proceedings in Switzerland allege misappropriation of up to $4 billion in state money. And in the United States, the Department of Justice opened an inquiry into Najib’s U.S. real estate holdings and the Federal Bureau of Investigation (FBI) into the 1MDB case itself. Najib maintains the money was a political donation from an unnamed Saudi royal, a claim that conflicts with the growing financial paper trail. How to Get Rid of Ghost Workers The Nigerian government cut nearly 24,000 non-existent, or “ghost workers” from its payroll, a move that saved $11.5 million last month alone. A Finance Ministry audit showed that workers’ names and bank accounts did not match, and some accounts were paid several times. Ghost workers cost many nations: Iraq paid at least $380 million per year to 50,000 soldiers who never reported for duty, Kenya found over 12,000 retired or fictitious civil servants on its payroll, and Cameroonian officials estimate that almost a quarter of the government’s 220,000 employees could be ghost workers, running up a $12 million monthly tab. Technology—in particular biometric screenings and bank ID verification systems—is helping reformers uncover these costly shams. Lax Bribery Laws in the OECD The Organisation for Economic Co-operation and Development (OECD) called out member nations Finland, Slovenia, and Belgium for weak anticorruption measures. Though all three countries rank favorably on Transparency International’s Corruption Perceptions Index, recent evaluations by the OECD Working Group on Bribery highlight their failures to prosecute companies and people that pay bribes elsewhere. Finland lags on adopting adequate whistleblower protections, Slovenia’s anticorruption commission is politicized, and Belgium has yet to convict a single national for foreign bribery. Though the OECD Anti-Bribery Convention is not legally-binding (unlike the United Nations Convention against Corruption), it distinctively and importantly takes on corruption’s supply side—going after those who pay, rather than demand bribes.

In recent years, global leaders and development economists have heralded financial inclusion as a critical tool to promote economic growth and provide a bridge out of poverty for millions of people around the world. As international partners drive towards the World Bank’s goal of universal financial access by 2020, the time is ripe to take stock of the progress that has been made and the crucial gaps that remain—particularly for women. According to the Global Findex, a comprehensive database on financial inclusion, about 700 million people opened bank accounts between 2011 and 2014, contributing to a remarkable 20 percent drop in the number of unbanked adults worldwide. This progress occurred at a far faster rate than many experts and international development practitioners had anticipated, in part due to mobile technology. Yet, over this same time period, the gender gap in access to financial services remained almost exactly the same. Research demonstrates that the financial inclusion gap between women and men, which is present even in some developed economies, is far more pronounced and stubborn in emerging ones: indeed, in the regions with the widest gender gaps, including the Middle East and South Asia, women are one-third to half as likely as men to hold bank accounts. By definition, efforts to promote inclusive finance should have at their core the inclusion of women, who comprise a disproportionate percentage of the world’s poor. Yet some financial inclusion programs focus primarily on expanding access without analyzing the gender distribution of uptake. Inclusive finance policies that fail to consider gender inequalities could actually serve to exacerbate the gender gap in access to finance: for example, setting a goal of one bank account per household in a country with conservative gender norms and familial roles ultimately may benefit male heads of households to the exclusion of women. Closing the gender gap in savings products is essential to realizing the promise of financial inclusivity. It is also critical because the business case for women’s financial inclusion has grown. The clearest bullhorn for the importance of women’s inclusion comes from Chile, the only country in the world to have consistently collected sex-disaggregated data in its financial system. Nearly fifteen years of data show that, in fact, women save differently than men: they hold more savings accounts, pay back loans faster, default less often, and bounce checks less frequently. This evidence supports the proposition that women are safe bets for banks—and, therefore, that increasing the proportion of female account holders will decrease systemic risk in the economy. In the wake of an economic slowdown that has roiled markets from Athens to Islamabad, the notion that greater financial inclusion for women could foster economic resilience and stability is one well worth pursuing. Economic policymakers must look broadly at the effect of financial services—who is using them, and how—rather than at access alone. More sex-disaggregated financial data are needed to better understand the role women play in family finances and develop policies and products that will encourage women not only to open bank accounts but also to engage with other formal financial systems. In the movement for global financial inclusion, multilateral financing institutions, governments, the private sector, and civil society all have an important role to play to better understand the case for women’s financial inclusion as a business opportunity and to promote the development of financial products that are valuable to all users—male and female alike.

Latin America’s corruption scandals of the past two years are moving slowly toward resolution. As they move forward, it is interesting to note that in a region that has been particularly protective of its sovereignty, foreign cooperation has played a significant role, whether it is via bilateral exchanges between prosecutors, mutual legal assistance treaties, or even United Nations support, as in the case of Guatemala’s International Commission Against Impunity (CICIG). But these various forms of international cooperation may soon be joined by another international anti-corruption effort that is less well understood in Latin America: prosecution by U.S. attorneys. The Petrobras scandal has so far touched down in Argentina, Peru, Panama, Brazil, and the United States, making it a truly hemispheric corruption case. I was therefore taken aback when a well-informed colleague from the region suggested to me that in his view, the United States would never prosecute Petrobras, because doing so might harm U.S. foreign policy interests. In reflecting on this remark later, I think that he meant that a U.S. government that seems to be trying hard to mend fences in the region would be loathe to be seen as violating national sovereignty or acting in ways that could cast the United States in the familiar role of an avaricious exploiter of Latin American resources. This perspective has deep roots. Brazilian academics have argued that the United States seeks to limit Brazil’s energy self-sufficiency as part of its broader geopolitical strategy of hegemony. A Brazilian senator echoed this perspective in floor debate last week, noting that, having weakened Petrobras, investors were now seeking a reduced role for the oil company that would hand “the future of Brazil to Shell.” Meanwhile, other prominent Brazilian politicians have shown little understanding of the independence of their own national prosecutorial office, and therefore may not be ready to accept that the discretion of U.S. prosecutors is also significant, even when foreign policy is on the line. Domestic legal calculations also play a role: Brazilian prosecutors, for example, have been very careful to paint Petrobras as a victim rather than a target. There are many reasons for this prosecutorial caution: there is doubt about the culpability of many of the firm’s directors, Brazil’s Clean Company Law is new and untested, and there are a variety of more attractive targets for prosecution. Furthermore, there may well be trepidation about the political costs of taking down the the crown jewel of Brazil’s state-owned companies: most Brazilians are up in arms that Petrobras has been so violated by graft and gross mismanagement, but they understandably do not want to see it further damaged. On the U.S. side, however, the big question is not really whether U.S. prosecutors are going to prosecute wrongdoing, but when. Given the sharp drop in Petrobras’ market capitalization—from a high of $380 billion to $23 billion today—the U.S. Securities and Exchange Commission (SEC) may have little option, given that its mandate is to curb behaviors that cause damage to shareholders and stock market integrity. Already, Petrobras has taken a write-down of more than $17 billion for overvalued assets, including $2 billion associated with corrupt acts, and the U.S. Department of Justice (DOJ) and SEC have announced investigations. News reports suggest that Petrobras could be the target of the largest ever penalties ever levied by U.S. authorities in a corporate corruption investigation, exceeding the record-breaking $800 million paid by Siemens in its 2008 agreement with the DOJ and SEC. If such fines came to pass, they would have a shocking effect on a Brazilian public already reeling from more than their fair share of bad news. A former Brazilian Supreme Court justice predicted that for those who are unaware that it is coming down the pike, a U.S. prosecution will be a “humiliation and a devastation.” U.S. prosecutors will also be keen to understand kickbacks and corruption that may have taken place on U.S. soil, as in possibly fraudulent refinery purchases, or that might have passed through U.S. banks via offshore accounts in Panama or Switzerland, as Brazilian investigators allege. There are a variety of potential avenues for enforcement, ranging from SEC administrative sanctions through a full prosecution under the Foreign Corrupt Practices Act (FCPA), made possible because Petrobras is publicly listed on the New York Stock Exchange (NYSE), and made more likely by the DOJ’s recent efforts to ramp up FCPA prosecutions. Prosecutions could be led by state prosecutors, the DOJ, by the U.S. Attorney for the Southern District of New York, whose office has been aggressive in prosecuting violations of corporate malfeasance, or by some combination of all of these autonomous actors. Potential oversight bodies could also include an alphabet soup of agencies involved in asset forfeiture and money laundering, in the DOJ and U.S. Department of Treasury, as well as state governments. And of course, Petrobras is already facing civil litigation in the United States, as well as the legal costs associated with nearly 300 foreign business partners who are also potential targets of investigation. In sum, the international dimension of Latin America’s corruption saga is only just getting underway. Legal action by the United States may not be greeted with acclaim across the Brazilian political spectrum, but together with Brazil’s enthusiastic prosecution of the case, it brings the hope that the regional compliance environment may change for the better.

Central America’s Anticorruption Support The presidents of El Salvador, Guatemala, and Honduras were in Washington to discuss plans for the $750 million that Congress authorized to help their nations take on violence and boost economic development. The outlay comes in the wake of a record uptick in Central American migration to the United States. Nearly 3 million people have fled their homes and neighborhoods, including 100,000 unaccompanied minors who arrived at the southern border between October 2013 and July 2015. The U.S. funding requires Northern Triangle governments to address myriad domestic problems, including strengthening legal systems, protecting human rights, and rooting out corruption. U.S. anticorruption efforts will be met with broad civil society and multilateral support, dovetailing with grassroots campaigns against graft and high-level impunity in Honduras and Guatemala, and furthering the resolve of multilateral-backed bodies such as Honduras’s new Mission Against Corruption and Impunity (MACCIH). The UNDP at Fifty The United Nations Development Programme (UNDP), the multilateral’s agency dedicated to reducing poverty and inequality, turned fifty on Wednesday. Since its founding, the number of poor dropped from one in three to one in eight people globally. UNDP helped spur these positive changes through its work in 170 countries and by rallying members to make ambitious commitments through the Millennium Development Goals (MDGs) and new Sustainable Development Goals (SDGs). But development aid is changing. Though worldwide government spending reached a $134.7 billion peak in 2013, it is far short of the UN’s 0.7 percent of gross national income (GNI) target, with a rich-country average closer to 0.39 percent. And Western governments are increasingly turning their attention and dollars to security assistance. The OECD recently widened the definition of aid to include military spending in fragile countries, and the United States is allocating more foreign assistance to programs such as Countering Violent Extremism (CVE). UNDP and other believers in traditional economic and social development worry this shift will not only slow, but undermine decades of gains. Foreign Bribery Actions Up Though only settling two Foreign Corrupt Practices Act (FCPA) cases last year, the U.S. Department of Justice (DOJ) is ramping up foreign corruption prosecutions. Dedicated staff will rise by 50 percent from nineteen to twenty-nine prosecutors this year, and an assistant attorney general recently announced many pending cases. Meanwhile, foreign authorities are also upping their actions. The UK just convicted its first corporation under the five-year old Bribery Act, finding Sweett Group guilty of paying bribes to secure construction contracts in the UAE. The $3.3 million fine follows a $25.2 million settlement with the British outpost of South Africa’s Standard Bank last December for illegal payments in a Tanzanian infrastructure project. The UK law goes even further than the FCPA in scope, holding companies accountable not just for giving or taking bribes, but also for failing to prevent bribes, as Sweett Group discovered.  

Can India Avoid Emerging Market Slump? India outpaced China as the world’s fastest growing economy in 2015, with gross domestic product (GDP) rising 7.5 percent. Consumption by the nation’s 1.3 billion citizens drove the gains, along with public infrastructure spending to upgrade the nation’s roads, railways, ports, and power grids. India’s government is on track to spend over a trillion dollars on infrastructure as part of a 2012-2017 five year plan, as one of the emerging markets able to borrow at low international rates (debt to GDP is for now a manageable 50 percent). Yet private sector investment hasn’t followed suit. Bureaucratic difficulties in acquiring land and permits and financing snafus show how difficult it is to do business – India is ranked 130 of 189 in the World Bank’s Ease of Doing Business Report. A tough external environment led to a decline in exports and an outflow of portfolio investments. To attract the private investment needed for long term growth, Prime Minister Narendra Modi will have to tackle issues including labor regulations, taxes, and onerous import and export documentation. U.S. Development Seeks Private Investment President Obama asked for $23 billion for development projects in the 2017 budget–roughly one half of a percent of the proposed $4 trillion in spending. A good portion of this amount focuses on stimulating private investment, for instance backing loans and providing guarantees to private companies investing in Sub-Saharan Africa’s power grid through the Power Africa program or funding  Overseas Private Investment Corporation’s (OPIC) development loans. Market trends may undercut this ongoing turn to private capital flows to lead development goals: last year over $700 billion fled emerging markets. Familiar Result in Ugandan Elections Uganda’s Yoweri Museveni looks to extend his thirty year presidential reign in next week’s election. The campaign has been marred by political intimidation, opposition arrests, and press censorship. In the face of threats of violence and even lethal force against potential protests, many young voters–those hit hardest by poverty and unemployment–are responding virtually, galvanizing support through the hasthtag #IChoosePeaceUG. But the United States may remain silent, as Museveni remains a long-standing if flawed ally in this unstable region.

Moldova’s Corruption Undermines EU Bid Moldova’s corruption continues despite deepening European Union (EU) ties. New Prime Minister Pavel Filip’s pro-EU party is linked to a $1 billion bank embezzlement scheme that saw nearly 13 percent of gross domestic product (GDP) disappear. Two former prime ministers fell in the scandal, one to a no confidence vote while another is in jail. Now, despite government rhetoric accepting the EU Association Agreement governance statutes and promising to stamp out corruption, protesters are calling for Filip’s resignation. It is unlikely that Moldova will move beyond EU “partner” status anytime soon. U.S. Investors Sue Over Foreign Corruption Private investors are taking on corruption in court. Hawaii’s state pension fund, North Carolina’s treasurer, and other major shareholders are suing Brazilian state-run oil company Petrobras for losses from bribes and political kickbacks. They allege that corruption inflated the company’s market value by nearly $100 million, or a third of its peak. Others are taking on U.S.-based mining company Freeport-McMoRan for Foreign Corrupt Practices Act (FCPA) violations in Indonesia after a $4 billion bribery scandal led to a high-profile political resignation. Beyond criminal charges for corporate executives accused of malfeasance, companies may increasingly face investor-led litigation. How Much Does Nigeria’s Corruption Cost? A new PricewaterhouseCoopers (PwC) report on corruption in Nigeria estimates that the nation lost up to $185 billion in GDP over the last fifteen years as graft lowered tax revenue, discouraged investment, and reduced human capital. The auditing and consulting firm projects corruption will account for well over a third of GDP by 2030 if left unchecked. Contrasts are stark. If Nigeria reduced its corruption to Ghana’s levels (as determined by Transparency International’s Corruption Perceptions Index), its GDP would be nearly a quarter higher. President Muhammadu Buhari has ordered the arrests and investigations of dozens of corrupt former officials since coming to power last year on a promise to fight graft. But two of its biggest sources—the notoriously mismanaged state-run oil company and opaque security spending—require deep reforms.