Brett Romero

Data Inspired Insights

Month: July 2015

Greece Crisis – Update

Update #2 – July 14, 2015

  • After the comprehensive win for the ‘NO’ campaign in the Greek referendum, negotiations reopened between the Greek government and the institutions. One notable difference this time around was the distancing of the IMF from the process, as Greece has technically already defaulted on their IMF debt.
  • Despite a ‘NO’ vote being sold in Greece as strengthening their hand in negotiations, the people negotiating on behalf of the institutions were not buying this line. What quickly became clear was that even if Greece completely capitulated and accepted the terms of the reform package offered pre-referendum, that would no longer be enough for a deal. The most commonly cited reason for the hardened stance was that the institutions no longer trusted the Greek government to undertake the reforms it was signing up to.
  • During the week, it began to look increasingly likely that no deal would be made. At one point, every country in the shared currency zone except France and Cyprus was pushing for a Greek exit ahead of the final discussion to take place on Sunday night.
  • After marathon negotiations, on Monday morning (13 July 2015), it appeared a deal had been reached. This deal is more or less the reform package demanded before the election (raising the pension age, raising the rate of VAT and other changes), but with one key addition. Greece will now be forced to place 50 billion euros worth of state owned assets into a fund. The fund will be managed by KfW, a German government owned development bank where German Finance Minister Wolfgang Schäuble is Chairman of the Board. Despite the apparent conflicts of interest, this setup is designed to allow the creditors to sell off those assets to pay off debt.
  • The deal has been been met with dismay by most people in Greece (and many observers). Immediately after the deal was announced, the number one trending hashtag worldwide was #ThisIsACoup.
  • The final hurdle at this stage is Greek Prime Minister Alexis Tsipras passing the needed reforms through the Greek parliament. Many members of his own party have already vowed to vote against the reforms. However, it is expected that with assistance from the other major parties, passage should be possible.
  • New elections are expected after the complete capitulation by Tsipras. Despite the apparent failure, many Greeks are behind their government, arguing that they at least made an honest attempt to improve the situation. However, once the new austerity measures are passed, the harsh reality is sure to hurt Syriza’s popularity. The tragedy of the situation is that it was a thinly veiled intention of European leaders to remove Syriza from power by humiliating the Greek people, and they look likely to succeed.

One interesting revelation that has come out in recent days is in relation to German Finance Minister Wolfgang Schäuble. What has become clear is that he has favored the path of forcing Greece out of the Eurozone entirely since at least 2012. Revelations from the 2014 memoir of US Treasury Secretary Timothy Geithner, Stress Test, have recently surfaced about a meeting in 2012 with Schäuble (emphasis mine):

“A few days later, I flew to meet Wolfgang Schäuble for lunch during his vacation at a resort in Sylt, a North Sea island known as Germany’s Martha’s Vineyard. Schäuble was engaging, but I left Sylt feeling more worried than ever. He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks. At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall. I found the argument terrifying,”

This insight into Schäuble’s thinking reveals the core issue at the heart of the shared currency zone –  Germany’s economic dominance. The Euro is essentially the new Deutschmark and this has a lot of side effects. Southern European nations benefit from being able to borrow at cheaper rates than they have historically, allowing governments to upgrade infrastructure and provide a stronger social safety net for their people. As it has turned out though, they also spent a lot of borrowed money on things that made them less competitive economically, such as large public sector salaries and very generous pension schemes.

Germany on the other hand benefits from having the Euro weighed down by those nations, making German exports extremely competitive internationally. It also benefits from the increased wealth of those southern European nations (even though it turned out to be mostly debt financed) who could spend more money on artificially cheap German exports.

Everyone was happy with the arrangement when things were going well, but when the crisis hit, the underlying inequalities were exposed. And despite the complex nature of the monetary union, there are only two basic ways the underlying structural issues in the shared currency zone can be resolved:

  1. Germany agrees to permanent and ongoing wealth transfers to the less efficient European nations in the same way richer states in the US subsidize poorer ones.
  2. Germany forces the rest of Europe to become more like Germany.

It is obvious which option appeals more to German politicians – convincing Germans to hand over their taxes to what they largely see as their lazy, poorly run neighbors is basically a non-starter.

Option 2 is more or less what has been happening and the results are clear – it caused huge economic disruption in those countries, particularly as the reforms were implemented during times of economic turmoil. But there is a fundamental question of democracy at play here. Obviously Greece (and to a lesser extent the rest of southern Europe) was not doing a particularly good job of managing its own economy. The question is are we OK with a world where unelected figures can force economic reforms on a country – even if they are beneficial in the long run – directly against the will of the people?

I will leave the final quote to Arnulf Baring, a German author and historian (amongst other things), who was strongly opposed to the introduction of the Euro. In his 1997 book, Scheitert Deutschland? (Does Germany Fail?), he made the following amazingly accurate prediction about the future of the Eurozone:

“They [populistic media and politicians] will say that we are subsidizing scroungers, lazing on mediterranean beaches. Monetary union, in the end, will result in a giant blackmailing operation. When we Germans demand monetary discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More, they will perceive us as a kind of economic policeman. We risk again becoming the most hated people in Europe.”

 

Update #1 – July 4, 2015

  • The latest polling on the referendum is showing that it is too close to call. Both sides are polling approximately 43% with about 14% of Greeks undecided as to which way they will vote.
  • Friday saw rallies in Athens for both campaigns ahead of a campaign free day on Saturday. Both had huge attendances but as one observer described: “[The] ‘NO’ rally is pure passion trying to look formal. ‘YES’ rally is something formal trying to look passionate.”
  • The Greek finance minister Yanis Varoufakis has declared that he would rather cut his arm off than accept a further bailout. Varoufakis confirmed Syriza would agree to the conditions of the bailout, should the ‘Yes’ campaign prevail, but also pledged to step down if this occurred.
  • The IMF on Thursday released a review of Greece’s debt, which many in the ‘No’ campaign are taking as a big win, given that the report includes an admission that Greece’s current debt is unsustainable. The report also revealed the ongoing disagreement between the IMF and Brussels regarding the best way forward for Greece. In apparent confirmation of the damage these revelations could cause, Eurozone countries are reported to have attempted to halt the release of the document before the referendum.

Original Piece – July 2, 2015

The debt crisis in Greece has been evolving quickly over the past few days, with several interesting developments. If this is the first you have heard about it or you haven’t been following the issue closely, I strongly recommend going back and starting here. For those that are up to date, here are the key updates so far this week:

  1. The European Central Bank (ECB) has not cut off emergency funding to banks in Greece as it was feared it might, but has decided against raising the amount of funding it will provide. The main story here is the banking sector in Greece avoids an immediate collapse and Greece will be able to survive until the referendum this weekend. But, by not raising the amount of funding, they have put Greek banks in a position where, if they ran in business-as-usual mode, they would not be able to keep up with the demand for Euro’s and would run out of cash.
  2. As a result, the Greek government has imposed capital controls and declared a bank holiday for this week. Banks will not open (with an exception for pensioners on Thursday) and people will only be able to take out 60 euros a day from ATMs. This is to ensure banks in Greece can stay viable until the referendum.
  3. In terms of the referendum, the expected result is unclear at this point. The latest polling is showing the ‘No’ (OXI) vote is ahead with 55% planning to vote ‘No’ to accepting the bailout under the current conditions, with only 33% planning to vote ‘Yes’ (NAI). But the gap has been closing as the situation has deteriorated. This picture contrasts with betting markets (yep, you can pretty much bet on anything) currently indicating a 66% chance of a ‘Yes’ vote.
  4. In the meantime, the Greek Prime Minister Alexis Tsipras has been campaigning strongly for a ‘No’ vote in the referendum. Tsipras is not out there on his own though. Two Nobel Laureates in Economics in Paul Krugman and Joseph Stiglitz have expressed their support for Syria’s decision and a ‘No’ vote, also adding a good helping of criticism for the role the creditors have played in getting to this point.
  5. However, in the meantime Syriza have still been attempting to continue negotiations with the creditors and yesterday (Wednesday) made further concessions in order to try to secure a deal.  The concessions made were agreeing to certain cuts to pensions (despite what you might have heard, the creditors are demanding further cuts) but on a delayed schedule, and agreeing to most of the VAT increases but maintaining an exemption for the islands. It should be noted that any deal reached at this point would not cancel the referendum, but would cause Syriza to reverse their current course and start campaigning for a ‘Yes’ vote.
  6. The creditors have basically slammed the door on further negotiations though, indicating that no further negotiations are possible before the referendum. This move is widely perceived as Europe calling Syriza’s bluff, but there is probably more to it than that. There have been further claims that no new deal is possible at all while Syriza remains in power. Indications are that regardless of the outcome of the referendum, the Eurozone will continue attempts to force new elections in Greece. Of course, this overlooks the fact that the only reason a marginal party like Syriza got into power in the first place was due to the extreme austerity forced upon Greece, but whatever. For outside observers, no matter what you think about who is to blame for this crisis, the completely undisguised attempts by Europe to destroy a democratically elected government because they don’t like their politics should make you very angry.
  7. Finally, based on the reaction from bond and equity markets this week, the financial contagion from a collapse in the Greek economy would appear to be limited. That said, the political contagion could live on for a long time. The behavior (see point above) of the institutions (and the people heading them) that are supposed to be run for the benefit of all Europeans has revealed how politicized they have become. Even in the scenario where Greece somehow stays in the Eurozone, significant damage has been done to the European project and to the goodwill that existed for it. If you haven’t already, I highly recommend reading Alexis Andreou’s fantastic insight into how a lot of young Europeans are likely to be feeling.

The situation is changing fairly rapidly at the moment, so I will continue to add updates here as things change.

Piketty Takes A Swing at Germany

Thomas Piketty, a French economist who found fame through his book Capital in the Twenty-First Century, recently conducted an interview with German magazine Die Zeit. After being translated, the transcript of the interview went viral with quotes showing up in the front pages of news sites all over the world. And for good reason, Piketty pulls no punches in his view of the crisis and the stupidity of ignoring the lessons of the past… again. This should be mandatory reading for anyone commenting on the crisis.

This version of the interview, which was originally in German, was translated by Gavin Schalliol. He has now taken down the translation while he sorts out copyright issues. Here is the full text:

DIE ZEIT: Should we Germans be happy that even the French government is aligned with the German dogma of austerity?

Thomas Piketty: Absolutely not. This is neither a reason for France, nor Germany, and especially not for Europe, to be happy. I am much more afraid that the conservatives, especially in Germany, are about to destroy Europe and the European idea, all because of their shocking ignorance of history.

ZEIT: But we Germans have already reckoned with our own history.

Piketty: But not when it comes to repaying debts! Germany’s past, in this respect, should be of great significance to today’s Germans. Look at the history of national debt: Great Britain, Germany, and France were all once in the situation of today’s Greece, and in fact had been far more indebted. The first lesson that we can take from the history of government debt is that we are not facing a brand new problem. There have been many ways to repay debts, and not just one, which is what Berlin and Paris would have the Greeks believe.

ZEIT: But shouldn’t they repay their debts?

Piketty: My book recounts the history of income and wealth, including that of nations. What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.

ZEIT: But surely we can’t draw the conclusion that we can do no better today?

Piketty: When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.

ZEIT: Are you trying to depict states that don’t pay back their debts as winners?

Piketty: Germany is just such a state. But wait: history shows us two ways for an indebted state to leave delinquency. One was demonstrated by the British Empire in the 19th century after its expensive wars with Napoleon. It is the slow method that is now being recommended to Greece. The Empire repaid its debts through strict budgetary discipline. This worked, but it took an extremely long time. For over 100 years, the British gave up two to three percent of their economy to repay its debts, which was more than they spent on schools and education. That didn’t have to happen, and it shouldn’t happen today. The second method is much faster. Germany proved it in the 20th century. Essentially, it consists of three components: inflation, a special tax on private wealth, and debt relief.

ZEIT: So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?

Piketty: Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed the second method with the three components that I mentioned, including debt relief. Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.

ZEIT: That happened because people recognized that the high reparations demanded of Germany after World War I were one of the causes of the Second World War. People wanted to forgive Germany’s sins this time!

Piketty: Nonsense! This had nothing to do with moral clarity; it was a rational political and economic decision. They correctly recognized that, after large crises that created huge debt loads, at some point people need to look toward the future. We cannot demand that new generations must pay for decades for the mistakes of their parents. The Greeks have, without a doubt, made big mistakes. Until 2009, the government in Athens forged its books. But despite this, the younger generation of Greeks carries no more responsibility for the mistakes of its elders than the younger generation of Germans did in the 1950s and 1960s. We need to look ahead. Europe was founded on debt forgiveness and investment in the future. Not on the idea of endless penance. We need to remember this.

ZEIT: The end of the Second World War was a breakdown of civilization. Europe was a killing field. Today is different.

Piketty: To deny the historical parallels to the postwar period would be wrong. Let’s think about the financial crisis of 2008/2009. This wasn’t just any crisis. It was the biggest financial crisis since 1929. So the comparison is quite valid. This is equally true for the Greek economy: between 2009 and 2015, its GDP has fallen by 25%. This is comparable to the recessions in Germany and France between 1929 and 1935.

ZEIT: Many Germans believe that the Greeks still have not recognized their mistakes and want to continue their free-spending ways.

Piketty: If we had told you Germans in the 1950s that you have not properly recognized your failures, you would still be repaying your debts. Luckily, we were more intelligent than that.

ZEIT: The German Minister of Finance, on the other hand, seems to believe that a Greek exit from the Eurozone could foster greater unity within Europe.

Piketty: If we start kicking states out, then the crisis of confidence in which the Eurozone finds itself today will only worsen. Financial markets will immediately turn on the next country. This would be the beginning of a long, drawn-out period of agony, in whose grasp we risk sacrificing Europe’s social model, its democracy, indeed its civilization on the altar of a conservative, irrational austerity policy.

ZEIT: Do you believe that we Germans aren’t generous enough?

Piketty: What are you talking about? Generous? Currently, Germany is profiting from Greece as it extends loans at comparatively high interest rates.

ZEIT: What solution would you suggest for this crisis?

Piketty: We need a conference on all of Europe’s debts, just like after World War II. A restructuring of all debt, not just in Greece but in several European countries, is inevitable. Just now, we’ve lost six months in the completely intransparent negotiations with Athens. The Eurogroup’s notion that Greece will reach a budgetary surplus of 4% of GDP and will pay back its debts within 30 to 40 years is still on the table. Allegedly, they will reach one percent surplus in 2015, then two percent in 2016, and three and a half percent in 2017. Completely ridiculous! This will never happen. Yet we keep postponing the necessary debate until the cows come home.

ZEIT: And what would happen after the major debt cuts?

Piketty: A new European institution would be required to determine the maximum allowable budget deficit in order to prevent the regrowth of debt. For example, this could be a commmittee in the European Parliament consisting of legislators from national parliaments. Budgetary decisions should not be off-limits to legislatures. To undermine European democracy, which is what Germany is doing today by insisting that states remain in penury under mechanisms that Berlin itself is muscling through, is a grievous mistake.

ZEIT: Your president, François Hollande, recently failed to criticize the fiscal pact.

Piketty: This does not improve anything. If, in past years, decisions in Europe had been reached in more democratic ways, the current austerity policy in Europe would be less strict.

ZEIT: But no political party in France is participating. National sovereignty is considered holy.

Piketty: Indeed, in Germany many more people are entertaining thoughts of reestablishing European democracy, in contrast to France with its countless believers in sovereignty. What’s more, our president still portrays himself as a prisoner of the failed 2005 referendum on a European Constitution, which failed in France. François Hollande does not understand that a lot has changed because of the financial crisis. We have to overcome our own national egoism.

ZEIT: What sort of national egoism do you see in Germany?

Piketty: I think that Germany was greatly shaped by its reunification. It was long feared that it would lead to economic stagnation. But then reunification turned out to be a great success thanks to a functioning social safety net and an intact industrial sector. Meanwhile, Germany has become so proud of its success that it dispenses lectures to all other countries. This is a little infantile. Of course, I understand how important the successful reunification was to the personal history of Chancellor Angela Merkel. But now Germany has to rethink things. Otherwise, its position on the debt crisis will be a grave danger to Europe.

ZEIT: What advice do you have for the Chancellor?

Piketty: Those who want to chase Greece out of the Eurozone today will end up on the trash heap of history. If the Chancellor wants to secure her place in the history books, just like [Helmut] Kohl did during reunification, then she must forge a solution to the Greek question, including a debt conference where we can start with a clean slate. But with renewed, much stronger fiscal discipline.

Corruption in Kosovo: A Comparative Analysis

Cross posted from OpenDataKosovo.org:

Previously in Part I of this series, we looked at corruption in Kosovo from the perspective of Kosovo civil servants, as documented in a United Nations Development Programme (UNDP) report entitled Gender Equality Related Corruption Risks and Vulnerabilities in Civil Service in Kosovo[1].

In Part II we are now going to look at global corruption perception statistics compiled by Transparency International to consider how Kosovo compares internationally.

An International Comparison of Corruption

Transparency International is an organization that works to reduce corruption[2] through increasing the transparency of Governments around the world. Arguably Transparency International’s most well known contribution is the Corruption Perceptions Index (CPI), an index measuring “the perceived levels of public sector corruption worldwide”. In 2014[3] the CPI was calculated by aggregating 12 indices and data sources collected from 11 different independent institutions specializing in governance and business climate analysis over the past 24 months. The 2014 CPI covered 175 countries, including Kosovo.

In addition to the CPI, Transparency International does its own survey and data collection in the form of the Global Corruption Barometer (GCB survey). The GCB survey focuses on the public’s opinion of corruption within their own country, and in 2013 (the latest edition of the GCB available at the time of writing) collected the opinions of over 114,000 people across 107 countries – including Kosovo.

So what did these two reports show?

Results

In the CPI, Kosovo performs poorly, placing 110th out of 175 countries with a score of 33 out of 100 (unchanged from 2013). To give some perspective, Kosovo finished equal 110th with 4 other countries – Albania, Ecuador, Ethiopia, and Malawi. This placed it behind Argentina (107th), Mexico (103rd), China (100th), India (85th) and Greece (69th), countries that are often associated with high levels of corruption. Finally, this was the lowest ranking for any country in the Balkans region (tied with Albania).

Chart 1 – GCB Survey Q6 – Perceptions of Corruption by Institution for 6 Countries

WAC_2_1

The GCB survey, however, shows that the people in Kosovo have a different perception of corruption in several areas to that reported in the CPI. Based on the responses to question 6[4] (see Chart 1) and question 7[5] (see Chart 2) of the GCB survey, people in Kosovo are somewhat more optimistic about the levels of corruption in their country than the low rating on the CPI might indicate. Kosovo scores well in several areas:

  • Only 16% of people reported having paid a bribe in the last 12 months. This placed Kosovo 35th out of the 95 countries that provided a response to question 7.
  • 46% of Kosovars generally believe their public institutions to be corrupt or extremely corrupt. This sounds high but actually puts Kosovo ahead of the US (47%) and only slightly behind Germany (40%). The results for certain institutions were even better:
    • The Military is believed to be corrupt or extremely corrupt by only 8% of those interviewed – only four countries had a lower percentage than Kosovo on this part of question 6.
    • NGOs and Religious bodies were also seen as uncorrupt by large majorities.
    • 44% of people believed public officials and civil servants were corrupt, placing Kosovo ahead of Germany, France and the US, among others.

Chart 2 – GCB Survey Q7 – Reports of Bribes Paid by Institution for 6 Countries

WAC_2_2

But not all the results were positive. Questions 1[6], 4[7] and 5[8] in the GCB survey in particular highlight a more pessimistic outlook:

  • In response to question 1, 66% of Kosovars stated that they believed corruption had increased over the past 2 years, while only 8% believed it had decreased.
  • In response to question 4, 74% of Kosovars stated they believed their Government is run by large entities largely or entirely for their own benefit.
  • In response to question 5, only 11% of Kosovars surveyed believed the actions of their Government in the fight against corruption are effective.

What does all this mean? Why does Kosovo perform so poorly on the CPI, and on some GCB survey questions, but on other questions the perceived level of corruption of people in Kosovo is comparable to some developed nations?

Perceptions vs. Reality

One of the issues when looking at the results of the GCB survey is that the responses to most of these questions are subjective. What constitutes corruption or extreme corruption varies by country and culture based on what people are used to living with. What someone in South Asia or sub-Saharan Africa considers standard practice and harmless may be considered unbelievably corrupt by people in other parts of the world.

These different standards are really highlighted when we compare the percentage of people believing an institution is corrupt with the number of people reporting to have paid a bribe to that institution, using questions 6 and 7 of the GCB survey. There are four institutions that appear as options for both questions, allowing us to make a direct comparison:

  1. Education
  2. Judiciary
  3. Medical and Health, and
  4. Police

In the comparison (see Chart 3), we find numerous examples where the percentage of people that reported paying bribes was higher than the percentage of people who believed the institution was corrupt. The implication of this finding is that significant numbers of people in these countries believe that paying a bribe is not a sign of corruption.

Chart 3 – Comparison of Perceived Corruption with Bribes Paid

WAC_2_3

Kosovo and most developed nations were examples of the opposite case – they generally reported relatively high numbers of people who believed the four comparable institutions were corrupt, and relatively low percentages of people reporting bribes being paid. Bribery, of course, is not the only form of corruption, and this result could simply be an indicator that different forms of corruption are more prevalent in these countries. But it could also be an indicator that people in some countries are particularly cynical about the fidelity of their institutions.

To get a better sense of how concerned people really are about corruption, lets now take a look at some of the responses to other questions in the survey.

Is a Person’s Willingness to Take Action a Better Indicator?

One of the questions asked on the survey that could potentially reveal some further information was question 10 – “Are you willing to get involved in the fight against corruption?” Respondents were then provided with a range of activities, both active and passive, and were requested to indicate whether they would be willing to participate.

At a high level, the responses to this question appear to show an inverse correlation between the value of the CPI for a country and how willing people in that country were to do something active to fight corruption. In other words, the higher the percentage of people willing to do something active to fight corruption, the lower the CPI index for that country (i.e. a higher level of corruption).

Using a statistical model (such as regression), we can check whether this relationship is real and how strong it is. However to do this, we need to consider countries with regimes that punish dissent and crack down on protests and/or organizations that might try to combat corruption. In these countries, you would expect to have a low percentage of people willing to take action against corruption despite corruption being high.

To account for this, we need to have some sort of indicator of how worried people are about speaking out in their country. The best piece of information that we have from the GCB survey that can serve this purpose was the question asking if the respondent would be willing to report corruption.

Using these two pieces of information, we can try to test the following hypotheses:

  1. A high percentage of people willing to take action against corruption in a given country is indicative of a high level of corruption.
  2. A low percentage of people willing to take action against corruption in a given country, but a high level willing to report corruption is indicative of a low level of corruption.
  3. A low percentage of people willing to take action against corruption in a given country, and a low level willing to report corruption is indicative of a high level of corruption in a repressive regime.

Based on these hypotheses, we also expect that there would be no (or very few) cases where there is high percentage of people willing to take action against corruption and a low level of people willing to report corruption.

Building a Model

Using our two pieces of information described above, and with the assumption that the CPI is the most accurate indicator of the true level of corruption within a country[9], we can build a model to predict CPI for each country and test our hypotheses. The formula for this model will be as follows:

Where:

Yi = the actual value of CPI for country i

β0 = a constant

Xi1 = the percentage of people willing to do something active to fight corruption[10] in country i

β1 = a constant applied to Xi1

Xi2 = the percentage of people willing report an incidence of corruption in country i

β2 = a constant applied to Xi2

εi = the residual or error

Using ordinary least squares (OLS) and the data for the 101 countries for which the CPI and the two variables (X1 and X2) described above are provided, the results of the model is as follows:

β0 β1 β2
Coefficient 27.9735 -0.8417 0.8798
Standard Error 4.8427 0.0705 0.0738
R2 66.7%

The first thing to note is that the coefficients support the three hypotheses we mentioned above:

  1. A strongly negative coefficient β1 indicates that the larger the percentage of people willing to do something active to fight corruption, the lower the predicted CPI.
  2. A strongly positive coefficient β2 indicates that the larger the percentage of people willing to report corruption, the higher the predicted CPI.

General Insights

Aside from providing support for our hypotheses, the other thing this model reveals is the countries that are not very well explained by this model. Chart 4 shows the CPI predicted by the model as compared to the actual CPI value for 2014.

Chart 4 – Predicted CPI vs. Actual CPI by Country

WAC_2_4

At a high level, we can split the chart into two parts:

  1. Points below and to the right of the line reflect countries where the actual level of the CPI was lower than the predicted level
  2. Points above and to the left of the line reflect countries where the actual level of the CPI was higher than the predicted level.

Starting with the first group – countries that were more corrupt than the model predicted – these cases appear to fall into two categories:

  • Conflict Affected Countries – In these cases, of which Sudan is the most extreme example, there was typically a low percentage of people willing to do something active to fight corruption, and therefore the CPI was predicted to be significantly higher than it is in reality. This is likely to be due the citizenry of these countries facing more immediate problems. This pattern was seen across Sudan, Afghanistan, Iraq, Libya and South Sudan.
  • Other – In these cases, of which Russia was the best example, there was generally a high percentage of people willing to report corruption (86% for Russia) and a relatively low percentage of people willing to do something active to fight corruption (47% in Russia). As a result the model predicted a relatively high CPI. The explanation for this is not as clear as above, but the evidence would seem to suggest that the people in these countries are either not aware of the high level of corruption present in their country, or that they have a significantly different opinion as to what constitutes corruption.

Contrasting with the above cases, we can also see there are countries above and to the left of the line in Chart 4. This represents countries that were less corrupt than the model predicted. In these cases the responses to the two questions were indicative of a country with a higher level of corruption than actually existed. The following were two interesting cases:

  • Finland – the model was thrown off by a surprisingly low percentage of people willing to report corruption. Of the respondents from Finland, only 65% of people surveyed reported they would be willing to report corruption – a surprisingly low percentage for a country with a CPI value of 89. In fact, Finland and Japan were the only countries with a CPI above 60 that reported a percentage below 80% for this question.
  • The United States – neither of the data points used for the US in the model were hugely abnormal for countries in the same CPI range. 80% of people said they would be willing to report corruption (a little lower than you would expect) and 50% said they be willing to do something active to fight corruption (a little higher than you would expect). Both of these potentially show a slightly higher level of mistrust in government than other developed nations, something that does tie in with the politics of large parts of the US.

Unlike the above examples, Kosovo appeared fairly typical for the model. Let’s now take a deeper look into the results of the model for Kosovo.

Insights for Kosovo

For Kosovo, the model was able to fairly accurately predict the CPI using the two variables described. Kosovo has both a high percentage of people willing to do something active to fight corruption (80%) and a high percentage of people willing to report corruption (84%). As a result, the model predicted a high level of corruption in Kosovo, a CPI of 35, which was just below the actual CPI value of 33.

However, aside from proving the accuracy of the model in this case, these high values reveal important information about the people of Kosovo. It reveals Kosovars do believe corruption is an issue, and that they are willing to do something about it.

Summary

Overall, there are positives and negatives for Kosovo that can be taken from the Transparency International data. On the negative side, the CPI highlights that corruption is a significant issue in Kosovo. Even in a region with consistently low CPI scores (the best performer is Slovenia with a score of 58) Kosovo is a significant underperformer. The most disappointing aspect of this underperformance is that Kosovo has had the significant advantage of 15 years of assistance from various international agencies in setting up infrastructure for good governance.

That said, there is a big positive that comes from the GCB survey data, and it is also potentially an important clue as to the best way forward for Kosovo and the international organizations involved in the region. That positive is that the people of Kosovo appear to be aware of the issues of corruption in their country, and more importantly, they are very willing to take an active role to fight it. Compared to Albania, a country with the same CPI as Kosovo, almost twice the percentage of survey respondents stated they were willing to do something active to fight corruption in Kosovo (80% vs. 44%), and significantly more people said they were willing to report corruption (84% vs. 51%).

What this suggests is that, if harnessed effectively, anti-corruption efforts in Kosovo could be very popular, and therefore powerful. But the right strategies have to be implemented and publicized to garner public support.

Somewhat unsurprisingly, we believe a key strategy has to be raising awareness of how data can be used to reduce corruption and bring about change. This can apply equally to data that is currently collected by government agencies but isn’t publically released, or new datasets that the public can assist in collecting. With the right data and right analysis, these datasets can help to improve governance in numerous ways including:

  • exposing systematic corruption
  • identifying gaps in anti‑corruption controls, and
  • better targeting of anti-corruption efforts.

Using this open data approach also helps reduce reliance on the bravery of individual whistleblowers. Although whistleblowers are often vital in helping to identify incidents and even patterns of corruption, the fact is that, even in developed nations, they will always risk retaliation and other subtler forms of retribution (reduced career prospects, being ostracized by their peers and generally being perceived as untrustworthy).

Overall, what the results of the Transparency International data shows us is that, with better coordination and targeting of anti-corruption efforts, there is the potential to actively involve large numbers of Kosovars. If that can be achieved and funneled into meaningful strategies, the future of Kosovo could be very bright indeed.

Have any suggestions for ways data could be used to fight corruption? Disagree completely? Feel free to leave your thoughts in the comments!

 

[1] Gender Equality Related Corruption Risks and Vulnerabilities in Civil Service Kosovo, United Nations Development Programme. November 2014. Gender Corruption final Eng.pdf

[2] Defined by Transparency International ‘… as “the abuse of entrusted power for private gain”. Corruption can be classified as grand, petty and political, depending on the amounts of money lost and the sector where it occurs.’

[3] The methodology for compiling the CPI is reviewed on a yearly basis with data sources added and removed as needed.

[4] “To what extent do you see the following categories in this country affected by corruption?” – responses of “corrupt” or “extremely corrupt” recorded as a positive response.

[5] “In your contact or contacts with the institutions have you or anyone living in your household paid a bribe in any form in the past 12 months?“

[6] “Over the past 2 years, how has the level of corruption in this country changed?”

[7] “To what extent is this country’s government run by a few big entities acting in their own best interests?”

[8] “How effective do you think your government’s actions are in the fight against corruption?”

[9] By their own admission, Transparency International’s CPI is not a perfect measure of corruption. Corruption by its nature is hidden and so there is no objective measure of the true level of corruption. However, the CPI is currently the most respected measure of corruption available and so we make the assumption that it is also the most accurate for the purposes of constructing this model.

[10] Taken as the average of the percentage of people who said they would take part in a peaceful protest and the percentage of people who said they would join an organization that works to reduce corruption as an active member

Greece Says ‘OXI’!

And how! With over a third of the vote counted, it looks like ‘Oxi’ (‘No’ to accepting the conditions of the creditors latest offer) will win in somewhat of a landslide. Current numbers are showing over 60% of Greeks voted ‘No’. No matter whether you think this is the right choice or not, you have to admire the bravery of the Greek people choosing what is almost certainly the high risk option. So what happens next?

Next Steps

This is the part no one is sure about. Within Greece, Syriza has been campaigning for the ‘No’ vote on the basis that it will not result in a Greek exit from the Eurozone, but that it will strengthen the hand of the Greek government in negotiations with the creditors. While it certainly provides them with a strong mandate to turn down the current offer, getting a better deal depends on the creditors.

Outside Greece, popular opinion is that the creditors have too much to lose from making concessions to Greece. The fear is that if concessions are made this would encourage other countries, primarily Spain, Portugal and Ireland, to elect anti-austerity parties, similar to Syriza, and also request concessions.

This doesn’t mean further negotiations are pointless, there could be a middle ground. The bargaining positions of the two parties before the referendum were already very close, with Syriza then making further concessions after calling the referendum. It would seem conceivable that the creditors could quietly agree to the final offer from Syriza (or something close to it), lose a little bit of face, but still basically get their way. Will Merkel, Junker, Schäuble et al be able to stomach making any concessions at this point? That remains to be seen. If no deal is reached though, a Greek exit could be on the cards in the very near future.

What About Europe?

Regardless of what happens economically, the impact of this referendum appears certain to have ongoing political fallout. The level of excitement and the joyous reconnection with the democratic process that occurred in Greece, in addition to the result, is sure to resonate with people across Europe. In countries that have also been struggling with high unemployment and poor economic performance, largely as a result of austerity policies, people are sure to be taking particular notice. Although the economies of these countries are now performing significantly better than the Greek economy, and have more manageable debt burdens, the improved conditions are yet to be felt by the majority of people. In Spain, a country that has itself undergone high levels of very unpopular austerity, the economy has been growing strongly over the past year, but unemployment still sits above 20%. 

For this reason, the governments in these countries (particularly Mariano Rajoy in Spain) were often the ones arguing the hardest for no concessions to be given to Greece. In what appears to be a purely political calculation, this stance was taken not with any thought for the suffering of people in Greece or their own countries, but to short circuit popular support for anti-austerity parties domestically. Those leaders will surely have some tough weeks (and probably years) ahead.

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