Economic Crimes, Corruption and the Conflict in Liberia: Policy Options for an Emerging Democracy and sustainable Peace
By: Amara M. Konneh
Minister of Planning & Economic Affairs
But any assessment by the TRC of the issues of economic crimes committed in Liberia between 1979 and 2003 should begin with an assessment of Liberia’s economic performance before this period to distill any significant departure from this trend and determine the likely causes of such departure. A further assessment of the economic outlook during the post 1979 years should provide an opportunity for articulating the mitigating circumstances, in terms of whether or not these were endogenously induced or exogenously created to determine the commission of economic crimes. At this hearing on economic crimes, our purpose is not to indict anyone, but to give a general, frank assessment of the economy with the view of stimulating a debate on the factors we believe are responsible for any economic crimes that may have been committed and the effects of such crimes on the national economy.
“Economic crime” is a phrase whose meaning shifts with the speaker. It can describe the corruption of the young by using them in the kind of violence that engulfed our country between 1990 and 2003, or refer to political decisions that provide narrow benefits for the governed the Liberian people - in the form, say, of the use public money to build a new road for the people to use or a school to educate young people. In short, speakers use the phrase to cover a range of actions that they find undesirable. Because my testimony today will focus on both corruption and poor governance, I omit both morally corrupting activities, on the one hand, and run-of-the-mill evidence-based data to prove that indeed economic crimes were committed here, on the other. I will use the common definition of corruption as the “misuse of public power for private or political gain,” recognizing that “misuse” must be defined in terms of some standard. Activities such as drug trafficking, exploitation of natural resources, corruption and misappropriation of money from banks negatively affected the economic well-being of the Liberian people between 1980 and 2003. During this period, paying and receiving bribes, fraud, embezzlement, self-dealing, and conflicts of interest were the primary reasons for creating wealth, and thus became the incentives for public service. As I outline below, one of the most important debates turns on the issue of “state capture” which characterized Liberia between 1980 and 2003, where a narrow elite had a disproportionate influence on state policy and resources, leading to outright economic collapse and a failed state. During this period, outright bribery was extremely high, and the system was riddled with special interest deals that favored only those in and close to power over the majority of our people. Therefore, my presentation today falls into four categories:
a) I will present the context of the conflict and collapse;
b) I will then present the empirical evidence to show the effects of economic crimes on the economy;
c) And I will look at the causes of corruption and poor governance;
d) Having presented credible data gathered by international sources that have studied keenly the nature, causes and effects of economic corruption in Liberia prior to 1979 and thereafter, I will offer options for improving governance and reducing the commission of economic crimes, and finally share my concluding thoughts on the issue.
Conflict and Collapse
The origins of the conflict can be traced to two broad factors. First, significant portions of our society were systematically excluded and marginalized from institutions of political governance and access to key economic assets. The founding constitution was designed for the needs of the settler population, with less consideration and involvement of the indigenous people. In the early days, the land and property rights of the majority of Liberians were severely limited. Later, marginalization was perpetuated by the urban-based policies of successive administrations. Political power was concentrated in Monrovia and primarily at the level of the Presidency. Most infrastructure and basic services were concentrated in Monrovia and a few other cities. Marginalization of youth and women and the mismanagement of national resources were widespread, which contributed to stark inequalities in the distribution of benefits.
The over-concentration of power bred corruption a major component of economic crimes, restricted access to the decision-making process, and limited the space for civil society participation in governance processes. The consequence was a high level of resentment toward the ruling elite, which in part led to the bloody military coup of 1980 and its initial support among the people. The military and successive governments however failed to correct the ills of society and magnified the problems.
Second, economic collapse helped to propel the crisis. Liberia’s economy posted steady economic growth averaging 4 to 7 percent per year through the 1960s, strong growth performance during the early 1970s averaging 12 percent per annum, underpinned by increased prices of our traditional exports: iron ore, rubber, logs, and cocoa. Between 1955 and 1965, private capital flow into Liberia rose from US$60 million to US$500 million. But most of the gains were concentrated within the elite, and the majority of Liberians saw little benefit. The economy began to unravel in the 1970s with the combination of a sharp increase in world petroleum prices and a decline in the prices of key export commodities, particularly iron ore. By the latter part of the decade all indicators pointed to a looming crisis. Unemployment and consumer prices, particularly food prices, all rose at alarming rates, while growth stagnated, and tensions rose sharply.
The April 1980 coup d’état marked the beginning of Liberia’s steep descent into crisis. In 1981, terms of trade declined to approximately 67.8 percent; domestic production declined and the problems of balance of payments set in. On the fiscal side too, revenue earnings decreased by approximately 8 percent as a result of reduced income from taxes and profits, a result of low productivity and unemployment. A decade of poor governance from 1980 to 1990, mismanagement and dictatorship led to the outbreak of civil war in late 1989 and 14 subsequent years of chaos, plunder, and violence which did not end until the arrival of international peacekeepers, the ousting of the Taylor Government, and the signing of the Accra Comprehensive Peace Agreement (CPA) in 2003.
The damage and negative consequences of the conflict were enormous. Commercial and productive activities ceased as various warlords looted and vandalized the country. Families were shattered; entire communities were uprooted; and social, political, economic, and traditional governance systems were destroyed. There was a massive exodus of skilled and talented individuals from the country. The economy completely collapsed. GDP fell a catastrophic 90 percent between 1987 and 1995, one of the largest economic collapses ever recorded in the world, according to the World Bank’s World Development Indicators. By the time of the elections in 2005, average income in Liberia was just one-quarter of what it had been in 1987, and just one-sixth of its level in 1979.
The decline was felt across the board. Agricultural production dropped as people fled their farms and the supporting infrastructure collapsed; rubber plantations closed, manufacturing essentially stopped, and services ground to a halt. Production of iron ore and timber, as well as mining, ceased completely. Rice production fell 76 percent between 1987 and 2005, financial services fell 93 percent, and electricity and water fell 85 percent. Transportation and communication, trade and hotels, and construction all fell around 69 percent. Only the production of charcoal and wood increased as Liberians turned to these products to meet their basic energy needs.
Economic Crimes and Effects on the National Economy: Empirical Evidence
In light of the overview of the economy we have just outlined, the fundamental question is, were economic crimes committed?
To answer this question, let us examine cross country research on corruption and governance, which is part of a growing body of research that looks for the institutional bases of economic growth. Measures of corruption and poor governance are correlated with per capita income and with the United Nations Human Development Index (HDI). This means that richer countries, on average, have less reported corruption and better functioning governments. The same holds true for countries with high levels of the HDI, a benchmark for measuring health and educational attainment as well as income. In a relationship between the HDI and the index of corruption developed by Transparency International, very high levels of human development are associated with low levels of corruption.
These two stylized facts raise the possibility that economic crimes might have been committed in Liberia between 1979 and 2003. In addition to this, the available statistical evidence suggests that, correcting for other factors, poor governance was itself one of the reasons Liberia was poor and registered negative growth rates during the period under review. Kaufmann and Kraay of the World Bank Institute confirmed this assertion when they showed Liberia’s dismal performance on their six governance indicators recorded between 1996 and 2003, namely voice and accountability, political rights, civil liberties, control of corruption, government effectiveness, and rule of law. Looking at the result of their work before you, they found a positive association between corruption and poor governance in Liberia between 1996 and 2003. Let’s take a graphical look at their findings.
The Worldwide Governance Indicators report on six different indicators of the quality of governance, including “control of corruption.” The indicators are not based on a single source or opinion, but rather on the combined results of a large number of surveys of citizens, business enterprises, and experts in countries around the world. The individual data sources underlying the aggregate indicators are drawn from survey institutes, think tanks, NGOs, and international organizations, among other sources. The indicators are highly regarded as one of the best quality databases in the world. Oxford Analytica has called them “the standard bearer” for measuring global governance.
Given the empirical evidence produced by Kauffman and Kraay in their Worldwide Governance Indicators, economic crimes, particularly corruption, are symptoms of the kind of economic collapse Liberia experienced between 1980 and 2003 when private willingness-to-pay trumped public goals. During this period, private individuals and business firms paid to get routine services and to get to the head of the bureaucratic line. They paid to limit their taxes, avoided costly regulations, obtained contracts at inflated prices, and got concessions and privatized firms at low prices. Of course, corruption, in the sense of bribes, payoffs and kickbacks, is only one type of government failure. Rule of law, a key governance indicator, was non-existent, further exacerbating the situation.
Highly corrupt countries like Liberia tend to under-invest in human capital by spending less on education, to over-invest in public infrastructure relative to private investment, and to have lower levels of environmental quality. In the Liberia, during the period under review, there was no investment in human capital, in infrastructure, and our environment was neglected powerful elites took the money that could have been spent of those programs.
High levels of corruption produce a more unequal distribution of income; please consider our current income distribution, which the Government, through the Civil Service Agency, is wrestling with. One study hypothesizes that if corruption is very high, inequality is high, meaning that in a highly corrupt country, everyone is equally poor. This empirical work, which looked at findings from the most impoverished countries in sub-Saharan Africa, suggests that higher levels of corruption lead to increases in inequality, associating inequality with low levels of per capita income.
Causes of Corruption and Poor Governance
Given the costs of corruption and poor governance on Liberia, reformers need to isolate the causes of these phenomena. Cross-country data permit one to obtain a broad overview of the underlying causes of corruption and weak governance. I have already mentioned the role of income and wealth as both a cause and a consequence of corruption. That association is clear in all the studies I have cited. However, public sentiments to indict alleged perpetrators are not well handled in the empirical work. Nevertheless, it seems possible to conclude, first, that poor governance contributes to low growth and to the other harmful outcomes noted above, and that weak underlying economic conditions facilitate corruption. The exception is a very poor country like Liberia with weak institutions that is so bad off that there is little for anyone to steal.
Some studies find that trade openness and other measures of competitiveness reduce corruption (Blake and Martin 2002), suggesting that societies with fewer rents to share are less corrupt. What does this mean? Some might suggest that Liberia didn’t experience any growth between 1979 and 2003, and therefore economic crimes might not have been committed. Once again the causation is unclear; countries that do not favor corrupt firms may be able to establish a policy of open and competitive markets. Weak law and order and insecure property rights encourage corruption which in turn discourages foreign capital inflows. There is no evidence of any legitimate foreign direct investment in Liberia, due primarily to a weak rule of law environment.
Inequality contributes to high levels of economic crimes too, particularly corruption. In democracies in particular, inequality facilitates corruption, a result consistent with the state capture variant of corruption. The negative effect of inequality on growth may be the result of its impact on corruption taken as a proxy for government weakness.
Demands for greater democracy, transparency, and integrity in government often become more insistent as per capita income rises. However, to the extent that corrupt rulers recognize this possibility, they have an incentive to limit prosperity to constrain such demands. Those who benefit from a corrupt status quo will try to impede reform. Improvements in human wellbeing seldom occur spontaneously but, instead, require government actions to complement private efforts. Governments that waste resources through malfeasance or inadvertence are a drag on growth and undermine the achievement of other goals.
Efforts to promote “good governance” must be broader than anti-corruption campaigns. Governments may be honest but inefficient because no one has an incentive to work productively, and narrow elites may capture the state and exert excess influence on policy, as was the case during the period 1979 - 2003. Bribery might induce the lazy to work hard and permit those not in the inner circle of cronies to obtain benefits. However, even in such cases, economic crimes cannot be confined to “functional” areas. It will be a temptation whenever private benefits are positive. It may be a reasonable response to a harsh reality, but, over time, it can facilitate a spiral into an even worse situation.
People who were behind these economic crimes were usually smart and sophisticated, making use of financial resources to build extensive connections with local and regional law enforcement officials. If the perpetrators were officials of government, then decisive and swift action would be required to restore society’s confidence in government policy on the issue.
Options for Improving Governance and Reducing the Commission of Economic Crimes
The operation of the state and its interaction with the public are key challenges of our time. If government performance does not improve in the rural areas, programs designed to help the poor, improve the natural environment, and stimulate economic growth will have little impact and risk inflicting harm.
Estimating the costs and benefits of specific reforms is difficult even if cross-country research indicates that the gains from reducing corruption and improving governance are large. The main problem for us is tracing specific links from particular, concrete policies to desirable outcomes. Even the World Bank, which has been a leader in quantifying the costs of corruption, has been unwilling to organize the data in that fashion. However, some options are almost costless. Hence, even if the benefits cannot be precisely measured, the rates of return are large. This is, of course, not to say that there are no losers. Obviously, individuals and institutions, many with political power, benefit from the status quo and will oppose change. A major challenge for governance reform in Liberia is to overcome or co-opt entrenched interests.
Unresolved empirical issues limit the estimates of the relative cost-effectiveness of different strategies and the ways in which distinct alternatives interact. Thus an option may be better than the status quo but not necessarily better than another proposed reform. Furthermore, some of the options have never been tried on a large scale and have never been subject to systematic efforts to measure their effectiveness. Thus, all of us leaders need to design experiments and pilot programs with a Liberian recipe to test the value of options that appear promising. Based on my collection of reform options, there are several promising options:
Option 1: Grassroots monitoring and service delivery with technical assistance and information provision provided centrally by government or civil society organizations.
Benefits: Cost savings on existing programs that have ranged as high as 400%. Better overall economic performance and access of the poor to public services.
Costs: Opportunity cost of people’s time; costs of consultants and central government officials to help design programs and provide information. Demoralization costs if government does not respond to citizen complaints. Assuming the underlying program is beneficial, net benefits for successful programs are likely to be large with large benefit/cost ratios, but more needs to be learned about what works and is sustainable. Positive model cases: Brazilian urban democracy, monitoring of Uganda school funding, Nepalese local public works, South Africa Community Participation Programs.
Option 2: Procurement reform: Develop benchmarks and use them to reward efficient providers of public services. Consider integrating benchmarking with web-based systems based on public input. Role for international institutions, regional bodies, or government in providing benchmarking cost estimates and setting up interactive public comment systems. Encourage competition in providing goods and services to the state through use of more open procedures. More purchase of standardized products sold in international markets. Benefits: Cost saving on public contracts that may total 30-40% according to some estimates.
Costs: Costs of gathering benchmarking information and creating a system to use it. Note: Once again, assuming the underlying project is worthwhile, net benefits and B/C ratios will be large with benefits many multiples of costs. The main problem is a “technical” one we need to design a viable system. Model Cases: Rwanda’s estimates of over- and under-invoicing, and the United States procurement reforms in the 1990s.
Option 3: Reform of revenue collection through tax simplification, incentives to collectors and tax payers, monitoring. Short-term use of private firms to assure integrity. Benefits: Increased revenue collection in the best cases can be close to 100%. Costs: Increased pay and bonuses for collectors or fees paid to outside contractors, but these seldom total more than 50% of the revenue collected. Because the costs apply to all revenue, the existing situation is quite dire to justify these expenses. But the costs and revenue gains can be checked ex post so the policy is self-correcting. A further cost is demoralization costs imposed on other government employees who see the benefits flowing to the tax office. Net benefits and B/C will be high in many cases. Either Liberia can lower taxes or raise the level of service provision, but either way the productivity of public spending rises. Mostly positive models: Ghana, Mozambique.
Option 4: Reduction in the state-imposed costs of establishing a new business and in the costs associated with ongoing business\government relations. Regulatory cutbacks tempered with concerns for valid goals of some public regulations. Benefits: Encourages formation of new businesses and increases economic value of existing businesses. Less managerial time spent dealing with public officials. Costs: Close to zero for pure “red tape,” but reformers also need to evaluate any benefits forgone from programs with some social value. If reforms are designed with care, there are very high B/C ratios and net benefits.
Option 5: International Options: Technical assistance to develop monitoring and transparency initiatives as in the Liberia Extractive Industries Transparency Initiative (LEITI). Benefits: More of the benefits of extractive industry projects would flow to the rural poor. Given the leakage in some past projects, this could increase Liberia’s benefits substantially. Increased risk of asset recovery could reduce the incentives to engage in corruption. These are transfer benefits that shift resources from multinationals and key political insiders to ordinary citizens. Costs: Administrative costs of setting up such systems which should be only a few percentage points of the value of any project. Although the net benefits of LEITI appear large, some technical issues have not been resolved so this is not an “off-the-shelf” option.
I conclude my presentation with a few thoughts about the relationship between these policy proposals and the international environment. Consider aid and lending. Presently there is an ongoing debate about the value of conditionality in the provision of aid to Liberia. “Conditionality” in some broad sense is inevitable. International donors must choose where to put scarce funds, and they will consider where the funds will have some positive payoff. A weak state or one with high levels of corruption will be unlikely to manage aid well and so will get less. A state that does receive aid must comply with financial reporting requirements to assure that the funds are not lost to corruption and waste. Such conditionality, however, is less directly intrusive than aid that comes with explicit requirements for institutional reform. This latter type of conditionality has not been notably successful. An alternative is to organize projects that are directly focused on improved governance. Liberia’s dramatic improvement in controlling corruption is thought to result from the strong steps taken by the Sirleaf Government during the last two years, including enacting a new procurement law, establishing the new Public Procurement and Concessions Commission (PPCC), utilizing a Cash Management Committee to ensure greater honesty in budget spending, establishing the GEMAP program with key partners, renegotiating concession contracts, and holding government officials more accountable for their actions, among many other actions. The proposed anti-Corruption Commission, currently being debated in the Legislature as part of an anti-corruption bill, is designed to further strengthen these efforts. Liberia’s dramatic rise in the World Bank Institute’s rankings shows that, despite suggestions to the contrary by some, the country is making clear improvements in fighting corruption. Nevertheless this success, we need to carefully study these programs to isolate its strength and weaknesses.
Liberia is rebounding and recovering from the economic collapse we described in the opening of our presentation. Growth prospects remain strong relative to the historical patterns of the 1950s, 1960’s and early ‘70s. However, in light of some of the economic crimes that may have been committed during most parts of the nation’s poor economic performing years (1980-2003), we ought to focus on policies, measures, and controls to sustain current growth path. The present government is heeding to this national urgency by instituting major policy reforms such as implementing the 150-Day Action Plan in 2006, implanting an Interim Poverty Reduction Strategy in 2007, and currently implementing the Poverty Reduction Strategy stylized Lift Liberia. The reforms demonstrate that Liberia’s shift toward good governance and accountability could accelerate growth, restore citizens’ confidence in their government and public officials, and garner much needed support from the international community that should be the foundation for sustained development and poverty reduction.
Recent discussions of how to allocate our county development funds and foreign assistance sometimes suggests that we in Liberia have such poorly functioning institutions that no external aid should be provided because so much of it will be lost. This represents not, as some say, an end to conditionality but is instead conditionality writ large - at the level of the country as a whole, rather than at the level of the program. The best mixture seems to be broad-based decisions about which government funded project to support with some share of aid taking the form of grants to improve government performance. We must not create an environment that allows outsiders to micromanage our development projects, for example, to build roads, support education, and provide health care. Instead, we must take ownership by being transparent and holding those in charge of projects accountable to the people. Our partners would then willingly supply technical assistance that could lead to a quite deep involvement with the details of government operations. In contrast, policies which try to isolate corrupt institutions and individuals from participating in the debate encourage leaders to descend into paranoia and isolation and are ineffective ways to help our citizens who are the real victims of corruption. Real reform requires systemic policy initiatives. Corruption is a problem of institutional failure. Good governance matters!
I thank you!