What's holding the Third-World back? It’s the corruption, stupid.

Getting oil production back online, overcoming ethnic and inter-tribal rivalries, and safeguarding territorial integrity are all challenges ahead for Libya. But none are as big as the challenge to overcome corruption.

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Forget oil conspiracies; corruption is keeping the Third-World down.
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Benjamin Mueller
On 1 November 2011 12:16

What is the biggest problem faced by the National Transitional Council in Libya following Muammar Gaddafi’s fall from power?

Getting oil production back online? Overcoming ethnic and inter-tribal rivalries to prevent Iraq-style sectarian violence? Securing the country’s borders and safeguarding territorial integrity?

These are all notable challenges. But Libya, for a variety of reasons, faces a far bigger, more insidious obstacle to progress than those listed above.

The structure of Libya’s economy - geared overwhelmingly towards oil production - and its experience of four decades of shambolic governance catering solely to the whims of one man and his cronies makes the country particularly susceptible to corruption.

The lure of black gold inevitably creates incentives for corruption which stretch down the entire value chain: from the Oil Ministry official seeking to secure himself a kickback in return for an export license, through the local security chief wanting to see cash in return for the protection of a pipeline, right down to the oil executive in need of new oilfields: opportunities for corrupt practices are ubiquitous in the oil industry.

In Libya’s case, this problem is exacerbated by the fact that the Gaddafi regime was little more than a tribal kleptocracy whose very operating principle was corruption, entrenched at the highest levels.

The most recent reports suggest that the Gaddafi clan had amassed a fortune in excess of US$100 billion. Anecdotal evidence detailing the international shenanigans of Gaddafi’s offspring indicates that a large share of Libya’s oil wealth has been funnelled directly through the hands of the ruling clique since Gaddafi assumed power in 1969.

Institutions in the country, where they exist, have intentionally been kept weak and ineffective; after all, governance in Libya meant implementing Gaddafi’s orders, and no more.

His son Saif ‘authored’ a PhD at the London School of Economics, gloriously titled ‘"The role of civil society in the democratisation of global governance institutions: from 'soft power' to collective decision-making?” Ironically, said civil society is non-existent in Libya, thanks to Saif’s megalomaniac father and his ruthless stifling of political dialogue and debate.

An economy built on a prized commodity facing huge and growing global demand but requiring foreign investment for its extraction, coupled with a newly freed society formerly run by one man and his assorted cronies for nearly half a century: post-Gaddafi Libya has been dealt an ominous hand for post-war reconstruction.

There is huge potential for endemic, rampant corruption taking hold, which could blight the country for decades to come.

It is a commonly held assumption among a certain demographic in the West that we are somehow to be held responsible for the economic misery that is the plight of the poor in the developing world.

Post-colonial guilt has given rise to theories which argue that liberal capitalist practices cause Third World poverty, due to their exploitative nature. The empirical evidence, however, tells a different story. 

The introduction of free market practices has lifted 500 million Asians out of absolute poverty since 1990. Capitalism is the solution to, not the cause of, global poverty. So why does over a billion of the world’s population still have to make do with less than US$1 per day?

Rather than blaming the rich world, the answer lies closer to home.

The World Bank estimates that each year, more than US$ 1 trillion is paid in bribes worldwide. That’s the equivalent of the entire annual GDP of South Korea, the world`s fifteenth-richest country, disappearing illicitly in the accounts of bureaucrats, government officials, court officials, corporate crooks and all others whose jobs routinely allow them to fraudulently extract money.

Another World Bank estimate places the value of illicitly looted funds transferred out of Africa for safekeeping abroad at $400 billion. To put that figure into perspective, Africa’s richest economy - South Africa - has a GDP of roughly $360 billion.

Mobutu Sese Seko, the former President of Zaire, looted his country’s treasury of $5 billion by the time he fell from power in 1997, enough money to have re-payed Zaire’s entire external debt at the time.

Between 1993 and 1998, the Abacha clan in Nigeria stole between $3 and $5 billion in public funds, an amount that could have paid for the treatment of 3 million AIDS victims (ten percent of the global total) with anti-retroviral drugs over a period of ten years.

The vast majority of corrupt practices in developing countries originate within the government: 91 percent of all bribes reported to BRIBEline in India and Russia and 85 percent of bribes reported in Mexico and China went to public employees.

Corruption often takes the form of rent-seeking behaviour - extracting a share of a fixed amount of wealth without contributing productively to wealth-creating activity. That makes its effects pernicious and multi-layered.

A bribe is in effect another form of taxation, except that it is arbitrary, intransparent, applied inconsistently and, worst of all, not put to use for the public good like ordinary forms of taxation.

Hence corruption worsens the investment climate in a given country by raising the cost of doing business there: investing in a relatively corrupt country compared to an incorrupt one can be as much as twenty percent costlier for investors.

Worse, when corruption is sufficiently lucrative, manpower can be misallocated as a country’s talent is wasted. Some will seek to partake in this fundamentally unproductive but personally enriching activity, others will emigrate abroad to escape corruption’s consequences.

With money diverted from public into private coffers, essential public investments required for countries to escape poverty are not undertaken. For example, a country which improves its performance on a number of World Bank corruption indicators by one standard deviation increases its public spending on education by half a percent of GDP. Similarly, the rate of foreign investment in such countries goes up by an average of four percent of GDP. Most importantly, per capita income increases between two-and-a-half and four-fold - equivalent to a GDP boost of up to 400 percent.

The state-building process awaiting Libya poses an unparalleled challenge for a nation newly liberated to build a modern, prosperous and flourishing society.

But, as I’ve shown here, if this exciting process becomes mired in corruption, nepotism and fraud, the economic effects can be devastating to the point where they cancel out the benefit of having removed Gaddafi in the first place.

Primary responsibility to avoid this lies with the Libyans. Thanks to Gaddafi’s paranoia, no NGOs were allowed to set up shop in Libya during his reign, meaning that there are no international or regional watchdog organisations present on the ground. The National Transitional Council must ensure that this changes swiftly.

On a wider societal level, corruption must become so firmly associated with the Gaddafi era in the eyes of the public that a deep social stigma is attached to those members of the NTC who abuse their positions for purposes of corruption. This is a question of education and allowing for the cultivation of a flourishing civil society, with a free press and functioning institutions.

It is in this respect that the international community can play a crucial role. We must encourage the new Libyan government to strengthen the rule of law and the institutions that uphold it and we need to pressure the government to design and implement stringent anti-corruption mechanisms. The accountability of public officials both before the courts and the electorate needs to be ensured. The infrastructure build-up and of course the extraction and export of oil needs to be tendered through competitive, transparent procedures.

Toward all these ends the international community can and must contribute materially, through our technical expertise and by encouraging good governance practices to take hold in Libya by making aid conditional on anti-corruption benchmarks.

The challenges Libya faces are vast. But given that corruption does not take root in a fundamental sense - meaning a clear break is made with the governance doctrine of the Gaddafi era - the possibility of a successful, growing, stable and peaceful Libya emerging in the coming decade is real.

Benjamin Mueller is Director of Virtue Politics, a London-based consultancy advising clients from the public and private sectors on how to reduce levels of corruption, designing means of combating corrupt practices, and implementing anti-corruption strategies. 

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