This Week in Markets and Democracy: Rule of Law Index, Corporate Tax Evasion, and Electoral Transition

This is the second post of a new series on the Development Channel, "This Week in Markets and Democracy." Each Friday, CFR’s Civil Society, Markets, and Democracy Program, will highlight the week’s noteworthy events and articles.

1. Updated Rule of Law Index

The World Justice Project (WJP) released its annual Rule of Law Index this week. The Index scores and ranks 102 countries based on their performance on eight categories including levels of corruption, constraints on government powers, and regulatory enforcement. The scores are based on 2,400 expert testimonies and over 100,000 household surveys. Predictably, Denmark, Finland, and other European states top the list, while Venezuela, Afghanistan, and Zimbabwe bring up the rear. Corruption is a huge drag for emerging economies. It costs developing countries an estimated $1 trillion annually. As the Rule of Law Index shows, corruption mostly comes from governments—whether a police officer extorting a payment or a public official asking for money to provide basic public services. Good governance and robust rule of law are critical to economic growth and democratic consolidation in emerging countries. As the Rule of Law Index suggests, there is much room for reforming judiciaries, police, and public administrations in the developing world.

2. Corporate Tax Evasion Deprives Developing Countries

In advance of the Group of Seven (G7) annual summit in Germany, international and civil society organizations are urging international tax reform. According to the International Monetary Fund, corporations evade over $200 billion in taxes to developing countries, depriving them of critical domestic revenue. Through using tax havens alone, corporations deprive developing countries of $100 billion in annual revenues. Trade mispricing—when subsidiaries or branches of the same corporation artificially “over-price imports or under-price exports” in internal transactions and thus shift taxable profits elsewhere—is another popular method. Oxfam’s “Africa: Rising for the Few” report shows that in 2010, G7 multinational corporations avoided paying $6 billion to African governments through trade mispricing—three times the amount needed to deliver healthcare in West Africa’s Ebola-affected countries.

Loopholes in the international tax system enable this evasion. And weak regulation and little leverage over large multinationals makes developing countries particularly susceptible to these practices. Oxfam has joined with several other organizations and charities to form the Independent Commission for the Reform of International Corporate Taxation (ICRICT), and they call for international tax policy reform, demanding that OECD efforts to curb tax dodging extend beyond advanced economies to developing nations.

3. Electoral Transition and Democratic Consolidation

This week marked an important moment for democracy advocates. Despite postponing the election, struggling to distribute smart voter cards to eligible voters, and fighting off a violent insurgency that displaced many communities in the northeast, Nigeria bid farewell to President Goodluck Jonathan and swore in the opposition candidate Muhammadu Buhari on Monday. This marked the country’s first alternation of power between civilians of different political parties. Quick on the heels of this momentous occasion, Amnesty International released a damning report exposing human rights abuses committed by the Nigerian security service dating back to 2009. While Buhari’s election signals a positive step toward democratic consolidation and was dubbed by the U.S. assistant secretary of state for the bureau of African affairs as a “beacon for democracy”, the Amnesty report underscores that electoral transition is a necessary but not sufficient indicator of political freedom. For analysis of the Amnesty findings, read John Campbell’s recent blog post. Turkey’s democracy will also be put to the test on Sunday, when voters go to the polls to elect a new parliament. Many expect the election to serve as a referendum on President Tayyip Erdogan’s tenure and his authoritarian policies—including censoring the media, infringing on the judiciary, and cracking down on civil protests. If Erdogan’s party wins—as expected—he will be given license to dilute further Turkey’s democracy.