Transparency: a powerful idea whose time has come

In his remarks at the launch of the Open Government Partnership in New York on 20 September 2011, Francis Maude, UK Minister for the Cabinet Office and Member of Parliament began with a quote from Victor Hugo: “You can resist an invading army; you cannot resist an idea whose time has come.” The Minister went on to suggest that “transparency is a powerful idea whose time has come”. I couldn’t agree more. Mr Maude was one of eight heads of state and representatives announcing their commitments to the Open Government Partnership along with 30 other countries. The OGP is a new multilateral initiative bringing together governments and civil society to promote transparency, fight corruption, strengthen accountability and empower citizens.

Amplifying Mr Maude’s point was the announcement made by President Obama at the same table that the United States will implement the EITI, making it the second OECD country after Norway to implement this international standard for transparency in payments and receipts for the extractives sectors.

Clearly, momentum is building, but where does this idea about transparency come from and how powerful is it?

American Justice Louis D. Brandeis wrote in Other People’s Money, published in 1913, “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” This was a powerful idea at the time, an idea that helped create the US Federal Reserve System and break monopolies. President Woodrow Wilson embraced Brandeis’ ideas and nominated him to the Supreme Court in 1916. Wilson later advocated transparency of treaties between governments as a way to reduce the risk of war between nations in his famous speech to congress in 1918.

Early set back

Wilson’s successor, Warren G. Harding, took the country in the opposite direction. President Harding led his administration in a secretive style with selected close friends, later known as the infamous Ohio Gang. At this time, in the early 1920s, the United States dominated world oil supply much as Saudi Arabia does today. In 1921, Congress adopted the Mineral Leasing Act, which authorised the US government to lease public lands for the extraction of coal, petroleum, natural gas and other hydrocarbon and mineral deposits. This Act contained a loophole, however, allowing for the allocation of contracts without competitive bidding. Soon after the adoption of this law, the then powerful Secretary of the Interior and member of the Ohio Gang, Albert Fall, leased oil production rights of the Navy’s strategic reserves to two oil companies without competitive bidding. In exchange for favorable terms, Fall received generous donations and interest-free loans from the companies the equivalent of US $7-10 million today. In April 1922, the Wall Street Journal broke the story of what became known as the Teapot Dome scandal, named after one of the two oil fields in Wyoming. Following eight years of litigation and sensational reporting, Albert Fall was found guilty of bribery in 1929, sentenced to one year in prison and fined $100,000. He became the first Cabinet-level official to go to prison.

Slow but steady progress since 1933

In the wake of the Great Depression, another American president, Franklin D. Roosevelt, cited Justice Brandeis extensively when advocating for the creation of the Security and Exchange Commission to mitigate the risks borne by private investors and improve the governance of big corporations. In 1964, the Securities Act was amended to require disclosure of stocks traded over the counter. Transparency policies targeting a wide array of issues like mitigating the risk of pollution (toxic release disclosure), consumer protection (restaurant hygiene disclosure, nutritional labeling), occupational safety (work place hazard disclosure) were widely adopted in the second half of the 20th century.

financial reporting to the forefront

In this new millennium, financial reporting has come to the forefront , because of its potential to reduce risk of corruption while increasing company efficiency and government accountability. Recognising this potential, activists formed coalitions, such as the Publish What You Pay and Global Witness led the charge in pressuring governments and companies to disclose payments and revenues in the extractive sector. This sector had been ripe with corruption and fuelled armed conflicts in some resource-rich countries such as the DRC and Sierra Leone.

In 2003, the UK government convened governments, companies and civil society organisations and they agreed a framework for disclosure that became the EITI. An international EITI Board and a quality control mechanism EITI Validation were established in 2007. In 2011 a new edition of the EITI Rules came into force which contains more stringent requirement for disclosure. Today, 35 countries are implementing the EITI. With some 3.5 billion people—nearly half the world’s population—living in countries rich in oil, gas, gold and other valuable minerals, transparency in the extractives is crucial for development.

But how powerful is this idea anyway?

Amid the excitement around the launch of the Open Government Partnership in New York, Clare Short, Chair of the international EITI Board asked a daring question to a public panel: “How do we know that transparency will lead to accountability?” The panel, which included Sanjay Pradhan from the World Bank Institute, answered … you guessed it, “it depends.” In Ghana, for example, a World Bank study found that disclosure of the terms of contracts would be key to ensure that revenues from Ghana’s minerals and oil were all accounted for. Another panelist, Yamini Aiyar, from the Accountability Initiative, noted that the effects of transparency are so broad and complex that quantitative methods (including RCTs) alone may not capture the effects. She suggested anthropological research and other qualitative studies would be needed to understand citizens’ reactions to the information and how to use it to hold officials to account.

In Full Disclosure: the Peril and Promise of Transparency, published in 2007, Archon Fung, Mary Graham, and David Weil devoted an entire chapter to “What makes transparency work”. After reviewing targeted transparency policies at both national and international levels, they describe a complex chain of reactions that would lead to behavioral change. They found that information provided by transparency measures was often incomplete, incomprehensible or irrelevant to consumers, investors, workers and community residents. They concluded that to be successful, transparency policies must generate accurate information, keep ahead of disclosers’ efforts to find loopholes, and above all, focus on the needs of ordinary citizens. With the right policies, transparency has been shown to work in a number of areas. For instance, Hail & Leuz, 2006 found that firms had a lower cost of capital in countries with stronger disclosure requirements, regulations and enforcement mechanisms.

As the United States commits to implementing the EITI, transparency of revenues from the extractive industries will truly become an international norm. International civil society organisations, such as Publish What You Pay, Revenue Watch Institute, Global Witness, Transparency International, Oxfam and many others, who have worked tirelessly advocating for this policy over the last 10 years, have effectively succeeded in shifting the paradigm. In their campaign for transparency and openness, the question is no longer why governments should implement the EITI, but why are they not? That is a remarkable achievement underscoring that transparency is indeed a powerful idea whose time has come.