Sigrún Davíðsdóttir's Icelog

The clear correlation between crisis and corruption

with 14 comments

I’m in Dublin these days. Before going I had been following news from Ireland rather carefully: it’s a small country and there is a natural affinity between Iceland and Ireland. The word ‘cronyism’ certainly has popped up once in a while in the international reporting on Ireland but it’s come as a surprise to me that the word on everyone’s lips here is ‘corruption’ – the Irish, those who have no interest in denying it, largely see the political life as fairly corrupt.

It’s not just rumours, the ex-Taoiseach (prime minister) Bertie Ahern was forced to resign two years ago because of persistent corruption charges. Most Irish know by heart what he said, when interviewed on corruption charges: “What I got personally in my life, to be frank with you is none of your business. If I got something from somebody as a present or something like that I can use it.” Brian Cowan who replaced Ahern abolished the tent at the Galway races: the tent where the political leaders of his party, Fianna Fáil, had traditionally met with the property developers, the core of the Irish business community, for fundraising.

There has been a deluge of Irish crisis books. Today, at the Hodges Figgis bookshop I counted nineteen titles. Snouts in the Trough; how we have all been betrayed by politicians, bureaucrats and bankers by David Craig tells you what many Irish think of these three social groups. I’m currently reading Fintan O’Toole’s bestseller since last year: Ship of Fools; How Stupidity and Corruption Killed the Celtic Tiger. Quite interesting to see that financial fraud is nothing new in Ireland. He writes on cases of blatant fraud going as far back as the ‘70s that went ignored, un-investigated and ultimately unpunished.

The point of interest, in a wider context, is the continuity. As to Iceland, I have emphasised that is wasn’t the privatisation of the banks, 1998-2003, that led to the collapsed of the Icelandic banks. The threads go much further back, to the unhealthy atmosphere where the political parties divided and reigned, meted out money and favours to the undeserving through the politically controlled state banks. Loans were given on a regular basis according to political allegiance not business acumen.

Iceland and Ireland are two countries badly hit by the present financial crisis – but so are Spain, Portugal and Italy. Belgium doesn’t seem to be doing too well and everyone knows what happened in Greece. Some classify these countries (minus Belgium which so far isn’t officially a country in crisis) as the peripheral countries. Belgium doesn’t really fit in there, being right at the heart of Europe.

There is, however, another criterion that fits them all: corruption. From observing Iceland and now Ireland I’ve come to the conclusion that corruption is an important factor as to why these two countries – and apparently other European countries badly hit by a financial crisis – are suddenly so badly off.

What characterises countries with rampant corruption and cronyism is that money isn’t distributed on merit but according to whom you can do favours and receive in kind. When these countries were suddenly awash with money there were no channels but the corrupt channels – and the money was to some/a large extent wasted on ill-conceived projects. All these countries are dealing with mountains of bad loans. What a corrupt country lacks is a mechanism to distribute money and projects according to merit, business sense and according to what’s best for society. There is nothing in place except the corrupt channels.

All these countries suffer from a fairly poor civic sense, if you compare them to countries like the four Scandinavian countries or Germany. Tax evasion is, if not a national sport, then something that people in general sympathise with or don’t condemn. Scandinavia, Germany and France have a fairly strong believe in the authority of the state and its right to tax and rule. In his book on the Mafia, Cose di Cosa Nostra, Giovanni Falcone wrote that the Mafia thrives where the state isn’t present. The same goes for corruption – it’s in those corners of society where the state isn’t present with its rule of incorruptible law. The weaker the state the more space there is for corruption.

Iceland – and probably the other countries as well – had been more or less able to handle its own affairs while its economy was self-contained and mostly fuelled by only its own exports. It was generally spending what it earned or when it went out of kilter it managed to regain its balance. An Icelandic bank went bust in the 70s but the country survived it. In all the crisis-stricken countries domestic banks have grown enormously by fetching money on the international markets and lending them to their local customers. When the ability to fetch money abroad arose money flowed into bad deals, lousy projects and private clients were allowed to borrow far beyond their means: Iceland wasn’t the only country where the banks rushed onto the mortgage market, offering 100% or even 110% mortgages thereby heating up the market to a boiling point.

These countries tend to have toothless, often complacent, regulators that certainly in Iceland neither had the expertise nor the proper understanding of complex modern banking. The state in these countries isn’t strong and consequently the state institutions are weak as well.

I don’t think it’s a coincidence that the European countries worst hit by the crisis are corrupt countries with weak state institutions. The crisis in each of these countries has some aspects unique to each country. The common factor, however, is corruption and money, plenty of money, coming from abroad.

The countries that have so far apparently been fairly resistant to the crisis are countries like Germany and France, Denmark, Sweden, Norway and Finland. Outside Europe it’s a country like Canada. All of these countries have a long history of strong institutions and a strong state with a strong sense of civic values.

UK and the US are somewhat in a group of its own – big economies where the banks definitely did overstretch but where the state has so far been able to prop them up with taxpayers’ money.

Although Germany and France have, in terms of their banking sector, been a model of restraint their banks have been unrestrained abroad. German and French banks, as well as UK and American banks, have gone on a lending spree abroad, lending to the countries that are now so crisis-stricken. There is a lot of anger here in Ireland towards the EU for forcing Ireland to save its banks so as not to wreck havoc for French, German and British banks. It’s always easier to be upset with others, in Iceland the anger has been vented against the IMF, but there is an element of truth in this that especially French and German banks did in some ways go abroad to do things they couldn’t do at home. – The German and French banks are like kids who at home behave impeccably but who take out their pen knifes and cut up the furniture when they are visiting their friends.

In terms of Iceland it’s inconceivable that a bank like Deutsche Bank, lending to all the Icelandic banks and thus with a certain insight into the standing of these banks, showed so little restraint. German banks are by far the largest creditors to the Icelandic banks. And it’s irritating beyond words that the banks show so little understanding of their own actions and upsetting that governments aren’t showing any move towards doing the only thing that will go some way to restrain the banks: to split them up.

In Ireland I keep hearing that the crisis here isn’t just an economic crisis but a crisis of moral and social understanding. The same can be said for the other European countries fighting with the consequences of crisis. It won’t be enough to get banks lending again. These countries will have to take a long and hard look at their institutions and their sense of civic duties. This crisis isn’t just about money but about moral.

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Written by Sigrún Davídsdóttir

December 7th, 2010 at 2:01 am

Posted in Iceland

14 Responses to 'The clear correlation between crisis and corruption'

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  1. As always very well expressed, and topical.
    But the UK has its own corruption; it is not as overly financially based as it is in the countries that Sigrun mentions, but it is there in a much more subtle way. Influence is obtained in different ways, often by contributions to political parties or by providing jobs, or through connections. The effect is the same, that the very people who wrecked the UK economy are for the most part still exercising influence. There have been some changes to the managements of some of the banks, but no prosecutions of the former managements, and on the whole no action taken against the auditors, rating agencies, lawyers, investment bankers, analysts, brokers, ir/pr firms, civil servants, or regulators who were all involved. They are still in place, giving their advice and influencing events. Indeed PWC who is being sued apparently by the Glitnir Winding-Up Board prepared the unpublished report for the FSA on the collapse of RBS in which they apparently found no illegality or failures of corporate governance!
    A distinguished economist expressed this in a different way a couple of weeks ago when he said in a national newspaper.
    “We have big government – but it is spectacularly ineffective government. Whether it is the egregious failure and gross waste of our social security system, or the degenerate state of our education standards, our transport infrastructure, or the travesty of the protection supposedly offered to the citizen against crime, it is the same story: huge amounts of money spent to little good effect.
    “We seem to have the worst of both worlds – big government, which makes a nuisance of itself and costs a fortune, but which achieves very little.

    I wonder what will happen when the British people wake up to how badly their leaders have governed them.”

    Tony Shearer

    7 Dec 10 at 11:13 am

  2. Krugman blog entry today, and his link to the NYT piece on Iceland –

  3. […] of The Digest – see right hand column of this website – will have already read “The clear correlation between crisis and corruption” by Sigrún Davíðsdóttir. Davíðsdóttir is the London correspondent for RUV (Icelandic […]

  4. Amen. The US has not yet collapsed under the weight of its own corruption only because it is expanding it to levels never seen. Which means that when the kleptocracy DOES finally implode here, watch out.

    Knute Rife

    8 Dec 10 at 7:27 pm

  5. Sigrun
    Iceland’s experiences are of great importance to me.
    Comparison is an excellent tool when writing on any subject.
    The subject of banking collapse, corruption, cronyism, nepotism,dynastic political selection over decades and the incestuous activities of political and commercial corruption of democratic standards … is extensive and complex subject matter.

    Many well meaning analysts, writers and concerned citizens are struggling to deal with such complexity.

    It may be argued that only by concentrating on one part of the national disaster and limiting analysis, can we really get to grips with this mess.

    The subject is far too complex for any single essay or book.
    In Ireland the cronyism and dynastic political culture over many decades requires study and research before we can understand why no politician or banker is not in jail in 2010.( or ever in the history of the Irish state)
    Unravel this area and action will be required from the criminal prosecutions department.
    Crimes have been committed, no action , no arrests and no charges have been made.
    The US style of arresting the perpetrators and then demand that the law enforcers get out there and make the case for prosecution is the only path to prosecution of criminals.

    The cronyism of Irish police causes them work in reverse.
    Police dine out and retire on “investigating ” political and commercial criminals for decades.
    And never any charges, never any jail time.

    Criminal law exists in Ireland but due to cronyism, dynastic politics and linked corruption of the criminal system, politicians and their associated commercial friends are “untouchable.”

    This has to be the starting point.
    Rigorous enactment of the criminal law in Irish courts.
    Cabinet collective responsibility for decision making means collective accountability in Irish criminal courts.
    There is a law on gang membership which would be a starting point for police work.

    Donal Buckley

    8 Dec 10 at 9:19 pm

  6. I agree with your posting, the banking problem is the same with all investments…gaining money for providing nothing but a swirling theater of ‘development’.

    They are all Ponzi schemes of corruption, done hand-in-hand with the local political authorities that are tasked to hand out permits, manage the land and markets, and provide the pretense of rating and regulating.

    The complexity is not limited to their twisted investment instruments, rather it extends to the broad and vast interplay of actors involved.

    And now where once the Ponzi fleecing was limited to the audience of small and late investors, now it has morphed ticket fees onto innocent citizens who stayed away from this crooked theatre thinking themselves safe. We truly do live in a world gone mad.

    Mike McCarron

    9 Dec 10 at 3:55 am

  7. Very interesting observations. Corruption, though, comes in very different shapes and shades. It’s gross and obvious in some countries; more subtle and hidden in others. But the fundamental things is that the whole economic system is corrupt in its workings and in its effects.

    David Q

    9 Dec 10 at 10:11 am

  8. Mike Mc Carron says “We truly do live in a world gone mad,”

    But we are not mad therefore action to control the insanity of political corruption must have legal enforcement.No one is above the law.

    Action through law enforcement may require a special prosecution section.

    David Q says “very interesting observations.”

    Yes there are many shades of grey but that argument is too facile.
    The perpetrators slip the net when broad perspectives and generalitiles are applied.

    Best to concentrate on the crimes committed by these politicians.Gross negligence, deliberate fraud, deception, embezlement of public funds, self enrichment and treason may be a few of the many specific crimes to be prosecuted.

    Donal Buckley

    9 Dec 10 at 5:20 pm

  9. Thanks SD for an excellent observation of Ireland’s present situation. You are correct when you state ‘these countries will have to take a long and hard look at their institutions and their sense of civic duties’

    It was ‘immoral’ if not insane for the Irish Prime Minister to be paid significantly more than either the British or German . I read the former CEO of Anglo Irish -the most discredited bank -is pleading ‘poverty’ in a Connecticut Court in the USA while owning a 5 million dollar mansion in that state ?

    As a country Ireland has been woken up these past few years by crimes committed by bankers , politicians , priests and other formerly respected ‘leaders ‘ in our society . Our criminal justice system is designed to lock up petty criminals but these sophisticated pin striped white collar criminals seem one step ahead of the police not just in Ireland but elsewhere as well .

    Martin McE

    10 Dec 10 at 2:18 am

  10. […] some interesting similarities between Iceland and Ireland, as I have pointed out earlier (on crisis and corruption and then broader similarities and differences) but the Icelandic way as a way of […]

  11. […] earlier Icelog on corruption and its effects on the Eurozone crisis can be found here and […]

  12. […] have earlier compared Ireland and Iceland, ia on corruption (see ia here and here). After the Icelandic SIC report I pointed out that Icelanders knew a good deal more on their […]

  13. […] have breached on this topic earlier – and now I’ve expanded on this topic in a blog on the Le Monde Diplomatique website. I […]

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