TCS Daily

Corruption Down Under?

By Alan Oxley - May 5, 2006 12:00 AM

John Howard, Australia's Prime Minister, recently took the unusual step of providing an Op-Ed in the Wall Street Journal. The thrust? To show how when questions arose about payment by Australia's monopoly wheat trading organization of over US$200 million in secret commissions to Saddam Hussein, he had set up a public legal inquiry to root out the truth.

That he did. But the morality tale in this story is that when governments give agencies legal authority to regulate trade, they set up frameworks which invite corruption. Corruption is prevalent in Africa and there is temptation to think this derives from the culture. The Australian experience demonstrates the proposition applies universally.

Iraq has been a major market for Australian wheat for decades. Years ago, researchers developed a strain of wheat which flourished in the relatively infertile soils of Australia and which was ideal for making unleavened bread. It is the flour staple in much of the Middle East.

Australia is a food basket for the world. Along with the US, France, Canada and Argentina, it is traditional provider of wheat for the world. It established enduring trading relationships with Iraq, Egypt and Iran. When the UN embargoed trade with Saddam's Iraq, it continued to supply wheat under the Oil for Food arrangements that the UN had set up to ensure Iraqis received essential imports of food after sanctions were put in place.

It is now common knowledge that Saddam's family cut themselves into that trade. In Australia's case, the Australian Wheat Board -- the government-designated buyer and exporter of wheat in Australia -- was directed to use Alia (a trucking business based in Jordan) to deliver the wheat to Iraq. It is now clear that company was owned by Saddam's family. For shipments of wheat worth nearly US $3 billion, the fee to the trucking company was mandated at around 10 percent. These were not just handsome trucking charges, they were secret commissions.

Australian Government officials received several warnings about this. The inquiry has revealed that Wheat Board advised consistently that there was no problem and that the UN affirmed the arrangements. Given the corruption in the UN Secretariat which the inquiry by Volker revealed, such a line has not proved a credible defense.

The CEO of the Wheat Board and some other senior executives have resigned. When the inquiry reports, it seems most likely that the Wheat Board will be put through the wringer. The opposition Labor Party in Australia has pointed out the inquiry was just asked to focus only on whether or not the transactions were legal. It complains the inquiry was not asked to assess if government officials did all they should to ensure that this government mandated agency was acting properly.

The politics are acute. The Howard Government's polling reportedly indicates that most Australians consider that this is what companies have to do to do business in the Middle East. The secondary message is that the Government did a good job in looking after the interests of Australian farmers.

Public polling suggests the public do not believe the Government was unaware of shady nature of the deals. But there is no indication the political standing of the Government will suffer. Over the period, the popularity of the leader of the opposition Labor Party, Kim Beazley, has continued to slip.

The Government's policy of mandating that only the Wheat Board, a public company largely owned by wheat growers, can export wheat has been controversial for a long time. Most Australian wheat growers believe it secures higher prices. The mandate is contested by wheat growers in the US and the EU who argue it is interference in the market.

Australian wheat farmers counter that their American and European producers receive very large subsidies which Australian growers do not (which is true); and that the cost of protection created by the export monopoly is far less than the subsidies (also true).

But there is also an influential group of wheat growers in Australia who believe they would get better prices on world markets if traders could compete to buy Australian wheat. Economics is on their side. But up until now their views have not influenced Australian Government policy.

There has been little attention in Australia on a salient point. If Saddam Hussein's regime had to deal with more than one seller of wheat from Australia (including traders who were not agencies dependent on a government mandate), could they have so easily demanded such fat commissions? It seems unlikely.

Australia has built a standing as a strong advocate of free trade in agriculture over the last two decades. It lead the reform push in the Uruguay Round of trade negotiations in the eighties which, for the first time in the history of the multilateral trading system established under the General Agreement on Tariffs and Trade (GATT), secured commitments to open world trade in farm products.

Australia was an exemplar in reducing protection of its own farmers to the point today where the OECD records it as having one of the least protected farm sectors in the world. One of the few areas in which it did not practice free trade was mandating how Australian grain would be exported.

If nothing else, the case of the Australian Wheat Board demonstrates that no matter how much the broad political framework supports open trade, any interference in how the market can work is capable of producing ugly results.

Alan Oxley was Australia's Ambassador to the GATT in the early years of the Uruguay Round international trade negotiations.


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