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Center for International Private Enterprise

ECONOMICREFORM Feature Service® December 9, 2011

Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption Richard C. O’Sullivan Principal, Change Management Solutions

Article at a glance • Self-regulation by civil society organizations is a marketdriven approach to anti-corruption that often provides a more effective and efficient alternative to top-down government regulation. • Associations, whose authority rests in acceptance in the marketplace rather than government enforcement, can play a crucial role in rooting out government corruption and creating more transparent markets by adopting and selfmanaging voluntary codes of business conduct and quality standards. • Because participation and compliance are voluntary and, therefore, do not require legislation or official endorsement to succeed, self-regulated standards are more easily transferred from one country to another, making them well suited for developing markets whose limited domestic resources demand that they both compete and cooperate regionally in order to grow. To comment on this article, visit the CIPE Development Blog: www.cipe.org/blog

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Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption

Center for International Private Enterprise

Introduction When addressing corruption and transparency, international development organizations and projects tend to view civil society organizations as passive participants who advocate for action by government agencies but take no direct responsibility for reforming corrupt systems themselves. However, according to Alina MungiuPippidi, professor of Democracy Studies at the National School of Administration and Political Science of Bucharest, “To date few successes have resulted from this investment [in anti-corruption projects]. Few anticorruption campaigns dare to attack the roots of corruption the distribution of power itself. Instead, anticorruption strategies are adopted and implemented in cooperation with the very predators who control the government and, in some cases, the anticorruption instruments themselves.” In this observation Dr. Mungiu-Pippidi is recognizing that official corruption is often essentially monopolistic rent-seeking behavior of government-managed services where public officials are able to influence the price for their services through bribery or coercion. To limit anti-corruption efforts to advocating for greater transparency without fundamentally changing the monopolistic structures has yielded only temporary injunctions at best. At worst, advocacy organizations themselves can become yet another corruptible gatekeeper. An alternative, proven approach is to empower civil society organizations to serve as more transparent solutions to the corruption problem without government mandates. Self-regulation might seem counter-intuitive to some, yet, in fact, it has been proven to effectively reduce corruption, foster more transparent business environments, lower risks to financial and human capital investments, reduce the informal economy and increase formal market participation and the tax base, and spur economic growth.

Significantly, self-regulation shifts the cost of regulation from taxpayers to the direct beneficiaries of more transparent market activity – participating suppliers and their customers. This more targeted funding approach ensures the longterm sustainability of independent anti-corruption programs and reduces fiscal demands on cashstrapped government agencies. Not meant to replace advocacy, which must remain an important tool to effect change within government institutions, self-regulation provides a powerful complement to anti-corruption efforts by leveraging market forces to reward transparency rather than punish corruption. By engaging directly in regulating economic environments, civil society organizations become responsible and accountable for the end result. Through this greater responsibility, self-regulating organizations become proactive partners with government in promoting social goals and not just demanding action by others. Through examples drawn from both developed and developing markets, this article explains the theoretical foundations, historical background, mechanics of self-regulation, and why it works. It includes a discussion on the conflicts of interest that self-regulating organizations face and how those conflicts are best managed.

Self-Regulation at Work Self-Regulation by the Nonprofit Sector The outpouring of generosity by the American public following the terrorist attacks on September 11, 2001 was staggering. Despite an economy that had already fallen into recession, charities reported receiving private donations of over $1 billion in just 60 days and, at that time, showed no sign of slowing down. Unfortunately, that much money inevitably breeds corruption. Hundreds of fraudulent charities claiming to help 9-11 victims were created to scam the public out of millions of dollars.

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Center for International Private Enterprise

Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption

Coincidently, earlier that same year, the Council of Better Business Bureaus’ (CBBB) Foundation, which housed the Better Business Bureau’s Philanthropic Advisory Service, merged with the National Charities Information Bureau to provide a single source of information on charitable organization transparency. By September 11, 2001, this new organization, called the BBB Wise Giving Alliance, had already been formed to “help donors make informed giving decisions and advance high standards of conduct among organizations that solicit contributions from the public.” As the scope of the 9-11 associated fraud became more apparent, the Alliance decided to move aggressively to develop and promulgate its Standards for Charity Accountability, an assessment of 20 key financial, governance, and fundraising activities against which donors could evaluate the transparency of any charity regardless of its core purpose.

By

essentially

monetizing

the

value of being transparent, the Wise

Giving

Alliance’s

Charity

Seal provides a financial incentive for nonprofit organizations to prove that they are legitimate and transparent. Alliance does not promote individual Charity Seal holders to prospective donors. Rather, the Alliance sells training manuals and other publications designed to help organizations meet the standard and it educates the public as to the purpose and value of the Charity Seal in deciding which charity to support.

By the end of 2002, the standards had been developed, approved, and published, a certification program was developed, training materials and courses were created, and auditors were trained to assess organizations’ practices against those standards; an exceptionally short development cycle for a national standard. By the summer of 2003, the BBB Wise Giving Alliance began offering national charities able to meet the Standards for Charity Accountability the option of applying for a BBB Charity Seal that could be displayed both online and in their solicitation materials. A list of all current Charity Seal holders is maintained on the Wise Giving Alliance’s web site and the seal provides the public with “a clear, concise and easily recognizable symbol that participating charities adhere to the Alliance’s strong and comprehensive standards.”

Why the Government did not Intervene There are several crucial elements that made the Wise Giving Alliance program a successful example of self-regulation and a better solution than direct government oversight. First, its transparency was data driven and not influenced by financial or political interests. The standards were developed through a consensus of business and charitable organization leaders based on surveys of donors’ needs and concerns, which ensured that their selection would be transparent and needs-based and not intended to favor any organizational type or group. That the Alliance was able to obtain the voluntary cooperation of all of these stakeholders in so short a period of time speaks to both the perceived severity of the problem and the universal support for a self-regulating solution.

Fees to participate were set on a sliding scale starting with $1,000 for charities with total donations less than $1 million and go as high as $15,000 for organizations with more than $100 million in donations. Evaluations must be resubmitted every 24 months for an organization to keep its quality seal current. The Wise Giving

Second, the program is voluntary. Because the Charity Seal is not required for organizations to solicit funds, it does not create a barrier to entry and, –3–


Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption

Center for International Private Enterprise

hence, create economic rent-seeking opportunities to those managing the program. Third, it is self-funding. According to the Alliance’s most recent tax-exemption filing (2009), two-thirds of its entire budget of $1.8 million comes from Charity Seal fees and publication sales. The CBBB provides an annual grant of $200,000. The remainder comes from grants from other organizations to support research on charitable giving practices and to update and maintain the Standards of Charity Accountability. By essentially monetizing the value of being transparent, the Wise Giving Alliance’s Charity Seal provides a financial incentive for nonprofit organizations to prove that they are legitimate and transparent, eliminating the need for government intervention or taxpayer subsidies. By creatinged a progressive tiered cost structure based on participating organizations’ total revenues and receipts, the Alliance was able to limit smaller organizations’ participation costs. Fourth, it is built on the mutual self-interests of the participants. In order to protect their investments in the “brand value” that the credential creates in the marketplace, each participating organization has a vested interest in all other participants’ honest adherence to the standards. Therefore, the participants, themselves, can be expected to report any false claims by non-participating firms. They will also demand immediate action against certifying agents suspected of accepting bribes for certifying firms that have not met the published standards. By sharing ownership of the credential, firms are far less likely to tolerate “gaming the system” as they do when the credential is the property of a government agency of which they have little or no control. For its part, the association will diligently guard against misuse of the credential because it provides significant revenues. In the U.S., for example, associations with certification programs earn 30 to 35 percent of their total revenues from royalties and training programs associated with the credential.

The United States has one of the highest levels of self-governance in the world. Most professions and industries regulate quality control, consumer protection, and skills certification themselves. Fifth, self-regulating organizations are more responsive than bureaucratic ones. Even taking into consideration that the Charity Seal program was based on the BCCC’s previous experience managing its Philanthropic Advisory Service, its ability to implement a nationally accepted quality assurance program from standards creation through testing development and certification to public promotion in less than two years demonstrates a nimbleness that no government agency could match. Additionally, the Wise Giving Alliance has demonstrated by directing resources and adapting to different crises, as it did in the aftermath of Hurricane Katrina in 2005, a flexibility that few government agencies could match. The Well-Worn Path of Self-Regulation But was the Wise Giving Alliance an exclusive or even exceptional example of a civil society organization coping with corruption or bringing transparency to a market without governmental assistance? Emphatically, no. In creating the Alliance the CBBB was following a well-worn path of self-regulation that has been the cornerstone of American associational organizations even before the founding of the United States. Some of the best known examples of self-regulation in operation today are well over century old.

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Center for International Private Enterprise

Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption

For example, perhaps the most widely recognized self-regulating organization among American consumers, Underwriters Labs (UL), was formed in 1894 by the National Board of Fire Underwriters to create product standards needed to reduce risks of electrical fires, which had become a major problem for insurers, in the wake of the exponential growth in electrical appliances in the late 19th century. While elsewhere this function might have become the responsibility of a governmental ministry, in the United States the insurance industry, which had to pay for the consequences of faulty electrical products, chose to work independently to create one set of product safety standards for the entire country. Because Underwriters Lab was answerable to insurers who could readily determine the value of its investment in the decline in the number of electrical fire claims, it was in UL’s vested longterm interests to vigilantly police its testers to prevent accepting bribes for certifying substandard products. Also, because the insurers and not the manufacturers of electrical products drove the standards, there were no opportunities for suppliers to use the standards process as artificial barriers of entry to favor existing suppliers over future competitors or technological changes. Thanks to the long-standing reputation for maintaining consumer-focused, transparent standards, today, the UL’s symbol is not only commonplace in the

The [U.S.]

self-regulating

practices

organizations

espouse

emerged because of a weak central

much

In a more recent example, the Forest Stewardship Council (FSC), first organized by forest harvesters, wood product manufacturers, and environmental groups in California in 1990, has also become an independent, nonprofit global standards setter and certifier of socially preferred business practices. Formed to ensure that “the world’s forests meet the social, ecological, and economic rights and needs of the present generation without compromising those of future generations,” the FSC began certifying forest management practices and chains of custody from forest to retailer in the United States and Mexico in 1992. In 1993, Canadian forest management and wood products firms asked to join. In an organizational meeting in Toronto that year, 130 firms from 26 countries formed a global industry association. In 1996, the first forest management certifications were issued and the first consumer product to sport the FSC label appeared in retail shops. By 2003, more than 1,300 firms from over 65 countries had joined FSC and the number of hectares forests certified worldwide had reached over 40 million. While the FSC credits the 1992 United Nations Climate Conference for educating the public in the commercial, economic, and social value of sustainable forest management, one need only compare the outcomes from that and other climate conferences and the progress of this nonprofit industry association to appreciate the flexibility and responsiveness of civil society organizations in addressing social issues. As these examples demonstrate, the United States has one of the highest levels of selfgovernance in the world. Most professions and industries regulate quality control, consumer protection, and skills certification themselves. Even in regulated industries and professions, such as healthcare products and services, regulating agencies rely on industry and professional experts

government plagued by capacity issues...not

United States. It has become the recognized quality seal of consumer electrical products in more than 100 countries and has spawned peer organizations in 30 of them.

different

from [the environment] in many developing countries today. –5–


Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption

Center for International Private Enterprise

to control standards development, manage certification processes, and monitor the market with the government’s role limited to policing the standards organizations for anti-trust activities and other market distortions. The success of selfregulating organizations is so diffused throughout the economy that government is generally seen as the regulator of last resort.

Since participation and compliance is voluntary, a nonprofit standards management

regime

does

not

require local legislation or official endorsement to succeed.

Applicability in Emerging Markets Some international development professionals interpret the American self-regulating practices as a more mature means of managing the business environment for which transitional and developing markets are not ready. Yet, the current success and maturity of many well-known U.S. associations mask their humble beginnings. The self-regulating practices these organizations espouse emerged because of a weak central government plagued by capacity issues and rampant corruption and an under-resourced and often politically motivated judiciary. In other words, the environment that helped to create the American civil society sector was not much different from those in many developing countries today.

Combating Government Corruption Directly Even if self-regulating organizations can reduce the opportunities for commercial corruption, could they directly root out corruption in areas that remain under direct government control? Again, the answer is, “Yes.” One of the better known examples of a nonprofit organization creating market pressure to reduce official corruption is TRACE International. In October 2001, at the 10th International AntiCorruption Conference, held in Prague compliance officers from seven multinational companies met over dinner and discovered that all seven companies had used the same sales agent in Egypt, and every year each of them had subjected that agent to costly and time-consuming background checks. The group estimated that they had collectively spent at least $250,000 investigating the financial, legal, and political activities of just that one individual.

Ironically, because self-regulating organizations are so much a part of the economic landscape in developed countries their value and even their very presence have gone unnoticed and unappreciated by many international development professionals, even those from countries where self-regulation is a core capacity in civil society. Ignoring the central role that associations, professional societies, and independent credentialing organizations play in managing a market economy, many anticorruption and civil society development projects intended to address corruption and create more transparent and competitive business environments unnecessarily limit their focus to reforming corrupt regulatory agencies rather than helping civil society organizations actively self-regulate.

In attendance that evening was Alexandra Wrage, senior international counsel with Northrop Grumman, who realized that by creating a single high standard based on the best practices a single organization could accomplish a number of shared goals: (1) raise the compliance standard of all seven companies, (2) lower the costs to each, and (3) encourage greater transparency in hundreds of major commercial transactions by making the process of background investigations and the practices of

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Center for International Private Enterprise

Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption

the participants more thoroughly known. From this simple idea TRACE International, a nonprofit membership association of multinational companies and their commercial intermediaries, was born.

Recognizing the Limits of the Nonprofit Model It is important to note that after several companies had requested individualized consulting in anti-corruption practices, TRACE International realized that, although such services would support the organization’s goal, offering them directly would necessarily create a conflict of interest between the nonprofit organization’s goal of promoting anticorruption practices widely and the objectives of a consultant to provide its clients with a competitive edge. To offer these services directly would expose TRACE to exactly the kind of conflict of interest that brought down Arthur Andersen, whose auditors were reluctant to report the losses due to failed strategies provided by its consulting services.

TRACE, whose name stands for “transparent agents and contracting entities, offers its members several core services and products that “provide a practical and cost-effective alternative to increasingly expensive and time-consuming corporate anticorruption compliance: due diligence reports on commercial intermediaries; model compliance policies; an online resource center with summaries of local laws governing business transparency, including guidelines on gifts and hospitality and an automated gift and hospitality tool; in-person and online anti-bribery training; and research on corporate best practices.” TRACE will soon be adding a complete supply chain management tool to is product offering.

In 2007 TRACE Inc. was formed as a separate for-profit firm to “provide tailored due diligence, mergers and acquisitions support, anti-bribery risk assessments and compliance program design and consulting.” Failure to create financial and organizational firewalls by associations that directly offer consulting services to their members has often led to cronyism. The end result, ironically, is less transparency. In addition, it distorts the business services sector by creating unfair competition for all of the for-profit service firms required to pay taxes on their revenues.

TRACE also offers commercial intermediaries its Anti-bribery Specialist Accreditation (TASA) certification, a professional credential for antibribery compliance specialists. The TASA credential provides certified intermediaries a marketing advantage by creating a bridge between them and companies doing business internationally. This comprehensive and rigorous program enables professionals working in this growing field to distinguish themselves from their competitors.

It is the customer, after all, who

Like CBBB’s Charity Seal and Underwriter Labs’ “UL” designation, the TRACE Anti-bribery Specialist Accreditation is designed to be selfsustaining. Also like those credentialing programs, it is self-regulating. TASA reduces corrupt behavior by creating increased market value for those who can prove that they act transparently. The approval of a TASA certified investigator opens a firm up to greater global business opportunities. As a consequence, official corruption is reduced as firms are rewarded in the marketplace for not submitting to bribery demands.

pays for standards implementation in the end through the higher prices the credentialed suppliers are able to charge for their products or services.

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Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption

Center for International Private Enterprise

International Reach

Taking It to the Streets

The UL, FSC, and TRACE examples also demonstrate a sixth advantage of nonprofit organizations in creating and monitoring standards: their ability to function as supra-national organizations. Since participation and compliance is voluntary, a nonprofit standards management regime does not require local legislation or official endorsement to succeed. Its authority rests in acceptance in the marketplace. FSC could create and implement a single sustainable forest management regime accepted by 26 countries in just two years because it sought mutual benefit over protecting local political and economic interests, the usual goal in treaty negotiations and all too often influence national legislative efforts.

The examples offered so far demonstrate the ability of nonprofit associations to leverage market forces to achieve numerous social goals in national and international markets. But what about markets dominated by local activities such as construction? Can associations work there effectively?

Nonprofit organizations are able to quickly reach consensus on common multinational standard and certification schemes without sacrificing social goals or objectives by focusing – not on the commercial advantages for its members – but on the best interests of the members’ customers. It is the customer, after all, who pays for standards implementation in the end through the higher prices the credentialed suppliers are able to charge for their products or services. With globalization, the role of nonprofits in ensuring quality controls has become increasingly crucial, especially for developing markets, in providing consistent compliance by suppliers from multiple countries regardless of the whims or greed of local government officials.

There is no need to invent new extrajudicial supranational organizations to address global solutions. In fact, they already exist.

By 2000, no longer able to tolerate the level of official corruption that led to the second People’s Power political revolt in the Philippines, a number of different volunteer organizations formed the Transparency and Accountability Network (TAN) to “contribute significantly to the reduction of corruption in the Philippines” by coordinating and providing mutual support for anti-corruption initiatives. Today, the TAN coalition has 25 organizations supporting its efforts. In 2009, Vincent Lazatin, TAN’s executive director, was working on the World Bank’s Construction Sector Transparency (CoST) initiative, which engages civil society organizations, governments, private sector, academics, and donor agencies to improve transparency in publicly funded construction projects. According to Mr. Lazatin, 30 to 60 percent of road construction projects in the Philippines are subjected to bribery and corruption. Following numerous failed attempts to obtain official documents on quality control and standards conformance of road construction projects, TAN took the initiative to independently evaluate road construction projects and created Road Watch to send observers to road construction sites to perform their own, independent inspections. Along with construction industry professionals armed with testing equipment and the press, Road Watch agents began visiting specific construction sites and performing their own tests. This included Mr. Lazatin himself sticking a ruler into a recently poured roadbed to ensure it met contract standards. With media representatives eager to report the results, construction site managers tried to discredit Road Watch participants as uninformed citizens

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Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption

who did not understand the complexities of building roads. The participation of construction specialists quickly dismissed this charge. In time, road construction companies and local government authorities, anticipating TAN’s independent policing of road construction projects, began meeting the published standards to avoid further public scrutiny.

The examples put forward in this article demonstrate that the organizational model proposed by Rischard is not a futuristic dream. There is no need to invent new extrajudicial supranational organizations to address global solutions. In fact, they already exist. Associations are already performing those tasks in countless markets, professions, and industries. By looking beyond governmental agencies for solutions and harnessing the forces of the market to reward positive behaviors and penalize socially unacceptable ones, nonprofit organizations have created transparent means of addressing corruption that has proven to be more responsive to changing environments and performs across political boundaries.

Conclusion Civil society organizations can be effective game-changers in the fight against corruption – not only as advocates for more transparent government behavior but also as independent and transparent self-regulating organizations. In that capacity, they can leverage market forces and mutual self-interests of the participants to reduce the opportunities for official corruption, shift compliance regulation costs from taxpayers to the businesses who benefit, and respond more quickly to market dynamics. Unfortunately, many development programs, either through lack of understanding or experience with self-regulating organizations, have not utilized them to best effect. Not only does this oversight leave local populations fighting corruption with one hand tied behind their backs, it denies advocates the use of the more dominant hand!

Endnotes Mungiu-Pippidi, Alina, Corruption, Diagnosis, and Treatment, Journal of Democracy, Vol. 17, No. 3, July 2006, National Endowment for Democracy and The Johns Hopkins University Press. 2 “Giving in the Aftermath of 9-11: Final Update on the Foundation and Corporate Response, http:// foundationcenter.org/gainknowledge/research/pdf/9_11 updt04.pdf. 3 See: www.bbb.org/us/Wise-Giving. 4 American Society of Association Executives’ Operating Ratio Report (annual, several years), www.asaecenter.org. 5 Term “associational” is used in this context to describe any voluntary organization formed to create a social good for mutual benefit and not just business or professional associations. These would also include educational foundations, parent-teacher associations, church groups, social clubs, in addition to advocacy groups. 6 See: www.ul.com. 7 See: www.fsc.org. 8 Atkins, Ben and Stephen Wrage, Building a Successful NonProfit Organization: The TRACE Experience, REFORM Case Study series, Center for International Private Enterprise, Washington, DC, December 27, 2006, www. cipe.org/publications/papers/pdf/IP0603-TRACE.pdf. 9 www.TRACEInternational.org. 10 See: www.tan.org.ph. 1

In an increasingly globalized environment, the value of associational groups to address transparency in standards compliance will become even greater. In his 2002 publication, High Noon, Jean-François Rischard, former World Bank vicepresident, proposed that in a globalized 21st century, there would be a need for new kinds of regulatory organizations that “would be recognized by governments but would function as extragovernmental bodies devoted to specific problems and would produce globally recognized standards.” Rischard also claimed that the authority for such organizations “would not be legal but normative” by singling out those organizations that do not comply.

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Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption

Center for International Private Enterprise

Richard O’Sullivan is the principal and founder of Change Management Solutions, an international consulting firm dedicated to helping organizations identify, understand, and harness the forces of profound market, economic, and social change. An economist and business environment analyst with 30 years experience in the public, private, and civil society sectors, O’Sullivan has worked with associations and other nonprofit organizations around the world. He is a recognized expert in applying market forces to address social concerns. From 2002 to 2004, O’Sullivan served as Assistant Director at the Johns Hopkins University Center for Civil Society Studies. He founded and now serves as co-chair of the Civil Society Workgroup for the Washington, DC chapter of the Society for International Development (SID-W). He also is one of 15 selected members of the International Council of American Society of Association Executives (ASAE). The views expressed by the author are his own and do not necessarily represent the views of the Center for International Private Enterprise (CIPE). CIPE grants permission to reprint, translate, and/or publish original articles from its Economic Reform Feature Service provided that (1) proper attribution is given to the original author and to CIPE and (2) CIPE is notified where the article is placed and a copy is provided to CIPE’s Washington office.

The Economic Reform Feature Service is CIPE’s online and electronic article distribution service. It provides in-depth articles designed for a network of policymakers, business leaders, civic reformers, scholars, and others interested in the issues relating to economic reform and its connection to democratic development. Articles are e-mailed and posted online twice a month. If you would like to subscribe free of charge, please join the CIPE network by entering your e-mail at www.cipe.org. CIPE welcomes articles submitted by readers. Most articles run between 3-7 pages (1,0003,000 words). All submissions relevant to CIPE’s mission will be considered based on merit. The Center for International Private Enterprise (CIPE) strengthens democracy around the globe through private enterprise and market-oriented reform. CIPE is one of the four core institutes of the National Endowment for Democracy and an affiliate of the U.S. Chamber of Commerce. Since 1983, CIPE has worked with business leaders, policymakers, and journalists to build the civic institutions vital to a democratic society. CIPE’s key program areas include anti-corruption, advocacy, business associations, corporate governance, democratic governance, access to information, the informal sector and property rights, and women and youth.

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Beyond Advocacy: An Inclusive Role for Civil Society Organizations in Addressing Corruption