Corruption and Integrity Improvement Initiatives in Developing Countries
United Nations Development Programme
Management Development and Governance Division
Bureau for Development Policy
304 East 45th Street, 12th Floor
New York, NY 10017
Tel : (212) 906-5054
Fax : (212) 906-6471
Email : g.shabbir.cheema@undp.org
Corruption And Integrity Improvement Initiatives In Developing Countries offers views of eminent international thinkers and practitioners on how to reduce and eventually eliminate corruption. The book shows that, while helpful, democracy is by no means a cure for corruption, nor is economic liberalisation a panacea for ending public sector crime. The contributors call for strategies that combine law enforcement, prevention through institutional reforms and public support. A strong correlation between successful anti-corruption programmes and civil liberties is demonstrated throughout the book.
Publication of this material follows an international conference in Paris on the same theme, co-sponsored by the United Nations Development Programme (UNDP) and the OECD Development Centre.
CORRUPTION AND INTEGRITY IMPROVEMENT IN DEVELOPING COUNTRIES
The views expressed in this book are those of the authors. They do not necessarily reflect the official views or policies of the United Nations Development Programme (UNDP) or the OECD Development Centre.
Table of Contents
Message from Transparency International, Peter
Eigen
Preface
Acknowledgements
Overview, Sahr J. Kpundeh and Irene Hors
Part 1
1. "Cross-Border Corruption":
Points of Vulnerability and Challenges for Reform, Michael Johnston
2. Corruption and the Global Economy, Susan
Rose-Ackerman
Part 2
3. Corruption and Anti-Corruption
Strategies: Issues and Case Studies from Developing Countries, Alan Doig and Stephen Riley
4. Revisiting Anti-Corruption Strategies:
Tilt Towards Incentive-Driven Approaches, Daniel Kaufmann
Part 3
5. The Role of Civil Society, Peter
Eigen
6. Political Will in Fighting Corruption,
Sahr J. Kpundeh
7. The Role of Civil Society
and Patron-Client Networks in the Analysis of Corruption, Mushtaq H. Khan
Part 4
8. Different Perspectives
of International Organisations in the Fight Against Corruption Pauline Tamesis
9. Strengthening Domestic Institutions
Against Corruption: A Public Ethics Checklist, Alexandra Mills
10. OECD Actions to Fight Bribery in International
Business Transactions, Carolyn Ervin
Appendices
1. United Nations General Assembly, Resolution
on Corruption in 1997
2. OECD Convention on International Bribery
in 1998
3. The Lima Declaration in 1997
Message from Transparency International
Corruption is present in almost any country, but has the most devastating effects in developing economies, because it hinders any advance in economic growth and in democracy.
Corruption wastes resources by distorting government policy against the interests of the majority and away from its proper goals. It turns the energies and efforts of public officials and citizens towards easy money instead of productive activities. It hampers the growth of competitiveness, frustrates efforts to alleviate poverty and generates apathy and cynicism. The harms caused by corruption, which are as numerous as the shapes corruption can take, have destroyed well-intentioned development projects in the South and undermined political and economic transitions in the East.
Whereas in a developed country corruption may prevail in a single component of the body politic, in a developing country, which often has weaker administrations and political institutions, the corruption problem can actually become part of the system. In Ecuador, its proliferation has endangered the country’s democracy. In Tanzania, corruption has been found in all sectors of society and has appeared as the main source of public discontent.
Dealing with corruption is far from being simply a matter of law enforcement. The casualties of corruption include the country’s integrity system itself, and therefore reform of the national integrity system has to take place.
In this effort, it is important from the outset that the political will is present to obtain legislative or administrative changes effective enough to contain corruption. It is also essential to have the three main actors of society working together: the government, the private sector and the civil society. The energies of all three are needed to assure changes in moral and ethical attitudes and to achieve meaningful reforms.
The role and the importance of international institutions in dealing with corruption have increased dramatically within the past few years. At the national level as well as internationally they have declared war on corruption and taken concrete steps to minimise its prevalence. Agreements over recommendations and international conventions (OECD), the introduction of specific procurement guidelines (World Bank, OECD DAC) and the development of projects promoting greater monitoring, transparency and accountability (UNDP, USAID) in countries in which donor agencies work, are examples of very effective measures towards the banishment of corruption.
This publication will provide the reader with a clear idea of the approaches mentioned above, what their strengths are and how they can weaken corruption practices. Corruption is multiple and needs to be fought on different fronts simultaneously. I therefore feel a certain relief and encouragement to see so many dedicated people and institutions, providing support and commitment to eradicate corruption.
I would also like to express my appreciation to the OECD Development Centre and to UNDP’s Programme for Accountability and Transparency for having provided us, during the conference on Corruption and Integrity Improvement Initiatives in the Context of Developing Economies, with a valuable opportunity for presenting and exchanging ideas, perspectives and approaches toward the analysis of the corruption problem generally and in specific cases, as well as with regards to ways of acting to curb this scourge.
Peter Eigen, Chairman Transparency International (TI)
Berlin, Germany
April, 1998
The international community's concern with corruption issues is not a passing phenomenon. It is now an accepted fact that corruption hinders economic growth and sustainable development and often results in human right violations. A firm commitment from all players -- government, the private sector and civil society -- is required to develop and implement solutions. Such solutions must include concrete measures -- preventive as well as punitive -- that address issues of accountability, transparency and inequity at various levels of social and economic systems. In this respect, the international community has a role to play both as catalyst and supporter for these reform efforts. The particularly complex nature of corruption makes international co-operation and co-ordination even more critical to the successful implementation of strategies to improve integrity in governance.
The need to build partnerships and encourage closer collaboration among all players in the international development community was underscored at the conference Corruption and Integrity-Improvement Initiatives in Developing Countries, held at the OECD Headquarters in Paris on 24-25 October 1997. The conference was jointly organised by the OECD Development Centre and the UNDP Programme for Accountability and Transparency (PACT). The meeting provided a forum for participants -- policy makers, academics, government representatives, experts, international development institutions and aid agencies -- to discuss the difficulties surrounding the design of effective strategies given a context of diverse corruption patterns and country-specific circumstances. In addition, the international dimension of corruption and the role of aid and lending agencies were addressed. Finally, and perhaps most importantly, the participants had the opportunity to debate some of the solutions and strategies that are proposed to developing countries to assist in their anti-corruption campaigns.
Both the OECD Development Centre and UNDP have programmes in place to study corruption and to assist policy makers in the fight against corruption. UNDP’s involvement is rooted in its mandate to create an enabling environment for sustainable human development. The PACT serves as the focal point within UNDP to ensure a coherent and effective strategy in supporting anti-corruption programmes. Its work focuses on (i) facilitating good governance interventions in specific domains; (ii) supporting methods to curb corruption, including policy dialogue, capacity building, documentation and analysis of best practices and support to national programmes; and (iii) making reformers aware of the importance of country conditions in programme development.
At the OECD Development Centre, policy-oriented research on corruption in OECD non-Member countries has been a priority since 1996. This work has a dual objective: to provide policy recommendations to developing country governments and aid agencies in their fight against corruption; and to provide OECD Member countries with a clearer understanding of the causes and consequences of corruption in developing countries. By using an analytical framework of corruption issues to explore country case studies, the project seeks to identify the diverse forms of corruption in various countries and the ways in which they affect economic efficiency and governance.
This publication covers a broad set of issues ranging from the global consequences of corruption to specific-country reform experiences. The objective of grouping this diverse set of papers is to provide policy makers with both traditional and innovative thinking on anti-corruption strategies as well as an analysis of the effectiveness of specific approaches and initiatives already in place. Moreover, the publication of the proceedings of the conference serves as a key element in the network building and information sharing which is essential to successful collaboration and co-ordination among key players in the reform effort.
The OECD Development Centre and UNDP believe that this publication will broaden the debate on anti-corruption strategies and contribute to strengthening initiatives to improve integrity in governance. Both organisations wish to express their gratitude to the authors and participants in the conference for their excellent contributions, without which this publication would not have been possible.
The views expressed in this publication are not necessarily shared by the Executive Board and the Member countries of UNDP or the OECD Development Centre.
G. Shabbir Cheema
Director, Management Development & Governance Division
Bureau for Development Policy
UNDP
Jean Bonvin
President OECD Development Centre
This publication is a product of the co-operation and commitment of an extensive group of organisations and individuals. UNDP is very grateful to the contributors, who agreed to prepare their chapters within tight deadlines and provided substantial suggestions and information on the manuscript. We are deeply grateful for their active participation in the completion of this volume.
UNDP also appreciates the partnership and teamwork with the OECD Development Centre in organising the conference and preparing this book. Jean-Claude Berthelemy and Irene Hors were critical to the success of both endeavours. A word of thanks also to our colleagues at the Development Centre, specially Micheline Dabos, who helped in the conference.
Most importantly, UNDP is greatly indebted to the editors, Sahr Kpundeh and Irene Hors, without their wise advise, expertise and dedication, this publication would not have been completed. Their work is immensely appreciated, particularly in skillfully editing and keeping control of the complex and multi-faceted manuscript.
This publication represents the joint efforts of the presentors, discussants and conference participants who have generously contributed their knowledge and experience to create this cutting-edge volume on corruption issues and integrity improvement initiatives. The UNDP PACT team, including Fred Schenkelaars, Ato Ghartey and Pauline Tamesis, extends its sincere thanks to all those who have made this publication possible.
Sahr J. Kpundeh and Irene Hors
The last decade has seen a growing mobilisation of the international community to combat corruption in developing countries. International organisations such as the World Trade Organisation, various United Nations agencies, the Organisation for Economic Co-operation and Development (OECD), the Organisation of American States, the European Union, and the Council of Europe are now addressing corruption as an important policy concern. Lenders such as the World Bank and the International Monetary Fund, along with some regional financial institutions have begun to recognise corruption as a problem that adversely affects their work.
Consequently, much human and financial effort is being devoted to curbing corruption. To ensure efficiency, we need to analyse past experiences, successes and failures. As Daniel Kaufmann puts it, it is useful to "pause a moment to distil the emerging lessons". It is with this perspective that the UNDP Programme for Accountability and Transparency (PACT) and the OECD Development Centre organised a conference on the issues of Corruption and Integrity Improvement Initiatives in the Context of Developing Economies, on the 24th and 25th of October 1997, at OECD headquarters in Paris.
One of the primary objectives of this conference was to work on a conceptual framework for the analysis of corruption in developing countries. It was important to the organisers of the conference to confront this conceptual framework with the developing countries’ realities. Conceptual frameworks, although clear and well-balanced, are sometimes too far from reality, and thus irrelevant for guiding action. To address this concern, the conference brought together specialists on corruption from academic institutions in both developed and developing countries, as well as journalists, entrepreneurs and government officials from developing countries, who have to deal with the problem of corruption in their own contexts. These participants were able to analyse the experience of several countries dealing with corruption in order to try to see the key elements and conditions for the success of anti-corruption programmes.
Another objective was to discuss integrity improvement initiatives and approaches developed by multilateral and bilateral agencies, and by non-governmental organisations. There were representatives from the UNDP Management Development and Governance Division, the OECD, the World Bank, the International Monetary Fund, Transparency International, the United States Agency for International Development and United Kingdom's Department for International Development. This gathering was intended to contribute to a better definition of the role of international institutions in integrity improvement.
This book is a collection of selected texts presented during the workshop; it also includes two critical compilations of several presentations and their related discussions (see chapter on the country experiences, and the chapter presenting several institutions’ activities and positions).
In chapter 1, Michael Johnston points out that the connections between cross-border and domestic corruption are simple and direct: practitioners of cross-border corruption will almost always require the co-operation of local officials to carry out and conceal their schemes. Johnston suggests that cross-border corruption should be of concern to us primarily because of its potential to interact with domestic corruption, often with the effect of intensifying both and making reform more difficult. Johnston discusses two types of cases which he thinks are the most worrisome: "source" countries and vulnerable states. Source countries are those that are home to powerful Mafia or drug cartels and those harbouring "outlaw" enterprises. Vulnerable states are those that experience severe cross-border corruption because of their political fragility--extensive domestic corruption, poverty, small size, political and administrative weakness, etc. Johnston points out that there is no single recipe for eliminating cross-border corruption. However, he suggests that efforts to control it will meet with little success unless they are supported by, and co-ordinated with, effective action against domestic abuses.
Susan Rose-Ackerman builds on Johnston’s arguments by stating in chapter 2 that like any exchange, there are two actors required in corruption--a buyer and a seller. She discusses "grand corruption" and provides several examples to demonstrate that it is the preserve of top officials and frequently involves multinational corporations operating alone or in consortia with local partners, and thus that corruption cannot properly be described as "exported" by multinational firms into innocent developing countries. Similarly, the view that a culture of gift giving and patronage in the developing world induces multinational firms to demonstrate their cultural sensitivity by paying bribes is also unconvincing. Therefore, the responsibilities of cross-border corruption should be shared. Rose-Ackerman further argues that despite the two-sided nature of grand corruption, multinational firms have an obligation to refrain from bribery in their dealings with the developing world and with countries in transition, and should work to reduce its prevalence in international trade and investment. The basis for this argument she points out, is the leverage or market power that such organisations possess--leverage that can have a serious impact on the future development of poor countries. She suggests four broad arenas for international involvement: controlling corruption in project loans and grants; supporting reform programmes such as civil service reform and reform of budgetary and financial management systems; limiting corruption in international business; and controlling money laundering and international criminal enterprise.
The chapters written by Alan Doig and Stephen Riley (chapter 3) and by Daniel Kaufmann (chapter 4) address the difficulties of the design and implementation of national anti-corruption programmes. Doig and Riley address the issue of the design of anti-corruption programmes in the context of developing countries. Drawing from five papers presented during the workshop relating the experiences in fighting corruption of Tanzania, Botswana, Ecuador and Hong Kong and the experience of Senegal and Mali in their battle against fraud in the customs administration, they raise questions about some common ideas often advanced as efficient anti-corruption solutions. An increase in official salaries, the development of democracy and political liberty, economic reforms such as privatisation and liberalisation do not always bring the expected reduction of corruption. This diversity in the results of anti-corruption measures reflects the diversity of the quality of their design and implementation as well as the contexts in which they were implemented. The authors identify a number of elements and principles to be included in anti-corruption programmes. They also propose a list of options for the design of short- and long-term strategies and programmes and suggest which options are to be chosen, not only according to the institutional context and the resources available, but also to the political orientation of the anti-corruption initiative.
Fighting corruption in an efficient and durable manner requires looking at its fundamental causes, to be found in the underlying institutional and economic structures, recalls Kaufmann. He signals a number of biases that can mislead actors in their efforts against corruption (anti-business bias, tackling-the-symptom bias, quick-fix bias, injection bias, anti-counter factual bias, etc.). Refraining from giving a list of solutions and actions to be taken, he discusses two central ingredients to the building of anti-corruption strategies: economic reforms (liberalisation and privatisation) and independent anti-corruption bodies. Drawing on several country experiences, he argues that in situations where economic reforms were counter-productive and of no help in dealing with corruption, it was because the reforms were "half-baked, poorly designed, and inadequately implemented". Well-designed and conducted economic reforms--limiting the discretionary control rights of officials and modifying the incentives of actors--address the problem of corruption at its very roots. Furthermore, Kaufmann argues that establishing independent anti-corruption bodies is not sufficient per se; their efficiency requires them to be supported by a strong political will, complemented by economic and institutional reforms. Finally, he stresses the significance of including certain variables in designing country-tailored anti-corruption strategies and programmes, and proposes some recommendations for the design of such programmes.
In part three, which includes chapters (5, 6 and 7) from Peter Eigen, Sahr Kpundeh and Mushtaq Khan, the role of civil society and the issue of political will are scrutinised. Peter Eigen, Chairman of Transparency International, stresses the need for a tripartite attack on corruption involving the government, the private sector and civil society. In his view, civil society plays a particularly important role as it can exert pressure on government and the private sector for greater transparency and accountability. Moreover, since the causes of corruption and the cultural context in which it operates vary from country to country, civil society is also important for linking reform measures to the experiences and expectations of real people.
Sahr Kpundeh discusses the issue of political will as a critical starting point for sustainable and effective anti-corruption strategies and programmes. Without it, Kpundeh argues, governments’ promises to reform the civil service, strengthen transparency and accountability, and reinvent the relationship between government, civil society and the private industry remain merely rhetoric. Political will can easily be declared, without reflecting a credible intention of doing something. Kpundeh points out that distinguishing between reform approaches that are intentionally superficial and designed only to bolster the image of political leaders and substantive efforts that are based on strategies to create change is a principal challenge. He proposes several indicators that demonstrate genuine political will. For example: To what degree are reform initiatives participatory, incorporating a range of political actors and involving civil society? Is an objective process in place to monitor the impact of reform and incorporate findings into a strategy? Furthermore, Kpundeh analyses the forces that shape political will in the fight against corruption and proposes ways to strengthen it.
Mushtaq Khan raises some questions about the way civil society is presented in development issues. He feels the role of civil society and its definition in the early stages of capitalist development is problematic. Civil society should not be presented as a neutral body. The suggestion that civil society can act as a pressure group demanding accountability and transparency of both government and business assumes it resembles the civil society found in advanced capitalist countries. In most developing societies the predominant middle-class groups that constitute civil society do not necessarily consider the economic system and the emerging capitalist property rights to be entirely legitimate. There may be conflicts among the dominant groups in civil society. One group may contest the legitimacy of emerging capitalism to further their own interests, and another may consist of those who have, by whatever means, already acquired capitalist property rights that are not widely recognised as legitimate. Mushtaq Khan analyses closely the pattern of the patron-client networks in place in order to have a more realistic idea of the structure of civil society and its relationship with the state. Drawing from analyses of the patterns of corruption in South Asia and South East Asia, he suggests that some configurations might have more damaging effects than others. Moreover, when patron-client exchanges result in interlocking economic and political corruption at different levels of state and society, the reform of civil society itself may be a necessary precondition for development as well as for sustainable anti-corruption strategies.
Pauline Tamesis illustrates how international development and aid agencies have publicly begun to acknowledge the problem of corruption in developing and transition countries and are adopting policies to address the problem. In chapter 8, she presents the different perspectives and approaches in the work on fighting corruption and improving integrity of several institutions. Although the differences in approaches reflect each organisation's mandate, some (for example, the UK and UNDP, and the Economic Development Institute of the World Bank (EDI) and USAID) seem to be undertaking complementary programmes and initiatives. There are also contrasts in time frame--short-term versus longer-term in some of the approaches. Furthermore, the motivations and hence the orientation of the strategies differ, such as improving integrity to reduce poverty in the case of DFID; curbing corruption to alleviate poverty and attain social and people-centred sustainable development in the case of UNDP; fighting against corruption as part of improving democratic institutions in the case of USAID; the World Bank’s view of corruption as a problem for economic development; and the OECD Development Assistance Committee and Development Centre combat against corruption to facilitate economic growth, political stability and social justice. Such diversity in approaches raises questions of whether this diversity poses a potential for conflicts or is useful as a clear distinction into areas of involvement.
Alexandra Mills’ paper (chapter 9) looks at the questioning within OECD countries on how to reform the public sector in order to reinforce the integrity of officials, while integrating the new demands for efficiency and quality of public service delivery. Drawing on information collected in several OECD member countries, an ethics checklist is being drafted which will catalogue the different means used to answer this challenge in these countries. Mills suggests that even if it can be argued that the contextual differences are particularly significant when addressing corruption issues, this ethics checklist and the experience in controlling corruption in developed countries in general can certainly be of interest for developing countries.
The OECD has endorsed the need to combat cross-border corruption through effective prohibition, co-ordinated in a multilateral framework to ensure harmonised implementation among its members. Carolyn Ervin’s chapter (10) outlines the work at the OECD to combat bribery in international business, including the negotiations of an international Convention which renders bribery of foreign government officials a crime. This OECD effort is meant to cut off the "supply" side of bribes to foreign officials, with each country taking responsibility for the activities of its companies. The Convention is a major step forward in the fight against corruption, as well as a strong signal from 33 OECD and non-OECD countries of their commitment to this task. Ervin points out that these efforts are not directed at the foreign officials who may take the bribes; this is left to the responsibility of the home country of the official. It also does not cover private sector bribery or bribery for reasons not related to business.
Conclusion: Lessons learned
This publication is an attempt by UNDP and the OECD Development Centre to contribute to the debate on corruption and ways of tackling it. Several lessons have been drawn from discussions held during the conference and from the texts published in this volume.
First, it is clear that cross-border corruption indicates the need to attack corruption on an international and regional basis. The sustainability of such efforts depends heavily on the support of and co-ordination with solid, domestic anti-corruption policies, but efforts should not only focus on cross-border and "grand corruption", but "petty corruption" as well, which directly affects the living conditions of the majority. While the scale of these illegal transactions may be small, cumulatively they can do considerable economic and political damage to civil society.
Second, there is no single recipe for fighting corruption. Causes and logics of corruption vary, and the resulting differences among situations need to be taken into account in the design of anti-corruption strategies. However the following points can be generally considered:
*exceptional political and managerial will is necessary to promote and maintain anti-corruption reforms;
*as much as possible, strategies should combine three components for action: enforcement of law, prevention through institutional reforms, and mobilisation of the population;
*in addition to institutional improvements, enhancing professionalism, ensuring independence and honing technical skills should strengthen capacity in key activities (law, accounting/auditing and investigative journalism);
*enhanced professional skills, as well as political and managerial will to control corruption, are more likely to be seen in democratic societies where the pressure of political competition often force politicians to act. Democratisation is thus a necessary but not a sufficient condition for the reduction of corruption; and
*although economic liberalisation is not a panacea for public-sector corruption, reducing the size of the state reduces the size of the potential corrupt "take" and enables the public sector to improve its efficiency.
*Third, more attention still needs to be given to questions of timing and sequencing, to the identification of short-term priorities and initial actions, to the consistency in approach and to the way in which to foster the political and managerial will, all necessary to promote and sustain reform.
Finally, there is a need for caution in relying on civil society activism in the fight against malfeasance, as it would be too optimistic to believe that the inclusion of "civil society" is a sufficient guarantee of either the sustainability of anti-corruption measures or of their developmental consequences. The objective of development has to be foremost when developing an anti-corruption agenda.
1 Cross-Border Corruption: Points of Vulnerability and Challenges for Reform
Michael Johnston
Introduction
The same globalisation of markets and developmental inequalities that have helped draw renewed attention to problems of corruption in recent years also confront us with the dilemma of cross-border corruption. Cross-border corruption involving international interests, actors, capital and economic processes (both licit and illicit) is a potentially serious problem in affluent and developing countries alike, and raises important questions for both analysts and would-be reformers. Monitoring, oversight and the gathering of reliable data are difficult enough with respect to legitimate international trade. For cases of domestic corruption, such challenges are even greater. But cross-border corruption occurs within and among many jurisdictions, each of which may experience only a part of a much more complicated process. A world in which capital, people, information and enterprises move freely and rapidly from place to place offers new development opportunities of many sorts, but also makes accountability more difficult: because the agents of cross-border corruption are capable of doing business almost everywhere, it is difficult to hold them accountable anywhere. Even when domestic governments or international organisations decide to confront the problem, the result can be a mismatch: governments of developing states, and international organisations with their finite resources and limited mandates, may be no match politically or economically for powerful interests, often working in secret, that hold the leverage underlying cross-border corruption.
Nonetheless, the issue must be confronted. Evidence is growing that corruption slows economic growth (Ades and di Tella, 1994; Mauro, 1995, 1997; Murphy, Shleifer and Vishny, 1993; Rose-Ackerman, 1996, 1997; Rose-Ackerman and Stone, 1996; World Bank, 1997) and serves as a heavy tax upon investment (Wei, 1997). Similarly, corruption undermines political development, is linked to poor-quality national institutions (Knack and Keefer, 1995) and weakens the political will needed for effective reform. As economies and markets become more interdependent, corrupt agents and dealings can quickly gain a foothold in countries far from their own. New technology means that they need not be physically present in a country to do their business, manipulate their assets (and those of others) and work their influence; it also means that direct evidence of corrupt activities may be difficult to come by. Cross-border corruption can facilitate, and be sustained by, illegal trafficking in money, drugs, technology, arms and human beings. In such a setting, corruption in one nation can quickly become a regional or global development and law-enforcement issue. With its negative effects upon political and economic development, it can impede the development efforts of aid donors and international organisations, reduce the effectiveness of externally-funded projects (IMF, 1995; Isham, Kaufmann, and Pritchett, 1995, 1996; Rauch, 1995) and further reduce political support for aid programmes within donor countries. Countries suffering from cross-border corruption cannot make the best use of their human and natural resources, or implement effective development strategies of their own; instead, they will more likely remain dangerously vulnerable to, and dependent upon, outside interests, technology and market trends. General domestic policy and the legitimacy of leaders and institutions are likely to be undermined where cross-border corruption is most serious, often in societies where sustainable development is most desperately needed.
International Influences upon Domestic Corruption
While cross-border corruption is a serious concern in its own right, it is also worth our attention because of its potential to interact with domestic corruption, often with the effect of intensifying both and making reform more difficult. In its causes as well as in its consequences, cross-border corruption has much in common with domestic varieties; countries that have serious internal corruption problems are likely to be particularly vulnerable to cross-border forms as well. Thus, strategies for reform must be carefully integrated; while it is increasingly futile to attempt to fight corruption only within national economies and political boundaries, the inverse will be true as well. Efforts to control cross-border corruption will meet with little success unless they are supported by, and co-ordinated with, effective action against domestic abuses.1
In many cases the connections between cross-border and domestic corruption are simple and direct: practitioners of cross-border corruption will almost always require the co-operation of local officials to carry out and conceal their schemes. That, after all, is usually the whole point of the practice: if local authority were not available for "rent", or if officials did not have the power to aid or impede rent-paying interests in the first place, cross-border corruption would not take place. But where rent-seeking officials (or the conditions that encourage and protect them) do exist, in many cases they will be available to both domestic and international clients. Particularly where poverty keeps official salaries low, the temptations to tap into external flows of capital may be irresistible.
Other connections are longer-term and systemic. If economic interests employ cross-border corruption to gain unfair advantages over competitors both international and domestic, economic inefficiency is likely to result (Rose-Ackerman, 1996, 1997). Particularly in developing countries, domestic competitors will operate at a severe disadvantage or be driven out of business altogether. Economic development will be impaired as a result, in terms of both aggregate growth and greater difficulty of sustaining balanced development within a country. Legitimate economic opportunities will be few and often tightly controlled; many people and firms may have few alternatives to dealing with corrupt interests, and thus domestic corruption grows. On the political side, officials who enrich themselves by facilitating cross-border corruption will not surrender their positions of advantage willingly; they may thus short-circuit political competition through intimidation, electoral fraud, extensive patronage and the like. This in turn weakens effective opposition to corruption, and political pressures for accountability. And where the political and economic realms meet--at the boundaries between state and society, or between politics and the bureaucratic and judicial institutions that implement policies and interpret the laws--orderly boundaries and channels of access (Johnston and Hao, 1995) are likely to break down. More corruption will be the likely short-term result, and a shortage of opportunities to resist the longer-term consequence. This combination of forces--reduced political and economic competition, and compromised institutional boundaries and linkages between those realms--can enable both domestic and cross-border corruption to become entrenched (Johnston, 1997) and thwart sustainable political and economic development.
Varieties of Practices and Problems
If one thing is apparent in the current international corruption situation it is the variety of cross-border-corruption problems. In some cases, international influence is exercised in dubious, and at times overtly corrupt, ways through established political processes. Donations to political campaigns from foreign sources have become controversial issues in recent years in the United States, where such donations are illegal, and in the United Kingdom, where (at the moment) they are not, to name two prominent examples. Such donations can become matters of intense partisan dispute, and occasionally of public outcry; but the fact that they are channelled into orderly electoral competition between established political parties, and that news media and opposition forces are free to decry such practices, suggest that they are unlikely to do major political or economic damage. This political connection also works the other way: for many years, major powers channelled money into foreign electoral processes more or less covertly, generally seeking to maintain ideologically sympathetic forces in power (or to keep others out) rather than in pursuit of detailed influence over policy. The effects of such efforts will probably never be fully known, but they probably did little to help institutionalise fair, open political competition, and may have made it easier for other practitioners of international influence to gain entry.
Other states open themselves up to cross-border corruption through their policy choices. Tolerating or encouraging extensive banking secrecy, offshore banking operations and informal markets; running loose border and customs controls; basing growth upon the transhipment of goods or upon the creation of tax havens; and offering lax or bogus regulatory regimes may all invite extensive flows of funds and goods of dubious origins. These states can become vulnerable to the influence of interests (some of them primarily engaged in legitimate business, but others more sinister in nature) seeking to conceal or "launder" illicit money and goods, and to protect their assets from taxation, disclosure, regulation or seizure. The boundaries between licit and illicit enterprise, and between legitimate growth strategies versus those aimed at capitalising upon shadowy activities, are difficult to define. In the best such cases, the economic and political costs of corruption partially cancel out the dividends that may come from operating a wide-open economy. In the worst cases, corrupt interests may gain considerable power within a country, and use its leaders and institutions for their own ends. This situation will not necessarily lead to a general collapse; indeed, it can be quite a profitable one for entrenched interests, and can enable them to see off potential political and economic competitors (Johnston, 1997). Such a state of affairs seems unlikely, however, to foster sustainable political and economic development.
The Most Serious Cases
"Source" Countries. Two types of cases seem especially worrisome. First are those countries that are sources (as well as targets, in many cases) of cross-border corruption. Countries that are home to powerful mafiyas or drug cartels might be the leading examples; so might those harbouring "outlaw" enterprises. These groups can extend their corrupt influence into faraway countries, in the course of running and protecting illicit businesses. Even a small share of their "take" can be enough to buy legal and political protection, at home and abroad. This of course intensifies domestic corruption in both source and host countries. But another major source-country issue is foreign bribery by otherwise legitimate businesses. Countries with major arms- and technology-exporting industries or international construction-contracting firms, for example, might well re-examine their policies of tolerating (and even granting tax-deductibility to) bribes and "commissions" paid abroad. These concern us not only because of the direct incidence of cross-border corruption, with its negative implications for developing societies. To the extent that they contribute to weak, ineffective governance and slower, uneven development abroad, they can also weaken their home countries' legitimate export markets, penalise the international investments of other firms and waste the resources their home countries devote to international development aid. As I will suggest below, for these reasons cross-border corruption can be a truly global problem, requiring co-operative initiatives. "Source" countries that regard international bribery as irrelevant--or even as helpful--to their own economic health might reach very different conclusions once they consider the big picture.
Vulnerable States.
The second serious kind of case is that in which countries experience severe cross-border corruption because of their political and economic vulnerability. Extensive domestic corruption (as noted), poverty, small size, political and administrative weaknesses and dependence upon external markets and technology can all facilitate such abuses; once in place cross-border corruption helps keep a country poor and politically weak. Cross-border abuses, aided by local officials with a share in the corrupt deals, will impede the growth of sound market institutions and of reliable basic economic rights (Knack and Keefer, 1995). The result can be further entrenchment of domestic corruption, delayed and distorted economic development, and diversion of talent and investment from productive enterprise and human-capital-creating public services into rent-producing activities (Rose-Ackerman, 1997; Murphy, Shleifer, and Vishny, 1993)--hardly a promising road to sustained development.
Points of Vulnerability
Under what conditions are international interests most likely to find it worthwhile to exercise corrupt influence in a country, and under what conditions are they most likely to be able to do so? How many of those sources of corruption are open to basic change, or at least to amelioration?
From this point onwards I propose to focus primarily upon cross-border corruption involving legitimate (or largely legitimate) international businesses and flows of capital and goods, rather than that perpetrated by criminal syndicates and outlaw firms that happen to operate internationally. This distinction is admittedly not always precise, and the latter groups are plainly important problems. But legitimate businesses and markets are central to strategies for sustainable development, and thus open, transparent, and efficient relationships with them are going to have to be worked out sooner or later. Their activities are central to international trade policy, and are more easily monitored by the international organisations making and implementing that policy. Illicit syndicates also are linked to a wide range of law-enforcement problems, in both their home countries and internationally, that are beyond the reach of reformers in "target" countries and clearly exceed the scope of this paper. In any event, some of the possible remedies to be discussed below may also help countries contain the influence of international criminal interests.
Another caveat: I do not wish to imply that strategies for dealing with cross-border corruption are separable from those aimed at domestic corruption. A country with high levels of one is likely to have a great deal of the other, as already noted; they can feed upon each other, as in the all-too-familiar cases of dictators who make personal corrupt deals with multinational economic interests, and then export their wealth to numbered bank accounts in other countries. Many contributing causes, such as poor monitoring of financial institutions, a lack of transparency in economic policy and its implementation, and, in domestic tax and expenditure policy, weak institutions and basic economic rights, and poorly-developed economic and political competition, are common to both cross-border corruption and home-grown varieties. Poor people and intimidated opposition groups exploited by a corrupt official establishment are unlikely to distinguish between local corruption and that of foreign origin. Nonetheless, we can identify some of the major points of vulnerability that can contribute to cross-border corruption problems, and in so doing identify possible strategies for reform. To the extent that possible remedies are common to the two syndromes, it will be possible to attack both at once.
Institutional Vulnerability Points
As with domestic corruption, weak and poorly run institutions increase vulnerability to cross-border corruption. Some of these have to do with international borders as geographical facts: where customs inspectors are poorly paid and trained, corruption is likely; this is all the more true when their superiors have been drawn into corruption too, and have built vertically organised systems of collective bribery and shared payments, with discipline enforced by the threat of dismissal or violence. Other military and law-enforcement agencies with border-control duties are points of risk too: "protection" may be bought and sold for the smuggling of goods and funds, for a tolerant attitude toward criminal or terrorist groups operating in neighbouring countries, and for the illegal, unlicensed or excessive extraction of natural resources. The range of possible practices is wide indeed. They have in common, though, the fact that the power to maintain a country's borders and geographical integrity affects the movement of goods, capital and enterprises, and thus can be put out for rent -- thus making the legitimate monitoring of imports and exports, and at times the protection of a nation's citizens and territorial integrity, more difficult and expensive.
International borders also exist in the form of administrative procedures and policy processes, and these too can attract substantial rents. Import and export licenses, taxes, currency exchange at favourable rates, policies regulating inward investment and joint ventures, labour and environmental regulations, treaty obligations and a variety of other requirements and processes can become issues when economic interests seek entry to a country, or when its own enterprises do business abroad. These rules and requirements may reflect valid policy goals and processes, but they can also be bought, sold and abused. A country may be well-advised to reassess its trade, taxation and regulatory policies, both as regards the opportunities for corruption created at its own legal or geographical frontiers, and in terms of their place in overall development strategies. Legitimate, productive policies must be supported by effective personnel, organisational and institutional reforms (for a fuller discussion, see Rose-Ackerman, 1978; Klitgaard, 1988); those that are outmoded, ambiguous, open to abuse or counterproductive because of the corruption they encourage may be in need of basic revision, or of repeal.
Institutions with domestic missions also enter into the picture: a weak judiciary and corrupted law-enforcement agencies are unlikely to enforce laws effectively once corrupt interests have set up shop in a country, and an ill-paid, demoralised, poorly organised bureaucracy practically invites rent-seeking and -paying activities by civil servants and entrepreneurs. These particular sources of cross-border corruption differ little from those of domestic varieties, but they are of concern because they make cross-border corruption easier to institutionalise within a country and considerably more difficult to eradicate.
Points of Political Vulnerability
Anyone intending to resist cross-border corruption from within will be taking on powerful enemies, both in government and in the economy. Reformers will thus need political resources and the opportunities to use them. Where those opportunities are scarce -- whether because of a general lack of civil liberties and political freedoms within a country, or because officials have become collaborators in corruption with external interests -- reform will be all the more difficult. Low levels of political competition mean that corrupt officials face few threats to their ability to deliver on their end of corrupt deals, and have little risk of losing power because of their abuses. Low competition also reduces incentives to respect the independence of courts and judges, and to exercise careful oversight over the domestic bureaucracy and border-maintenance agencies. Indeed, political and bureaucratic corruption can become entrenched (Johnston, 1997), with corrupt leverage and incentives being shared within and between the political and bureaucratic structures. In such a setting, would-be reformers are intimidated or frozen out of influence, and existing anti-corruption rules and agencies become empty shells.
Politically insecure officials--those whose hold on power is fundamentally uncertain--can be just as damaging as an entrenched elite facing no competition. Officials who do not know how long their power is likely to last have strong incentives to steal as much as they can, as quickly they can take it (Scott, 1972; Knack and Keefer, 1995), and to make sure they store as much of the take as they can in safe havens abroad. Moreover, when they do lose power they may have to flee the country lest they lose their assets, their freedom or their lives. Thus they are likely to be all the more accommodating to corrupting foreign interests that might be in a position to give them, and their money, new homes on short notice. Here too, a poorly integrated political process can open the door to substantial cross-border, as well as domestic, corruption.
A weak civil society is another source of vulnerability. Strong business, trade and professional associations can help discipline their members in their dealings with international interests, with governments and officials in other countries, and with each other. An active self-organising social sector is more likely to form and enforce strong social norms (Cooter, 1997) that might help officials and business people resist the blandishments of foreign corrupt interests and insist upon reform at home. People and groups in a viable civil society may enjoy some support and protection when they criticise corruption in government. A strong civil society is essential for the structured political competition that can remedy the political problems discussed just above, and that can reinforce the political will needed for reform. Similarly, an active civil society depends upon, and in turn can help sustain, an open and competitive economy. None of these advantages, by itself, will be decisive in the fight against cross-border corruption, and all of these problems are interconnected with others. Without a broad-based understanding of factors making for serious corruption, however, success will be unlikely.
Economic Vulnerabilities
Finally, economic policies and realities can also encourage cross-border corruption. Any law, regulation or procedure blocking, delaying or raising the cost of the movements of goods, information and capital across international borders is a potential "squeeze point" for corrupt bureaucrats or focus for bribery from economic interests. As noted above, these procedures may well be a part of essential policies; moreover, completely unimpeded movement across borders may pose real economic, social and health and safety threats for a nation's citizens. But the rent-attracting potential of any such policy must be factored into the assessment of its importance and effectiveness, and while some should be retained and enforced with vigilance, others may not be worth the costs -- in corruption terms and otherwise -- that they incur. Multiple exchange rates and systems of price control, for example, encourage the growth of unofficial markets and extensive corruption. Excessively open economies, as noted above, may become havens for corrupt interests. Conversely, preferences granted to some enterprises or trade partners but withheld from others can encourage bribery. Even legitimate, widely accepted rules, if they are unevenly enforced, poorly drafted, ambiguous or needlessly complex, can attract rents and create opportunities for official abuses. In our increasingly global and interdependent trade environment, countries will find it important to review their policies closely and to ask whether, as well as how, many of them should be maintained and enforced.
The nature of the domestic economy is an important variable as well. A country that is dependent upon technology and expertise from abroad, or upon the selling of extracted natural resources upon global markets, is vulnerable to the leverage of outside speculators and middlemen. Weak internal economic competition, or the exclusion of various regions and segments of the population from the mainstream economy, can open up opportunities for exploitation by international interests, and can render whole societies or segments of them unable to resist because of poverty, dependency and a lack of economic alternatives. Such a situation is also likely to weaken civil society and political competition, two problems discussed above.
The state of a country's market processes and economic rights is also an important concern. Where property rights and the sanctity of contracts are uncertain, international firms and investors will look for other, at times illicit, means to protect their interests. Or, they may keep their capital and enterprises as mobile as possible, ready to be withdrawn if the situation becomes threatening. Keefer (1996) has argued persuasively that uncertain legal rights, and the potential for capricious or abusive state policies (often conditions accompanying serious corruption), lead entrepreneurs to insist on quick profits rather than to invest for the long run. From officials' point of view, the uncertain future prospects thus created may increase the short-term incentives to engage in corruption. Where banking systems, currencies, equity markets and similar institutions are open to manipulation or arbitrary political interference, investors are again likely to seek extralegal protections and guarantees, and/or to stay perpetually prepared for a quick exit--that is, if they choose to do business in a country at all. These issues overlap with institutional points of vulnerability, and reform requires a sound, independent judiciary and bureaucracy as well as political will from the top. Moreover, these interlocking problems not only increase the opportunities and temptations for corrupt deals between international interests and domestic officials; they also are a poor prescription for sustainable development, and may thus help maintain a country in a state of economic dependency and vulnerability.
What Can Be Done?
At one level, the possible remedies for cross-border corruption are very similar to those for domestic varieties. Aggressive, but honest and accountable, law enforcement; careful political oversight of the bureaucracy; judicial and bureaucratic institutions that are independent of political abuse, and open and accountable to society at large; transparency in government and business dealings; proper training and realistic salaries for civil servants; the active involvement of the citizenry; and (perhaps above all) the cultivation of sustained political will and leadership from the top, are all essential parts of the mix. These anti-corruption strategies--aimed primarily upon controlling the intersections between wealth and power--while very important, are familiar to us from our efforts against domestic corruption, and thus need not be discussed at length here.
Instead, I will put more emphasis upon dimensions of the fight against cross-border corruption that may be less well-known, and that are peculiar to this problem. In the former category is the need for significant, structured competition in both the economic and political realms. Where officials stand to win, or to lose, significant power through orderly political competition, pressure can be placed upon them to address cross-border corruption issues, and those who are found to be involved can be sacked and punished. Political competition can place a check upon arbitrary political interference in the bureaucracy, encouraging genuine oversight in its place, and can maintain healthy opposition to political attempts to compromise judiciary and regulatory agencies. Where economic competition is sufficient to maintain strong pressures for efficiency, and orderly enough that firms and investors can look beyond immediate circumstances to longer-term costs and benefits, corruption begins to look less like a useful form of influence, or an acceptable overhead cost of doing business, and more like an unreliable, inefficient and very costly way of doing business. Corrupt officials, after all, do not always stay "bought", and bribes once paid do not necessarily clear away obstacles for all time. Indeed, once officials know that payments can be had, they may well contrive ways to extract more; once a person or firm has paid up, it has given corrupt officials evidence that can be used against them, and has effectively forfeited recourse to the law. Without significant, structured political and economic competition the opportunities and reasons to resist corruption may be few; with it, those who may now be participants in corruption can be enlisted as anti-corruption forces, and the lasting incentives that motivate them and guide their choices can sustain support for reform.
Economic and political competition can scarcely solve all problems; its benefits depend upon the free flow of information (and thus upon civil liberties and a relatively free press), a lack of pervasive violence in everyday life, a viable civil society, credible guarantees of basic economic rights and political will and determination among government and opposition leaders alike. Indeed, it can create opportunities of its own for certain kinds of cross-border corruption, as suggested by the controversies over foreign political donations and interference noted above. Thus, with political competition the struggle against cross-border corruption may be risky and difficult; but without it, the task will be even tougher, particularly in any country larger and more complex than a city-state.
Transparency in the economic and state realms makes corruption more difficult to conceal, and can help people resist dealing with corrupt interests on their terms and thus being exploited. Transparency strategies, however, depend upon civil liberties, a free press and a strong civil society: transparency means little if there is no one to look in, or if no one can act on the knowledge thus obtained. In this connection, streamlining trade policies is also worth consideration. Where transparency prevails, bottlenecks and squeeze points are more difficult to conceal and exploit, procedures move more rapidly and rent-extraction is more difficult. As noted, such basic policy revisions will have to take into account many considerations other than corruption problems, and reform will require considerable resources: raising bureaucratic salaries may well prove to be a necessary (if not sufficient) step. But where political will is strong, it should be possible to increase public scrutiny and official accountability, substantially reducing officials' opportunities to create petty (or major) monopolies, and/or to exercise discretion in self-serving ways (Klitgaard, 1988). When this has been done, corruption at a country's geographical and administrative frontiers is likely to decline.
Many of the foregoing statements apply not just to cross-border corruption but to corrupt dealings in general. Cross-border corruption, however, may demand regional and international responses unique to its particular dynamics. Regional co-operation in customs and law-enforcement may raise the costs or cut the rewards of illicit movements of people, goods and capital, and make it more difficult to conceal corrupt deals and illicit enterprises. Harmonisation of laws regarding contraband and forbidden substances might similarly help individual countries reduce dangers along their own borders. Regional economic co-operation that opens up borders and reduces the administrative costs of trade can reduce opportunities for rent-seeking; similar policies that pursue broad-based regional economic development may, over time, help a group of countries become less dependent upon single resources or exports, and upon outside markets, investment and technology. Regionally based economic development may also increase overall economic (and perhaps indirectly, political) competition. Like any other strategies, regional responses have their risks: regional customs unions or law-enforcement consortia will only be as strong as their weakest links, and once inside, corrupt interests may find large regional markets and easy internal movement very much to their liking. But to the extent that small countries and those overly dependent upon single resources or markets can pool their strengths, their chances of resisting cross-border corruption may improve.
Finally, the more affluent nations and major international organisations must take important initiatives. The American Foreign Corrupt Practices Act, enacted in the late 1970s, remains unique a generation later. A full assessment of its impact is beyond the scope of this discussion, but it does seem to have reduced bribery by American corporations to a significant extent, and at times is invoked by the corporations themselves as a way of resisting extortion. Views on its implications for economic competitiveness vary; but if all or most of the major exporting nations were to adopt and enforce similar legislation, comparative disadvantages would cease to be a major issue and important incentives to cross-border corruption might dry up. The OECD's initiative to end the tax-deductibility of bribes is an equally important and promising initiative, as is the recent commitment by the Organisation of American States to criminalise bribery in the Western Hemisphere. Such reform strategies will take a long time to bear fruit, and raise major questions about content and implementation. But to the extent that countries that are home to sources of cross-border corruption begin to move against the problem, major progress and widely shared economic benefits begin to seem a real possibility. Further opportunities exist for international organisations. Technical assistance programmes, and surveys of best practices and their effects (in routine administrative services such as customs processes, as well as in the field of anti-corruption reforms) could be of great value to reformers in many nations. Substantive policy reviews to eliminate rent-seeking opportunities, such as those arising in the course of shipping agricultural commodities among the nations of the European Union, should also be a high priority.
There is no single recipe for eliminating cross-border corruption. Practices, the interests and countries involved, and the policies that do and do not apply to relationships among them, vary so widely and are so complex that in this discussion I have only been able to discuss the problem in general terms. What is clear, however, is that fighting corruption only within the boundaries of individuals nation-states is an enterprise that is doomed to failure; equally, efforts to combat cross-border corruption must dovetail with domestic reforms. International and regional co-operation offer real opportunities for reform, particularly in the current climate of globalisation and regional integration of markets, and of renewed concern over corruption in general. The substantial political, economic and developmental costs of cross-border corruption demand that those opportunities not be lost.
References
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2 Corruption and the Global Economy
Susan Rose-Ackerman
Corruption, like any exchange, requires two actors--a buyer and a seller. The buyer in the private sector pays a bribe to the seller in the public sector to obtain something valuable. Bribes can be used to allocate perfectly legal, but scarce, benefits such as foreign exchange, import licenses, credit or public contracts, or they may provide something the buyer does not deserve such as exemption from a valid regulation, an illicit tax break or permission to carry on an illegal business. Bribes can even be used to induce public authorities to harass and investigate one’s competitors. Bribery does not always involve public officials--private purchasing agents have been implicated in corruption scandals, as have loan officers in private banks. The common feature is a person with authority to distribute a scarce benefit who uses some method to select beneficiaries other than the willingness to bribe.
Corrupt buyers and sellers frequently develop systems that are mutually reinforcing and persist over time. Such systems are not just effective ways of hiding payoffs and managing the disposal of illicit funds. They may also be organised to affect the very types of services and contracts the government provides. Government decisions about what kinds of public works projects to support and what types of concessions and privatisations to sponsor may be intimately linked to the corrupt system. Since corruption benefits the participants on both sides, neither group has an incentive to end the relationship unilaterally. There is no way to disentangle the network to affix blame on just one of the participants. All bear responsibility.
Some legal systems, however, make a distinction between bribery and extortion. In the former the private individual actively seeks a corrupt benefit from the government official and in the latter the public official extracts money from the private individual in return for not imposing a cost or not withholding a benefit. Although it may be meaningful to speak of extortion when an ordinary person deals with a powerful government official, the bribery/extortion distinction is not relevant for most major public projects. In suggesting that the bribe payer is not responsible, a claim of extortion creates a false impression of injured innocence. Conversely, the criminal law in some countries distinguishes between "active" and "passive" corruption. The briber is viewed as the "active" party and the public official as "passive". This distinction also does not capture the variety of circumstances under which corruption can occur (M. Yves, 1996: 311). No corrupt deal can go through unless both sides agree to it and both agree to keep quiet about it. Yet expressions of coercion and lack of responsibility are common from both international firms, on the one hand, and from high-level public officials, on the other. Each argues that necessity forces them to participate in corruption.
This paper first reviews the situations under which high-level or "grand" corruption can occur and outlines the costs that such corruption can impose on developing countries and on the efficiency of economic activity. With this background, I argue that multinational firms have an obligation to refrain from corruption and to work to reduce its prevalence in international trade and investment. This is so in spite of the two-sided nature of grand corruption. The final section of the paper presents a strategy for the international community, both international organisations and international businesses.
"Grand" Corruption
Corrupt payments to win major contracts, concessions and privatising of companies are generally the preserves of large businesses and high-level officials. Although sometimes low-level clerks are bribed to reveal information, and some smaller businesses bribe to get routine supply contracts, the important cases represent a substantial expenditure of funds and can have a major impact on a government’s budget and a country’s growth prospects. These deals are by definition the preserve of top officials and frequently involve multinational corporations operating alone or in consortia with local partners. One observer calls this "grand" corruption (Moody-Stuart, 1994).
When the government is a buyer or a contractor, there are several reasons to pay off officials. First, a firm may pay to be included in the list of prequalified bidders and to restrict the size of the list. Second, it may pay for inside information. Third, bribes may induce officials to structure the bidding specifications so that the corrupt firm is the only qualified supplier. Fourth, a firm may pay to be selected as the winning contractor. Finally, once a firm has been selected as the contractor, it may pay to get inflated prices or to skimp on quality.
Corruption in contracting occurs in every country even those at the high end of the honesty index such as Singapore and New Zealand. A few examples will suggest the range of possibilities.
In Zimbabwe collusion between senior ministers in Posts and Telecommunications and a Swedish telecommunications company may have led local tender board procedures to be circumvented. Kickbacks up to $7.1 million have been alleged.
In an airplane deal between South Korea and several United States companies, bribes were allegedly paid to President Roh Tae Woo. Multinational suppliers have been questioned, but deny involvement. Roh Tae Woo’s national security advisor acknowledged receiving money from businesses hoping to get arms contracts. He is accused of accepting $300,000 in connection with fighter plane purchases. In particular, the head of a Korean conglomerate was accused of giving $65,000 to the advisor. He admitted giving the money but said it was a gift.
A major scandal in Singapore, involving several multinational firms and a senior official of the Public Utility Board, concerned payments made to receive confidential information about tenders. The case led to the blacklisting of five major multinationals implicated in the scandal. The official received a 14-year jail term.
Developed countries have recently been involved in similar procurement scandals. In Germany bribes were apparently paid to win contracts worth DM 2.5 billion to build Terminal 2 at Frankfort Airport. According to the public prosecutor, corruption led to an increase in prices of about 20-30%. In the French department of Seine-Maritime, 14 people have been charged with corruption in connection with contracts for computers. Civil servants distorted normal procedures for the award of contracts leading to a loss estimated at 50 million francs according to the French Department of Interior. In Belgium $1.9 million in bribes is believed to have been paid to senior figures in the Socialist party in connection with a defence contract.
Not all procurement and contracting scandals involve large-scale construction or capital goods projects. Goods that are used up in consumption are prime candidates for payoffs since it may be difficult ex post to discover whether or not the goods were actually delivered in the proper quantity and quality. For example, auditors in Malawi found that millions of dollars of non-existent stationery had been "purchased" by the Government Press Fund. The agency had no approved written control system for local purchases. In Kenya, the government lost about $1.5 million through irregular drug procurement by the Ministry of Health.
Privatisation of state-owned enterprises can improve the performance of the economy and, in the process, reduce corruption. However, the process of turning over state assets to private owners is fraught with opportunities for corruption and self-dealing. The sale of a large parastatal or public firm is similar to the process of tendering for a large public infrastructure project. Thus the incentives for malfeasance are similar. Corruption may undermine the efficiency rationale that lies behind economic justifications for privatisation. If firms pay to preserve the monopoly power of the enterprise after it enters private hands, the result may simply be a transfer of profits from the state to the new owners. The employees of the newly privatised firm may then face demands from suppliers and customers seeking to share in the monopoly benefits.
Is there anything distinctive about corruption in government contracting and privatisations other than the size of the deals? At one level, they appear analogous to cases in which government disburses a scarce benefit, only this time the value of the benefit is valued in many million, not a few thousand dollars. Under competitive conditions the high briber will be the most efficient firm, and the winner will behave efficiently ex post irrespective of whether or not it used a bribe to obtain the benefit.
Nevertheless, systemic corruption can introduce inefficiencies that reduce competitiveness. It may limit the number of bidders, favour those with inside connections over the most efficient candidates, limit the information available to participants and introduce added transactions costs. But does the scale of the corrupt deal and involvement of high-level officials change anything?
One essential difference is the likelihood in such cases that rulers are effectively insulated from prosecution. They can thus be less restrained in their corrupt demands than lower-level officials who may be subject to more external and internal constraints. High-level corrupt officials can obtain a higher share of the gains than lower-level ones. Since deals involving major contracts, concessions and privatisations can each have a noticeable impact on the government budget and the country’s overall prosperity, the size and incidence of the payoffs are especially relevant. Second, those who obtain licenses and tax breaks through the bribery of low-level officials are rarely thought to behave inefficiently once the benefit is obtained. In contrast, for the major deals considered here the contrary argument is often made. But is there anything to it? To answer these questions, first consider the incidence of corrupt payoffs and, second, ask if corruption breeds inefficiency in firms that pay bribes.
Consider a logging concession obtained corruptly by a company over the higher bids of competitors. Suppose, to begin, that the corruption "market" is efficient so that it operates just like an idealised competitive bidding process. Then we can distinguish between the impact of corrupt payments on government behaviour and the way corruption can affect the efficiency of the concessionaire. Suppose that as a result of corruption, the government obtains less than fair market value for the resources under its control. If corruption does not restrict entry and if the official cannot affect the size of the concession, the high briber is the firm that values the benefit the most. It is the most efficient firm that would offer the highest price in a fair bidding procedure. The losses are the dead weight losses of the extra taxes that must be collected and the foregone benefits of public programmes not undertaken. Honest officials receive distorted information about the value of the concession and may in the future support fewer of them. A similar analysis applies to corrupt contracts and privatisation projects. The most efficient firm will be selected under competitive bribery, but the benefits to the government are reduced. In the contracting case, for example, part of the cost of the bribe may be hidden in the value of the contract.
The bribe will be extracted partly from returns that would otherwise flow to government and partly from the profits of the winning firm. In the idealised competitive case, the winner is indifferent to whether he wins the concession through an honest or a dishonest auction. However, in some cases the corrupt official may have more leverage than the honest one and be able to extract a larger share of the profits. The firm prefers to deal with honest officials. Alternatively, the corrupt official may be able to structure the deal so that it is more lucrative for firms than an honest deal, designing the concession to maximise the profits available to share between officials and the bidding firm. In so doing he may sacrifice values that would be reflected in an honestly negotiated contract. For example, in a timber contract, environmental damage or harm to indigenous people may be ignored. The same problem may arise for privatisation projects and for contracts. Thus corrupt officials can promise to preserve the monopoly position of a privatised enterprise or contract for "white elephant" projects with little value in promoting economic development.
Now consider a firm that has obtained a secure long-term timber concession at a bargain price even when the bribe is added in. If it operates in the international market, its subsequent actions should depend upon the market for timber. The fact that it has underpaid for the concession should not affect its production decisions. It still seeks to maximise profits, and the concession payment is a sunk cost. The cost of corruption is felt by the public fisc, but no inefficiency has been introduced into the international timber market. Even if the total payment is above that expected in an honest system, there should be no impact.
The claim of no impact on firm behaviour is an important result, but it is too simple to reflect reality. The operative terms are secure and long-term. A corrupt system is not just one in which individuals in key positions can benefit at the expense of the state and ordinary citizens. Rather, the corrupt nature of the deal introduces uncertainties into the economic environment that can have additional effects on the way private firms do business. Difficulties may arise even if the most efficient firm wins. The corrupt nature of the deal may give the firm a short-run orientation. There are two reasons for this. First, the concessionaire (or contractor or purchaser of a privatised firm) may fear that those in power are vulnerable to overthrow because of their corruption. A new regime may not honour the old one’s commitments. Second, even if the current regime remains in power, the winner may fear the imposition of arbitrary rules and financial demands once investments are sunk. It may be concerned that competitors will be permitted to enter the market or worry that its contract will be voided for reasons of politics or greed. Having paid a bribe in the past, the firm is vulnerable to extortionary demands by those who can document the illegal payments. For these reasons, the corrupt firm with a timber contract may cut down trees more quickly than it would in less corrupt countries. It may also be reluctant to invest in immovable capital that would be difficult to take out of the country should conditions change. In the electric power area, the most dramatic examples of this are the floating power stations put in place in several developing countries to make exit easy and relatively inexpensive. In short, both the timing of production and the input mix may be inefficiently chosen as a result of the corrupt nature of the system.
Furthermore, it is unlikely that corruption will be limited to a one-time payment to top officials to cement the deal. Instead, the winner may be a firm more willing than others to engage in ongoing corrupt relationships up and down the hierarchy to protect its interests. For example, if the timber concession includes a royalty per log that is calibrated by the type of timber, the firm may pay inspectors to misgrade the logs. It may also pay to cut down more trees than the concession permits. Under a construction contract, the high briber may anticipate bribing building inspectors to approve work that does not meet the nation’s safety standards (Park 1995). In fact, the expectation of a long-term relationship may be part of the appeal of signing with a corrupt firm in the first place. Alternatively, the corrupt firm may itself hold back some promised bribes as a way to guarantee performance by the country’s officials. Thus a firm might sign a contract to deliver cement to a road-building agency but only pay bribes as payments are received from the public authority. Frequently, such arrangements take the nominal form of consulting contracts with payments tied to the receipt of funds under the contract.
"Imported" Corruption and Obligations of Multinational Business
The preceding discussion had demonstrated that corruption cannot properly be described as "imported" by multinational firms into innocent developing countries. Similarly, the view that a culture of gift giving and patronage in the developing world induces multinational firms to demonstrate their cultural sensitivity by paying bribes is also unconvincing. Authors from the developing world argue persuasively that it is quite insulting to suppose that a traditional culture of gift giving will support massive payoffs to political leaders (e.g. Ayittey 1992). Survey evidence from Thailand, for example, shows that people make quite sophisticated distinctions between appropriate and inappropriate gifts. They do not look with tolerance on major payoffs involving high-level officials and major investors (Phongpaicht and Piriyarangsan, 1994).
Sometimes multinational firms that pay bribes argue that antibribery laws in the host country are dead letters that mean nothing. The laws are seldom enforced, and when they are, political opponents of the regime in power seem to be targeted. The managers of such firms ask why they should keep to a higher standard than domestic companies. Even officials in international aid and lending agencies sometimes argue that nothing will get done if they do not ignore evidence of corrupt dealings. However, even acknowledging the two-sided nature of all corrupt deals, I believe that large multinationals have an obligation to refrain from bribery in their dealing with the developing world and with countries in transition. International aid and lending organisations, less controversially, should also face a similar constraint. The basis for these claims is the leverage or market power that such organisations possess--leverage that can have a serious impact on the future development of poor countries. Responsible corporate and institutional behaviour will be spurred by recent OECD efforts to induce members to end the tax deductibility of overseas bribes and to criminalise foreign bribery, but the basic argument does not depend upon the success of these political efforts.
In contrast with large multinationals, some developing countries may reap relatively few benefits from limiting bribery in their international dealings. There may be honest systems that are little better for the country in question than corrupt ones. For example, suppose a country must deal with a single firm that is the monopoly purchaser of the country’s key mineral or agricultural export. Such a firm does not need to pay high bribes since the country’s rulers have no choice but to deal with it. As a monopolist, it can strike a hard bargain (Rose-Ackerman 1998). A programme to end payoffs under such conditions is likely merely to raise the profits of the multinational with no benefit to the country’s citizens. Competition is needed, not just transparency. This is a lesson that developing countries need to learn when they push for greater honesty in international business dealings; they should also be pushing for a more competitive environment. In fact, one way to reduce the pressure on individual firms and investors to behave "responsibly" is to create an environment in which corrupt behaviour is not profitable. This implies a more competitive environment where other firms have an incentive to expose the corrupt deals of their competitors (Rose-Ackerman, 1996, 1998).
But the market power of multinational firms and aid organisations cannot always be eliminated. Their position depends upon the nature of their dealings with government and upon the size of their deals relative to the size of the government. Firms may have contracts to extract hard rock minerals or petroleum, to cut down trees or to produce and market agricultural products. They may purchase privatising firms or establish new manufacturing plants or service firms. When the deal represents a sizeable share of a country’s national income or state budget, firms cannot responsibly adopt the position that their own business interests are all that is at stake. They may claim that they ought to be under no obligation to take a broader perspective, but they cannot claim that their actions are irrelevant to conditions in the developing or transitional country.
The struggle to appropriate the gains of public projects can have a destructive impact on a developing country’s economic and political system. When the struggle generates no productive benefits and is just a fight to divide a fixed pie, economists call it "rent seeking" (Kreuger, 1974). Talented people may concentrate their effort on such rent seeking rather than on productive activities. This can occur on both sides of the corrupt transaction. Similarly, potential entrepreneurs may abandon the private sector and become public officials charged with allocating rents. In a democracy, people may seek political office, not to fulfilll some idea of public service, but to extract as many rents for themselves and their supporters as possible (Diamond, 1993, 1995). Private business people may concentrate on the struggle for publicly provided benefits, be they mineral concessions or aid contracts, rather than on establishing productive enterprises.
Troubling cross-country evidence suggests that a strong natural resource base frequently does not help a country develop and does little to benefit those at the bottom of the income ladder (Gelb et al., 1988; Sachs and Warner, 1994). Capital investment often produces few long-term growth benefits in developing countries; much investment seems to have simply disappeared. Evidence on the benefits of foreign aid is mixed at best. A secure source of foreign aid is a little like a diamond mine or an oil deposit; countries with access to such largesse have a cushion that others lack, but this largesse can be used for good or for ill.
Weak public sector institutions are one reason why rent-seeking is endemic, and one symptom of a poorly functioning state is the prevalence of corruption. Weak states may face the paradoxical situation where increases in resources undermine political stability. So long as the state is poor, few may care about controlling the levers of power. If, however, the state acquires a large foreign aid package or gains control over a newly valuable mineral, new political figures may arise seeking to claim a share of the benefits or even outright control of the state. The political struggle becomes a fight to control the state’s wealth for a period of time. Insiders try to prevent outsiders from benefiting except to the extent payoffs are needed to buy their assent to the status quo. In such unfortunate situations, increases in wealth are destabilising and can lead to subsequent falls in the wealth of ordinary citizens. We can describe the "absorptive" capacity of a state as its ability to use additional resources for social benefit rather than for the private gain of the rulers (Coolidge and Rose-Ackerman, 1997).
But such explanations are too one-sided. They ignore the active role that outside investors and aid organisations can play. If multinationals actively participate in corrupt systems and if aid organisations tolerate endemic corruption, it is overly harsh to place the blame entirely on internal failures in the developing country.
International aid and lending institutions have begun publicly both to acknowledge the problem of corruption in developing and transitional countries and to adopt policies to address the problem. Debate over the most effective techniques is ongoing, but the basic commitment seems clear enough (IMF, 1997; World Bank, 1997; United Nations, 1997; UNDP, 1997). These institutions should not support aid projects that increase the value to individuals of controlling the government. On the more constructive side, loans and grants should seek both to improve the performance of state institutions and increase the accountability of the public sector.
Unlike international aid organisations, multinational businesses have not generally considered the impact of their behaviour on the long-term prospects of the countries where they invest and trade. One still hears expressions of cynicism and resignation from business leaders and their advisors. However, in an international environment with no effective means of regulating inefficient behaviour, large firms have a stronger obligation to behave responsibly than in the developed world with its network of regulations and its reasonably responsive political systems. In most OECD countries, firms can focus on profit, confident that other institutions exist to worry about monopoly power, environmental externalities and misleading business practices. A firm that operates within the laws of the United States can argue that the constraints imposed by tax and regulatory laws are sufficient to fulfilll its obligations. Such a position is controversial even in the developed world, but it is, at least, plausible. This view, however, will not do when investment and trade occur in overseas environments where legal rules are either poorly specified or overly restrictive and where the accountability of top government officials to the long-term success of their country’s economic and social development is in doubt. Of course, there are very few cases where a multinational firm can single-handedly influence the operation of a state. The number of modern day "banana republics" is probably quite small. Some countries such as China, India or Russia are so large that they have market power on their own. Even in those countries, however, some companies have leverage at the national level, and the regional impact of other deals is large. For example, consumer goods companies with strong international brand recognition may be such a symbol of successful development that they can successfully resist corrupt demands. Other companies with a strong market position in their fields of business can refuse to participate in corrupt arrangements. Even if such firms lose out on corrupt deals, some countries may be induced to operate more cleanly so as not to sacrifice the firms’ business. Large, highly diversified firms may have a further advantage if they can credibly threaten to exit a country entirely in the face of corruption in one line of business. Such a firm may also have the bargaining power to protect local subsidiaries from acquiescing to corrupt demands. Firms that successfully use the leverage they have will not only help contribute to the long-term growth prospects for the country but also will generally benefit in the short run as well.
The important issue for companies operating in a corrupt environment is whether to participate actively, quietly refuse to deal, or report corruption to local authorities and to those in the outside world. Keeping quiet is probably the worst option. The firm not only loses the business; it also has done nothing to change the underlying situation for the better. The advantage of the current interest and concern with corruption is that reporting corrupt demands can lead to international embarrassment for the corrupt officials that may, in turn, produce reforms. Companies that claim to abhor corruption while accepting it as a necessary evil are not acting consistently so long as one assumes that the pressure of international public opinion can have an impact both on corrupt public officials and on bribe-paying business firms.
The Role of the International Community
The growing interest of the international community in limiting corruption is part of a general rethinking of the function of international aid and lending organisations in the post-cold-war age. The end of the cold war has changed the balance of forces and removed any need to support corrupt regimes for national security reasons. The widespread corruption and organised crime influence in many countries have made the problem difficult to ignore. Some Latin American and Asian countries are threatened by the corrupting influence of the illegal drug business. The failure of Africa to develop in the face of substantial progress in many parts of Asia and Latin America raises questions about the role of the state in development. The worldwide move to privatise and deregulate requires a rethinking of the relationship between the market and the state.
Even some who acknowledge the costs of highly corrupt governments argue that the control of corruption should not be linked to international trade and lending policy and question the involvement of international aid and lending agencies. In line with the debate over human rights and labour standards, they argue that trade policy and development assistance should not be tied to "non-economic" issues. But corruption is in large part an economic issue. It affects the competitiveness of the global economy and the efficiency of investment and development projects worldwide.
Certain strategies are possible today that would have been infeasible just a few years ago. There are four broad arenas for international involvement.
Controlling Corruption in Project Loans and Grants
Aid organisations, concerned with the success of the projects they support, will obviously be troubled by endemic corruption. For example, suppose that 20% of aid funds are lost due to corruption. That 20% represents not bribes per se, but the inflated contracting costs and the loss of equipment and other inputs from tolerating bribery. Then a project with a budget of $100 million could have been completed for $80 million in an honest system. Consider a simple project where funds invested in the present earn a return one year hence (and only in that year), and suppose that an investment must earn an annual return of 10% in order to pass muster. Then an honestly administered project would need to generate benefits of $88 million. The corrupt project would need to produce returns of $110 million, a difference of $22 million. A project that should have cost $80 million must return $110 million in order to be worthwhile--a rate of return on productively used resources of 37.5%. Even in the developed world, not many projects have such a high return. In the absence of corruption many more projects would seem worth doing.
Furthermore, if corrupt opportunities vary across projects and if a country’s corrupt top officials have a say in which projects are sponsored, they will favour those with large opportunities for private gain thus skewing the ranking of projects. The problem, then, is not just that too few projects will seem worthwhile to the aid and lending agencies, but also that an inefficient mixture will be supported. One recent buzzword in development circles is "ownership". Projects will fail unless the borrower feels that it "owns", or has a stake in, the project. Unfortunately, one form of ownership is all too common. Political figures in borrower countries and firms in lender countries express an "ownership" interest in projects that produce personal benefits for the politicians and profits for the firms. They will oppose projects that spread the benefits more broadly to the poor and that assure free competition. "Ownership" is a questionable value in cases where a country’s rulers do not seem committed to poverty alleviation.
In the future the UNDP and the World Bank may have no choice but to impose more stringent controls and improve oversight. Until recently, the main focus has been on analytical rigor at the project approval stage and on transparent procurement processes under Bank and UNDP loans and grants. Some projects with strong support from a country’s rulers were not supported because of the concern that they would simply create pools of rents for the powerful. At the World Bank procurement guidelines sought to assure some level of competitive bidding on most large contracts, but worries about corruption were implicit. In 1996, however, the Bank revised its procurement guidelines to state explicitly that corruption and fraud would be grounds for cancelling a contract if the borrower has not taken appropriate action. Companies found to be corrupt by the Bank can be excluded from bidding on future projects. The new rules permit Bank audits of contractors and require contractors to record all payments to agents both before and after the bidding since such payments are frequently the route by which payoffs are made. The importance of these changes will depend upon how they are implemented in the field, but they represent a promising first step.
The procurement changes might be supplemented by a requirement that potential bidders sign an Integrity Pact under which they pledge to refrain from corruption. Transparency International (1995) has recommended this practice, and Ecuador has experimented with it, but it has never been put into broad use. This is a variant of the prequalification processes used by procurement offices in many jurisdictions. The number of bidders might fall, but the selective elimination of corrupt firms will enhance the competitive nature of the process, not reduce it. Although such pledges look redundant since corruption is, in any case, illegal, they may have the advantage of highlighting the issue in countries with little respect for the formal law on the books. However, when such pacts exist, losers have an incentive to accuse the winner of corruption even if none occurred. The international aid and lending community needs a way to make constructive use of the information contractors can provide without becoming enmeshed in investigating the claims of every disappointed bidder. Since bid challenges are often costly and time-consuming, those experimenting with this method must decide how to balance the need for a speedy sale against a process designed to deter corruption in this and future deals.
Other reforms should be considered. For example, projects could be designed with the fragility of a country’s procurement processes in mind. If that were done, project officers would favour off-the-shelf items sold in international markets rather than specialised goods. These standard goods could simply be purchased in the market with no specialised procurement procedures. Another possibility is to develop external benchmarks for certain types of procurement. In such cases the price of comparable products in the private sector can help limit the price inflation that often accompanies payoffs in procurement.
At the World Bank, the Controllers Office is exploring ways to improve ex post monitoring so that there is more review of goods and services actually provided. Instead of relying mostly on paper records, Bank auditors are considering more physical inspections and on-site reviews. The Operations Evaluation Division is the World Bank’s own inside/outside oversight agency. A study done for its annual evaluation review found that highly corrupt countries were less likely to have successful World Bank projects (Kilby, 1995). This result suggests that the OED itself take up this issue as part of its review of Bank priorities. The UNDP is sponsoring a series of projects designed to improve the accountability of aid (UNDP, July 1996).
Aid and lending organisations must acknowledge the political and organisational dynamics that make corruption control difficult. They must self-consciously review their own control institutions to isolate areas of deficiency. If they do not carry out the oversight function themselves, they may end up having it thrust upon them by outside observers.
Supporting Reform Programmes
The UNDP, the World Bank, the bilateral aid agencies and the regional development banks have a good deal of leverage with their borrowers and grantees. They have often been reluctant to use it for fear of being accused of lacking cultural sensitivity or of being heavy-handed advocates of democracy and "Western" values. This attitude may be changing as the costs of systemic corruption for development become clear. Citizen surveys and expressions of public outrage suggest that widespread tolerance of corruption is not the rule in most countries. Furthermore, organisations concerned with the reduction of poverty need to remember that even if elites are tolerant of corruption and benefit from it, this will seldom be true of the intended beneficiaries of aid.
The international institutions are acknowledging the problem of corruption in countries in transition in eastern Europe and Asia and considering how aid projects might provide constructive help in alleviating its worst excesses. Once such projects are contemplated in Russia and Turkmenistan, it is difficult to argue that they are inappropriate for Guinea, Pakistan or Brazil. In fact, as private capital becomes more important in some traditional areas of World Bank lending, its role in institutional reform should increase. The UNDP is basically a grant-making organisation that is already in the business of providing technical support for governments.
These institutions already support public sector management and "governance" projects in a wide range of areas. The UNDP has also provided aid for the development of democratic institutions (UNDP July 1996, 1997a). At the World Bank some projects began as part of the structural adjustment lending carried out in the eighties and, at a somewhat reduced level, up to the present. This is an awkward vehicle for institutional reform efforts, and free-standing projects are now being carried out. Other loans aiming to reform regulatory authorities, taxation agencies, the judiciary, and other public institutions are being considered or implemented. The Bank frequently advises countries on the privatisation process. Aid agencies such as UNDP and the bilateral donors have been leaders in developing institutional reform projects. All these initiatives require a long-term commitment of funds and expertise and a realisation that "output" measures will not be easy to formulate precisely. Nevertheless, the development community can play a role in providing a framework within which development can proceed as a partnership between the public and the private sectors.
Sometimes the problem is not just reducing corruption in existing institutions, but also preventing it from arising in new ones. A privatisation auction can be tarnished by payoffs and insider deals. A new regulatory agency established to oversee privatised firms can be corrupted. Illegal campaign contributions and vote buying can undermine a fledgling democratic process. Thus reform programmes supported by outside aid need to assess the opportunities for corruption and self-dealing that can arise as a result of reforms that are otherwise beneficial.
International aid and lending agencies can work with reform-minded government and individual countries to develop a realistic programme to reduce corruption. The priorities for reform will differ across countries, but the basic factors that must be considered include substantive law reform to reduce corrupt incentives in particular sectors, reform of the legal framework and improvements in the integrity of monitoring and law enforcement reform of the civil service, and the strengthening of checks and balances.
Greater success in improving the institutional environment for development would be likely if both the international aid lenders and borrower governments took a more straightforward approach to controlling corruption and other forms of malfeasance. The UNDP and World Bank try to manoeuvre between the economic interests of poor and wealthy states and to manage the tensions between charitable goals and the politics of aid and lending policy. The issue is a complex one, but a place to start is with an acknowledgement of the problem of corruption and self-dealing and with concerted efforts to limit its impact on efforts to promote growth and reduce poverty. The goal should not be to insulate aid projects from a country’s corrupt climate or from the payoffs that have become routine in some areas of international business. Instead, the goal should be to seek fundamental changes in attitudes and institutions in situations where corruption and governmental ineffectiveness go together.
Limiting Corruption in International Business
Multinational business firms face a dilemma when they deal with corrupt regimes. Each believes it needs to pay bribes in order to do business, but each knows that all of them would be better off if none of them paid. The playing field is tilted toward unscrupulous, but less efficient, firms who would not fare so well in an honest system. This realisation has fed recent international efforts at limiting corruption in international business. Such efforts could complement the solutions outlined above which largely focus on what a country can do whose leaders are committed to reducing the level of malfeasance. Current activity includes multinational efforts, especially at the Organisation for Economic Co-operation and Development (OECD) and at the Organisation for American States (OAS), to constrain corruption and efforts by the business community to promulgate voluntary codes of conduct. In addition to measures currently under way, another proposal merits discussion--the idea of an international tribunal to resolve disputes.
Some have recommended the creation of new international capacities to deal with global corruption. The involvement of the World Trade Organisation (WTO) has been proposed, but worries over tying trade policy too closely to a range of other issues from labour conditions to human rights to corruption, suggest that this will not be the first line of action. Within the WTO the most feasible possibility is a revision of the Agreement on Government Procurement so that more countries will join. The present agreement entered into force on January 1, 1996, but only a few countries, mostly in the developed world, have adopted its provisions. One possibility is to redraft the Agreement to focus on anti-corruption aspects in the hope of attracting more countries.
The idea of a dispute resolution mechanism deserves further scrutiny to determine if there is a feasible way to create a body to hear complaints by firms claiming to have lost business to rivals as the result of corruption. In establishing a general forum for resolving disputes, there are clearly some difficult problems of proof and standards of decision. Nevertheless, some models exist in the international legal arena that may provide ideas about how to proceed. For example, the World Bank Group’s International Center for the Settlement of Investment Disputes (ICSID) resolves disputes under contracts where it is the forum of choice (Shihata and Parra, 1994). ICSID panels are not formally courts, and their use is based on the prior consent of the parties, but they do occasionally deal with issues that are indirectly related to corruption. The process has difficulties because of a review mechanism that lacks finality and that has sometimes taken an overly technical and formalistic approach. Nevertheless, these problems have apparently become somewhat less severe in recent years (Reisman, 1992, pp. 46-106). ICSID has not, however, heard disputes arising at the contract awarding stage, and it may not have jurisdiction in such matters. It is also an expensive and time-consuming process that is not presently able to handle a large volume of cases.
Tribunals also exist in the fields of human rights, international labour standards, and nuclear energy that might be dispute resolution models (Barratt-Brown, 1991). Non-governmental organisations can bring complaints before them and participate in the presentation of evidence. Each of the existing bodies has its own problems, and none is a perfect model for those concerned with anti-corruption efforts. Nevertheless, a more careful examination of the possibilities for some kind of international tribunal needs further exploration.
Alternatively, the international community could establish a forum to review cases of suspected corruption in privatisation or contracting processes, perhaps in connection with an Integrity Pact mechanism. Cases brought by disappointed bidders or defrauded lenders would require that the country involved make a transparent accounting of its behaviour. The actual payment of bribes would not necessarily need to be documented. Instead, the focus would be on the terms of the deal. If it seems to diverge significantly from what would have been expected in an honest process, the remedy could be to require the project to be rebid. One difficulty in making the process operational, however, is that the rebid will not simply be a more transparent and honest rerun of the old one. All the players have new information as a result of the first round that will affect their behaviour in the second round. The strategic aspects of this proposal need to be carefully analysed to avoid creating an even more unfair system.
Such a process would, of course, discourage some projects from going ahead. That might not be such a bad thing. When an inside deal appears inevitable, privatisation should be delayed, since a public firm is much easier to monitor than a private one. Similarly, a public works project may have been des