Bribery: Corruption in the spotlight TUESDAY SEPTEMBER 16 1997 Martin Wolf on the growing interest in how to combat the global problem of bribery among governments and business "Let's not mince words: we need to deal with the cancer of corruption." James D. Wolfensohn With these words, the president of the World Bank announced a crusade against corruption. The occasion was last year's annual meeting of his institution and its sister, the International Monetary Fund. Corruption has emerged as one of the main themes at this year's Bank/Fund meeting, which takes place next week in Hong Kong, and Mr Wolfensohn hopes to use the paper, Helping Countries Combat Corruption: the Role of the World Bank, to show that his organisation can tackle the disease. The Bank is not alone. From the IMF came The Role of the IMF in Governance Issues, published on August 4. And from the Organisation for Economic Co-operation and Development came Combating Bribery in International Business Transactions, on May 23. It is difficult to think of a significant international organisation not looking at corruption. The World Bank defines corruption as "the abuse of public office for private gain". It is as old as government. So what explains this sudden flurry of interest in it? The immediate answer is a worldwide spate of scandals. From Italy, France and Russia, to Japan, South Korea and India, to Mexico, Colombia and Brazil, politicians have been prosecuted for crimes ranging from consorting with the mafia and accepting drug money to old-fashioned sales of public contracts. Even the vice-president of the US is fighting allegations of improper use of public assets to raise money for electioneering. This raises the question: is there more corruption or have people merely become more conscious of it? That there is more corruption than before is not proved. That people are more agitated about it is certain. Numerous explanations can be advanced for the increased attention being paid to corrupt practices: the ending of the cold war, which destroyed the legitimacy of governments that were merely anti-communist; the transition from communism in eastern Europe and the former Soviet Union, which revealed the extent of corruption and provided opportunities for more; globalisation, which has brought opportunities for corruption and put business in contact with corrupt regimes; the loss of deference towards their rulers of better educated citizens; the rise of democracy; and the consensus on the superiority of the market, which has turned attention towards the role and functioning of the state. Corruption has apologists. Some countries, including Indonesia and China, have deserved reputations for corruption, and yet have grown fast. Economists have argued that corruption can increase economic efficiency in some areas. Consider, for example, the allocation of import licenses. If officials were to sell these to the highest bidder, it is argued, the outcome would be more efficient than if they were merely given away, because that bidder would be the one who values imports most highly. If an economy is sufficiently distorted, corruption may indeed make it work better - or might be needed to make it work at all. The pre-1991 Indian control regime may have fallen into this dismal category. Soviet central planning certainly did. Without illegal markets and under-the-table payments, the economy would have seized up. All the same compelling rebuttals can be given to the case for bribery. It is far better to eliminate the policy distortions that lead to corruption than rely on bribery to get round them. Corrupt politicians and bureaucrats create opportunities for enrichment, by resisting liberalisation, multiplying controls, following opaque procedures and introducing unnecessary delays. Corruption will unavoidably spill over into areas where regulations ought to be enforced, such as tax collection and control over environmental damage. Markets for under-the-table payments are, by definition, never open and transparent. Those who do best from them are the least scrupulous and best connected, not the most efficient. And corruption will undermine the legitimacy of government itself. On balance, the evidence supports the proposition that corruption is damaging. A number of organisations produce indices of corruption based on surveys of businesses and other affected parties. Using several of these surveys, Transparency International, a not-for-profit organisation based in Berlin, which campaigns against corruption, produces a "corruption perception index". As shown below, this suggests that the poorer the country, the more corrupt it tends to be; the richest countries are the least corrupt. The match is not perfect, but it is close. This does not demonstrate that countries are poor because they are corrupt. Causation might run the other way: countries are corrupt because they are poor. Probably, it is a bit of both. But what is certain is that corruption varies among countries with similar incomes per head - and does significant damage to economic performance. This year's World Development Report from the World Bank argues that, in a sample of 39 advanced and developing countries, high levels of corruption, combined with low predictability of the level and the outcome of bribes, lowered the rate of investment in gross domestic product from 28.5 per cent to a mere 12.3 per cent. Corruption is less costly if it is predictable, but that is the exception, not the rule. Using a corruption perception index with a range of zero to ten, Paolo Mauro of the IMF argues that a 2.4 point improvement in the index is associated with a four-percentage point increase in a country's investment rate and over a half-percentage point increase in its growth rate per head.* Investment is especially hard hit by corruption, because corruption makes the policy environment unpredictable and the greater the lack of predictability the less attractive become irrevocable commitments to the future. Corruption imposes heavy economic costs. Yet an excellent survey by Susan Rose-Ackerman of Yale University has detailed the many reasons why bribes might still be offered: to clear markets for scarce goods; to motivate officials and politicians; to reduce costs; to gain a share of spoils; to obtain influence; and to override legal norms.** So long is the list that the question must be why bribery varies from one country to another. Bribery is more likely to be serious when people in power possess an effective monopoly to grant valuable privileges, have little likelihood of being caught, suffer small penalties if they are and confront counterparties with little countervailing power. If the chances of being caught are inversely related to how many officials are corrupt, countries could end up at one of several different levels of corruption. All of them could be stable, but in some corruption would be pervasive and in others it would be relatively small. The most important implication, however, is for reform. Economic liberalisation will reduce opportunities for corruption. Daniel Kaufmann, of the World Bank and the Harvard Institute for International Development, notes that in Chile, El Salvador and Uruguay senior managers spend only 8-12 per cent of their time dealing with officials. In Russia and Ukraine, by contrast, the corresponding figure is 30-40 per cent.*** Corruption is the price of economic survival in such hostile policy environments. Liberalisation will drastically reduce opportunities and incentives for corruption, but it cannot eliminate them. Businesses have an interest in evading taxes and other onerous regulations, in obtaining privatised property at below market prices, in securing public contracts on favourable terms and in winning court judgements. The incentive to corruption will never disappear. Yet it can be controlled. The diminution of distortions should help keep the public services clean. It is important to pay public servants adequately, introduce meritocratic systems of recruitment and punish corrupt officials severely. Also valuable are a division of powers among public servants, particularly between the judiciary and the executive, and transparency and public scrutiny. This is why democracy tends to reduce corruption, even though it also raises the perennial hazard of campaign finance. The rising tide of concern about corruption is welcome. It indicates determination to make governments serve their peoples. But the question for those meeting in Hong Kong is how far outside institutions can and should be involved. The answer is that they cannot avoid being so. Where corruption is an obstacle to economic development, official assistance must be in question. Similarly, the US is right to argue that advanced countries should discourage their businesses from corrupting officials in other countries. This is not neo-imperialist interference. Outsiders should merely advise well-intentioned governments on how to reduce corruption, while removing support from the malevolent ones that impoverish their citizens. If that is what Mr Wolfensohn intends to do, he deserves commendation. His organisation needs to be a bank determined, when necessary, to say no. * Paolo Mauro, "The Effects of Corruption on Growth, Investment and Government Expenditure: A Cross-Country Analysis", in Kimberly Ann Elliott, ed., Corruption and the Global Economy (Washington D.C.: Institute for International Economics, 1997); ** Susan Rose-Ackerman, Corruption and Development, World Bank Conference on Development Economics, Washington D.C., April 30 -May 1 1997; *** Daniel Kaufmann, Corruption: the Facts, Foreign Policy, Summer 1997. Martin.Wolf@FT.com[mailto:Martin.Wolf@FT.com]
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