Editorial – The end of corruption

Lawrence Solomon
The Next City
December 1, 1998


Without corruption, poor countries, would not be poor, not even those ravaged by years of warfare. The Asian Development Bank reports that corruption can cost governments as much as half of their tax revenue and can amount to more than a country’s total foreign debt. The World Bank estimates that corruption increases the cost of public projects by as much as 30 per cent. London’s Centre for Accountability and Debt Relief estimates that government corruption accounts for 5 to 7 per cent of government expenditures in advanced economies and for 15 to 25 per cent, and sometimes more, in poor countries. For the poor countries, this amounts to some $600 billion per year — about 10 times as much as they receive in foreign aid from all the world’s foreign aid agencies combined.

Big though these sums are, most costs of corruption don’t show up in studies, which merely tend to count the amounts pocketed. Because megaprojects and the big contracts that accompany them are efficient vehicles for siphoning graft into politicians’ pockets, unneeded public works will be ordered, not because the country needs a remote dam or a four-lane highway through a rainforest, but because the politicians in charge can then claim their cut. The bigger the project, the bigger the cut.

While corruption leads the state to waste billions in white elephants, it also prevents billions in legitimate investments from entering a country. Singapore’s Business Times warned its readers recently to be wary of developing land in China, despite the large profits in convincing a local official to rezone low-value agricultural land for, say, apartment buildings: “The flip side of this easy adjustment is that the change often lasts only as long as the person who changed it stays on the job. If the person is removed, the land could suddenly revert back to its original use — regardless of how much investment had been put into it.”

Some costs of corruption can’t be quantified. Because so many in the Third World have lost faith in the criminal justice system, vigilantism has become rampant. To stop petty thievery by the thousands of youths and homeless children who wander Sao Paolo’s streets, vigilantes murdered 202 street children during the first three months of 1993. In Nairobi, mobs lynched more than 100 crime suspects in 1994.

Despite its depravity, until recently corruption has had lofty supporters. In the late 1970s, Columbia University’s Nathaniel Leff argued that “corruption may introduce an element of competition into what is otherwise a comfortably monopolistic industry . . . payment of the highest bribes [introduces] . . . a tendency toward efficiency.” A 1985 article in the Journal of Political Economy asserted that “bribing strategies . . . minimize the average value of the time costs of the queue.” While economists developed elaborate models showing corruption’s conduciveness to development, other academics — pointing to the Asian Tigers’ economic success — deemed corruption “cultural,” and not to be judged by inappropriate western standards.

This academic environment helped legitimize bribery in the minds of corporate and government leaders. Prime Minister Jean Chrétien, when a trade minister in the 1980s, urged Canadians not to put their “head in the sand” and pass up overseas sales when our Crown corporation, Atomic Energy of Canada Ltd., became embroiled in shady dealings. In response to an investigation by Canada’s Auditor General into $18 million in payments to clinch the sale of reactors to South Korea and Argentina, the Canadian government stated that a Canadian could not only legally bribe a foreign official, but also deduct bribes as an expense, provided the briber obtained a receipt. “Commercial practices in other countries sometimes are different from ours,” Chrétien explained. “I am not about to condemn the morals of anybody. It would be very presumptuous for Canadians to tell other people how to conduct their morals.” Other countries, including Germany and France, also viewed bribes as legitimate business expenses. When the United States, which banned bribery in 1977, proposed a universal ban by UN treaty, it was widely mocked for misguided moralism.

The academics should have come down from their ivory towers to view the world as it is. Far from greasing the bureaucratic wheels to speed development, corruption puts a spanner in the works: Officials often create regulations solely to receive bribes. In India, one high-level civil servant, unable to speed an approval given the multiple bureaucracies involved, solicited bribes to slow approvals required by rival companies.

Corruption impedes not just multinationals but also the most modest of enterprises. To demonstrate the hurdles involved in establishing a typical small business — a simple garment factory — Peru’s Institute for Liberty and Democracy rented the premises of an existing factory on the outskirts of Lima, installed sewing machines and other equipment, and recruited four university students to comply with the bureaucracy. Although an administrative lawyer guided them, the students handled all the red tape themselves, going from government office to government office, filing form after form, as would a person of humble origin.

To comply with the law took 289 days and 11 permits. Along the way, bureaucrats asked for 10 bribes; 8 were avoided, but two had to be paid. The entire procedure cost $1,231, or 32 times the minimum monthly living wage. In a different study, buying an urban lot and building a house took 83 months of red tape. In yet another, establishing an outdoor market took 14 and a half years. Corruption, the institute discovered, excludes ordinary people from the economy, restricting access to those skilled in politicking and red tape, and impoverishing the nation.

Fortunately, apologists for corruption are no longer in vogue. The United Nations, in its 1991 Human Development Report, acknowledges the destructive process in which “Citizens use political influence to get access to government services. Politicians ensure that government resources are directed toward their supporters. And public officials exploit their official positions for personal reward.” Where once they looked the other way, the World Bank, the International Monetary Fund, and other international organizations now seek to curb corrupt practices. The OECD’s Convention on Combating Bribery of Foreign Public Officials, signed in 1997 and now being ratified by the legislatures of 34 nations, will criminalize bribery of foreign legislative, administrative, and judicial officials, whether appointed or elected, and of officials of government-controlled corporations and international organizations.

Much of the pressure to clean up corruption comes from U.S. corporations who, according to the U.S. Commerce Department, lost 100 foreign contracts worth $45 billion in 1994 and 1995 to overseas rivals providing bribes. But businesses everywhere dislike this degrading, time-consuming activity. A survey of Russia and the Ukraine found that owners and senior managers of high-bribing firms spent an inordinate 30 to 40 per cent of their time with government officials to overcome myriad regulations, licences, and taxes. Based on a survey of 2,000 companies in 49 countries, businesses that operate in highly regulated settings routinely confront outstretched hands: in fact, the more regulatory discretion, the likelier the need to bribe officials. Corruption hits business’s bottom line: Investing in a relatively corrupt country, a recent economic study shows, amounts to an additional 20 per cent tax on the investment.

But mostly, the worldwide push against corruption comes from an increasingly intolerant global citizenry. In Asia, Indonesian President Suharto fell following protests against his refusal to undertake reforms, especially regarding his family’s ill-gotten billions from state-connected enterprises. Corruption charges ousted Prime Ministers Narasimha Rao of India and Benazir Bhutto of Pakistan, and jailed former South Korean presidents Roh Tae-woo and Chun Doo-hwan. In Japan, numerous top-level government and business leaders have resigned in the wake of corruption scandals, as has a Politburo member in China. In Latin America, bribery charges led to the impeachment of Presidents Fernando Collor de Mello of Brazil and Carlos Andres Perez of Venezuela and to the resignation of Ecuador’s President Abdala Bucaram. In Europe, corruption overthrew Italy’s entire leadership of more than four decades, defeated Spain’s Prime Minister Felipe Gonzales, and forced the resignation of NATO Secretary General Willy Claes and Czech Prime Minister Vaclav Klaus.

People are corruptible, in the West as in the Third World. The U.S.’s Koreagate scandal of 1976-78 involved dozens of congressmen who had taken money or gifts from agents of the South Korean government. In the Abscam scandal of 1978-80, FBI agents posing as Arab sheiks found numerous public officials willing to accept money for help with immigration authorities; six representatives and one senator were convicted of bribery. In the Wedtech scandal of 1986-89, payoffs by a military contractor led to dozens of convictions, including of two representatives on charges of racketeering, tax evasion, bribery, fraud, grand larceny, and perjury.

People in low places are also corruptible. Last fall, Montreal suspended 74 Green Onions — one-third of its entire parking police force — along with 10 managers after a parking ticket scam came to light. Under the system, which had existed in different forms for decades, Green Onions had distributed more than 500 tiny VIP stickers to themselves, to relatives, and to city employees, including an estimated 180 police officers. Those with stickers on their licence plates didn’t get tickets.

CORRUPTION INVOLVES STEALING FROM THE PEOPLE, GENERALLY FROM the public purse or from a public institution that has a relationship of trust with the public. Unlike the theft of one man’s possessions by another, corruption involves the theft of the public weal by a public official.

Corruption cannot exist in an open system, where no official enjoys any discretion over a decision. Corrupt officials need regulations, protectionism, state monopolies, and state ownership — without these tools, they cannot ply their trade. Corruption also cannot exist in a free market. Third World corruption-greased projects — say, hydroelectric dams — cost 25 per cent too much. Without a monopoly, a company can’t force its customers to pay 25 per cent more for its power. They will buy power from plants free of the corruption surcharge. Only the state can enforce this ability to coerce consumers.

Lord Acton’s famous dictum from the previous century — “Power tends to corrupt and absolute power corrupts absolutely” — brilliantly reduces the power-corruption relationship to its essentials. But the dictum also works in reverse. The less power held, the less there tends to be corruption. Lord Acton was talking generally — not just of absolute monarchs but also of the Catholic Church prior to the Reformation, when corrupt clerics cravenly sold dispensations. The data from modern times bear him out.

As Harvard Business School economists Alberto Ades and Rafael Di Tella discovered after analyzing data from many countries, trade openness and product competition reduce corruption; liberalizing an economy by minimizing regulations and maintaining moderate, simple tax regimes with little discretion further reduces corruption.

While many justifiably fear that privatization of state enterprises will unfairly enrich politicians’ friends — all too often, state corruption has had this very outcome — failing to privatize only worsens the situation. Studies show completed privatizations have been less corrupt than other transactions; the underground economy of most countries that delayed privatization, meanwhile, thrived in comparison. Corruption ends once enterprises operate in a free environment.

As deregulation and globalization force governments to become smaller and smaller, as their commercial operations become privatized, and as industrial monopolies break up and become subject to competition, government power will devolve to the people. Needless regulations will disappear, eliminating most corruption and increasingly isolating its remaining strongholds. The OECD’s anti-bribery convention points us to the most significant of these: While politicians have agreed to ban the bribery that occurs in much of government, they insisted on exemptions to protect their own political institutions. It will remain legal to bribe foreign political parties, party officials, and candidates.

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