18569 The World Bank Ma y PREMnotes 1998 Public Se c t o r Corruption and development Corruption’s costs It is sometimes argued that bribery can The growing body of theoretical and have positive effects under certain circum- empirical research on the economic stances by giving firms and individuals a impact of corruption suggests that: means of avoiding burdensome regula- • Bribery is widespread, but there are sig- tions and ineffective legal systems. But in nificant variations across and within corrupt societies many politicians and Growing recognition regions. For example, survey responses bureaucrats exercise enormous discretion suggest that Botswana and Chile have to help fuel the growth of excessive and dis- and discussion of less bribery than many fully industrial- cretionary regulations on entrepeneurs. ized countries. Empirical evidence refutes the “grease” corruption have • Bribery raises transactions costs and and “speed money” arguments. Responses uncertainty in an economy. from more than 3,000 firms in 58 coun- made it possible to • Bribery leads to inefficient economic tries surveyed in the World Economic outcomes. It impedes long-term for- Forum’s Global Competitiveness Survey address its costs eign and domestic investment, misallo- for 1997 indicate that enterprises report- cates talent to rent-seeking activities, ing a greater incidence of bribery also and causes and distorts sectoral priorities and tend—even after taking firm and country technology choices (by, for example, characteristics into account—to spend a creating incentives to contract for large greater share of management time with defense projects rather than rural bureaucrats and public officials negotiat- health clinics specializing in preventive ing licenses, permits, signatures, and taxes care). It pushes firms underground, (figure 1). undercuts the state’s ability to raise rev- Bribes are equally pernicious when they enues, and leads to ever-higher tax override regulations needed by society, such rates being levied on fewer and fewer as building codes, environmental controls, taxpayers. This, in turn, reduces the prudential banking regulations, and restric- state’s ability to provide essential public tions on logging in tropical rain forests. The goods, including the rule of law. A obscure insider lending practices and vicious circle of increasing corruption improper financial schemes resulting from and underground economic activity poorly supervised financial schemes have can result. contributed to macroeconomic crises in • Bribery is regressive, falling heavily on Albania, Bulgaria, and several Asian coun- trade and service activities undertaken tries. Finally, bribers can also purchase by small enterprises. monopoly rights to markets—as, for exam- • Corruption undermines the state’s ple, in the energy sectors in some transition legitimacy. economies, where unprecedented amounts f rom th e de velo pm ent eco nom ics vice pr e siden c y an d p ove r ty red u cti on an d eco nom i c ma na geme nt n e t w o r k of grease payments buttress gigantic monop- often restricted. Laws in government are olistic structures. poorly developed, if they exist at all, and the legal institutions charged with enforc- Corruption’s causes ing them are ill prepared for this complex Corruption is widespread in developing job. The watchdog institutions that pro- and transition economies, not because vide information on which detection and their people are different from people enforcement is based—such as investiga- elsewhere but because conditions are ripe tors, accountants, and the press—are also for it. First, the motivation to earn income weak. Yet strong investigative powers are The cost of capital is extremely strong, exacerbated by poverty crucial. Because the two parties to a bribe and by low and declining civil service often both benefit, bribery can be for firms tends to be salaries and the absence of risk-spreading extremely difficult to detect. Even if detec- mechanisms (including insurance and a tion is possible, punishments are apt to be higher where bribery well-developed labor market). mild when corruption is systemic—it is Second, opportunities to engage in cor- hard to punish one person severely when is prevalent—and ruption are numerous. Monopoly rents so many others (often including the can be very large in highly regulated “enforcers”) are likely to be equally guilty. corruption imposes economies—and in transition economies, And the threat of losing one’s job is a lim- where property is essentially up for grabs. ited deterrent when official pay is low. a significant tax on The discretion of many public officials is Finally, certain country-specific factors, broad in developing and transition such as population size and natural foreign direct economies, and this systemic weakness is resource wealth, also appear to be posi- exacerbated by poorly defined, ever- tively linked with the prevalence of bribery. investment in all changing, and poorly disseminated rules and regulations. Creating political will regions Third, accountability is typically weak. Understanding what makes powerful Political competition and civil liberties are politicians do what they do, and which interests they represent, is of paramount importance in addressing corruption. Finding pockets of political support is cru- cial; even in countries where corruption is endemic, there are likely to be some reform-minded decisionmakers whose constituencies will support reform to fur- ther the country’s broader interests. And windows of opportunity may open up when there is a change in regime or in individual leadership, or when there is a crisis. When such special opportunities are absent, though, the necessary political will may still be generated—albeit more slowly—by efforts to enhance public awareness and mobilize civil society to sup- port anticorruption efforts. Constructive pressure and assistance from abroad is certainly not decisive, but it can help. International organizations and donors can help to focus attention on corruption and support reformists in gov- ernment and civil society. Furthermore, in an increasingly integrated global econ- omy countries competing for foreign a list of possible anticorruption measures investment are discovering that foreign (figure 2). To be credible, they felt, such investors value stability, predictability, and watchdog bodies needed to be created in a honesty in government. Evidence is emerg- political environment characterized by ing that corruption imposes a significant honest leadership, insulation of civil ser- “tax” on foreign direct investment in all vants from political interference, and regions of the world, including East Asia. revamped incentives that discouraged cor- ruption. Otherwise, such bodies could eas- Tackling corruption ily be rendered useless or, worse, misused Is fighting corruption worth the bother? for political gain. The respondents empha- International Skeptics point out the dearth of successes sized the importance of economic liberal- in anticorruption drives and the fact that it ization and budgetary, tax, and regulatory organizations and took England more than a century to bring reforms, soundly rejecting the notion that corruption under control. But Hong Kong such reforms fuel corruption. donors can help to (China) and Singapore, for example, have In fact, survey respondents thought their shifted reasonably quickly from being very countries should have made more progress focus attention on corrupt to being relatively clean. Botswana in implementing broad reforms and indi- has been a model of propriety for decades. cated that corruption and vested financial corruption and Chile has performed well for many years, interests were key reasons for their slow and Poland and Uganda have recently progress. While emphasizing first and fore- support reformers made progress in controlling corruption. most the domestic causes of corruption, What are the most common features of many respondents also indicated that in government and these successes? Anticorruption watchdog bribery by foreign firms played a significant bodies, such as the Independent Com- role. They thought that OECD members civil society mission Against Corruption in Hong Kong should enforce antibribery legislation (China) and smaller corruption-fighting abroad and that international institutions institutions in Botswana, Chile, Malaysia, should make curbing corruption a priority and Singapore, are often credited with when providing assistance to their countries. much of the progress. In contrast, the In sum, addressing corruption effec- broader economic and institutional tively requires an emphasis on preven- reforms that have taken place simultane- tion—that is, reforms of economic ously have not received sufficient credit. policies, institutions, and incentives—if The government that came to power in enforcement measures taken by the police, Uganda in 1986 implemented a strategy ethics offices, or government watchdogs encompassing economic reforms and are to bear fruit. deregulation, civil service reform, a strengthened auditor general’s office, the appointment of a reputable inspector gen- eral empowered to investigate and prose- cute corruption, and a public information campaign against corruption. In Botswana sound economic and public sector man- agement policies led to honest governance early on; the country’s success in fighting corruption has not been principally derived from the more recent advent of its anticorruption department. In a recent survey public officials and members of civil society in developing economies rated the effectiveness of anti- corruption watchdog bodies the lowest on The following are only some of the needs to reflect the particular lessons the major economic policy changes that will country has learned about dealing with unambiguously reduce opportunities for perverse political influences, and how spe- corruption: lowering tariffs and other bar- cific innovations in procurement and bid- riers to international trade; unifying ding methods can reduce corruption. market-determined exchange rates and Finally, practitioners need to search for interest rates; eliminating enterprise subsi- the information gathering and dissemina- dies; minimizing regulations, licensing tion methods that can have the quickest requirements, and other barriers to entry and most direct impacts. The Bangalore for new firms and investors; demonopoliz- (India) NGO scorecard method, whereby The entrenched ing and privatizing government assets; and users rated local service-providing agen- transparently enforcing prudential bank- cies, has already resulted in firings of offi- nature of systemic ing regulations and auditing and account- cials, improved service delivery, and a ing standards. The reform of government decreased incidence of bribery. Gathering corruption requires institutions may include civil service data and publicizing the vastly different reform; improved budgeting, financial costs of publicly provided school lunches in boldness in management, and tax administration; and various localities have brought about gov- strengthened legal and judicial systems. ernment reforms. The existence of a free implementation— Such reforms should involve changing press is of paramount importance. To safe- government structures and procedures, guard citizens’ freedoms of expression and incrementalism is placing greater emphasis on competition information, libel laws protecting politi- and incentives within the public sector, cians and public officials must not be overly unlikely to work and strengthening internal and external restrictive. Indeed, however difficult and checks and balances. As a complement to imperfect gathering data and disseminat- these broader reforms, the transparent ing information about corruption are, the implementation of enforcement mea- importance of these activities cannot be sures, such as prosecuting some prominent overstated. Secretiveness has helped elites corrupt figures, can also have an impact. and politicians keep corrupt practices Emphasis should be placed on selecting under wraps in many countries. Careful measures that are in line with a country’s analysis, presentation, and dissemination implementation capabilities during an of data can be very effective in raising gen- anticorruption campaign. The entrenched eral awareness, creating momentum for nature of systemic corruption requires reforms, and furthering our limited under- boldness in implementation—incremen- standing of what does and does not work in talism is unlikely to work. Genuine reform- efforts to control corruption. ers will want to move quickly beyond the general first principles contained in a This note is adapted from an article in the country assessment to demand practical, March 1998 Finance and Development writ - country-specific advice. For instance, tech- ten by Cheryl W. Gray (Interim Director, Public nocratic lessons are beginning to emerge Sector, PREM Network) and Daniel Kaufman as to how different privatization method- (Lead Economist, Development Research Group, ologies may contain greater or lesser Development Economics). For further reading on opportunities for corruption, how the corruption-related topics, visit the Knowledge strengthening of banking regulations Management System website (http://kms). This note series is intended to summarize good practice and key policy findings on PREM-related topics. PREMnotes are distributed widely to Bank staff and are also available on the PREM website (http:/ /prem). If you are interested in writing a PREMnote, email your idea to Kim Murrell. For additional copies of this PREMnote please contact the PREM Advisory Service at extension 87736. Prepared for World Bank staff The original had problem with text extraction. pdftotext Unable to extract text.