Combating Corruption

1

• Combating Corruption

Anti-Corruption Initiatives from a Business View
Point
July 14, 2003 The Center for International
Private Enterprise Washington DC
2
Overview of Corruption

• Corruption is often a taboo topic in many
  countries.
• Institutionalized corruption threatens the
  development of democracies and markets.
• Corruption increases transaction costs and
  undermines the competitiveness of the private
  sector in todays global economy. It is
  essentially a waste of resources.
• Corrupt countries lack predictable economic
  environments and stable legal institutions the
  base for international investment, trade and
  growth.

3
Roots of Corruption

• Corruption is not simply an abuse of the public
  office for private gain corrupt behavior
  involves nepotism, cronyism, insider-trading,
  etc.
• Corruption is often institutionalized and is an
  acceptable behavior in many countries.
• Complex and vague legal systems along with
  governmental discretionary powers breed
  corruption.
• Over-regulation of the business sector creates
  perverse incentives.

4
Measures of Corruption

• Transparency International Corruption
  Perceptions Index ranks 102 countries on the
  scale of 10 1, with 1 being the most corrupt
  and 10 being the least corrupt country.

Rank Country Score
1 Finland 9.7
2 Denmark 9.5
10 United Kingdom 8.7
15 Austria 7.8
16 USA 7.7
18 Germany 7.3
25 France 6.3
Rank Country Score
57 Mexico 3.6
64 Turkey 3.2
71 Russia 2.7
77 Philippines 2.6
85 Ukraine 2.4
96 Indonesia/Kenya 1.9
102 Bangladesh 6.3
5
Anti-Corruption Strategies

1. Break the taboo
2. Mobilize private sector initiatives and political
   will
3. Identify specific mechanisms that sustain
   corruption
4. Develop targeted programs and accountability
5. Evaluate

6
CorruptionSupply-Side vs. Demand Side
Supply-Side
Demand-Side
Private Sector
Government Officials
7
Demand Side of CorruptionThe Role of the
Private Sector

• The business community has to gain a reputation
  for equity, fairness, transparency,
  accountability and responsibility by developing
  the institutions of corporate governance
• Transparency (full disclosure)
• Independent Auditing
• Conflicts of interest involving boards of
  directors and managers
• Procedures for bankruptcy
• Property rights
• Contract enforcement
• Corruption and theft

8
Principles of CG

• OECD Principles
• Protecting the rights of shareholders
• Treating shareholders fairly
• Recognizing the role of stakeholders
• Ensuring disclosure and transparency
• Clarifying responsibilities of the board of
  directors

9
CIPEs Experience

• For businesses to succeed in the world economy,
  they must have healthy corporate governance
  mechanisms including rule of law
• Building corporate governance in developing
  countries requires refashioning institutions
• Private sector must participate in developing
  governance mechanisms
• The reward is a thriving democratic society that
  supports economic growth

10
Case Studies

• TRACE (Transparent Agents and Contracting
  Entities) - a business-led effort to establish
  standards for agents and reduce due diligence
  costs
• Business Principles for Countering Bribery
  (Transparency International and Social
  Accountability International) NGO and business
  community joint effort to establish standards of
  internal controls ethics

11
Practical Approaches to Combating Corruption

• Coalition Building
• Coalition 2000 (Bulgaria)
• Identifying Obstacles
• Center for Liberal and Democratic Studies
• (Serbia)
• Journalist Support
• Journalists Against Corruption
• (Latin America)

12
Practical Approaches to Combating Corruption

• Public-Private Efforts
• Center for Economic Development (Slovakia)
• Legal Reform
• Constitutional Reform and Legal Streamlining
  (Ecuador)
• Integrity Pacts
• Probidad (Colombia)

13
Combating Corruption A Policy Toolkit

• Demand-side
• Recommendations
• Establish sound procurement codes
• Require independent audits
• Legal reform and simplification
• Inventory of legal barriers and duplicative
  regulations
• Reduce the shadow economy
• Simplify tax codes
• Salaries of the civil servants have to be
  competitive with private sector ones
• Transparency in the financial/banking sector

• Supply-side
• Recommendations
• Independent media equipped with tools of analysis
• The role of think tanks, business associations
  and other NGOs
• OECD Anti-Bribery Convention
• Internationally accepted accounting standards
• Good standards of corporate governance
• Continue strengthening general OECD guidelines

14
(No Transcript)
15
Governance and Controlling Corruption is Central
for Socio-Economic Development and Growth New
Reports and Evidence

• Presentation by Daniel Kaufmann, The World Bank,
  on New Books and Research on Quality of Growth
  and Anticorrruption and State Capture in
  Transition
• ICPS Roundtable, Kyiv, November 6th, 2000

16
Broadening our Perspective Assessing Governance

• Control of Corruption (or Graft)
• Rule of Law
• Lack of Regulatory Burden
• Government Effectiveness
• Voice and Accountability
• Political Stability and lack of Violence

17
Quality of Rule of Law by Region
Good
Poor
18

19
Corruption in the Banking Sector
( EIU 1997-98, Selected Countries )
High
4
Corruption
3
2
1
Low
Corruption
0
Syria
Chile
Turkey
Mexico
Hungary
Ecuador
Russia
Hong Kong
Panama
20
CORRUPTION DETERS FOREIGN INVESTORS Probability
of Investment Loss due to Corruption (within 5
years)
95
TURKMENISTAN
79
COLOMBIA
71
GEORGIA
68
PAKISTAN
62
UKRAINE
58
RUSSIA
44
BULGARIA
41
ROMANIA
39
MEXICO
29
POLAND
24
ESTONIA
15
GREECE
12
COSTA RICA
Source SP/DRI 1998
10
ITALY
6
SINGAPORE
5
UNITED STATES











0
10
20
30
40
50
60
70
80
90
100
21
Impact of good government on investment and growth
Income per capita Growth Rate
Investment share in GDP
20
15
10
Medium
Low
High
High
Medium
Low
Government Quality
22
The Dividend of Good Governance
Note
The bars depict the simple correlation between
good governance and development outcomes. The
line depicts the
predicted value when taking into account the
causality effects (Development Dividend) from
improved governance to better
development outcomes. For data and methodological
details visit http//www.worldbank.org/wbi/governa
nce.
23
Corruption Bureaucratic Discretion
High
Corruption
Low
Bureaucratic Discretion
24
Enterprises are Prepared to be Taxed for Better
Government Share of Firms that would pay
additional taxes to eliminate corruption, crime
and excessive regulations
Prepared to Pay Taxes to Alleviate
25
(No Transcript)
26
Smaller Firms Are Hit Harder by Corruption in
Russia and in Transition Economies
Bribes to secure public procurement bids
( of contract value)

6
4
of contract value
2
0
Small
Medium
Large
Small
Medium
Large
27
Extent of State Capture in Transition
28
Differences in Transition Countries on the Extent
of State Capture

50

45

40

35

30
of all Firms report negative impact of grand
corruption

25

20

15

10

5
0
Hungary
Estonia
Russia
Azerbaijan
Adverse Impact of
Purchases of
Parliamentary legislation
Decrees
Central Bank Influence
29
Enormous Socio-Economic Costs of State Capture by
Oligarchs and Vested Elite Interests Business
sector grows much slower, lacks investments and
insecure property rights
30
The result weak property rights
Firms reporting insecure property and contract
rights

80
70
60
50
of All Firms
40
30
20
10
0
Lit
Est
Sln
Hun
Slk
Pol
Geo
Bul
Arm
Bel
Cro
Rus
Ukr
Uzb
Cze
Kyr
Mol
Kaz
Azer
Rom
31
State Capture exists where partial Civil
Liberties and slow Economic Reforms
Economic Reforms
Degree of Civil Liberties in Transition Economies
32
Civil Liberties Help Control Corruption
(Worldwide Evidence, 150 countries)
High
Corruption
Low
Civil Liberties
33
Control of Corruption and Freedom of the Press
High
Control of Graft kkz
r .68
Low
Low
High
Freedom of the Press (Freedom House)
34
(No Transcript)
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Strategy for Good Government and Anticorruption

• Accountability of Political Leadership
• Disclosure of parliamentary votes
• Transparency in party financing
• Asset Declaration, Conflict of Interest Rules

• Checks and Balances
• Independent and effective judiciary
• Decentralization with accountability

Good and Clean Government

• Civil Society Oversight
• Freedom of information
• Public hearings of draft laws
• Monitoring by media/NGOs

• Competition Entry
• Competitive restructuring
• of monopolies
• Regulatory simplification

• Public Administration and Public Finance
  
• Meritocratic civil service
• Transparent, monetized, adequate remuneration
• Accountability in expenditures (Treasury, Audit,
  Procurement)

36
Emerging Operational Strategies

• Albania
• Judicial reform
• Tax and customs
• Standards for health care
• University entrants
• Monitoring by NGOs

• Georgia
• Regulatory reform
• Tax and customs
• Public procurement
• Fiscal management
• Replacing Judges
• Monitoring by NGOs

37
Overall Corruption Over Time
(Selected Countries ICRG index, rescaled 0-10)
10
High corruption
Indonesia
El Salvador
8
Russia
Indonesia
6
Russia
4
El Salvador
Poland
2
Poland
Low corruption
Finland
Finland
0
1992
1993
1994
1995
1996
1997
1998
1988-92
38

• National Governance Challenges in Integrating
  Anti-Corruption Into a Strategy of Institutional
  Change
• A simple Formula synthesizing Governance/Anticorru
  ption
• IG and AC KI LE CA
• Improving Governance and Anti-Corruption
  
• Knowledge/Info.Data
• ... Leadership (incl. Political)
  ...
• ... Collective Action (change)