Corruption Essay ⋆ Business Essay Examples ⋆ EssayEmpire

In general, corruption is defined as the abuse of authority for improper gain. Public corruption refers to the misuse of governmental authority while private corruption indicates a misuse of purely nongovernmental power. Many analysts focus on public corruption. A very standard definition of public corruption, used by the World Bank, is “the abuse of public power for private benefit.” A more detailed discussion is offered by Bradhan who notes the violation of an implicit or explicit agreement between a principal and their agent:

[public] corruption ordinarily refers to the use of public office for private gains where an official (the agent) entrusted with carrying out a task by the public (the principal) engages in some sort of malfeasance for private enrichment which is difficult to monitor for the principal.

A more neutral and legalistic formulation, and one that can apply in both public and private settings is offered by Tanzi; he defines corruption as consisting of “intentional non-compliance with arm’s length relationship aimed at deriving some advantage from this behavior for oneself or for related individuals.” There are other types of intentional subversions of processes such as political corruption (e.g., vote-buying in an election) but these meanings will not be considered here.

As to the types of specific actions that may constitute corruption, there are many. A few examples include: bribery and gratuities; influence peddling; offering one’s official services for sale; misreporting of financial transactions; fictitious billing and invoicing; fabricating documents, signatures, and approvals; destroying records and evidence; fraud; misrepresentation; and providing special favor to related parties.

However context is critical in judging whether or not any of these actions in a specific instance are, in fact corrupt. For example misreporting may simply be due to negligence and not intentional, therefore not corrupt. Favoring of family members over nonfamily members may be culturally accepted in some cases and therefore not seen as corrupt, especially when the favored party is able to meet a particular obligation, such as a job qualification, even if that party is not the most able available.

Thus two sets of norms help to delimit what might constitute corruption in a given circumstance: morality and legality. Morally, the abuse of authority implies some violation of trust, whether it is the trust of the citizen in their officials or the trust of shareholders in their managers. And abuse that leads to gain is in a general sense doubly immoral, first because it is breaking a commitment (and thus lying to one or more parties, by omission or commission) and second because it implies taking resources that do not belong to the party taking those resources, i.e., stealing. There will be some cultural variation on whether a specific action in a particular context constitutes lying, betrayal, and stealing but these general concepts are in the abstract almost always universally disapproved of.

The law offers a second set of standards by which to judge corruption though these generally will be based on some prior moral precepts, if only loosely. Therefore corruption is not always illegal, nor is illegal behavior always corrupt. For example, gratuities offered by contractors to public agencies are, in most countries, generally legal so long as they are some de minimus (i.e., very small) amount. Conversely, misreporting of transactions to protect shareholders from a venal management might be illegal but might be the morally correct thing to do under the circumstances.

International Legal Standards

There are a variety of legal standards pertaining to corrupt behavior, nationally and internationally. National laws generally offer the greatest penalties for corruption and of course the greatest potential enforcement, but they also exhibit the greatest variation across countries. Price-fixing and offering of bribes in particular are not consistently illegal according to national local codes.

Internationally, there is the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions which has been signed by 30 OECD countries and six non-OECD countries. The Convention deals specifically with bribery and requires that peer-country panels review each signatory country’s performance in implementing and applying the Convention. There is also the 2003 United Nations (UN) Convention against Corruption, which has now been ratified by the required minimum number of signatory and is therefore technically binding.

Of course the problem with transnational laws is that there is little ability to enforce them and equally little penalty for breach of them. The OECD Convention offers a self-regulating and peer-accrediting approach to legal regulation of corruption which is only as strong as the commitment of the peers involved and which has no formal sanction beyond moral suasion. The UN Convention has no enforcing authority other than the UN itself which obviously has limited enforcement power. More effective are transnational anti-corruption codes such as those established by the World Bank and which are applied to Bank development assistance. The International Monetary Fund (IMF) applies similar conditions to its loans. Even here however, such codes apply only to aid or loan recipients and are often flouted by those recipients.

Costs

Regardless of subtlety in the understanding and interpretation of corruption, there is certainly a material amount of it taking place in business and government worldwide. The estimates of the cost of corruption, while necessarily rough, are substantial. A 2003 UN conference on corruption estimated such costs as representing 5 percent of the world economy, or more than $1.5 trillion a year. In reviewing the literature on gross corruption costs, the Asian Development Bank (ADB) highlighted some particular sets of costs that illustrate both the magnitude and spread of the problem: as much as $30 billion in aid for Africa ending up in foreign bank accounts; one East Asian country over the course of 20 years estimated to have lost $48 billion due to corruption, surpassing its entire foreign debt of $40.6 billion; in one North American city, businesses cutting $330 million from an annual waste disposal bill of $1.5 billion by removing Mafia domination from the garbage industry; studies that indicate that in several Asian countries governments have paid from 20 percent to 100 percent more for goods and services because of corrupt practices by contractors; and estimates that corruption in a European country has inflated this country’s total outstanding government debt by as much as 15 percent or $200 billion.

These are direct costs but equally or more important are the costs that corruption imposes on economic development, poverty and competitiveness. The biggest problem is that corrupt practice distorts implicit and explicit pricing, creates deadweight loss and causes misallocation of resources. Thus investment may be driven to uneconomical projects because of payoffs, and legitimate entrepreneurial activity might be supplanted by higher ‘return’ sham enterprises. Individuals who might otherwise engage in honest business might decide they have no alternative but to participate in a culture of economic subversion. The poor often suffer the most because they are not well-connected or able to pay bribes. Worst case there might be an undermining of legitimacy of the entire public sector.

Within a purely private setting, a corrupt company will likely become less competitive for the same reasons of resource misallocation and in extreme cases may fail due to malfeasance. There are a significant number of large corporate failures that can be traced at least indirectly to corrupt practices and compromised internal governance. In the United States the failure of Enron was in large part due to a business model that relied on an ever-increasing firm share price which became collateral to finance reckless expansion using accounting irregularities, earnings misreporting, market rigging (as was the case with its energy trading and its abuse of company-owned electricity generating assets in California), and blatantly unethical and illegal structured-finance and derivatives transactions. In Europe, Parmalat collapsed for somewhat similar reasons, namely a rapid expansion that temporarily hid structural financial problems which were covered up by managers through the use of fraud. Even when failure is not the end result, misuse of shareholder resources for the enrichment of specific managers is all too common.

Research bears out the existence and ultimate costs of these processes. In a study of over 70 countries during the late 1970s and early 1980s, Mauro found that corruption is negatively associated with investment rates; according to his model a one standard deviation improvement in the “corruption index” will translate into an increase of 2.9 percent of GDP in the investment rate and a 1.3 percent increase in the annual per capita rate of GDP growth. Research published in the World Bank 1997 World Development Report found that countries that were perceived to have relatively low levels of corruption were always able to attract significantly more investment than those perceived to be more prone to corrupt or illicit activity. Of course these financial and economic measures such as these do not fully capture the range of deleterious public consequences that corruption can engender, such as a building collapse due to building codes that were unenforced because of bribes or consumer deaths due to tainted food that was not properly inspected.

From a private shareholder perspective corruption is no less costly. Taylor, in reviewing a particularly bad year for US corporate scandals (2002) in which there were failures or soon-to-be failures of Enron, WorldCom, Adelphia and Global Crossing, and scandals at blue chip companies like Xerox and AOL Time Warner estimated that in a total of 23 firms under investigation that year, the CEOs of these firms collectively earned $1.4 billion from 1999 to 2001, laid off 162,000 employees, and saw the reduction in the value of their shares fall by $530 billion, about 73 percent of their market value. While these consequences cannot be completely attributed to corrupt practice, it is nonetheless indicative of what such practices can held lead to.

Prevalence

More general evidence finds that the prevalence of corruption varies both geographically and sectorally although there is little doubt that the problem occurs in some form almost everywhere. Transparency International (TI), the largest international NGO dedicated to monitoring and reporting on global corruption, publishes a Corruption Perceptions Index (CPI), which ranks countries according to the perceived level of their corruption in demanding bribes. The 1999 CPI, to take but one example, ranked Denmark, Finland, New Zealand, Sweden, and Canada in the top five as far as having the least perceived corruption and Uzbekistan, Azerbaijan, Indonesia, Nigeria, and Cameroon as in the bottom five as having the most. Countries such as the United States, UK, Chile, and Australia were included in the top 20 and Kenya, Russia, and Pakistan were in the bottom 20. While there is some shifting across the geography from year to year, the TI rankings are overall generally stable. TI estimates that some US$100 billion annually is paid out worldwide in the form of bribes or some other pay-off.

Another measure of the incidence and cost of corruption is offered by the World Economic Forum Global (WEF), a Europe-based consortium with a large membership of firms, and designed by the Harvard Institute for International Development (HIID). The WEF issues an annual Competitiveness Report which surveys responding firms about various aspects of “competitiveness” in the host countries where they invest. The questions on corruption asks the respondent to rate the level of corruption on a one-to-seven scale according to the extent of “irregular, additional payments connected with import and export permits, business licenses, exchange controls, tax assessments, police protection or loan applications.” The corruption index for a particular country is the average of all respondents’ ratings for that country, with 7 being the best score. In the 2006/7 survey Iceland, Singapore, Finland, Norway, Sweden, and Denmark all had numerous rankings within the top 10 positions in terms of low corruption. Venezuela is ranked near the bottom with very high corruption. The United States has a somewhat middling rate: the worst rankings for the United States were 111 on the cost of terrorism to business and 102 on the impact of legal contributions to political parties.

There are some criticisms of measures such as these. In particular, these instruments are survey-based and so only indicate perceptions of corruption, not direct observational metrics of it. There can be biases and gaps in such surveys. Survey results may not always be comparable across different instruments that are conducted by different organizations or even across the same instrument across given years given changes in survey questions. However there is a high correlation of national rankings across surveys and relative stability within a given survey from year to year, indicating a basic core stability of the measures.

Besides national variations, some industrial sectors are well known to be more corrupt than others, like oil and gas, construction and armaments. A firm negotiating a deal in one of these sectors, in a country with a generally high corruption level is likely to be doubly hit and there may still be significant corruption in problematic sectors even in relatively ‘clean’ countries. The scale of sectoral corruption is indicated by the example of such costs in the construction sector, estimated globally at some US$3,200 billion per year according to TI. TI’s Global Corruption Report of 2005 presents case studies of large-scale infrastructure projects that have been plagued by corruption, such as bribes paid to secure contracts for the Lesotho Dam in Africa, and the implication of politicians in corruption concerning the purchase of a waste incinerator in Cologne, Germany. Stories such as these are repeated in various reports and studies year after year. It is notable that they take place in both the developed and developing world.

Cause And Effect

A big focus of discussion in the corruption literature revolves around cause and effect. For example, an academic study by Treisman found that countries with Protestant traditions, histories of British rule, more developed economies, and higher imports to be less corrupt; with federal states, more corrupt; and the current degree of democracy not significant, although long exposure to democracy predicted lower corruption.

This broad finding, while by no means incontrovertible, is broadly consistent with other research that focuses on the relationship between governance institutions and corruption. A governance-corruption model generally asserts that corruption affects overall productivity and efficiency by reducing governmental capacity, weakening political institutions and citizen participation, offering more opportunities for rent taking by well-connected parties, reducing overall trust in government and thus leading to a sort of vicious cycle. Conversely transparent and efficient government in a context of well-educated, empowered, and actively participating citizenry will enjoy a virtuous circle of low corruption.

Of course any theory of particular causes of corruption will yield corresponding theories as to how to combat it. To the extent that fundamental social values are important (e.g., “Protestant traditions” as noted by Treisman) corruption will be harder, though not impossible, to change. However, evidence on the role of social and cultural factors is inconclusive. The relatively stable corruption rankings of individual countries on various surveys suggest some role for cultural factors but closer examination of the effect of specific cultural norms on corruption does not seem to carry significant explanatory effect and as Wei notes the costs of corruption do not vary by culture. Since corruption in general is costly it would seem to be undesirable from that standpoint alone, regardless of cultural and social context.

Governance and management can be more readily changed and many proposals to limit corruption focus on these elements. There are a number of common themes across such proposals. Transparency is key since open information about who gets what and who is paying who at least make the participants in the problem apparent and may provide disincentives to corrupt behavior through the threat of prosecution and public disapproval. Accountability is also mentioned frequently, in this context meaning that there are clear lines of authority and responsibility for consequences of actions. Legality is a final plank in which there are clear laws, regulations and codes defining what corruption is and what it is not and spelling out clear and strong penalties for noncompliance. Education underlies all of this since people must be trained in both the values and workings of any anti-corruption system.

The ADB follows these general principles in guidelines that it has developed and which are consonant with much of the anti-corruption literature. The ADB framework focuses on processes for hiring and promotion and remuneration of responsible authorities; regulations on conflicts of interest and conduct in office; regulations concerning gifts and hospitality; guidance and training on ethical conduct; enforcement of codes of conduct; duties to report; e-government and other methods of information dissemination; rotation of officials and division of duties; strong, independent and proper auditing procedures and institutions; criminalization of corrupt activities such as bribery and illicit enrichment; well-funded and well-trained enforcement authority; and public education and building of public support.

Although the ADB framework is focused on public agencies, private corruption will have a set of parallel issues. Thus in private corporations it is generally recommended that there be clear corporate policies governing conduct with clear sanctions spelled out for noncompliance; proper external and internal audit authority; appropriate division between different levels of management and between the board of directors and management; and free flow of information. Classic problems in corporate corruption include boards that are compromised or captured by management (for example through the offer of lucrative company contracts by managers to board members) and internal processes where there is a lack of genuine oversight for critical decisions (for example having a manager responsible for setting an underling’s pay and promotion also overseeing that underling’s performance as an internal auditor).

There is a school of thought that sees public information and education as primary in effecting a shift towards values that are antithetical to corruption. Once values are changed, so the thinking goes, behavior will follow. Examples of such an approach are offered by TI which compiles a Bribe Payers Index that evaluates the perceived propensity of firms from industrialized countries to bribe in the places where they do business and the Integrity Pact, in which the host government and all would-be bidders for a public contract agree beforehand that no party to the negotiations will offer or accept bribes. TI claims to have achieved success with Integrity Pacts in some of the world’s most chronically corrupt countries. Whether such an approach is universally effective remains to be seen.

Of course an alternative approach is creation and enforcement of laws in which acts are clearly criminalized and vigorously prosecuted. Clearly there are many public and private officials who have been heavily fined, jailed and, in some cases, such as China, even executed and such disincentives and penalties no doubt have limited the extent of overall corruption. Nonetheless there are at least as many officials who escape without penalty and the costs of enforcement are very high. Whether worldwide public and private corruption is being reduced, increased, or staying level, there is no question that it remains a significant and costly problem with no one single solution.

Bibliography:

Asian Development Bank (ADB), AntiCorruption Policies in Asia and the Pacific (2004);
Stewart Hamilton and Alicia Mickelthwait, Greed and Corporate Failure: The Lessons from Recent Disasters (Palgrave MacMillan, 2006);
Seymour M. Lipset and Salman Lenz, “Corruption, Culture, and Markets,” in Lawrence Harrison and Samuel Huntington, eds., Culture Matters: How Values Shape Human Progress (Basic Books, 2001);
Transparency International, Transparency International Press Release Global Corruption Report 2005 (March 2005);
Daniel Treisman, “The Causes of Corruption: A Cross-national Study,” Journal of Public Economics (v.76, 2000);
Shang-Jin Wei, Corruption in Economic Development: Beneficial Grease, Minor Annoyance, or Major Obstacle? Harvard University and National Bureau of Economic Research Working Paper (1998);
World Bank, World Development Report: Helping Countries Combat Corruption: The Role of the World Bank (1997).

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