Corruption in Developed and Developing Countries
CORRUPTION IN DEVELOPED AND DEVELOPING COUNTRIES.
While corruption, in one form or another, has perverted virtually all human societies throughout history, it has not had uniform impact on any one of them. Scholars who study corruption in an effort to find ways to minimize it have had to deal with the fact that it is difficult to define and measure, making empirical testing very difficult.
Modern social science defines corruption in terms of three basic models: First, corruption is related to the performance of the duties of a public office. According to J. S. Nye, corruption is
[b]ehavior which deviates from the normal duties of a public role because of private-regarding (family, close private clique), pecuniary or status gains; or violates rules against the exercise of certain types of private-regarding influence. This includes such behavior as bribery (use of reward to pervert the judgment of a person in a position of trust); nepotism (bestowal of patronage by reason of ascriptive relationship rather than merit); and misappropriation (illegal appropriation of public resources for private regarding uses). (p. 419)
Second, corruption is related to the concept of exchange derived from the theory of the market. Jacob Van Klaveren argues that the bureaucrat views his public office as an enterprise from which to extract extra-legal income. As a consequence, the civil servant's compensation package "does not depend on an ethical evaluation of his usefulness for the common good but precisely upon the market situation and his talents for finding the point of maximal gain on the public's demand curve" (p. 26). In an economy pervaded by high levels of government regulations, civil servants may devote most of their time and effort to assisting entrepreneurs in evading state laws and statutes. In exchange the civil servants are paid extra-legal income (Mbaku, 1992).
Finally, the definition of corruption is couched in terms of the public interest, as argued by Carl Friedrich:
[t]he pattern of corruption may therefore be said to exist whenever a power holder who is charged with doing certain things, that is a responsible functionary or office holder, is by monetary or other rewards, such as the expectation of a job in the future, induced to take actions which favor whoever provides the reward and thereby damage the group or organization to which the functionary belongs, more specifically the government. (p. 15)
Friedrich argues further that the opportunistic activities of corrupt bureaucrats can severely damage the public interest and should be considered important variables in the study and evaluation of corruption.
Public choice theory and corruption.
Economists, dissatisfied with these explanations for corruption, have turned to public choice theory, which sees corruption as post-constitutional opportunism designed to generate benefits for individuals or groups at the expense of the rest of society. According to public choice theory, the scope and extent of corruption in a country is determined by that country's institutional arrangements and not necessarily by the character of its civil servants and politicians. Once the constitution has been designed and adopted and a government established, there is an incentive for individuals and groups to subvert the rules in an effort to generate benefits for themselves. Rules subversion, if successful, can allow individuals to secure benefits above and beyond what would have accrued to them otherwise. This kind of behavior can occur in both democratic and nondemocratic societies.
Bureaucrats, whose job it is to design and execute public policies, may attempt to use the process to maximize their private objectives at the expense of serving the general public efficiently and equitably. The desire by civil servants to maximize their private objectives and the effort by organized interest groups to subvert the rules and to extract benefits for themselves create opportunities for corruption. For example, an entrepreneur who wants to secure a lucrative import or production permit may bribe a clerk at the ministry of trade in order to (1) secure the permit and (2) make sure that the bureau protects his new monopoly position by not issuing additional permits to entrepreneurs from the area in which he operates. In exchange for providing the entrepreneur with opportunities to earn supranormal profits, the civil servants at the ministry of trade "earn" extra-legal income, and the importer who receives the permit earns an above normal rate of return on investment, but society loses.
Government regulatory activities usually impose significant transaction costs on enterprise owners and severely affect the profitability of their operations. To minimize these regulation-induced costs, some entrepreneurs may seek help from the civil service, whose job it is to enforce the laws. Usually, the business owner pays a bribe to the government regulator in order to receive preferential treatment and minimize the burden of the regulations on his or her operations. Public choice theorists argue that bureaucratic corruption is directly related to the scope and extent of government intervention in private exchange (i.e., in markets). Effective control of corruption, then, must be based on a modification of existing rules in order to change incentive structures and constrain the ability of the state to intervene in private exchange and create artificial scarcities.
The International Dimension of Corruption
Since the end of the Cold War, policymakers in many countries have recognized the global nature of corruption and are now making efforts to coordinate their control and cleanup efforts. Thus, instead of viewing corruption as a domestic problem caused primarily by the interaction of the bureaucracy with the private sector, many lawmakers, especially those in the developing and transition economies, are now acknowledging the contributions of transnational corporations to the problem.
Many governmental and nongovernmental organizations—including the United Nations (UN), the Organization of American States (OAS), the International Chamber of Commerce, Transparency International (TI), the World Economic Forum (WEF), World Bank, Interpol, and the Organization for Economic Cooperation and Development (OECD)—have developed an interest in dealing with corruption.
Several reasons have been advanced to explain the sudden interest by these organizations. Changes in international political relations during the period from 1989 to 1991 significantly reduced people's tolerance for incompetence, malfeasance, and venality in the public sector. As part of the movement toward improved governance, citizens of many countries demanded the elimination of corrupt practices. Thus, since the late 1980s, the balance of power in many countries has been shifting in favor of more open, transparent, and participatory governance structures.
Scholars have identified three changes that have contributed to the globalization of corruption. First, greater levels of economic integration have increased chances that corruption in one region of the world will have an impact on economic and political activities in other parts of the world. For example, when the corrupt activities of the Bank of Credit and Commerce International (BCCI) forced it into insolvency in 1991, many economies around the world were affected. In fact, several countries in Africa suffered significant financial losses from the BCCI collapse.
Second, developments in communication technology have revolutionized the international financial system and enhanced the ability of traders to engage in corruption. The emergence of electronic networks for the transfer of funds has made it quite difficult for countries to deal effectively with corruption. Many anticorruption organizations have argued that the ease with which funds can be transferred to Europe or the Caribbean from different parts of the world implies that corrupt civil servants can effectively hide their extra-legal income from the public, making it virtually impossible for such funds to be recovered in the event of conviction. Fortunately, policing agencies, especially in the West, continue to innovate and come up with technology that can effectively monitor traffic in these electronic networks. Such technology could prove very helpful in the fight against global corruption.
Third, since the end of the Cold War there has been a significant increase in the number of cooperative alliances between economic units, within countries and across borders. Continued globalization exacerbates the problem of corruption; however, it also offers opportunities for its control.
Pervasive corruption is a major threat to the maintenance of a free, multilateral trading system. In order for a global competitive economy to function properly and efficiently, participants must play by the rules. Opportunism (e.g., corruption) by some market participants can derail the international trading system since it (i.e., corruption) invariably creates an unlevel playing field. For example, corporations or countries that do not tolerate corruption will be placed at a competitive disadvantage. Those countries that encourage their companies to engage in corruption abroad and offer favorable tax treatment for bribes paid to foreign public officials place these firms at a competitive advantage over those from countries in which corruption (including paying bribes to foreign public officials) has been criminalized. In fact, many American firms, which are prohibited by U.S. law from offering bribes to foreign officials, have complained bitterly of the disadvantage that they suffer since, until recently, many of their European counterparts were allowed and often encouraged by favorable tax treatment by their national governments to engage in corrupt practices abroad.
Many policymakers around the world, especially in the developed countries, have come to realize that the long-run social, economic, human, and political costs of global corruption are enormous and that it poses a threat to the rule of law. It can also cause citizens to lose confidence in their leaders and distort market incentives and negatively affect the flow of investment and, hence, wealth creation. Perhaps more important is the fact that corruption can prevent the poor from gaining access to welfare-enhancing and even life-saving public goods and services.
Four strategies have been employed in the past by successive governments to deal with corruption, usually with varying degrees of success. These are societal, legal, market, and political strategies.
In the societal strategy, each society defines a common standard of morality, which can then be employed to determine if a given behavior qualifies as corrupt. Civil society is encouraged to remain vigilant and watch out for individuals who engage in corruption and report them to the police. The government and civil society organizations are expected to educate the general public about corruption and its negative effects on economic growth and development. Through such an educational program, citizens can significantly improve their ability to determine if behavior is corrupt and report perpetuators to the relevant authorities for further action. The private press plays an important role in this approach to corruption cleanup—it investigates and exposes corruption, paving the way for the police to gather the evidence needed for effective prosecution by the judiciary.
In the legal approach, the judiciary, the police, and the mass media are expected to lead the fight against corruption. First, national laws define the responsibilities of civil servants and properly constrain them in the performance of their duties. Second, the law defines corruption and corrupt behavior. Third, citizens are encouraged to be vigilant and report any suspected corrupt activities to the police. Fourth, the police are expected to thoroughly investigate such activities, gather the necessary information, and present the latter to the judiciary. Fifth, the judiciary then prosecutes the accused and imposes the appropriate punishment if found guilty. Special commissions of inquiry or special prosecutors can be constituted and used by the government to investigate incidents that point to large-scale corruption and public malfeasance. Commissions of inquiry are especially important in cases where high-ranking officials have been implicated in corruption.
Police and judiciary officers can only perform their functions properly and efficiently if they are not corrupt—that is, they are effectively constrained by the law. If, on the other hand, these institutions are pervaded by corruption, it would be prudent to first engage in reforms to improve their efficiency before engaging them in the fight against corruption.
In many developing countries, low salaries for public servants have been given as a reason why some of these workers may engage in corruption. As part of the effort to minimize corruption in the civil service, it has been suggested that pay scales in the public sector be made competitive with those in the private sector. One must note, however, that higher pay in the public sector may simply force opportunistic civil servants to demand higher bribes to compensate for the probability of losing what is now a relatively more important and lucrative position. It has also been suggested that any civil-service reforms be supplemented with counteracting agencies such as an independent judiciary or some kind of independent review board, an ombudsman, or other investigative body. One must consider the fact that such bodies can become politicized (as evidence from many developed and developing countries shows) and used by incumbent ruling coalitions to punish the opposition and continue to monopolize political spaces.
The market approach to corruption cleanup is based on the belief that there exists a discernible relationship between market structure and corruption. Government regulation of private exchange creates opportunities for regulators to extort bribes from enterprise owners. The remedy that scholars have usually recommended is decreased government regulation and more reliance on markets for the allocation of resources. Such an approach has at least two problems. First, it is based on the manipulation of outcomes within an existing or given incentive structure (i.e., existing institutional arrangements). Second, the problem here is not with the market but with the incentive structures that traders are facing. Rules define the incentive structure faced by participants in markets and, hence, determine the behavior of these traders and market outcomes. If the government's regulatory activities are reduced and resource allocation made more dependent on the market, there is not likely to be much of a change in outcomes if the incentive structure has not been altered. The most effective way to minimize opportunistic behaviors, including corruption, is to reform or modify existing rules and, by implication, change the incentives faced by traders. Changing or modifying the rules does not imply deregulation, but reconstitution and reconstruction of the state through democratic constitution-making to provide transparent, participatory, and accountable governance and economic structures.
The political strategy emphasizes decentralization of power and argues that the concentration of power in the center enhances the ability of the ruling coalition to engage in corrupt activities. The recommendation is that the public sector be made more transparent. For example, the public budget process should be made more open and participatory and the outcome (i.e., the budget) should be published and made available to the mass media and any other interested individuals and groups. Unfortunately, such reforms can easily be reversed (and power reconcentrated in the center) by subsequent governments in response to lobbying from interest groups.
Traditional approaches to corruption control depend on the effectiveness and professionalism of the country's counteracting institutions (e.g., the police, judiciary, and the mass media). It is assumed that institutions such as the police and judiciary are well constrained by the law and that they are free of corruption. First, a significantly large number of countries around the world do not have fully functioning private media that are free to investigate and expose corruption without fear of censure by the incumbent government.
Second, the judiciary systems of many countries are not independent of the executive branch of government. Instead, the country's chief executive controls the judiciary and retains the power to appoint and dismiss judiciary officers.
Third, many public institutions, especially in the developing countries, are pervaded by high levels of corruption. Hence, a corruption cleanup program developed and implemented by any of these institutions is not likely to be successful. An effective anticorruption program, then, must begin with the selection of appropriate new rules that (1) constrain the exercise of government agency and (2) provide the necessary foundation for the design and adoption of new and more effective counteracting agencies (e.g., an independent judiciary, a well-constrained police force, a professional and neutral military, an independent central bank, a free press, etc.).
Public Choice Theory and Corruption Control
Corruption is a "rules-related" problem. Rules determine the incentives faced by participants in markets. Unless the analyst understands the laws and institutions of the economy being examined, any attempt to study corruption and other forms of opportunism will not yield policy-relevant results.
In a 1985 study, Brennan and Buchanan argue that rules (1) determine the nature of the interaction between individuals within society; (2) provide the means for the peaceful resolution of conflict; (3) provide information to market participants, enhancing the ability of each individual to anticipate the behavior of others; and (4) constrain the behavior of individuals, as well as that of collectivities within the society. To deal effectively with corruption, for example, it is necessary that the police, who investigate and collect evidence to be used in the prosecution of those accused of corruption, be adequately constrained by the law. Since the rules determine the incentive structures faced by market participants, any effort to deal with corruption and other forms of opportunism (e.g., rent seeking) must begin with a negotiated modification of existing rules so that the economy can be provided with a new set of rules that effectively constrains state custodians and makes it quite difficult for them to behave opportunistically.
Rules can be implicit (e.g., tribal custom and tradition) or explicit (e.g., a written constitution). After a country has developed and adopted a constitution, corruption can be seen as post-constitutional opportunism—that is, behavior on the part of individuals or groups designed to generate extra-legal income for themselves, usually through the subversion of rules. One can see corruption then as part of the larger problem of constitutional maintenance or how to enforce compliance to the rules. Here, opportunism is defined as behaviors designed to improve the welfare of an individual or group at the expense of other citizens and includes such behaviors as shirking, corruption, adverse selection, moral hazard, and free riding.
The key to producing a sustainable and effective anticorruption campaign is a thorough and complete examination of the country's existing rules and by implication, its market incentives. This approach to corruption control has many benefits. First, institutional reform, especially if undertaken democratically, can produce rules that (1) reflect the values of the relevant stakeholder groups and hence are most likely to be considered legitimate tools for the regulation of sociopolitical interaction, improving the chance that people would respect and obey them; and (2) effectively constrain the state and make it quite difficult for civil servants and politicians to extort bribes from the private sector.
Second, institutional reform can be used to entrench economic freedom and improve entrepreneurship and wealth creation. Finally, institutional reform can provide each economy with more viable and effective structures for the management of ethnic diversity, resulting in a reduction in communal violence. A more peaceful society should significantly improve the environment for investment and wealth creation.
See also Civil Society ; Constitutionalism ; Corruption ; Economics ; Globalization .
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John Mukum Mbaku