How to Spend $50 Billion to Make the World a Better Place

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by Bjorn Lomborg


  have socialist or French legal origins. Fortunately, such

  factors become insignificant when income is considered:

  richer countries have less corruption whatever their his-

  torical legacies. High levels of economic freedom lead to

  greater prosperity and are also correlated with low corruption levels.

  Much corruption occurs in the administration of public

  programs as when bribery is used to evade regulations and

  taxes. However, the World Bank also identifies what it calls

  “crony capitalism” or “state capture,” where the government effectively serves the interests of a small group of business people and politicians, with or without an element of organized crime. This seems to be a particular problem in former Soviet Union countries. Those firms associated with crony

  networks thrive, but at the expense of the overall economic health of the nation.

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  Reform proposals

  Policies that just focus on economic growth will not be sufficient to reduce corruption, and such policies will not even produce the desired results unless the state is reasonably well governed. Proposals should therefore address governance issues in a coordinated way. They must also over-

  come the inevitable resistance from powerful vested inter-

  ests, which will occur however beneficial the reforms may

  be to the general population.

  Compared to some of the other global challenges –

  hunger, disease and conflict, for example – corruption does not seem such a pressing issue. However, the weak governance typically associated with corruption also reduces the effectiveness of policy initiatives to tackle them. Improved governance designed to reduce corruption and improve

  state functioning would make initiatives to tackle other

  social ills more likely to succeed.

  Benefit-cost analysis of reform proposals is difficult

  although cross-country analysis indicates that the benefits of reducing corruption are large. It is difficult to demonstrate clear effects from individual policies. Nevertheless, some reforms are essentially costless and their benefit-cost ratios therefore are very large.

  Although some states may be so dysfunctional that effec-

  tive reform is not feasible at present, in many cases a con-certed application of the following opportunities could have significant benefits. Note that these are not isolated choices; effective reform will require an appropriate mix of these

  complementary initiatives.

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  How to Spend $50 Billion to Make the World a Better Place Opportunity 1: Oversight and transparency

  Low levels of accountability are associated with low per

  capita income and a high degree of “crony bias.” A specific proposal to correct this is the encouragement of local citizen involvement. The key to its success is to identify wasteful government programs that are suitable for managed decentralization (although data coordination and anti-corruption laws would still be administered centrally). Citizens can be involved either as monitors or as producers and sometimes

  as both.

  There is good empirical evidence of the benefits of

  improving integrity and increasing transparency under the

  right conditions. For example, in Uganda the corruption

  level was so great that, for every $1 of government spend-

  ing on education, only 20 cents reached the local primary

  schools targeted. Reforms that increased publicity (so that parents were aware of the money allocated) and improved

  monitoring raised this to 80 cents; not perfect, but an

  increase of 400%. This improvement does not, in itself,

  guarantee good education, but it is certainly an important factor in the equation. Unfortunately, such improvements

  cannot be achieved everywhere: in some cases decentraliza-

  tion can invite local corruption, particularly in hierarchical rural societies.

  An example of using citizens to produce public bene-

  fits occurred in a pilot study in Nepal that gave local people direct control over a food-for-work program. It resulted in twice as many miles of roads being built with the same

  budget, a large part of which had previously been pocketed

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  The Challenge of Poor Governance and Corruption

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  Chad

  3

  High

  Guatemala

  r = 0.0

  r = −0.5

  Argentina

  Paraguay

  2

  Angola

  Nicaragua

  Haiti

  Ukraine

  Zimbabwe

  Romania

  Venezuela

  Peru

  Ireland

  y bias

  Turkey

  1

  Hungary

  Russia

  Madagascar

  Cron

  Kenya

  Thailand

  Greece

  Norway

  USA

  Pakistan

  Korea

  Tunisia

  India

  Vietnam

  Jordan

  Ghana

  United Kingdom

  Cameroon

  New Zealand

  0

  South Africa

  China

  Netherlands

  Singapore

  Finland

  Denmark

  Malaysia

  Lo −

  w 1−2

  −1

  0

  1

  2

  Low

  High

  Democratic voice and accountability

  Figure 5.1. Crony bias, voice, and accountability

  Note: Data from Executive Opinion survey (2003) and World Bank Institute’s calculations; ‘crony bias’ is defined in the note to figure 6.3; the voice and accountability variables are from Kaufmann, Kraay and Mastruzzi (2003).

  Source: Kaufmann (2004).

  by the contractors rather than used to pay workers. How-

  ever, a bid to extend this scheme met with resistance from national officials and private contractors.

  In general, there seem to be two ways to limit corruption

  via grassroots involvement: monitoring the use of central

  funds and reporting misuse, or local provision of a service

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  How to Spend $50 Billion to Make the World a Better Place under contract. To be effective, the service must first be wanted by the local community, the local organization must be relatively effective and egalitarian, and the relationship with national government must permit sustainable local

  empowerment.

  However, such grassroots efforts are not sufficient in certain areas where monitoring by individuals is not practical; for example, procurement and revenue collection.

  Opportunity 2: Procurement and civil service reform

  Corruption in contracting occurs in every country, even in those at the high end of the honesty index. However, i
t is more widespread and harmful in some countries, particularly where the public sector accounts for a large share of construction contracts. Not only does corruption raise costs and reduce rates of return, it also offers little incentive for officials to make economically rational decisions. The result is often a double waste of money; for example, the wrong

  infrastructure projects are built, and they cost more than necessary.

  Procurement reform offers the opportunity to rethink

  what the government buys, as well as how it makes the pur-chase. For example, buying standard goods sold in com-

  petitive markets reduces the risk of corruption compared

  with buying custom-made items. But this may not be pos-

  sible for contracts such as large infrastructure projects.

  The World Bank requires the use of an International Com-

  petitive Bidding (ICB) process for its infrastructure loans.

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  The Challenge of Poor Governance and Corruption

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  This process might be supplemented with a benchmarking

  exercise in the form of a central database of contractors, including evidence on their efficiency and any involvement in fraud.

  Alongside this, civil service reform can provide incen-

  tives for officials to avoid corruption – for example, by

  providing bonuses for meeting procurement targets, backed

  up by a credible enforcement effort. Unfortunately, such

  an approach would have little impact on “grand corrup-

  tion,” where senior politicians are implicated in procure-

  ment scandals.

  Opportunity 3: Customs and tax administration

  In the great majority of developing and transition coun-

  tries where surveys have been conducted, customs and tax

  administration are cited as areas where large unofficial payments are common.

  Collusion between corrupt officials, businesses, and

  individuals results in tax evasion, and the cost is borne

  by those taxpayers who are poorer or less well connected.

  In Pakistan, for instance, one study estimated that halving the losses due to corruption and mismanagement would

  increase the tax collected from 13.6% to over 15% of

  GDP. In Africa, the situation can be even worse: In the

  Gambia in the early 1990s, revenue from taxes and customs

  duties amounting to 8–9% of GDP was not collected. This

  represents six to seven times the amount the government

  spent on healthcare.

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  How to Spend $50 Billion to Make the World a Better Place Corruption is often greatest where nominal tax rates are

  high. This can be addressed by reform which lowers over-

  all tax rates, but levies taxes on bases that are difficult to hide or underestimate. For example, Russia recently introduced a flat rate of 13% for income tax, combined with

  credible enforcement measures, and tax revenues have now

  increased.

  In cases where reform proves difficult, one option is to

  have tax assessment and collection carried out by a private firm, which then retains a percentage of the revenue. While this may be effective in the short term, it is an expensive option and only a first step toward a fully reformed local service.

  Opportunity 4: Business regulation

  In many countries illicit payments to ensure the introduc-

  tion of particular rules and regulations, or the avoidance of existing ones, are common. This is not only a direct cost; corrupt firms also waste more time dealing with the authorities. Red tape and vague rules encourage this sort of corruption. A costless reform would therefore be to simplify

  the rules that make operation difficult, thereby reducing

  opportunities for bribery.

  However, there are areas of regulation that are both

  complex and socially necessary, such as pollution control

  and worker health and safety. The key is to eliminate super-fluous regulations and keep necessary ones, ensuring that

  they are administered in ways that minimize corruption

  opportunities. This can be facilitated by the expansion of

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  diagnostic work being undertaken by the World Bank and

  other institutions to encourage efficient and honest systems of regulation.

  Opportunity 5: International efforts

  Several international treaties seeking to control corruption in multinational business have been enacted by bodies such as the Organization for Economic Cooperation and Development (OECD) and United Nations (UN). However, none

  of these can be effective without strong and effective policies in both the home and host countries.

  The extractive industries sector illustrates some of the

  major issues. If the state is weak and corrupt, the pres-

  ence of oil and other natural resources can actually hold

  back economic growth because attention is focused on

  personal gain by government officials rather than using

  the income stream for the public good. Proposals such as

  the international, multi-stakeholder Extractive Industries Transparency Initiative (EITI) seek to avoid this trap by

  encouraging both parties in transactions to publicly report payments.

  Such initiatives have the potential to provide large ben-

  efits at minimal cost, but will be fiercely resisted by those who profit from current corruption. Equally, in countries

  with weak democratic institutions and poorly organized

  civil societies, leaders may find that transparency has little effect domestically.

  A further aspect of international efforts is asset recov-

  ery, which forms an important part of the new UN treaty.

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  How to Spend $50 Billion to Make the World a Better Place Access to public utilities

  80

  % Firms

  Extent of

  Public procurement contracts

  report bribery

  bribery in:

  Capture of laws and regulations

  40

  0

  Latin

  Former Eastern

  SSA

  Middle

  South

  East

  East

  OECD

  America Soviet

  Europe

  East

  Asia

  Asia

  Asia

  Union

  developing Industrial

  % of firms rate type of corruption as high/very high

  Figure 5.2. Unbundling corruption (Executive Opinion survey (GCR), regional averages, 2002)

  Source: Kaufmann (2003).

  However, this is a very difficult process, which would

  require controversial changes to entrenched legal regimes.

  Summary of options for improving governance

  and reducing corruption

  Corruption and poor governance in many developing coun-
>
  tries are barriers to the effective tackling of poverty and other global challenges. The direct benefits of reform are

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  The Challenge of Poor Governance and Corruption

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  difficult to assess but, since many reforms are essentially costless, cost effectiveness is likely to be very high.

  A major challenge to reduction of corruption and poor

  governance is the difficulty of overcoming entrenched interests. A proportion of foreign aid should be directed to support institutional reform, even in countries judged presently to be so corrupt that they are not worth supporting.

  Isolation from the international community is only likely

  to make matter worse.

  In summary, promising policy options are:

  Option 1: Grassroots monitoring and service delivery, with technical assistance and information provision

  provided centrally by government or non-governmental

  organizations.

  Option 2: Procurement reform via the development

  of benchmarks to reward efficient providers of public

  services.

  Option 3: Reform of revenue collection through tax sim-plification, incentives to both tax collectors and payers, and monitoring.

  Option 4: Reduction in the state-imposed costs of establishing and maintaining a business.

  Option 5: International efforts to develop monitor-

  ing and transparency initiatives, as in the extractive

  industries.

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  THE CHALLENGE OF POOR GOVERNANCE

  AND CORRUPTION

  OPPONENTS’ VIEWS

  Jean Cartier-Bresson and Jens Christopher Andvig have

  contributed their own detailed views on this challenge. Both agree with Susan Rose-Ackerman, author of the original

  paper, that corruption is a major challenge, but they put

  forward their own analyses of the causes, effects, and ways to tackle it.

  Cartier-Bresson is in broad agreement with Rose-

  Ackerman’s analysis, making the following points:

  r Institutionalized corruption is a symptom of fail-

  ing government and must be tackled by institutional

  reform.

  r Realistic benefit-cost analysis is not possible, mainly

  because it is impractical to collect reliable data on what is essentially an illegal activity.

  r Despite the general agreement among economists on

  the negative effects of corruption, there are formidable

 

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