How to Spend $50 Billion to Make the World a Better Place
Page 10
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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The Challenge of Poor Governance and Corruption
81
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
83
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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The Challenge of Poor Governance and Corruption
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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