Tuesday, August 14, 2007

World bank giving advice? Right!

July­September 1997Volume 8, Number 3
Reducing corruptionAn effective state can contribute powerfully to sustainable development and the reduction of poverty. But there is no guarantee that state intervention will benefit society.
The state's monopoly on coercion, which gives it the power to intervene effectively in economic activity, also gives it the power to intervene arbitrarily. This power, coupled with access to information not available to the general public, creates ample opportunities for public officials to promote their own interests, or those of friends or allies, at the expense of the general interest. How can countries establish and nurture mechanisms that give state agencies the flexibility and the incentive to act for the common good, while at the same time restraining arbitrary and corrupt behavior in dealings with businesses and citizens? What formal checks and balances must be built into the structure of government? And what can the state do to combat corruption?
Restraining the potential use and abuse of state power is a challenge for any country. Harder still is doing it without depriving state agencies of the flexibility they need to do their job. But arbitrary and capricious state action undermines more than credibility. It undermines the rule of law itself, by weakening the force of whatever rules the state has set in place. And it fosters conditions that encourage state officials to place themselves above the law and tempt the rest of society to do the same. Development, in these circumstances, hits a brick wall.
Instruments of restraint-including an independent judiciary and the separation of powers-are a vital foundation for sustainable development. But excessive restraint can lead to paralysis. Every instrument for restraining government needs to be complemented by institutional arrangements that build in flexibility for the executive branch in formulating and implementing policies and adapting to new information and changing circumstances.
Countries have used a variety of institutional arrangements that combine flexibility with restraint. Some arrangements-such as deliberation councils in East Asia and the Administrative Procedures Act in the United States-delegate substantial autonomy to executive agencies to define the substance and undertake the implementation of policy. But they also require these agencies to follow procedures that open their decisions to input and oversight by other arms of the state and by civil society and businesses. Other arrangements rely on mechanisms within the executive branch to promote flexibility within restraints, such as the devolution of managerial authority to executive agencies within set budgets and performance targets.
But even if bureaucracies are embedded in processes that provide ample opportunity for outside input and oversight, the risk remains that officials will pursue personal rather than organizational goals. Self-seeking behavior can degenerate into corruption when private interests wield their influence in illegal and secret ways, circumventing the legal and bureaucratic rules designed to keep them out.
Whether public institutions succumb to these and other sources of corruption will depend on the strength of their institutional defenses. Corruption flourishes where distortions in the policy and regulatory regime provide scope for it and where institutions of restraint are weak. It lies at the intersection of the public and private sectors, as private interests wield their influence through illegal means to take advantage of opportunities for corruption and rent seeking, and public institutions succumb to these and other sources of corruption in the absence of credible restraints.
Corruption violates the public trust and corrodes social capital, and it can have far-reaching externalities. Unchecked, the creeping accumulation of seemingly minor infractions can slowly erode political legitimacy to the point where even honest officials and members of the public see little point in playing by the rules. The implications for investment and economic growth are profound. A private sector survey conducted for the World Bank's World Development Report 1997: The State in a Changing World (New York: Oxford University Press, 1997) confirms earlier studies that found that corruption (as perceived by businesspeople) is negatively correlated with both investment and growth. (This survey created an internationally comparable data set, for 69 developing and industrial countries, on different aspects of institutional uncertainty as perceived by entrepreneurs.) And surveys and anecdotal evidence suggest that the greatest victims of petty corruption are usually the poor.
Despite such evidence, many parts of the developing world retain a certain ambivalence toward corruption. A commonly heard view is that corruption merely greases the wheels of commerce, and that without it there would be no transactions and no growth. Apparent support for this argument comes from the fact that some countries (including a few in East Asia) with high levels of corruption have also achieved high levels of growth. The private sector survey provides some insights into this apparent paradox. It found that the predictability of corruption-in terms of both the amount of the bribe and the certainty of obtaining the desired outcome-is an important mediating factor. Countries with similar levels of corruption can differ dramatically in their rates of investment; countries with highly predictable corruption have significantly higher investment rates than those in which payments and outcomes are more uncertain (figure 1). Overall, however, corruption hurts economic performance: no matter how high the degree of predictability of corruption in a country, its rate of investment would have been significantly higher had there been less corruption.
Moreover, countries that have achieved high rates of economic growth despite serious corruption may find themselves paying a higher price in the future. Tolerating corruption that siphons off payments of, say, 10 percent on average may generate pressures to increase the take to 15 or 20 percent. Corruption feeds on itself, creating a widening spiral of illegal payoffs until ultimately development is undermined and years of progress are reversed. And the very growth that permitted corruption in the past can produce a shift from productive activities to an unproductive struggle for the spoils. Over time corruption becomes entrenched, so that when governments finally do move to contain it, they meet powerful resistance.Causes of corruption Incentives for corrupt behavior arise whenever public officials have wide discretion and little accountability. Some corruption stems from opportunities generated by the policy environment, at the bottom or the top of the hierarchy. Payoffs are frequent to lower-level officials charged with collecting tariffs, providing police protection, issuing permits, and the like. When corruption is endemic, these officials may create additional red tape and delays to induce even higher payments. Corruption also occurs at the highest levels of government, in the awarding of major contracts, privatization, the allocation of import quotas, and the regulation of natural monopolies. This helps explain why corruption is more prevalent in countries with highly distorted policies, as measured by such variables as the black market premium (top panel in figure 2).
The probability of being caught and punished also affects the level of corruption. Economic analysis of the law suggests that individuals weigh the expected benefits of breaking the law against the expected costs (the probability of being caught and punished multiplied by the level of punishment). Corruption may be high in countries in which the government does little to deter bribes. Corruption can even persist in countries with substantial freedom of the press and public resentment of corruption if there is little hope of independent judicial resolution of important cases, a relationship confirmed by the private sector survey (middle panel in figure 2).
Finally, corruption may thrive if the consequences of being caught and disciplined are low relative to the benefits. Where civil service wages are very low, officials may try to supplement their pay with illegal payoffs (bottom panel of figure 2). But simply raising civil service salaries may not reduce corrupt behavior. Pay reform must be combined with credible monitoring and law enforcement.Combating corruption Corruption cannot be effectively attacked in isolation from other problems but must be combated through a multipronged strategy. Critical is to reduce opportunities for corruption by cutting back on officials' discretionary authority, to increase accountability by strengthening mechanisms of monitoring and punishment, and to reward favorable performance in decisions on pay and promotion. Reducing opportunities for corrupt practice Any reform that increases the competitiveness of the economy will reduce incentives for corrupt behavior. Thus policies that lower controls on foreign trade, remove entry barriers to private industry, and privatize state firms in a way that ensures competition will all support the fight. If the state has no authority to restrict exports or to license businesses, there will be no opportunities to pay bribes in those areas. If a subsidy program is eliminated, any bribes that accompanied it will disappear as well. Of course, reducing official discretion does not mean eliminating regulatory and spending programs with strong justifications. Such programs must be reformed, not eliminated.
Governments have sought to reduce the opportunities for corruption in various ways:
Clarifying and streamlining laws in ways that reduce official discretion.
Contracting for services with private companies, possibly foreign firms with no close ties to the country.
Making rules more transparent.
Introducing market-based schemes that limit the discretion of regulators.
Adopting administrative reforms that introduce competitive pressures into government. Strengthening mechanisms for monitoring and punishment Independent watchdog institutions that are part of the government structure can also curb corruption. Countries have experimented with various approaches:
Independent anticorruption commissions or inspectors general can investigate allegations and bring cases to trial.
Ombudsmen can hear citizen complaints and help increase the accountability of government agencies.
Public agencies can establish internal units to root out corrupt contractors and propose ways to reorganize the agency to reduce corruption.
Whistleblower statutes can be adopted to protect and reward public employees who report the malfeasance of coworkers or government contractors.
Citizens groups can also be an important check on the arbitrary abuse of government power-if people can organize and if they can find out what is happening. To provide citizens with the means to act as independent watchdogs, governments should publish budgets, revenue collection data, statutes and rules, and the proceedings of legislative bodies. Financial data should be audited by an independent authority; unaudited secret funds or extrabudgetary funds available to chief executives are an invitation to corruption. But even if both the necessary information and the means of punishing corrupt practices are available, individual citizens are unlikely to act alone. Laws that make it easy to establish associations and nonprofits can help resolve this collective action problem.Fostering incentives to play by the rules The same oversight mechanisms used to detect and punish corrupt practices can be used to reward politicians and civil servants who act in the collective interest. Merit-based recruitment, promotion, and remuneration restrain political patronage and attract and retain more capable staff. Clear and widely understood rules of conduct, accountability in performance, and transparency in decisions on pay and promotion all contribute to a healthy esprit de corps. They also encourage closer identification with an organization's goals, reduce the costs of making people play by the rules, and nurture internal partnerships and loyalty.
Meritocracy has not yet become established in many countries. But countries with weak institutions and inadequate checks and balances can improve the performance of their civil service by relying on more transparent and competitive mechanisms for hiring and promotion.Strategic options: Balancing flexibility with restraints States in many developing countries have demonstrated a clear imbalance between flexibility and restraint. The capricious exercise of state power coupled with rampant and unpredictable corruption has undermined development in several countries. States with too much flexibility and not enough restraint will find that their actions are not viewed as credible, and investment and growth will suffer. These countries need to strengthen the formal instruments of restraint to enhance the credibility and accountability of the state. International commitment mechanisms can serve as a short-term substitute while these institutions are built up.
Yet these actions will not be sufficient to stop the rot in countries in which endemic and entrenched corruption has undermined key functions of the state. Strengthening formal instruments of restraint is only one element of a multipronged strategy to control corruption. Reforming the civil service, reducing opportunities for officials to act corruptly, and enhancing accountability are other essential steps. Strengthening mechanisms for monitoring and punishment-of the people who pay bribes as well as those who accept them-will require vigorous enforcement of criminal law. But it will also require oversight by formal institutions such as statutory boards and by ordinary citizens (through voice and participation). These efforts can help not only in controlling corruption but also in improving many other functions of the state, such as policymaking and service delivery.Drawn from World Bank, World Development Report 1997: The State in a Changing World (New York: Oxford University Press, 1997).
Back to the World Bank Policy and Research Bulletin

No comments: