Featuring
Matthew Hennessey
The Wall Street Journal; Former Carnegie Council Staff
Andrei Kozlov, the first deputy chairman of Russia’s central bank, in September was murdered by gunmen in the parking lot of a Moscow soccer stadium. Mr. Kozlov for years had been leading the effort to reform Russia’s famously corrupt banking system. He had overseen the closure of dozens of banks involved in money laundering and other illicit activities. His death reverberated around the world as people in the financial community struggled to comprehend the public assassination of a well-known government official in a modern, and increasingly wealthy society.
At the moment Mr. Kozlov lay dying, the leaders of the World Bank and the International Monetary Fund (IMF) were convening their annual meeting in Singapore. The leaders of the development community planned to use the meetings to affirm their commitment to combating corruption and promoting governance reforms.
The problem of corruption has long bedeviled those tasked with promoting and sustaining development in the world’s poorest countries. By distorting markets, stifling growth, and discouraging investment, corruption has made it difficult for developing countries to escape the cycle of poverty. Corruption also demoralizes communities by advertising the successes of the criminal, unethical, and often violent individuals that are able to capture positions of power and influence.
The World Bank was created in 1945 with a mandate to reduce global poverty and promote economic development. Historically, however, critics who deemed corruption a political problem rather than an economic one prevented Bank leaders from substantively addressing the issue. In the 1990s Bank president James Wolfensohn and chief economist Joseph Stiglitz sought to capitalize on new understandings of the statistical relationship between the quality of a nation’s governance and its economic performance. The Worldwide Governance Indicators (WGI) were designed to track the political, economic and institutional dimensions of governance in over 200 countries. The report, released every two years, analyzes six aggregate indicators of good governance: (1) voice and accountability; (2) political stability and absence of violence; (3) government effectiveness; (4) regulatory quality; (5) rule of law; and (6) control of corruption.
The most recent WGI report, issued in September, paints a clearer picture than ever of the beneficial effect of reducing corruption and improving governance. Statistical analysis reveals a significant "development dividend" for countries successful at scaling back corruption. According to the report, even the smallest increases in the quality of governance can lead to gains in national income over time. "An improvement in governance of one standard deviation can triple a nation’s per capita income in the long run," the authors write. In other words, it pays to be honest.
When Paul Wolfowitz took the reins of the World Bank in 2005, he pledged to make governance reform one of the Bank’s top priorities. In an April 2006 speech before national leaders in Jakarta, Indonesia, Dr. Wolfowitz defined good governance as "the combination of transparent and accountable institutions, strong skills and competence, and a fundamental willingness to do the right thing."
Traditionally, anti-corruption advocates have focused on promoting good policies and honest government in countries with a history of corruption and under-development. This seemed the natural approach for agencies and NGOs seeking to help countries help themselves. Lately, however, the onus has been shifting from those who take bribes and onto those who pay them.
Transparency International (TI), the Berlin-based anti-corruption watchdog group, has been pressuring corrupt governments since 1993 by publishing its annual Corruption Perceptions Index (CPI), which ranks countries in terms of the degree to which corruption is perceived to exist amongst public officials.
TI last week released the most recent edition of the CPI. The report is not encouraging. "Almost three-quarters of the countries in the CPI 2006 score below five, indicating that most countries in the world face serious perceived levels of domestic corruption," said Leslie Benton, TI’s Washington-based policy director, in an interview with Policy Innovations.
TI is credited with putting corruption on the agenda of the United Nations, the World Bank, and the IMF. It has expanded its arsenal by publishing the Bribe Payers Index (BPI), a ranking of 30 leading exporting countries according to the propensity of their firms to pay bribes when doing business abroad. With BPI 2006, TI has shifted the terms of the corruption debate and focused scrutiny onto the supply side of bribery.
The report was compiled from surveys of 11,232 business executives based in 125 countries. Russia, China and India, three countries often touted as development success stories, posted the three lowest scores calculated by the BPI 2006. Companies headquartered in these rapidly growing economies pay more bribes abroad than any other nation’s companies. Whether these countries are exporting corruption or simply playing by the international rules of the game is unknown, but it appears that economic growth alone is not a corruption panacea.
The results of full report illustrate that even companies from high-scoring states such as Germany, Japan and the United States show a considerable predilection for making pay-offs when doing business in foreign lands. According to James Paul and Jason Garred of Global Policy Forum, "Corporations that adhere to regulations in their home countries often abuse labor, human rights and the environment in other countries, especially poor countries."
With this bribe-paying and bribe-taking going on, it’s fair to ask: Is anyone doing the right thing by refusing to take part?
Pressure from watchdog groups like TI and the Business and Human Rights Resource Centre, which scrutinizes the human rights impact of over 3,000 companies worldwide, has at the very least opened people’s eyes to the systemic damage associated with corruption. But anti-corruption efforts will likely continue to meet stiff opposition from entrenched interests. As the killing of Andrei Kozlov demonstrates, it is not possible to reform corrupt societies simply by throwing a switch. Crooked politicians and bribe-paying businesses can exploit the mechanisms of government to obstruct the efforts of reformists. Organized crime thrives even in countries with well-established legal systems.
Most governance experts agree that the strength of three institutions—the judicial system, the press, and civil society—can help push reform to produce real results. The absence of an independent, transparent, and reliable judiciary makes it difficult to enforce contracts—a condition that invites corruption. Countries with serious corruption problems often lack the vital check on power that a free press can offer. The same holds true in societies without a vibrant civil society to challenge, dialogue with, and debate government.
Advocates for reform should begin by targeting these three areas. "If governments are serious about development, it’s time they got serious about corruption," says Angel Gurria, Secretary General of the Organization for Economic Cooperation and Development (OECD). In a speech at the Singapore meetings he emphasized the need for international cooperation. "Developing and developed countries alike share the responsibility in fighting corruption. Bribery, money laundering, tax havens, and counterfeiting all involve illegal activities that operate across borders in our countries. Therefore, working together and joining forces is the key to successfully reducing corruption."
The international community has taken recent steps to harmonize anti-corruption efforts. The 1999 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions criminalizes the bribing of foreign officials by companies headquartered in all 30 OECD member states and six non-member states—Argentina, Brazil, Bulgaria, Chile, Estonia, and Slovenia. Similarly, the United Nations Convention Against Corruption, in place since 2005, requires member states to establish corruption as a criminal offence and to take steps to facilitate international cooperation.
As the Worldwide Governance Indicators reveals, good governance tends to pay dividends over the long term, so it is important for nations to stay the course on reform. Development stars such as China and India would be well advised to concentrate a significant amount of their newfound wealth on fixing corruption problems. Rich countries, too, must do a better job of policing their own firms as they operate globally or risk partial blame for the inequity in today’s state of globalization.
