Combating Corruption Anti-Corruption Initiatives from a Business View Point July 14, 2003 The Center for International Private Enterprise Washington DC

Overview of Corruption Corruption is often a “taboo” topic in many countries. Institutionalized corruption threatens the development of democracies and markets. Corruption increases transaction costs and undermines the competitiveness of the private sector in today’s global economy. It is essentially a waste of resources. Corrupt countries lack predictable economic environments and stable legal institutions – the base for international investment, trade and growth.

Roots of Corruption Corruption is not simply an abuse of the public office for private gain: corrupt behavior involves nepotism, cronyism, insider-trading, etc. Corruption is often institutionalized and is an acceptable behavior in many countries. Complex and vague legal systems along with governmental discretionary powers breed corruption. Over-regulation of the business sector creates perverse incentives.

Measures of Corruption Transparency International “Corruption Perceptions Index” ranks 102 countries on the scale of 10 – 1, with 1 being the most corrupt and 10 being the least corrupt country. RankCountryScore 1Finland9.7 2Denmark9.5 10United Kingdom8.7 15Austria7.8 16USA7.7 18Germany7.3 25France6.3RankCountryScore 57Mexico3.6 64Turkey3.2 71Russia2.7 77Philippines2.6 85Ukraine2.4 96Indonesia/Kenya Bangladesh6.3

Anti-Corruption Strategies 1.Break the taboo 2.Mobilize private sector initiatives and political will 3.Identify specific mechanisms that sustain corruption 4.Develop targeted programs and accountability 5.Evaluate

Corruption: Supply-Side vs. Demand Side

Demand Side of Corruption: The Role of the Private Sector corporate governance The business community has to gain a reputation for equity, fairness, transparency, accountability and responsibility by developing the institutions of corporate governance:  Transparency (full disclosure)  Independent Auditing  Conflicts of interest involving boards of directors and managers  Procedures for bankruptcy  Property rights  Contract enforcement  Corruption and theft

Principles of CG OECD Principles 1.Protecting the rights of shareholders 2.Treating shareholders fairly 3.Recognizing the role of stakeholders 4.Ensuring disclosure and transparency 5.Clarifying responsibilities of the board of directors

CIPE’s Experience For businesses to succeed in the world economy, they must have healthy corporate governance mechanisms including rule of law Building corporate governance in developing countries requires refashioning institutions Private sector must participate in developing governance mechanisms The reward is a thriving democratic society that supports economic growth

Case Studies TRACE (Transparent Agents and Contracting Entities) - a business-led effort to establish standards for agents and reduce due diligence costs Business Principles for Countering Bribery (Transparency International and Social Accountability International) – NGO and business community joint effort to establish standards of internal controls & ethics

Practical Approaches to Combating Corruption Coalition Building Coalition 2000 (Bulgaria) Identifying Obstacles Center for Liberal and Democratic Studies (Serbia) Journalist Support Journalists Against Corruption (Latin America)

Public-Private Efforts Center for Economic Development (Slovakia) Legal Reform Constitutional Reform and Legal Streamlining (Ecuador) Integrity Pacts Probidad (Colombia) Practical Approaches to Combating Corruption

Combating Corruption: A Policy Toolkit Supply-side Recommendations Independent media equipped with tools of analysis The role of think tanks, business associations and other NGOs OECD Anti-Bribery Convention Internationally accepted accounting standards Good standards of corporate governance Continue strengthening general OECD guidelines Demand-side Recommendations Establish sound procurement codes Require independent audits Legal reform and simplification Inventory of legal barriers and duplicative regulations Reduce the “shadow” economy Simplify tax codes Salaries of the civil servants have to be competitive with private sector ones Transparency in the financial/banking sector

Governance and Controlling Corruption is Central for Socio-Economic Development and Growth: New Reports and Evidence Presentation by Daniel Kaufmann, The World Bank, on New Books and Research on ‘Quality of Growth’ and ‘Anticorrruption and State Capture in Transition’ ICPS Roundtable, Kyiv, November 6th, 2000

Broadening our Perspective: Assessing Governance Control of Corruption (or Graft) Rule of Law Lack of Regulatory Burden Government Effectiveness Voice and Accountability Political Stability and lack of Violence

Quality of Rule of Law by Region Good Poor

%

Corruption in the Banking Sector ( EIU , Selected Countries ) Chile Hong Kong Hungary Mexico Ecuador Turkey Panama Syria Russia High Corruption Low Corruption

CORRUPTION DETERS FOREIGN INVESTORS: Probability of Investment Loss due to Corruption (within 5 years) UNITED STATES SINGAPORE ITALY COSTA RICA GREECE ESTONIA POLAND MEXICO ROMANIA BULGARIA RUSSIA UKRAINE PAKISTAN GEORGIA COLOMBIA TURKMENISTAN *Source: S&P/DRI 1998 %%%%%%

Impact of good government on investment and growth 10% 15% 20% High MediumLow % Investment share in GDP HighMediumLow -1.5% 0% 1% 2% 1.5% -0.5% -1.0% 0.5% Income per capita Growth Rate Government Quality Government Quality

The ‘Dividend’ of Good Governance Infant Mortality and Corruption WeakAverageGood Control of Corruption x Development Dividend 0 2,000 4,000 6,000 8,000 10,000 12,000 WeakAverageGood Regulatory Burden x Development Dividend Per Capita Income and Regulatory Burden Literacy and Rule of Law WeakAverageGood Rule of Law x Development Dividend Per Capita Income and Voice and Accountability WeakAverageStrong Voice and Accountability x Development Dividend Note: The bars depict the simple correlation between good governance and development outcomes. The line depicts the predicted value when taking into account the causality effects (“Development Dividend”) from improved governance to better development outcomes. For data and methodological details visit

Corruption High Low Bureaucratic Discretion Corruption & Bureaucratic Discretion

Enterprises are Prepared to be Taxed for Better Government: Share of Firms that would pay additional taxes to eliminate corruption, crime and excessive regulations Prepared to Pay Taxes to Alleviate:

Smaller Firms Are Hit Harder by Corruption in Russia and in Transition Economies Bribes to secure public procurement bids (% of contract value) SmallMediumLarge % of contract value SmallMediumLarge %

Extent of State Capture in Transition

HungaryEstoniaRussiaAzerbaijan Parliamentary legislation DecreesCentral Bank Influence Differences in Transition Countries on the Extent of State Capture %of all Firms report negative impact of grand corruption % % % % % % % % % % Adverse Impact of ‘Purchases’ of:

Enormous Socio-Economic Costs of State Capture by Oligarchs and Vested Elite Interests: Business sector grows much slower, lacks investments and insecure property rights

The result: weak property rights Est Uzb Pol Sln Azer Hun Cro Slk Geo Bul Arm Rom Bel Cze Kaz Lit Kyr Rus Ukr Mol Firms reporting insecure property and contract rights % of All Firms %

State Capture exists where partial Civil Liberties and slow Economic Reforms Degree of Civil Liberties in Transition Economies Economic Reforms

Corruption High Low Civil Liberties Civil Liberties Help Control Corruption (Worldwide Evidence, 150 countries)

Control of Corruption and Freedom of the Press High Low High r =.68 Freedom of the Press (Freedom House) Control of Graft [kkz]

Civil Society Oversight: Freedom of information Public hearings of draft laws Monitoring by media/NGO’s Good and Clean Government Competition & Entry : Competitive restructuring of monopolies Regulatory simplification Public Administration and Public Finance: Meritocratic civil service Transparent, monetized, adequate remuneration Accountability in expenditures (Treasury, Audit, Procurement) Strategy for Good Government and Anticorruption Accountability of Political Leadership: Disclosure of parliamentary votes Transparency in party financing Asset Declaration, Conflict of Interest Rules Checks and Balances: Independent and effective judiciary Decentralization with accountability

Emerging Operational Strategies Albania Judicial reform Tax and customs Standards for health care University entrants Monitoring by NGOs Georgia Regulatory reform Tax and customs Public procurement Fiscal management Replacing Judges Monitoring by NGOs

Overall Corruption Over Time (Selected Countries; ICRG index, rescaled 0-10) High corruption Low corruption Indonesia Indonesia Finland El Salvador 10 Finland Russia Russia Poland Poland

National Governance: Challenges in Integrating Anti- Corruption Into a Strategy of Institutional Change A simple Formula synthesizing Governance/Anticorruption: IG and AC = KI + LE + CA Anti-Corruption = Improving Governance and Anti-Corruption = = Knowledge/Info.Data + …...+ Leadership (incl. Political) Leadership (incl. Political) Collective Action (change)... + Collective Action (change)