How institutions work in a high corruption equilibrium. The legal assumptions. The Montesinos case. National and international institutions vs. power networks Experiences from the World Bank. New Ideas to go from high to low corruption equilibrium.

Legal framework All citizens have equal rights. Citizens vote to choose their government. REPRESENTATION.The government represents the interest of all and has monopoly power to make public decisions. SOVEREIGNTY.Each national government maintains formal relations with foreign governments and multilateral organizations.

‘Traffic Light’ World Maps Control of Corruption – 2000/01 Source for data: ; Map downloaded from : Colors are assigned according to the following criteria: Red, 25% or less rank worse; Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

Criminal prosecution and political networks 1985/7. Criminal prosecutor of the military juntas ( three former presidents), 22 generals, admirals and other officers. 1988/91. 2 military rebellion cases. 1988/92. More than 100 big corruption cases, involving private bankers and businesspersons, public officials and cabinet members. Big mistake. What was the difference? Power networks.

The former minister of labor case The former minister of labor was appointed President of a state-owned company. We collect evidences of fraud against him for one year. Finally, the judge indicted him, resulting in a political scandal. President Menem fired him. “A man under criminal suspicions can not be a public official” A woman who had two indictments was appointed as a new President of the company.

the individual behavior approach. (judges and prosecutors, journalists, people)

Binnary ethic Demons Saints

Small number of criminals 90% Saints 10% Demons

Beyond binnary profiles Demonsgood but sinfulSaint

Ethical profile 25% Demons 50% Honest but sinful 25% Saints 25% demons 50% sinful25%saints 25 %

Institutions from individual to organizational behavior.

Authorities abide by the law and are commited to enforce it STATE PUBLIC EMPLOYEES OFFICIALS CABINET

Ethical Profile of Authorities Difficult situation STATE CABINET OFFICIALS PUBLIC EMPLOYEES

Solutions Institutional changes are not sufficient.

ENVIRONMENT COMPANY Z COMPANY Y COMPANY X MANAGERS SUPERVISORS EMPLOYEES CABINET OFFICIALS PUBLIC EMPLOYEES MANAGERS SUPERVISORS EMPLOYEES MANAGERS SUPERVISORS EMPLOYEES government

The Montesinos case.

The clientelistic network Evidences from 110 vladivideos transcript in “El Comercio” The political and resource interchange of 230 people. Each number is a person Each blue line represent a political favor Each purple line represent a money interchange

1 State (Bureaucracy) Vladimiro Montesinos Media Private Sector Municipal Government Military Political Parties Civil Society International Legislative Branch Judiciary Alberto Fujimori Political Support Network Moreno Ocampo

Media Private Sector Vladimiro Montesinos Municipal Government Military State (Bureaucracy) Political Parties Civil Society International Legislative Branch Judiciary Alberto Fujimori 1 Resource Dependency Network Moreno Ocampo

Lessons from Montesinos case The judicial approach. Does the elimination of the central node ensure the disarticulation of the network or can the network be regenerated? The institutional approach. Can we change institutions by constructing buildings, improving technology, training people or changing procedures? The international approach. Can we use the relation with formal institutions to control informal networks in power?

A 170-person refuse collection company working for the city of Salta, the 700,000 inhabitant state capital of the Salta Province in northern Argentina. In part because of Salta´s economic difficulties, payments for the refuse collection contracts in question had been delayed. These delays in the payment of over 2.0 million dollars which the municipality of Salta owed to company began to pose problems. Total annual sales amounted to roughly 2.2 million dollars and the outstanding debt to the company began to threaten its viability. payroll had been delayed for over two months. the treasurer informed the company’s CEO that by order of the Mayor, 33% of the contract ($660,000) would have to be paid in bribes in order for any payment to be made. the manager takes into considerations: the major is from the same party of the governor and a close friend of the state prosecutor. The governor is the owner of the state newspaper. He also appointed and control all the criminal judges. THE SALTA CASE

PAY OR NOT FFINANTIAL BENEFITS 1.37 million Dollars  MORAL BENEFITS Payment of salaries Profit for stockholders Inclusion in public contracting networks (future contracts) Financial viability of firm, including the provision of employment for workers FINANTIAL BENEFITS No short-term financial benefits for the company. MORAL BENEFITS Personal moral satisfaction

Mayor Treasurer

Prosecutor Mayor Treasurer Newspaper Governor

Supreme Court Chief Justice Judge Prosecutor Mayor Treasurer Newspaper Governor

Supreme Court Chief Justice Judge Prosecutor Mayor Treasurer Newspaper Governor

RESULTS The company refused to pay kickbacks and successfully denounced the mayor. The mayor was fired, jailed and replaced by a new mayor. 9 months later the company lost its contract. 5 years later the company had still not received the payment.

The Solution: destroy one node is not sufficient, you have to create a preventive network

WB Data

WBI data about State Capture Source: Hellman, Jones, and Kaufmann, ‘Seize the State, Seize the Day’. State Capture Index = [1+….+6] / 6

An Index of State Capture

Peru: “State Capture” by elite, shaping laws/regulations (as reported by firms, GAC diagnostic, 2001) % firms reporting that bribes by others to institution have negatively affected their operations Capture by Vested Interests of:

Fig.13: Peru: Sources of Undue Private Influence on the State Based on governance diagnostic surveys of public officials and enterprises Responses by:

WB data shows democratic representation is seriously distorted. Who represents the poor ? This is not an occasional problem but a stable situation. Formal institutions are crossed and controlled by a network of people who interchange favours and take the government for themselves. In order to assure the possibility of controlling or distorting any public policy these networks maintain the public management at a very low level.

CHALLENGING ASSUMPTIONS State Institutions represent citizens’ interest. Representation is not working. The World Bank can develop economic programs and build institutions in developing countries without being involved in political issues. Commercial Sovereignty is gone.

Note: For transition economies, average of 20 countries. Source: Hellman, Jones and Kaufmann, 2000 ( Companies responsibility State capture

WORLD BANK INCENTIVES 20 billions dollar in loans. How much poverty alleviation?

Is the private sector the key actor for the social change?

THE TEST MADE TO 300 DIRECTORS OF U.S. AMERICAN COMPANIES IN LATIN AMERICA 1.Who of you pays bribes to obtain business and to solve problems in the public sector? 2.Who believes that their competitors pay bribes to win business and to solve problems with the public sector? 3.Who has a strategy that would impede or make it difficult for other companies to obtain business because they paid bribes? IN DEVELOPING COUNTRIES THE GOVERNMENT IS UNABLE TO ESTABLISH AN EFFICIENT PUBLIC MARKET. THE PRIVATE SECTOR IS UNABLE TO THINK ABOUT IT.

Beyond individual behavior and state institutions. Focus in the outcome of the interaction. IMPROVING THE QUALITY OF SERVICE DELIVERY

Creating Goods Social Networks Connecting green nodes Changing the incentives of yellow nodes Controlling red nodes Monitoring the interchange between nodes

ENVIRONMENT COMPANY Z COMPANY Y COMPANY X MANAGERS SUPERVISORS EMPLOYEES cabintet OFFICIALS PUBLIC EMPLOYEES MANAGERS SUPERVISORS EMPLOYEES MANAGERS SUPERVISORS EMPLOYEES government

Governance The process and institutions by which authority in a country is exercised.