Economics of Corruption

Project Report On ECONOMICS OF CORRUPTION Subject: Economics Submitted to: Mr. C.S.Shylajan Faculty, Managerial Economics I.B.S., Hyderabad Section E Group name: Immortal Mafia Presented by: Abir Zara Khan – 08BSHYD0030 Aditya Vikram Kapoor – 08BSHYD0008 Megha Khandelwal –08BSHYD0429 Sachin Punni – 08BSHYD0700 Soumojoy Dutta – 08BSHYD0819 ECONOMICS OF CORRUPTION Page 1 Acknowledgement At the outset we‟d like to extend our heartfelt gratitude to our Faculty of Economics, Mr. C.S. Shylajan for giving us this opportunity to work on the project – Economics of Corruption. Through this project we have gained immense knowledge on how economics of corruption works. We also like to thank our classmates for helping us out during the research of this project. ECONOMICS OF CORRUPTION Page 2 TABLE OF CONTENTS TOPIC  Executive summary –  Introduction –  Types of corruption –  Causes of corruption –  Demand and supply –  Consequences of corruption –  Model of corruption –  Cost of corruption –  Combating corruption –  Conclusion and recommendations –  References PAGES 3 4 5 7 11 14 15 19 21 23 28 ECONOMICS OF CORRUPTION Page 3 EXECUTIVE SUMMARY The focus of this paper is corruption as a major development issue. Frustration that aid has achieved so little has drawn attention to corruption as possibly a principal cause of failure. The departure of corrupt Third World dictators of the Cold War era, the crash in East Asia (which had seemed both corrupt and prosperous), and the growing cost of corruption to business have all helped to focus minds. Yet the effects of corruption may be hard to disentangle from other negative influences such as mismanagement. There is also a danger that the West may seek to use the corruption issue as a means to shift the blame for aid failures and as another tool to reshape developing economies. There are a number of definitions of corruption. It may flourish both in overregulated and deregulated economies, under democracy or dictatorship. Mingling business with politics (particularly ethnic politics) is a sure recipe for corruption. Other clear culprits are secrecy (in government) and poverty. The paper sets out some guiding principles for moves to tackle corruption: corruption is a burning moral and human rights issue; economic and political liberalisation is at best a partial answer and may be no answer at all; corruption cannot be tackled in isolation from other issues such as poverty; it is a joint problem for developed and developing nations; secrecy is a closely related problem.A number of recommendations are put forward. ECONOMICS OF CORRUPTION Page 4 OBJECTIVE: First, it aims to review the essential elements of the various approaches that have been used to analyze the causes and effects of corruption. Thus, the study is organized as a literature review, extracting and evaluating the core elements of corruption research in economics, political science and sociology/anthropology. Second, it aims to explore how research has been applied in developing countries. This is a question of what policy recommendations have been made, and what might be learned from the anti-corruption campaigns and policies applied in specific countries. DEFINING CORRUPTION Corruption is essentially termed as an "impairment of integrity, virtue or moral principle; depravity, decay, and/or an inducement to wrong by improper or unlawful means, a departure from the original or from what is pure or correct, and/or an agency or influence that corrupts It is a very broad term. It covers fraud (theft through misrepresentation), embezzlement (misappropriation of corporate or public funds) and bribery (payments made in order to gain an advantage or to avoid a disadvantage). UNDERSTANDING CORRUPTION Corruption is a complex and multifaceted phenomenon with multiple causes and effects, as it takes on various forms and functions in different contexts. The phenomenon of corruption ranges from the single act of a payment contradicted by law to an endemic malfunction of a political and economic system. The problem of corruption has been seen either as a structural problem of politics or economics, or as a cultural and individual moral problem. The definition of corruption consequently ranges from the broad terms of “misuse of public power” and “moral decay” to strict legal definitions of corruption as an act of bribery involving a public servant and a transfer of tangible resources. Corruption is “multi-disciplinary” and dispersed, ranging from universal theoretical modeling to detailed descriptions of single corruption scandals. It is a problem of political, economic, cultural ECONOMICS OF CORRUPTION Page 5 or moral underdevelopment, and mostly as something in between. The nature of corruption is very complex and vast and it pervades every era, every generation, every society, every time. Furthermore, corruption does not disappear as countries develop and modernize, but rather that corruption takes on new forms as John Girling said in his book Corruption, Capitalism and Democracy published in 1997. TYPES OF CORRUPTION  The first is incidental corruption. This is small-scale. It involves junior public officials, such as policemen or customs officers; it produces profound public alienation; it has little macro-economic cost, but it is often hard to curb.  Secondly, there is systematic corruption. This is corruption that affects, for example, a whole government department or parastatal. It can have a substantial effect on government revenues; it may divert trade and/or development; it can only be dealt with by sustained reform.  Thirdly, there is systemic corruption, that is, kleptocracy or government by theft. In this situation honesty becomes irrational, and there is a huge developmental impact. ECONOMICS OF CORRUPTION Page 6 A perfect example of incidental corruption is taken from South Korea wherein both junior and senior officials take bribes to help the sons of the wealthy and the influential avoid the military draft. The list includes General Ha Young-Po (who is alleged to have 225 bank accounts!) Example of systematic corruption- In Haiti Finance Ministry inspectors found that 23 per cent of the names on the government payroll were bogus. Examples of systemic corruption we turn to Nigeria: The Abacha regime in Nigeria made use of a two-tier exchange rate system. Thus, for example, Mohammed Abacha, the son of the former dictator, is alleged to have taken $100 million from the Central Bank, sold it on the black market at N84 to the dollar, then repaid the CBN at the official rate of N22 to the dollar. Systematic and systemic corruption will include political corruption (buying votes, discrimination in the selection of candidates, dubious sources of party funds, jobs for supporters) and corruption of the legal process (buying judges and policemen, malicious prosecutions). It is not easy to define a corrupt deal in a few words because there are a number of elements to the transaction. It is an act of theft (and hence an offence against human relationships), but it is a very particular kind of theft. One definition that has the virtue of simplicity (but which needs unpacking) is “the act by which „insiders‟ profit at the expense of „outsiders‟ ”. This can convey the ideas of abuse of position, offending against relationships, and underhandedness. Let us look at these three areas in turn. First - Abuse of position- Human beings are, by nature, interdependent. They must seek services from one another and supply them in turn, and these transactions must be fair. However, one party may operate from a position of greater strength and position. He/she is an „insider‟. If this position is misused it makes the transaction corrupt. For example, the strength of one party may arise because they control the supply of a good, have discretion in giving or withholding ECONOMICS OF CORRUPTION Page 7 that good, and are not held properly accountable for the choices they make. This has been expressed in the form of an equation: corruption equals monopoly plus discretion minus accountability (C=M+D-A). The party in a position of strength is often a public official, hence the common definition of corruption as “the abuse of public office for private gain”. Secondly - Offence against relationships:-The weaker party in the transaction is treated as an „outsider‟, but there may be others who are even further „outside‟. This happens when both parties to a corrupt transaction come from a position of relative strength, but with a view to excluding others. This may arise, for example, because the individual or company that is made an „outsider‟ loses a contract, or is queue-jumped. Or it may be the general public which suffers the consequences of the corrupt transaction. They may pay a higher price for a good such as electricity, or obtain a poorer service - and they may be quite unaware that they are paying. Thirdly- Underhandedness: Because the transaction is illegitimate the parties will usually try to keep it from the public domain. THE CAUSES OF CORRUPTION 1. Government Size and Decentralization Government involvement in private markets is commonly seen as a source of corruption. This impact appears almost tautological: the misuse of public power will increase with the extent of public power. Such a tautological correlation would be obtained if the Corruption Perceptions Index is distorted towards countries with a large government share, assessing more corruption in countries with a larger public sector. With large governments, bribes to public servants might increase relative to firms‟ revenues. This might induce respondents to surveys on corruption to assess higher levels of corruption in countries with a larger public sector. It has thus been ECONOMICS OF CORRUPTION Page 8 suggested that the overall size of the government budget relative to GDP may be positively correlated with levels of corruption The share of subnational expenditures in total public spending is a measure of decentralization. In a sample of 80 countries, this index correlates positively with various measures of good governance. 2. Competition Concerning the causes of corruption, studies have been made on the extent to which corruption can be explained by a low level of competition among private firms. Competition is commonly assumed to lower supplier‟s prices. In public procurement, e.g., the resulting rents for private firms decrease. As a consequence, public servants and politicians have less to “sell” in exchange for bribes, reducing their motivation to start with a corrupt career. To the contrary, where competition is restricted profits increase and politicians can grasp the opportunity to assign these profits – in exchange for a share. Government restrictions on economic freedom are likely to reduce competition and thus encourage corruption. Henderson [1999] argues that corruption is negatively correlated with different indicators of economic freedom. This result is largely supported by Goldsmith [1999: 878] for a sample of 66 countries, where the regression is controlled for GDP per head. 3. Recruitment and Salaries Higher values in the merit-based recruitment index are associated with a greater proportion of higher–level officials in the core economic agencies to be either in possession of a university degree, or to enter the civil service through a formal examination system. Controlling for income, this index is negatively associated with corruption. Low salaries force public servants to supplement their incomes illicitly. At the same time, high salaries are a premium that is lost if a public servant is caught and fired. In a small sample of 31 developing countries, they find a significant negative influence of civil service wages relative to manufacturing wages on the level of corruption. Doubling the civil service wage will improve the corruption index by the order of 1 point of the TI index. Corrupt countries tend to have a poor budgetary performance or may ECONOMICS OF CORRUPTION Page 9 subscribe to the view that civil servants earn sufficient income from corruption, and may reduce civil service pay as a consequence. Such endogeneity problems diminish the prospects of fighting against corruption by increasing wages. Even disregarding these issues, it becomes apparent that pay increases turn out be a costly approach to fight corruption. 4. Democracy and the Political System Democracy reduces corruption, but not the lukewarm type, not the type with little electoral participation and not immediately after its implementation. Before transforming authoritarian systems into halfhearted democracies it is worthwhile considering whether such systems have established their peculiar methods of honoring integrity and how these might be endangered during transition. Thinking about an ideal type of democracy, there is evidence that presidential systems fare worse with respect to corruption as compared to parliamentarism. But it remains to be seen whether presidentialism might be a second best option where political parties are of poor quality. Finally, but less strong in magnitude, electoral systems of proportional representation are associated with higher corruption than plurality rule with single-member districts. Westminster democracy would be the model best capable in reducing corruption. This result survives the inclusion of dummy variables of British colonialism and British legal origin. It really seems to be the electoral system that is at play. However, these effects of electoral rules are rather small as compared to that of other variables. Also, some influence of political parties has been found to be helpful in containing corruption. Considering that changing the electoral system can be a costly thing, even going along with transitional insecurity and corruption, the disadvantage of proportional representation might be too small to suggest an abandonment of this voting system. Proportional representation might be acceptable, in particular because it tends to go along with more favorable large voting districts. Once accepting large voting districts there is also no reason to reject closed-list voting. ECONOMICS OF CORRUPTION Page 10 5. Cultural Determinants Some societies are characterized by a high level of trust among its people, while in others people tend to have misgivings about each other. Tracing the level of corruption to cultural determinants should not suggest that corruption is by and large inevitable. Culture can explain only a certain fraction of the level of corruption, and there remains sufficient room for improvements of a country's integrity. But a clear conclusion drawn by Husted [1999] is that effective measures to fight corruption are dependent on culture. Countries with a large power distance, or a strong desire for material wealth will require different treatment than others. In contrast to the positive impact of trust on the absence of corruption, some types of trust can also be a facilitator for corrupt transactions. Since corrupt deals cannot be legally enforced, it requires trust among the partners that their favors will be reciprocated. This resembles a strategic type of trust that clearly differs from “generalized trust”. a correlation indicating that countries, where bribers are confident that favors will be reciprocated, also exhibit higher levels of corruption. Throughout various specifications and different indices of corruption, it is shown that opportunism among corrupt partners, although potentially troublesome to investors, reduces a country's level of corruption. Instrumental variable technique ascertains the hypothesized causality. It is concluded that the adverse effects of corruption cannot be avoided by divesting it of its unpredictability.17 The term "trust", on the other hand, requires a precise definition before sound conclusions vis-à-vis its impact on levels of corruption can be derived. Denial of access to information (a problem in much of the developed world as well as in developing countries) removes a powerful disincentive to corrupt practice. The motivation for bribe-seeking is high where there is widespread poverty combined with limited risk-spreading. The bribery may be large-scale and highly organized. This is particularly the case when the illegal exploitation of resources (e g the felling of tropical timber, unlicensed diamond-mining, cocaine-trafficking) is at stake. In this case the corruption of officialdom ECONOMICS OF CORRUPTION Page 11 becomes the necessary pre-condition for the activity to continue. The corruption may also be at the individual level. If public employees are under-paid and/or unpaid they will seek to supplement their income by exploiting any „insider‟ status they may have, seeking to „sell‟ ostensibly-free public services. Unpaid teachers, for example, may seek bribes from parents who want to place children in school. Health workers may do the same with people who come for medical help. People are also likely to fall back on ethnic and extended family ties, in which case „outsiders‟ will be exposed to bribe-seeking. DEMAND AND SUPPLY OF CORRUPTION   To bypass laws and regulations corruption is fruitfully employed. Insider trading : a politician using his knowledge of zoning to purchase land which he knows is planned for development, before this is publicly known, and then selling it at a significant profit  Extortion: officials in any organization, especially if involved in illegal activities, are also liable to extortion, both by senior corrupt officials or other criminals. These develop over time into complicated networks of corruption, where law enforcement merely serves as a way to discredit and destroy.  Patronage: Patronage refers to favoring supporters, for example with government employment. This may be legitimate, as when a newly elected government changes the top officials in the administration in order to effectively implement its policy. It can be seen as corruption if this means that incompetent persons, as a payment for supporting the regime, are selected before more able ones  Nepotism and cronyism: Favoring relatives (nepotism) or personal friends (cronyism) is a form of illegitimate private gain. This may be combined with bribery, for example demanding that a business should employ a relative of an official controlling regulations affecting the business.  Kickbacks: A kickback is an official's share of misappropriated funds allocated from his or her organization to an organization involved in corrupt bidding. For example, suppose that a politician is in charge of choosing how to spend some public funds. He can give a ECONOMICS OF CORRUPTION Page 12 contract to a company that isn't the best bidder, or allocate more than they deserve. In this case, the company benefits, and in exchange for betraying the public, the official receives a kickback payment, which is a portion of the sum the company received. This sum itself may be all or a portion of the difference between the actual (inflated) payment to the company and the (lower) market-based price that would have been paid had the bidding been competitive. Kickbacks are not limited to government officials; any situation in which people are entrusted to spend funds that do not belong to them are susceptible to this kind of corruption.  Lack of transparency: often results in corruption demand as everyone‟s wants their share of profit resulting from this transparency.  Insufficient Salaries : Officials are simply not paid very much and so they need to supplement their salaries with money from bribes.  Time Constraints: if the work is required to be done in a particular time frame instead of the normal procedure, corruption prevails .  Clientelism: Clientelism is an informal relationship between people of different social and economic status: a 'patron' (boss, big man) and his 'clients' (dependents, followers, protégés). The relationship includes a mutual but unequal exchange of favours, which can be corrupt.  Conflict of interest: Conflict of interest arises when an individual with a formal responsibility to serve the public participates in an activity that jeopardizes his or her professional judgment, objectivity and independence. Often this activity (such as a private business venture) primarily serves personal interests and can potentially influence the objective exercise of the individual's official duties.  Competitive bidding: Competitive bidding is a selection process based on the principle of open and transparent advertisement of an item or service, which ensures that the best ECONOMICS OF CORRUPTION Page 13 bidder wins according to qualifications, value and other objective criteria (and consequently not according to family or friendship ties, bribery or threats). Competitive bidding processes are often required by law on public contracts and purchases above a certain value.  Embezzlement: Embezzlement is the misappropriation of property or funds legally entrusted to someone in their formal position as an agent or guardian.  Incentives: An incentive is an inducement or stimulus (the carrot or the stick), that encourages someone to do something. Incentive theory provides a conceptual framework for analyzing the role and potential of recruitment and promotion mechanisms, detection and penalties, and different wage systems in improving the efficiency of public agencies.  Money laundering: Money laundering is the process whereby the origin of dishonest and/or illegally obtained money is concealed so that it appears to come from a legitimate source. Money laundering is often use to disguise the proceeds of corruption, and is widely practiced by drug traffickers, human traffickers, kleptocrats and white-collar criminals. Bank secrecy and tax havens make laundered money particularly hard to trace  Protected disclosure: A protected disclosure is a statement or report about serious wrongdoing, like corrupt conduct, maladministration or a substantial waste of public money. It is an admission or revelation that - when fulfilling certain requirements entitles the person who made the disclosure to support and protection from reprisals, victimization or even prosecution. Protected disclosures are made internally in the organization, or to an Ombudsman or someone with the power to prevent retaliation against the discloser. ECONOMICS OF CORRUPTION Page 14  State capture: State capture is the phenomenon in which outside interests (often the private sector, mafia networks, etc.) are able to bend state laws, policies and regulations to their (mainly financial) benefit through corrupt transactions with public officers and politicians. SHORT-RUN AND LONG-RUN MACROECONOMIC CONSEQUENCES OF OFFICIAL CORRUPTION We will try to predict the short and long term consequences of corruption in general with the help of the following model on official corruption ECONOMICS OF CORRUPTION Page 15 A MODEL OF CORRUPT BEHAVIOR BY A PUBLIC OFFICIAL Let us assume: i) All individuals have identical utility functions. ii) All individuals have equal capabilities but skills and training may be unequal. iii) The public official maximizes his utility (function) which depends on his money and psychic incomes. iv) The official derives psychic income by practicing nepotism, and additional money income by practicing corruption. v) We assume people belonging to two groups: g and h. The official in this model belongs to group g. The official‟s utility function is given by: U = U{YmYs} Where: Ym is money income, Ys is psychic income. For a corrupt official: Ym = Ye + Y r b – Ypb Where: Ye is earned income/his salary Yrb is income received through bribes Ypb is income lost through paying bribes And assuming Ye is constant, and Yrb = PgWg + PhWh ECONOMICS OF CORRUPTION Page 16 Where: Pg Ph Wg is illegal price charged to members of group g per unit of “favor”, is illegal price charged to members of group h per unit of “favor”, is total units of “favor” done to members of group g; Wh is total units of “favor” done to members of group h. And assuming: Ypb = kYrb Where, 0 ≤ k ≤ 1 Ym = Ye + Yrb – kYrb = Ye + (1-k)(PgWg + PhWh) Further assume: Ys = (Wg,Wh) Now the official will maximize: U = U{Ye + (1-k)(PgWg + PhWh), Wg,Wh} ∂u/ Wg = (1-k)Pg + U’wg = 0 ∂u/ Wh = (1-k)Ph + U’wh = 0 Equating the marginal utilities derived from doing an extra unit of “favor” to the members of the groups g and h, i.e., ∂u/ wg = ∂u/ wh We get: Ph = 1/(1-k)(U’wg - U’wh) + Pg Page 17 ECONOMICS OF CORRUPTION Here U’wg is marginal utility from psychic income the official derives by doing an additional unit of ”favor” to members of group g; and since he belongs to this group. We assume: U’wg ≥0 Similarly U’wh is marginal utility from psychic income associated with an additional unit of “favor” to members of group h; and since the official does not belong to this group, we assume: U’wh ≤ 0 Thus: Ph ≥ Pg So he is likely to charge a higher price to members of group “h” as compared to group “g”. i.e., nepotism. If Ph = Pg > 0, he is not discriminating between groups g and h, i.e., he is not practicing nepotism. But as long as Ph and/or Pg is greater than zero he is practicing corruption. When Ph > Pg ≥0, the official is both corrupt and nepotic. Another way to look at it is: Ph > 0 or Pg > 0 U’wg > 0 U’wh < 0 : corruption : nepotism : hatred/malice This model is amenable for further analysis under different assumptions. ECONOMICS OF CORRUPTION Page 18 CORRUPTION LEVELS IN VARIOUS COUNTRIES PUBLIC OFFICIALS CHARGED WITH CORRUPTION ECONOMICS OF CORRUPTION Page 19 THE COSTS OF CORRUPTION Far from being a „victimless crime‟ corruption infringes the fundamental human right to fair treatment. All persons are entitled to be treated equally, and when one person bribes a public official he acquires a privileged status in relation to others. He becomes an „insider‟ while others are made „outsiders‟ (and the more „outside‟ they are - the very poor, the landless, women, ethnic minorities - the more they will be hurt). Corruption is thus profoundly inegalitarian in its effects Secondly, corruption results in biased decision-making, as considerations of personal enrichment take precedence over the establishment of rights for all. Government expenditure will be prioritized according to opportunities to extort bribes rather than on the basis of public welfare, and companies will be preferred on the basis of their willingness to pay. The poor may then pay the cost of bribes indirectly through higher prices for essential services. If a company pays a bribe to secure a contract to supply electricity or water, for example, and the poor buy the electricity or water, then they will be paying an artificially high price for that service. Furthermore, specific goods and services may be bought that would not otherwise have been bought at all. There will almost certainly be over-investment in capital goods („white elephant‟ projects, large defense contracts) at the expense of GDP growth. Thirdly, corruption leads to infringement of civil and political rights, for example, granting timber rights in an area where indigenous tribes gain their living, bribing a judge or court official, interfering with the electoral process. Corruption has further ramifications. When corrupt leaders waste aid money, siphon off national resources and build up foreign debt (so that government revenues are then diverted into debtservicing), or when the shadow economy flourishes at the expense of the aboveboard economy, then government revenue is reduced. „On the basis of timber known to be exported [from Cambodia] in 1995 and 1996, US$ 400 million should have gone into the state budget, but only ECONOMICS OF CORRUPTION Page 20 10 million went in.‟ What is lost to the common purse through this „grand corruption‟ is, by definition, not available for the provision of public services. When public services decline it is the poor who suffer. They are the ones most dependent on those services, and they do not have the resources to pursue exit strategies. The ramifications spread yet further. Productive foreign investment may be lost. Before the Asian crisis of 1997/98 there were some who argued that corruption was not harmful, it merely greased the wheels of commerce. It was pointed out that some countries which ranked high in surveys of the level of corruption, also excelled in economic growth. The World Development Report notes that the question of predictability (the amount to be paid, the certainty of outcome) throws some light on this apparent paradox. „For a given level of corruption, countries with more predictable corruption have higher investment rates.‟ However, the Report went on to state that even in these countries corruption had an adverse impact on economic performance, because the higher transaction costs and increased uncertainty put off potential investors. Time magazine 23 quotes research by Professor Shang-Jin Wei of Harvard School of Government to the effect that the high level of corruption in Mexico compared with Singapore was the equivalent of a 24 per cent increase in the marginal rate of taxation. And the ramifications spread yet further again. A conservationist, Lansen Olsen, in a letter to the Transparency International Newsletter 24 notes that “political corruption is a major feature of the political habitat in which wildlife conservation efforts sink or swim”. When corruption breaches regulations designed to protect the environment, everyone suffers in the long term, as the loss of primary forest leads to soil erosion, local climate change etc, but it is the poor who have the smallest resources with which to weather environmental degradation. Corruption can also have ugly and unpredictable consequences for the (Western) briber. As soon as he pays he begins to lose control. If he does not get what he paid for he is in no position to complain. Having broken the law he is vulnerable to blackmail. If he tries to break the corrupt relationship he may face a variety of threats, including the threat of violence. ECONOMICS OF CORRUPTION Page 21 COMBATING CORRUPTION “Corruption is one of the few disasters which is wholly man-made” and, this being so, there should be remedies at hand. There are in fact a number of anti-corruption initiatives afoot at the moment. These may be divided into:  International (e.g. OECD, EU, World Bank)  National (e.g. auditors-general, state funding of parties, police reform)  Local or „Citizen‟ level (media exposure, complaints and redress, decentralization, new administrative procedures such as establishing overlapping jurisdictions)  Populist measures (purges of civil servants, „new citizen‟ campaigns). Reforms at International Level  The USA began to work for an international anti-corruption agreement as long ago as 1989.The OECD Convention on Combating Bribery of Foreign Public Officials was signed in December 1997 and came into force on February 15, 1999.  The Council of Europe’s Criminal Law Convention on Corruption covers the whole field of corruption (payer/receiver, public/private, home/abroad). It also covers trading in influence, false accounting, corporate liability and the „laundering‟ of the proceeds of corruption. Signatories are required to adopt minimum standards in criminalizing acts of corruption, and to bring their criminal laws into closer harmony. Both this and the OECD Convention provide for criminal, civil or administrative liability. International conventions are a good start, but they will only be effective if they are translated into national measures. ECONOMICS OF CORRUPTION Page 22 Reforms at National Level which need to be considered are the following:  Civil service reform (reduction in the discretionary powers allowed to bureaucrats and an increase in accountability; abolition of unnecessary procedures and licenses; requirements to disclose assets and liabilities, and sources of income and benefits received - a sensitive area, but crucial when public officials become wealthy beyond known sources of income).   Tax reform (elimination of the tax deductibility of bribes; definition of a bribe as against legitimate broker fees and commissions). Subsidiarity: an over-powerful centre is an open invitation to corruption, so decentralizing decision-making can reduce the scope for bribery. However, new powers would have to be matched by new accountability (e g the oversight and auditing of public procurement) otherwise decentralization may simply create lower-level corruption.  Freedom of information is a powerful check against corruption, but in too many countries, in the developed as well as the developing world, there is an unhealthy culture of secrecy. The balance needs to be shifted so that those who seek information do not have to explain why they want it, but rather the officials who seek to withhold that information must make a clear case for doing so. The role of the investigative media should be welcomed as a further check on wrong-doing.  Legal reform (criminalization of the payment of bribes; strengthening cross-border cooperation on such matters as extradition; adoption of powers to undo corrupt „trusts‟ and „gifts‟; measures to tackle collusion so that individuals become „constructive trustees‟, that is, liable for the corrupt gains of the group; measures to strengthen judicial independence). Action at local or ‘citizen’ level is the work of Transparency International. TI was formed in 1993. It does not expose or investigate individual cases of corruption. Instead its emphasis is on prevention and on reforming systems. Among the measures it advocates are the following: ECONOMICS OF CORRUPTION Page 23 The “Island of Integrity” approach. This means fencing off an area of government activity in order to address corruption in a manner isolated from the cross pollination of other influences. The Environmental Management Systems (EMS) being tried in the USA, aiming to strengthen corporate environmental management. The Integrity Systems based on a municipal survey, the integrity workshop and the integrity pact (an agreement among all potential parties to a procurement that they will neither bribe nor be bribed), an elected legislature, with power to hold public officials to account. TI does have some credibility problems of its own, arising from its links with international institutions and its pro-business bias. Nevertheless it can help political leaders and civil society wishing to do something about corruption. Populist measures such as the purge may be dramatic but ultimately ineffective. Extensive highlevel corruption can contribute to political upheavals, but the problem of corruption does not disappear with the removal of those key officials identified as corrupt.‟ Some would argue that real change cannot be achieved with a „top-down‟ approach. The small fish get caught in the net, but the big fish escape. Making an example of senior figures is a better strategy and sets a good precedent though, admittedly, this will involve political difficulties. CONCLUSIONS AND RECOMMENDATIONS Sadly, it seems that corruption is to be found wherever there are human beings. Archives recovered from the administrative centre of Middle Kingdom Assyria (c 1,400 B C) refer to civil servants taking bribes, with senior officials and a close relative of the head of state implicated. We suggest here a number of key principles for a campaign against corruption, and then some suggestions for action. ECONOMICS OF CORRUPTION Page 24 Principles  The first principle, we suggest, is that corruption must be exposed for what it is, a form of organized crime and a serious abuse of human rights. Much of the current anti-corruption activity acknowledges that corruption is an ethical issue, but focuses on it at as a practical issue. This will not provide the foundation for a sustained campaign. Drawing a lesson from the last century we may note that practical drawbacks in slave trading may have strengthened the arguments of the anti-slavery campaigners, but it was slaving as a moral issue that stirred public concern and eventually carried abolition through parliament.  Second, the developed world must not be allowed to use the corruption issue as a way to pin the blame for development failures wholly on the developing world. Nor should anticorruption measures be confused with moves to reshape developing economies to suit the West. To suppose that economic and political liberalization will resolve the problem of corruption is, quite frankly, simplistic. All the evidence indicates that corruption can flourish in regulated and unregulated markets, under democracies or dictatorships.  Third, the issue of corruption will never be resolved if it is treated as a problem solely, or mainly, of the Third World. The developed world must set an example by addressing its own corruption. Then it needs to acknowledge that it is aiding and abetting the corrupt of the developing world. It is not enough to pursue the burglar and ignore the receiver of stolen goods. Key issues here are the maintenance of offshore havens, and the activities of export credit guarantee agencies.  Fourth, corruption cannot be tackled in isolation, but only in the context of efforts to reduce world poverty. Corrupt individuals and companies may be exposed and punished, but of itself this will only redirect the corruption. (There may be some parallels with the war on the drugs trade. Uprooting coca plants in Bolivia or opium poppies in Afghanistan ECONOMICS OF CORRUPTION Page 25 may give the impression that something is being done, but the peasant farmers who grow them need to be offered a better way to make a living.) Other issues such as the burden of Third World debt and the imbalance of power in world trade need to be addressed at the same time as tackling corruption.  Fifth, action aimed specifically against corruption will have to go hand in hand with action to secure freedom of information. Recommendations For Action  Civil society groups (NGOs, the churches, the media etc) have a key role to play in exposing corruption and shaming governments into taking action. And civil society coming together in a popular alliance would have an even stronger voice. Transparency ECONOMICS OF CORRUPTION Page 26 International has the potential to encourage such cooperation between individuals and organizations.  A civil society organization taking up the corruption issue would have to make sure that its own house was in order. This would mean debating the issue internally, drawing up and implementing codes of conduct to guard against corruption within, and ensuring that the organization is in no way contributing to corruption elsewhere in society.  Religious Institutions, both in the developed and the developing world, are well-placed to make a high profile stand against corruption. Again, they would have to ensure that their own houses were in order. An appropriate starting point for such action would be teaching, and discussion of the issue, among congregations.  A key role for civil society would be in the monitoring of government to government aid.  Transparency, and access to information, would be prerequisites for such a program  Donor governments could insist on such transparency/ access as part of the aid package. This should lead not only to more effective use of aid money, but also to the empowering of local people and the strengthening of democracy. 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