Dr. Dermot Grenham - Greasing Palms or Oiling Wheels: The Impact of Corruption on Developing Countries

Dr. Dermot Grenham holds a doctorate in mathematics from the University of Oxford and a specialist master’s degree in population and development from the London School of Economics. He is a part-time tutorial fellow at the L.S.E.’s Development Studies Institute and a Fellow of the Institute of Actuaries.
Seminar held on 26 January 2010

INTRODUCTION
It is a commonplace that one of the main problems with developing countries is that their societies, starting with their leaders, are corrupt and that until and unless this corruption is eradicated these countries do not have a hope of achieving even a modest level of development. 

For example, Niall Ferguson in his introduction to Dambisa Moyo’s recent book Dead Aid states that Moyo’s 'crucial insight is that the receipt of concessional ... loans and grants has much the same effect in Africa as the possession of a valuable natural resource: it’s a kind of curse because it encourages corruption and conflict'. (Moyo, 2009, x)

Putting aside the fact that Moyo’s ‘crucial insight’ is what any LSE Development Studies student  would already have known, what I wish to argue in this paper is that focusing on corruption as the obstacle to development is to miss the point and can lead to development policies and strategies that may only make matters worse. I am not therefore covering the moral issue about whether corruption is 'good or bad' or whether certain types of corruption are 'good or bad'. Although these are important questions they are outside the parameters I have set for this paper.

In my talk I aim to cover the following topics. I will discuss what corruption means and how much of it there is.  I will then discuss the impact of corruption on developing countries. Then I will look at the causes of corruption, both at an individual as well as at a political economy level. Finally, I will propose possible solutions to the actual problem.

CORRUPTION IS NOT NEW
Corruption among political leaders and their servants is clearly not a new phenomenon. Kautiliya wrote in his Arthasastra (written in India sometime between the 4th and 2nd centuries BC):

Just as it is impossible not to taste the honey (or the poison) that finds itself at the tip of the tongue, so it is impossible for a government servant not to eat up, at least, a bit of the king's revenue.

He also listed 40 different methods of embezzlement. 

Plato in his Republic, written sometime around the beginning of the 4th century BC, proposed some ways of avoiding corruption of leaders of his ideal state to which I will come back at the end of my talk.

WHAT IS CORRUPTION?
The following formal definition of corruption is often quoted:

the misuse of public office or public responsibility for private (personal or sectional) gain.

However, not all corruption relates to public office or is for private gain, but this definition will do for the time being.

The general public tend to have two typical understandings or experiences of corruption. The first, and perhaps most notorious, is the large-scale creaming off of revenues (from, for example, aid or natural resources) by heads of state or ministers to 'Swiss bank accounts', although they do not have to be Swiss. According to Transparency International, President Mobutu is estimated to have stolen some US$5billion from the Democratic Republic of the Congo during his time as president. It has come to the stage where there is among the general public a sense that every African politician is ‘at it’. Even when new governments are elected on the basis of cleaning up the State, it often does not take long before they too are mired in some scandal or another. Newly appointed anticorruption officials often find that they have too few resources to investigate effectively crimes, or their terms of references are too restrictive.  The resignation of Kenya’s anticorruption adviser, John Githongo, in 2005 is an example of the difficulties encountered by those trying to tackle ‘graft’ at the highest levels of government. According to a World Bank report in 2004 (World Bank, 2004, 25), the ruling elites of 30 sub-Sahara-African countries had overseas assets equal to 145% of the debts owed by their countries. Not all of this will have been ill-gotten gains, but given the poverty of these countries it certainly will not all have been the result of honest toil either. And why do they hold their assets overseas anyway? Possibly as security against being overthrown. But if they held assets in their own country they might be keener on its development.

The second experience of corruption is the demand for relatively small amounts of money by minor officials in order to carry out bureaucratic services. While at the lowest level this is an annoyance and something that one would prefer to be without this is often considered simply as part of the price of getting things done.

These two experiences are examples of two types of corruption: stealing and rent seeking. Both can happen at all levels of society. 'Rents' in this context means the extra amount that has to be paid to someone as a result of that person having a natural or artificial (usually State-created) monopoly over the supply of something. Such rents arise, for example, from trade restrictions (e.g., tariffs and quotas), subsidies and price controls, monopoly service providers. Low civil service and police wages can encourage such rent seeking. Actual or possible opportunities for rent seeking and hence making money tend to lead to bribery and lobbying for the right to benefit from these opportunities.

Both stealing and rent-seeking types of corruption can occur within a system where corruption is illegal and there is a greater or lesser chance of being found out and punished, or within a system where the Rule of Law, at least in this area, has effectively broken down and corruption has become the norm.

Corruption is not, though, just about money and in fact in certain situations the ill effects relate more to the impact on societal norms than on the economic consequences. In its widest sense, corruption includes any misuse of power for personal (or family or tribal) advantage. It can, therefore, include misuse of patronage (and every government has power of patronage), influencing the judicial processes to one’s benefit, changing laws to the benefit of oneself, one's tribe or one's region, and so on.

How much corruption is there?
By its very nature it is not possible to know, even approximately, how much corruption takes place and whether it is increasing or decreasing. Although some may take a certain pride in how much they are able to milk the system they are unlikely to advertise their success too widely. Transparency International produces an annual Corruption Perception Index which is a league table of how countries perform. Not too surprisingly the top places are dominated by Scandinavian countries although New Zealand is currently number 1. Somalia, also not much of a surprise, is at the bottom. Haiti was 168 out of 180.  This index, though, is not unproblematic. (As an aside I would propose changing this index's name to the 'Honesty Perception Index' as this is a much more positive way of looking at this issue.) Much of the measurement depends on hearsay, rumour and ‘perception’ and is necessarily subjective and not necessarily comparable across countries. Measures of corruption tend to correlate closely with measures of other things such GDP per capita, levels of violence and the perceived quality of institutions and so may not be totally independent of these other factors. They may, therefore, be unlikely to reduce until these other factors improve.

In the case of the correlation between GDP per capita and corruption we have to be careful not to equate correlation with causation – in either direction. It could easily be that richer countries can afford to put in place better mechanisms to identify and punish corruption, and so it is increases in GDP that reduce corruption rather than corruption reducing GDP.

WHAT IS THE IMPACT OF CORRUPTION?
Moyo in her book which I mentioned earlier talks about negative and positive corruption (Moyo, 2009, 56-57). She cites examples of positive corruption in China and Thailand which have posted impressive levels of economic growth in spite of scoring low on Transparency International’s corruption index (although at 79th and 84th position respectively out of 180 they were both in the top half). Negative corruption, according to Moyo, is where low scores on the corruption index go together with low or even negative economic growth. However, Moyo’s description of positive corruption is, I believe, misleading. While corruption may not, in certain instances, have a negative impact on economic growth it is unlikely to have a positive impact, i.e., China and Thailand have not developed because of their level of corruption and perhaps they would have developed faster if they had been less corrupt. However, it does show that countries can develop with relatively high levels of corruption.

Studies have indicated that increasing one’s score by one mark on the Transparency International’s Index is correlated with an increase in GDP of 4% and that higher levels of corruption are correlated with higher borrowing costs and higher inflation. However, what is the causal mechanism? If every developing country became as honest as New Zealand overnight would they all start registering higher rates of growth? I suspect not.

Where otherwise there might be a poor allocation of resources, corruption could lead in certain circumstances to a better allocation. According to Samuel Huntingdon:

In terms of economic growth, the only thing worse than a society with a rigid, overcentralized, dishonest bureaucracy is one with a rigid, over- centralized, honest bureaucracy.

From a Marxist or neo-Marxist perspective, corruption could be seen as a form of primitive accumulation that might actually lead to a more productive capitalist use of those resources than would otherwise have been the case. In these situations when faced with a sclerotic bureaucracy prone to corruption, the optimal solution is likely to be to reform the bureaucracy first and deal with the corruption later.

If the proceeds of corruption are invested outside of the country or are used in producing ostentatious goods then this is unlikely to contribute to that country’s development. However, if the proceeds of corruption are invested in generating jobs or if the corrupt processes enable things to be done more quickly than they otherwise would be, there could be advantages in allowing the existing system to continue. A distinction could be made between payments that speed up a process from those that distort that process. However, in the case of payments that appear to be simply oiling the wheels, one may find that the whole system has been deliberately slowed down as a result precisely to capture the potential rents. However, the danger with trying to clamp down on a given situation of corruption only by targeting growth-retarding corruption is that one may not be able to distinguish what is growth-enhancing from what is growth-retarding. One may have to let the wheat grow with the tares for some time.

A recent study showed that while corruption does tax and impede trade in the majority of cases, in high-tariff environments where tariffs are in excess of 25-30%, corruption can actually enhance trade flows between countries by allowing firms to evade these tariff barriers (Dutt and Traca, 2009).

In addition to how the proceeds of corruption are invested, its purely economic effects also depend on its certainty (if one knows one always has to bribe an official 10% of the cost of a permit then one can treat this like a tax) which is more likely when corruption is regularised: how costly the corruption process is and the impact of corruption on the State’s capacity or willingness to undertake developmental roles. 

In a paper by Alesina and Weder, 'Do Corrupt Governments Receive Less Foreign Aid?', the authors asked the following questions:

  • Do less corrupt governments receive more aid or debt relief?
  • Do various donors differ in their willingness to discriminate against corrupt governments?
  • Does foreign aid reduce or foster corruption?

The answers were that there was no evidence that less corrupt governments got less aid, that governments do take corruption into account in different ways when disbursing aid, and thirdly, and slightly tentatively, that more aid was associated with more corruption.

But corruption’s effects are not just economic, or directly economic. If corruption damages the legitimacy of the regime or weakens the rule of law it may put off potential investors in a country. Perhaps surprisingly, the US does not seem to allow the level of corruption in a country to influence whether or not to invest in that country. It has other goals. If the whole of a political system is corrupt such that being corrupt is an electoral advantage and honesty a disadvantage then the political system will tend to attract dishonest candidates which will lead to a continuing cycle of disillusionment with the political process. If achieving power is a route to gaining wealth then the process for achieving power will be expensive in anticipation of a payback once in power – thus perpetuating the cycle. Corruption when pervasive throughout a society undermines the social capital, the trust that needs to exist within that society if it is to develop.

CAUSES OF CORRUPTION
In order for corruption to take root and flourish there need to be two conditions in place. 

In the first place there have to be people who are prepared to misuse their power, great or small, to steal, lie and cheat.  In the second place they must have the opportunity to do so.

The saying goes that ‘guns don’t kill, people do’. Similarly, 'systems do not steal, people do'. However, systems and the associated cultural and behavioural norms in a country do have a major influence on the way people act. Cultural norms are themselves built up from the historic circumstances of the society. As I mentioned earlier, a corrupt political system tends to be self perpetuating. As Augustine said in The City of God:  'A State which is not governed according to justice would be just a bunch of thieves'. Disraeli spoke of British politics as 'a greasy pole'. What would he have said about politics in some African countries? The need to buy off opposition, keep supporters on side, and deliver on election promises does not come cheap. The opportunities for corruption may be precisely what attracted certain people to aim to capture State power. In fact it may even be expected of them. Even the most honest of people may have a price, even if it is very high – although it was said that the patron of the Thomas More Institute could not be bought. And once involved in some corrupt dealings it can be very hard to extract oneself, if only as a result of being blackmailed.

In some countries corruption has become engrained in social dealings as a result of it being a response to oppression. For example, tax evasion, black markets, smuggling, vote rigging may have become commonplace during periods of external rule as an act of defiance or of individualistic entrepreneurship. However, once in place they have a tendency to continue once that external pressure has disappeared. In many African countries the post-colonial inheritance has led to, although not determined, greater opportunities for corruption both as a result of the emergence of strong presidential rule along with the cleavage of society along regional, racial and tribal lines.

In some cases it may simply be too easy. Or the thought comes that no one is going to notice or this will not affect anyone, or that everyone is doing it, or that 'I had better prepare a nest egg as I never know when I will be forced out of office'. One starts with claiming for a couple of videos and before one knows where one is one is repairing one's moat with public funds!

But motive is not enough; there must also be opportunities. With power, there comes not just great responsibility but great opportunities, and the greater the power the greater the opportunities. In Moyo’s terms, aid is the oxygen that allows corruption to grow. For Paul Collier it would be the existence of revenues from natural resources.

The World Bank (1997, 4) has stated that:

The dynamics of corruption in the public sector can be depicted in a simple model. The opportunity for corruption is a function of the size of the rents under a public official's control, the discretion that official has in allocating those rents, and the accountability that official faces for his or her decision.

The existence of rents, or of large revenue flows from aid or natural resources, are a necessary but not a sufficient condition for corruption, or at least not for the extensive corruption that would significantly reduce the speed of a country’s development. However, passing large amount of money to countries with weak institutions of checks and balances strikes me as asking for trouble. And continuing to grant loans and aid to governments which are known to be corrupt seems to be throwing good money after bad. The main argument for continuing aid payments is that at least some of it is getting through to those that need it.

Many developing countries do not have checks and balances built into their systems to prevent abuses of power (and many of the liberalising reforms demanded by the IMF and World Bank in the 70s and 80s weakened what State capacity there was to clamp down on corruption): from the President siphoning off government revenues to his own or friends’ bank accounts to the petty passport official who wants an inducement to process your visa. This state of affairs is not surprising; many currently developed countries have had a poor historical record on corruption until relatively recently. Theodore Roosevelt said about the New York assemblymen that they 'had the same idea about Public Life and Civil Service that a vulture has of a dead sheep'. Therefore, there is about this more than a little of the pot calling the kettle back. What may, though, be different about current day corruption in developing countries compared to corruption in the past is that at the highest level it often relates to funds provided by external agencies, i.e., the leader is ripping off foreigners rather than, or in addition to, his own population. Also, more of the proceeds of corruption are likely to be invested offshore, and therefore to be less developmental. Corruption in current times may also be related to other criminal activities such as drug trafficking.

WHAT CAN BE DONE ABOUT CORRUPTION?
Ha-Joon Chang in his book Kicking away the Ladder puts forward three possible approaches to dealing with deficiencies in institutional standards in developing countries. The first is a top-down imposition of a whole panoply of 'good' institutions either by a strong state or the international community. The second is to let institutions develop over time as they have in the developed countries and the third is a middle way of improving institutions based on the historical experience of developed countries, getting -- one hopes -- the benefits of this incremental approach without all of the pain. His preference is for the third way as the first has the risk of incorrectly identifying what the 'good' institutions are, and trying to impose them too quickly, while the second method is likely to take a lot of time and to offer no guarantee of success -- although in fact none of the approaches guarantee success.

Before diving in and trying to work out what institutions are required to combat corruption, we need to step back and consider what the 'big picture' is. From the international community’s perspective does it want to eradicate corruption or does it want to help countries develop? At times these may be conflicting goals, at least where there are limited resources available. Although more developed countries tend to be less corrupt (some might wish to argue with this) it is not clear, as I mentioned earlier, if lower corruption causes development or if development causes less corruption, or if in fact they both depend on other factors. Therefore, painful as it may sound, focussing too much on eradicating corruption, as I hinted at earlier, could in fact slow down a country’s development process. Similar caution is required, for example, with trying to eradicate inflation in an economy. While rampant inflation does nobody any good in the long, and even the short, run, the effort to squeeze inflation out of a system altogether can be harmful and there is no evidence to show that a low level of inflation is harmful. However, as with surgery one only wants to remove the diseased parts, with corruption one should try to remove only that which is anti-developmental. The trick is knowing how to identify the bad type of corruption, and it is likely to vary from place to place and across time.

Much of the international community’s efforts, especially from the World Bank and IMF, in reducing corruption have been focused on encouraging, through aid conditionality, 'good governance', and hoping as a consequence for a reduction in corruption – at least at the higher levels of the State. To the extent that the existence of aid provides a golden opportunity for corrupt politicians to divert funds to other purposes (and as far back as 1947 Paul Rosenstein-Rodin, Deputy Director of the World Bank Economics Department, complained that 'When the World Bank thinks it is financing an electric power station, it is really financing a brothel') this would seem like an obvious approach to take. However, in practice this has had little effect.  Aid gets diverted, governments break their promises and yet the aid flows continue, especially where the conditionality was a posteriori.  If, though, Western donors put too many conditions on their aid or loans then developing countries can look for help from countries which are less worried about corruption – but at least it would be someone else’s money being wasted.  Not that this is a reason for the West to weaken its own standards. An alternative is that the aid tap is turned off in order to starve the corruption of oxygen and encourage policy reform. The problem is that other things may die in the process (and more quickly).

A number of countries have set up anti-corruption task forces, but with mixed success. I mentioned the Kenya situation earlier. Zambia has also had problems with calls to disband the task force in the middle of two investigations into corruption cases involving US$28 million. The task force is struggling to maintain credibility and last year its head was sacked following the acquittal of a former president.

Absent military invasion I believe that there is little that external countries and agencies can do to change a culture of corruption in another country without a change in their own culture. Donor agencies have as their raison d’être to loan or to grant large amounts of money and therefore come under pressure to continue lending in the face of evidence of the futility of lending to a particular country. Partly this is a reflection of the fact that the money does not actually belong to those agencies. If we want countries to change we will have to take some of the pain ourselves. If the only way a Western country is going to get a contract to build a lot of military hardware for another country is by bribing certain people in that country then the Western country should refuse to bribe and take the risk of not being awarded the contract with the consequent potential loss of jobs.

In a paper by Fisman and Gatti, the authors showed that greater fiscal decentralisation was linked to lower levels of corruption (although Federal states were not necessarily less corrupt), possibly as the central power while retaining a monitoring function has no direct access to funds. It could therefore keep the decentralised authorities honest. Encouraging fiscal decentralisation may, therefore, help reduce corruption.

While the current degree of democracy was not significant, long exposure to democracy associated with lower corruption. Therefore, trying to impose democracy may not lead to a reduction in corruption and in fact could have the opposite effect.

Praising honest leaders so that they can act as role models to other leaders may work but one has to choose the role models carefully in case they turn out to have some nasty skeletons in their cupboard. And even if they do remain honest, if their country is not also an example in other areas such as economic development, human rights, education and health, then the effect of the role model may be the opposite of what is required. Having said that, the first two recipients of the Ibrahim Prize for Achievement in African Leadership appear to have been good choices (Joaquim Alberto Chissano of Mozambique and Festus Mogae of Botswana). Unfortunately, no leader was found worthy of the prize in 2009. Botswana ranks 37 in Transparency International’s CPI which is pretty good while Mozambique comes in at a lowly 130. It would be worth looking at how and why these two leaders managed to keep their noses clean. Was it something about themselves that enabled them to resist the temptations of the 'perks of the job' or was it something in their countries that prevented them from taking undue advantage of their positions.

Various other actions have been taken to try to reduce opportunities for corruption. For example, the Extractive Industries Transparency Initiative (EITI) aims to strengthen governance by improving transparency and accountability in the extractives sector. Payments between companies and governments must be published. There is a Natural Resource Charter which aims to ensure better use of income form natural resources for the benefit of the whole population. These are both relatively new initiatives and their success is still to be confirmed.

At a seminar I attended on migration at the beginning of January we were presented with comparable figures for aid flows and remittances. In 2008 remittances to developing countries were US$338bn (World Bank 2009). Meanwhile official development assistance was about one-third of this amount at US$119.8 billion. As senders of remittances are more likely to be keen on ensuring that their money is used wisely this may give some ideas  for reducing corruption: for example, by paying aid directly to those who need it rather than via the government, or by sending it in smaller amounts.

Could the International Criminal Court be used to try leaders who misuse grants and aid to the serious detriment of their populations? Could fewer lives have been lost in the recent Haitian earthquake if aid money had been used for its original intentions? A Review Conference is due to take place in the first half of 2010. Among other things, the conference will review the list of crimes within the competence of the ICC.

Alternatively we could try to impose Plato’s suggestions for reducing the risk that Guardians might be corrupted by power and make Commoners envious of them. The rulers of States might be obliged to live in poverty and to have their children in common. But who could we find to enforce this, especially if they were required to lead by example?