Growing threat of int'l corruption

By Henry Bosch

This is the first of two articles on dangerous repercussions of the increased incidence of corruption worldwide. It is excerpted from a paper presented at the Australian Institute of International Affairs.

MELBOURNE: Corruption in international business has increased, is increasing and ought to be diminished.

After a long period in which public recognition of it was almost unknown, we have seen, in the last two years, the president of the World Bank devote a major speech to it, the OECD Council of Ministers pass resolutions on it and the International Chamber of Commerce introduces a new Code of Conduct to deal with it.

We may well agree that all corruption is equally unethical, but all corruption is not equally damaging. Since the payment and receipt of bribes is so widespread and forms of corruption so diverse that its complete abolition would be an unrealistic goal, at least in the short-term, it seems prudent to select the most damaging form as a target for action.

Transparency International (TI) has, therefore, focussed on international grand corruption, removed from corruption within single countries.

TI defines grand corruption as the abuse of public power for private gain. It occurs when large payments are made to people in positions of power, almost always politicians and senior civil servants, to get things done that would otherwise be illegal.

Probably the most common form of grand corruption is the awarding of major contracts on the basis of payments made to individuals directly or indirectly, rather than on the basis of declared and accepted criteria in accordance with the law of the country concerned.

Almost always the bribes, and the issues at stake, are very large. Most of the cases involve payments by exporting or contracting companies in developed countries to people in power in developing countries.

Grand corruption is distinguished from facilitation payments which are made to get things done (or to get them done more quickly) for things which are in themselves legal, like getting a telephone connected or a container cleared from a wharf. They almost always involve small amounts of money and relatively low level officials. TI does not condone facilitation payments but it is just focused on grand corruption.

Of course corruption is not new; it was complained about in the Bible over 3000 years ago and, a thousand years later, the Roman historian Tacitus reminded us that "there will be wickedness as long as there are men". Indeed corruption emerges in various forms and with some frequency from the pages of history.

In the 1960s it was endemic in a relatively small number of countries which foreign investors and contractors were able to avoid. Italy provides perhaps the largest example, but most of the others were comparatively poor developing countries in Africa, Latin America and Asia.

Over the last three decades, and particularly in the last 10 years, corruption has spread and become far more serious. In many more countries, particularly but not exclusively in the developing world, corruption has become common.

At the same time the size of the bribes paid has increased, both in absolute terms and as a proportion of the sums involved in the business deals. Thirty years ago, 5 percent of a contract price would have been regarded as quite a high proportion to pay in bribes in most countries, but now 20 percent is not at all uncommon in many places.

There have been many spectacular cases that have attracted international attention. The Lockheed scandal involving a prime minister of Japan was one of the first. Shortly thereafter 450 major U.S. corporations voluntarily admitted to paying huge bribes in several different countries.

More recently we have seen two former presidents of South Korea imprisoned, the secretary-general of NATO forced to resign, three former prime ministers of Italy prosecuted and a former prime minister of India and several of his cabinet ministers prosecuted and forced to resign in the face of serious accusations.

In many countries investigations and prosecutions are proceeding; no doubt we will see many more cases in the headlines.

Why has grand corruption spread so rapidly?

There seem to be two reasons: temptation and competition.

The most common pattern of grand corruption is that bribes are paid by foreign companies to the politicians and public servants in developing countries.

Typically the salaries paid to those who seek bribes are relatively low, and the temptation is great when they deal with enormous sums in their public capacities and are brought into contact with businessmen who enjoy far larger personal rewards.

At the same time international competitive pressures have grown enormously, firms seeking contracts and licenses have seen bribery as an effective way of gaining and advantage over their competitors.

A whole profession of middlemen or facilitators has emerged who make their living from taking a proportion of the bribes paid.

Lessons learned in previously corrupt countries have been applied to others that previously had high standards of integrity. Of course, where systems of financial audit and control are relatively unsophisticated, there is less danger of getting caught and more risk that corruption will spread rapidly.

Does all this really matter? What damage is it doing?

Grand corruption has had its defenders in the West, such as Lord Young, chairman of Cable and Wireless PLC in Britain. He argued that while firms would not dream of paying bribes in their own countries, it is acceptable to do so in developing countries because "that is the way they do things there".

These advocates also argue that since their competitors will do it anyway it is a necessary, if regrettable, part of doing business. In 1996 a survey of Danish businessmen found that 68 percent believed that it was an acceptable way of getting business overseas and that it was reasonable to treat bribes as a tax deduction.

In the countries in which bribes are received it is not unusual to hear the practice defended in public but, at least among actual and potential beneficiaries, it is understood and accepted.

Apart from the small numbers of people in these two groups it is generally recognized that grand corruption is wrong. I am not aware of any ethical system that approves of bribery, nor am I aware of any legal system that condones the payment of bribes within its national borders.

The real and serious economic and social damage done to the countries in which grand corruption occurs in seven ways.

First, the payment of bribes diverts large sums of money from productive uses to the personal wealth of individuals who often place the money in numbered foreign bank accounts. From here, it tends to find its way into the property markets of rich countries.

A recent Swiss report estimated that over US$20 billion is currently being held in that country on behalf of the leaders of certain African countries, most of whose citizens live in extreme poverty.

Second, grand corruption distorts decision-making when contractors or developers are selected on the basis of what they offer the decision maker rather than their ability to do the best job for the cheapest price.

An interesting example is quoted by George Moody Stuart in his book The Good Business Guide to Bribery: the contract for the Turkwel Gorge dam, in Kenya, was awarded to French contractors in 1986 without international competitive bidding.

According to the delegate of the EEC to Kenya, the price of $270 million was more than double what would have been expected from competitive bids. The installed price of the turbines was listed as $277,000 each against a British consultant's estimate of $140,000 each.

The EEC delegate calculated that the cost of energy from Turkwel would be 2.4 times as much as that from Kiambere on the Tana River. He ended his report: "The Kenya government officials who are involved in the project are fully aware of the disadvantages of the French deal... but they nevertheless accepted because of high personal advantage".

Third, grand corruption often leads to projects being done badly. Those who pay the bribes often recover their money by compromising on the quality of the work they do.

There are many instances of roads cracking shortly after they are completed and new buildings with peeling walls and unworkable systems.

In development projects, such as timber collection, it is not uncommon for safety standards to be compromised at serious risk to the people who work on the projects, and for the environment to be ruthlessly exploited without regard to sustainable development or the interest of those who live in the areas developed. When bribes have been received it is difficult to demand high standards from the paymasters.

Fourth it is not uncommon for projects to be selected not because the country needs them most, but because they provide the easiest way for the biggest bribes to be received.

The Good Business Guide to Bribery identifies three criteria: size, immediacy and mystification, which can be used to select the project which are likely to produce the highest level of bribes. The application of these principles has often led to the expenditure of large sums of scarce national resources on projects which are uneconomic or inappropriate; such as overly complicated defense systems.

Fifth, grand corruption has wider economic consequences. The distortion of the process of selecting contractors undermines confidence in the market and indeed in the fairness of the society, Once corruption at high levels becomes well established and widely recognized the decision making process in the society is distorted.

Sixth, once a country becomes recognized internationally as one with a comparatively high level of corruption its reputation will be seriously damaged and it will become more difficult for it to attract foreign investment.

Of course those contractors and developers who are skilled in corrupting officials are likely to be attracted but they are not likely to wish to invest their own money in the projects they carry out and there may be other reasons to prefer the honest firms who would choose to operate in a corruption free environment.

Seventh, once a country has lost its reputation for integrity it will not be able to avoid the consequences in the interest rates it pays. Some international lenders will lose confidence and will decline to lend; all will be less enthusiastic about lending in that market than they otherwise would be.

It follows that there will be less competition among lenders for business in that country and inevitably, interest rates will rise.

It is quite possible that a country whose reputation has been compromised will pay 2 percent or even more above the rate that it would pay if it enjoyed a reputation for security and integrity.

These seven considerations amount to a serious practical case for the effective combating of corruption. That practical case stands alongside the purely ethical arguments; each strengthens the other.

The writer is former head of Australian Securities and Exchange Commission.

Window: Almost always the bribes, and the issues at stake, are very large. Most of the cases involve payments by exporting or contracting companies in developed countries to people in power in developing countries.