Economist's View: Stiglitz on Corruption

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Stiglitz on Corruption

This is a good follow-up to the post noting the release of The Bribe Payers Index. Here's Joseph Stiglitz on the need to reduce corruption in developing countries while not losing sight of the bigger goal of enhancing development and reducing poverty:

An intricate plan of attack, by Joseph Stiglitz, Guardian: At its recent annual meeting, World Bank officials spoke extensively about corruption. It is an understandable concern: money that the bank lends to developing countries that ends up in secret bank accounts or finances some contractors' luxurious lifestyle leaves a country more indebted, not more prosperous. ...

But the World Bank would do well to keep four things in mind as it takes up the fight. First, corruption takes many forms, so a war on corruption has to be fought on many fronts. You can't fight the diversion of small amounts of money by weak and poor countries while ignoring the massive diversion of public resources into private hands of the sort that marked, say, Russia under Boris Yeltsin.

In some countries, overt corruption occurs primarily through campaign contributions that oblige politicians to repay major donors with favours. Smaller-scale corruption is bad, but systemic corruption of political processes can have even greater costs. Campaign contributions and lobbying that lead to rapid privatisations of utilities - before appropriate regulatory frameworks are in place, and in a manner that produces only a few bidders - can impede development, even without direct kickbacks to government officials.

Life is never black and white. Just as there is no "one size fits all" policy for economic development, there is no such policy for fighting corruption...

Second, it's fine for the World Bank to deliver anti-corruption sermons. But policies, procedures, and institutions are what matter. In fact, the bank's procurement procedures are generally viewed around the world as a model to be admired...

But success in fighting corruption entails more than just good procurement procedures (avoiding, for instance, single-source non-competitive bidding). Many other policies and procedures can be enacted that reduce incentives for corruption. For example, some tax systems are more corruption-resistant than others, because they curtail the discretionary authority of tax officials.

Third, the World Bank's primary responsibility is to fight poverty, which means that when it confronts a poor country plagued with corruption, its challenge is to figure out how to ensure that its own money is not tainted and gets to projects and people that need it. In some cases, this may entail delivering assistance through non-governmental organisations. But seldom will it be the case that the best response is simply to walk away.

Finally, while developing countries must take responsibility for rooting out corruption, there is much that the west can do to help. At a minimum, western governments and corporations should not be complicit. Every bribe that is taken has a payer, and too often the bribe payer is a corporation from an advanced industrial country or someone acting on its behalf.

Indeed, one reason for the so-called "natural resource curse" - the fact that resource-rich countries do not, on average, do as well as resource-poor countries - is the prevalence of corruption, too often aided and abetted by companies that would like to get the resources they sell at discount prices...

It is equally important to address bank secrecy, which facilitates corruption by providing corrupt dictators with a safe haven for their funds. In August 2001, just before the terrorist attacks on America, the US government vetoed an OECD effort to limit secret bank accounts. While the government has since reversed its stance on bank secrecy for terrorists, it has not done so for corrupt officials. A strong stand by the World Bank would enhance its credibility in the war on corruption.

Those who criticise the bank's stance on corruption do not do so because they favour corruption. Some critics worry about corruption in the corruption agenda itself: that the fight will be used as a "cover" for cutting aid to countries that displease the US administration. Such concerns have found resonance in the seeming incongruity of the bank's tough talk on corruption and simultaneous plans to expand lending to Iraq. No one is likely to certify that Iraq is corruption-free - or even ranks low on corruption internationally.

The most strident criticism, however, comes from those who worry that the World Bank is straying from its mandate. Of course, the bank must do everything that it can to ensure that its money is well spent, which means fighting both corruption and incompetence.

But money itself will not solve all problems, and a single-minded focus on fighting corruption will not bring development. On the contrary, it might merely divert attention from other issues of no less moment for those struggling to lift themselves out of poverty.

Posted by Mark Thoma on October 6, 2006 at 05:49 PM in Economics | Permalink

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Comments

Corruption is partly culturally defined, and can be a subtle thing.

There are lots of different kinds of "corruption". There's the kind of corruption that greases the wheels, and there's the kind that rusts the machine frozen.

Part of the problem in Russia in Yeltsin's day (and today) is that a Communist culture had defined a whole broad range of capitalist behavior as "corrupt" and, so, only "bad people" could function in a capitalist economy. If the available social norms prevent all economic functioning, that's not going to be good. It is not surprising that gangsters end up dominating the economy.

George Washington Plunkitt, who famously saw his opportunities, and took 'em, made a potentially important distinction between good graft and bad. In his day, Tammany Hall was building the infrastructure of New York City. The transit system was built, and men like G.W.P. made fortunes in real estate, because they knew the routes, which would be approved. Corruption, sure, but corruption, which ensured the cooperation of government in building necessary infrastructure. Such diversion of rents gave officials an incentive to get the job done, which is quite different from corruption that prevents any job from being done.

In the American Reconstruction/Redemption South, the forces of white supremacy defined all kinds of State activity, including progressive taxation and vigorous support for public education as "corrupt". Generations later, the U.S. still suffers from the effects, as Southern conservatives in the Republican Party vigorously work to establish a plutocracy over the whole country.

I've remarked in comments before about observing what I regarded as harmless corruption in the 1970's in Congress. Democratic Congress people would carry water for business interests in circumstances in which the consequences were limited, by the very fact of a Democratic majority, which was ideologically committed to balancing business interests against labor and the public interest in general. Technocracy actually thrived in those circumstances, because business had to finance research to make arguments showing how what was good, say, for General Motors would also be good for the UAW or for the American People in general.

The Republicans, committed to business interests ideologically, have no brakes; their K street project has encouraged "transactional lobbying" and lots of earmarks and almost no deliberation or oversight. The policymaking process in the Congress and at the White House is moribund and is under constant attack in many parts of the Executive Branch.

Simple-minded, albeit idealistic, efforts to restore the integrity of Congress through transparency have considerable potential to backfire. The internet has become a conduit for raising campaign funds, but because the names of donors are public and easily googled, it is only a matter of time before businesses start policing to whom their employees and contractors and vendors donate.

Our economy and the social, political and economic organization that undergirds our peace and prosperity are an emergent result of a distributed process of self-organizing. The thing about such organic, emergent processes is that they don't stop: decay follows growth, and death, birth. Healthy growth requires a lot of nurturing, grooming, pruning and, above all, replanting.

Posted by: Bruce Wilder | Oct 6, 2006 6:45:23 PM