Corruption
...n hurts consumers, who receive fewer technologically advanced goods and goods of otherwise lower quality and pay higher prices for these goods. v) Lowers Public Revenue for Essential Goods and Services Evasion of taxes, one of the biggest threats to government revenue flow, is widespread in corrupt countries, because firms that are informal do not report their profits and subsequently do not pay taxes. Also, firms that operate in the formal economy will pay bribes instead of taxes when tax administration is corrupt or opportunities for abuse of the tax code are widespread. Moreover, corrupt government agents take for themselves fees and payments they collect from firms for the state budget, thus depriving government of funds needed to provide essential goods and services. vi) Increases Public Spending Public investment projects often offer opportunities for government officials to get bribes. Faced with the possibility to directly benefit from awarding contracts to cronies, government officials will promote as many public investment projects as possible. In fact, these scandals erupt not only in corrupt developing countries, but also in more developed nations where corruption is less rampant. Sometimes it is a situation that projects awarded to cronies are never finished as funds simply get stolen. vii) Lowers Productivity and Discourages Innovation In corrupt systems individuals and firms spend time and resources engaging in corruption rather than in growth-enhancing activities. Also, corruption discourages innovation, as corrupt systems lack rule of law institutions that protect property rights. viii) Increases Costs of Doing Business Time and money spent on bribing government officials and dealing with complex regulations increases the costs of doing business. These costs are either passed on to the consumers though increased prices or products of lower quality or serve as a barrier to market entry by firms. Also, corrupt judicial systems limit the ability of business to enforce contracts, hindering normal operation and blocking new opportunities. ix) Lowers Growth Levels Corruption hurts small enterprises because the high costs of corruption are harder to sustain for smaller firms than for larger firms. Generally, small firms have less power to avoid corruption, and they tend to operate in highly competitive environments and thus cant pass on the costs of corruption to customers. Thus, in corrupt environments it is harder for small businesses to survive, and this hurts an economys growth rate because small firms are the engine of growth in most economies. x) Lowers Private Sector Employment Levels By forcing business into the informal sector, creating barriers to entry, and increasing the costs of doing business, corruption essentially reduces private sector employment, because firms are less likely to grow and expand. xi) Reduces the Number of Quality Public Sector Jobs Corrupt governments often offer many low-paying jobs to patronize key constituents. Also, the quality of public jobs suffers in corrupt systems because government officials spend resources on extorting bribes rather than providing services. For example, in many cases, within licensing agencies, public officials will simply shelve the licensing process if they dont receive additional payments or gifts. xii) Aggravates Poverty and Inequality Corruption lowers the income earning potential of the poor because there are fewer private sector opportunities. Also, by limiting spending on public sector services, corruption facilitates inequality it limits access to such essential resources as health care and education. xiii) Weakens the Rule of Law Corruption creates a culture where government officials are not held accountable for their actions. Also, in corrupt systems, laws and regulations on paper are not enforced consistently and fairly. Therefore, what matters is not the law but whom you know and how much you are willing to pay. xiv) Impedes Market-Oriented Reforms In order to be successful in building market economies and societies, countries have to build and develop institutions that provide the enforcement of laws and ensure a transparent and inclusive policy-making process. In corrupt systems, developing such sound and well-designed institutions is an arduous task. Corrupt government officials responsible for reforms are less likely to take measures that will directly limit their ability to personally benefit from bribes and kickbacks. xv) Adds to high crime rates Corruption fosters a system with a high disregard for the rule of law, and creates a society where legal, judicial, and enforcement institutions are ineffective. In corrupt systems, it is easy for crooks to buy their way out of punishment. Corruption not only leads to political and corporate crime, but it is also responsible for fostering organized crime. 5. ROOTS OF CORRUPTION Before putting forward plans to restrain corruption, it is essential to identify the nature and the origin of corruption. Although there are differences, the primary cause of corruption is ill-designed institutions. Corruption can often be blamed on inefficient economic systems, where regulatory hurdles such as conflicting and restrictive rules and regulations alongwith excessive discretionary powers in the hands of government officials and inefficient court systems create opportunities for public servants to be corrupt and force the private sector into corruption to avoid the inefficiency of the formal economy. Opportunities for corruption arise in inefficient systems where businesses explore ways to avoid inefficiencies. Corruption thrives in systems plagued by inadequate, unclear, excessive, unpublicized, and frequently changing laws and regulations. Trade laws and customs procedures are a good example of how complex regulations breed corruption. Restrictive trade policies often compel firms to try to gain preferential treatment by bribing government officials. Introduction of a more simplified tariff schedule can reduce corruption and at the same time increase government revenues. Burdensome taxation regimes are another good example of how complex regulations are responsible for corrupt behaviour. To avoid paying unreasonably high taxes or to take advantage of numerous complex exemptions, firms not only misreport their profits but also often bribe government officials. i) Lack of transparency and accountability Lack of transparency and accountability is another reason for high levels of corruption corrupt behaviour is easier to sustain in the systems that lack those institutions. When citizens do not have mechanisms to hold government officials accountable, they are essentially handing them a blank cheque. Therefore, society must seek to establish certain institutional mechanisms to ensure that public officials act in the interest of the public. ii) Low public sector wages While many studies suggest that raising public sector wages is not enough to reduce corruption, the fact is that low wages do force some percentage of public sector employees into corruption. Low wages are often responsible for petty corruption small-scale corruption on the local level. Public sector employees in developing countries are often not paid enough to meet daily needs, thus accepting and extorting bribes often becomes their only source of a living income. However, it is important to note that simply raising the wages of government officials will not curb corruption as long as opportunities to abuse the system exist and punishment is weak, corruption will persist. iii) Inadequate, inconsistent, and unfair enforcement of laws and regulations Weak enforcement is a significant yet often overlooked component of corruption. There are numerous examples of countries that pass legislation aimed at limiting corruption or eliminating one of the sources of corruption by enacting laws to simplify business registration procedures but this legislation is never enforced. This lack of enforcement creates double systems where the right regulations seem to be in place, but corruption is still prevalent. Worthy of mention, law enforcement agencies are often among the most corrupt agencies, especially on the local level, as citizens and businesses often prefer to pay a small bribe than face a criminal penalty. iv) Weak punishment for violations Corruption also thrives in environments where perpetrators are at lower risk of being caught and punished. When punishment is inadequate to deter corruption and the justice system is too slow to respond, the incentives for corrupt behaviour outweigh the possible costs such as losing public office or facing jail time. Also, corruption itself, particularly political corruption, makes punishment weaker. This happens when public officials are able to provide favours to each other in order to conceal corruption. 6. COMBATING CORRUPTION Efforts to fight corruption are gathering momentum in all parts of the world. Globalization of capital and a growing intolerance for corruption have fuelled these efforts. While meaningful reductions in corruption entail a long time horizon, the process requires political leadership, collective action, and informed decisions throughout. Combating corruption should be thought of as more than simply weeding out crooked government officials. Corruption is a complex phenomenon and in many cases is the consequence of more deep seated problems of policy distortion, institutional incentives and governance. Therefore, it cannot be addressed by simple legal acts proscribing corruption since effective efforts to combat corruption have been limited. Corruption occurs when economic opportunities for it prevail and political will to combat it is lacking. In a way, corruption is a symptom of fundamental economic and political problems. Addressing them effectively, therefore, requires dealing with the underlying economic, political and institutional causes. Reducing opportunities for discretion is often an important element for prevention. Similarly, on the enforcement side, weak institutions often require the help of independent oversight commissions with powers to investigate, and at times prosecute and/or adjudicate. Finally, proper interface needs to be formed between civil society, the private sector and governments to help assess the issues and develop support for combating corruption, and to develop more effective ways of doing business. More than in any other field, corruption is not an area that lends itself to technocratic solutions developed by a few and executed by many; long-term and sustainable development requires a real stake of all concerned, and often needs home grown and tailor-made solutions. More broadly, a combination of actions on prevention, enforcement and support of the local community could help in overcoming the problems. In the end, though, any effort will require a diagnosis of the specific problems; an ensuing prioritization and sequencing of interventions; and monitoring of impact. Whatever course is taken focus should be given on minimum, critical mass of interventions -- at times a few initial examples -- in order to get some early gains for later replication. ANTI-CORRUPTION PROGRAMS Below is a wide list of steps that might be part of an anti-corruption program. Not all steps are appropriate in every setting, and not all are steps that can or should be taken. It is essential to diagnose an individual setting and consider proposed solutions carefully and to work closely with allies in the government and with other partners to coordinate strategies and identify individual activities that complement each other. A. PREVENTION Economic Reform Liberalization and deregulation where possible Privatization of parastatals in competitive sectors A new look at tax and regulatory policy Opening of trade regimes to create "competition" and pressure for reform Administrative Reform Preparation of a proper inventory in the public sector Establishment of competing bureaucracies to deliver similar services where possible. Assignment of responsibilities with institutional capacity in mind Identification and support of "pockets of excellence" Civil Service Reform Move toward merit-based processes in civil service recruitment, performance- evaluation, promotion and termination Establishment of reasonable salary levels and gradation Budget Reform and Financial Management Review/Audit of government procurement practices Service delivery surveys as an audit device Bypassing of government agencies: Direct donor funding of community-level service delivery projects or private infrastructure projects Accounting, disclosure and auditing standards for public and private sector institutions prudential regulations, bankruptcy arrangements and other oversight mechanisms for financial intermediation Reform in Tax and Customs Organization Functional organization of departments Establishment of benchmarks for performance Increasing data availability and transparency Strengthening of taxpayer appeals mechanisms of the Revenue Department B. ENFORCEMENT Procurement Inclusion of "no-bribery-pledge" in Bidding Documents Encouraging alternative legal institutions for settlement of disputes, mediation, etc. Legal and Judicial Reform Review of anti-corruption and conflict-of-interest legislation to ensure adequacy. Steps towards heightened independence of the judiciary Strengthening incentives and building skills of public prosecutors Review of administrative law to strengthen transparency and public input to regulatory rulemaking Setting-up of a special anti-corruption agency Revelation of higher-level civil servants' income or tax return C. INTERFACING Societal Support Action Awareness raising and combined problem-identification through workshops Generating and disseminating information and data Review of defamation legislation Journalist training and support Identification and support of local champions including NGOs Collective action by international and domestic institutions, involving political leadership, business communities, financial institutions and NGOs Self-Regulating Arrangements Issuance of codes of conduct of enterprises Establishment of review boards or oversight committees Sentencing guidelines reflecting enterprises self-corrective behaviour 7. THE RESPONSE Aware of these developments, corruption is of growing concern to donors, non-governmental organizations, governments, businesses and citizens, in developing and industrial countries alike. Fortunately, the opportu...