Public Sector Governance & Corruption

Public Sector Governance & Corruption A Quick Introduction

Contains materials from Public Sector Governance and Anti-corruption Core Course, Public Sector Group, the World Bank

Why governance and corruption? • Ch 11 deals with the poor, the sick, the disenfranchised. • These people are a significant majority in developing economies. • The contrast between rich and poor is significant and troubling. • Ch 12 suggests that foreign direct investments can limit conflict. • FDI depends on economic and political stability. • Governments or states have a role in how economies are managed, determines political climate. • Governance deals with how states acquire and exercise its authority. • Corruption is the absence of good governance

Relevance • Political risk is heightened by • Disenchantment with government • Too many frustrated and disempowered • Too sick = poverty • “Terrorist” activities can arise from • Disenchantment • Religious, tribal/ethnic, and clan rivalries • Individual ambition • Conflict with neighboring countries • Weak and/or corrupt central government

Relevance (continued) • Political risk can lead to • Violence e.g. civil unrest, coup d’etat, rebellion • “Non-regular” change in control of central government • Change in “rules of the game” • The price is usually control of central government • Concentration of power • Impose goals, e.g. ideological, religious, etc. • Rent seeking • “For good of the country”

Relevance (continued) • Recall discussion on Tienamen square situation • Conflict or threats build up, but how to gauge? • If a country is considered particularly risky, there will be contingency plans in place. • Things to look out for? • Security of personnel • Security of the facility or investment • Report to head office and obtain guidance • Manage head office – find out • Before hand, build your network, e.g. government officials, local business entities, etc.

Relevance (continued) • Impact on foreign companies: during crisis • Physical harm to managers and employees • Loss of control of physical and technological assets; management flexibility • Possible impact if crisis results in “non-regular” or unplanned change in government • Increased cost of doing business • Loss of investments • Opportunities – if worse does not occur • If one stays and everyone leaves • If one takes a chance, competitors do not

Corruption . . . • Reduces the amount of resources intended for specific sectors of society. • Estimate of losses due to corruption in Iraq $5b • Reduces the amount of resources collected for government to do its work. • Estimate of portion of national revenues not collected due to corruption in tax collection: 20% of national budget • Distorts markets: eliminates a level playing field. • Weakens credibility and legitimacy of government, in some cases faith in the ballot

Definitions & discussion • State = government, which includes national and local units • Provides goods and services not otherwise provided by private sector • Acquisition of authority • Election • Exercise of authority

Governance Corruption Institutions Concepts/Definitions The manner in which theState acquires and exercises its authority to provide public goods and services Usingpublicoffice for privategain The“rules of the game”that govern the behavior of people within a given environment

Administrative Corruption: Private payments and other benefits to public officials in connection with the implementation of government policy and regulations State Capture: Influence of powerful private interests in the formation of laws, regulations, through illegal provision of private gains for public officials Concepts/Definitions Corruption

Delegation of Implementation Delegation and Voice Political Accountability Internal Accountability Public Goods and Services Client Power/Social Accountability The Governance Triad Politicians/ Policymakers Citizens Bureaucrats

The Governance Triad Politicians/ Policymakers Compact Delegation of Implementation Delegation and Voice Political Accountability Internal Accountability Public Goods and Services Citizens Bureaucrats Client Power/Social Accountability

Comment on relationships • Because of the complexity of relationships between entities, what is delegated and who are accountable have to be decided on a case by case basis • Relationship is implicit – citizens vote, politicians act on their behalf – and explicit, e.g. bureaucrats can have job descriptions. However link to citizenry is usually weak.

Some basic principles of good governance • In providing goods and services, states do have to deal with various sectors. • Who should be involved in decision making? • Are goods and services being delivered? • Are public officials accountable? Is there transparency? • Fairness – equal opportunity, laws enforced impartially • Direction – strategic vision on good governance and human development

Administrative Corruption The Governance Triad Politicians/ Policymakers Compact Delegation of Implementation Delegation and Voice Political Accountability Internal Accountability Public Goods and Services Citizens Bureaucrats Client Power/Social Accountability

State Capture The Governance Triad Politicians/ Policymakers Delegation of Implementation Delegation and Voice Political Accountability Internal Accountability Public Goods and Services Citizens Bureaucrats Client Power/Social Accountability

Example of administrative corruption • I will use my classification scheme • Petty – bribery to facilitate a process or avoid minor penalties, e.g. traffic violations • Extortion through use of authority to extract bribe • Major – briberies and use of influence to win major contracts or control of assets • Manage a port or power plant • State capture – in addition to major contracts, write laws that favor specific interests

Example of administrative corruption • Related to the enforcement of laws • Bribes to avoid traffic citation, facilitate paper work required, extortion to avoid trumped up charges, etc.. • Citizens may actually pay the same or less to obtain the service or avoid penalties. Either way, government suffers financially and in terms of credibility. • Other examples?

Examples of state capture • In case of Saudi Arabia, based on reading, is there state capture? Why? • Bribing legislators, by whatever means, to enact laws favorable to one’s industry or company. • Difference between lobbying and cash in an envelope • Or bribing printer of laws and implementing regulation. • Other examples – readings?

Additional examples? • Award and management of contracts • Transparency in bidding and award process • Hurdles during evaluation of performance under the contract, collection, change orders,etc. • Article on Saudi Arabia • Venezuela – evidence that President is using nationalized companies to “take care” of his loyal supporters • Nigeria – misuse of oil revenues, flawed elections to retain power • Others?

Where corruption thrives • Monopoly • one can only go to one office for a transaction • Human discretion • Rules are subject to interpretation or lack of transparency • Low risk of capture, e.g. no history of anyone being jailed • Penalties for capture much less than sums of money to be gained • Large sums of money . . . and small salaries • Stated another way, corruption will thrive when: • Rules are unclear and subject to interpretation • Weak rule of law • Low paid civil servants • Social acceptance that corruption is inevitable

Approaches to stopping corruption • Anti-corruption campaigns • Leadership appoints an anti-corruption czar • Publicity to announce end to corruption • A few heads roll • Czar must be independent, hit the big fish, sustained, e.g. Hongkong program bagged the police chief • “Al Capone” strategy • Systems and procedures must be changed to eliminate some of the conditions that allow corruption • Regulatory change sometimes necessary • Internal changes to systems and procedures

Governance • Myths about governance and corruption in http://www.imf.org/pubs/ft/fandd/2005/09/basics.htm • Governance and corruption are one and the same. • Governance and corruption can not be measured • The importance of governance and corruption is over-rated. • Governance is a luxury only rich countries can afford. • It takes generations for governance to improve.

Governance • Myths about governance and corruption (continued) • Donors can “ringfence”projects in highly corrupt countries and sectors. • Fight corruption by fighting corruption. • The culprit is the public sector in developing countries. • There is little countries can do to improve governance. • There is not much the IFIs can do.

In-class writing • List issues or topics we have covered so far that you find: • Personally interesting • Believe a global manager must be knowledgeable of • Note whether the topic meets both criteria

Some suggested topics • Use governance and corruption framework in understanding political situation in a particular country? For example, are China and India really “model” states? • Causes and organization behind terrorist activities in a given country • Islam and its relationship with specific countries (where one may have a major operation.)

Some suggested topics • Challenge to global companies of “flat world”: e-waste, mass produce but cater to individual markets, competition from non-traditional locations, etc. • Investigate movement of an industry in the last couple of decades to understand how and why these became global; provide perspective on “triple convergence” • What were the roles of indigenous entrepreneurs in establishing manufacturing facilities in places like southern China, northern Mexico (maquiladoras), or software companies in India? Roles of global firms? • Various means used by different countries to encourage foreign direct investments

Public Sector Governance & Corruption