Combating Corruption

1. Anti-Corruption Initiatives from a Business View Point Combating Corruption July 14, 2003 The Center for International Private Enterprise Washington DC

2. Overview of Corruption • Corruption is often a “taboo” topic in many countries. • Institutionalized corruption threatens the development of democracies and markets. • Corruption increases transaction costs and undermines the competitiveness of the private sector in today’s global economy. It is essentially a waste of resources. • Corrupt countries lack predictable economic environments and stable legal institutions – the base for international investment, trade and growth.

3. Roots of Corruption • Corruption is not simply an abuse of the public office for private gain: corrupt behavior involves nepotism, cronyism, insider-trading, etc. • Corruption is often institutionalized and is an acceptable behavior in many countries. • Complex and vague legal systems along with governmental discretionary powers breed corruption. • Over-regulation of the business sector creates perverse incentives.

4. Measures of Corruption Transparency International “Corruption Perceptions Index” ranks 102 countries on the scale of 10 – 1, with 1 being the most corrupt and 10 being the least corrupt country.

5. Anti-Corruption Strategies • Break the taboo • Mobilize private sector initiatives and political will • Identify specific mechanisms that sustain corruption • Develop targeted programs and accountability • Evaluate

6. Corruption:Supply-Side vs. Demand Side Supply-Side Demand-Side Private Sector Government Officials

7. Demand Side of Corruption:The Role of the Private Sector The business community has to gain a reputation for equity, fairness, transparency, accountability and responsibilityby developing the institutions of corporate governance: • Transparency (full disclosure) • Independent Auditing • Conflicts of interest involving boards of directors and managers • Procedures for bankruptcy • Property rights • Contract enforcement • Corruption and theft

8. Principles of CG OECD Principles • Protecting the rights of shareholders • Treating shareholders fairly • Recognizing the role of stakeholders • Ensuring disclosure and transparency • Clarifying responsibilities of the board of directors

9. CIPE’s Experience • For businesses to succeed in the world economy, they must have healthy corporate governance mechanisms including rule of law • Building corporate governance in developing countries requires refashioning institutions • Private sector must participate in developing governance mechanisms • The reward is a thriving democratic society that supports economic growth

10. Case Studies • TRACE (Transparent Agents and Contracting Entities) - a business-led effort to establish standards for agents and reduce due diligence costs • Business Principles for Countering Bribery (Transparency International and Social Accountability International) – NGO and business community joint effort to establish standards of internal controls & ethics

11. Practical Approaches to Combating Corruption • Coalition Building Coalition 2000 (Bulgaria) • Identifying Obstacles Center for Liberal and Democratic Studies (Serbia) • Journalist Support Journalists Against Corruption (Latin America)

12. Practical Approaches to Combating Corruption • Public-Private Efforts Center for Economic Development (Slovakia) • Legal Reform Constitutional Reform and Legal Streamlining (Ecuador) • Integrity Pacts Probidad (Colombia)

13. Combating Corruption: A Policy Toolkit • Demand-side • Recommendations • Establish sound procurement codes • Require independent audits • Legal reform and simplification • Inventory of legal barriers and duplicative regulations • Reduce the “shadow” economy • Simplify tax codes • Salaries of the civil servants have to be competitive with private sector ones • Transparency in the financial/banking sector Supply-side Recommendations • Independent media equipped with tools of analysis • The role of think tanks, business associations and other NGOs • OECD Anti-Bribery Convention • Internationally accepted accounting standards • Good standards of corporate governance • Continue strengthening general OECD guidelines

15. Governance and Controlling Corruption is Central for Socio-Economic Development and Growth: New Reports and Evidence Presentation by Daniel Kaufmann, The World Bank, on New Books and Research on ‘Quality of Growth’ and ‘Anticorrruption and State Capture in Transition’ ICPS Roundtable, Kyiv, November 6th, 2000

16. Broadening our Perspective: Assessing Governance • Control of Corruption (or Graft) • Rule of Law • Lack of Regulatory Burden • Government Effectiveness • Voice and Accountability • Political Stability and lack of Violence

17. Quality of Rule of Law by Region Good Poor

18. %

19. Corruption in the Banking Sector ( EIU 1997-98, Selected Countries ) High 4 Corruption 3 2 1 Low Corruption 0 Syria Chile Turkey Mexico Ecuador Hungary Russia Hong Kong Panama

20. CORRUPTION DETERS FOREIGN INVESTORS: Probability of Investment Loss due to Corruption (within 5 years) 95 TURKMENISTAN 79 COLOMBIA 71 GEORGIA 68 PAKISTAN 62 UKRAINE 58 RUSSIA 44 BULGARIA 41 ROMANIA 39 MEXICO 29 POLAND 24 ESTONIA 15 GREECE 12 COSTA RICA *Source: S&P/DRI 1998 10 ITALY 6 SINGAPORE 5 UNITED STATES % % % % % % % % % % % 0 10 20 30 40 50 60 70 80 90 100

21. 2% 1.5% 1% 0.5% 0% -0.5% -1.0% -1.5% Impact of good government on investment and growth Income per capita Growth Rate % Investment share in GDP 20% 15% 10% Medium Low High High Medium Low Government Quality

22. Per Capita Income and Infant Mortality and Corruption Regulatory Burden 12,000 90 80 10,000 70 8,000 60 50 6,000 40 4,000 30 20 2,000 10 0 0 Weak Average Good Weak Average Good Development Regulatory Burden Control of Corruption Development x x Dividend Dividend Literacy and Rule of Law Per Capita Income and Voice and Accountability 100 10000 9000 8000 75 7000 6000 50 5000 4000 3000 25 2000 1000 0 0 Weak Average Good Weak Average Strong Development Development Rule of Law x x Voice and Accountability Dividend Dividend The ‘Dividend’ of Good Governance Note : The bars depict the simple correlation between good governance and development outcomes. The line depicts the predicted value when taking into account the causality effects (“Development Dividend”) from improved governance to better development outcomes. For data and methodological details visit http://www.worldbank.org/wbi/governance.

23. Corruption & Bureaucratic Discretion High Corruption Low Bureaucratic Discretion

24. Enterprises are Prepared to be Taxed for Better Government: Share of Firms that would pay additional taxes to eliminate corruption, crime and excessive regulations Prepared to Pay Taxes to Alleviate:

26. Smaller Firms Are Hit Harder by Corruption in Russia and in Transition Economies Bribes to secure public procurement bids (% of contract value) % 6 4 % of contract value 2 0 Small Medium Large Small Medium Large

27. Extent of State Capture in Transition

28. Differences in Transition Countries on the Extent of State Capture % 50 % 45 % 40 % 35 % 30 %of all Firms report negative impact of grand corruption % 25 % 20 % 15 % 10 % 5 0 Hungary Estonia Russia Azerbaijan Adverse Impact of ‘Purchases’ of: Parliamentary legislation Decrees Central Bank Influence

29. Enormous Socio-Economic Costs of State Capture by Oligarchs and Vested Elite Interests: Business sector grows much slower, lacks investments and insecure property rights

30. The result: weak property rights Firms reporting insecure property and contract rights % 80 70 60 50 % of All Firms 40 30 20 10 0 Lit Sln Slk Hun Est Geo Arm Pol Bul Bel Ukr Cro Rus Uzb Kyr Mol Cze Kaz Azer Rom

31. State Capture exists where partial Civil Liberties and slow Economic Reforms Economic Reforms Degree of Civil Liberties in Transition Economies

32. Civil Liberties Help Control Corruption (Worldwide Evidence, 150 countries) High Corruption Low Civil Liberties

33. Control of Corruption and Freedom of the Press High Control of Graft [kkz] r = .68 Low Low High Freedom of the Press (Freedom House)

35. Strategy for Good Government and Anticorruption • Accountability of Political Leadership: • Disclosure of parliamentary votes • Transparency in party financing • Asset Declaration, Conflict of Interest Rules • Checks and Balances: • Independent and effective judiciary • Decentralization with accountability Good and Clean Government • Civil Society Oversight: • Freedom of information • Public hearings of draft laws • Monitoring by media/NGO’s • Competition & Entry : • Competitive restructuring • of monopolies • Regulatory simplification • Public Administration and Public Finance: • Meritocratic civil service • Transparent, monetized, adequate remuneration • Accountability in expenditures (Treasury, Audit, Procurement)

36. Emerging Operational Strategies • Albania • Judicial reform • Tax and customs • Standards for health care • University entrants • Monitoring by NGOs • Georgia • Regulatory reform • Tax and customs • Public procurement • Fiscal management • Replacing Judges • Monitoring by NGOs

37. Overall Corruption Over Time (Selected Countries; ICRG index, rescaled 0-10) 10 High corruption Indonesia El Salvador 8 Russia Indonesia 6 Russia 4 El Salvador Poland 2 Poland Low corruption Finland Finland 0 1992 1993 1994 1995 1996 1997 1998 1988-92

38. National Governance: Challenges in Integrating Anti-Corruption Into a Strategy of Institutional Change • A simple Formula synthesizing Governance/Anticorruption: • IG and AC = KI + LE + CA • Improving Governance and Anti-Corruption = • = Knowledge/Info.Data + … • ...+ Leadership (incl. Political) + ... • ... + Collective Action (change)