The 9th International Anti-Corruption Conference
An Action Plan
We need not be as pessimistic as to conclude that all countries that are currently corrupt are hopelessly and irreversibly so. However, it is useful to realise that even in countries where the leaders see the threat of corruption, necessary reforms are often difficult to start or to sustain due to a number of constraints. These constraints result in political inaction.
There are three such constraints that are particularly important. The first constraint is political risk. Because corruption is a system- wide problem, only comprehensive reforms can be effective in reducing corruption. But a comprehensive reform package contains inherent unpredictability and risk for the leaders. [It is observed that within a year after a country has implemented price liberalisation, its prime minister or finance minister or both are often involuntarily removed from their jobs. Such observations must be important in political leaders' mind.]
The second constraint is budgetary affordability. A necessary component of an effective anti-corruption strategy is to raise the civil servants' salary to appropriate level (along with other reforms). But this can be expensive, particularly since countries with a severe corruption problem often also have problems in collecting taxes.
The third constraint is the limit of usefulness in importing a "blueprint" from the outside. Even if we know a "master list" of what are done in Singapore or Sweden to produce a low corruption there, which is a big if by itself, we still have a very imperfect knowledge of how to transplant the lessons to a country like Tanzania or Indonesia. Local culture, local institutions and local history do matter here.
We need a reform strategy that addresses these constraints. What I propose below is not a sure success, but might help to enhance the chance of a success.
What I advocate is to establish a Special Governance Zone (SGZ) as a practical entry point to an eventual nation-wide anti-corruption program. An SGZ is an enclave within a country. Within a SGZ, comprehensive reforms are implemented. A SGZ is analogous to a special economic zone such as those in China. In fact, the comparison with special economic zones is very useful. A special economic zone tends to focus only on special economic policies such as zero tariffs or tax holidays. A SGZ aims to establish a comprehensive set of new institutions and new policies. Within such a SGZ, a comprehensive civil service reform should be undertaken; the role of government in the economy should be redefined; and the rule of law and citizen's voice should be enhanced. The actual name could also be "special administrative zone," "clean administration area," and so on, depending the circumstances of the country. Like a (well-designed) special economic zone, a SGZ also involves drastically reducing regulatory burden and regulatory discretion. In this sense, it is a special economic zone plus. On the other hand, some of the policy measures that are typical in a special economic zone such as tax holidays, are not necessary in a SGZ.
Advantages of the SGZ Idea
Because SGZ is only an experiment within the country, it reduces the political risk for the leaders (and hence reduces the political opposition relative to a comprehensive nation-wide reform). Because SGZ is small, enough resources can be concentrated in the first stage to raise the civil servants' salary all the way to an appropriate level. Finally, because SGZ is an experiment, reform measures can be fine-tuned to fit local history and culture.
SGZ is good economics as reduced corruption brings a faster economic growth and an expanded tax base. SGZ is good politics as reduced corruption also brings increased citizen satisfaction.
SGZ also has the advantage of possessing a built-in forward momentum. Once a SGZ becomes successful, people in the rest of the country no longer can say that low corruption is not possible for a country with their history and their culture. So it removes one factor for political inertia and creates a momentum for other regions in the country to emulate. This advantage is not shared with some alternative reform strategies that focuses on reforming some government functions (e.g., tariff or tax collection). So it provides useful complements to other reforms.
How to Implement an SGZ in Practice?
In actual implementation, we can be flexible to some degree. There are a number of variants of the SGZ idea that can be considered depending on a country's conditions.
(1) Two-speed reform.
In some cases, the SGZ idea is just a two-speed or two-track reform strategy. If certain reforms can be implemented on a national scale, so should they be done. But it is often the case that many other reforms are politically too difficult to implement nationally. Rather than doing nothing, we advocate implementing these reforms in an SGZ first.
(2) Municipal Reform Plus
In some countries, municipal reforms are gaining momentum. An SGZ plan can be built on this momentum. Rather than spreading resources across all municipalities (which is too expansive), we advocate that the World Bank or the central government should concentrate the resources to build up one or two success stories first. Once the initial SGZ becomes successful and can payback the initial loans, the list of SGZ can be expanded.
As far as the choice of the first SGZ is concerned, one possibility is to have interested municipalities to nominate themselves as candidates. In exchange for a generous assistance package from the World Bank or the central government (which includes sufficient resources to raise the local civil servants' salaries), the local leaders pledge to adhere to stricter penalty rules if they are discovered to violate regulations or ethic standard, and to implement a broad set of reforms agreed upon with the World Bank or the central government.
(3) Special Economic Zone Plus As discussed before, some policies in existing special economic zones are also helpful in improving public governance. But other policies in a special economic zone such as generous tax exemption are not necessary in a SGZ.
Special economic zones (under the name of export processing zones, free trade zones, etc.) exist in seventy or so countries, so they are relatively easy to be accepted politically. In many countries, special economic zones are not very successful in part because all the attention has been on offering special economic treatment but not enough attention has been given on building a good public governance in general. In many other countries (and I put China in this category), even though special economic zones have played very useful roles, their usefulness have more or less been exhausted as a place to experiment new economic policies.
For these countries, I advocate that they convert some of the existing special economic zones into SGZs.
(4) Other forms of SGZ
There are other ways to organise some sub-national units into SGZs.
There are a few basic principles for successfully operating a SGZ. First, whenever possible, a fair market mechanism should be used to allocate resources, to produce and/or procure public goods, to cut red tape, and to reduce the need for permits and licenses. This would limit the opportunities for government officials to take bribes (and to be offered bribes). The reward for civil servants to deliver quality service and not to take bribes should be raised. At the same time, the penalty for civil servants for poor performance and for taking bribes should also be raised and fairly applied.
The World Bank (and/or international financial institution) can play an important role in providing financial and technical assistance, especially at the early stage of the reform. If multiple cities/regions in a country are interested to be a candidate for a SGZ, the World Bank and the National Government can have them bid on it.
Hong Kong, Singapore and other governments in the same geographic region with reputation of strong governance can be invited to participate in providing advice and technical assistance.
The Administrative Architecture of an SGZ
In concrete terms, there are several key aspects of a new administration in the SGZ:
The Role of the World Bank (or other international institutions)
The role of the World Bank is crucial, particularly in the early stage of the reform. The first role is to provide needed technical advice and offer best practice from other countries as models.
Second, the bank can provide needed temporary financial support. Raising civil servants' salaries costs money. In the long run, the tax base in a SGZ should rise through reducing arbitrary tax exemptions by officials and through a rise in investment and output in the zone. The expanded tax base should generate more revenues than what is needed for the initial cost of raising public sector salaries. [Plus, much of the raise is in fact converting civil servants' current illegal and semi-legal income (what the Chinese call "grey income") to legal income.] But in the short run, public sector pay increase may present a problem to a cash-strapped government. Even though the future prospect is improved, the government may have trouble in borrowing from future. In this case, the fiscal help from the World Bank or other institutions is crucial for a successful start of a SGZ.
Comparison with Alternative Programs
There are several alternatives to establishing a Special Governance Zone.
The SGZ idea reflects a fundamental belief that the quality of public governance in many developing and transition economies can be significantly improved and corruption can be drastically reduced. The actual execution of any reform program carries risks. Our proposal is designed to achieve several objectives: to start the reform program within an area small enough to contain unpredictable consequences, to experiment and fine-tune various components of the anti-corruption program in practice, and by the power of example, to build momentum to implement a nation-wide governance-improving program.
Appendix 1: High Costs of Poor Public Governance for Economic
"Controlling corruption " was one of the major policy prescriptions made to nations recently in crisis. Yet there are also people who believe that corruption can work like "grease," speeding up the wheels of commerce. What does a careful examination of facts and data tell us? This appendix reviews recent studies on the consequences of corruption on economic development.
1.1 Measuring Corruption
By the very nature of corruption (secrecy, illegality, variations across different economic activities), it is impossible to obtain precise information on the extent of corruption in a country, unlike, for instance, measuring inflation. This difficulty also precludes a precise grading of countries according to their relative degree of corruption. That said, one can still get useful information on the seriousness of corruption in a country by surveying experts or firms in that country. Like pornography, corruption is difficult to quantify, but you know it when you see it. There are several survey- based measures of "corruption perception" that are increasingly visible now. I will describe four of them, in part because they cover relatively wide sample of countries, and in part because they are used in the research studies that I will review below.
As a survey of surveys, the TI index has its advantages and disadvantages. If the measurement errors in different surveys are independent and identically distributed (iid), the averaging process used to produce the TI index may reduce the measurement error. But iid assumption may not hold. Moreover, since different surveys cover different subsets of countries, the averaging process may introduce new measurement errors when cross-country rankings are produced. One should also note that, as the TI indexes in different years are derived from potentially different set of surveys, they should not be used to measure changes in corruption level over time for a particular country.
As examples of the corruption ratings according to these sources, I reproduce below the BI, TI and GCR indices for a subset of countries. In the original indices, large numbers refer to low corruption (e.g., the BI-index value for Singapore is 10). To avoid awkwardness in interpretation, I re-scale all the indices in Table 1 so that low values imply low corruption (e.g., the re-scaled BI index value for Singapore is 1). To facilitate comparisons, I have re-scaled the GCR ratings from the original 1-7 range to 1-10 range in the table.
(1) See the text immediately preceding the table for sources on BI, TI and GCR indices.
(2) In the original BI, TI and GCR indices, small numbers imply more corruption. All the indices in the
table have been re-scaled so that large numbers imply more corruption. For BI and TI indices, the values in
the table = 11-original scores; and for the GCR index, the values in the table = 8-original scores.
(3) The GCR ratings are rescaled and transformed. The values in the table = (7- original scores)*3/2+1.
It is worthwhile to emphasise again that these indices are people's perception, as opposed to objective measures of corruption. Perception can be different from reality. However, two things may be worth noting. First, for many questions such as how corruption affects foreign investment, perception -- and thus perhaps our measure -- is what actually matters. Second, despite the very different sources of the surveys, the pairwise correlations among the indices are very high. For example, according to Wei (1997b), the correlation between the BI and TI indices and that between BI and GCR indices are 0.88 and 0.77, respectively. These high correlations suggest that statistical inference on the consequences of corruption is not very sensitive to the choice of corruption index.
1.2 Measuring the Costs of Corruption
We now review some recent studies that systematically examine the consequences of corruption on the economic development.
On domestic investment
This was when the trouble began. Bureaucrats and their relatives loved the restaurant. They paid countless visits over the years, sometimes in the name of work inspection. The problem is that they did not pay the bills. By Huang's account, by February 1997, the County Government of Tanying, where the restaurant was located, owed him 80,665 Chinese yuans in unpaid bills. On May 20, 1997, burdened by his inability to return the restaurant to its profitable past, Huang sadly folded "Changxin Restaurant."
Let us now turn to some statistical evidence based on the data on a large cross-section of countries. In a regression of total investment/GDP ratio, averaged over 1980-1985, on a constant and the corruption index, the point estimate of the slope is 0.012 (Table IV, in Mauro, 1995, p696). To illustrate the quantitative effect of corruption, let me do a sample calculation by taking literally the point estimate and the corruption ratings. If Philippines could reduce its corruption level to the Singapore level, other things being equal, it would have been able to raise its investment/GDP ratio by 6.6 percentage points (=(6.5-1)X0.012). This is quite a substantial increase in the investment.
[When Mauro used linguistic and ethnic fractionalisation as an instrumental variable for corruption in the above regression, he obtained an even larger point estimate on the effect of corruption on investment/GDP ratio, about twice as large.]
On foreign direct investment
Many Asian countries offer substantial tax incentives to lure multinational firms to locate in their countries. For example, China offers all foreign invested firms an initial two years of tax holiday plus three subsequent years of half of the normal tax rate. This research suggests that these Asian countries would have attracted just as much or even more foreign investment without any tax incentive if they could get domestic corruption under control.
In fact, Wei(1995) documented that, contrary to a cursory reading of the news, China is an underachiever as a host of direct investment from five major source countries (the U.S., Japan, Germany, the United Kingdom, and France), once one takes into account its size, proximity to some major source countries and other factors. Wei(1998) suggests that high corruption in China may very well have contributed to this.
On economic growth
To illustrate the quantitative effect, let me take the point estimate in Column 6, Table VII of his paper. If Bangladesh were able to reduce its corruption to the Singapore level, its average annual per capita GDP growth rate over 1960-1985, would have been higher by 1.8 percentage points (=0.003x(7-1)). Assuming its actual average growth rate was 4% a year, its per capita income by 1985 could have been more than 50% higher3.
Using an instrumental variable approach, such as in Column 8 in Table VII of Mauro's paper, one would get even larger effect of corruption on growth, though the result becomes borderline significant at the 15% level.
On the size and composition of government expenditure
Similarly, Mauro (1997) systematically examined the relationship between corruption rating (according to ICRG) and various components of government spending. He found that corruption tends to skew public expenditure away from health and education, presumably because they are more difficult to manipulate for bribe purposes than are other projects.
Let me illustrate some of the Tanzi-Davoodi findings by looking at the effect of a change in corruption on a variety of indicators, averaged over 1980-95. An increase in corruption from the Singapore level to Pakistan level would increase the public expenditure/GDP ratio by 1.6 percentage points (Column 2 of Tanzi-Davoodi's Table 1); and reduce government revenue/GDP ratio by 10 percentage points (Column 2 of Tanzi-Davoodi's Table 2).
An increase in corruption reduces the quality of roads, and increases incidence of power outages, telecommunication faults, and water losses. Specifically, an increase in corruption from the Singapore level to the Pakistan level would be associated with an extra 15 percent increase of roads in bad condition, after controlling for a country's level of development and its public investment to GDP ratio (Column 2 in Table 5).
On Domestic Financial System
Using a clever data set that measures the strength of Indonesian firms' connection to Suharno and his family, Fisman (1998) showed that the stock market valuation of the politically well-connected firms tend to lose value sharply each time there was a rumour about the health problem of Suharno. This suggests that the market does not believe that the resources allocated to these firms are justified except for the abnormal returns associated with their political connection. Using the data from the 1997 GCR survey, Wei and Sievers (1999) reported a clear pattern: corrupt countries are more likely to have inadequate government supervision of the financial system, and are also more likely to have vulnerable banks.
On Turning Firms to the Underground Economy
The unofficial economy grows at the expense of the official economy. Taking into account this effect has important implications. On the one hand, the effect of corruption on investment and growth may be not as large as if base all measures only on firms in the formal sector. On the other hand, a high and growing unofficial economy implies a low and shrinking tax base, and a poor and deteriorating public goods provision.
On urban bias, poverty and other consequences
Defence contracts are often budgeted at the expense of rural health clinics specialising in preventive care (Gray and Kaufmann, 1998). To the extent that rural residents tend to have lower incomes than their urban counterparts, this corruption-induced policy bias may worsen the income distribution, and at the same time, divert the needed resources away from the countryside.
The last example shows that poverty can be made worse and more persistent by corruption. In fact, one can expect that corruption would make poverty worse in cities as well as in rural areas, as poor people have less means to bribe officials and less political power in general. Rose-Ackerman (1997) listed several channels through which poor people are hurt by corruption. (A) The poor will received a lower level of social services. (B) Infrastructure investment will be biased against projects that aid the poor. (C) The poor may face higher tax or fewer services. (D) The poor are disadvantaged in selling their agricultural produce. And (E) their ability to escape poverty using indigenous, small scale enterprises is diminished.
Using cross-country regressions over the period 1980-97, Gupta, Davoodi, and Alonso-Terme (1998) show that high and rising corruption, as measured by the ICRG index, increases income inequality and poverty. Several channels have been identified in the paper through which corruption worsens the (relative and sometimes absolute) poverty: corruption lowers economic growth, biases the tax system to favor the rich and well-connected, reduces the effectiveness of targeting of social programs, biases government policies towards favouring inequality in asset ownership, lowers social spending, reduces access to education by the poor, and increases the risk of investment by the poor.
Does Corruption "Grease" the Wheels of Commerce?
Kaufmann and Wei (1998) argues that this view is true only in a very narrow sense when the bad regulation and official harassment are taken as exogenous. Officials often have lots of leeway to customise the type and amount of harassment on individuals firms. Tax inspectors may have room to over-report taxable income (see Hindriks, Keen and Muthoo, 1998). Fire inspectors can decide how frequently they need to come back to check fire safety in a given year. Using data on a survey of nearly 2400 firms in 58 countries, Kaufmann and Wei show that, even within a country, managers of the firms that pay more bribes on average waste more, rather than less, time negotiating with government officials. It is likely that there was, on average, a disadvantage to those paying bribes as well as to the society in general. This evidence supports the idea of "tailored harassment" and "endogenous obstacles," and thus rejects the hypothesis of beneficial grease. Hence, what might appear to be value-creating bribery in a partial equilibrium may very well be value-reducing in a general equilibrium.
Why is Corruption So Taxing?
1.3 Culture: Is Asia Special?
Denis Osborne's (1997) paper documents clearly the possible differences in attitude towards corruption and bribery in different countries and times. Tanzi (1995) argued that firms in some countries are culturally less inclined to have arms-length economic relationships, which in turn may lead to more ingrained corruption.
While there is ample evidence that different people may have different views with respect to bribes versus gifts 5 , or group loyalty versus self-interest, Osborne also observed that many of these differences may not be inherently cultural. For example, seemingly greater tolerance of bribes in some communities may be a result of the short horizons of the official due to uncertainty about future in a time of rapid change, or pitifully low salaries of civil servants that are regarded by the officials or ordinary citizens on the street as "unfair" (Osborne, 1997, P22). These should not be properly defined as "cultural." Furthermore, Osborne documented that throughout human history, from ancient Greece, William Shakespeare in the West, to Confucianism and Hinduism in the East, one can find repeated expressions of distaste by scholars and ordinary people for corruption and dishonesty.
We do not have enough good, detailed country studies on the interaction among culture, corruption and economic development. Pasuk Phongpaichi and Sungsidh Piriyarangsan's book, Corruption and Democracy in Thailand, bravely as well as brilliantly offers an in- depth study of corruption in Thailand. At the beginning of the book, the authors reviewed many early studies of the subject, many of which attribute Thai corruption to cultural heritage (see their description of the work by Lucien Hanks (1982), Fred Riggs (1966), Edward Van Roy(1970), Thinapan Nakata (1977), and Clard Neher (1977). With a large-scale survey, the Pasuk-Sungsidh book concludes that Thai people do have a higher limit on the amount of money officials may take from the private sector before it is considered corruption.
In the previous section, we cited evidence that foreign investors on average invest less in more corrupt countries. Some may suspect that East Asia must be an outlier since it seems such a popular destination for foreign investment. Let us note here that, yes, foreign investment in East Asia has been big, but East Asia is a large market and has been growing faster than the world average. Many East Asian countries also have low wages. On these factors alone, East Asia naturally attracts more foreign investment. To see whether foreign investors are less sensitive to corruption in Asian host countries, one needs to control for these factors. A section in Wei (1997) did exactly that. The evidence shows that there is no support for the Asian exceptionalism hypothesis. Rather, investors from the major source countries are just as averse to corruption in East Asia as elsewhere. Putting it differently, among East Asian host countries, foreign investors still prefer to go to less corrupt countries other things being equal. One should note that the paper does not compare whether domestic and foreign investors may have different degrees of sensitivity to corruption.
Appendix 2: Causes of Poor Public Governance
Because corruption is a crime in most countries' penal codes, it is common to emphasise the role of law enforcement in the fight against corruption. While there is no question that law and law enforcement are important, we should note that it is at least as important to look into the root causes of corruption, the institutional environment and the incentive structure under which corruption thrives.
Several important theoretic works (e.g., Rose-Ackerman, 1978; Tanzi, 1998; etc) have pointed out factors that affect a country's level of corruption. I will first review these factors from the theoretical viewpoints and summarise recent empirical attempts at testing and quantifying the roles of these factors.
A. Opportunities induced by Government's Role in the Economy
This point is almost elementary. If it requires obtaining a license and paying a tariff before a firm can import certain goods from abroad, then officials deciding who gets a license and granting tariff exemptions have the opportunity to extract bribe payments. If no license or tariff is needed, no firm would pay bribes before importing.
Tanzi's excellent survey (1998) offers a number of concrete descriptions of where opportunity for corruption may arise as a result of government (over-)regulation. For example, in the taxation area, he pointed out that the more difficult it is to understand the laws, the more likely there is corruption; the more discretion given to tax administrators over the granting of tax incentives, determining tax liabilities, and selecting audits and litigations, the more likely there is corruption.
Similarly, the size of government spending and the procedure used in allocating the expenditure also significantly affects the opportunity for corruption. Also, if a government is involved in providing certain goods and services at subsidised prices, say foreign exchange, credit, public housing, educational opportunities, or water and electricity, then officials with the duty to decide also have the opportunity to pocket a fraction of the implicit subsidy (e.g. the difference between the market value of the goods or services and the price the government is asking), in the form of bribes extracted from the recipient of the subsidised goods or services.
In the papers both by Mauro (1995) and by Kaufmann and Wei (1998), it is shown that the corruption index and the index of government regulation is positively correlated.
Many countries in Asia have been pursuing an active industrial policies. Industrial policies by their very nature involve discretion on the part of government officials, in terms of which industry to support, which firms within a industry to support, how to allocate subsidised loans, grants, tariff rebates, and so on. Ades and Di Tella (1997) argue that, logically, industrial policies can promote corruption as well as investment. Using data on indices of corruption and industrial policy across a number of countries, they then show that corruption is indeed higher in countries with more active industrial policy. The negative effect of corruption induced by the industrial policy seems large (probably on the order of 56% to 84% of the direct beneficial effect), and therefore should not be neglected in any cost-benefit analysis of industrial policies.
Before leaving this subsection, it should be pointed out that, while less discretion by government officials reduces the scope for corruption, we are not advocating abolishing all the regulations. Many regulations and even bureaucratic discretion serve useful functions in the society. The point is that we should be mindful of the implications for corruption when designing government regulations.
B. Civil servant recruitment and promotion system
Rauch and Evans (1997) composed indices of degree of meritocratic recruitment and promotion for civil servants in 35 countries (as well as their average wages relative to private sector alternatives). They then show that the cross-country ratings a la the International Country Risk Guide are statistically significantly related to the way civil servants are recruited and promoted. Meritocratic recruitment is most important for reducing corruption, followed by meritocratic promotion and security of employment.
C. Compensation for civil servants
The view that high salaries to civil servants help to deter corruption is certainly not restricted to Asia. For example, according to Tanzi (1998), Assar Lindbeck (1998) attributes the low corruption in Sweden during the 1870-1970 period partly to the fact that high-level government administrators earned 12-15 times the salary of an average industrial worker.
Systematic and statistical examination of the evidence on the connection between corruption and public sector wage is a relatively recent undertaking. In a cross-country regression study cited above, Rauch and Evans (1997) did not find robust support for the role of high salaries. But the World Bank's World Development Report 1997 and the working paper by Van Rijckeghem and Weder (1997) do report evidence that countries with poorly paid public officials tend towards higher corruption.
What is important here is not the absolute level of civil servants' wages, but their values relative to the best private sector alternatives. In Van Rijckeghem and Weder's paper, given the constraint of data availability, they take the average civil servant pay relative to average manufacturing sector wage, as their measure of officials' incentive to resist corruption. Using a regression technique, they found a negative and statistically significant correlation between public sector's relative wages and the extent of corruption involving government officials. Based on their point estimates, they also calculated, for each country in their sample, the ratio of public to private sector wages that is needed in order to reduce the corruption to Singapore level, which has the lowest corruption grade. It maybe instructive to reproduce the part of their Table 6 below that reports the actual versus the warranted relative wages for the Asian and other selected countries in the sample. Like all other projections in this paper, the numbers below are meant to be illustrative and not to be taken literally.
Source: The first two columns are from Table 6 in Van Rijckeghem and Weder (1997). Column (3) is author's calculation based on the first two columns.
A few things are particularly worth noting in the table. First, to really eradicate corruption (or to reduce it to the Singapore level), one needs to raise the public sector's pay by a substantial margin (sometimes by 500% or even 900%). Although government officials in Asia are comparatively better-paid than some of their African and Latin American counterpart and hence a smaller increase is needed, the 200% to 500% increase may be still fiscally infeasible for these countries. Second, we do not know for sure if the warranted salary increase should raise the pay to the government officials above their private sector alternatives . If they do, there is a serious equity issue even if these governments have the money (or have the ability to transform most of the currently illegal bribes to the incremental taxes needed to raise the civil servants' legal pay). Third, if civil servants are paid a higher salary than their private sector alternatives, many people may pay a bribe to be chosen for these public jobs. So the high pay policy itself may create new type of corruption. Forth, extortion and bribe-taking practices could have become part of the bureaucrats' work culture and habit, so that increased legal pay may not do much to reduce corruption, at least initially.
To sum up, raising salary of public servants is important to fight corruption. But is has to be one component in a multi-component comprehensive package. We now turn to another important component below.
D. Legal system, "watch-dog" organisation, "hot-line,
" client surveys, free press and democracy.
There are several channels through which detection and punishment capacity is realised. Let me mention seven of them here: (A) An independent and impartial judicial system, (B) an official anti-corruption agency such as Hong Kong's Independent Commission Against Corruption (ICAC)7 , (C) existence of grassroots "watchdog" organisations, (D) a telephone "hot line" as those in the United Kingdom and Mexico that allow citizens to complain directly to the government, (E) public opinion surveys such as those carried out by Public Affairs Centre in Bangalore, India or by the World Bank's Economic Development Institute in other countries that register the public's attitude, particularly those of the poor, towards corruption, (F) freedom of the press to bring to light any official corruption, and finally (G) democracy that serves the dual purpose of throwing corrupt officials out of power by the populace and protecting those individuals and organisations that dare to expose corrupt officials. All of these channels are potentially important. There are some case studies and much anecdotal evidence that demonstrate both effectiveness in specific countries and time periods, and suggestions on how to implement them . It seems possible that the extra revenue collected by the government as a result of the actions of the various anti-corruption bodies can exceed the cost of these bodies.
While the intuition for the importance of these channels seems straightforward, so far there is very little systematic statistical analysis of their relative importance for a broad sample of countries. Such will be a very fruitful future research topic.
E. International Pressure
The second channel is concerted international effort to criminalise the offering of bribes by multinational firms to host countries' officials. So far, the United States has been the only major source country of international direct investment that has an enforced law -- The Foreign Corrupt Practices Act (FCPA) of 1977 -- that prohibits its companies from bribing foreign officials. For most other major source countries in the OECD, not only it is not illegal to bribe foreign officials, it is, up until very recently, tax-deductible . The U.S. law has not been very effective in reducing corruption in foreign countries, mainly because companies from other countries are too eager to pick up the business that the U.S. firms miss due to the law . Corruption-prone foreign officials do not feel enough pressure to change their behaviour even if they are genuinely interested in attracting foreign investment into their countries. An international treaty that bans foreign corruption can strengthen the collective ability of all major multinational firms not to pay bribes. They are more likely resist demand of bribes if they can be confident that they will not lose business to their competitors as a result.
It should be pointed out that we should not have any romantic hope on the degree of effectiveness of international pressure. First, the mandates of almost all international governmental organisations place some limits on how much anti-corruption objective can be pursued in the organisations' activities. If the World Bank were to suspend lending to countries with severe corruption ratings according to the Transparency International, it would have to stop half or more of its loans. That is not realistic as it would contradict its other very important objectives and possibly the survival tendencies of the organisations.
Second, and more importantly, domestic efforts and domestic institutions ultimately determine the success of any anti-corruption program. If government officials do not intend to seriously reduce corruption, they would simply not request a loan if the international organisation requires corruption reduction as a prerequisite. So while the international pressure is useful and should be applied whenever and wherever possible, it should be regarded as supplemental to other domestically-based reforms.
Appendix 3: Examples of Special Economic Zones Around the World
* This list is preliminary. Many of these locations (cities) and types are yet to be verified by checking a government official website, assuming that an official website exists.
SEZ: Special Economic Zone
Appendix 4: References to Relevant Literature
Ades, Alberto, and Rafael Di Tella, 1997, "National Champions and Corruption: Some Unpleasant Interventionist Arithmetic," The Economic Journal, Vol. 107 (443): 1023-42, July.
Andvig, Jens Christopher, 1991, "The Economics of Corruption: A Survey," Studi, Economici, 43: 57-94.
Bliss, Christopher, and Rafael Di Tella, 1997, "Does Competition Kill Corruption?" Journal of Political Economy, December, 5(105): 1001-1023, October.
Bardhan, Pranab, 1997, "Corruption and Development: A Review of Issues," Journal of Economic Literature, Vol. XXXV (September): 1320-1346.
Du, Julan, Daniel Kaufmann, and Shang-Jin Wei, 1999, "Public Malfeasance and Financial Market Development," Harvard University and the World Bank.
Elliot, Kimberly Ann, ed., 1997, Corruption and the Global Economy, Washington, DC: Institute for International Economics.
Fisman, Raymond, 1998, "It's Not What You Know...Estimating the Value of Political Connections." World Bank.
Gray, Cheryl W., and Daniel Kaufmann, "Corruption and Development," Finance and Development, March 1998, p7-10.
Gupta, Sanjeev, Hamid Davoodi, and Rosa Alonso-Terme, 1998, "Does Corruption Affect Income Inequality and Poverty?" forthcoming, IMF Working Paper, May.
Hanks, Lucien M., 1982, "Merit and Power in the Thai Social Order," American Anthropologist, LXIV.
Hines, James Jr., 1995, "Forbidden Payment: Foreign Bribery and American Business After 1977," NBER Working Paper 5266, September.
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