Corruption as an International Policy

10
Problem: Overview and Recommendations

KIMBERLY ANN ELLIOTT

In just a few months in early 1997, Mexico fired its top drug-enforcement
official for accepting bribes and ultimately closed the agency because it
was so ridden with corruption; Ukraine’s president once again declared
war on corruption; Chinese Prime Minister Li Peng lamented that his
country was losing ground in its war on corruption; President Kim Young
Sam deplored endemic corruption in South Korea; Russian Interior Min-
ister Anatoly Kulikov pledged to crack down on corruption and the gray
economy; Pakistan’s voters, disillusioned by perceptions of widespread
corruption, stayed away from the polls in droves; and public schools in
Washington were alleged to be rife with cronyism and nepotism.
Corruption scandals in recent years have also contributed to the downfall
of governments in Ecuador, Brazil, Italy, and India. Long-entrenched
ruling parties have been weakened, including Japan’s Liberal Democratic
Party and Mexico’s Institutional Revolutionary Party. In the United States,
two decades after the Watergate scandals prompted new rules regard-
ing political contributions and the passage of the Foreign Corrupt Prac-
tices Act (FCPA), campaign finance reform has reemerged as a major
political issue.
The number, variety, and importance of countries experiencing corrup-
tion scandals highlight both the complexity of this phenomenon and its
prominence as a global issue. When it is pervasive and uncontrolled,
corruption thwarts economic development and undermines political le-
gitimacy. Less pervasive variants result in wasted resources, increased
inequity in resource distribution, less political competition, and greater
distrust of government. Creating and exploiting opportunities for bribery

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at high levels of government also increases the cost of government, dis-
torts the allocation of government spending, and may dangerously lower
the quality of infrastructure. Even relatively petty or routine corruption
can rob government of revenues, distort economic decision making, and
impose negative externalities on society, such as dirtier air and water or
unsafe buildings.
The spread of democratization and market reforms should reduce cor-
ruption in the long run. In the short run, however, the opening of po-
litical systems may expose previously hidden corruption and create a
perception of increased corruption, or it may allow newly empowered
citizens to voice disgust more openly. Imbalances in the pace and scope
of political and economic reforms may also introduce new forms of cor-
ruption or allow more virulent forms to take hold. The privatization of
state-owned enterprises, for example, is thought to have been distorted
by bribes or favoritism in many countries. Real or perceived increases in
corruption during times of transition often threaten to undermine sup-
port for difficult reforms. Thus, whether the political and economic open-
ing that is occurring around the world is sustained may depend on the
ability of governments to do something about corruption.
Of course, corruption is not just a problem for developing countries
and countries from the former Soviet bloc. The fund-raising scandals in
the United States, the demise of the Christian Democratic Party in Italy,
and the dissatisfaction with politics as usual in a number of Western
European countries and Japan demonstrate the need for continued vigi-
lance if democracy is to be sustained.
Increasing global integration has also elevated the importance of cor-
ruption as an international issue. The impact of corruption on economic
development and political stability within countries sometimes spills over
to neighboring countries or the international community more broadly.
In an essay for the Financial Times (31 January 1997, 18), Grigory Yavlinsky
warns of an extreme case in which the potential consequences of cor-
ruption and a failure of reforms in Russia could spill far beyond its
borders, including “loss of control over nuclear weapons [and] nuclear
materials . . . development of a breeding ground for terrorism . . . [and
a] high probability of large-scale environmental disaster.” The recent dis-
missal and arrest of General Jesús Gutiérrez Rebollo as head of Mexico’s
drug control agency is an all too familiar—if still shocking—example of
the deep connections between corruption and international drug traf-
ficking.
More broadly, as economic globalization grows, so does the potential
impact of corruption on international flows of goods and capital. Interna-
tional financial institutions and bilateral assistance agencies are concerned
that resources intended to assist development in poor countries be used
as efficiently as possible. Developing countries are concerned that the
perceptions of corruption will cause them to lag as private capital increas-

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ingly displaces official finance in many emerging markets. Government
procurement, particularly related to large infrastructure projects in devel-
oping countries, has been a focus of several recent international anticor-
ruption initiatives. Finally, US policymakers are concerned that US firms
will become increasingly handicapped in international markets if their
competitors continue to use bribery as a tool to win business.
This discussion underscores the difficulties facing analysts and policy-
makers alike in addressing corruption problems. The first task in this
overview chapter is to summarize the key analytical lessons elsewhere
in this volume and in the literature with particular regard to patterns of
corruption that are most damaging to the domestic economic and politi-
cal development of countries. This chapter also examines the potential
international consequences of corruption in an increasingly integrated
international economy, before turning to policy options. It examines how
trends toward democratization and economic liberalization affect cor-
ruption and what types of institutional reforms may be needed to supple-
ment these broader systemic reforms. Next comes an assessment of the
international initiatives being pursued in a variety of forums, including
the Organization for Economic Cooperation and Development (OECD),
the international financial institutions, the Organization for American
States (OAS), and the World Trade Organization (WTO). Despite the
high-level attention recently given to anticorruption movements around
the world, there is a danger that the momentum may flag as it did after
a brief spurt of interest in the 1970s. The chapter concludes with priori-
ties for international action to keep that from happening again.

The Many Meanings of Corruption

Graft is what he calls it when the fellows do it who don’t know which fork
to use. —Jack Burden in All the King’s Men

The challenges facing corruption analysts begin with how to define it.
Most people know corruption when they see it. The problem is that
different people see it differently. The most commonly specified defini-
tion is something along the lines of the abuse of public office for private
gain (Klitgaard 1991, 221; Transparency International 1995, 57-58; Shleifer
and Vishny 1993, 599). But, as Johnston notes in chapter 3, the meaning
of each of the elements of the definition—abuse, public office, private
gain—is subject to debate. And “contention over who gets to decide
what those terms mean is [often] the most important political dimen-
sion of the [corruption] problem.” Ultimately, defining corruption is a
social and political process, although certainly some lines may be drawn
and some behaviors universally condemned.

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 What is clearly excluded from this definition is identical behavior that
occurs entirely within the private sector. Insider dealing, bribes to se-
cure private contracts, and other practices that might be considered cor-
rupt are ignored in this analysis, not because their economic effects are
small, but because the topic is already complex, and it need not be made
even more unwieldy.1 Both the private and public sectors may also at
times be plagued by “internal” corruption—theft or fraud that is perpe-
trated on a firm or public agency by its employees without the involve-
ment of an outside actor. Although graft in the public sector clearly
represents “abuse of public office for private gain,” it is not a major
focus of this analysis, which looks more closely at corruption arising
from the interaction between the public and private sectors.
Figure 1 illustrates this nexus, dividing the actors in a country into
three groups: private actors, elected politicians, and nonelected public
officials identified as bureaucrats and the judiciary.2 The figure high-
lights the fact that sectors often expected to behave autonomously within
their separate spheres in fact interact extensively. As emphasized by
Johnston (chapter 3), the key difficulty lies in balancing access and au-
tonomy so that public officials have both the information and indepen-
dence necessary to promote the public interest.
In this stylization, petty corruption occurs when private actors inter-
act with nonelected government officials, particularly lower-level, admin-
istrative bureaucrats. These transactions involve taxes, regulations, licensing
requirements, and the discretionary allocation of government benefits
such as subsidized housing, scholarships, and jobs. It is at the highest
levels of government, where political leaders, the bureaucracy, and the
private sector all interact, that grand corruption may occur. This consists
of government decisions that typically cannot be made without high-
level political involvement. Examples include the procurement of big-
ticket items such as military equipment, civilian aircraft, or infrastruc-
ture or broad policy decisions about the allocation of credit or industrial
subsidies. Distortions at both levels can arise from either economic influ-

1. The multibillion dollar bailout of failed savings and loan (S&L) associations in the
United States in the late 1980s is a striking example of the potential public costs of
private-sector corruption. Although economic forces, regulatory laxness, and the incen-
tives for S&L executives to take excessive risks were the major factors in the crisis, the
Congressional Budget Office (CBO) (1992, 12-13) cites estimates by others that fraud
accounted for anywhere from 3 percent to 25 percent of the government costs of the
bailout. With a total estimated cost of $180 billion, the lowest estimate of taxpayer losses
due to fraud would be nearly $5.5 billion, although it may actually be much larger (CBO
1993, 6). The role of deregulation in contributing to the crisis should also serve as a
cautionary note to those who would emphasize it as a remedy for corruption. The envi-
ronment in which deregulation occurs is crucial.
2. This stylization ignores the fact that judges in some countries, including in some US
states, are elected.

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ences, such as bribes, or from personal allegiances, such as ties of fam-
ily, tribe, or friendship.
At times the line dividing the licit and illicit interactions of private
agents and politicians becomes blurred, as illustrated so vividly by the
debate in the United States over campaign finance reform. Noonan (1984,
chapter 19) discusses the difficulties in distinguishing between bribes
and legal campaign contributions and the degree of reciprocity expected.
He offers seven hypothetical situations ranging from a case in which a
contributor gives to candidate X because he does not like candidate Y—
meaning he is not rewarding X and expects nothing from him—to a
case in which the contributor gives to candidate X with the expectation
that X will vote a particular way on a particular piece of legislation—
meaning full reciprocity is expected. In the latter case, Noonan notes
that the “distinction between bribe and contribution is close to collaps-
ing” (1984, 623). Situations like the latter, especially where contributions
to top political leaders or their parties are intended to influence specific
decisions, for example on defense procurements, can be labeled grand

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corruption. In general, however, because of the complexities involved
and because campaign finance reform does not lend itself to interna-
tional coordination, what is often called electoral corruption is largely
ignored in this discussion.
The final area of overlap in figure 1 is between elected and non-
elected government officials. The variety of interactions occurring here
prevents the use of a handy shorthand for the illicit activity that might
arise. One possibility is “bribe sharing,” if politicians pass on proceeds
from a bribe in order to influence how legislation is implemented by
bureaucrats or vice versa. Similarly, a high-level elected official might
share bribe proceeds with lower levels of the bureaucracy in order to
fulfill an understanding arising from a bribe. Another possibility is that
either bureaucrats or politicians might bribe a judge in order to avoid
prosecution or reduce a penalty. Less direct exchanges might also occur,
such as appointments of “friendly” judges—even relatives—with the ex-
pectation that they will treat the leadership’s friends with leniency.
In each of these spheres, lines must be drawn between legitimate and
illegitimate interaction. Kjellberg (1995, 342-43), for example, distinguishes
four types of corruption depending on whether the transgression flouts
legal, ethical, or social norms, and whether the transaction involves a
direct or indirect exchange. Bribes of public officials fall into the cat-
egory that is easiest to define because they are illegal in most countries
and typically involve a direct exchange of money for favors. An illegal
transaction involving indirect exchange, perhaps over a period of time,
may be more difficult to police and to prosecute in court than a bribe,
which is already difficult enough to detect given the secrecy involved.
Questionable transactions in which the exchange is indirect and does
not run afoul of the law will be the most difficult to discipline. An ex-
ample of the latter might be the high-level attention given to a trade
dispute between the United States and the European Union over ba-
nanas, following large campaign contributions by Carl Linder, head of
Chiquita Bananas, to both the Democratic and Republican Parties.
In political terms, what is ultimately being sought in all these cases is
influence. Each society will, through the process of political give-and-
take, draw a line somewhere between licit and illicit public-private inter-
actions. Though the divide may vary across countries and over time,
both Klitgaard (1991) and Noonan (1984) note that legitimate gifts can
usually be distinguished from illegitimate bribes: gifts can be given openly,
bribes cannot. Similarly, Heimann (chapter 8) suggests that corporations
unsure about where to draw the line should use the “newspaper test”:
if it would cause discomfort on appearing in tomorrow’s newspaper,
then don’t do it.
Figure 1 illustrates just one possible set of arrangements; many alter-
native configurations with different implications for the predominant type
or volume of corruption are possible. The relative size of the areas of

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overlap will vary with the relative size of government and the balance
of power between the executive and legislative branches of government.
The size of the overlaps reflects the potential volume of illicit trans-
actions, but it is not necessarily indicative of the magnitude of the im-
pact. Ideally, the figure would be three-dimensional, illustrating depth
or density as well. It is possible for some forms of corruption, such as
influence peddling, to be widespread but relatively shallow in impact,
while others such as grand corruption may occur less often and yet
have a deeper impact. Other concrete factors determining the preva-
lence of corruption are discussed below.

Sources of Corruption

The temptation to engage in corrupt behavior may arise whenever a

public official has control over something valued by the private sector
and the discretion to determine how it will be allocated (Rose-Ackerman,
chapter 2). And since every government in the world spends money
and taxes and regulates its citizens to one degree or another, “[w]hatever
size and type of state a country chooses, the threat . . . remains” (Klitgaard
1993, 231). But as suggested in figure 1, the incidence of corruption and
the predominant forms that it takes across countries might be expected
to vary with the size, structure, and type of government as well as the
types of activities in which it engages.
Klitgaard (1988, 75) summarizes the “basic ingredients of corruption”
in the following formula:

Corruption = Monopoly + Discretion – Accountability.

Rose-Ackerman (chapter 2) discusses in detail the factors that determine

the incidence and size of bribes. The aim here is to use what empirical
evidence is available to look for general patterns across countries.
First, a measure of corruption across countries is needed. Since 1995,
Transparency International (TI), a Berlin-based nongovernmental orga-
nization (NGO) established in 1993 to combat corruption around the
world, has released rankings of countries according to how corrupt they
are perceived to be. The ranking, which starts at zero for the most cor-
rupt and goes to ten for the least corrupt, is based on a survey of sur-
veys compiled by Professor Johann Graf Lambsdorff and is available
on the Internet. Because it includes only 54 countries, however, I have
added corruption ratings from a second source that covers more than
100 countries (see appendix B for more details).
As for evidence on the sources of corruption, it is difficult to measure
bureaucratic discretion across countries. But quantitative indicators of
potential monopoly—government size and the importance of industrial

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policies, trade restrictions, and other state interventions in the economy—
are available for many countries. Accountability of public officials, which
determines the likelihood that corruption will be punished, is more dif-
ficult to measure objectively. But accountability is derived in part from
the political structure in which officials operate, and qualitative indica-
tors of relative political openness are also available for a large number
of countries.
One simple measure of the role of the state in an economy is its size.
LaPalombara (1994, 338) argues that the larger the government, as mea-
sured by its share of GDP, the higher the level of expected corruption.
A large government share of GDP could indicate a large bureaucracy
and a lot of regulation and red tape; it might also be expected that the
larger the share of national income that passes through government
hands, the greater the opportunities for malfeasance. But, as LaPalombara
notes, the experiences of Norway and Sweden show that high levels of
government spending do not necessarily lead to higher levels of corrup-
tion. In fact, for 83 countries for which data are available, there is a
strong positive correlation between low levels of corruption and the level
of central government expenditure (table 1). Moreover, in the 16 most
corrupt economies for which data are available, the average share of
government expenditure is 21 percent of GDP, well below the 32 per-
cent average for the sample as a whole.3
More important than the size of government are the types of activi-
ties in which it engages. Most obviously, a government that restricts
economic competition—for example, through maintenance of trade re-
strictions or monopolistic state-owned enterprises—will create economic
rents (profits in excess of a normal return in competitive markets) and
thus greater incentives and opportunities for rent-seeking corruption.4
Table 1 presents evidence on the correlation between corruption and
the share of state-owned enterprises in nonagricultural GDP and be-
tween corruption and the openness of economies as measured by trade
shares. Though simple correlations do not demonstrate causality, both
coefficients offer at least some support for the hypothesis that more
direct government intervention in the economy will tend to produce
more corruption. By far the strongest of the correlations shown in table
1, however, is the qualitative measure of economic freedom developed

3. LaPalombara argues that this problem will be worse in developing countries where
“the institutions of civil society that might serve as watchdogs against and brakes on
corruption are very weak” (338). But there is also a positive correlation between the size
of government and the relative honesty of government when higher-income countries
are excluded from the sample.
4. As noted above, however, in sectors that are imperfectly competitive, collusion and
rent-seeking can occur whether ownership is private or public. Similarly, fraud and white-
collar crime are problems that can involve private as well as public managers.

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by Freedom House, which is a subjective index designed to measure in
66 countries the freedom to hold property, earn a living, operate a busi-
ness, invest one’s earnings, and trade internationally.5
Ades and Di Tella (1994) provide further evidence that the less com-
petitive the economy the greater the opportunities for corruption. They
conclude that in 55 economies in the early 1980s there was a significant
negative correlation between corruption and the share of imports in GDP.
They also find higher levels of corruption to be associated with qualita-
tive measures of market dominance by a few firms and with lax anti-
trust enforcement in a sample of 32 countries. In a subsequent work,
Ades and Di Tella (1995) find evidence that various measures of govern-
ment industrial subsidies are correlated with relatively more corruption,

5. The Freedom House scoring of economic freedom also includes the freedom to par-
ticipate in the market economy, but that part of the index is excluded because it includes
a judgment on how pervasive corruption is and the degree to which it interferes with
market forces. The construction of the particular form of the ranking used here is de-
scribed in more detail in appendix B.

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but they suggest caution in interpreting the results, again because of the
very small sample size (no more than 32 countries).
Although the level of potential rents created by the government’s role
in the economy may be an incentive for engaging in corrupt activities,
holding public officials accountable for those activities will offset the
temptation. Freedom House also gauges governments for the level of
political rights and civil liberties permitted and protected. This index
captures some elements of transparency (media freedom) and account-
ability (the degree to which citizens are allowed to express their opinion
through protest and the ballot box) that one would expect to find posi-
tively correlated with cleaner government. Indeed, table 1 confirms a
relatively strong correlation between political openness as measured by
Freedom House and lower levels of corruption. This supports Johnston’s
conclusion that “combating corruption and encouraging open, competitive
politics can be closely allied reform goals” (chapter 3).
Other factors that may affect the opportunities for corruption include
the stage of economic and political development and how development
interacts with cultural tradition. This is not to suggest, as is sometimes
argued, that certain cultures are inherently corrupt. Rather, the argument
is that broad environmental factors—history and culture—influence the
evolution of political and economic institutions, their legitimacy in the
eyes of the governed, and the capacity of government to deliver the
services demanded of it. Moreover, in times of transition when values,
standards, and institutions are undergoing change, countries may become
particularly prone to certain forms of corruption.
Table 2 lists countries perceived as more and less corrupt according to
the survey of surveys compiled by TI. It is immediately obvious that in
the eyes of international business, for whom and by whom these assess-
ments and surveys are compiled, relatively more developed and richer
countries are perceived to be less corrupt than poorer ones. It is likely
that the differences in relative levels of corruption between developed
and developing countries are somewhat overstated because of the way
corruption is usually defined and measured in these surveys. Neverthe-
less, there are a number of reasons that developing countries might be
more vulnerable to corruption and that, in turn, corruption might help
to keep them poor.
Low wages are frequently cited as a source of corruption (see Ul Haque
and Sahay 1996, 761). When public sector wages do not even cover sub-
sistence, the petty bureaucrat may be expected to supplement his salary
with “tips.” This situation recalls the European feudal era when “public”
office typically was regarded as private property, with the proceeds of
office serving as remuneration for services rendered (usually loyalty to
the sovereign) (Heidenheimer 1970, 10-12). Poverty is also often accom-
panied by illiteracy, which may make it easier for relatively more liter-
ate bureaucrats to exploit their clients. In addition to inadequate pay

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and illiteracy, other factors identified in a cross-country study of seven
developing countries in East Asia were: inadequate management con-
trols and lack of adequate technology for monitoring, poor recruitment
and selection procedures, including nepotism, poor working conditions
and facilities, lack of public information, and generally inadequate ca-
pacity to meet the demand for government services (Alfiler 1986, 66;
Lee 1986, 101-03).
Social attitudes toward government institutions are also important.
Colin Leys (1965) has argued that “new [post-colonial] states” were par-
ticularly vulnerable to corruption because “the idea of the national inter-
est is weak . . . [because] the ‘state’ and its organs were identified with
alien rule and were proper objects of plunder,” and because corruption
is easier to conceal where the rules are unclear, the commitment to them
is weak, or the enforcement institutions themselves are weak (the police
and judiciary, in particular). It may be that these factors put in motion a
vicious cycle whereby initial, supposedly transitional, conditions facili-
tate corruption that further undermines the state’s legitimacy and ca-
pacity, and evokes yet more corruption. This could help explain why
many “new” states suffer from pervasive corruption 30 years or more
after independence.

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Domestic Economic Consequences of Corruption

[S]ure, there’s some graft, but there’s just enough to make the wheels turn without
squeaking. —Willie Stark, All the King’s Men

Corruption leads to loss of much needed revenue and human talent for development,
distorts priorities for public policy, and shifts scarce resources away from the public
interest . . . . [P]olitical instability, corruption, and underdevelopment are mutually
reinforcing.
—Stephen Ouma, Corruption in Public Policy and Its Impact on Development

While positive effects in certain situations have been claimed for corrup-
tion, most scholars agree with Ouma that widespread corruption is det-
rimental to economic and political development. As detailed in the papers
in this volume, higher levels of corruption may lower total investment
(and thus growth) and skew the allocation of government spending,
particularly away from public education (see Mauro and Ruzindana).
Even when relatively contained, corruption can cause inefficiency in the
allocation of resources, greater inequities in income distribution, and the
loss of savings and investment due to the flight abroad of proceeds from
bribes (see Rose-Ackerman). In general, the consequences of corruption
depend on

n the degree to which economic incentives are already distorted by gov-

ernment policy;
n the degree to which economic incentives are distorted or social objec-
tives undermined by corruption; and
n the prevalence of corruption and the ability of the government to
control it.

Corruption as a Second Best

Some analysts and observers argue that corruption need not be inimical
to economic development. When facing an inept or understaffed bureau-
cracy or inefficient regulators, corruption may be a rational second-best
response (see Bayley 1970, Leff 1970, and Nye 1970). Also, where the rule
of law is weak, as in Russia and China today, corruption may serve as an
alternative means of contract enforcement. Samuel Huntington said, “In
terms of economic growth, the only thing worse than a society with a
rigid, overcentralized dishonest bureaucracy is one with a rigid, over-
centralized, honest bureaucracy” (1968, 498-99). In this context, bribes are
often called “speed money” or “grease” and are viewed not only as
reasonable but as enhancing efficiency in situations where red tape or
state control of the economy may be strangling economic activity. As

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suggested below, however, the conditions under which corruption has
positive economic effects appear to be fragile.
When the demand for government services exceeds the bureaucracy’s
ability to keep up, speed money, in the form of a “voluntary tax” or
“tip,” may be offered to a public official in exchange for faster or more
efficient service.6 This second-best solution has net positive effects for
the economy as a whole, however, only if the official is constrained—by
limits on discretion or political power or by careful monitoring—from
introducing new delays or regulations to increase bribe collections (Rose-
Ackerman, chapter 2; Alam 1990). Empirical evidence suggests the net
effects are often negative. The Santhanam Committee found in its inves-
tigation of corruption in India many years ago that the “custom of speed
money has become one of the most serious causes of delay and in-
efficiency,” because bureaucrats will do nothing until paid off (cited in
Myrdal 1970, 541). In Ecuador, under allegedly corrupt ex-President Abdala
Bucaram, the processing time for import shipments in the port city of
Guayaquil reportedly increased from two days to a month (Washington
Post, 16 February 1997, A36). More broadly, Mauro (1995, 695) found in
a statistical analysis of more than 60 countries that corruption is nega-
tively correlated with investment even in the presence of large amounts
of “red tape”—when corruption in the form of grease money would be
expected to be most beneficial.
Corruption may also be a second-best response when a bureaucrat is
bribed to ignore official duties that entail enforcement of regulations
that are inefficient, duplicative, or simply unnecessary. In this case, there
may also be a welfare gain. Edward Banfield (1975, 595, 23n) offers the
example of the New York City construction industry, which at the time
was governed by an 843-page building code that required as many as
130 permits from a variety of city departments for large projects. Banfield
cites a city commission study that found that most builders typically
applied for only the most important permits, often bribed officials to get
those permits quickly, and then paid off the police or inspectors to avoid
harassment for not having the others. The commission concluded that
none of the bribes they investigated “. . . resulted from a builder’s effort
to get around the requirements of the building code. What was being
bought and sold, an official said, was time.”
While corruption in particular situations may be efficiency-enhancing,
it is difficult to restrict it to only those situations. Because these trans-
actions are usually secret, it is difficult to monitor them to ensure that the
public interest is not subverted. In a competitive market with reasonably
honest enforcement agencies, especially the judiciary, Rauch’s “perfor-

6. In this case, Tilman (1970, 62) argues that corruption may be seen as “a shift from a
mandatory pricing model [for government services] to a free-market model”—what he
dubs “black-market bureaucracy.”

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mance rule” might work to ensure generally efficient outcomes (see his
comment in part I). Under this “rule,” if the builder does not abide by
essential safety regulations and the building collapses, he will go out of
business or go to jail and the corrupt inspector will also be punished. With
less competition and accountability, however, both parties will be more
likely to escape punishment and more tempted to cross the line, skirting
regulations or standards to cut costs in ways that affect quality and are not
simply timesaving. And when government benefits are allocated, what
ensures that a bribe only cuts through red tape and does not divert
benefits intended for “worthy” individuals to those with the ability to
pay?

Misallocation and Redistribution of Resources

The supply of bribes is often linked to a desire to influence the creation

or distribution of scarce government benefits or of the economic rents

that often arise when government intervenes in the economy.7 Bribes
that are extorted by government officials introduce distortions by raising
the cost of doing business. Whether extorted or voluntary, the degree of
distortion tends to rise with the rank of the official involved and the
value of the bribe (or other exchange) (see figure 2).
The distinction between bribes that are voluntarily offered or extorted
is similar to the distinction in Shleifer and Vishny (1993, 601-02) be-
tween corruption involving and not involving theft. In the latter case,
the official turns over the full cost of the public good or service (for
example, a license) to government coffers but is able to extract addi-
tional bribes, because he is in a position to withhold the service and in
effect create an artificial shortage. In this situation, competition among
suppliers of public services might reduce the probability that bribes will
be extorted, because the applicant can go to another official. Among
those most vulnerable to extorted bribes are firms with high fixed costs
and without alternative production locations, producers or brokers of
perishable goods, or uneducated taxpayers or other constituents in need
of government services. Firms working under contracts with fixed dead-
lines and penalties for delays will also be vulnerable to bribe demands.
In the case of corruption with theft, the official accepts a bribe in
exchange for lowering or waiving the price of the good (for example, by
influencing a tax bill), thus depriving the government of its due. As
Shleifer and Vishny note, “Corruption with theft is obviously more
attractive to the buyers” and competition among buyers in this type of

7. See Krueger (1974) and Bhagwati (1982) for analyses of the inefficiencies and wasted
resources arising from “directly unproductive” efforts to capture rents created by gov-
ernment interventions that restrict supply or artificially depress or subsidize prices.

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case will tend to increase the level of corruption (1993, 602; see also
Klitgaard 1988, 87).
Petty corruption generally refers to the routine government transac-
tions typically overseen by middle and lower-level bureaucrats, such as
tax payments, allocation of permits, and regulatory enforcement. At higher
levels of the bureaucracy and among the political leadership, officials
and politicians will tend to control more valuable assets or opportunities
and have more discretion in their allocation. At this level, decisions are
made regarding major procurements (including airplanes, military equip-
ment, power-generating equipment, and telecommunications infrastruc-
ture) and major investment projects (including roads, irrigation projects,
and dams). The greater the concentration of political power (i.e., the less

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accountable that politicians and high-level officials are) the greater the
opportunities will be to engage in corrupt behavior.
A cross-country study of administrative corruption in South Korea,
Malaysia, Nepal, the Philippines, Singapore, Thailand, and Hong Kong
analyzes the prevalent forms and incidence of corruption in three govern-
ment functions: taxation, expenditure, and regulation (Alfiler 1986) (see
also table 3 for a summary of opportunities for and consequences of
corruption). The study found that bribery was the most common form of
corruption (compared to nepotism and “internal” corruption, basically
defined as the theft of government property). As might be expected, it
found that reduction of taxes due was the primary corrupt objective in

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customs and other revenue collection agencies. With respect to govern-
ment spending, the study found that overpricing, substandard quality,
and the theft of government property for sale on the black market were
the most common consequences of corruption. In the regulatory area,
most of the cases look at police departments, where the most common
outcome of corruption was protection of illegal vice, such as prostitution
and gambling.
As Scott (1972, 66) has noted, “the pettiness of corruption refers only
to the size of each transaction and not to its total impact on government
income or policy.” Indeed, widespread evasion of taxes including cus-
toms duties may seriously detract from the ability of the government to
provide services. It is also likely to exacerbate the problem of low public-
sector wages and further spread the corruption virus. Consistent with
Shleifer and Vishny’s analysis of corruption involving theft, the follow-
ing example from Asia illustrates how competition among public officials
in tax collection agencies can increase the volume of corruption:

In Nepal, “chhoties”—customs offices situated in border areas—tried to com-

pete with each other in attracting taxpayers. One way was to reduce their
effective tax rates by charging duty only for a certain percentage of goods
imported or exported. Businessmen naturally flocked to stations which charged
the lowest rates. Some of these chhoties went to the extent of hiring bandits
to harass traders using certain routes favorable to their competitors (Alfiler
1986, 48).

If the government is unable or unwilling to reduce expenditures, rev-

enue shortfalls due to widespread corruption could also have severe
macroeconomic consequences.
Other potential consequences of petty corruption include

n negative externalities from unenforced regulations (environmental degra-

dation threats to worker or consumer health and safety),
n reduced government efficiency when hiring is based on favoritism
rather than merit,
n shortages of subsidized necessities (due to theft and smuggling), and
n misallocation of talent from productive to nonproductive rent-seeking
activities.8

Of course, similar illicit activities can occur at higher levels of bureau-

cracy. The more that higher level officials condone or engage in such
behavior, the more pervasive corruption and its effects are likely to be-
come.

8. For an analysis of the effects of rent-seeking opportunities on the allocation of talent,

and the follow-on effects on growth, see Murphy, Shleifer, and Vishny (1993).

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 Certain decisions, such as those concerning government procurement
and infrastructure, can only be made at higher levels of government.
Even where particular projects respond to social needs, corruption may
increase their costs, lower the quality, or lead to inappropriate choices
of technology. (The more complex the project, the harder it is to prove
that bribery rather than technical specifications determined the award of
a contract.) Worse are “white elephant” projects that enrich officials and
suppliers but serve little public purpose. A National Public Radio broad-
cast on corruption in Nigeria cited the construction of four incinerators
in Lagos, none of which worked properly and which together repre-
sented considerable excess capacity (Morning Edition, 27 August 1996;
see Rose-Ackerman, Ruzindana, and Tanzi for other examples).
Much of the corruption that comes to light involves white elephant
projects or military procurement.9 But data limitations and the plethora
of factors determining government expenditures make it difficult to move
beyond anecdotal evidence and demonstrate that in general more cor-
rupt countries spend relatively more on these types of activities. Mauro,
however, finds evidence that more corrupt countries spend relatively
less on public education and perhaps less on health, though the evi-
dence is weaker. This has two larger implications. First, some case stud-
ies have found an association between illiteracy and corruption (Alfiler
1986). Second and even more important is the contribution human capi-
tal makes to growth.
Corruption can also reduce the resources available to poor countries
by facilitating capital flight or by driving away international donors. It is
estimated that $60 billion left Russia between 1992 and 1996, with cur-
rent capital flight continuing at $12 billion annually, almost all of it
illegally (Financial Times, 14 February 1997, 3). Corruption may also con-
tribute to capital flight because of the desire to hide illicit wealth from
scrutiny or repossession, and the more uncertain the political situation,
the more likely that the fruits of corruption will be stashed abroad.
The potential impact on aid flows was demonstrated in the Kenyan
energy sector, which was suffering from inadequate capacity and regu-
lar power failures in 1995. “Donor allergy” had developed from what
one source described as “a slap in the face of the donor community”
during construction of the Turkwel Gorge dam several years earlier. The
contract was awarded without competitive bidding. In the judgment of
a report by the European Community, “the project ended up costing
many times its original, already inflated price as a result of kickbacks
paid to government officials” (Financial Times, 25 October 1995, 9). In
late 1995, the Financial Times reported that international donors had not
funded any power projects in Kenya for the previous five years.

9. Many of the deals that have been exposed as corrupt have involved military procure-
ment.

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 Finally, decisions on government procurement may lead to less effi-
cient resource allocation when bribery plays a role in the selection of
the supplier. If all eligible firms are willing to bribe and have the same
information, the most efficient supplier will be able to offer the highest
bribe, so that corruption would have no impact on resource allocation.
But some firms, including more efficient ones, may choose not to bribe
or may be constrained from doing so (as US firms are by the FCPA).
The secrecy surrounding corruption also makes information harder to
obtain. Firms that may not be the most efficient but that spend the most
time “making friends” may obtain inside information that allows them
to learn how much to bid and whom and how much to bribe. Since
favoritism is another common form of corruption, favored firms may
also collude with officials to raise the price of winning bids while setting
aside kickbacks for these cooperative officials.
Even though greater amounts of money will typically be required
when individual transactions take place at the higher political and ad-
ministrative levels, it is not clear that the aggregate effects of grand
corruption are necessarily greater than those of petty corruption. The
harassment element of petty corruption, in the form of extortion, for
example, might be expected to have a broader negative effect on private
economic behavior than would grand corruption, which is likely to be
limited to fewer sectors. Rampant petty corruption may also be more
politically corrosive over time because it affects more people on a regu-
lar basis.10 The point is that although a little bit of high-level corruption
may be more damaging to an economy than a little bit of low-level
malfeasance, pervasive petty corruption may still be quite harmful. Of
course, it is unlikely that petty corruption would become widespread in
the absence of corruption at top levels of the government, but one should
not underestimate the potential effects of low-level corruption simply
because individual cases may involve small sums.

Competition, Credibility, and the Systemic Effects of Corruption

When corruption and its consequences cannot be controlled and con-

tained, the credibility of government suffers, the security of property
rights erodes, and the level of uncertainty and risk in the economy in-
creases. If public officials cannot be relied upon to deliver on promises
when bribed, or if necessary approvals for a project cannot be ob-
tained at reasonable cost because officials at successive layers of bureau-
cracy demand a piece of the action, then corruption will prejudice eco-
nomic activity more than if it were controlled and promises were
credible.

10. I thank Michael Johnston for emphasizing this point. Also see Klitgaard (1988, 47-49).

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 Shleifer and Vishny (1993) analyze corruption markets that are mo-
nopolistic, competitive, or made up of independent monopolists. When
the market structure is monopolistic, a king, dictator, or ruling party (for
example the Communist Party in the old Soviet Union) is able to orga-
nize the market and ensure both predictability—it is known who must
be bribed and by how much—and security of property rights over gov-
ernment goods or services once the bribes are paid. When the market
among public officials is competitive, constituents shop around until they
find an honest official and avoid paying a bribe. In the real world, how-
ever, a business owner or investor often needs several permits from
more than one agency. If the public officials in this case act as indepen-
dent monopolists, each setting a bribe price with no regard for what the
others are doing, the total cost of the bribes will not be known in ad-
vance and may escalate to a level where the planned project becomes
unprofitable. The problem will be particularly acute if there is free entry
into the bribe market; that is, if bureaucrats can create new rules or
regulations in order to get in on the action. In this case uncertainty is
greater and property rights are not secure. Under these circumstances,
economic activity that requires interaction with the government will
either move into the informal sector, move abroad (or to another city or
region), or in extreme cases, such as in Russia today, “mafias” may move
in to provide the protection for property rights and contract enforce-
ment that the government cannot.
This analysis provides the backdrop for the empirical evidence pre-
sented by Mauro (chapter 4, also 1995) on the impact of corruption on
investment and growth. The cross-country data that are available do
not clearly distinguish between corruption with and without “theft” or
whether it is of the petty or grand variety. However the rankings that
Mauro and others have used to study the effects of corruption typically
attempt to measure the prevalence of corruption in a country. Thus,
these assessments could be considered as indicative of the degree to
which corruption is or is not controlled.
As might be expected from Shleifer and Vishny’s model, Mauro finds
that higher levels of corruption have a significant and negative correla-
tion with lower levels of gross domestic investment. More recently, Wei
(1997) also attributes a large negative impact on foreign direct invest-
ment (FDI) to corruption.11 One problem in interpreting these results
arises if corruption is endogenous to economic conditions; that is, the
observed lower levels of investment are due to the effects of poverty

11. Wei, using the data on corruption from Mauro (1995) and data on FDI flows from 14
source countries into 45 host countries, finds that an increase in the level of corruption
from that of Singapore to that of Mexico is equivalent to a 21 percentage point increase
in the tax rate on multinationals. In his results, a one percentage point increase in the tax
rate is associated with roughly a five percent reduction in FDI.

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rather than corruption. In many cases, however, the causality is likely
to run in both directions, with corruption and poverty reinforcing one
another.12
While the negative relationship between corruption and investment
may hold in general, some analysts argue that, in countries where the
rule of law is weak, corruption may substitute for other forms of con-
tract enforcement and decrease uncertainty for investors. Betancourt (1995)
argues that China, as it undergoes the transition to a market economy,
may benefit in the short run from corruption as a substitute for legal
forms of contract enforcement. Wei observes that China in recent years
has become the largest recipient of FDI among developing countries,
and he argues that China may be a special case, because of the large
proportion of its FDI from overseas Chinese. He notes that “overseas
Chinese capital apparently is less sensitive to corruption, possibly be-
cause [these investors] are better able to use personal connections to
substitute for the rule of law . . .” (Wei 1997, 14).
China aside, Wei concludes that “the dampening effect of corruption
on FDI is greater for East Asian countries than for the world as a whole”
(1997, 12).13 Nevertheless, relatively high levels of corruption in many of
the economies in that region appear not to have prevented relatively
rapid growth. It is possible that these countries would have grown even
faster had corruption levels been lower. Borner, Brunetti, and Weder
(1995, 58-61), however, argue that it is the government’s ability to keep
promises and protect property rights that is the key to growth, not how
corrupt it is. They cite the experience of a businessman who responded
to a survey and had worked in both Brazil and Indonesia. Both coun-
tries received similarly poor ratings for the honesty and efficiency of the
bureaucracy and judiciary but very different ratings for political credibil-
ity. The businessman commented “that while doing business in Brazil
he was always afraid of large policy swings that could destroy his mar-
kets, whereas while working in Indonesia he was so convinced that this
could not happen that he did not even read the newspapers.”14
Borner, Brunetti, and Weder also note, however, that corruption typi-
cally has negative distributional consequences. In China, for example,

12. Mauro addresses the potential endogeneity problem by substituting an “instru-

mental variable” for corruption in some tests, as well as by controlling for per capita
income.
13. Wei’s results might also be skewed by the relatively small number of host countries
in his sample and the absence of government policy indicators. For example, Japan and
more recently South Korea have actively discouraged inward FDI in many sectors.
14. The issue of how some East Asian countries have been able to contain corruption
and control its effects is obviously related to the larger issue of how the governments of
these countries were able to intervene in their economies and use industrial policies
relatively effectively when so many other countries have failed to do so.

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where rapid economic growth is creating social strains among ethnic
groups and economic classes and between rural and urban areas, cor-
ruption has become a rallying point for discontent. Recent economic
troubles in Japan and South Korea also raise questions about the stabil-
ity of corruption equilibriums. In particular, the corruption-linked col-
lapse of Hanbo Steel, which may cost the South Korean government
billions of dollars in payments to exposed banks and suppliers, under-
scores the risk of a failure in institutional controls and of corruption
spinning out of control.
In sum, corruption that creates broadly felt negative externalities, such
as unsafe infrastructure or environmental degradation, will be more
damaging socially and politically than corruption that simply reallocates
economic rents arising from government policy or imperfect competi-
tion. Most damaging of all, however, is corruption that is pervasive at
all levels. Given the difficulties in controlling corruption, it is not likely
to be compatible with sustainable long-term economic growth, just as it
is not compatible with sustainable democracy.

Political Consequences of Corruption

A dog with a bone in his mouth cannot do two things: He cannot bark and he cannot
bite. —Mexican Dictator Porfirio Díaz,
explaining how he ruled so long (1876-1911)

[Corruption is] the gangrene of democracy, the AIDS of democracy.

—Miguel Angel Burelli Rivas, Foreign Minister of Venezuela

Until recently, most of the literature on corruption was in the domain of

political science or sociology. Whereas studies on corruption as a prob-
lem of economic development have focused on poor countries in the
late twentieth century, the literature on the political causes and conse-
quences of corruption covers early industrial England and the United
States at least as extensively as it is does today’s developing countries.15
There is also a large and rapidly growing literature on the role of money
in politics, influence peddling, and campaign finance reform.
Johnston (chapter 3) analyzes the political sources and consequences
of corruption in terms of imbalances in domestic political and economic
opportunities and in the relative accessibility and autonomy of elites. He
identifies four syndromes. Two of them, interest-group bidding, typical
of liberal democracies, and patronage machines, such as in Mexico, may
involve corruption that is “significant but bounded in scope, serving
more to limit the competitiveness of politics and the responsiveness of

15. See, for example, Heidenheimer (1970) and Heidenheimer, Johnston, and LeVine (1989).

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government than to threaten their viability.” In the other two syndromes—
elite hegemony in China today, and fragmented patronage as in Italy
or Russia—corruption may spiral out of control and threaten political
stability.
That the political effects of corruption remain a concern for devel-
oped, as well as developing, countries is clear from the unseating of the
Christian Democratic Party in Italy, the loosening of the Liberal Demo-
cratic Party’s hold in Japan, several scandals in France and Belgium, and
the growing demands for campaign finance reform in the wake of the
most recent and expensive US presidential election in history. In the US
case, there are few direct, tangible links between political contributions
and policy outcomes, though unequal access certainly influences the policy-
making environment. The primary political cost of influence-peddling
“corruption” is increased cynicism among voters and the alienation of
citizens from their government. Cynical use of corruption scandals by
political opponents exacerbates the problem and may contribute to
political gridlock. The need to raise large sums of money for political
campaigns also dissuades some would-be office-seekers from becoming
candidates.
Analyses of political corruption in less developed societies, especially
those focusing on the operation of patronage machines, sometimes find
beneficial effects. In this framework, corruption helps provide a sepa-
rate, possibly more accessible communication network, soften the inter-
action between citizens and a government they may not understand,
and may even prevent violence.16 It is also argued that corruption some-
times provides access for groups otherwise excluded from political influ-
ence, for example, ethnic Chinese minorities in Thailand and Indonesia
(see Scott 1972 and Schwarz 1995). Similarly, an expert on Asian politics
argued recently that corruption in China had had some positive eco-
nomic effects by providing access to marginalized groups, “which has
led to the diversification and strengthening of the economy” (Hillstrom
1996, 4).
Professor Sun Yan concluded, however, that corruption had simulta-
neously “served to benefit the Mafia and entrenched elites,” and that in
general “its undemocratic and detrimental nature causes moral decay,
social discontent, and political alienation” (Hillstrom 1996, 4). Johnston
(1993, 193) also concludes that

Sometimes corruption appears as an adaptive force, “humanizing” government

and enabling citizens to influence policy. More often, corruption allows those
with disproportionate money and access to protect and enhance their advan-
tages. . . .

16. See Huntington (1968), Johnston (1993), McMullan (1970), and Scott (1972).

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Equally important, as Johnston points out, in some cases “corruption
props up institutions and regimes that might otherwise be ready for
needed changes.”
On the other hand, corruption may be destabilizing in situations where
it is used as a club by the “outs” to attack the “ins” (see also McMullan
1970, 317-18). Opposition parties may exploit scandals, exaggerating or
even inventing evidence of corruption in order to undermine support
for reforms that affect their constituents or to gain power so they can
get a piece of the action. The seemingly endless rotation of military
coups and civilian governments in Nigeria is one example (Diamond
1993); Ghana during and after Nkrumah is another (Werlin 1979; LeVine
1989). Thus, in assessing the impact of corruption on political stability, it
is important to distinguish between corruption and scandal (Johnston,
chapter 3).
Corruption may be particularly dangerous and destabilizing during
times of transition. During times of rapid change, the institutions that
could control corruption may be weak or underdeveloped. Liberaliza-
tion and deregulation of the economy, while helpful in the long run,
may spur corruption in the short run if development of the institutional
structure lags. And, if the gains of liberalization seemed to be skewed
because of corruption, and corruption is associated with democratization
and market capitalism, reforms become more difficult to implement and
could even be short-circuited, as was feared might happen in Russia in
its 1996 presidential election.

Distortion of International Trade and Investment

Most public statements about the evils of corruption include a reference

to distortion of international competition and trade flows. Former US
Trade Representative and Commerce Secretary Michael Kantor called
corruption “a virus threatening the health of the international trading
system” (Kantor 1996b). The United States has a particular interest in
the impact of bribery on international transactions because of the per-
ception that the US FCPA presents a significant competitive disadvan-
tage for US firms competing with multinational firms from countries
that do not penalize and may even implicitly encourage the use of bribes
to win contracts abroad.
The net impact of corruption on trade is not clear, however. Bribes
could lead to either an increase or a decrease in the volume of trade,
depending on the circumstances. Although corruption may well affect
the composition of trade, with regard to products and countries, it is
not clear that focusing on corruption is a more effective policy response
than focusing on the conditions that give rise to corruption or on the

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observable policy outcomes that may be influenced by corruption. The
following sections examine these questions and analyze the potential
impact of the FCPA on US trade and investment.

Corruption as an Impediment to International Trade

The general aims of the international trade rules under the WTO are to
remove impediments to trade and, to a lesser degree, investment, and
to eliminate discrimination among member countries. Depending on the
circumstances, however, corruption may either increase or decrease im-
pediments to trade and investment. Impediments will be increased if
corruption is out of control, too costly, or primarily in the form of extor-
tion. Impediments might be lower if corruption is a second-best response
to existing barriers or other distortions. Also, many procurement mar-
kets, such as aircraft, are sectors with economies of scale and imperfect
competition, so corruption may redistribute economic rents but have
little effect on global welfare.17 Moreover, while WTO rules are intended
to constrain government trade policies, many instances of corruption
subvert government policy. When illicit payments influence the outcome
of government policy and lead to the creation of a new trade barrier or
an illegal export subsidy, the existing rules will normally be sufficient to
address the consequences.
Customs agencies are notorious for corruption in many countries. The
net impact, however, is not obvious. Extortion of a shipper by customs
officials, who, for example, threaten to allow a shipment of bananas to
rot on the dock, could reduce the level of imports if the shipper is
unable or unwilling to pay the bribe. But imagine an alternative sce-
nario: suppose the exporter of the bananas offers a bribe if the customs
official will lower the duty amount. In that case, rather than reducing
trade, corruption might actually increase it (while lowering public rev-
enues). And, since the anecdotal evidence suggests that tax evasion is
perhaps the most common motive for bribery, it seems plausible that it
might increase trade at the margin (Klitgaard 1988; Alfiler 1986). One
would also expect that, the more restricted trade is, the more likely that
an increase in trade will result from corruption.18 Either scenario could
cause problems for firms prevented from offering bribes—whether from
moral sensitivity or by the law. In either case, exporters of homoge-
neous or highly perishable products would be most vulnerable, those
selling specialized and technologically sophisticated products less so.

17. See the discussion of these issues in Rodrik and Rauch (chapter 5).
18. See Wei (1997) for a discussion of the black market and the smuggling of cigarettes
and other products into China.

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 In developing an appropriate international policy response, the im-
pact on the policy of the countries involved also matters. Does cor-
ruption influence the formulation of policy and lead to discrimination
against imports or foreign investment? Or does it subvert the govern-
ment’s declared policy and international commitments? In the first case,
the injured WTO member may be able to use existing rules to challenge
the discriminatory policy directly. For example, several US steel compa-
nies recently asked the Clinton administration to file a complaint with
the WTO claiming that South Korean government subsidies to Hanbo
Steel, allegedly influenced by bribes to government officials, had dis-
torted world steel markets (Journal of Commerce, 21 February 1997, 3A).
In other cases where corruption subverts government policy, and par-
ticularly where it deprives the government of customs revenue, the
government has an incentive to act, and the problem may reflect inad-
equate government capacity rather than intent to discriminate.
If corruption affects primarily the allocation of trade flows and not
the volume and if any resulting discrimination among suppliers is due
primarily to differences in treatment of transnational bribery among
exporting countries (rather than the importing government’s policy), it
might be more appropriate to analyze the problem as a potential export
subsidy. As with other export subsidies, which are generally prohibited
by the WTO, no exporter gains relative to another if equivalent sub-
sidies are available to all. The prevention of subsidy wars is in fact the
major incentive for countries to negotiate agreements to constrain them-
selves. But in the case of transnational bribery, where a major competi-
tor, the United States, is unilaterally constrained by the FCPA, the in-
centive for other countries to enact controls is weaker. This has been a
major source of concern and frustration for US policymakers and firms.

The FCPA as a US Export Disincentive

Following the corruption scandals of the 1970s involving illicit pay-

ments by US multinational corporations to both US and foreign politi-
cians, there was some international discussion of bribery in the context
of codes of conduct for multinational investors. However, these discus-
sions did not result in much concrete action (see Pieth and Heimann,
chapters 6 and 8). Only in the United States did the Congress pass
legislation, the FCPA, which was signed into law by President Jimmy
Carter in 1977, making it illegal for US firms to pay bribes to foreign
government officials.
From the beginning, some US firms complained that the unilateral
nature of the FCPA placed them at a competitive disadvantage relative
to international firms based in other countries. In the 1988 Omnibus
Trade and Competitiveness Act, Congress amended the FCPA with the

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objective of reducing the burden of compliance. In that spirit, Congress
also added a provision calling on the president to negotiate an agree-
ment with other OECD members addressing transnational bribery. Little
action was taken on the latter provision until President Bill Clinton took
office in 1993 (see statement by Larson in appendix A). The attention
given to the issue by the Clinton administration raises two questions:
Why is international corruption suddenly so high on the US trade policy
agenda? How significant a competitive disadvantage is the FCPA and
how far should the United States go in addressing it unilaterally?
Why now? Not long after the Clinton administration entered office,
Commerce Secretary Ron Brown launched a major export advocacy
effort that eventually evolved into the “Big Emerging Markets” (BEM)
strategy. As of 1996, the BEMs were considered to be Argentina, Brazil,
Mexico, the Association of Southeast Asian Nations (Singapore, Indone-
sia, Thailand, Malaysia, the Philippines, Brunei, and Vietnam), the “Chi-
nese Economic Area” (China, Hong Kong, and Taiwan), India, South
Korea, Poland, Turkey, and South Africa (US Department of Commerce
1995). Comparing this list to table 2, one finds that the three largest
BEMs, China, India, and Indonesia, along with the Philippines, are among
the most corrupt of the 54 countries in the TI ranking. The TI rankings
for Argentina, Brazil, Mexico, Thailand, and Turkey are also below the
average score for the sample as a whole. The rankings for Taiwan and
South Korea are at about average while Malaysia, Poland, and South
Africa receive scores slightly above the average.
The administration also identified “big emerging sectors,” including
energy, health care, information, and transportation, which are among
those most likely to have a large degree of state ownership or regulation
in many countries. Firms in several of these sectors were also reported,
during an investigation by the US Securities and Exchange Commission
(SEC) of illicit payments in the 1970s, to have made questionable pay-
ments to foreign public officials (Jacoby, Nehemkis, and Eells 1977, 141).
(Although the FCPA had not yet been passed and these payments were
not illegal under US law, the SEC was investigating whether false report-
ing of the payments could have misled investors or deprived them of
pertinent information.) Of the 63 health care, drug, or cosmetics firms
responding to SEC investigators, 29 reported making “questionable pay-
ments.” In addition, 31 percent of aerospace and 22.5 percent of air
transport firms reported making such payments, while between 15 and 20
percent of the firms responding in office equipment, machinery, and
electronics and electrical equipment admitted to making such payments.
(Industry definitions can be found in Standard & Poor’s “Classification of
Industries” published at that time.) A cursory review of press articles over
the past two years reveals that the big emerging sectors—and the military
equipment sector—are also where corruption has been most often ex-
posed.

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 But present levels of exports to these countries and in these sectors
do not tell the whole story. These markets were selected not just
because they were big but also because they were among the most rap-
idly growing. The size and rapid growth of the BEMs mean that their
infrastructure needs are enormous. The US Commerce Department has
estimated that new infrastructure projects in Asia alone may be worth
over $1 trillion over the next decade, with perhaps another $500 billion
in such projects being launched in Latin America (US Department of
Commerce 1995, 22). With sluggish growth in much of the rest of the
world, competition for exports to and investment in the BEMs is ex-
pected to be intense. This was why Secretary Brown in a 1995 report on
the topic suggested that the US and its major allies and competitors
should consider developing

[a] framework for keeping competition in which governments themselves par-

ticipate within bounds. That would mean taking a look together at all the
tools which are being used, and trying to develop some rules of the game in
terms of financing (including foreign aid), illicit payments and other kinds of
arrangements which are being used to win deals (US Department of Com-
merce 1995, 45).

How important a competitive factor is the FCPA? For the FCPA to have
an important overall effect on US sales abroad, at least the following
three things would have to be true: all or most of the large markets in
which US firms compete would have to be corrupt; evasion strategies
would have to be difficult or nonexistent; and there would be no other
offsetting factors.
Because of the nature of bribery, it is obviously difficult to estimate
with much confidence the overall magnitude of the cost of corruption.
The US Department of Commerce has estimated that bribes may have
contributed to US firms losing some $11 billion in contracts over the
period from early 1994 to late 1996 (Trade Promotion Coordinating Com-
mittee 1996, 12). The department regards this as a low estimate, be-
cause this figure includes only the contracts that have come to light
and because it excludes potential follow-on sales (for example, of re-
placement parts). There has been some confusion over the magnitude
of these estimates, however, and it is difficult to evaluate their validity
because the analysis on which they are based remains classified (see box
1).
Moreover, in evaluating the effects on US exporters it is also impor-
tant to keep in mind the net effects. As long as there are some situations
where it is not necessary to bribe—because government officials are honest
or other safeguards are in place—it is possible that bribes shift sources
and destinations around without substantially changing global market
shares. In a study of the Institute for International Economics on self-
imposed export disincentives, Richardson (1993, 131) concluded that “Across-

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the-board regulatory burdens, such as procedures mandated for all busi-
nesses by the FCPA, seemed generally unimportant.”19
Another widely cited study of the effects of the FCPA on US foreign
direct investment and exports of aircraft did find a statistically signifi-
cant negative impact on these variables following passage of that law in
1977 (Hines 1996). But the analysis is of the period immediately follow-
ing passage of the original FCPA so it would not capture possible offset-
ting effects following the 1988 amendments or other possible adapta-
tions by American firms (see below). Using a more recent and possibly
more reliable data set, Wei (1997) finds that corruption on average has a
depressing effect on foreign direct investment. But he finds no differ-
ential impact on US investors. Multinational firms in other countries
apparently are just as cautious as are US investors when it comes to
risking their capital in nations where corruption is widespread.
Even if past competitive effects have been limited, however, some of
the fastest-growing markets and most lucrative project opportunities are
in emerging markets, many of which have also been judged relatively
corrupt. Thus, there will now be more demand for corruption-prone
types of exports and contracts in more corrupt countries. A second source
of growing concern for US exporters might be in the nature of the fi-
nancing available for these projects. The World Bank and other official
financial institutions, international and domestic, usually require inter-
national competitive bidding and the right to review contract awards
before disbursing funds. A decade ago, the official development finance
was 1.7 times greater than foreign private capital flows for developing
countries ($36.7 billion versus $21.4 billion). In 1995, that relationship
had roughly reversed, with private capital flows exceeding official flows
by 60 percent ($78.7 billion private versus $48.6 percent official). With a
greater number of large projects being financed by the private sector, it
is possible that the bidding process could become less transparent and
more vulnerable to corruption (World Bank 1996d, 35).20

19. This conclusion was based on an analysis of the impact of the regulatory costs of
compliance with the FCPA, i.e., of the additional accounting and auditing costs of the
disclosure requirements, and not the potential effects on competitiveness of being re-
strained from bribing in markets where competitors in fact do. Richardson’s broader
finding of little impact was based on the source-shifting behavior described above and
on the fact that no firm interviewed by him mentioned the inability to bribe as a com-
petitive disadvantage.
20. A second potential source of protection for US exporters when official finance is
involved is the concern of the World Bank and other international financial institutions
that the shares of officially funded procurements that supplier countries receive are
not too out of line with their financial contributions to the organization. For example,
the US share of World Bank payments to supplier countries for foreign procurements is
roughly 19 percent (both for the 1996 fiscal year and cumulatively), slightly above its
current quota of 17.4 percent (World Bank 1996a, 225, 239).

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 Just the same, the prohibition against bribing foreign officials may not
be as great a handicap for US firms as has been claimed. Some firms
have used the FCPA as a shield to protect themselves from extortion by
corrupt foreign officials. George David, president and CEO of United
Technologies Corporation, indicated at a meeting on ethics in 1993 that
following a crackdown on illicit payments by a subsidiary in Mexico, not
only were market share and profitability maintained, but the firm was
“able to shorten [its] long, long overdue collection period on govern-
ment receivables in one of the more notorious problem countries” (David
1994, 8). Just as a reputation for honesty may serve as a shield, a repu-
tation for being willing to pay bribes may open one’s firms to cease-
less demands for more. Some China observers note that whereas honest
operations may be more challenging and time-consuming, they may
avoid trouble in the long run (Ettore 1994, 21; see also Givant 1994). In
another example, Colgate-Palmolive was reported to have used the FCPA
as a shield to avoid paying bribes or being forced to engage in “nepotis-
tic employment” practices while building a $20 million operation in Guang-
dong Province in 1992 (Pines 1994, 210-11).
Also, where bribes are an additional operating cost (as opposed to
being offered to win a contract or other business), firms that can avoid
internal corruption among employees and external corruption among
suppliers, distributors, customers, and regulators should be relatively more
cost-efficient and competitive. Furthermore, if corruption is as common
as alleged, the losers must be paying bribes for nothing, further raising
costs. Pines (1994, 211-12) notes that, because they lack access to reliable
information, some firms may overpay or pay someone who fraudulently
claims to have the “right connections.” The perception that contracts
can only be won through bribery could also result in reduced innova-
tion and laziness on the part of some firms. Pitman and Sanford (1994,
18-19) argue that the FCPA could have offsetting benefits because it
“mandates that [firms] find other, more effective methods to ‘get the job
done’ when they previously may have thought bribery was their only
option.”
At the other end of the spectrum, some companies may decide to
ignore the FCPA and risk getting caught. Lockheed Corporation (now
Lockheed Martin Corp.), whose bribery of Japanese politicians in the
1970s brought down a government and contributed to the passage of
the FCPA, pleaded guilty in 1995 to bribing an Egyptian official to win
an aircraft supply contract (Wall Street Journal, 29 September 1995, 1). In
early 1996, two other large US multinationals were under investigation
for possible violations of the FCPA, but nearly a year later, charges had
not been brought (National Journal, 20 April 1996, 871).21

21. As of early April 1997, the US Justice Department declined to confirm or deny whether
the investigations were taking place. In March, however, following settlement of an FCPA

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 But there are also other, less risky methods of evasion. Among other
changes, the amendments to the FCPA in the Omnibus Trade and Com-
petitiveness Act of 1988 explicitly defined allowable facilitating payments
for “routine governmental” services (licenses, permits, paper processing,
provision of police protection, other government services) and created
two affirmative defenses: that the payment is legal in the country where
it occurs; or that the payment was for “reasonable and bona fide expen-
diture” such as travel or lodging for training or other trips abroad for
government officials. According to a source at the US-China Business
Council, “You’d think Disney World was a training site” (Wall Street
Journal, 29 September 1995, 1; see also New York Times, 12 April 1996,
A10). Wei (1997, 5n) also reports that conversations with Chinese busi-
nessmen and officials suggest more subtle, possibly legal forms of influ-
ence, such as study trips for officials to tour a foreign country, are more
commonplace than outright bribes.
Finally, the aggressive advocacy and export promotion efforts of the
Clinton administration can provide at least partial and, perhaps, tempo-
rary offsets for any hypothetical disadvantage posed by the FCPA.22 For
example, although the Middle East is widely thought to be one of the
most corrupt regions in the world and aircraft one of the sectors most
vulnerable to distortion by bribery, President Clinton’s personal inter-
vention in 1995 helped to clinch the sale to Saudi Arabia of $6 billion in
commercial aircraft for Boeing and McDonnell Douglas. At the time,
presidential spokesman Michael McCurry was quoted as saying that the
President was not at all hesitant in using his influence to “go to bat for
American companies” (International Trade Reporter, 1 November 1995, 1824;
Wall Street Journal, 18 December 1995, 1). The 1996 national export strat-
egy report claimed that US government advocacy efforts had helped US
businesses to make deals worth over $40 billion, nearly four times more
than the value of contracts allegedly lost to bribery (Trade Promotion
Coordinating Committee 1996, 89).
Whatever the current or anticipated impact, the Clinton administra-
tion has stepped up efforts to get other countries, particularly OECD
member states, to take action against transnational bribery. In 1996, the
Department of Commerce revised its “advocacy guidelines” to buttress
the FCPA and to ensure that US-based firms and especially subsidiaries

case with Triton Energy over questionable payments by its Indonesian subsidiary, the
head of enforcement for the Securities and Exchange Commission, William McLucas,
expressed concern that bribery of foreign officials might be becoming a significant prob-
lem for the first time since the FCPA was passed (Bloomberg News, 5 March 1997).
22. Some American businessmen and government officials argue that the United States
lags behind other countries in these other forms of export promotion, so there is little or
no counterweight to the disadvantage posed by the FCPA. See the Trade Promotion
Coordinating Committee’s report on National Export Strategy (1996).

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of foreign-owned multinationals would not benefit from US export pro-
motion programs if they or any part of their worldwide corporate fam-
ily engaged in bribery. The new requirements state that for US-based
subsidiaries or affiliates of foreign multinationals to qualify for US gov-
ernment support when bidding on an international contract, the parent
corporation must actively enforce a policy prohibiting the bribery of for-
eign officials (Trade Policy Coordinating Committee [TPCC] 1996, 119-
122).23 The Export-Import Bank (Eximbank) and the Overseas Private
Insurance Corporation (OPIC) also increased their reporting requirements
for beneficiaries of their programs. US subsidiaries of foreign-owned com-
panies are already covered by the FCPA. The major aim of the changes
in the advocacy guidelines is to put pressure on their overseas parent
corporations to adopt stronger policies against bribery.
Some American policymakers have advocated even stronger unilat-
eral action. One proposal, going beyond the augmentation of reporting
requirements, would have explicitly conditioned eligibility for assistance
from the Eximbank or OPIC on the adoption and enforcement of an
antibribery policy by the corporate parent. That position was rejected as
overly intrusive in the affairs of recipient countries who would also be
party to the contract. Potentially more controversial were the oft-voiced
hints dropped by Michael Kantor when he was Secretary of Commerce,
and earlier as US Trade Representative, that transnational bribery would
be defined as an unfair foreign trade practice constituting grounds for
retaliatory sanctions under section 301 of US trade law (see for example,
Kantor 1996a).
In sum, there is little evidence that the FCPA has a major negative
impact on overall US exports. The impact on particular sectors is more
significant, and given the potential for more than $1.5 trillion in infra-
structure projects in Asia and Latin America over the next decade, US
firms in these sectors have reason to be concerned about possible distor-
tions from bribery. With globalization and democratization making cor-
ruption less and less acceptable around the world, however, US firms
that have been forced by the FCPA to become more innovative and
aggressive should be well placed to reap the benefits. The FCPA could
also be a competitive advantage in some newly democratizing countries
where politicians or public officials concerned about negative publicity
might prefer a US firm because they can more credibly claim that no
corruption was involved. For these reasons, and also because mean-
ingful international action against corruption will require cooperation
from other governments, the United States should avoid aggressive uni-
lateral actions in this area (see also Heimann, chapter 8, and Pieth, chap-
ter 6).

23. According to the TPCC report, government support in this context “can take the
form of letters, representations, or other interventions by US officials” (1996, 119).

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Domestic and Institutional Reforms
to Control Corruption

Just as the most important sources and consequences of corruption are

internal to countries, the fundamental reforms that will most effectively
reduce it over time must take place at the national level in the countries
where it occurs. And since the specific sources, types, and consequences
of corruption vary widely among countries, no simple prescription will
fit all cases. Each country must individually identify the most important
sources of corruption and the consequences that most cry out for atten-
tion. Nevertheless, any analysis of remedies to corruption must begin
with its broad underlying sources: restricted economic and political com-
petition, excessive bureaucratic or political discretion, and a lack of trans-
parency and accountability. This section examines how broad-based eco-
nomic and political reforms can reduce the opportunities for corruption,
as well as how these reforms must be supplemented by institutional
reforms to improve governance and state capacity to sustain reductions
in rampant corruption.

Macro Reforms and Their Limits

Reforms that open up and liberalize the economy and increase competi-
tion, by, for example, lowering trade barriers, reduce the opportunities
and the pool of rents available for bribery. Economic reforms that elimi-
nate unnecessary regulations and simplify essential ones reduce the power
and discretion of public officials, thereby removing opportunities for ex-
tortion. Political reforms that give more power to citizens as voters and
as users of public services and endow the media with greater freedoms
make corruption riskier and increase both the chances of detection and
the potential penalty for politicians who get caught. In the long run, all
of these reforms should limit the opportunities and incentives to engage
in corrupt behavior.
In the short run, however, the balance between political and economic
reforms, the sequencing of particular reforms, and the priority given
to implementing corollary institutional reforms will determine whether
corruption can in fact be reduced. The transfer of state-owned enterprises
and other assets to the private sector illustrates many of the pitfalls
awaiting would-be reformers. Privatization (or deregulation) in a situation
where there is an underlying market failure or the market is not competi-
tive may not result in net gains for social welfare. For example, corruption
may be eliminated only to be replaced by private-sector collusion (Rose-
Ackerman, chapter 2). When the privatization process itself is corrupt,
state enterprises or other public resources may go not to the most com-
petitive bidder but to favored insiders.

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 Whether ownership is public or private, the incentives persist to main-
tain rents in the form of direct subsidies, import protection, or other
restrictions on competition. The technocratic policymakers in Indonesia
were reported to have slowed down the pace of privatization of state-
owned enterprises there because of concerns they would be bought
up by cronies of Prime Minister Suharto who would then seek special
favors such as continued import protection or subsidized access to credit
(Schwarz 1995, 148). As Klitgaard (1988, 67) points out, whether a cer-
tain activity takes place in the public or private sector is not the issue;
rather, whether it takes place in an environment of “competition and
accountability” is what really counts (emphasis in original).
Perceptions that privatization and other reforms favor certain parties
may feed public suspicions about market-oriented reforms and under-
mine their public support. Opposition parties and political dissidents
may use corruption as an excuse to try to reverse reforms. In Russia
and other parts of the former Soviet Union, the virulent and chaotic
forms of corruption spawned by systemic collapse threaten to under-
mine the transition of those countries to more open political and eco-
nomic systems. Rampant tax evasion has left the government unable to
pay pensions or workers in the remaining state-owned enterprises, and
the conspicuous consumption of those with new wealth also contributes
to the nostalgia of some segments of the population for the days of
stable Communist Party rule.
Thus, political and economic opening may expose old ways of doing
business and open up possibilities for reform, but they may also intro-
duce new opportunities for corruption and bring new players into the
game. The Wall Street Journal, for example, reported that the movement
toward freer markets and democracy in Latin America had also “democ-
ratized” corruption and that the inflows of capital following economic
liberalization raised the incentives for corruption (1 July 1996, 1). More-
over, even successful economic reforms do not obviate the need for gov-
ernment entirely; the need to raise taxes, provide benefits, and regulate
in many areas of public interest will persist. Micro reforms to strengthen
government and social institutions must therefore accompany the macro
reforms.

Reforming Institutions and Building State Capacity

Even under the best of circumstances, democratization and economic

liberalization take time to consolidate. Naím (1995b, 8-11) in looking at the
process of economic liberalization and Charlick (1992, 178) in focusing
on democratization emphasize the importance of strengthening state ca-
pacity and improving governance to reduce corruption and consolidate
reforms. Crucial areas for improved governance include civil service

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reform; greater tax collection capacity; and reforms to increase the capac-
ity, independence, and honesty of the judiciary. Naím calls these “Stage
II” reforms. Analysts who have focused closely on the need for institu-
tional reforms emphasize the need to reduce inequities in access to infor-
mation asymmetries and the need for changes in incentive structures.
Improved information gathering allows agency leadership to acknowl-
edge honest bureaucrats and investigate and punish dishonest ones.
Klitgaard (1988) analyzes several cases of efforts to reduce corruption
and derives lessons for reformers. His most detailed case study concerns
the efforts of Justice Efren Plana to reduce rampant corruption in the
Philippines Bureau of Internal Revenue. In addition to improving infor-
mation collection and creating an incentive structure to reward perfor-
mance, Klitgaard recommends punishing “big fish” (i.e., prominent, high-
level corrupt officials) to obtain a maximum demonstration effect. The
big-fish tactic sends a signal of seriousness and lends credibility to anti-
corruption reforms. Box 2 summarizes other recommendations for im-
proving information flows and changing incentives. Rose-Ackerman (chap-
ter 2) offers similar recommendations for institutional reform, and as
elsewhere (1978), she emphasizes the deterrent benefit of escalating penal-
ties in proportion to the size of the bribe in the case of public employ-
ees and in proportion to the value of illicit gains in the case of the
briber.
The benefits of incorporating transparency and accountability in the
reform process are highlighted in Oldenburg (1987), who studied the
example of a land consolidation program in India. The program, which
sought to increase agricultural efficiency by consolidating scattered plots
claimed by a single owner, seemed vulnerable to bribery that would
influence outcomes. Yet it seems to have been largely free of corruption.
Oldenburg attributes this in large part to the openness integrated into
the program design. The proceedings were conducted largely in the vil-
lages with the participation of affected farmers. According to Oldenburg,
“All proceedings [were] open and well publicized, and the records [were]
open” (1987, 516). Moreover the farmers were given the right to appeal
decisions, enhancing accountability by forcing officials to justify their
decisions.
The importance of the right of appeal in making anticorruption re-
forms work underscores the need to create and maintain an honest and
independent judiciary. If not addressed, judicial corruption could facili-
tate corruption elsewhere in the system by protecting restricted eco-
nomic or political competition. It would almost certainly impede clean-
up efforts if not dealt with because whistle-blowers would otherwise
have no protection, reform-minded officials could be harassed, businesses
suffering from discrimination would have no recourse, and corrupt offi-
cials and business people would not have to fear punishment. An hon-
est judiciary could also provide recourse for third parties suffering the

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consequences of corruption; for example, individuals injured when an
unsafe building collapses. Thus, judicial reform should receive priority
attention from anticorruption campaigners in countries where the judi-
ciary is itself corrupt.
Changes in regulation, tax collection methods, and provision of ben-
efits can reduce opportunities for corruption by reducing bureaucratic
discretion (Rose-Ackerman, chapter 2). The adoption of more market-
oriented methods of regulating private economic activity, for example
auctioning pollution rights rather than setting limits by administrative
fiat, often enhance efficiency and may also have antibribery benefits. 24

24. This is an additional argument in favor of auctioning import and export quota li-
censes, though the authors of an Institute study on that topic did not recognize it at the
time. See Bergsten, Elliott, Schott, and Takacs (1987).

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Increased user fees for scarce government services could also address
the excess demand problem that sometimes results in covert payments
to affect the distribution of government benefits.
Just as corruption has costs, however, so does fighting it. As noted by
Rose-Ackerman (chapter 2),

Corruption can never be entirely eliminated. Under many realistic conditions,

it will simply be too expensive to reduce corruption to zero. Furthermore, a
single-minded focus on corruption prevention can have a negative impact on
personal freedoms and human rights. Such a focus could produce a govern-
ment that is rigid and unresponsive.

Reducing corruption takes real resources, for example to make civil ser-
vice salaries and benefits competitive with the private sector or for moni-
toring and enforcement activities. Living beyond one’s (apparent legal)
means is frequently cited as potential evidence of illicit enrichment that
should be grounds for investigation and prosecution of corrupt officials,
but Moisés Naím has warned that witch hunts against public officials
can precipitate the loss of some of the best talent in countries that can
ill afford it. Overzealous anticorruption efforts may have other indirect
costs, such as decreased morale among public employees or impaired
government functioning because of too little discretion and overcentral-
ization (see also Klitgaard 1988, 24-25). Thus, costs must also be consid-
ered in the development of anticorruption strategies and the selection
of particular tactics.

Supporting Internal Reforms: The Role of the International

Financial Institutions
The World Bank, International Monetary Fund (IMF), regional develop-
ment banks, and bilateral aid agencies can lend valuable support for
anticorruption efforts in a variety of ways. In the past, the World Bank
and the IMF felt constrained in addressing corruption and other sensi-
tive issues because of the requirement that they not interfere in mem-
bers’ internal political affairs. But both institutions, as well as other multi-
lateral development banks (MDBs), have increasingly recognized the
importance of governance issues in attaining development objectives.
For the first time in public, Bank President James Wolfensohn and IMF
Managing Director Michel Camdessus explicitly broached the issue of
corruption in speeches at the joint annual meetings of their agencies in
Washington in October 1996.
At the request of a member government, these agencies provide ad-
vice, technical assistance, and financial support for institutional and policy
reforms that often help to reduce corruption either directly or indirectly.
The contribution of the IMF comes primarily from the conditions it gen-
erally attaches to its loans, which encourage economic liberalization and,

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implicitly, reductions in the opportunities for corruption. The World Bank
provides financial and technical assistance that can contribute more di-
rectly to both institutional reform and development in countries that
need and desire such assistance. The argument has been put forth that
lending be explicitly conditioned on efforts in borrower countries to re-
duce corruption, but this suggestion is more controversial.
The primary objective of IMF-sponsored programs is usually macro-
economic stabilization. In this context, the IMF urges national govern-
ments to reduce their interventions in the economy by reducing trade
barriers, liberalizing financial markets, freeing up other prices, ending
subsidies for food and other necessities, and privatizing state-owned enter-
prises (or at least cutting subsidies to them), among other measures.
Whatever their other effects, these reforms also tend to reduce the op-
portunities for corruption.
But the central plank of most stabilization agreements is some mea-
sure of fiscal austerity, which may have unanticipated consequences if
not handled carefully. One result of the combined inflation and policy-
inspired squeeze on the public sector that occurred in many countries
during the debt crisis of the 1980s was a large reduction in the real
wages of public sector employees. These reductions, in turn, led to in-
creased pressure to engage in bribery (Ul Haque and Sahay 1996; Klit-
gaard 1988, 197). When corruption is widespread in revenue collection
agencies, as often occurs, a vicious cycle emerges in which austerity
increases the incentives for corruption, which reduces government rev-
enue, thereby leading to further austerity measures. Of course, govern-
ments can lower their total payroll costs by reducing the number of
employees while maintaining the real wage level, but it is often more
expedient not to act and simply allow inflation to erode wages. The IMF
cannot and should not dictate exactly how a country achieves its fiscal
targets, but it should work with borrowers to ensure that its recommen-
dations do not make a bad situation worse.
The World Bank can more directly support anticorruption efforts be-
cause it provides lending for specific projects, in addition to providing
resources for structural adjustment.25 In a background paper circulated
at the 1996 annual meetings, the World Bank identified key areas where
it is contributing to anticorruption reforms:

n support for and technical assistance in implementing economic reforms

to reduce rent-seeking in the tax and regulatory areas, and to privatize
state-owned enterprises or strengthen their regulation in uncompetitive
markets and

25. The World Bank’s rules intended to prevent corruption in government procurement
in relation to the projects that it funds are discussed in more detail in the next section.

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n support for institutional reforms in the areas of government financial
management (budgeting, accounting, and auditing systems); civil ser-
vice reform; government procurement; and governance more broadly.

As one aspect of improved governance, the Bank is also supporting

innovative programs, such as training workshops for journalists con-
ducted in some countries by the Economic Development Institute (EDI)
(World Bank 1996c). EDI has also worked with Transparency International
(TI) to support establishment of “national integrity systems” in Tanzania
and Uganda and to disseminate TI’s “Source Book” for building such
systems (United Republic of Tanzania 1995; Transparency International
1996). The Source Book discusses the role in combating corruption played
by civil society, the press and the importance of judicial, legislative, and
administrative reforms that would heighten monitoring, protect whistle-
blowers, and promote open and transparent procurement systems and
self-policing by the private sector.
The World Bank is also supporting the “Partnership for Capacity Build-
ing in Africa,” which was instigated by the Bank’s African Governors at
the 1995 Annual Meetings with the goal of “strengthening or improve-
ment of people, institutions and practices that enable countries to achieve
their development goals” (World Bank Press Release, 28 September 1996).
Even if not explicitly aimed at it, such capacity building should have
anticorruption benefits. The World Bank also has increased its focus on
human capital development and social spending (education and health),
especially as private capital markets assume a larger role in financing
large infrastructure projects. If Mauro’s conclusion (chapter 4) that cor-
ruption is negatively correlated with government spending on educa-
tion is borne out by further research, then increased international fund-
ing for education could help to offset the effects of corruption. Case
studies indicate that illiteracy among government constituents facilitates
petty corruption, so increased spending for education can help reduce
such abuses.
Finally, some observers suggest that the World Bank and the regional
development banks make reduction of corruption an explicit part of their
conditionality. Certainly, the World Bank, the other MDBs, and the IMF
should be less tolerant than they have been in the past toward corrupt
governments. According to a detailed report in the Financial Times, the
IMF, under pressure from the United States and other Western gov-
ernments, lent Zaire more than $1 billion in the 1980s after receiving
a report from a senior IMF official warning that Mobutu Sese Seko’s
government was completely corrupt (12 May 1996, 1-2). Total multilat-
eral lending to Zaire between 1982 and 1994 totaled nearly $2 billion.
With the obvious exception of procurement rules, however, it is not
clear that it is either necessary or helpful to bring corruption explicitly
into the general conditions attached to development assistance. How

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would corruption be defined and how would reductions be observed
and measured? Where procurement rules and auditing procedures
effectively insulate Bank projects from corruption, should lending be
cut off because of corruption elsewhere in the government? If corrup-
tion does not obviously interfere with economic performance or the
adoption of reforms is it a legitimate concern of these institutions? Given
that pervasive corruption usually has an adverse impact on economic
performance, is it necessary to introduce explicit conditionality in this
area?
Even without explicit conditionality, the Bank has increasingly been
emphasizing governance issues, including corruption, in its lending policies
and in its policy dialogues with borrower countries. “Country Portfolio
Performance Reviews” are conducted annually in most countries and
focus on obstacles to the implementation of Bank projects (World Bank
1994, 38). “Country Assistance Strategy” (CAS) statements engage the
Executive Board as part of the process of reviewing overall lending strategies
in each country. The intent of these statements is to ensure that imple-
mentation problems “are taken into account in decisions on the volume
and composition of lending.” An analysis of a representative sample of
40 such statements in 1994, however, revealed that treatment of gover-
nance issues was generally restricted to the fairly narrow area of public
sector management. Transparency, accountability, and issues concerning
the rule of law were rarely raised in the statements reviewed (World
Bank 1994, 38). For these reviews and assessments to be effective tools,
however, the Bank must follow through by reducing or suspending as-
sistance when corruption interferes with project implementation or broader
development objectives. In these cases, however, the reason for inter-
rupting lending programs is the impact on development goals, not the
corruption per se.

The Role of Leadership

Finally, Ruzindana addresses the role of leadership (chapter 7). In his

words, “corruption cannot exist without the connivance of the political
leadership, even if passive.” It is possible to have limited anticorruption
reforms even when serious corruption involves top leadership, but po-
litical support is still required. Klitgaard’s case study of the Philippines
Bureau of Internal Revenue illustrates the potential for successfully tack-
ling corruption despite otherwise rampant corruption at the top of the
Marcos government (1988, chapters 2 and 3). Yet Marcos still appointed
the anticorruption judge who cleaned up the agency and supported
him when he punished high-level corrupt officials. Thus, even incre-
mental steps require at least minimal political support.
With the political and economic reforms that are occurring around
the world, however, such leadership should be more forthcoming. Moreover,

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leadership need not always be imposed from above; it can also come
from below. In addition to top-level leadership, Ruzindana (chapter 7)
emphasizes the role of civil society and the need to educate the public,
to strengthen grassroots groups, and to protect and strengthen a free
and independent media. These activities may be supported by the inter-
national community, but they must be homegrown to be effective.

International Initiatives to Combat Corruption

Corruption’s effects on economic development and political legitimacy

spill over a given country’s borders, affecting global peace and pros-
perity. Thus, it is natural that corruption concerns the international
community as a whole, just as distortions in international trade and
investment flows are also concerns. The most important role of the in-
ternational community is the one described above of providing financial
and technical support to countries undertaking difficult anticorruption
reforms.
Other international anticorruption initiatives focus on the role of multi-
national corporations in offering bribes and the impact on international
transactions, particularly government procurement, where the public and
private sectors do business directly. Potentially, the most important are
the efforts in the OECD to deter and punish transnational bribery. Pieth
(chapter 6) discusses the evolution of these efforts in detail, while recent
breakthroughs are summarized below. Also discussed here are the Inter-
American Convention against Corruption approved by the members of
the Organization of American States (OAS), which includes measures to
promote cooperation among member states in enforcing anticorruption
laws and recent efforts by the World Bank and World Trade Organiza-
tion to restrict the opportunities for corruption in government procure-
ment contracts. Highlighting the need to address both supply and de-
mand, the UN General Assembly approved a resolution in December
1996 calling on members to take “concrete action” against all forms of
corruption. The nonbinding UN declaration incorporates elements of
both the OAS Convention and the OECD recommendations discussed
below. Some countries have proposed resuming negotiations on a uni-
versal anticorruption treaty under UN auspices, but little progress has
been made to date and UN action on this issue remains primarily rhe-
torical.26
Corruption also raises global concerns because of how it facilitates

26. Some European countries that have been resisting strong action against transnational
bribery in the OECD proposed universalizing the negotiations in the UN, reportedly in
the hope that they would become bogged down as they did in the 1970s. For a brief
history of the earlier UN negotiations, see Pieth (chapter 6).

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international criminal activity, particularly drug trafficking and money
laundering. Money laundering can have significant collateral economic
effects and the liberalization of financial markets around the world
has contributed to its spiraling growth. Nevertheless, the primary locus
of concern is the criminal activity that spawns these activities and,
while a reduction in corruption would clearly help, the primary policy
responses must still focus on law enforcement, financial market regula-
tion, and drug-addiction treatment.27 Those issues are not addressed in
this volume.

The Inter-American Convention Against Corruption

One of the striking things about the OAS anticorruption initiative is the
leading role played by several South American countries in advancing
the process. The first steps were taken in March 1994 when President
Clinton invited heads of state in the Western Hemisphere to a summit
to discuss strengthening and consolidating democracy and promoting
economic growth in the region. Anticorruption action was an important
American objective for the summit, but President Clinton initially spoke
of the need for improved governance in the hemisphere without mak-
ing explicit mention of corruption (Clinton 1994). Inclusion of an explicit
anticorruption initiative on the summit agenda was then promoted by
Ecuadorian Vice President Alberto Dahik, who was the chairman of the
Advisory Council of Transparency International (TI) at the time, and
Venezuelan President Rafael Caldera, who attributed the bank failures
and financial crisis that struck his country shortly after he took office in
1993 to the corruption of his predecessors.28
At the Summit of the Americas held in Miami in December 1994, the
leaders of 34 Western Hemisphere countries (all but Cuba) agreed on a
“Declaration of Principles” and a “Plan of Action” for strengthening and
expanding cooperation and economic integration in the region (Feinberg
1997). The portion of the plan of action that addresses measures to

27. The Financial Times recently reported that global earnings from organized crime, mostly
from drug trafficking, reached an estimated $1 trillion in 1996 (14 February 1997, 1). See
Pieth (chapter 6) for a brief discussion of the Financial Action Task Force, which was
established in 1990 to address money laundering of criminal proceeds. For analysis of
the sources, scope, and potential threat to macroeconomic and financial market stability
from money laundering, see Quirk (1996) and Tanzi (1996). For discussions of interna-
tional organized crime and US policies on international drug trafficking, see Raine and
Cilluffo (1994) and the Council on Foreign Relations (1997), respectively.
28. See Transparency International (1995) and Andres Oppenheimer in the Miami Herald,
4 December 1994. Ironically, Vice President Dahik is now in exile in Costa Rica, having
fled Ecuador to avoid prosecution on charges of corruption. Dahik claims that the cor-
ruption charges are simply part of a political vendetta against him.

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strengthen democracy included an initiative against corruption.29 Although
this initiative listed several steps that countries should consider taking
to combat corruption and improve governance, including potentially far-
reaching institutional reforms, the initial focus was on the provision call-
ing for development within the OAS of “a hemispheric approach to acts
of corruption in both the public and private sectors that would include
extradition and prosecution of individuals so charged.” The leaders also
called on “the governments of the world to adopt and enforce measures
against bribery in all financial or commercial transactions with the Hemi-
sphere.” At the urging of the United States, the leaders also included a
suggestion that the OAS establish a liaison with the OECD Working
Group on Bribery in International Transactions.
The resulting Inter-American Convention against Corruption was adopted
29 March 1996 in Caracas, a little more than a year after it had been
proposed. It was signed there by representatives of 21 countries in a
special session. The United States signed before the OAS General As-
sembly in Panama the following June, after the treaty had been thor-
oughly examined by the US Justice Department. The principal provi-
sions of the convention require adherents to criminally sanction bribery,
transnational bribery, and “illicit enrichment,” and to cooperate with one
another in the investigation and prosecution of acts defined as corrupt
in the convention, through extradition and assistance in recovering illic-
itly acquired property or wealth. The convention also discourages the
use of bank secrecy laws as the basis for withholding cooperation from
investigations of corruption.
The key provision from the US perspective is Article VIII, which
effectively internationalizes the FCPA by requiring parties to the con-
vention to make it a crime to bribe foreign public officials. Article IX
requires each member state to “establish under its laws as an offense a
significant increase in the assets of a government official that he cannot
reasonably explain in relation to his lawful earnings during the perfor-
mance of his functions.” This provision has been depicted as an essen-
tial tool in combating a phenomenon cloaked in secrecy and deception.
But it was also the most troublesome for US negotiators and prevented
the United States from immediately signing the convention in Caracas.
Although implementation is subject to the Constitution and fundamen-
tal legal principles of each member state, the US Justice Department
wanted to ensure that the language did not conflict with the US Consti-
tution and legal tradition that the accused is innocent until proven guilty.
Thus, the focus in the convention is on criminal sanctions and en-
forcement. Though the scope for an international role is limited, corol-
lary domestic and institutional reforms are still rather weakly dealt with

29. For more detail on the convention and its negotiation, see Elliott (1996).

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in the convention. Article III refers to “preventive measures” that mem-
bers “agree to consider . . . within their own institutional systems.” These
measures include standards of conduct for public officials, “mechanisms
to enforce these standards,” and strengthening government procedures
in the areas of hiring, government procurement, and tax collection. Sig-
natories also agree to consider “whistle-blower” protection and “over-
sight bodies with a view to implementing modern mechanisms for pre-
venting, detecting, punishing, and eradicating corrupt acts.” Article III
notes the need for “mechanisms to encourage participation by civil soci-
ety” and NGOs and the “study of further preventive measures that take
into account the relationship between equitable compensation and pro-
bity in public service.” These domestic reforms are crucial if the conven-
tion is to be an effective anticorruption instrument. Unfortunately, there
are no follow-up measures specified in the convention to support or
monitor the implementation of these reforms.
As of the end of 1996, only a handful of countries had ratified the
OAS convention, and the Clinton administration had not yet submitted
it to the US Senate. OAS Secretary General César Gaviria has suggested
that the OAS could assist in the drafting of “model laws” aimed at de-
tecting and punishing corruption and at modernizing the state in ways
that reduce the opportunities for corruption. To this end, Gaviria has
also suggested that the OAS encourage “horizontal cooperation and
exchange of experience in the area of combating corruption and set up
a data base of success stories in this field” (Gaviria 1995). The Inter-
American Development Bank has also identified ways in which it can
support anticorruption efforts, in particular its support of judicial and
civil service reforms in the region.
The Inter-American Convention against Corruption is the first docu-
ment of its kind, codifying anticorruption measures in a treaty reached
by both developed and developing countries. If the potential is to be
realized, however, a number of steps must be taken. First, the United
States should set an example by quickly ratifying the convention. In a
recent speech, US Ambassador to the OAS Harriet Babbit said that she
hoped to see ratification before the end of the year, that is, about 18
months after it was signed. At the time of her remarks, only Paraguay
and Bolivia had submitted instruments of ratification to the OAS. The
United States should move as rapidly as possible toward ratification and,
along with Secretary General Gaviria, should encourage all OAS mem-
bers to ratify the convention prior to next year’s summit in Santiago,
Chile.
Second, greater attention to other implementation issues is needed.
Secretary General Gaviria’s commitment to having the OAS monitor and
review implementation, which was not explicitly mandated in the con-
vention, is a useful demonstration of his overall support. His first report
on the implementation of the convention is due to be presented to the

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General Assembly in 1997. It will be the first indication of how effective
the OAS can be in this area. The technical assistance and financial sup-
port of the Inter-American Development Band will also be helpful in
meeting the challenge of far-reaching domestic reforms that will be nec-
essary in some countries.

Controlling the Supply of Bribes: The Organization

of Economic Cooperation and Development
and the International Chamber of Commerce

The initiatives of the ICC and OECD focus on deterring the use of brib-
ery by multinational enterprises in the course of business operations in
foreign countries, allegedly a major source of illicit payments. Like the
United Nations, the ICC and OECD initially considered the problem of
transnational bribery in the 1970s, following a series of scandals and the
passage in the United States of the FCPA. These initial efforts failed to
make an impact, but interest has been renewed in the 1990s.
The OECD revived its interest in the corruption issue in 1993 under
the prompting of the Clinton administration. In early 1994, the Commit-
tee on International Investment and Multinational Enterprises approved
a recommendation for submission to the Council that urged members to
“take concrete and meaningful steps” against the bribery of foreign offi-
cials. The recommendation, which also created a Working Group on
Bribery in International Business Transactions, was formally adopted by
the OECD Council of Ministers later that spring (see Pieth, chapter 6).
This was followed two years later by a second recommendation approved
by the Council that called on members to end the tax deductibility of
transnational bribes and to consider means of imposing criminal sanc-
tions on such behavior.30 Neither recommendation is legally binding on
members, but both contain provisions for the monitoring and review of
actions taken to implement the recommendations. The working group
has also been developing “best practice” principles for accounting and
auditing procedures to facilitate effective enforcement. Secrecy is an
essential component in the bribery transaction, so transparency and
thorough record keeping are important tools to control corruption.
The results with respect to national implementation of the recom-
mendations are thus far mixed, however. Recently, the United Kingdom
concluded that a 1906 antibribery law could be interpreted as covering
bribery of foreign officials, though it had not previously been used for
that purpose. Japan also not long ago announced that it would take

30. At the time the recommendation was approved, Austria, Belgium, Luxembourg, Nether-
lands, Germany, and Greece allowed “commissions” to be deducted as a business ex-
pense with few restrictions. Australia, Canada, Denmark, France, Ireland, Norway, New
Zealand, Spain, and Switzerland allowed tax deductibility if the recipient was identified.

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steps to criminally sanction transnational bribery, probably by amending
its Law for the Prevention of Unfair Competition, which carries criminal
sanctions. The Japanese government expects the measure to be passed
and to take effect in April 1998, but concerns have been raised as to
whether Japan’s Fair Trade Commission will be more effective on this
issue than it has been on other fair competition issues in the past.
Regarding the tax deductibility of bribes, only Norway has completely
implemented the recommendation; a handful of countries have legisla-
tion pending, but most OECD members have not moved to implement
the recommendation on tax deductibility. France and Germany have said
they cannot eliminate tax deductibility until the criminalization issue is
resolved (Transparency International USA Newsletter, March/April 1997, 2).
One OECD member state has taken steps to end tax deductibility for
bribes, but only following a criminal conviction for bribery, presumably
in the country where it occurs.
The breakthrough in the OECD came in May 1997 when the mem-
bers agreed to quickly negotiate and promptly implement an interna-
tional convention to criminalize transnational bribery. Although the United
States, supported by most other OECD members, had opposed the con-
vention approach because of the legal complexity and delay involved,
France and Germany, supported by Japan and Spain, insisted that
criminal sanctions be codified in a formal convention (Washington Post, 9
May 1997, A22). The compromise involved setting tight deadlines for
final implementation of treaty provisions. The final convention would
be based on the draft principles for criminalization developed by the
OECD working group. That text defines the perpetrators and collabora-
tors in acts of bribery, acts that would constitute a criminal violation,
how to establish jurisdiction, and how to ensure effective enforcement
in light of the different legal and judicial systems among OECD coun-
tries (OECD 1996). Continued progress depends primarily on peer pres-
sure among governments, as well as the pressure of public opinion in
countries suffering domestic corruption of their own (see also Glynn,
Kobrin, and Naím in chapter 1).
As the OECD has progressed in its efforts to prevent international
corruption, interest in codes of conduct and compliance programs for
multinational cooperation has increased. The ICC appointed a commit-
tee in 1994 to review its earlier report on transnational bribery, issued in
1977, and to update the recommendations as appropriate (see Heimann,
chapter 8 for further detail). Major contributions of the new report in-
clude the strengthened “rules of conduct” for preventing illicit payments
and a recommendation to establish a standing committee “to promote
widespread use of the rules and to stimulate cooperation between gov-
ernments and world business.” The report, approved by the ICC execu-
tive board in March 1996, also calls on governments to make procure-
ment procedures more transparent, to condition government contracts

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with corporations on their abstaining from bribery, and to implement
promptly the steps recommended by the OECD on this issue. The pro-
posed standing committee has been appointed with one group focusing
on developing a detailed compliance program to flesh out the general
principles in the code. A second group is working with ICC national
committees to get member companies to adopt the proposed code.

Targeting Grand Corruption in Government Procurement:

the World Bank and the World Trade Organization
The World Bank and most other international and national aid agencies
require international competitive bidding when official funds are used
in whole or in part to fund government procurement of goods, services,
or projects. The World Trade Organization (WTO) also oversees rules
on government procurement, but they are incorporated in a multilateral
agreement currently subscribed to by only 22 countries (the United States,
the 15 countries of the European Community, Canada, Israel, Japan,
Norway, South Korea, and Switzerland). The issue currently before the
WTO is how to expand the country coverage of rules on transparency
and due process in government procurement.
For those procurements where international competitive bidding is
appropriate, World Bank guidelines emphasize transparency at all stages
of the bidding process, from the public call for bids through the award
of contracts. They also provide for the World Bank to review and evalu-
ate bids and award contracts. The Bank may declare a “misprocurement”
if procedures are not followed or if it later finds it had received “incom-
plete, inaccurate, or misleading information” or if corruption influenced
the award. In July 1996, the World Bank further tightened its guidelines
by removing the constraint that misprocurement due to corrupt prac-
tices can only be declared following a decision by a court of law, by
revising the standard bidding documents that must be used in Bank-
funded procurements to require disclosure of commissions paid to agents
or other third-party intermediaries in the bidding process, and by intro-
ducing sanctions against borrowing countries and international firms that
engage in corrupt practices. The potential sanctions include rejection of
contract awards or cancellation of the portion of a loan linked to fraudu-
lent or corrupt practices, and the blacklisting of firms that engage in
such practices, either indefinitely or for a specified period of time (World
Bank 1996b).
TI has further suggested that the World Bank should encourage the
use of corporate codes of conduct by making them a condition for bid-
ding on Bank-funded projects (see Heimann, chapter 8). Some in the
World Bank have resisted this proposal, however, because it could re-
duce competition (because so few firms outside the United States cur-
rently have codes), and it would increase the paperwork and red tape,

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which are already substantial. Those in the bank opposed to the pro-
posal also argue that the offsetting benefits may be few because of the
difficulties in ensuring that newly created codes are no more than fig
leaves.
Finally, recent changes in how the Bank evaluates its own perfor-
mance, though adopted for other reasons, could have anticorruption bene-
fits. Both personal and institutional success previously were measured
by the volume of loan approvals. Complaints from NGOs and other
groups about the consequences of this approach in relation to the envi-
ronment, human rights, and other areas contributed to a reassessment
of project review and loan approval. More careful analysis of the devel-
opment impact of proposed projects should reduce the likelihood that
“white elephant” projects receive funding approval. The most important
way in which the Bank (and other international financial institutions)
can contribute to the fight against corruption, however, is through ca-
pacity building and promotion of institutional reforms, as discussed above.
Although bribery and nepotism are recognized as anathema for effi-
cient government procurement, most governments openly intervene in
favor of domestic suppliers for a variety of procurement projects, argu-
ing national security or industrialization goals. The current WTO Gov-
ernment Procurement Agreement (GPA) is primarily intended to reduce
the level of explicit discrimination in favor of domestic suppliers and to
introduce greater competition into these markets. In addition to listing
the government entities and activities subject to its rules, the GPA speci-
fies extensive and detailed bidding procedures regarded by representa-
tives of some countries as excessively complex and burdensome. Although
Taiwan and Singapore are currently involved in negotiations on access
to the agreement, few additional countries are expected to join any time
soon.
Because the membership of the GPA is limited, the United States is
seeking an agreement on transparency, openness, and due process in
government procurement that would be mandatory for all WTO mem-
bers.31 Under such an agreement, which US negotiators hope would be
an interim step to full acceptance of GPA disciplines, WTO members
would not have to reduce home-country preferences or otherwise liber-
alize their government procurement regimes, but they would have to
abide by agreed on procedural rules. A major objective of the proposed
rules would be to ensure that when international bids are entertained,
the process is not distorted by bribery. At the WTO ministerial meeting
in Singapore in December 1996, however, few other countries embraced
the US proposal to conclude within a year an agreement on transpar-

31. It should be noted that 75 percent of US exports in 1995 went to countries that are
already members of the GPA or are in the process of joining it, or to Mexico, which is
covered by the government procurement rules of NAFTA.

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ency in government procurement. US negotiators were only able to ob-
tain a rather weak call to “establish a working group to conduct a study
on transparency in government procurement practices . . . and, based
on this study, to develop elements for inclusion in an appropriate agree-
ment . . .” (World Trade Organization 1996).
Another recent proposal for reducing corruption in government pro-
curement comes from David Finch, a former IMF official (Finch 1996).
He recommends that the Berne Union, an international association of
export credit agencies primarily from OECD-member countries, require
supervised international competitive bidding for appropriate sales guar-
anteed by them (he excludes military contracts, for example).32 Finch
suggests having the World Bank supervise the bidding procedures in
these sales, because it already has experience in monitoring its own pro-
curement guidelines. But the World Bank may reject additional respon-
sibilities, and it is not clear that such an agreement would have more
than symbolic impact, because OECD figures show that only 3.2 percent
of OECD manufactured exports were covered by official export credits
in 1992 (cited in Ray 1995, 7).
Finally, World Bank President Robert McNamara has proposed the
use of “antibribery” pacts to increase transparency and stem the oppor-
tunities for corruption in government procurement. As described in Hei-
mann (chapter 8), antibribery pacts could be developed to fit the needs
of countries or even particular agencies adopting them. The key ele-
ments would include commitments by the procuring agency or govern-
ment to use transparent bidding procedures, guard against extortion by
their officials, and establish procedures for monitoring compliance and
sanctioning violations; only firms willing to sign the antibribery pact
would be allowed to bid and they would also have to commit publicly
to refrain from paying bribes and to establish a corporate code of con-
duct and a program to enforce compliance.
The motivation behind the antibribery pact is, first, to allow reformers
to prominently signal that the rules for doing business in their country
have changed and, second, to help firms avoid the collective action prob-
lem in refraining from offering bribes. Many firms claim that they pre-
fer not to bribe but fear being edged out by a competitor if they unilat-
erally refrain. The pact is aimed at leveling the playing field.

Priorities for an International Anticorruption Strategy

There are no quick fixes or simple solutions for corruption. The sources
and consequences of corruption differ from place to place, and each

32. The OECD, which has rules governing tied aid and subsidized export financing, is
also studying this issue.

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country must set its priorities and fashion its own responses based on
its particular needs. In general, however, reforms that increase political
accountability and economic competition are the keys to reducing op-
portunities for corruption. Contested elections, greater transparency in
the policymaking process, and a free media increase the potential costs
of corruption, while a more open economy reduces the potential gains.
While many countries today are pursuing democratization and open-
ing up their economies to competition, the institutional reforms needed
to consolidate and build upon these efforts often lag. Without “institu-
tional adjustment” or “therapy” (see Klitgaard 1995 and Naím 1995b,
respectively) these initial macro reforms may not be sustainable. Among
the micro reforms that will support broader systemic reforms and ad-
dress corruption are

n judicial reforms to ensure honesty and independence and build ca-

pacity;
n civil service and other institutional reforms to improve information
flows and increase the incentives for honesty and performance while
discouraging dishonesty;
n simplification of tax and regulatory systems;
n use of auctions, competitive bidding schemes, and market-based regula-
tory mechanisms whenever possible to reduce bureaucratic discretion;
n strengthening campaign finance laws and rules on conflict of interest;
and
n strengthening the institutions of civil society, including the media,
NGOs, and other grassroots groups.

Difficult and far-reaching internal reforms such as these are the building
blocks for an anticorruption strategy, but the international community
also has a role to play. First, it can encourage and support the internal
reforms and, second, it must tackle the international sources and conse-
quences of corruption. The recent OECD commitment to implement an
international convention criminalizing bribery of foreign public officials
is potentially a major step in this direction.

International Support for Internal Reforms

The international financial institutions already support internal anti-

corruption strategies in developing countries in a variety of ways, but
they could do more. The World Bank and IMF support anticorruption
reforms most importantly through loan conditionality focusing on pro-
competitive, market-oriented economic reforms. The Bank also directly

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addresses corruption in its guidelines governing procurement that uses
Bank funds. It beefed up those regulations in the summer of 1996 and
stated more clearly than ever before that it will cancel procurements
and punish responsible parties if it finds corruption. To maximize the
impact, the World Bank and other MDBs should act quickly on the
recent recommendation of the G-7 finance ministers to cooperate in stan-
dardizing their procurement guidelines based on the World Bank model.
The international financial institutions also provide technical and fi-
nancial assistance for institutional reform and capacity building, but
they need to focus more attention on governance issues. World Bank
staff have begun to use their “country portfolio performance reviews”
and “country assistance strategy” statements to explicitly link governance
issues and economic development. Early assessments, however, suggest
they focus too narrowly on “public sector management issues” and need
to include governance issues more systematically in their discussions
with borrower countries.
Where corruption is widespread but safeguards against malfeasance
in particular projects are possible, the Bank should redirect loans to ac-
tivities neglected or undermined as a result of corruption, such as edu-
cation and health. If it is not possible to ensure that official funds will
be effectively used or that they are not being stolen or diverted, lending
should obviously be suspended and funds withheld in these cases. In
such situations, standard conditionality regarding project implementa-
tion and economic performance is likely to provide ample ammunition
for reduced lending. In some situations, however, it may send a useful
signal if the World Bank highlights the role of corruption in blocking a
country’s development.

Corruption in International Business

Most countries have laws against bribing their own public officials, but
many lack the legal and institutional capacity to effectively deter and
punish such behavior. By criminalizing bribery of foreign officials by
their nationals and corporations, OECD countries will help to fill this gap.
In addition, the World Bank, WTO, and others are studying how to
expand the use of open, competitive bidding so that government procure-
ment contracts will not be distorted by corruption. Though bribery in
international transactions is only part of the problem, such agreements
are an important component of an overall anticorruption strategy.
At the May 1997 ministerial meeting, OECD members committed to
implementing by the end of 1998 a multilateral convention to deter and
punish transnational bribery. A potential obstacle, however, is the diffi-
culty in observing and documenting illicit payments, which raises con-
cerns about free riders—countries who may commit themselves to sanc-
tion such behavior but then fail to enforce with vigor. Thus, the key to

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finalizing the agreement and making it effective will be establishing a
monitoring process to ensure expeditious and vigorous enforcement.
The model for rigorous monitoring and peer review adopted by the
OECD is that of the Financial Action Task Force (FATF) for monitoring
implementation of its recommendations to combat money laundering.
The first step involves self-reporting by OECD governments on the steps
they take to implement anticorruption recommendations. The second
step involves review by the Working Group on Transnational Bribery to
independently evaluate the speed and scope of actions taken by mem-
ber countries and to assess whether these actions are likely in practice
to be effective.33 The OECD recommendation calls vaguely for the “pro-
vision of regular information to the public.” Both the national reports
and the Working Group assessments should be publicly available for
outside review by citizen groups and NGOs such as Transparency Inter-
national, which could then add their own assessments as well as addi-
tional public pressure if necessary.
The major weakness of the OECD agreement is that the Agreed Com-
mons Elements for criminalization define only bribery related to obtain-
ing or retaining business as an offense. This addresses only bribery in
contracting and would still permit firms to pay bribes in order to evade
customs duties or other taxes or to avoid regulations protecting the en-
vironment or health and safety. Corruption in these areas are poten-
tially more socially damaging than allocative inefficiencies related to
government procurement, and this lacuna should be addressed in the
treaty negotiations.
Other mechanisms intended to increase transparency and guard
against corruption in international business include the proposal by
former World Bank President Robert McNamara for “antibribery pacts,”
similar to the TI proposal for “islands of integrity” and the proposal that
the World Bank require corporate codes of conduct and effective com-
pliance programs as a condition for bidding on its projects. Under the
pact, both government officials and bidding firms would publicly pledge
not to offer or accept bribes and would take additional steps to guard
against corruption in particular countries, agencies, or single projects.
Because the World Bank already requires international competitive
bidding for major procurements, antibribery pacts would be most help-
ful in procurements not already subject to external supervision. The pacts
should be used by countries wanting to lend credibility to their anticor-
ruption efforts, to send a signal to their own officials that the rules have
changed and as a signal to multinational corporations that they can no
longer do business as usual. Widespread adoption of the antibribery

33. For example, Japan has proposed to sanction transnational bribery under its unfair
competition law but some observers fear this will have little impact in practice, because
Japan’s competition watchdog, the Japan Fair Trade Commission, has been widely criti-
cized as ineffective.

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pacts would also put pressure on international corporations to adopt
and enforce corporate codes of conduct and would reinforce OECD ef-
forts to control transnational bribery.
The World Bank can reinforce these efforts and those of the OECD
by requiring multinational corporations bidding on Bank-funded projects
to have a code of conduct in place. The Bank’s concerns about reducing
competition by limiting the pool of eligible bidders could be mitigated
by announcing with sufficient notice (a few months to a year) that the
codes would be required. That would give firms time to develop codes
and compliance programs. To minimize the additional paperwork re-
quired, the Bank could enforce the requirement by adding a one- or
two-sentence addendum to existing bidding documents. To raise the
profile of the issue and further deter violations, the addendum should
be signed by a high-level officer affirming that the parent corporation
and all applicable subsidiaries have and enforce codes of conduct and
that they will abide by the borrowing country’s laws and regulations
relating to corruption in government procurement. It is likely, as the
Bank fears, that many firms will nominally adopt a code but not enforce
it. Nevertheless, when corruption is alleged in a particular case, evi-
dence as to the steps a firm has taken to enforce compliance, for ex-
ample, getting a signed statement from local representatives and agents
that they have received and read a copy of the code, could be helpful in
identifying possible violations.
If, as recommended, other multilateral development banks standard-
ized their regulations on the World Bank model, procurement rules em-
phasizing transparency and competitive bidding would cover as much as
15 to 18 percent of total nondefense government expenditure on goods
and services in 88 low- and middle-income countries (Hoekman 1996, 39).
In May 1996, Development Assistance Committee (DAC) members adopted
a statement of principle that anticorruption provisions should be included
in bilaterally funded procurement contracts. Since October 1996, the US
Agency for International Development has included a statement explicitly
prohibiting bribery in all contracts and providing for cancellation and
legal action in the case of violations (TPCC 1996, 121). If other countries
enforce similar rules, the ratio of covered government purchases would
rise to somewhere between one-third and one-half of nondefense ex-
penditures in recipient countries (Hoekman, 1996, 39). This could signifi-
cantly boost anticorruption efforts in many countries, though tied aid, by
reducing the level of competition, will reduce the potential benefits.
To expand the coverage of anticorruption safeguards even further,
the World Trade Organization should act on the proposal made by the
United States in Singapore last December to negotiate an agreement on
transparency and due process in government procurement. The proce-
dural safeguards in the Government Procurement Agreement (GPA) could
serve as the basis for a separate agreement that would be binding on all

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WTO members. Countries that are not signatories to the GPA, however,
would not be required to take on its broader nondiscrimination commit-
ments and would be under no obligation to open their government
procurement to international competition. They would simply have to
be open in the process of awarding contracts, which would tend to
reduce the opportunities for corruption. Indeed, an analysis of the costs
and benefits of the GPA for less developed countries concluded that
“transparency arising from the procedural requirements of the GPA may
well be the primary benefit of membership for developing countries—
even if strict nondiscrimination is not pursued” (Hoekman 1996, 10).
A phenomenon that has been with us since before biblical times will
not be eradicated overnight. But the day when bribes were considered
mere gifts, and corruption was a way of doing business, are in the past.
While tolerance of corruption may continue to prevail in some quarters,
it is no longer publicly expressed. This change in attitude is a big step,
but, to reiterate, the international community must take additional steps
if the current momentum is to be maintained:

n The World Bank, International Monetary Fund, and other multilateral

and bilateral development agencies should emphasize the role of ef-
fective governance in economic development and should devote more
resources and technical assistance to institutional reforms and capac-
ity building in countries where corruption is rampant. Where corrup-
tion blocks reform, the IFIs should cut off countries far more quickly
than they did in Mobutu’s Zaire.
n Other MDBs should conform their procurement guidelines to the
World Bank’s high standards.
n All DAC members should adopt anticorruption guidelines for their
aid programs, and both MDBs and bilateral aid agencies should be
even more vigilant in supervising bidding procedures and auditing
project implementation to ensure that scarce public resources are not
siphoned off for personal use.
n OECD countries should meet or even beat the deadlines they have
set for themselves to criminalize transnational bribery and end tax
deductibility of bribes. They should also expand the definition of the
crime to encompass bribes paid in the course of doing business.
n The members of the World Trade Organization should conclude an
agreement providing for transparency and due process in govern-
ment procurement markets.

Of course, the ultimate responsibility for ending corruption still lies

with the leaders of each nation and the citizens who must hold them
accountable.

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