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DOI: 10.1177/0021909613479319

published online 17 May 2013Journal of Asian and African Studies Roopinder Oberoi

ResponsesMapping the Matrix of Corruption: Tracking the Empirical Evidences and Tailoring

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Mapping the Matrix of Corruption:

Tracking the Empirical Evidencesand Tailoring Responses

Roopinder OberoiUniversity of Delhi, India

AbstractThe literature on corruption is extensive as the topic is multifaceted, testifying to the intractable andstubborn nature of a problem that societies have been struggling to tackle with for centuries. Lack ofimprovement in eradicating corruption is the result of misguided and misplaced strategies based on weakanalytical underpinnings and still weaker appreciation of the institutional milieu of individual countries. Thispaper attempts to introduce and unpack key concepts associated with the idea of corruption. The paperattempts to punctuate that corruption needs analysis as an indicator of failed governance. It presentsempirical substantiation from various studies undertaken and offers a comprehensive study of the extentand effect of corruption on the Indian economy and the perception of a cross-section of people on variousfacets and the impact of corruption on diverse sectors.

KeywordsAnti-corruption strategies, corruption indicators, global integrity index, governance indicator,Transparency International

What Is Corruption?Rich but unresolved theoretical debates compose the vast majority of the literature on corruption.However, new empirical studies have begun to resolve long-disputed issues. This is especially truewith regard to the literature on the impact of corruption on development, pertinent to the goal of

building political will to counter corruption. In light of the difficulty in collecting data on corrup-tion, given its intrinsic secrecy, it is not surprising that there have been few empirical works. Ingeneral, the studies that have been done on corruption draw their data from original surveys, inter-views, and focus groups on public perceptions, and purchasable corruption indexes created for

business-related purposes.There is, however, no comprehensive and universally accepted definition of corruption. The

origin of the word is from the Latin corruptus (spoiled) and corrumpere (to ruin; to break into pieces). The most frequent definition of corruption as the abuse of public office for private gain

Corresponding author:Roopinder Oberoi, Department of Political Science, Kirori Mal College, University of Delhi, Delhi, India.Email: [email protected]

9319 JAS0010.1177/0021909613479319Journal of Asian and African StudiesOberoi

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2 Journal of Asian and African Studies 0(0)

(Kaufmann, 1997; Rose-Ackerman, 1999; Tanzi, 1997) was modified by the World Bank to: theabuse of power for private gain. 1 This definition of corruption rests on the presumption that thestate operates under the norm of ethical universalism; public integrity is thus understood as equaland fair treatment of citizens, which may occasionally be influenced by favouritism or corruption.It encompasses unilateral abuses by government officials such as embezzlement and nepotism, aswell as abuses linking public and private actors such as bribery, extortion, influence peddling, andfraud. Public sector corruption is a symptom of failed governance. Governance is defined as thenorms, traditions, and institutions by which power and authority in a country are exercised. Thesenorms, traditions, and institutions include the institutions of participation and accountability ingovernance, mechanisms of citizen voice and exit, and norms and networks of civic engagement;the constitutional-legal framework and the nature of accountability relationships between citizensand government; the process by which governments are selected, monitored, held accountable, andrenewed or replaced; and the legitimacy, credibility, and efficacy of the institutions that govern

political, economic, cultural, and social interactions among citizens and between citizens and theirgovernments (Shah Anwar, 2006).

As governance is defined as the set of formal and informal institutions shaping who gets whatin a given polity, the understanding of governance regimes is an indispensable step towards creat-ing a more strategic approach to anti-corruption. Three distinct types of governance regimes aredescribed in the various reports: (1) open access or ethical universalism regimes, which exist inmost of the developed world; (2) closed-access regimes, divided between neo-patrimonial (where

power is monopolized by the ruler and their clique); and (3) competitive particularistic (whereseveral groups compete for the spoils, but spoiling the state remains the rule of the game). Freeelections by themselves do not solve the problem of corruption: more democracies than autocraciesfeature presently among systemically corrupt countries. The widely used perception indicators,which are presumed to measure corruption, actually measure governance in general, not only ille-gal corruption, which is only a small part of the overall picture (hence their insensitivity to change).

Concern about corruption is as old as the history of government. In 350 BCE Aristotle sug-gested in The Politics To protect the treasury from being defrauded, let all money be issuedopenly in front of the whole city, and let copies of the accounts be deposited in various wards(quotes in Shah, 2007: 234). However, these concerns have mounted in recent years; in tandemwith growing empirical evidence of its detrimental impact on development (World Bank, 2004).Corruption slows gross domestic product (GDP) growth (Abed and Davoodi, 2000; Mauro,1995) and adversely affects capital accumulation (Lambsdorff, 1999a, 1999b). It lowers thequality of education (Gupta, Davoodi and Tiongson, 2000); public infrastructure (Tanzi, 1997);and health services (Tomaszewska and Shah, 2000; Treisman, 1999). It reduces the effectivenessof development aid and increases income inequality and poverty (Gupta, Davoodi, and Alonso-Terme, 1998). Bribery, often the most visible manifestation of public sector corruption, harmsthe reputation of and erodes trust in the state. Poor governance and corruption make it more dif-ficult for the poor and other disadvantaged groups, such as women and minorities, to obtain

public services (Mauro, 1996).Corruption further affects macroeconomic stability; for example, the allocation of debt guaran-

tees based on cronyism or fraud in financial institutions leads to a loss of confidence by savers,investors, and foreign exchange markets. The current economic crisis has demonstrations of thistoo. Corruption is not manifested in one single form. It typically takes at least four broad forms : (1)

petty, administrative, or bureaucratic corruption; (2) grand corruption; (3) state or regulatory cap-ture and influence peddling; and (4) patronage, paternalism, clientelism, and being a team player(Mauro, 1998).



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Corruption is estimated to cost US$2.6 trillion annually, an amount equal to more than 5% ofglobal GDP. Each year, over US$1 trillion is paid in bribes; not only do these payments underminefair competition and affect the profitability of businesses operating globally, but they also divertcrucial public resources away from their legitimate uses, denying citizens essential public servicessuch as education, clean water, and healthcare. Over the last few years the issue of corruption andthe abuse of public office for private gain have attracted renewed attention, both among academicsand policymakers. There are a number of explanations why this topic has come under fresh scru-tiny. Corruption scandals have toppled governments in major industrial countries and developing

countries. In the transition countries, the shift from command economies to free market economieshas created substantial opportunities for the appropriation of rents (that is, excessive profits) andhas been accompanied by a modification from a well-organized system of corruption to a morechaotic and deleterious one. Corruption and sluggish economic growth has persisted in many coun-tries with malfunctioning and weak institutions and processes.

This recent concern in studying corruption has led to a new flurry of pragmatic research to graspthe source and outcome of corruption and fraud. An important body of knowledge was acquiredthrough theoretical research done in the 1970s by Jagdish Bhagwati, Anne Krueger, and SusanRose Ackerman, among others (Mauro, 1996). A key principle is that corruption can typicallyoccur where rents exist as a result of government regulation and public officials having discretion

in allocating them. The classic example of a government restriction resulting in rents and rent-seeking behaviour is that of an import quota and the associated licences that civil servants give tothose entrepreneurs willing to pay bribes. More recently, researchers have begun to test some ofthese long-established theoretical hypotheses using new cross-country data.

The chart in Figure 1 shows regional averages of a World Governance Indicator, 2 the Control ofCorruption. 3 The Organization for Economic Co-operation and Development (OECD) countriesaverage is the only one to have reached the green level. The region which has showed more prog-ress in the past two decades is Eastern Europe, but this is only true for countries in the successfulCentral Europe, since the former Soviet Union actually rates at the very bottom, below Sub-SaharanAfrica. Not only do the rest of the regions lag far behind the OECD but with the exception of

Eastern Europe the trend is toward stagnation, not improvement. There was some improvementin the Middle East and North Africa between 1996 and 2002 but the trend then reversed itself.

Figure 1. World governance indicator.Source: World Governance Indicator (2008).



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According to the Worldwide Governance Indicators (WGI), by the end of 2008 Finland rankednumber one for controlling corruption (with a rating of 2.3 out of a maximum of 2.5), while the

Netherlands ranked seventh (rating of 2.2), the United Kingdom (UK) ranked 16th (rating of 1.8),the United States of America (USA) ranked 18th (rating of 1.5), Spain ranked 31st (rating of 1.2),Portugal ranked 36th (rating of 1.1) and Greece ranked 82nd (rating of 0.1). Thus the difference

between Greece and Spain, or the difference between Spain and the Netherlands, is one standarddeviation, and the difference between Greece and the top-ranked Finland exceeds two standarddeviations, a vast difference.

Underpinning the Causes, Costs and Consequences ofCorruptionSince the ultimate source of rent-seeking behaviour is the availability of rents, corruption is liableto occur where restrictions and government intervention lead to the presence of such excessive

profits. Examples include trade restrictions (such as tariffs and import quotas), favouritism inindustrial policies (such as subsidies and tax deductions), price controls, multiple exchange rate practices and foreign exchange allocation schemes, and government-controlled provision of credit.Some rents may arise in the absence of government intervention, as in the case of natural resources,such as oil, the supply of which is limited by nature and the extraction cost of which is far lowerthan its market price. Finally, one would expect that corruption is more likely to take place whencivil servants are paid very low wages and often must resort to collecting bribes in order to feedtheir families (Krueger, 1974).

The rational choice approach generally views corruption as the result of an equilibrium betweenresources and costs (Nye, 1967; Rose-Ackerman, 1999). When costs are low and resources/oppor-

tunities high, it is rational for an individual to be corrupt. Robert Klitgaard (1988: 75) proposed thefamous equilibrium formula describing a state of equilibrium:

C = M D A

C = Corruption

M = Monopoly

D = Discretionary power

A

+

= (Lack of)Accountability

The equilibrium model at the individual level is poorly connected in the corruption literature with a

similar approach at the national level. Quantitative models treating corruption as a dependent vari-able test historical causes of good governance together with policies, with little thought that controlof corruption in a society is actually equilibrium and should be conceptualized in such terms.

So far, the literature on causes of corruption (Treisman, 2000) has included two broad categoriesof factors: (1) structural factors (population, legacies, religion past regime); and (2) current govern-ment policies pertaining to good governance (economic, but also specific anti-corruption policies).A review of determinants tested so far suggests that the equilibrium concept can actually make amore theoretically meaningful model. Such a model would include:

Under resources:

Discretionary power resources (due not only to monopoly, but also privileged access under power arrangements other than monopoly or oligopoly; for example Webers status groups,Mancur Olsons negative social capital networks, North and Wallis social orders, cartels, etc.).



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Material resources (state assets and procurement budgets, foreign aid, natural resources, public sector employment, any other resources which can be turned into spoils or gener-ate rents).

As constraints: Legal: this supposes an autonomous, accountable and effective judiciary able to enforce

legislation, as well as a body of effective and comprehensive laws. Normative: this implies that existing societal norms endorse ethical universalism and moni-

tor permanently and effectively the deviation from this norm (through public opinion,media, civil society, critical citizens/voters). For an effective sanction we need a populationof autonomous and critical citizens capable of collective action.

Control of corruption or its opposite, particularism, can then be summarized in the formula below:

Corruption/control of corruption = resources (power + material resources) constraints (legal + normative)

This equilibrium formula can be empirically tested and offers a more complex picture, not only ofthe individual causes of corruption (or even categories of factors), but also of their interaction,allowing for a better understanding of why certain policy combinations work and others do not. Allelements of the formula can be affected by human agency. Resources, for instance, are not an abso-lute given; they can be manipulated by policy. Power resources can be increased by discretionaryregulation and red tape, and decreased by transparency; many anti-corruption policies focus on thatarea. Material resources include four basic categories:

public jobs, as the public sector can be politicized and each winning party fills not only political offices but many civil service positions with its own people;

public spending, for instance the commissioning of public works, but also preferential bail-outs, subsidies, loans from state banks, any form of monetary rents;

preferential concessions and privatizations from the state property; and market advantages in the form of preferential regulation

Most academic literature on corruption conceptualizes anti-corruption at the individual level,as do most current theories about anti-corruption. This presumes that corruption is a deviationfrom an otherwise established norm of ethical universalism, where every citizen is treatedequally by the state and all public resources are distributed impartially. In fact, outside the devel-oped world the norm is not ethical universalism, since the process of modernization leading toan impersonal state autonomous from private interest was never completed in most countries.Most anti-corruption instruments that donors favour are norm-infringing instruments from thedeveloped context, when they should be norm-building instruments for developing contexts.

Empirical studies on corruption have too often relied on legal and formal criteria to qualifystandards of corruption (Nye, 1967). In this sense, corruption is a behaviour which deviates fromthe formal duties of a public role because of private-regarding (personal, close family, privateclique) pecuniary or status gains; or violates rules against the exercise of certain types of private-regarding influence (Nye, 1967: 417). Michael Johnston enlarged this to Behaviour which devi-ates from the formal duties of a public role (elective or appointive) because of private-regarding(personal, close family, private clique) wealth or status, gains, or (which) violates rules against theexercise of certain types of private-regarding influence (Johnston, 1986: 460). In practice,

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however, there are important practical consequences between defining corruption as just bribing(which is easier to legalize) or as any particularistic publicprivate exchange, where the gain ismore difficult to prove.

While all of the hypotheses described are empirically testable, in the sense that data are avail-able for that purpose, only a few have actually been tested. Some empirical studies have been doneto support certain hypotheses, such as that there is less corruption where there are fewer traderestrictions; where governments do not engage in favouritism; and that there is somewhat less cor-ruption where civil servants are paid better, compared with similarly qualified workers in the pri-vate sector (Van Rijckeghem and Weder, 1997).

Cost of CorruptionCorruption poses a grave challenge in all spheres. In the political realm, it undermines democracyand good governance by subverting formal processes. Corruption in elections and in legislative

bodies reduces accountability and representation in policymaking; corruption in the judiciary sus- pends the rule of law; and corruption in public administration results in the unequal provision ofservices. Moreover, corruption erodes the institutional capacity of government as procedures areoverlooked, resources are siphoned off, and officials are hired or promoted without regard to per-formance. At the same time, corruption undermines the authority of government and democraticvalues such as trust and tolerance.

Corruption weakens economic development by generating considerable distortions and ineffi-ciency. In the private sector, corruption increases the cost of business through the price of illicit

payments, the management cost of negotiating with officials, and the risk of breached agreementsor detection. Although some claim corruption reduces costs by cutting red tape, an emerging con-sensus holds that the availability of bribes induces officials to contrive new rules and delays. Wherecorruption inflates the cost of business, it also distorts the playing field, shielding firms with con-nections from competition and thereby sustaining inefficient firms.

Corruption engenders economic distortions in the public sector by diverting public investmentaway from core sectors like education and heath into capital projects where bribes and kickbacksare plentiful (Lal, 2007). Officials increase the technical complexity of public sector projects toconceal clandestine dealings, thus further distorting investment. Corruption lowers compliancewith construction, environmental, or other regulations; reduces the quality of government servicesand infrastructure; and increases budgetary pressures on government.

These distortions deter investment and trim down economic growth. In quantitative terms,Mauros analysis of 94 countries suggests that a reduction in corruption of 2.38 points on his10-point scale would increase a countrys annual investment by 4% of GDP and would increaseannual growth of GDP per capita by 0.5% (Mauro, 1996). The World Banks The State in aChanging World: World Development Report (1997) further refines the relationship betweencorruption and investment by distinguishing between the level of corruption and the predict-ability of payments and outcomes. It suggests that investment drops off most in countries wherecorruption levels are high but the predictability of payments and outcomes is low. Nevertheless,it is hard to show conclusively that the cause of the problem is corruption only, rather than theinstitutional weaknesses that are closely associated with it. The fact is that probably all of theseweaknesses are intrinsically linked in the sense that they nourish upon each other (for example,red tape makes corruption possible, and corrupt bureaucrats may increase the extent of red tapeso they can extract additional bribes) and that getting rid of corruption helps a country



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overcome other institutional weaknesses, just as reducing other institutional weaknesses helpsit curb corruption.

A 2004 World Bank study of the ramifications of corruption for service delivery con-cluded that an improvement of one standard deviation in the International Country RiskGuide corruption index leads to a 29% decrease in infant mortality rates, a 52% increase insatisfaction among recipients of public healthcare, and a 3060% increase in public satisfac-tion stemming from improved road conditions. Studies also show that corruption slowsgrowth, impairs capital accumulation, and reduces the effectiveness of development aid, andincreases income inequality and poverty (Gupta, Davoodi and Alonso-Terme, 1998; Halland Jones, 1999; World Bank 2004).

John Sullivan lays down a comprehensive study of corruption. Corruption must be rooted out asit: misallocates resources; fosters misguided and unresponsive policies and regulations; lowersinvestment levels; reduces competition and efficiency; lowers public revenue for essential goodsand services; increases public spending; lowers productivity and discourages innovation; increasescosts of doing business (serves as a tax on business); lowers growth levels; exacerbates poverty andinequality; undermines the rule of law; hinders democratic, market-oriented reforms; increases

political instability; and contributes to higher crime rates (Business Leaders Forum, 2005; Sullivanand Shkolnikov, 2004).

Tracking Corruption Around the World: EmpiricalAuthenticationCorruption indicators refer to discrete, often quantitative measurements of a particular aspect ofcorruption (including the level of corruption). Transparency International undertakes many initia-tives to report, curb and eliminate corruption. It publishes an annual Corruption Perceptions Index(CPI), as detailed in Figure 2, which measures the perceived level of corruption of the public sector

Figure 2. Corruption Perceptions Index, 2010.Source: Transparency International (2010).



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in 178 countries. (The index features a scale of 010, where 0 indicates the highest level of corrup-tion and 10 the lowest.)

The results of the 2010 CPI indicate that, of the 178 countries surveyed, over 75%, or 133countries, scored below 5.

Denmark, New Zealand and Singapore were the least corrupt, each with scores of 9.3. Theywere followed closely by Finland and Sweden at 9.2, and Canada and the Netherlands at 8.9.

Afghanistan and Somalia were the most corrupt, at 1.4 and 1.1, respectively. The key factorsleading to the low scores are government instability and heavy political intervention in theformulation of regulatory frameworks (Transparency International, 2010).

Corruption in a society should not be conceptualized as an aggregate of individual corruption(s).The non-corrupt countries at the top of Transparency Internationals list do not differ from coun-tries at the bottom simply by the numbers of individuals engaged in corrupt acts, but by theirwhole mode of governance. The countries at the top managed to institutionalize open and non-discriminative access at some point in their past and so their institutions differ substantially fromthe ones at the bottom (Asmerom and Reis, 1996; North, 1998). Many countries in the middlestruggle between two worlds: both universalistic practices as well as particularistic practicescoexist, more or less competitively (Van de Walle, 2001). To understand them we need to abandonthe individual level of corruption and analyse the societal level (governance) and put state andsociety in relation, as Eisenstadt and Roniger (1984) have done in their Patrons, Clients and

Friends . Some scholars struggled to find differences between various manifestations of particu-larism, for instance clientelism and corruption, in the observance of legal norms. These distinc-tions are largely arbitrary; as countries employ a variety of anti-particularistic practices (nepotismfor instance is legal in some countries and illegal in others). Particularism is simply the generalcategory indicating the deviation from the norm of ethical universalism. Within particularism wefind several phenomena: vertically structured favouritism (clientelism/patronage); horizontallystructured particularism (networking); kinship-motivated particularism (nepotism, ethnic favou-ritism); and graft-motivated particularism (bribing). What is essential is if particularism is the ruleof the game or not (are the majority of transactions particular or universal?). When particularismis the rule of the game we will find a cluster of such practices, not just one (bribing), which is theusual (erroneous) presumption.

Corruption is what every society decides it is; it simply has to be internally consistent with for-mal institutions of a given society. As most countries today proclaim ethical universalism as themain governance principle, any form of favouritism should be considered corrupt, even if it doesnot involve a cash transfer.

Bribery and Bribe Payers Index (BPI)Transparency Internationals 2008 bribe payers index (BPI) highlighted that, although there arestrict laws and norms to control and curb corruption, almost all influential economies are affected

by corruption either directly or indirectly. The BPI is an assessment of how willing a nation is toadopt measures to stop corrupt business practices. It is presented on a scale of 1 to 10, where 1indicates that bribery is very common and 10 that bribery is minimal.

Following are some key statistics from the 2008 BPI, conducted across different countries andindustry sectors: European countries such as Belgium, the Netherlands, Switzerland, Germany, theUK and France ranked high on the 2008 BPI, as shown in Figure 3. On the other hand, Russia,



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South Africa, Brazil, China and India have low BPI scores, as firms there are willing to pay bribesand whistle-blowers are not well protected. Indian firms are also perceived to export corruptionoutside its borders. The country comes at the bottom of Transparency Internationals 2008 Bribe

Payer Index , ranking 19 from 22 countries with a score of 6.8. This indicates that Indian firms are perceived by business people as very likely to engage in bribery when doing business abroad. Theglobal corruption barometer (GCB) polls the ordinary citizens, unlike the expert opinion of CPI.The 2010 GCB ranking placed India almost at the tail end India came out as the fourth worst

bribe-paying country, better than only Afghanistan, Cambodia, and Cameroon. Similarly, thoseindustries ranking high on the 2008 BPI include financial services, information technology (IT)and arms and defence, as shown in Figure 4. As the aerospace, power generation and infrastructuresectors involve high levels of political intervention in their operations, they are prone to corrupt

practices (Transparency International, 2008).The findings of KPMGs 2011 global anti-bribery and corruption survey of 214 executives in

the USA and the UK showed that more than 70% of the respondents (73% in the UK and 70% inthe USA) agree that there are certain regions/countries in the world where business cannot be done

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T a i w a n

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Figure 3. Bribe payers index by country.

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Figure 4. Bribe payers index by sector, 2008.Source: Transparency International (2008).



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without indulging in bribery and corruption. A similar survey done by KPMG in India, which stud-ied the impact of corruption on the economy and business environment, highlighted that 31% ofthe respondents agree that corruption hinders the economic growth of the country, while over 68%

believe that India can achieve more than 9% GDP growth if corruption is contained and eliminated(KPMG, 2011a).

The Growing Importance of Emerging MarketsThe global hotspots for corruption are developing countries (see Figure 5). The previously sig-nificant costs of corruption will only increase as the proportion of global business conducted indeveloping countries and emerging markets in particular continues to rise. Research indicatesthat high-growth emerging markets have higher levels of corruption than G-7 countries. The

powerful influence that these markets will have on the future success of multinational corpora-tions is a strong incentive to engage in anti-corruption efforts (Economist Intelligence Unit,2008).

Evidence of Losses from CorruptionThe following are some examples of how companies have suffered from financial losses as a resultof corruption and bribery:

In 2011 Dow Jones conducted a State of Anti-Corruption Survey of 300 companies globally.It discovered major losses of business as a result of corruption, specifically when dealing ininternational markets. Further, there have been large increases in the number of companieslosing business due to unethical practices. There are number of cases where companies facedlosses due to unethical or corrupt practices. More than 40%, or over 120 companies, lost busi-ness to their competitors due to corrupt practices.

Figure 5. Emerging markets have higher corruption.Source: Hills et al. (2009).Note: On the CPI scale of 1 to 10, 10 indicates the lowest levels of perceived corruption.



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In 2011 corruption in Egypt caused losses worth US$6 billion. The Middle East and NorthAfrica (MENA) region (including Egypt) reported the highest rate of illicit financial out-flows (IFFs) money illegally earned, transferred or utilized.

In 2010 a telecom corruption scam in India involving the government came as a shockingrevelation as it involved over 500 million mobile phone users. The corruption resulted inlosses of over US$40 billion for the Indian government.

Also in 2010, enforcement of the US Foreign and Corrupt Practices Act (FCPA), underwhich a US person or entity or foreign entity can be detained for offering bribes in anattempt to obtain or retain business with a US firm, resulted in many multi-national corpora-tions being fined approximately US$1 billion. The number of cases where companies facedlosses due to unethical or corrupt practices quadrupled from 10% in 2009 to 40% in 2010.

Impact of Corruption on Industries Numerous corporate penalties owing to bribery or corruption have been reported to date. Table 1outlines some examples of industries highly prone to corruption

The impact of corruption is seen across capital markets, as stated by nearly 93% of the respon-dents from the KPMG bribery and corruption survey in India. The survey highlighted that the mostcorrupt industries in India are financial services, information technology, media, legal, chemicals,

pharmaceuticals and healthcare.

Impact of Corruption on GovernmentIn 2004 the World Bank reported that the cost of corruption reached as high as US$1 trillion a year

globally, and that bribery received by public officials in developing and transition countriesamounted to US$2040 billion per year. In the Organization for Economic Co-operation andDevelopment (OECD), over 263 investigations and 256 corruption cases were reported in morethan 19 member countries, according to a 2008 Transparency International study. The followingare a few of the primary examples:

In 2009 a key official of the Linden Housing Rehabilitation Programme in the USA was sen-tenced to 60 months in prison for taking bribes. Earlier, in February 2008, the official pleadedguilty and admitted to accepting more than US$180,000 as cash payments and other benefits inexchange for favourable treatment to certain contractors.

In China, the sectors most affected by corruption are construction, infrastructure, transport andrailways. From January to March 2011 key agencies in China reported 1583 cases involvingcrimes related to various activities in construction projects. Out of these, a staggering 1498cases CNY270 million (US$41.5 million) were related to corruption and bribery.In 2008 a British company sued the country of Romania for US$100 million on charges of cor-ruption involving contracts for airport construction and airline duty-free concession, for whicha former prime minister allegedly demanded over US$2.5 million as bribes (as recorded onaudio tapes) from the company executives.Officials from Russias state budget committee stated that, in 2006, corrupt officials in thecountry took bribes amounting to US$240 billion. Further, Transparency International Russia

Director Elena Panfilova told the BBC (2006: para. 9), This figure is not only for bribery, it iskickbacks to state officials for procurements and for the purchase of permission for business.



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Table 1. Impact of corruption on industries.

Industry/sector Impact on industry/sector Example

Aerospace anddefence

Uncurbed corruption in thedefence sector affects theestablishment and operationaleffectiveness of the armed forces,affecting the security of citizens,diminishing military standardsand posing a threat to thedemocratic system.

A global company engaged in thedevelopment, delivery and supportof advanced defence, security andaerospace systems faced severe lossesdue to charges of corruption andfailure to comply with anti-corruptionand anti-bribery norms. The companylost over 282 million (US$362million) as a result.

Extractive industries The sector cites corruptionand bribery as a prevalent andaccepted practice. However,large sections of the working

population in the sector remainpoverty-stricken and devoid ofthe basic facilities of livelihood.

In February 2009 an oil fieldservices provider and its subsidiarycompany lost 440 million (US$689million) owing to charges against it

of corruption and bribery-relateddealings with Nigerian officials.

Financial services The financial services sector andits intermediaries are prone tocorruption. Financial institutionsare also used by corporatecustomers as a means to placefunds in banks, often in offshorelocations, in order to pay bribes.

In January 2009 the UKs FinancialServices Authority (FSA) fined a globalreinsurance provider 5.25 million(US$7.3 million) for failing to establishand maintain effective systems andcontrols to counter risks of briberyand corruption associated with makingpayments to overseas firms and individuals.

Infrastructure The infrastructure industry isconsidered to be particularlyprone to corruption andunethical practices. This is due tothe high number and complexityof the deals in such sectors astelecommunications, powergeneration or road construction.

The UK government has beenconducting several cases of allegedbribery by infrastructure industrygroups. As a result of one suchinvestigation, a UK bridge builder paida 6.5 million bribe (US$9.4 million)in 2009.

Pharmaceuticals Corruption in thepharmaceuticals sector isrampant across all stages of thedrug life cycle, from the drugdevelopment stage throughto dispensing, marketing andpromotion.

A multinational manufacturer ofpharmaceutical, diagnostic, therapeutic,surgical and biotechnology productspaid US$70 million in settlementcharges for bribing doctors andhospital administrators in manyEuropean countries.

Telecommunications The telecommunicationsindustry is considered one ofthe most corruption-pronesectors owing to its diverseset of players across regions,intense competition, large capitalinvestments, and stringentgovernment and regulatory

norms.

On 16 November 2010 IndiasController and Auditor General (CAG)released a report on the sale of the2G frequency spectrum. The reportindicated that the Indian Ministry ofTelecommunications caused a monetaryloss of US$40 billion to Indias treasuryby selling the 2G spectrum on a first-

come first-served basis, to the benefitof a few favoured operators.

Source: KPMG (2011b).



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Oberoi 13

Even though almost all countries have anti-corruption laws in place, more effective implemen-tation is needed. This is particularly important, as corruption can have the following impacts on acountrys economy:

Lower tax revenues: corruption can result in ineffective tax collection, particularly in econo-mies where regulations and enforcement mechanisms are not very stringent. Many studies sug-gest that corruption lowers a countrys taxGDP ratio. A study of 97 countries by Tanzi andDavoodi showed that a one point increase in the CPI is associated with a 2.7 percentage pointdecline in the taxGDP ratio. Moreover, abuse of political power may lead to both inefficienttax structures and favourable treatment of certain industries or businesses.Inefficient public expenditure: corruption increases bureaucracy, which leads to ineffective uti-lization of public funds.Adverse impact on fiscal balance: as the tax collection process involves many stakeholders,including tax officials, politicians, and taxpayers, the opportunities for bureaucracy to developincreases. This in turn demotivates taxpayers, and can lead to a high level of tax evasion. Further,inefficient tax policies and corruption can lead to the creation of a shadow economy or an unof-ficial economy. One of the major reasons for Greeces fiscal debacle is tax evasion by Greekworkers and companies: it is estimated that Greek workers and companies have evaded taxesamounting to more than 31 billion (US$42 billion), which equals more than 10% of its GDP.Adverse impact on productivity, competitiveness and growth: the widespread prevalence of cor-ruption and bribery increases the cost of doing business, which results in investments and busi-ness decisions that are less efficient (KPMG, 2011b).

Corruption-Related Losses Reported by GovernmentsEvery year, the 27 European Union (EU) EU economies lose an estimated 120 billion (US$168.7

billion), or 1% of the EUs GDP, to corruption. According to a report by US-based Global FinancialIntegrity (GFI) a body promoting national and multilateral policies, safeguards and agreementsaimed at curtailing the cross-border flow of illegal money India is reported to have lost overUS$462 billion in illegal capital flows from 19482008. This is more than twice Indias externaldebt of US$230 billion, and approximately 16.6% of its GDP loss of LKR80 billion (US$1.9 bil-lion). Further, economists suggest that corruption is rampant in the country, primarily because ofthe higher tax rates on the working population, which compels them to engage in corrupt practicesfor monetary gain.

In 2007 African countries reported losses worth US$148 billion, equivalent to losses of 25%of the GDP of any country on the continent. These losses were owing to corruption, petty bribesand inflated public procurement contracts. In 2006 Ghana lost 50% of its health funds due tomisallocation of funds, funds lost due to corruption, and funds not reaching clinics and hospi-tals on time.

According to the Director of the Kenya Anti-Corruption Commission (KACC) PLO Lumumba,in 2010 almost 40% of Africas GDP was lost to corruption-related practices. Unfortunately, gov-ernment officials have also participated in corrupt practices by offering and accepting bribes.

According to a 2010 report by bribe-reporting body TRACE Internationals BRIBEline(Business Registry for International Bribery and Extortion), 85% of all bribe demands in Mexicowere reported to be from government officials, including the police and national- and state-levelgovernment officials. The report also revealed that over 60% of bribery demands were recurring.



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Further, more than 65% of the bribery cases were estimated to be for amounts less than US$5000,with 10% for amounts greater than US$10,000, and 4% for more than US$100,000.

In Russia, according to a 2009 survey conducted by BRIBEline, the majority of bribes weretaken by the police, state government and state and city officials. In over 80% of the cases, theamounts were reported to be of at least US$5000.

In India, over 20072008, the amount of reported bribery cases exceeding US$5000 accountedfor 84%. Most bribes were taken by national and provincial government officials and police offi-cials. In addition, the KPMG bribery and corruption survey in India highlighted that over 51% ofthe respondents believe that India will attract less investment due to corruption. On the other hand,46% believe that, although India will attract investment, it will be limited to select industries andsectors, resulting in skewed growth.

Across all industries, sectors and levels of government, the varied impacts of corruption hinderinvestment and growth. In almost all regions, illegal payoffs increase the cost and lower the qualityof business and deals by 3050%. Owing to these negative implications, government bodies andassociations have introduced various national laws, norms and initiatives, as well as enhanced theirenforcement regimes. The KPMG survey in India on corruption and bribery highlighted that over51% of the respondents believe that India will attract less investment owing to corruption.

Increasing Corruption: The Potential Risk of Limiting Growth The Case of India

Corruption Scorecard of IndiaIt was not long ago that the Indian market was saddled with excessive regulations and protectionistgovernment policies that significantly limited foreign investment and stifled competition. The

business culture in this environment was one in which corruption was prevalent and, in manycases, it became a normal pricing mechanism in the economy. From what started as petty paymentsdemanded by babus during the licence-permit raj days, corruption has taken a much larger formand scale today. Post liberalization and technological revolution, India is faced with a differentkind of challenge. It is not about petty bribes (bakshish) anymore, but scams to the tune of thou-sands of crores that highlight a political/industry nexus which, if not checked, could have a far-reaching impact. Media stories on financial scams indicate that, while petty corruption continuesto be an irritant and mostly driven by public officials at lower levels, larger scams could be attrib-uted to the willingness of the private sector to pay politicians and senior public officials to get theirwork done. Dev Kar, a former International Monetary Fund (IMF) economist, said that the illegalmoney that consists of Indias underground economy drains out in foreign lands. According to him,Indias underground economy was believed to be 50% of the countrys GDP US$640 billion atthe end of 2008. The sixth round of the India Corruption Study (ICS) by the Centre for MediaStudies (CMS) in 2009 also reaffirmed the rampant and omnipresent corruption in the country. Nostate or even a village could claim to be corruption free. And the worst sufferer is a common man(aam adami ). The ICS study (2007) conducted among below poverty line (BPL) households had

brought out that every third household either paid bribes or used a contact to avail the services ofgovernment departments in the country.

Accordingly, Indias rank on Transparency Internationals CPI has also declined further to 95out of 183 countries surveyed in 2012, from 87 out of 178 countries in 2010, indicating a seriouscorruption problem. Figure 6 reports on what percentage of people have paid bribes at least oncein last one year. The table places Liberia on top with 90% of the people admitting that they had to



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Oberoi 15

pay bribe at some point in last 12 months to service providers. India stands with around 55%,admitting that they had to pay bride to service providers at least once in nine times.

Similar conclusions have been drawn by an Asia Pacific region survey conducted by leading

Hong Kong-based business consultancy Political & Economic Risk Consultancy Ltd (PERC),where India had been rated at 8.67 (on a scale of 0 to 10 with the high end being the worst case ofcorruption) as the fourth most corrupt nation among 16 countries. Table 2 provides comparativestatistics about the CPI since 2006. It helps us understand the Indian position as compared to otherAsian and South Asian countries. Table 2 also highlights the gap between India, South Asia, Asiaand worlds least corrupt nations.

In the latest survey released by Transparency International Index in December 2012, India wasranked 94 out of 176 countries, with a score of 3.6 ( Economic Times , 2012). Similarly, accordingto the report by Dev (2010) The Drivers and Dynamics of Illicit Financial Flows from India:19482008, released by Washington-based Global Financial Integrity, post-independence India

lost a staggering US$462 billion in illicit financial flows due to tax evasion, crime and corruption.The report also stated that some 68% of Indias aggregate illicit capital loss occurred after Indiaseconomic reforms in 1991, indicating that deregulation and trade liberalization actually contrib-uted to/accelerated the transfer of illicit money abroad. Reports that wealth is stashed in offshore

jurisdictions and tax havens also go on to indicate the extent of the problem we are looking at.Following is a partial list of financial scandals since the economic liberalization of 19911992. Thetotal monetary worth of the scams committed since 1992 in India is worth more than around Rs10mcrores. Needless to say, a lot of other scandals of probably smaller magnitude must have also taken

place but have gone unnoticed or unreported.Corruption is considered to be one of the major roadblocks in Indias journey from a developing

to a developed economy. There is an urgent need to have a comprehensive framework that wouldhelp curtail corruption at higher levels. There continues to be a decline in Indias integrity score to3.1 in 2011 from 3.5 in 2007, 3.4 in 20082009 and 3.3 in 2010 (see Table 3 and Figure 7).

0 10 20 30 40 50 60 70 80 90 100

Liberia Afghanis

IraqIndia

GhanaTurkeyMexico

RomaniaRussia

ChinaUSA

BrasilCanadaS Korea

GermanyBritain

Figure 6. People report on paying bribes to service providers.Source: Transparency International



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India scores 70 (out of 100), implying that it is only moderately capable of handling the menaceof corruption. It also highlights a large gap (of 31 points) between the legal framework and actualimplementation on the ground. Let us see the overall score in each of the six categories: category I

civil society, public information and media (72, moderate); category II elections (70, moder-ate); category III government accountability (59, very weak); category IV administration andcivil service (66, weak); category V oversight and regulation (80, strong); category VI anti- cor-ruption and rule of law (71, moderate). Thus overall government accountability comes to be veryweak despite strong oversight and regulatory mechanisms.

The WGI also provides a comparison on governance indicators with regard to Indias position(Table 2). 4 Perceptions about corruption in India also seem to have increased primarily due to theongoing movement for the enactment of an effective Lokpal and alleged corrupt practices in aseries of scandals involving the sale of telecom licences, preparations for the CommonwealthGames, a land scam involving high-level military officers, improper property loans made by

Table 2. Comparative statistics about CPI since 2006.

Year No. ofcountriessurveyed

Indias CPIscore & rank

Highest CPI score& rank (top 3countries)

Asian highestCPI score &rank

CPI score & rankof Asian nations

2006 163 3.3 (70) Finland (9.6)Iceland (9.5)New Zealand (9.6)

Singapore 9.4(5th)

Pakistan (2.2)Bhutan (5)Nepal (2.5)Sri Lanka (3.2)

2007 180 3.5 (72) Denmark (9.4)Finland (9.4)New Zealand (9.4)

Singapore 9.3(4th)

Pakistan (2.4)Bangladesh (2)Bhutan (5)Nepal (2.5)Sri Lanka (3.2)

2008 180 3.4 (85) Finland (9.5)Iceland (9.3)

Sweden (9.3)

Singapore 9.2(4th )

Pakistan (2.5)Bangladesh (2.1)

Bhutan (5.2)Nepal (2.7)Sri Lanka (3.2)

2009 180 3.4 (84) Denmark (9.3)New Zealand (9.4)Sweden (9.3)

Singapore 9.2(4th )

Pakistan (2.4)Bangladesh (2.4)Bhutan (5.0)Nepal (2.3)Sri Lanka (3.2

2010 178 3.3 (87) Denmark (9.3)New Zealand (9.4)Singapore (9.3)

Singapore 9.3 Pakistan (2.3)Bangladesh (2.4)Bhutan (5.7)

Nepal (2.3)Sri Lanka (3.2)

2011 183 3.1 (95) New Zealand (9.5)New Zealand (9.5)Finland (9.4)

Singapore(9.2)

Pakistan (2.5)Bangladesh (2.7)Bhutan (5.7)Nepal (2.2)Sri Lanka (3.3)

Source: Adapted from Transparency International India (2011).



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Oberoi 17

state-owned financial institutions, and the WikiLeaks reports. This trend is confirmed by the vari-ous reports released recently by the Comptroller General of Accounts (CAG; KPMG, 2011a).

Taken together, these three indicators (the CPI, the BPI and the GCB) provide an overall pictureof corruption in a country and the respective rankings offer useful comparative status at the globallevel. This provides a snapshot of corruption in India (see Table 4).

Assessing the Impact of Corruption on the Indian Economy

According to the World Economic Forums Global Competitiveness Index 2010, corruption could bea major hurdle to Indias growth in the coming decade and may impact its fair business competitive-ness. Burgeoning investment and growth opportunities may also be impacted if corruption is not

Table 3. Indias integrity indicators scorecard 2009.

India: integrity indicators scorecard 2009

Overall score : 70 (+/ 2.00) moderate

Overall implementation gap: 31

Category I Civil society, public info and media 72 ModerateI-1 Civil society organizations 57 Very weak I-2 Media 72 ModerateI-3 Public access to information 85 StrongCategory II Elections 70 ModerateII-1 Voting & citizen participation 94 Very strongII-2 Election integrity 89 StrongII-3 Political financing 27 Very weak Category III Government accountability 59 Very weak III-1 Executive accountability 73 ModerateIII-2 Legislative accountability 65 Weak III-3 Judicial accountability 38 Very weak III-4 Budget processes 60 Weak Category IV Administrative & civil service 66 Weak IV-1 Civil service regulations 50 Very weak IV-2 Whistle-blowing measures 69 Weak IV-3 Procurement 58 Very weak IV-4 Privatization 88 StrongCategory V Oversight & regulation 80 Strong

V-1 National ombudsman 88 StrongV-2 Supreme audit institution 93 Very strongV-3 Taxes & customs 75 ModerateV-4 State-owned enterprises 82 StrongV-5 Business licensing & regulations 65 Weak Category VI Anti-corruption & rule of law 71 ModerateVI-1 Anti-corruption law 89 StrongVI-2 Anti-corruption agency 69 Weak VI-3 Rule of law 67 Weak VI-4 Law enforcement 58 Very weak



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controlled. Echoing these sentiments, over two-thirds of our survey respondents perceive that Indiacan achieve more than the projected 9% GDP growth if corruption is controlled, while the rest feel thatcorruption is definitely a key risk to the projected growth rate and this may result in a volatile politicaland economic environment (Figure 8).

International research suggests that the corruption levels in a country often have an adverseeffect on foreign direct investment (FDI) inflows: a one-point increase in the corruption level canlead to a reduction in per capita FDI inflows by up to 11%. Moreover, an overwhelming 90% ofrespondents opined that corruption negatively impacts the performance of stock markets byincreasing volatility (40%) and prevents institutional investors from making long-term investments(32%; Figures 9 and 10).

Across international financial markets, corruption is considered to be associated with higher borrowing costs, lower stock valuations and bad corporate governance. Similarly, respondents to

Table 4. Comparative status of corruption in India by three indicators.

Institution Index India China Brazil Russia USA UK TotalCountries

World Bank Worldwide governanceIndicators 2009

112 148 91 161 26 20 213

Transparency International Corruption PerceptionIndex 2010

87 78 69 154 22 20 178

Transparency International Bribe Payers Index 2008 19 21 17 22 9 5 22

Note: The numbers indicate the rank of the countries on respective indices.

Figure 7. India: comparison between 2009, 2004 and 1998.



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Oberoi 19

our survey also opined that corruption, if not checked, can erode the very pillars of our economicgrowth.

Respondents opined that the biggest impact of corruption on business is its tendency to skew the

level playing field and attract organizations with lesser capability to execute projects (Figure 11).Such practices could have a serious impact on efficiency and the quality of delivery resulting inincreased costs, a point again highlighted by 99% of respondents. Another interesting insight is that68% of respondents believed that, in many cases, corruption is induced by the private sector. Alarge number of respondents (31%) to the KPMG India Fraud Survey 2010 stated that organiza-tions pay bribes to win and retain business. This is a typical scenario where organizations tend tooverlook the implications of encouraging these practices and often look only at short-term benefitsachieved. They fail to realize that what has worked in their favour could also land them into troublelater and lead to adverse consequences for them.

Some industries tend to have relatively higher instances of bribery and corruption than others,

primarily due to the link they have with multiple parties both in the government as well as the private realm. Approximately 50% of the respondents are of the view that real estate and construc-tion and telecom sectors are most prone to corruption followed by the social development sector

31%

68%

1%0%

10%

20%

30%40%

50%

60%

70%

80%

Corrup on is a deterrentand a key risk to theprojected 9 % GDP

growth rate

India can achieve morethan 9 % growth if

corrup on is reduced

Corrup on has no impacton India's GDP growth

rate

Figure 8. Impact of corruption on Indian GDP.

7%

93%

No

Yes

Figure 9. Corruption negatively impacts the capital market.



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(Figure 12). This does not come as a surprise since in all these sectors government and politicalintervention is considered higher. Large capital investments, multi-level approvals, complex pro-cesses and huge projects give immense opportunity for corruption in these sectors. The WorldBanks Doing Business report 2010 estimates that 6080% of building projects (construction) indeveloping economies are undertaken without adequate permits and approvals this in itself is a

big area of public corruption.The Indian governments track record in combatting bribery and corruption has not been very

effective. The main reason for this is political interference and delayed justice that impairs theeffectiveness of the verdict, opined corporate India. Respondents also stated that corruption levels

28%

40%

32%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Corrup on aids inar cially ina ng share

prices

Corrup on increasesvola lity in the stock

market

Corrup on preventsins tu onal investors

from inves ng long termin the capital markets

Figure 10. Impact of corruption on capital markets.Source: KPMG (2011a).

100% 99%

68%

45%

11%16%

0%

20%

40%

60%

80%

100%

120%

Corrup on skews the level playing eldand tends to a ract organisa on withlesser capability to execute projects

Corrup on creates inefficiency in thesystem and hence increases the cost of opera ons

In many cases corrup on is induced by theprivate sector

Corrup on has had a direct impact on yourbusiness and reduced your company'sgrowth which it could have otherwiseachieved

Corrup on has reduced your ability toaccess funds from domes c nancialmarkets

Figure 11. Short-term gain, long term pain: Impact of bribery and corruption on business.Source: KPMG (2011a).



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Oberoi 21

are expected to remain at the current level irrespective of the current and impending legislations.The Prevention of Corruption Act came into force in 1988. However, the number of convictions

under this act is considered abysmally low. Eighty-four per cent of the respondents believed thatthe Indian government has not been very effective in enforcing anti-bribery and corruption laws.The Right to Information Act (2005) is a landmark legislation under which one can seek specificinformation under the control of public authorities with the objective of promoting transparencyand accountability of those holding public positions. This act in recent times has helped unearthcertain prevalent malpractices in the country. Other anti-bribery and corruption initiatives in Indiainclude the presence of the State LokAyuktas; Central Vigilance Commission; the proposed

National Anti-Corruption Strategy; and Guidelines on Corporate Governance; however, enforce-ment of these legislations has not been effective. Figure 13 below depicts Indias percentile in itsability to control corruption.

Recent disclosures by media on some of the large scams as well as ongoing enquiries of someof the senior government officials indicate that there is a silver lining. Public furore over the recent

32%

17%

13%10% 9%

6% 5%

9%

0%

5%

10%

15%

20%

25%

30%

35% Real estate & construc on

Telecommunica ons

Social development sector(educa on, poverty allevia on)

Financial services(Banking, Insurance, Mutualfunds,etc)

Defence

Figure 12. Perception of most corrupt industries.Source: KPMG (2011a).

Figure 13. Indias percentile rank in its ability to control corruption.Source: Kaufmann et al. (2010).Note: The governance indicators presented here aggregate the views on the quality of governance provided by a largenumber of enterprise, citizen and expert survey respondents in industrial and developing countries. These data aregathered from a number of survey institutes, think tanks, non-governmental organizations (NGOs), and internationalorganizations. The WGI do not reflect the official views of the World Bank, its executive directors, or the countries theyrepresent. The WGI are not used by the World Bank Group to allocate resources.



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scams, extensive media coverage and outcry indicate that, as a nation, we are starting to realize thateradicating corruption must be one of the priorities if we are to attain sustainable growth.

In terms of WGI, India ranked at about 46th percentile in 2009, implying that more than half ofthe 210 countries studied score better on governance. India is particularly weak on political stabil-ity and regularity quality. If the control of corruption indicator is compared for the top 10 econo-mies of the world, India gets third rank from the bottom only better than Russia and China.

Survey respondents identified political interference, delayed justice that impairs the effective-ness of the verdict and the absence of harsh penalties as the top three reasons for poor enforcement.India has been facing governance challenges at various levels for a long time. Rigid bureaucracy,complex laws and long drawn-out processes of the legal system deter people from consideringlegal recourse in corruption cases. India has around 35 million court cases pending to be resolved.Factors such as inadequate infrastructural facilities and man power were identified as key reasonsfor such delays. Moreover, the legal framework around bribery and corruption lacks teeth. Allthese factors have impacted on the power and independence of the judiciary (Norton Rose, 2010).

Designing and Implementing Anti-Corruption StrategiesPolicymakers too often use the C word and focus directly on dealing with the symptoms of cor-ruption while ignoring the broader disease of dysfunctional governance. Only by focusing on gov-ernance is the fight against corruption likely to be successful in the long run. The followingconsiderations may be helpful in designing and implementing anti-corruption strategies:

Recognize the Pecking Order of ReformsBecause corruption reflects a system of failed governance, the higher the incidence of corruption,the less an anti-corruption strategy should include tactics that are narrowly targeted to corrupt

behaviours and the more it should focus on the broad underlying features of the governance envi-ronment. This suggests a pecking order of reforms in highly corrupt countries.

The first order of priorities in these countries should be establishing the rule of law, strengthen-ing institutions of participation and accountability and establishing a citizens charter defining

basic legal rights, including access to defined public services standards. Limiting governmentinterventions and implementing economic policy reforms should be part of this package. The sec-ond order of priority should be clarifying the roles and responsibilities of various orders of govern-ment and introducing performance-based accountability to hold government to account for servicedelivery performance. The third order of priority should be implementing policies dealing withdetection and punishment of corrupt acts.

Assess Service Delivery PerformanceAny serious effort by domestic and external stakeholders to hold governments to service deliverystandards will eventually compel those governments to address the causes and consequences ofcorruption. Given the difficulty of detecting corruption through financial audits, corruption may bemore easily detected through observation of public service delivery performance. Malaysias cli-ents charter represents an important innovation to empower citizens to hold government to accountfor delivery of defined service standards (Shah, 2005).



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Oberoi 23

Empower Citizens by Supporting BottomUp ReformsIn many countries in which corruption is entrenched, governments lack either the will or the capa-

bility to mount effective anti-corruption programmes. Internal and external stakeholders maychoose to amplify citizens voices and strengthen exit mechanisms in order to enhance transpar-ency, accountability, and the rule of law. Strengthening local governance and establishing homerule may be important tools in this regard.

Disseminate InformationLetting the sun shine on government operations is a powerful antidote to corruption. The moreinfluence donors can exert on strengthening citizens right to know and governments obligation torelease timely, complete, and accurate information about government operations, the better the

prospects for reducing corruption. Information about how governments spend money and manage programmes and what these programmes deliver in services to people is a key ingredient ofaccountability, which in turn may be an important brake on corruption.

Support Economic Policy ReformTrade and financial liberalization can reduce opportunities for corruption by limiting the situationsin which officials can exercise unaccountable discretionary powers, introducing transparency, andlimiting public sector monopoly powers (Kaufmann et al., 2005).

Just as corruption stems from a variety of institutional failings and societal predispositions,responses to corruption must vary to address particular causes. Moreover, responses must conformto a politically constrained reality, adapting to the opportunities and constraints for fighting corrup-tion at a given time (Table 5). While the mix of interventions will vary, use of societal measures to

build and maintain awareness and political will are key to sustaining the effort. Where corruption

is pervasive, the fight against it must be a public as well as a technocratic affair.Examples of institutional and societal measures useful when there is support for reform:

Table 5. Institutional causes institutional responses.

Institutional causes Institutional responses

Wide authority Limit authority; e.g. privatization, liberalization, competitive procurement,completion in public services.

Minimalaccountability

Improve accountability through transparency; e.g. freedom of informationlegislation, financial disclosure, open budget process, financial managementsystem.Oversight; e.g. audit offices, inspector general/ombudsman/anti-corruptionagency, legislative oversight, hot lines, and whistle-blower protection.Sanctions; e.g. electoral, criminal and administrative sanctions, judicial reform.

Perverse incentives Realign incentives; e.g. living wage, performance-based incentives,professionalization, ethics codes, eliminating redundant and ghost workers.

Societal causes Societal responses

Anti-system attitudes Raise awareness about costs of corruption and mobilise political willfor reform; e.g. through surveys, public relation campaigns, investigative

journalism, civic advocacy organizations, workshops, international pressure.



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Targeting government institutions where the corruption problem is serious and political willfor change exists (often derived from a high-level official who identifies his or her tenurewith fighting corruption);

Identifying specific interventions based upon root causes of the problem wide authority,little accountability, or perverse incentives;

Sponsoring integrity workshops; Fostering anti-corruption NGOs; Encouraging anti-corruption advocacy; Promoting civic monitoring; Providing training in investigative journalism; Promoting private sector efforts to prevent corruption; Advocating international cooperation and conventions;

Experience strongly suggests that combatting corruption requires an indirect approach that startswith its root causes. To understand why, it is helpful to look at a model that divides developingcountries into three broad categories high, medium, and low reflecting the incidence of corrup-tion. The model assumes that countries with high corruption have a low quality of governance,those with medium corruption have fair governance, and those with low corruption have goodgovernance (Table 6).

What this model reveals is that, because corruption is itself a symptom of fundamental gov-ernance failure, the higher the incidence of corruption, the less an anti-corruption strategyshould include tactics that narrowly target corrupt behaviours and the more it should focus onthe broad underlying features of the governance environment. For example, support for anti-corruption tailoring the fight against corruption to country circumstances, agencies and publicawareness campaigns is likely to meet with limited success in environments in which corrup-tion is rampant and the governance environment deeply flawed. In fact, in environments wheregovernance is weak, anti-corruption agencies are prone to being misused as tools of politicalvictimization (Gurgur and Shah, 2000). These types of interventions are more appropriate in alow corruption setting, where governance fundamentals are reasonably sound and corruption

is a relatively marginal phenomenon. The model also suggests that, where corruption is high(and the quality of governance correspondingly low), it makes more sense to focus on theunderlying drivers of malfeasance in the public sector by building the rule of

Table 6. Priorities for anti-corruption reforms given level of corruption and quality of governance.

Incidence of corruption/quality of governance

Priorities for anti-corruption efforts

High/poor Establish rule of law, strengthen institutions of participation andaccountability, establish citizens charter, limit government intervention,and implement economic policy reforms.

Medium/fair Decentralize and reform economic policies and public management,introduce accountability for results.

Low/good Establish anti-corruption agencies, strengthen financial accountability,raise public and official awareness, require anti-bribery pledges andconduct high profile prosecutions.

Source: Huther and Shah (2000).



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law and strengthening institutions of accountability, for example. Indeed, a lack of democraticinstitutions (a key component of accountability) has been shown to be one of the most impor-tant determinants of corruption (Gurgur and Shah, 2002).

Concluding RemarksIn order to curb corruption, organizations could adopt the following preventive mechanisms:

a. Draw up a comprehensive code of conduct and ensure strict enforcement of the code com-municating zero tolerance towards corruption.

b. A structured whistle-blowing mechanism to report potential bribery/corruption issues.c. A comprehensive and periodic risk-assessment mechanism, including third-party audits

with specific reference to corruption-related risks.d. A regular monitoring mechanism to address issues arising out of bribery/corruption.

While stringent compliance programmes, upgraded controls and regular monitoring could helpto prevent corruption, social control like building an ethical culture in the organization is one ofthe best ways to prevent any form of unethical practice including bribery and corruption. Socialcontrols would primarily include the following:

Adequate training for employees giving illustrations of unacceptable practices Strong communication mechanisms enabling bottom to top feedback/ concerns Promoting an ethical culture in the organization (KPMG, 2011a).

Industry bodies can take the lead in standing up against bribery and corruption and take ade-quate steps to ensure that their members are committed to working in a corruption-free envi-ronment by not paying or accepting bribes. Each step in the direction of building up aneffective governance to reduce the temptation of accepting bribes would also involve control-ling the payer of the bribe.

Notes1. The World Bank addresses corruption along four dimensions: (1) preventing fraud and corruption in

Bank projects; (2) helping countries that request Bank assistance for corruption; (3) mainstreaming aconcern for corruption in the Banks work; and (4) lending active support to international efforts toaddress corruption.

2. The WGI project defines governance as the traditions and institutions by which authority in a countryis exercised. This includes how governments are selected, monitored and replaced; the governmentscapacity to effectively formulate and implement sound policies and provide public services; and therespect of citizens and the state for the institutions that govern economic and social interactions amongthem.

3. Control of corruption captures perceptions of the extent to which public power is exercised for privategain, including both petty and grand forms of corruption, as well as capture of the state by elites and

private interests.4. The WGI ranks countries with respect to six dimensions of good governance: (1) voice and account-

ability the extent to which the general public is able to participate in selecting the government,degrees of freedom of expression and association, and the extent of media freedom; (2) political sta-

bility and absence of violence the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including political violence or terrorism; (3) government



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effectiveness the quality of public services, the quality of the civil service and the degree of itsindependence from political pressures, the quality of policy formulation and implementation, and thecredibility of the governments commitment to such policies; (4) regulatory quality ability of thegovernment to formulate and implement sound policies and regulations that permit and promote pri-vate sector development; (5) rule of law the extent to which people have confidence in and abide by

the rules of society, and in particular the quality of contract enforcement, the police, and the courts,as well as the likelihood of crime and violence; (6) control of corruption the extent to which public

power is exercised for private gain, including both petty and grand forms of corruption, as well ascapture of the state by elites and private interests.

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