The Cost of Corruption



Economic experts worldwide now agree that corruption -ranging from bribery and extortion to nepotism- can have disastrous effects on struggling economies.

    In one World Bank survey, more than 150 high-ranking public officials and top citizens from over 60 developing nations ranked corruption as the biggest impediment to economic development and growth in their countries.

    Corrupt practices drain government coffers, play havoc with free trade and scare away investors. The World Bank estimates that corruption can reduce a country’s growth rate by 0.5 to 1.0 percentage points per year. IMF research has shown that investment in corrupt countries is almost 5 per cent less than in countries that are relatively corruption-free.

    Standard and Poor’s, the bond rating agency, gives investors a 50 to 100 per cent chance of losing their entire investments within five years in countries with various degrees of corruption. Such odds make long-term investment C which is of most benefit to a country C risky and unlikely.

    “It is widely acknowledged that corruption scares away foreign investment and development aid”, according to Pino Arlacchi, Executive Director of the Vienna-based United Nations Office for Drug Control and Crime Prevention (ODCCP). “Obviously, it is wiser to invest in countries with more transparency, independent and well-regulated banks and strong court systems.”

    As evidence mounts of the huge economic costs of corruption, the United Nations has decided to step up efforts to fight it. A special workshop will focus on the problem at this year’s Tenth Congress for the Prevention of Crime and the Treatment of Offenders in Vienna in April. The workshop, to be coordinated by the United Nations Interregional Crime and Justice Research Institute (UNICRI), will examine corruption at the so-called street, business and top levels.

Selling licenses, buying laws

“Street level” corruption infests public offices and police departments, where money could change hands for licences and other permits or officials could be bribed to ignore inconvenient laws.

    In the 1996/97 International Crime Victims Survey (ICVS), an average of 18 per cent of respondents from developing countries, 13 per cent from countries in transition and 1 per cent from the industrialized world said they had paid bribes to various public officers over the previous year.

    In developing and transition countries, poor pay and low social status may lure officials into corrupt habits, according to a 1997 World Bank study. A 1999 report published by the United Nations Development Programme (UNDP) noted that civil service pay in several South Asian countries had dropped considerably over the past 50 years, which could contribute to high corruption in that region.

But corruption may also stem from a “moral or cultural attitude”, according to Fred Schenkelaar, Special Adviser to the UNDP’s Programme for Accountability and Transparency. “Low pay could account for petty corruption in the [South Asia] region, but increasing the salaries of civil servants will not guarantee that it disappears”, he said.

Bribes for business

Bribes from businesses may be even more difficult to resist, since fat rewards may be offered by the firms themselves C both local and foreign C for licences and contracts or even to evade taxes and tariffs.

    Some companies, especially smaller ones, may feel pressured into paying bribes simply to survive. Some 97 per cent of all convictions in United States federal courts for corrupt practices are handed out to small companies with fewer than 50 employees, according to the proceedings of a 1999 international corruption conference in Milan, Italy.

   In one World Bank survey, business people in an Eastern European country blamed corruption on high tax levels, complicated by inefficient regulation, confusing rules, licensing at the discretion of officials and an invasive corps of field-level bureaucrats. Lower-level officials calculated a company’s tax liability -often creatively- and issued stiff fines for violations.

    With the rules uncertain and enforced at the whim of officials, businesses were free to negotiate. Most firms paid “unofficial” export and import fees and almost always had to bribe officials for phone lines. Informal payments to health, tax and fire inspectors were common, as were unofficial fees for leases or access to credit.

    In addition to these costs, companies lost at least 37 per cent of management time dealing with the government.

    The World Bank has noted that the high cost of dealing with State officials through bribery encourages many firms to cut down on taxes by underreporting sales, costs and payroll to the authorities. The State, of course, loses a substantial amount of revenue. The poor may make up the shortfall, through increased taxes and fewer social benefits.

    Many developing and transition countries lose tax and customs revenue through corrupt acts. Taxes are evaded through smuggling as well as off-the-books and fraudulent accounting.

    In one African country, lost revenue from customs duties and income tax was found to make up 8 to 9 per cent of gross domestic product (GDP) C six to seven times what the country spent on health. Income tax evasion alone accounted for 70 per cent of this.

   A World Bank study of the problem revealed that only 40 per cent of small and medium-sized businesses in the country paid taxes and that many individuals did not file returns. A lack of clear customs guidelines or published tariff rates had led to a gross underpayment of customs duties. Officials had wide discretion, which encouraged corrupt payoffs to evade tariffs.

Bribes for illegal gains

Organized crime may deliberately use corruption to increase its share of illegal markets. For example, gamblers and drug dealers in North America and Latin America have paid officials to raid their competitors or keep them out of the country, the UNDP notes. Or corrupt businesses may directly intimidate potential rivals, often paying the police to stay away.

    Organized crime may use corrupt practices to profit from legal businesses. For example, an Asian airline paid about $215,000 to an organized crime front company over three and a half years to ensure peaceful shareholders’ meetings, according to the Milan conference. In a North American city, businesses cut $330 million from an annual waste disposal bill of $1.5 billion by ridding the garbage industry of Mafia domination.

    Corrupt criminal groups can pose a particular threat to transition countries, where the entire wealth of a State is up for grabs, according to the UNDP. If criminal groups create uncertain and violent conditions, they will drive competitors away, especially Western firms, leaving them with a free field.

In an effort to close the ranks on this type of corruption, the proposed United Nations Convention on Transnational Organized Crime –  to be ready for adoption by the UN General Assembly in September 2000- will criminalize corrupt acts linked to organized crime groups, among several other measures to combat transnational criminality. In addition, nations have decided to draw up a separate international treaty against corruption.

Corruption at the top

When corruption enters the higher levels of officialdom, it can have wide-reaching and devastating effects. Corrupt officials in high places may misuse international aid, abandon crucial development projects, or keep living standards impossibly low because of excessive spending.

    Up to $30 billion in aid for Africa -an amount twice the annual gross domestic product (GDP) of Ghana, Kenya and Uganda combined Chas ended up in foreign bank accounts, according to the anti-corruption organization Transparency International. The World Bank estimates that one Asian country has lost $48 billion over the past 20 years to corruption, surpassing its entire foreign debt of $40.6 billion.

    In many cases, high-level corruption is helped along considerably by Western partners. International banks have allowed embezzled funds to be held in secret foreign accounts. By some estimates, some $30 billion in Nigerian “flight capital” is on deposit with European and North American banks.

    Foreign firms eager to sell their goods have bribed ministers or tacked “commissions” for high officials onto contracts or investment agreements. In some Western nations, bribing foreigners for business purposes is legal and even a legitimate tax deduction.

    Industrialized nations themselves are plagued by corruption. In one celebrated European scandal, bribes were paid by several companies for contracts worth about $1.34 billion to build a new terminal at a major international airport. Fourteen people in another European ministry were charged with corrupt practices in awarding computer contracts, leading to an estimated loss of $787,000, according to Transparency International.

International treaties to combat corruption

The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, 1999, obliges nations to criminalize the bribery of foreign public officials.

    The Council of Europe Civil Law Convention, 1999, defines common principles and rules at the international level in civil law and corruption.

   The IMF Code of Good Practices on Transparency in Monetary and Financial Policies: Declaration of Principles, 1999, aims at increasing the transparency of the public and financial sectors.

   The Council of Europe Criminal Law Convention on Corruption, 1998, obliges nations to criminalize a range of corrupt acts and boost international cooperation in prosecuting corruption offences.

   The EU Convention on Corruption, 1997, criminalizes active and passive corruption of officials.

   The UN Code of Conduct for Law Enforcement Officials, adopted by the General Assembly in 1996, includes a stipulation that law enforcers should avoid corruption as well as rigorously combat it.

The UN Declaration against Corruption and Bribery in International Commercial Transactions, 1996, urges both the public and private sectors to follow the laws and regulations of nations where they do business and consider the impact of their actions on economic and social development as well as the environment.

    A Protocol to the Convention on the protection of the European Union’s Financial Interests, 1996, criminalizes active and passive corruption of national and community officials. A second Protocol, 1997, criminalizes the laundering of proceeds from corruption and introduced liability for companies and corporations involved.

    The Organization of American States’ (OAS) Inter-American Convention against Corruption, 1996, aims to fight corruption in an effort to boost democratic institutions and to prevent distortions in the economy, improprieties in public administration and damage to civil society.

Combating corruption

Opening up financial records to public scrutiny has been one of the most successful ways of foiling corruption.

Other methods have included setting up clear rules of procedure for contracting, systems of checks and balances between key units and monitoring or auditing bodies.

    Some countries have used independent commissions to monitor, audit and survey public transactions. Such anti-corruption bodies have significantly cut corrupt practices in Australia, Hong Kong, Poland, Singapore, and Uganda.

    The fight against corruption has also been boosted by several international treaties, which have been adopted by the United Nations, the Organisation for Economic Cooperation and Development (OECD), the Council of Europe, the International Monetary Fund (IMF) and the Organization of American States (OAS).  These agreements have focused on tightening up and harmonizing trade, environmental and tax rules to close loopholes corruption could slip through.

A huge step forward was taken last year when OECD countries adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The treaty obliges nations to criminalize the bribery of foreign public officials and punish it with penalties comparable to those for domestic officials.

    To keep a tighter hold on aid payments, the International Monetary Fund (IMF) recently agreed to deny financial assistance to countries where corruption threatens to undermine economic recovery programmes.

    Several other organizations are actively working with Governments at the country level to help reform weak public institutions and systems, including the OECD, the World Bank, Transparency International, the UNDP and the United Nations Centre for International Crime Prevention (CICP) C the crime branch of the ODCCP.

The CICP has been helping several nations with law reform, public administration management, training for civil servants and criminal justice personnel, and tendering for international aid projects. Last year, it drafted an international code of conduct for public officials.

    In 1999, the CICP launched a Global Programme against Corruption. The Programme is helping countries assess national measures against corrupt practices and training policy makers, judges, prosecutors, law enforcers and members of the financial world. It is also gathering information about anti-corruption measures worldwide for use in an international database to be set up by the CICP, in collaboration with the UNICRI.

“The Global Programme will provide comparative data about corruption to promote accountability, transparency and the maintenance of the rule of law. In particular, it will explore the corruption/organized crime nexus”, said ODCCP Executive Director Pino Arlacchi.


Source: United Nation


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