Fighting Corruption Needs More than a “Spray Gun”

Mr. Sta. Ana coordinates Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, October 2, 2006 edition, page S1/5.

Corruption is bad.  Corruption is evil. Corruption is harmful to development.

Everyone says all this, including George W. Bush, Tony Blair, Gloria Arroyo, Merceditas Gutierrez, Transparency International, the International Monetary Fund, and the World Bank.

World Bank President Paul Wolfowitz has in fact made an anti-corruption drive his main preoccupation.  Wolfowitz’s tough talk against corruption has led to the suspension, reduction or withdrawal of Bank loans to some countries.  Following Wolfowitz’s drive, the World Bank suspended loans for Argentina, Bangladesh, Chad, Congo, India, Kenya, Uzbekistan, and Yemen.

The World Bank is not exactly united on Wolfowitz’s campaign.  In the first place, the Bank’s mandate is to reduce poverty, not fight corruption.  Too much emphasis on the anti-corruption drive will detract the Bank from its mandate.  Moreover, the Wolfowtiz directive is not clear about the instruments to fight corruption.

Joseph Stiglitz, who undoubtedly can provide the economic principles to demolish a misplaced argument that corruption is a binding constraint of development prefers dishing out a witty response to Wolfowitz:  “Just delivering a sermon and saying you’re going to be tough on corruption, is not enough.”  In the same breath, he reminds us that the US Defense Department, wherein Wolfowitz was once a leading cadre, “was recently shown to have $10-$40 billion of expenditures that couldn’t be accounted for.  If they can’t account for their money, what do we expect from societies that have been left by the legacy of colonization with no one to do the accounting?”

The moralists and purists laud Wolfowitz’s campaign.  Transparency International (TI) Chair Huguette Labelle says that her organization is “pleased to see the Bank advancing its work on corruption.”  Corruption, after all, is a key issue of TI.  Says Ms. Labelle:  “We feel strongly that if we don’t deal with corruption, we will not get rid of poverty.”  But this statement is very iffy.  If Ms. Labelle were talking about the Philippines, she might be on track.

But her argument cannot apply to other countries with a lot of corruption like China or Vietnam.  China and Vietnam have enjoyed sustained, high growth, in spite of corruption, resulting in a drastic decline in absolute poverty.

A number of scholars have done empirical studies that convincingly show that corruption per se does not hinder growth and poverty reduction.  What matters is the nature or type of corruption.  Predictable corruption, as in the case of China and Vietnam, does not impede investments and growth.  High levels of corruption combined with unpredictability are the most pernicious.

In the volume edited by J. Edgardo Campos (Corruption: The Boom and Bust of East Asia, 2001), the editor says that “the authors argue that rents and corruption have been essential to the credible enforcement of contracts and thus to the large inflows of investment.”

The likes of Gloria Arroyo and Jose de Venecia might find justification for “tolerable” corruption from the above statement.  Unfortunately, the nature of corruption in the Philippines is very different from the kind of corruption in China.  Philippine corruption is predatory, massive and unpredictable.  Think of the PIATCO (Philippine International Air Terminal Corporation) case.

To be sure, we must fight corruption.  But it cannot be done through the Wolfowitz way, through moral appeals, or through lifestyle checks.

But even the rational, amoral social scientists have faltered in their approaches to corruption. Mainstream economics, political science and public administration, notwithstanding their different perspectives and methodologies, converge on the assumption that corruption arises from greed and the discretionary powers of public officials.  Mushtak Hiusain Khan calls this the “greed plus discretion” theory of corruption.

On that assumption, mainstream economists prescribe a standard set of anti-corruption reforms such as liberalization, privatization, higher salaries for public officials, and transparency.  But as Khan cautions in his paper (Governance and Anti-Corruption Reforms in Developing Countries: Policies, Evidence and Ways Forward, 2006), “econometric and case study evidence suggest that these policies have not achieved very much in reducing corruption.”

Khan identifies four types of corruption, which require specific, nuanced interventions.

The first type is the corruption and rent seeking that come as a result of necessary state activities (e.g., technology policy) that cannot be addressed by way of privatization or liberalization. To deal with such kind of corruption, the reforms have to revolve around strengthening the state capacity to carry out the necessary activities and even legalizing as well as regulating the rent-seeking behavior.

The second type of corruption is related to the state’s role of maintaining political stability, especially in the context of a severe fiscal constraint (e.g., trade protection for farmers to compensate for the lack of funds for safety nets). In this situation, it is necessary to manage well the politics to minimize the costs, but the strategic solution is obviously a sustainable fiscal reform program.

The third type of corruption pertains to the institutional weaknesses in enforcing property rights.  But as the examples again of China or Vietnam show, informal institutional arrangements, including innovative incentive mechanisms, can substitute for the lack of formal property rights, with satisfactory outcomes to both the individual and the collective.

Finally, predatory corruption is the most harmful.  And it is prevalent in countries that have soft states.  Paul Hutchcroft (1998) has described the Philippines as a “booty capitalist” state.

All told, an anti-corruption program cannot remain general.  A spray-gun approach won’t do.

It cannot either be seen simply from the worldview of a neoconservative like Wolfowitz who only sees evil.  The irony is that Wolfowitz, who has staked his credentials on his anti-corruption drive, obtained the World Bank presidency, not through merit but through the intervention of his crony, George W. Bush.  Obtaining a high post through cronyism hardly qualifies him as poster boy against corruption. Or perhaps “cronyism” only applies to the Marcoses and Suhartos?

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