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close this bookThe Courier N 140 - July - Aug 1993 - Dossier: National Minorities - Country Reports: Dominica, Mozambique (EC Courier, 1993, 96 p.)
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View the document1993 Human Development Report
View the documentGrand corruption in Third World development

Grand corruption in Third World development


In the European Community this year there have been loud calls for 'good governance' and for stamping out corruption in high places, spurred by the collapse of one Member State's government amid accusations that leading politicians had for years benefited from covert financial links with big business and organised crime. An organisation dedicated to openness in the conduct of public affairs, called Transparency International, has recently been launced in Berlin

But suspicions of high-level dishonesty are not confined to Europe, unfortunately. The author of the article below is a businessman with 30 years ' experience of work in the agroindustrial field in African, Caribbean and Pacific countries. He maintains that the abuse of public power for private gain, at the very top, puts a high surcharge on business, and consequently development, in many Third World countries -and he believes the problem is getting worse.

Corruption-'The misuse of public power for private profit'-has probably existed for as long as there has been public power. To eliminate corrupt officials and avaricious businessmen it would probably be necessary to change human nature; but an increasing number of people in both North and South are now actively discussing the problem and refusing to accept that corruption is inescapable.

The last three years have produced an unprecedented number of business scandals in the developed world, to an extent that nobody could now think of corruption as a problem of the South alone. However, there is an important distinction between internal corruption of the kind which may occur within any country and the international variety which so seriously affects the development of the South. This article is not concerned with businessmen who defraud their own shareholders, creditors or employees, nor with customs officials, policemen or minor officials who seek 'tips' to make the wheels go round. It is concerned only with what is sometimes called 'grand corruption' - the practice by which senior officials, ministers and, all too frequently, heads of state require payments before approving major purchases and developments. It seeks to answer very briefly four questions:

-how widespread is grand corruption? -how does it work?

-what damage does it do?

-what are the possible solutions?

How widespread?

It is difficult and potentially dangerous to generalise about a subject which is essentially secret in its nature and which covers a wide diversity of countries. I believe that 30, even 20, years ago grand corruption was confined to a small number of countries-Mexico, Ghana and the Philippines were notorious in the 1960s. In the last ten years it has multiplied enormously. Of the 20 developing countries which I know reasonably well, of which ten are in Africa, there are only two which are not seriously tainted. For some years I have made a habit of asking business friends about their own experiences, both in countries which I know and in those I do not, and it is very rare indeed for a country to get a 'clean' verdict.

It is important to recognise that, even in those countries where grand corruption is rife, there are senior officials and ministers who are absolutely honest. They deserve appreciation and admiration, particularly when they may receive poor salaries and can see their colleagues 'earning their pensions' by self-enrichment. It is not surprising that such men are becoming less common.

How does it work?

Grand corruption generally arises from the interaction of governments, as buyers, and the private sector, as sellers. Opportunities arise through the sale of capital goods, major projects, on-going supplies or consultancy services. The potential beneficiaries are those in a position to make or influence government purchasing decisions-heads of state, relevant ministers and senior officials. The principal losers are the general public and the funding agencies, not only because goods or services cost more than they should but also for more complex reasons described below. The suppliers may emerge as gainers or losers.

Three main factors seem to influence the suitability of a transaction for grand corruption. They are:

a) Size. The bigger the purchase or project, the bigger the potential 'take'.

b) Immediacy. Politicians and even officials in the South know that their terms of office may be brief. A pay-day at some remote time is not very interesting.

c) Mystification. A high technological content is attractive because it makes price comparisons very difficult. A cargo of cement has a calculable value on a given day but who knows the fair price for a sophisticated piece of military equipment?

Applying these criteria, one reaches an order of attractiveness which puts aircraft, military supplies and telecommunications at the top of the list; major industrial, agro-industrial and civil engineering projects in the middle; and ongoing supplies and large consultancy contracts towards the lower end.

'But surely', it will be argued, 'large and reputable companies do not bribe people?' Indeed they do not. However, they may appoint an agent or representative, who is likely to be a man of high standing in the community in which they wish to do business, sometimes a lawyer, a banker or a senior businessman. He can provide a range of valuable services, such as obtaining visas, meeting visitors at the airport, arranging accommodation and transport, advising on local finance and taxation-and making appointments with the top officials and ministers. In return for all of this he may receive a success-related fee, perhaps five or even l5 percept of the value of the business secured. What reputable company needs to bribe anybody when it has an agent capable of ensuring that 'things run smoothly'?

'But again', the sceptic will say, 'there are mechanisms to prevent over-pricing such as International Competitive Bidding.' Apart from the fact that there are many situations, some of them entirely legitimate, in which ICB can be shown to be inappropriate, it does no more than make life a little more difficult for the agent and his clients. The common practice of short-listing, welcomed in principle by almost all sellers, makes it unlikely that the corrupt buyer will be defeated by ICB. In the last resort, if his favoured supplier does not get the business, he can always abort the tender ('changed priorities', 'shortage of finance', 'alteration to scope of work') and start again.

It is not, of course, suggested that all contracts are manipulated for corrupt reasons. However, nobody should doubt that present practices leave major North/ South contracts potentially wide open to grand corruption.

What damage does it do?

The most obvious, but almost certainly not the most serious, effect of grand corruption is that major items of imported goods and services are frequently costing countries of the South as much as 15% more than they should. Estimates have been made indicating enormous sums lying in Swiss bank accounts to the credit of Third World leaders; and even if, as is sometimes claimed, a proportion of this money trickles back to the countries which have originally suffered from its loss, it is believed that much has been used to inflate the property markets of Europe and North America.

Far greater damage arises from the fact that the availability of bribes can seriously distort the decision-making process. The principal criteria in deciding from whom a purchase will be made should be quality and cost, with other considerations such as credit terms and delivery taken into account. When personal gain becomes a factor, it rapidly becomes the factor and all others pale into insignificance.

Two main areas of damage arise from the suspension of sound and critical decision-making. The first is that the wrong suppliers or contractors are liable to be chosen. The second, which has led to some of the worst development catastrophes, is that totally unnecessary or inappropriate purchases are made.

Grand corruption has opened the way for major contracts to be won by companies which would have had little hope of winning them in fair (i.e. uncorrupt) competition. It is healthy for long established suppliers to lose business sometimes to newcomers, particularly those from the emerging powers of Asia; but the South cannot afford to waste its scarce resources on shoddy supplies or projects which are so badly executed that they fail, whatever their source.

Even more costly than choosing the wrong supplier or contractor is choosing supplies or a project which are not needed at all. The supplier from the North may argue that it is only good salesmanship when he can persuade a buyer from the South that he needs aircraft or communication systems or generating plant or food processing factories; but when the buyer's judgment is grossly distorted by the seller's agent's 'persuasion', the damage can be enormous. Commissions may add 10 or 15 per cent to costs; but in a failed project or a useless purchase the total cost has to be written off, often with extra losses arising from attempting to rectify the unrectifiable.

The question of moral damage also demands consideration. Some businessmen from the North argue that no moral issue is involved-'Africans believe that for a big man not to get rich is a sign of weakness or stupidity'. In none of the countries of the South which I know well is the taking of bribes regarded as 'OK', however common it may be, although it may be viewed with less repugnance than in the North. The mass of uneducated people have little idea what is going on. The educated minority only appear to object very strongly when distorted decision-making causes obvious loss-the new road breaks up or a sugar factory is built where no-one can grow sugar-cane. But whether grand corruption is recognised with resigned acceptance, with wry amusement or as part of local custom and practice, it is by definition outside the law. If a head of state, a minister or a top official can break the law, where can the line be drawn?

There are moral effects on the suppliers too. Many of those who work in North/ South transactions are justifiably proud of the contribution which they make to development, supplying more efficient equipment, providing better infrastructure, growing more crops, improving medical services or whatever. Grand corruption is something that they have learned to live with but it is not surprising that some of them begin to wonder whether any South decision-maker is influenced by any consideration other than his own pocket. Regrettably there are some countries where such a conclusion appears to be justified.

What are the possible solutions?

Businessmen in the North usually regard grand corruption as an unpleasantness for which the South is responsible. Its rapid spread through so many countries in recent years makes this highly improbable. I believe that grand corruption is largely the responsibility of the North and it is largely the responsibility of the North to find the solutions.

Some large companies have systems of self-regulation. In the case of one highly reputable multi-national this takes the form of a statement of business principles, combined with a letter, to be signed annually by every chief executive within the group. The letter states, inter alia, that :

-'neither the company nor its authorised representatives has been party to the offering, paying or receiving of bribes;

-'no payments have been made which knowingly violate the laws of the countries in which the company has operated;

-'no receipts or payments of, or derived from, company moneys or other assets have been either unrecorded or falsified when described in the relevant books and records and no other improper accounting practice has been adopted in the period under review'.

Clearly it would be impossible for an honest chief executive to sign such a letter if his company had directly or indirectly been a party to grand corruption. The option of 'preferring not to know' (or 'the ostrich syndrome') is closed.

However, a system of voluntary self regulation cannot be sufficient to meet the present problem, as many companies would fear unequal competition if they committed themselves to it. Why should not such a declaration, combined with an appropriate audit certificate, become mandatory for all companies entering into contracts with the South?

Ideally these provisions would be given the force of law throughout the North. It is strange that bribery, which is a criminal offense when committed in any of these countries, is not generally an offence within such a country if committed by one of its citizens outside his own country. The fact that the USA's courageous Foreign Corrupt Practices Act (1977) seems largely to have failed should not discredit the concept of effective legislation. If others had followed the Americans, lead the present picture might have been very different.

The introduction of the necessary legislation would take some years but fortunately there is an alternative method of applying pressure to the sellers. A high proportion of major North/South transactions are dependent on finance from a third party, ranging from export credits, through bilateral loans to loans and grants from multilateral agencies, of which the World Bank and its affiliates are much the most important. Why do not these financial agencies determine that, from a future date, any supplier who does not complete the necessary declaration and provide the appropriate audit certificate will not be eligible to compete for contracts financed by them? This would have the great advantage of applying to companies of all nationalities, whether or not national legislation was in place. There would doubtless be an outcry from some South countries which object to any form of conditionality; but what is wrong about a financial institution taking steps to see that its money is used for the intended purpose rather than being diverted to a private bank account?

Grand corruption will not be easily eliminated, but the newly-formed Transparency International believes that it can be greatly and beneficially reduced. If the task seems formidable, it may be worth recalling the words of the Anglo-lrish statesman, Edmund Burke: 'The only thing necessary for the triumph of evil is for good men to do nothing.'

On corruption

Corruption, long the supposed province of the developing nations (which is no excuse for its forward progress), has suddenly surfaced, like an impetuous Etna, to plague the many democratic governments now prey to its scourge. But corruption is no newcomer to a modern world where finance dominates economics and politics, as JeanClaude Waquet points out in a work on cupidity morals and power in Florence in the 17th and 18th centuries.

Part one begins with a detailed history of this phenomenon? in which it appears that the shortage of writing on corruption in France under the kings should not be taken to mean that there was no corruption. 'fly no means,' Mr Waquet says. 'In the first half of the 17th century, under Henri IV and Louis XIII, office could be bought. Candidates not only bought the positions themselves, but may well also have bought the people who could help them get the jobs. The fact that this is passed over in silence reflects an approach to the writing of history, which recognises, but does not make a problem of, the existence of corruption.'

Little has been written on corruption outside France either. However, from a long-standing body of research, Mr Waquet singles out the work of the German writer Jakob Van Klaveren, who has this to say: 'Corruption is no more than the exploitation of public office in accordance with the laws of the market. Jobs become a particular form of enterprise, whose output is the public service and whose clientele is those who are administered, and judges sell sentences just as government dignitaries sell places in the State apparatus.' This is fraud elevated into a system and it is indissociably linked to a particular stage of constitutional development. It depends, Mr Waquet maintains, on two important conditions being met, i.e. that the State organisation gives its employees considerable freedom of action and the system of norms is not such that civil servants are specifically required to display integrity. Van Klaveren's approach points us to an economic and therefore amoral definition of corruption, with corruption associated with the absence of centralisation and moral stringency which, he believes, prevails in some standard forms of organisation such as oligarchic republics and constitutional monarchies.

But he believes that corruption is incompatible with democratic and despotic forms of government in which institutional change and threats of punishment combine to keep the civil servants in step. The British monarchy in the first half of the 17th century was, in his view, a good example of a corrupt regime involving great freedom for its employees and enormous permissiveness, he says.

Today, 'studying corruption means first highlighting particular cases and gauging the harmful effects such disruptions have had upon the smooth running of the machinery of state and the wellbeing of the people it administers' Mr Waquet says. Corruption was once a vice and the corrupt were dishonoured and chastised, but corruption now tends to be seen as a technical term used mainly to refer to malpractice by employees of the state. And the risks are higher now for those who try to combat it than for those who are guilty of it. This is the 'justice of the master,' the author says, in that corruption is no longer just infringement of the law, but means acts that may well be initiated, practiced and covered up by people in high places.

Mr Waquet's conclusion, basically, is this. 'The state is to be seen in all its frailty here. It is by no means free to eliminate corruption unilaterally. It is the responsibility of the official authority to eradicate the evil, but not its responsibility alone. Public servants are involved too and they, ultimately, must imbue themselves with a sense both of wrong and of duty-provided the example comes from the top, i.e. from the state. Corruption cannot be approached as either the haphazard, insignificant outcome of events of varying degrees of seriouslyness, or a platform for a pointless declaration of the vices of those in power, or, finally, a setting in which social developments take their automatic course and the individual disappears behind all-powerful structures.'

And, he adds, corruption should not be thought of as an incurable disease either, for history teaches us that, between the late 18th century and the start of the 20th century, part of the world was won over to mtegrity.