FAQs:

Causes & consequences of corruption

From the research knowledge base:
What do we know about the causes and consequences of corruption?

In what kind of environment does corruption thrive?

Corruption can grow in a variety of political and economic environments but it thrives when bad government makes it impossible to control. While the importance of different factors can vary from place to place and from time to time, it seems that, for corruption to flourish, certain key pre-conditions are necessary:

1. A set of imperatives and incentives which encourage politicians and officials to engage in corrupt transactions, which include low and irregular salaries for officials with large dependent families. Such officials may feel compelled to become corrupt, and political instability and economic uncertainty encourages politicians to exploit current opportunities. Very few African officials can anticipate lifelong job security or a guaranteed pension.
2. The availability of multiple opportunities for personal enrichment. Some economic environments are much more conducive to corruption, in particular mineral and oil rich environments are more fertile territories than subsistence agriculture. The size and growth of public spending will help define the possibilities for corruption. Where there is extensive discretion over the allocation of economic costs and benefits.
3. Access to and control over the means of corruption. Motive and opportunity create the possibility but there have to be ways of actually engaging in corruption. These might include control over an administrative process such as tendering or having access to offshore accounts and the techniques of money laundering.
4. Limited risks of exposure and punishment. Corruption will thrive where there are inadequate and ineffective controls (both internal and external). Policing, detection and prosecution encourages corruption. Where the media are controlled and censored, corrupt politicians and officials have less to fear.

The incidence of corruption is a result of the strength of incentives, the range and scale of opportunities, the availability of means and the risks of punishment. Corruption thrives on bad governance where controls are weak and decision-making is opaque, arbitrary and lacking in accountability mechanisms. It is therefore more likely to flourish in dictatorships than democracies and where there are extreme inequalities of wealth and power.

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Where is corruption most prevalent (countries and sectors)?

Corruption is difficult to measure, but most experts are in broad agreement with the rankings produced in the Corruption Perception Index (CPI) published annually by Transparency International since 1995. This is the best tool currently available, although there are issues about distinguishing between types and levels of corruption and concerns about the alleged precision of the measurement (to one decimal place on a scale of 0-10 with 0 being the most corrupt).

The 2001 CPI showed that corruption was perceived to be most prevalent in developing and transition countries and this is entirely consistent with all the CPIs published since 1995. In 2001 the CPI included 91 countries and shows the countries where corruption was thought to be most prevalent as:

Grand corruption mostly occurs in relation to large procurement projects and is most prevalent in public and private construction projects, in roads, dams, hospitals, airports; and in arms and defense contracts, in new weapons technology, aircraft purchase, warships, artillery pieces. Petty corruption occurs where citizens and companies seek to evade duties and taxes and when officials abuse their regulatory discretion by attempting to extort money from citizens and companies. Thus petty corruption is extremely prevalent in customs and excise, i.e. smuggling, illegal import and export, in taxation, i.e. evasion of income, business and sales taxes, in licensing/permits, for instance taxis, cars, market stalls, and in motoring, for instance in police/army checkpoints and vehicle checks. In relation to customs and excise and taxation, corruption can be grand as well as petty.

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In what way is corruption related to the level of economic development?

There is no firm, fixed correlation between any particular level of economic development and the incidence of corruption. Corruption can be prevalent in countries with low, medium and high levels of economic development. According to the 2002 CPI, there is more corruption in Italy than there is in Botswana and there is more corruption in Germany than there is in Chile.

In the 1960s and 1970s, many experts argued that corruption was best understood as a phase of economic development. They thought it would first intensify and then decline as economic development occurred and they pointed out that this was what had happened in Western Europe and North America. This analysis was flawed. It assumed that developing countries would develop rapidly, and that their development path would follow that of developed countries, and it assumed that the problem of corruption had largely been solved in the developed world; economic development had caused it to 'wither away'.

Both assumptions proved wrong. The development process in many parts of the developing world (and especially in Africa) appears stalled and those countries experience high levels of corruption. Elsewhere, as in the 'Asian Tigers', rapid economic growth and development have occurred but usually accompanied by high levels of corruption. Yet remarkably low levels of corruption accompany Singapore's economic development.

In the developed world, corruption scandals have become an everyday feature of life in Italy, France and some states in the USA, and these 'corruption eruptions' do not seem connected to any change in the economic development of these countries.

Levels of economic development do affect the forms and sectors where corrupt transactions take place. Petty corruption is particularly prevalent in developing countries where it is necessary to pay a small bribe to secure services that ought to be provided free of charge. While this practice has largely disappeared from many developed countries, their greater public resources and higher incomes mean that corrupt transactions tend to be grand rather than petty.

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In what way is corruption related to economic liberalisation?

Economic liberalisation is seen as a major way of tackling corruption and prompting economic growth but it has also been identified as a source of corruption. It involves redefining the role of government and the relationship between the government and the economy.

Corruption can be explained in terms of the abuse of state power. A large state machine, which intervenes and regulates intensively and extensively, offers fertile territory for corruption. Politicians and officials will have a great deal of individual power which many are likely to use for personal gain.

Advocates of economic liberalisation argue that, if the state is the main source of corruption, then cutting back the size of the state and restricting its activities will, almost by definition, reduce the opportunities for corruption. The main aims of economic liberalisation are to improve the efficient operation of the market and correcting market distortions by reducing state subsidies. It is associated with the privatisation of state enterprises, liberalising trade, lifting exchange controls, reducing the size of the civil service and deregulating industry and commerce.

The experience of privatisation in many developing and transition economies has been to sell state assets to the political and economic elite at below market prices in a non-transparent and corrupt manner. The 'sale' of state enterprises has, in extreme cases, been little more that the legalized theft of state resources.

Downsizing the state may appear to reduce the overall opportunities for corruption, but the downsizing process itself offers new opportunities for corruption. This new corruption may be seen as a transitional and temporary price worth paying for a longer-term reduction in corruption.

But economic liberalisation policies may actually facilitate corruption in the longer term if, in reducing the size and role of government, it also reduces the capacity of government to identify and combat corruption. Anti-corruption strategies invariably accord a prominent role to state institutions and there is a risk that economic liberalisation may reduce further the efficiency and effectiveness of the state.

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In what way is corruption related to democracy?

The Corruption Perception Index consistently shows that the countries, which appear to be the least corrupt, are all long established democracies.

The so-called 'Third Wave' of democratisation in the early 1990s in developing and transition states might thus be seen as promising future reduction in levels of corruption in those states. But the relationship of corruption to democracy is far from simple and there is no straightforward correlation between levels of democracy and levels of corruption. This is partly because both corruption and democracy are contested concepts and difficult to measure.

The relationship partly depends on how firmly rooted democracy is in a particular country. Many modern states claim to be democracies and appear to have some democratic forms and processes but, for most, democracy is still fragile and poorly institutionalised. For corruption to flourish, office-holders must posses the discretion to abuse their public role for their private benefit. But democracies are usually thought to impose limits on the discretion of politicians and possess means of holding them to account for their actions. As political accountability increases, it increases the risks for corrupt officials of exposure and punishment.

The ultimate sanction on politicians in a democracy is defeat in elections, which removes them from office and the opportunities for corruption. In a democracy, opposition groups and parties will monitor the conduct of office-holders, expose corruption in government and generally hold the government accountable for its performance. But the prospects of having orderly, structured and open political competition in an environment where corruption is deeply entrenched and pervasive are poor. In such circumstances, the office holders seek to buy off opponents, bribe voters and electoral officials and generally corrupt the democratic process.

The persistence of differing degrees of corruption in established democracies shows that no particular set of political arrangements is a panacea for eliminating corruption. But established democracies usually have an underlying consensus on the values, rules and processes of political change. Politics is not seen as a zero sum game and, while corruption may persist, it does not endanger the constitutional order.

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In what way is corruption related to a free press?

Corruption is secretive and private and the corrupt most fear public exposure. Corruption is therefore the enemy of openness and transparency. Where corrupt politicians want to keep the public in the dark, a free press can shed light and help inform and empower the public.

Where the press is owned or controlled by the state, it will report only information which is acceptable to the state. State censorship is one mechanism of social control exercised by governments who do not command public trust. Curbing press freedom is an important means of ensuring that corrupt officials are not held accountable.

The freedom of the press can be threatened by persecution of journalists (this can involve requiring journalists to disclose their sources thereby exposing corruption whistleblowers, deporting journalists who are not nationals of the country), restricting the flow of information (official information may be tightly restricted by official secrets acts so that corrupt actions remain concealed), newspapers may be intimidated by people working on behalf of powerful corrupt individuals, and imposition of strict libel laws can be made to protect the 'reputations' of corrupt politicians.

A free press offers a vital way of challenging the powerful to account for their actions. It gives poor people a voice, a way of articulating their concerns. It helps educate people about what is going on in their name. For members of civil society, a free press is an essential prerequisite for ensuring that government is open and responsive. When the political class has been bought off by corruption, it falls to the press to question, to probe and to act as a watchdog for public integrity. Press reports can force the disclosure of incriminating information and prompt police investigations of corruption.

But often the press is handicapped also because there are few journalists and they lack professional training, there are no Freedom of Information laws that can secure access to government decision-making processes, and investigative journalism is too expensive and time-consuming.

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In what way is corruption related to poverty?

Contemporary discussions of poverty have broadened the concept from a narrow income-based definition to a more inclusive notion of 'capability' poverty, which addresses issues of health, literacy and social exclusion. But whatever definition is used, petty and grand corruption have direct and indirect impacts on poverty.

Corruption perpetuates and exacerbates poverty in a variety of ways including:

• Diverting resources and benefits towards the rich and away from the poor.
• Disturbing the pattern of public spending and investment by encouraging large capital-intensive projects to maximize bribe receipts. This reduces the resources available to governments to reduce poverty through education and social programmes.
• Imposing an additional unofficial 'tax', which the poor are least able to pay.
• Reducing tax revenues to governments and thus a reduction in public services that benefit the poor.
• Undermining social and political stability with consequences that leave poor people more insecure.
• Reducing economic growth and thereby reducing the opportunities for the poor to escape from poverty.
• Perpetuating social exclusion and preventing the poor from acquiring the capability to challenge inequalities of power and resources.
• Depriving the poor of their legal rights and entitlements.

The overall impact of corruption is to damage the prospects for development and thus the prospects of the poor.

Most corruption rewards the already relatively rich but some poor people are themselves engaged in corruption and thereby receive some material benefit. Where bureaucratic salaries are low and paid irregularly, or not at all, and officials have many dependents, they have a strong incentive to accept bribes. In these cases, poor officials may benefit but the poor in general suffer.

Corruption contributes directly to poverty by depriving the poor of public services and benefits, by denying them political, social and legal rights and by distorting development priorities. Corruption encourages the poor to see government as predatory and oppressive rather than enabling and their sense of powerlessness and exclusion is reinforced.

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In what ways is corruption related to gender?

The relationship between corruption and gender can be explored in three ways:

• Women's experiences of corruption and the extent it differs from men's experiences.
• The question of whether there are psychological and behavioral differences in the ways in which women and men perceives and reacts to corruption.
• The role of women in strategies aimed at reducing corruption.

Research suggests the following conclusions:

• Women are disproportionately more likely to suffer from corruption than men.
• Women across different societies appear to be less corrupt than men.
• Empowering women seems to help reduce levels of corruption.

Corruption involves illegitimate and unequal access to, and use of, resources. In general, women have less access to, and control over, resources than men. Women have less education, lower incomes, less access to capital and credit and less control over their lives and property. Women are underrepresented in politics, bureaucracy and business and, because they are disadvantaged politically, economically and socially, women are both more vulnerable to the impact of corruption and less able to challenge the corrupt.

Research sponsored by the World Bank argues that women are more trustworthy and more public spirited than men. Other research shows that women are less involved in bribery and less likely to condone bribe taking. One way of helping to reduce corruption is by looking at the role of women in countries where corruption is low. Research shows a correlation between a larger share of women in the labour force and in parliament and lower levels of corruption. This association holds true even when comparing countries with the same civil liberties, education, legal institutions and income levels.

Where countries adopt specific measures to narrow gender gaps, for example, more equal rights to employment, to education, to health services and to public and political office, they seem likely to gain a range of economic and political benefits including a reduction in corruption. Countries where women have greater rights and participate more in public life tend to have cleaner business and government.

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In what ways is corruption related to low salaries?

When officials are unable to meet their minimal living costs from their salaries, corruption will always be prevalent.

But the relationship between salary levels and corruption is complex. Low salaries can provide a powerful incentive for officials to become corrupt but they only form part of the environment in which corruption flourishes. The incidence of corruption depends more crucially on the wider economic, political and social context.

What criteria can be used to determine whether salaries are so low as to exacerbate corruption?

• Are there problems in recruiting and/or retaining staff?
• To what extent have salary levels been eroded by inflation?
• Are they low in relation to jobs available in the private sector?
• Are they low compared to expatriate workers?

Different answers to different questions offer different perspectives on what is meant by 'low salaries'. The issue of low salaries is also connected to the relative size and viability of the public and private employment sectors. When the private sector is small with relatively few white-collar employment opportunities, as in the case in much of Africa, the tendency is for the public sector to expand to meet the demand for employment.

Most developing countries have large public sectors, too large for the resources available to pay them. The consequence is that salaries of officials and especially junior officials are depressed. Only by operating a smaller public sector is it possible for most developing countries to pay adequate salaries.

There are difficult choices here for governments:

• Low salaries seem to encourage corruption but also enable more people to enjoy some kind of regular income.
• A smaller, better paid bureaucracy may be less inclined to corruption but there is likely to be a significant increase in unemployment and a consequent risk to political stability.

Many countries have chosen to retain large public sectors for social welfare reasons. But low wages, sometimes irregularly paid, in a context of rapid inflation are likely to ensure that the corruption of low paid officials is widespread and almost unavoidable.

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What is the role of international trade?

International trade is a major source of large-scale corruption.

The Bribe Payers Index clearly shows that a large number of companies from major exporting countries are very likely to offer bribes to gain or retain business. Countries that give a high degree of protection to their economies may still experience domestic corruption but they enjoy some insulation from the bribery of international corporations.

But international trade is often cited as an important contributor to economic growth and development and developing and emerging market economies are under pressure from the International Monetary Fund, the World Bank and the World Trade Organisation to liberalise their policies on international trade.

If tariff barriers are high, foreign exporters hoping to penetrate new markets may use bribery to gain special exemptions or concessions from governments. But domestic economic interests may be fearful of foreign competition and seek to influence governments to keep tariffs high. This influence may be a straightforward bribe or it can take the form of large contributions to election campaign funds.

When tariff barriers are lower or non-existent, there is no impediment to the flow of goods other than the ability to pay. But when tariff barriers are high, they encourage smuggling and the corruption associated with it. Corruption thrives when there are shortages, 'bottlenecks' in supply caused by government-imposed distortions of the market.

Many developing countries are apprehensive about liberalising their trade policies because they are fearful of the consequences. Groups and interests previously favoured by protection will see their incomes threatened and may use illegitimate means to protect their positions. Opening up to foreign trade and investment may force a restructuring of the economy and serious economic dislocation.

Corruption flourishes in periods of economic and political uncertainty as politicians and officials seize their chances. Theoretically, free trade increases efficiency and investment but corruption thrives on inefficiency and increased trade for the corrupt politician means more opportunities for bribes.

Liberal trade policies, like corruption, tend to favour a pattern of growth that favours the rich.

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What is the role of international corporations?

International corporations are the supply side of grand corruption.

If they did not offer bribes to gain contracts, concessions and exemptions, there would be a dramatic fall in grand corruption.Grand corruption particularly arises from mining and oil/gas concessions, construction projects, and sales of military equipment.

The need of international corporations to enhance their profitability drives them to seek new markets and new opportunities. Competition with other international corporations means there is always a search for competitive advantage and corruption is often seen as an important and necessary method of enhancing or securing profits.

The Bribe Payers Index (BPI) 2002, shows that 'large numbers of multinational corporations from the richest nations are pursuing a criminal course to win contracts in the leading emerging market economies' (Peter Eigen, Transparency International Chairman). Such activities serve to undermine global free trade and signal that many corporations pay only formal attention to international bribery conventions.

According to the BPI, corporations were most likely to bribe to get construction contracts. It also shows that corporations with headquarters in Russia, the People's Republic of China, Taiwan and South Korea were thought most likely to offer and pay bribes to win or retain business. In relation to the more mature developed countries, corporations from Italy, the United States and France also showed a relatively high propensity to bribe. International corporations with headquarters in Australia, Sweden and Switzerland were thought least likely to offer bribes.

The BPI data shows not only that the OECD Anti-Bribery Convention has made no difference to the use of bribery by international corporations but also that less than 20% of survey respondents were even aware of the Convention.

In their defence, international corporations argue that they are more often the victims of extortion than the initiators of bribes and business reality suggests that, if they refuse to pay a bribe, there will always be another corporation ready to do so. BPI data also indicates that domestic companies are even more likely to offer bribes than international corporations.

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What is the role of foreign direct investment (FDI)?

If corruption is deeply entrenched and pervasive in a country, it is likely to discourage FDI because it raises the costs and uncertainties of making investments.

FDI is widely believed to be an essential and important ingredient of economic growth that, in turn, is seen as vital to poverty reduction. FDI adds to total investment in a country and provides a means of transferring production technology, skills, innovation and 'best practice' to the recipient country.

In practice, FDI has been a mixed blessing. It can deliver some benefits but it can also undermine local businesses and financial institutions. In some cases, foreign investors use illegitimate means to 'persuade' governments to allow them to invest. Bribery is also common when foreign companies are only prepared to invest if they can secure special privileges.

If economic liberalization is intended to end market distortions, FDI sometimes works in the opposite direction. Foreign companies seek special privileges, which are particular to them in the form of exemptions from tariffs and taxation policies. They may also bribe governments to exclude foreign investment from other countries and companies.

Corrupt governments make agreements with foreign firms, which allow the firms to do business on very favourable terms, often to the economic disadvantage of the local population. Foreign direct investment often involve contracts in which the foreign investor gains the profits and the government bears the risk.

FDI often flourishes only because of the special privileges extracted from the government and frequently these privileges are the result of corruption. In this sense, FDI sometimes comes at the high price of undermining democratic processes. This is particularly true for FDI in minerals, oil and other natural resources where foreign investors offer huge bribes to obtain the concessions at below market prices. FDI is inextricably linked to the supply side of corruption, which is illustrated by the Bribe Payers Index.

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What is the role of offshore banking and tax havens?

Offshore financial centres are places where financial assets acquired through illegal means can be securely held.

Global economic liberalization means that funds can be moved very quickly and offshore centres play an increasingly large role in the movement of money. Their attraction to the corrupt is that they are physically and legally separated from more conventional states. Most are located in small jurisdictions or microstates and the majority are found in small island economies. Their financial activities include offshore banking (both wholesale and international private); offshore funds, trusts and offshore companies.

Anyone wishing to conceal and secure funds derived from corruption, organized crime, drug trafficking or tax fraud will be in need of an offshore bank and tax haven. The biggest users will operate multi-currency bank accounts and sophisticated asset management employing complex structures of offshore companies and trusts spread across several different offshore financial centres.

According to the leading authority on offshore banks, they have hitherto proved uncontrollable. Microstates with limitations of size, population and natural resources find such centres an attractive development option. For the corrupt, they offer three advantages:

• Their structures are deliberately opaque and they offer what they call 'customer confidentiality' or what others term strict bank secrecy.
• They are outside the jurisdiction and regulation of mainland economies.
• The constitutional status of such microstates and dependencies is somewhat ambiguous and ill-defined. This creates further room for financial manoeuvre and uncertainty about how to restrict their activities.

Since the late 1990s, there has been concerted international action in the form of the Financial Action Task Force (FATF), which is intended to make the activities of offshore banks more transparent and make it more difficult for the corrupt to conceal their assets. National governments, including Britain, now take a closer interest in what is happening in their dependencies. If banks have to ensure that their money is clean, the offshore centres will lose their attraction to the corrupt.

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What is the role of money laundering?

Money laundering involves 'washing' dirty money clean.

Money laundering has the same relationship to corruption as a receiver of stolen goods has to a thief. Every thief needs to dispose of stolen goods to avoid detection and prosecution but at the same time the thief doe not wish to give up the material value of the goods. Having receivers of stolen goods is a necessary condition for thieves to operate on any scale or over a length of time.

The aim of any corrupt transaction is to generate a profit for an individual or group and money laundering is the processing of these criminal profits to disguise their illegal origin. Money launderers enable the corrupt to enjoy their criminal profits without revealing their original source.

For the corrupt, the problem is how to gain control of illicit funds without attracting attention to the underlying activity or themselves.

The answer is to disguise the sources by changing the appearance of the profits and by locating them in places where they are less likely to attract interest from law enforcement agencies.

Money laundering has three phases:

• Placement stage where illegal funds are introduced into the financial system and broken down into a number of different financial packages.
• Layering stage where the launderer goes through a series of conversions and/or movements of the illicit funds to distance them from the source and make it more difficult to track.
• Integration stage when the illicit funds are re-integrated into the legitimate economy by, for example, buying real estate or investing in conventional businesses.

Money laundering is essential if large-scale corruption is to continue because the corrupt want to make use of their criminal profits. The incentive to take a large bribe would be reduced if the corrupt had no means of recycling the funds and reintegrating them as 'clean' money into the economy. Similarly, without money laundering, the risks of engaging in grand corruption would be much greater and some might think they outweighed the potential benefits.

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What is the role of international (organised) crime?

Organised crime and corruption are intimately connected: where you find organised crime, you invariably find corruption.

The origins, growth, sustainability and global expansion of organised crime are fundamentally dependent on corruption. Corruption of the criminal justice system and, in particular, of the law enforcement agencies is a necessary condition for the survival of organised crime.

Criminals engaged in activities with high risk and substantial capital outlays, for example, international drug trafficking, require some assurances that their investments are secure and they are protected against loss. Unlike legitimate entrepreneurs, they cannot ask insurance companies to offset their risks, so they resort to bribery.

Police forces and customs departments are especially vulnerable because they operate at the front line of law enforcement. No major criminal enterprise can sustain its activities over a prolonged period without the consent and protection of elements in the relevant police forces. Police corruption scandals around the globe consistently demonstrate intimate corrupt connections between police officers and criminals.

The most vulnerable police are those engaged in curbing illegal markets such as trafficking in drugs and people, pornography and prostitution. Corruption is an important tool used by organised crime to minimise the risks inherent in conducting illegal activities. Bribery is used not only to corrupt police and customs officers but also to corrupt tax officials, juries and judges.

When organised crime has fully penetrated the machinery of the state, it is hard to distinguish between governments and gangsters. In such cases, bribery reaches into the political class and politicians are bought, or at least rented, like any other commodity or service. The corrupt and the criminal also collaborate because of their shared need to launder the proceeds of their illegitimate activities and hide them away in offshore banks and tax havens.

Organised crime and corruption both transcend national boundaries and it is difficult for national governments to regulate them effectively. They are inextricably linked and you cannot combat one without simultaneously tackling the other.

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What impact does corruption have on growth and development?

Corruption delays, disturbs and diverts growth and development.

Its impact is difficult to measure directly because corruption normally occurs within institutions, which have other inadequacies and weaknesses. It is therefore difficult to separate out corruption as an independent variable especially because corruption appears to be both a cause and effect of inefficient and unaccountable institutions.

What is clear is that, when taken with other forms of institutional weakness, corruption is a cause of low economic growth.

Corruption is believed to have a significant impact on lowering investment, both foreign and domestic. It does so because potential investors perceive it as an unwarranted and pernicious tax. It raises the cost of investing without providing any guarantee of producing the required results. Corruption therefore increases the uncertainty and risk attached to investment as well as reducing the incentive for entrepreneurs. According to IMF research, lowering investment accounts for at least one third of corruption's overall negative effects.

To implement sustained development programmes, governments need secure, reliable and expanding revenue sources, but where corruption occurs in the form of tax evasion, there is a corresponding shortage of funds for productive investment.

Corruption can also influence the willingness of the donor community to provide aid and development assistance. High levels of corruption can cause donors to suspend, reduce or withdraw development assistance. When aid is not withdrawn it can be diverted to corrupt, non-productive purposes. Even when it is not diverted, aid allows corrupt governments to replace regular government spending which is then released for use in projects with high corruption potential.

When corruption takes hold, spending is diverted from productive programmes, such as education, with a high correlation with economic growth and into public spending on capital projects, such as buying military equipment, which generate large bribes.

Corruption slows investment, erodes the revenue base and disturbs the composition of public spending.

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What impact does corruption have on poverty eradication?

Eradicating poverty requires macroeconomic stability, economic growth, improving institutional capacity, and investing in services such as education and health that particularly benefit the poor.

High levels of corruption can threaten economic stability, slow down growth, weaken institutional capacity and reduce the resources available for social programmes.

If macroeconomic stability can be maintained, inflation will be low which is of benefit to the poor and such stability provides a platform for economic growth. High inflation can erode the tax base and affect the government's ability to maintain social spending. High inflation is often a result of excessive government borrowing and, in highly corrupt countries; politicians have personal incentives to encourage high spending levels because it provides more opportunities for corruption.

Economic growth expands the capital and employment base and provides opportunities for the unemployed to find work and encourages the creation of small businesses. But corruption has a significant impact on lowering investment and growth because it is perceived as an illegitimate tax and because it creates an uncertain investment climate.

Where institutional capacity is weak, governments are unable to implement effectively their poverty eradication policies and programmes. If, for example, the government cannot make reasonably accurate budget forecasts, it is hard to see how appropriate spending decisions can be made. Reducing poverty requires strong financial, administrative and regulatory institutions. But corruption undermines institutions and distracts public officials from their duties.

Helping the poor requires a reallocation of public expenditures. Resources need to be moved to activities that promote growth, such as universal primary education and basic health care provision. But because large bribes can be earned from arms purchases and major construction projects, the composition of public spending is distorted and spending beneficial to the poor receives a lower priority.

When corruption levels are very high, there is always a danger that the donor community will suspend, reduce or withdraw their own poverty eradication programmes. In extreme cases, corruption can destroy an entire economy and it becomes a major factor in spreading and deepening poverty.

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What impact does corruption have on human rights?

Corruption in all its forms constitutes a violation of the human rights of the people who experience it.

Governments who are complicit in corruption are failing in their duty to protect and promote human rights. The struggle for human rights and the struggle against corruption are intimately and inextricably linked because corrupt governments are no respecters of human rights. Human rights are, by definition, general and universal while corruption, by definition, concerns the few and the particular.

The best-known statement of human rights is the Universal Declaration of Human Rights adopted by the United Nations in 1948.

The original focus was on individual freedom. But now there is a greater concern with a wider range of rights. Two covenants, one dealing with civil and political rights and the other focusing on social, economic and cultural rights, have supplemented the Universal Declaration. Most countries have signed these covenants.

But billions of people are denied their human rights and corruption plays an important role in perpetuating this situation:

• Corruption is an obstacle to the realization of rights, for example, if a child cannot get a place in a school without paying a bribe to a head teacher, the child's rights have been violated.
• Corruption is a denial of accountability and prevents people from exercising their political rights. When politicians are bought and sold by powerful economic interests, it undermines the democratic process.
• Most importantly, human rights are an expression of a belief in the equality of human beings, of equal treatment by governments.

But corruption is an especially pernicious form of discrimination. Its purpose is to receive favourable, privileged treatment from politicians and officials. There would be no purpose in bribery if all seekers after the same service were treated equally.

Corruption violates human rights because it discriminates against the poor by denying them access to public services and preventing them from exercising their political rights.

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What impact does corruption have on the environment?

Corruption has a devastating impact on the environment. It is the enemy of environmental protection and a major obstacle to environmental management.

Corruption creates problems for environmental managers because it:

• Undermines environmental policies
• Subverts existing laws and regulations
• Promotes fraud and tax evasion
• Violates international agreements and protocols
• Reduces the accountability of corporations
• Bypasses inspection and monitoring systems

Where natural resources are abundant, the incidence of corruption appears to increase. Corruption helps accelerate the exploitation of resources without regard to environmental impact. Natural resource development is usually capital intensive and this commands the attention of corrupt politicians and officials. Oil exploration, mining concessions and harnessing water power are activities characterized by corruption and environmental damage.

Corruption damages the environment because projects are implemented according to their capacity to generate bribes.

For the poor, corruption damages their environments in a number of ways:

• Corruption can damage their health and endanger their lives. Two examples: If corruption means that regulations on the disposal of toxic waste or discharging effluent are evaded, there is a health risk to the local population. If corruption leads to excessive and illegal logging, as in SE Asia, it can damage air quality and cause respiratory illness and death.
• Corruption can destroy their living and working environment. Corruption encourages the overexploitation of forests, fisheries and farmlands in pursuit of quick profits without regard to the long-term needs and livelihoods of local populations. And corruption can bring about the implementation of environmentally unsound projects, for example, large dams, which flood river valleys and displace and impoverish the former residents.

The poor are disproportionately affected by damage to the environment. History shows that the rich have always had the means and inclination to move out of stinking cities for more congenial environments.

Environmental management is long term and dependent on notions of conservation and sustainable development. Corruption is unplanned, short term, opportunistic and illegitimate and its impact on the environment can be catastrophic.

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What impact does corruption have on private sector development?

Corruption has a negative impact on the scale, form and growth rate of private sector development. It has both direct and indirect consequences for the conduct of business.

At the macro economic level, the consequences include:

• Corruption helps distort the market by redirecting economic activity from one sector to another. In so doing, corruption destroys the structure and pattern of economic development and reduces the efficiency of economic activity.
• Corruption has fiscal, budgetary and debt effects which collectively damage the economy and make private sector development very difficult. In its extreme form, corruption destroys economies and makes business activity impossible.

At the level of the individual business or corporation corruption is damaging in the following ways:

• It raises the costs of doing business
• It increases the risks and uncertainties of doing business
• It discourages and reduces investment in general and capital investment in particular
• It creates unfair competition
• It diverts resources away from productive investment
• It complicates and delays business transactions
• It deters entrepreneurs from starting up businesses

In developing and transition economies, much private sector activity arises from the privatisation processes, which transferred state assets into private hands and turned pubic monopolies into private monopolies. These transfers are frequently associated with large-scale corruption and the newly enriched business leaders are able to exploit illegitimately acquired power at the expense of their business rivals.

Corruption undermines the efficiency of markets and the competitiveness of producers and suppliers. Where corruption occurs in international trade, it can undermine local companies by encouraging governments to buy from overseas. Where there is corruption, which enables importers to avoid customs duties and import taxes, the competitiveness of domestic companies is thereby eroded and they are likely to fail.

Private sector development flourishes when investment prospects are favourable and when entrepreneurs can minimize their costs and decrease their uncertainties. Corruption reduces the incentives and increases the costs and risks of doing business.

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What impact does corruption have (and how) on development assistance and aid flows?

Corruption undermines the effectiveness and endangers the flow of aid from the donor community.

Paradoxically, increasing the flow of aid can increase the levels and costs of corruption. Most obviously, it provides new resources to plunder but, more subtly, it is fungible, interchangeable, which simply means that money going in for one purpose frees up other money for another, potentially corrupt use.

Giving development assistance to countries with high levels of corruption is clearly fraught with risks but, ironically, the donor community has been supplying more assistance and aid to such countries than it has to those with higher governance standards. Too often, bilateral aid decisions appeared to be made more by the strategic and ideological interests of the donors than the likely development benefits for the recipient country.

International donors have often turned a blind eye to corruption partly because they believed that there was nothing they could do about it and partly because they believed that, despite the corruption, some aid and assistance did reach its intended targets. Cutting off aid would therefore leave the poor in an even worse situation.

Since the end of the Cold War, the ideological imperatives have been reduced but 'aid fatigue' has set in and donors have become more interested in developing good governance as a necessary condition for the receipt of aid.

The effectiveness of aid and assistance depends largely on the quality of policymaking and governance. Without good governance, aid effectiveness declines because of:

• An increase of corruption through the 'leakage' of funds in development projects. Corruption appears at all stages from the design stage to the bidding process, the implementation phase and even the way the project is audited.
• Corruption can result in the award of contracts to inefficient and incompetent companies at excessive cost and in the implementation of inappropriate and uncompleted aid projects.
• Development assistance is diverted away from its original aims by corrupt politicians and officials and spent on projects that provide the greatest opportunities for personal enrichment.
  

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What are the economic costs of corruption?

The economic costs of corruption vary according to the scale and frequency of corrupt transactions and on which part of the economy and population are most affected by it.

In principle, corruption acts as an unofficial tax on consumers and producers and those least able to pay, the poor, suffer the most from its regressive impact. The macroeconomic costs are hard to assess because it is difficult to measure how much corruption there is and because it is hard to establish a robust causal link between levels of corruption and levels of economic performance.

But many economists agree that there are significant correlations between high levels of corruption and a range of negative economic consequences including:

• Creating inefficiencies in the operation of markets.
• Distorting the composition of public expenditure by focusing spending on activities likely to yield large bribes, for example, major public construction works and defence contracts.
• Reducing the level of direct foreign investment by adding costs and creating uncertainty.

Petty corruption imposes disproportionate costs on the poor but its wider economic costs are limited. Large scale or grand corruption can destroy the economy and impoverish entire populations.

In developing and transition countries there seems to be significant correlation between high levels of corruption and lower levels of investment and growth. High levels of corruption are not incompatible with high levels of economic growth, as some of the East Asian 'Tiger' economies demonstrate. But current economic thinking suggests that if those states had been able to reduce their levels of corruption, they would have experienced even higher rates of economic growth.

In a large robust dynamic economy, the economic costs of low levels of corruption are minimal. In a fragile, unbalanced, stagnant economy, the economic costs of high levels of corruption are insupportable.

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What are the social/cultural costs of corruption?

Corruption is divisive and makes a significant contribution to social inequality and conflict.

This divisiveness can take two forms: lateral and vertical. Laterally, it separates the poor from the rich, the observers from the players. Vertically, it helps divide ethnic groups and communities from each other and promotes rivalries and jealousies.

High levels of corruption help breed a culture of suspicion and distrust. Encounters with strangers, especially those in authority positions, are fraught with difficulty. In extreme cases, social cohesion breaks down. In a corrupt society, it becomes more difficult to persuade people to work together for the common good. Corruption encourages and rewards selfishness and denigrates collective action.

In social terms, corruption develops a range of behaviours, attitudes and beliefs:

• It disempowers people and encourages their sense of alienation.
  " It undermines respect for authority and increases cynicism about leaders at all levels of society.
• It discourages participation in civil society and elevates self-interest as a guide to conduct.
• In practical terms, corruption can divert resources away from social programmes with a number of negative consequences.
• As education spending falls, so will levels of literacy.
• As health spending falls, so the incidence of disease will increase.
• The poor will be increasingly marginalised and their sense of social exclusion will be strengthened.
• Within the ranks of the poorest people, women will be particularly disadvantaged and prevented from developing their capacities and taking a full part in society.

These are some of the costs, which are particularly characteristic of developing countries but similar if less stark consequences follow for developed countries. Where the belief is widespread that all politicians are crooks, it is bound to widen the gap between the political class and the rest of society.

It will stimulate people with resources to turn away from government and politics and provide their own solutions to problems. Corruption will foster an increasing withdrawal from membership of political organisations for fear of being identified with the corrupt political class.

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What are the costs of corruption in political terms?

The political costs of corruption vary according to the type and level of corruption and the type of political system in which it occurs.

Corruption appears to have a number of potentially negative impacts on politics:

• It substitutes personal gain for ideology and principle.
• It prevents or makes it more difficult for governments to implement laws and policies.
• It damages the reputation of politicians and encourages people to go into politics for the wrong reasons.
• It undermines public trust in politicians and in political institutions and processes.
• It erodes international confidence in the government.
• It encourages cynicism and discourages political participation.
• It can contribute to political instability, provoke coups d'état and lead to civil wars.
• It perverts the conduct and results of elections.
• It ensures that the poor remain politically powerless.
• It consolidates political power and reduces political competition.
• It delays and distorts political development and sustains political activity based on patronage, clientelism and money.
• It limits political access to the advantage of the rich.
• It reduces the transparency of political decision-making.

The precise political costs in any given country are path-dependent in that they depend on history and political circumstances. But there is little doubt that corruption impedes the development of open democratic political systems.

To assess the political and other costs of corruption, it is important not to attribute every negative development to corruption and to retain some degree of realism about the extent of its impact. Corruption scandals have certainly provoked political unrest but it should not be assumed that these countries would otherwise have been havens of tranquillity. Corruption certainly erodes the political rights of the poor and reduces their political participation but it is not the sole cause of poverty and dictatorship.

Corruption is the antithesis of good governance and democratic politics. For those striving to create open, competitive and transparent forms of political activity, corruption offers a range of obstacles and imposes significant costs.

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What is the Corruption Perception Index (CPI)?

The Corruption Perception Index, CPI, is a league table of international corruption with the least corrupt countries at the top and the most corrupt at the bottom. It has been published annually by the NGO Transparency International since 1995.

The league table measures perceived level of corruption among public officials and politicians rather than corruption as such. Countries are assigned scores of between10 - 0 (with 10 being low) which are derived from polls and surveys of corruption in each country and, in effect, the CPI is a 'poll of polls'.

In 2001, the CPI included 91 countries and the data was derived from 14 polls and surveys published by 7 independent organisations. Where less than 3 surveys of corruption are available, a country is not included in the CPI. The CPI has consistently shown that developed countries are generally perceived as less corrupt than developing and transition countries.

Some critics of the CPI have pointed out that the CPI fails to take account of the supply side of bribery, which often originates in the developed world. Partly in response to this criticism, Transparency International created the Bribe Payers Index, BPI, in 1998.

While the database has expanded and the statistical methods have become more sophisticated, critics claim the CPI still has important weaknesses:

• Constructing a league table on the basis of perception assumes that the perceptions of survey respondents are both accurate and representative.
• The perceptions of international businessmen differ from those of rural labourers.
• The entire CPI rests on the measurement of perceptions of corruption but perceptions may reflect not the actual incidence of corruption but its openness and the extent to which it is publicized.
• The use of different surveys for different countries raises the issue of whether like is being compared to like.

The CPI has received wide publicity and fulfils Transparency International's aim of raising public and political awareness of corruption. Its assumptions and methodological limitations indicate that the results of the CPI should be regarded with caution.

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What is the Bribe Payers Index (BPI)?

The Bribe Payers Index, BPI, is a league table of bribery in international trade, which ranks countries in terms of their perceived willingness to offer bribes.

The BPI rankings are limited to bribes between leading exporting countries and senior public officials in a specified group of key emerging economies.

It measures the supply side of bribery by identifying the country of origin of bribe givers whereas the Corruption Perception Index (CPI) focuses on bribe recipients. Transparency International produces both indices, and the BPI was first published in 1999.

The BPI is a useful way of showing how leading export countries help create and aggravate the incidence of corruption in developing countries. As such, it helps share the 'blame' for corruption between the developed and developing worlds.

Although presented on a similar 10 - 0 numerical scale, the BPI differs in important respects from the CPI:

• It is highly selective and based, in 2002, on surveys in 15 emerging market economies, relating to 21 exporting countries.
• It is based on only one source of data, 835 interviews conducted by the Gallup International Association, rather than using the CPI method of using different sets of data from several independent organizations.

The 2002 BPI shows that companies from Russia, the People's Republic of China (PRC) and Taiwan are the most likely to offer bribes while companies from Australia, Sweden and Switzerland are the least likely.

Because it is based on the perceptions of business people, accountants, bankers and lawyers, it is vulnerable to objections based on accuracy, representativeness and reliability. It has striking omissions in that it was not, for political reasons, possible to conduct a survey in the PRC, the largest emerging market economy in the world.

In identifying countries rather than companies, it may give the potentially misleading impression that countries promote bribe giving but Transparency International claims there are too many multinational companies to rank.

The BPI is a useful complement to the CPI but it has serious methodological limitations.

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How does corruption affect people's lives?

When corruption is pervasive, it permeates every aspect of people's lives. It can affect the air they breathe, the water they drink and the food they eat.

Environmental corruption can result in the over-exploitation of natural resources with the result that air is polluted, rivers are poisoned and land is contaminated.

Poor people in developing countries frequently find that their lives are made even harder by corruption:

• If they need public housing, they never get to the top of the waiting list because corruption enables some people to 'jump the queue'.
• If they want access to utilities - electricity and water - they may find that supplies are only forthcoming if a bribe is paid to the appropriate officials.
• They may also experience disruption of supply due to defects in the construction of the pipeline: the contract for which was given not to the best qualified contractor but to the one who paid the best bribe.
• If they want their children to go on to secondary school, they may find that the headteacher insists on a special personal payment.
• If they fall ill, they find that primary health care is inadequate because budget funds have been re-directed to buying defence equipment. These purchases are almost invariably surrounded by 'commission payments' and bribes.
• If they actually see a nurse or doctor, the medical staff may demand extra payment and if they need drugs, they often discover that there is a shortage because of 'leakage' to the black market.
• When seeking public sector employment, they may discover that jobs are bought and sold like other commodities.
• Once in employment, transfers and promotions may also be subject to the payment of bribes to superior officials.
• If they want to start a small business - a market stall or taxi service - they often find that the required permits and licences are only available after a bribe has been paid.

When corruption is at a low level, its impact is correspondingly reduced and many people in developed countries may be unaware of its consequences.

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Why is it that anti-corruption laws are not always enforced?

The main reason why anti-corruption laws are not enforced is because there is no political will to enforce them.

The anti-corruption laws may have been inherited, imposed or accepted as a condition of receiving development assistance. They may not reflect the views of the government or politicians but be deemed necessary in order to gain international respectability and to prevent donors from reducing, suspending or withdrawing their support.

There may be domestic political reasons for having anti-corruption laws. They can be passed in order to appease or deflect criticism from political opponents and the media without any commitment from the political leadership to enforce them.

Anti-corruption laws may, in some cases, be difficult to enforce. They may be poorly drafted or imported wholesale from very different jurisdictions. Anti-corruption laws may be unenforceable in that they depend on the availability of information and resources, which simply do not exist in the country.

Enforcement requires effective auditing and monitoring institutions, a non-corrupt police force with specialist training and an efficient and non-corrupt judicial system. In the absence of any of these elements, the prospects for detecting corruption, accumulating evidence against individuals and securing convictions are poor.

Political will is a necessary condition for rigorous enforcement but it is not a sufficient one. Political will alone will not be enough if corruption is pervasive and deeply entrenched and political will cannot compensate for a lack of funding, personnel and technical skills.

It is sometimes the case that when anti-corruption laws are not enforced, other laws are also not enforced. It is a symptom of a wider breakdown in the rule of law and effective government.

But every government has to make choices about the allocation of resources and when there are multiple pressing needs, as there are in developing countries, anti-corruption enforcement may become one of the less pressing priorities.

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Do strong executives/presidents impact on corruption?

A corrupt president is a guarantee of a corrupt government.

But having a 'saint' as president who is personally immune to corruption does not ensure that the government will be equally pure.

When levels of corruption are high, it is possible to determine a structure of corruption that stretches from the lowliest clerk to the presidential palace, from the rural areas back to the capital and each layer of corrupt officials blames the one above them.

Strong presidents who are not personally corrupt will sometimes make an example of one or more individuals in the hope that it will deter others. Some have ordered the execution of officials and ministers but, not only does this not address the structural character of corruption, it normally involves members of the previous regime rather than the present one.

Other presidents start with good intentions and give anti-corruption work a high priority and relatively generous resources but, when members of their family or political allies are the target of corruption allegations, their commitment starts to fade.

Fighting corruption depends partly on political will and, if the president is personally free of corruption and willing to lead a sustained attack on corruption, there is some prospect of progress. The problem is that, in many contexts, presidents face a daunting array of urgent and intractable problems and it is very difficult for even the best-intentioned president to devote sufficient attention and energy to the task.

Anti-corruption work is not eye-catching or vote getting and there are few simple, quick or inexpensive strategies, let alone any final victory. It requires constant vigilance and presidents are too often deflected by wars, famines, financial crises, the wider challenges of development and maintaining their grip on office.

Anti-corruption strategies need to be embedded and institutionalised because experience suggests that focusing a strategy on an individual, however powerful and charismatic, does not produce sustained progress.

Unfortunately, very strong presidents often prove to be personally corrupt and their corruption contaminates the entire political system.

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Why can't governments contain corruption effectively without the help of others?

When corruption is pervasive and deeply entrenched, no section of society, no business sector and no social group can escape its impact.

• Corruption is a social and economic problem as well as a political problem. Its containment requires the mobilization of social and economic sectors in addition to the commitment of the political authorities.
• Corruption is a global phenomenon, which is no respecter of national boundaries. It can originate, as the BPI shows, from outside the country where the corrupt transaction occurs and the proceeds of corruption flow outside national boundaries.

Corruption thrives when it is accepted, when victims of corruption do not protest, when it goes unreported and un-investigated and when its consequences are not widely understood. Tackling corruption requires the active participation of the media, the churches, business groups, trade unions, civic associations and voluntary groups, teachers, health workers and NGOs.

Many countries have a shortage of personnel with the relevant expertise and experience to combat corruption. They need to go abroad to recruit consultants and expatriate staff engaged in similar work elsewhere to help in:

• Setting up anti-corruption agencies: staff from the Hong Kong Commission has been recruited to work in Africa.
• Training local police, prosecutors and judges.
• Training auditors, bank staff and key staff in the most vulnerable sectors.
• Advising on institutional reform and sharing best practice.

When the source of corruption is in another country, there is a need for bi-lateral cooperation between governments. When there are multiple sources, there is a need for international cooperation in the form of treaties, agreements, protocols and exchanges of information and personnel.

Bi-lateral and international cooperation is also essential to help tackle the associated problems of money laundering and tax havens.

Containing corruption requires not only the commitment of governments but also the participation of civil society and international cooperation and assistance.

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