Causes of Corruption

CO RRUPTIO N AND G O VERNMENT
The second edition of Corruption and Government updates Susan Rose-Ackerman’s 1999 book to
address emerging issues and to rethink old questions in light of new data. The book analyzes the
research explosion that accompanied the fall of the Berlin Wall, the founding of Transparency
International, and the World Bank’s decision to give anticorruption policy a key place on its agenda.
Time has vindicated Rose-Ackerman’s emphasis on institutional reform as the necessary condition for
serious progress. The book deals with routine payoffs and with corruption in contracting and
privatization. It gives special attention to political corruption and to instruments of accountability.
The authors have expanded the treatment of culture as a source of entrenched corruption and added
chapters on criminal law, organized crime, and postconflict societies. The book outlines domestic
conditions for reform and discusses international initiatives – including both explicit anticorruption
policies and efforts to constrain money laundering.
Susan Rose-Ackerman is the Henry R. Luce Professor of Jurisprudence (Law and Political Science)
at Yale University. She is one of the world’s leading scholars of the political economy of corruption
and one of the first economists to write on the subject. She is the author or editor of seventeen books
and numerous articles. The first edition of her book Corruption and Government has been translated
into seventeen languages. In addition to her work on corruption, she writes about public law and
public policy from a comparative law and political economy perspective. Her most recent book is
Due Process of Lawmaking (with Stefanie Egidy and James Fowkes). She has been a visiting
researcher at the World Bank and a fellow at the Center for Advanced Study in the Behavioral
Sciences, the Paris Institute of Political Studies, and the Wissenschaftskolleg zu Berlin.
Bonnie J. Palifka is an Assistant Professor at the Tecnológico de Monterrey (ITESM), Campus

Monterrey, in Mexico. She has taught a course on corruption based on the first edition of this book
since 2004 at ITESM and since 2011 at Yale University. Dr. Palifka has spoken on corruption at
conferences in the United States, Mexico, Guatemala, St. Kitts, and France. Her most recent
publication is “A Review of Drivers of Corruption: a brief review, by Tina Søreide” in the journal
Crime, Law and Social Change.
COR R U P T I ON AND GOVER NMENT
Causes, Consequences, and Reform
Second Edition
Susan Rose-Ackerman
Yale University
Bonnie J. Palifka
Tecnológico de Monterrey
32 Avenue of the Americas, New York NY 10013-2473, USA
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© Susan Rose-Ackerman and Bonnie J. Palifka 2016
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no reproduction of any part may take place without the written permission of Cambridge University Press.
First published 2016
Printed in the United States of America by Sheridan Books, Inc.
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Library of Congress Cataloging in Publication Data
Names: Rose-Ackerman, Susan. | Palifka, Bonnie J.Title: Corruption and government : causes, consequences, and reform /
Susan Rose-Ackerman, Bonnie J. Palifka.
Description: Second edition. | New York, NY : Cambridge University Press, 2016. | Includes bibliographical references and
index.
Identifiers: LCCN 2015038967| ISBN 9781107081208 (hardback) | ISBN 9781107441095 (paperback)
Subjects: LCSH: Political corruption. | Political corruption – Economic aspects. | BISAC: POLITICAL SCIENCE / Public
Policy / Economic Policy.
Classification: LCC JF1081.R675 2016 | DDC 364.1/323–dc23
LC record available at http://lccn.loc.gov/2015038967
ISBN 978-1-107-08120-8 Hardback
ISBN 978-1-107-44109-5 Paperback
Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet Web
sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or
appropriate.
Dedication
Susan Rose-Ackerman: For my grandchildren
Bonnie J. Palifka: In memory of Arthur Jefferson Boynton III, who taught by example
Contents
List of Figures
List of Tables
List of Boxes
List of Acronyms
Preface to the First Edition (1999)
Preface to the Second Edition
Acknowledgments
Introduction
1 What Is Corruption and Why Does It Matter?
Chapter 1 Appendix: Cross-Country Measures of Corruption
Part I Corruption as an Economic Problem

2 Bureaucratic Corruption
3 Corruption in Procurement and Privatization
4 Reducing Incentives and Increasing Costs

Chapter 4 Appendix: Economic Analysis of Anticorruption Reforms
5 Civil Service Reform and Bureaucratic Reorganization
6 Using the Criminal Law to Deter Bribery and Extortion
Part II Corruption as a Cultural Problem

7 Culture and Corruption
Part III Corruption as a Political Problem
8 Politics, Corruption, and Clientelism
9 Organized Crime, Corruption, and Money Laundering
10 Corruption in Postconflict State Building
11 Democracy: Corruption, Connections, and Money in Politics
12 Accountability beyond the Ballot Box
Part IV Reform Agendas: Domestic Political Will and

International Influence
13 Domestic Conditions for Reform
14 The Role of the International Community
15 International Cooperation: States, Firms, Banks, and Organized Crime
Conclusions
16 Conclusions
References
Index
Figures
1.1 Corrupt interactions
1.2 Corruption indices for 2013: The Corruption Perceptions Index vs. the Control of
Corruption Indicator
1.3 Sector-specific results from the 2013 Global Corruption Barometer
1.4 Global Corruption Barometer: Incidence of bribery in subsectors
1.5 Public opinion (GCB) vs. expert opinion (CPI)
1.6 Incidence (GCB) vs. expert opinion (CPI)
1.7 Incidence (paid a bribe) vs. public perception (how much of a problem is corruption?)
1.8 Causes and consequences of corruption
1.9 Corruption and development
1A.1 Global Corruption Barometer 2013: Incidence of bribery, by country
2.1 Cross-country relationship between days to start a business and the frequency of bribery
by firms
2.2 The Bribe Payers Index
3.1 Selected cost overruns
3.2 Procurement process
4A.1 Supply-side reforms
4A.2 Demand-side reforms
8.1 Types of corrupt governments

8.2 Johnston’s “Syndromes of Corruption”
9.1 Corruption and organized crime
9.2 Money laundering flows
9.3 Corruption, organized crime, and money laundering
10.1 Control of Corruption Indicator in the year immediately after conflict ended
10.2 Corruption Perceptions Index in four countries vs. world average
11.1 Percent of survey respondents who believe that voters are bribed “fairly often” or
“very often”
12.1 The cross-country relationship between judicial independence and diversion of public
funds
Tables
1A.1 Data sources of the Corruption Perceptions Index 2014 (covering corruption in 2013)
and the Control of Corruption Indicator 2013
1A.2 Comparing results across corruption indices: Percentile ranks
7.1 Payments by clients or customers
10.1 Nature of postconflict regimes
15.1 The twenty largest corporations in the world by sales
15.2 Selected international initiatives: Anti-corruption, anti-organized crime and anti–money

laundering
Boxes
1.1 Types of Corruption
2.1 The Market for Bent Rules
2.2 Corruption in Mexican Customs
2.3 Corruption as a Prisoners’ Dilemma Game
4.1 OPEN Initiative in Seoul
9.1 Organized Crime and Prostitution
14.1 The UN Oil-for-Food Scandal
Acronyms
AC
Anticorruption
ACA
Anticorruption Agency
ACINET
Arab Anti-Corruption and Integrity Network
ADR
Alternative Dispute Resolution
AML
Anti-Money Laundering
APA
Administrative Procedures Act, U.S.
AOC
Anti-Organized Crime
ASEAN
Association of Southeast Asian Nations
BAE
BAE Systems, a British defence and aerospace firm
BIT
Bilateral Investment Treaties
CEO
Chief Executive Officer
CCI
Control of Corruption Indicator, World Bank
CDU
Christian Democratic Union, the dominant right of center party in Germany
CIA
Central Intelligence Agency
CPI
Corruption Perceptions Index, Transparency International
CoE
Council of Europe
CPIB
Corrupt Practices Investigations Bureau, Singapore
CREW
Center for Responsibility and Ethics in Washington
EITI
Extractive Industries Transparency Initiative
EU
European Union
FAR
Federal Acquisition Regulation
FATF
Financial Action Task Force
FBI
Federal Bureau of Investigation, U.S.
FCPA
Foreign Corrupt Practices Act, U.S.
FDA
Food and Drug Administration
FDI
Foreign Direct Investment
FIFA
Fédération Internationale de Football Association
FIU
Council of Europe’s Financial Intelligence Unit
FOIA
Freedom of Information Act, U.S.
GAO
Government Accountability Office, U.S.
GCB
Global Corruption Barometer
GDP
Gross Domestic Product
GES
Global Enterprise Survey
GGM
Good Governance in Medicine, World Health Organization
GNI
Gross National Income
GPA
The World Trade Organization’s Revised Agreement on Government Procurement
GRECO
Group of States Against Corruption
HBMX
HSBC Mexico
ICAC
Independent Commission Against Corruption, Hong Kong
ICB
International Competitive Bidding
ICC
International Chamber of Commerce
ICJ
International Court of Justice
ICRG
International Country Risk Guide
ICSID
International Center for the Settlement of Investment Disputes, World Bank
ICTs
Information and Communication Technologies
ICVS
International Crime Victimization Survey
IFI
International Financial Institution
ILOAT
International Labor Organization Administrative Tribunal
IMF
International Monetary Fund
INT
World Bank’s Department of Institutional Integrity, set up to detect corruption and ethics violations
at the World Bank
IP
Inspection Panel, World Bank
IPO
Initial Public Offering
KPMG
International consulting firms
LAPOP
Latin American Public Opinion Project
MDB
Multilateral Development Bank
NAFTA
North American Free Trade Agreement
NGO
Nongovernmental Organization
NPM
New Public Management
NRS
National Revenue Service, U.K.
OAS
Organization of American States
OCG
Organized Crime Group
OECD
Organization for Economic Co-operation and Development
OED
Operations Evaluations Department, the World Bank’s oversight agency
OPEC
Organization of the Petroleum Exporting Countries
PAC (U.K.)
Public Accounts Committee
PAC (U.S.)
Political Action Committee
PAP
People’s Action Party, the party that has ruled Singapore since 1959
PEP
Politically Exposed Person
PETS
Public Expenditure Tracking Surveys
PR
Proportional Representation
PRI
Partido Revolucionario Institutional, the dominant political party in Mexico during the twentieth
century
PWYP
Publish What You Pay
REDD
Reducing Emissions from Deforestation and Forest Degradation
RFD
Rural Free Delivery, U.S.
RICO
Racketeer-Influenced and Corrupt Organization Act, U.S.
STAR
Stolen Assets Recovery Initiative
SEC
Securities and Exchange Commission, U.S.
SME
small- and medium-sized enterprises
TI
Transparency International
UN
United Nations
UNAT
United Nations Administrative Tribunal
UNCAC
United Nations Convention against Corruption
UNCTAD
United Nations’ Comtrade
UNDP
United Nations Development Program
UNODC
United Nations Office on Drugs and Crime
UNTOC
United Nations Convention against Transnational Organized Crime
USAID
United States Agency for International Development
WB
World Bank
WBAT
World Bank Administrative Tribunal
WBES
World Bank Enterprise Survey
WEF
World Economic Forum
WGB
Working Group on Bribery in International Business, OECD
WHO
World Health Organization
WTO
World Trade Organization
WVS
World Victimization Survey
Preface to the First Edition (1999)
Economics is a powerful tool for the analysis of corruption. Cultural differences and morality
provide nuance and subtlety, but an economic approach is fundamental to understanding where
corrupt incentives are the greatest and have the biggest impact. In an earlier book, Corruption: A
Study in Political Economy (1978), I made this point for an audience of economists and technically
trained political scientists. Twenty years later I hope to broaden my audience and deepen my analysis
with a new book that focuses on the way corruption affects developing countries and those in
transition from state socialism.
The growing interest in institutional issues among development economists encouraged me to
make this effort. The study of corruption forces scholars and policy makers to focus on the tension
between self-seeking behavior and public values. Those worried about the development failures
common throughout the world must confront the problem of corruption and the weak and arbitrary
state structures that feed it.
In 1995–6 I was a Visiting Research Fellow at the World Bank in Washington, D.C. Because I
previously had focused on public policy problems in the United States and Western Europe, a year at
the Bank was a transformative experience. I learned a tremendous amount, not just by reading
whatever was at hand, but also by making shameless use of the Bank’s e-mail system to track down
lunch partners with complementary interests. For a scholar used to sitting alone before a computer,
the year in Washington was a welcome and energizing change. It was fascinating to work on a topic –
corruption – that the Bank had treated with indirection in the past. I began to collect euphemisms.
People told me that when a review of a program mentioned “governance problems,” “unexplained
cost overruns,” or “excessive purchase of vehicles,” this meant that corruption and simple theft were
a problem. A Bank staffer pointed out that complaints about “excessive capital-labor ratios” in a
report on Indonesia meant that corruption was not only rife but costly.
My current work on corruption began before I arrived at the Bank and was completed after I left,
but my understanding was deepened by talking to Bank staff who were living with the problem.
Among the many supportive and helpful staffers, I want particularly to thank Ladipo Adamolekun,
William Easterly, Daniel Kaufmann, Petter Langseth, John Macgregor, Boris Pleskovic, Neil Roger,
Sabine Schlemmer-Schulte, Frederick Stapenhurst, and Michael Stevens. At the International
Monetary Fund I also had useful discussions with Nadeem Ul Haque, Paolo Mauro, Vito Tanzi, and
Caroline Van Rijckegham. All of them were helpful sounding boards, but should not, of course, be
implicated in any of my conclusions. Obviously, the World Bank itself bears no responsibility for my
analysis and conclusions. I owe a special debt to Estelle James for suggesting that I apply to the Bank
as a Visiting Research Fellow and to Michael Klein and his staff for providing me with a congenial
institutional home at the Bank’s unit on the Private Provision of Public Services located in the Private
Sector Development Department.
Soon after I arrived in Washington, James Wolfensohn, the World Bank’s new president, sought
to put the corruption issue openly on the Bank’s agenda. Because my economic perspective fit well
with the Bank’s own efforts to define its role in this area, I was pleased to contribute something to the
internal debate – a debate that generated a 1997 paper, Helping Countries Combat Corruption
(World Bank 1997a), stating the Bank’s position.
After leaving the Bank, I continued to work with Bank staff on the corruption section of the
World Development Report 1997, The State in a Changing World (World Bank 1997b), and I wrote
a paper entitled “Corruption and Development” for the Annual World Bank Conference on
Development Economics in May 1997 (Rose-Ackerman 1998b). Both Brian Levy and Sanjay Pradhan
of the World Development Report team were helpful critics and colleagues. In the spring of 1997 I
presented the Philip A. Hart Memorial Lecture at Georgetown Law School on the topic of “The Role
of the World Bank in Controlling Corruption” (Rose-Ackerman 1997c). I also wrote a background
paper for the Management Development and Governance Division of the Bureau for Policy and
Programme Support of the United Nations Development Programme (UNDP). The UNDP issued this
report as a discussion paper, entitled, Corruption and Good Governance, in the summer of 1997
(UNDP 1997a), and the UNDP has used this paper to develop its own thinking on the topic.
In 1994 I joined the board of the U.S. chapter of Transparency International (TI), an international
nonprofit organization devoted to fighting corruption worldwide. This association has given me a
valuable opportunity to be on the inside of a growing international movement and to keep up to date
on worldwide developments. TI-USA’s executive director Nancy Boswell has been a strong moral
supporter of my research efforts as has Fritz Heimann, the chair of TI-USA’s board. The international
organization – based in Berlin, but with chapters worldwide – has become a global force and a
clearinghouse for information on corruption. This is due to the tireless efforts of TI Chairman Peter
Eigen and TI’s first managing director Jeremy Pope. Their efforts in raising the issue of corruption to
international consciousness have corresponded to my own scholarly and policy interests. I thank TI
for its interest in my own work, but obviously do not implicate them in any of my specific proposals.
Several collaborative papers have contributed to the arguments I develop here. Within the World
Bank Group, I collaborated with Jacqueline Coolidge of the Foreign Investment Advisory Service on
a paper on corruption in Africa and with Andrew Stone of the Private Sector Development
Department on a paper that analyzed World Bank surveys in the Ukraine and Pakistan. At Yale
University, I collaborated with Silvia Colazingari, an advanced graduate student in political science,
on a paper on the Italian case. I thank all three co-authors for bringing their own knowledge and
insights to bear on topics that I could never have tackled on my own.
Two Yale political science graduate students, Jonathan Rodden and Sarah Dix, provided
indefatigable research assistance on all manner of diverse topics. I am extremely grateful for their
help, patience, and good humor. As always, I want to thank Gene Coakley and the Yale Law Library
staff for their help in tracking down sources and checking references. I am also very grateful to my
husband, Bruce Ackerman, who gave the manuscript a careful and critical reading as it neared
completion.
Over the last several years, as my thinking developed, I have presented my work in a variety of
places. I gave seminars at a number of universities and colleges including the universities of Iowa,
Michigan, Ottawa, and Pennsylvania; the Kennedy School at Harvard University; New York
University; Northeastern University; Swarthmore College; Trinity College; Yale University; and the
Jerome Levy Institute at Bard College. Several workshops at the World Bank and International
Monetary Fund were especially helpful. The Comparative Law and Economics Forum, of which I am
a member, was a congenial place to present several early draft papers. I also presented papers at the
American Economic Association Annual Meeting in San Francisco; a workshop in Dakar, Senegal,
sponsored by the U.S. Agency for International Development; the Annual Meeting of the American
Society for International Law in Washington, D.C.; a conference organized by the Institute for
International Economics; several seminars and workshops in Santiago, Chile, and Buenos Aires,
Argentina during a visit sponsored by the U.S. Information Agency; a meeting in Paris sponsored by
the Organisation for Economic Co-operation and Development and the UNDP; a conference on
institutional reform held at Instituto Tecnológico Autónomo de México in Mexico City; the Latin
American Law and Economics Association Meeting in Buenos Aires; and a conference at the Yale
Center for International and Area Studies sponsored by the UNDP.
My research on this book was made possible by research stipends provided by Yale Law School
and by the Visiting Research Fellows program of the World Bank. I am grateful to both institutions for
their support without implying any responsibility for the results.
Susan Rose-Ackerman
Preface to the Second Edition
Since Corruption and Government was published in 1999 interest in the topic has burgeoned in both
academic and policy circles. Empirical work, in particular, has flourished, with scholars and policy
analysts devising clever techniques to measure and study a phenomenon that is inherently difficult to
observe. My own institutional, political-economy approach to the study of corruption has, I believe,
been vindicated by this newer work, and my 1999 and 1978 books have helped structure the debate.
The 1999 book was translated into seventeen languages and has engaged activists and scholars
worldwide. Nevertheless, even if the basic message of the book remains relevant, the text is outdated
in that it reports only on scholarship and corruption scandals from before 1999. Thus, a second
edition can inform the ongoing debate. In Bonnie Palifka, I have found an excellent co-author. Bonnie
has taught courses based on the first edition for ten years at both Tecnológico de Monterrey in Mexico
and at Yale, and she has a teacher’s perspective on what needs to be expanded or better explained.
This new edition not only assesses the empirical bases for claims made in the first edition; in
addition, it develops themes that were mentioned but not fully explicated in that volume. The new
material deals with debates over the cultural bases of corruption, with corruption in democracies, and
with reconciling corruption control and democratic values. We have added chapters on the criminal
law, organized crime, and corruption in postconflict societies, and expanded the material on
international anticorruption to reflect current developments. Corruption is a problem that has existed
since the rise of organized states and that is not likely to disappear any time soon. However, some
states and sectors have managed to become less corrupt over time. Although we cannot claim to
provide a comprehensive literature review, we do try to incorporate new work that asks what lessons
can be learned from both successes and failures of reform.
Susan Rose-Ackerman
Acknowledgments
Susan Rose-Ackerman: This new edition has benefitted from some of my published work since 1999.
Excerpts from that material have been incorporated into some of the chapters, and I am indebted to
Jana Kunicová, Rory Truex, Tina Søreide, Paul Lagunes, Sinéad Hunt, and Miguel de Figueiredo,
who were my co-authors or research assistants on these projects. I want particularly to acknowledge
the work of Tina Søreide, Paul Lagunes, and Paul Carrington for their co-editorship of volumes on
corruption and for help in organizing the conferences that led to the books.1 Gisela Mation, Leo
O’Toole, Kyle Peyton, and Cait Unkovic provided excellent research help connected with aspects of
the second edition. I am very grateful to the staff of the Yale Law Library, particularly Sarah Ryan, for
excellent assistance, and to my assistant Cathy Orcutt for help in bringing the manuscript to
completion. For financial help, I thank the Yale Law School and the Wissenschaftskolleg zu Berlin,
where I spent the academic year 2014–15. Finally, I thank my husband, Bruce Ackerman, who was, as
always, an anchor of support and patience.
Bonnie J. Palifka: I would like to thank Susan for her generosity. I have long admired her work;
now I am honored to call her my mentor, colleague, and friend. Part of this research was conducted
while I was on sabbatical from Tecnológico de Monterrey, January through December 2014, during
which time I was a Visiting Research Fellow at the MacMillan Center for International and Area
Studies at Yale University: I am indebted to both institutions. I am grateful to Alejandra Lee and
Carlos Rojo for research assistance. I would like to thank my students at Tecnológico de Monterrey
and Yale University, who are a constant source of inspiration. Finally, I thank my family and friends
for supporting me throughout this project.
1 The review articles are Rose-Ackerman (2010a, 2010b) and Rose-Ackerman and Truex (2013).
The edited volumes are Rose-Ackerman (2006a), Rose-Ackerman and Søreide (2011), Rose-
Ackerman and Carrington (2013), and Rose-Ackerman and Lagunes (2015).
Introduction
1
What Is Corruption and Why Does It
Matter?
◈
The Millennium Development Goals (MDGs), established in 2000 under the auspices of the United
Nations, aimed to reduce extreme poverty to half of its 1990 level, by 2015. This goal was achieved
ahead of schedule, by 2010, but as impressive as this achievement is, the gains were not distributed
equally across the world: 94% of the reduction in the number of people living in extreme poverty
occurred in China.1 In Paul Collier’s (2007) terminology, a “bottom billion” – 1.2 billion people –
still live in extreme poverty (less than $1.25 per day) and 2.4 billion live in poverty (less than $2 per
day).2
Poverty, poor health, low life expectancy, and an unequal distribution of income and wealth
remain endemic. Many poor countries have had very low or negative growth rates that challenge
convergence models of development.3 Others have weak economic records in spite of a well-
educated labor force. Even some countries that are well endowed with natural resources have poor
growth records, low per capita income, and massive inequality. The MDGs set specific global
development targets, but fulfilling those goals at the country level has proven much more challenging
in some countries than in others.
The world’s leaders continue to debate how to move forward. The MDGs, now called
Sustainable Development Goals (SDGs), have been reformulated with the shortfalls of the first effort
in mind.4 Recognizing the remaining problems of low growth and development, the World Bank in
2013 announced the establishment of a new mission: eliminating extreme poverty by 2030.5 Recent
data suggest that this goal is overly ambitious for a variety of reasons, including the fact that a large
number of people were just below the original cutoff.6 However, one part of the explanation is
dysfunctional public and private institutions that both hold back growth and restrict the flow of
benefits to those at the bottom of the income distribution.7 Neither public funds nor outside assistance
are used as effectively as they could be. Low-income countries and those with weak growth records
are often in difficulty because they are unable to use their human and material resources to further
development and to aid the poorest.8 These countries need institutional reform, but such reform is
difficult. Dams, highways, and port facilities are technically straightforward. Reforming government
and nurturing a strong private sector are more subtle and difficult tasks that cannot be reduced to an
engineering blueprint. The United Nations’ recently proposed SDGs include fighting corruption
specifically to promote equity, justice, and peace, but reducing corruption will help achieve all the
goals.9
Until the mid-1990s, international development organizations, such as the World Bank and the
International Monetary Fund (IMF), mostly took institutions as given; since then, some (most notably
the World Bank) have made institutional reform and good governance priorities. Bilateral lending or
aid is also often conditional on staying off “black lists” that highlight corruption, drug trafficking, and
other illicit activities.10 Several factors converged to contribute to this change in policy. The end of
the Cold War reduced incentives for the more powerful countries to tolerate corruption in their allies
(Theobald 1999). Transitions from centrally planned economies to market economies opened up new
opportunities for both licit and illicit profit (Rose-Ackerman 1998b). Accelerated globalization and a
1977 U.S. law criminalizing overseas bribery11 pressured governments to reduce unfair dealing and
firms to reexamine their overseas practices. The founding of Transparency International (TI) and the
publication of its Corruption Perceptions Index (CPI)12 raised international concern about corruption
and caused alarm (and, often, anger) in some poorly rated countries (Johnston 2005). Finally, the
intellectual underpinnings of development policy began to recognize the key role of public institutions
(e.g., Olson 1996). The macropolicy prescriptions of the “Washington Consensus” proved to be
insufficient to stimulate growth and to alleviate poverty.13 Development economists began to reach
out to the fields of political science and sociology and to incorporate work on the functioning of
institutions into their conceptual framework; this led them to confront corruption as a particularly
obvious pathology.
The tensions between the capacities of developing countries and the requirements of
international aid and lending organizations arise, in part, from the diverse histories and cultures of the
countries involved. To critics, the international organizations do not appreciate local customs and
institutions and fail to adapt their programs to fit individual countries’ special circumstances.
Although this is undoubtedly true in many cases, that claim is not the end of the story. Some countries’
institutions are poorly adapted even to their own stated development goals, and others manifestly
neglect the interests of ordinary people or of important subgroups.
Other critics question the goals of the international community, arguing that economic growth is a
narrow and incomplete measure of well-being and that international institutions tend not to take into
account local conditions and traditions (e.g., Stiglitz 2003; Easterly 2013). But even if one accepts
that criticism, wide differences remain across and within countries in health, education, economic
opportunity, and environmental quality. Whatever one’s standards of value, they vary widely around
the world and are rising and falling at different rates. We do not argue here for a standard of universal
value – be it per capita income, “human flourishing” in A. K. Sen’s terminology (Sen 1999), ethical
universalism, or impartiality. Rather we aim to show that whatever the goals of an institution or
polity, corruption can undermine those goals.
We begin with a basic fact of human motivation. Differences in culture and basic values exist
across the world, but there is one human trait that is both universal and central to explaining the
divergent experiences of different countries. That motivating trait is self-interest. Critics call it greed.
Economists call it utility maximization. Whatever the label, societies differ in the way they define and
channel self-interest. Endemic corruption suggests a pervasive failure to tap self-interest for
legitimate and productive purposes.
We can go a long way toward understanding development failures by understanding how a
country’s institutions manage or mismanage self-interest, and how self-interest interacts with generous
and public-spirited motivations. The best case for the social value of self-interest is the archetypal
competitive market where self-interest is transmuted into productive activities that lead to efficient
resource use. The worst case is war – a destructive struggle over wealth that ends up destroying the
resource base that motivated the fight in the first place. In between are situations in which people use
resources both for productive purposes and to gain an advantage in dividing up the benefits of
economic activity – called “rent seeking” by economists (e.g., Bhagwati 1974; Krueger 1974; Tullock
1993; Khan and Jomo 2000; Ngo and Wu 2009).
We explore the interaction between productive economic activity and unproductive rent seeking
by focusing on the universal phenomenon of corruption in the public sector.14 Corruption, of course,
also takes place in the private sector with no government officials involved, and it often has very
damaging consequences.15 Such activities, although not the focus of our book, remain an important
subject for research and policy reform that should complement our emphasis on the public sector. To
us, public-sector corruption deserves special emphasis because it undermines developmental and
distributional goals and conflicts with democratic and republican values.
I. What Is Corruption?
Corruption has many connotations and interpretations, varying by time and place, as well as
discipline. Box 1.1 provides some examples of corrupt acts; it is an illustrative rather than a
comprehensive list.16 To encompass the wide range of meanings, we start with TI’s definition of
corruption as: “the abuse of an entrusted power for private gain.” This definition captures the
principal-agent problem at the root of all types of economic and political corruption – bribery,
embezzlement, nepotism, influence peddling, conflicts of interests, accounting fraud, electoral fraud,
and so forth. The key term is “entrusted power,” which refers to the tasks one is expected to perform
– reviewing permit applications, passing laws, or hearing legal cases, for example – according to
certain rules, written or otherwise. This power may be entrusted by an employer to an employee, or
by the populace to a government leader. If one abuses entrusted power, the rules are broken, and the
principal’s stated goals are subverted. The harm takes two forms: first, in many cases the corrupt
official acts inconsistently with his or her mandate, and second, even if he or she only takes
acceptable actions in response to a payoff, the official has sold a benefit that was not supposed to be
provided on the basis of willingness to pay.17 Thus, corruption includes both accepting a bribe in
return for certifying an unsafe building and demanding a bribe as a condition for approving a fully
compliant structure. It includes embezzling contract funds so a promised infrastructure project is
delayed and over budget, as well as the simple theft of public funds in a way that inflates public
budgets but with little noticeable effect on the level of public services.
Box 1.1. Types of Corruption
bribery The explicit exchange of money, gifts in kind, or favors for rule breaking
or as payment for benefits that should legally be costless or be allocated
on terms other than willingness to pay. Includes both bribery of public
officials and commercial bribery of private firm agents.
extortion Demand of a bribe or favor by an official as a sine qua non for doing his
or her duty or for breaking a rule. We treat extortion as a form of bribery
where the bribe taker plays an active role. (Sometimes the rule is created
by the extortionist in order to exact the bribe.)
exchange of The exchange of one broken rule for another.
favors
nepotism Hiring a family member or one with close social ties, rather than a more
qualified but unrelated applicant.
cronyism Preferring members of one’s group – racial/ethnic, religious, political, or

social – over members of other groups in job-related decisions.
judicial fraud A decision based on any of the preceding types of corruption, or threats to
the judge, rather than the merits of the case.
accounting Intentional deception regarding sales or profits (usually in order to boost

fraud stock prices).
electoral Manipulation of election results, through vote buying or threats to the

fraud electorate, or by falsification or destruction of votes.
public Any activity that undermines the legal requirements of public service
service fraud delivery even if no bribes are paid. For example, teachers might provide
students with the correct answers or change students’ responses on
standardized tests (usually in order to ensure funding). Health care
providers might prescribe unnecessary tests or invent patients to increase
reimbursements. Civil servants might neglect their jobs for private-sector
work, steal supplies for resale, or simply not show up for work.
embezzlement Theft from the employer (firm, government, or NGO) by the employee.
kleptocracy An autocratic state that is managed to maximize the personal wealth of the
top leaders.
influence Using one’s power of decision in government to extract bribes or favors

peddling from interested parties.
conflicts of Having a personal stake in the effects of the policies one decides.
interest
We recognize, however, that some polities may be so riddled with self-dealing that the populace
cannot really be said to have “entrusted” power to politicians and officials. This can occur either
because too much power is in the hands of self-interested, wealth-maximizing rulers – for example,
pre-Arab Spring governments in the Middle East18 – or because the institutional framework is so
weak and chaotic that there is no power “entrusted” to anyone, as in the case of Somalia from 1991 to
2012. Some governments and institutions establish goals that most of us would abhor, but efforts to
undermine them can still be corrupt in our sense, even if we would applaud those who try to subvert
these goals.19 A weak or autocratic state fuels corruption, and the level of corruption, in turn, makes
reform difficult and undermines public trust in government institutions, producing a vicious cycle.
Some work on corruption starts with a strong commitment to a particular view of government
legitimacy – most prominently the work of Rothstein and his colleagues (e.g., Rothstein and Teorell
2008) and of Mungiu-Pippidi (2013, 2014). Rothstein focuses on impartiality as a central normative
goal for the state. Mungiu-Pippidi stresses “ethical universalism,” but the concepts are similar, and
they are analogous to North, Wallis, and Weingast’s (2009) “open access orders” and Acemoglu and
Robinson’s (2012) “inclusive institutions.” Government actions and institutions that violate these
norms are then labeled corrupt.20 We, instead, study a range of institutional structures that can
produce incentives for payoffs and self-dealing. Analysis of the incentives for bribes, kickbacks, and
other forms of self-dealing are then an input into both specific anticorruption policies and broad-
based efforts at state reform. An implication of both Rothstein’s and Mungiu-Pippidi’s work is that if
bribery undermines a ruler’s effort to favor a tight elite and leads to a more impartial or universalism
distribution of public benefits, then it is not corrupt. Of course, they argue that such cases are unlikely
to occur, but we do not want to rule out that possibility by definition. Rather than associating clean
government with a particular normative commitment, we analyze the normative consequences of
corruption under different background conditions.
II. Incentives for Corruption
We focus on corruption in the public sector, ranging from grand to petty corruption and covering many
different types of public/private interactions. Grand corruption involves a small number of powerful
players and large sums of money. The corrupt seek government contracts, privatized firms, and
concessions; they pay legislators to pass favorable laws and cabinet ministers and agency heads to
enact beneficial regulations. Heads of state may engage in outright embezzlement of public funds
without the direct involvement of dishonest private firms.
Petty corruption is easier for ordinary citizens to observe and experience. Thus, bribes might be
paid to avoid speeding tickets, evade taxes, or gain access to government services. Government job
offers and routine procurement contracts may favor relatives, cronies, and friends with few
qualifications. Grand and petty corruption may be linked together in hierarchical bureaucracies;
corruption at one level can support and encourage corruption elsewhere in the organization.
We concentrate on bribes and kickbacks, but we recognize that large gray areas exist, and we
discuss some of the most troublesome in later chapters. We do not claim to have necessarily located
the most harmful abuses of power and invite more research on the impact of borderline behavior, such
as campaign spending, cronyism, and conflicts of interest.21
Figure 1.1 provides a schematic diagram of the loci of typical corrupt acts. Each arrow shows
the flow of illicit gains in monetary or equivalent terms; the label on each arrow indicates what is
gained in exchange (except in the cases of embezzlement or fraud, when only the embezzler or
defrauder gains). “Government Treasury” represents all government funds from any source.
Figure 1.1. Corrupt interactions.
Source: Authors.
Many heads of state (presidents, prime ministers, etc.) have stolen government funds throughout
history. As explained in Chapter 8, kleptocracy is the extreme case in which the state is organized
purely to maximize the head of state’s gains. In somewhat more institutionalized settings, the head of
state may derive illicit gains by playing a direct role in public procurement or in the approval of
foreign direct investment (FDI) projects by, for example, charging a “consulting fee” for every
contract approved. Members of the legislature may embezzle directly from the resources they control,
accept “gifts” from firms or lobbyists in exchange for supporting or opposing particular laws, or
distribute resources to the electorate in order to influence votes.
Government officials are the heads of national or decentralized offices, such as customs
administration, public healthcare programs, public education, or regulatory agencies. They have the
power to design public tenders or select firms for projects, and may take (or demand) kickbacks in
this process. They also oversee the bureaucrats charged with applying taxes or regulations. If
corruption is top-down, the higher-up official takes the bribe or kickback and gives instructions to the
bureaucrats, possibly sharing the bribe with them. For example, in customs administration, the port
administrator may take a bribe from an importer, and instruct the customs agent at a particular gate to
allow a specific shipment through without inspection (or to inspect all shipments by a competing
importer). Conversely, corruption may flow from the bottom up: the customs agents take bribes and
sharea portion with the port administrator to avoid punishment. Similar relationships may exist
between doctors and hospital administrators or teachers and school principals or superintendants.
Some individuals (and firms) are willing to bribe their way out of legal punishment. If
attempting to bribe the arresting officer fails, the court clerk or judge might be more amenable to such
a deal. If all else fails, the prison guards may accept bribes to allow contraband to enter the prisons,
to permit extra conjugal visits, or even to facilitate escapes.
Nepotism and bribery connected to hiring and appointments may occur in both the public and
private sectors. This provides a gain to the person hired: a higher salary than is available in the
market, job security, or excellent benefits, including access to bribes. Conflicts of interest may occur
at all levels of government: legislators may hold stock in companies that benefit from their
legislation; regulators (or their relatives) may own firms they regulate; and police officers may
frequent businesses owned by known criminals. These conflicts may facilitate outright corruption, but
even if they do not, they can distort public choices.
Firms engage in many kinds of corruption. They may give kickbacks to the head of state to gain
preference for important projects; pay off the legislature to influence laws in their favor; bribe
officials and bureaucrats to get an inside edge in public tenders or to evade taxes and regulations; and
pay the judiciary and law enforcement to avoid punishment. Other types of corruption occur
exclusively in the private sector, for example, when a sales agent bribes a purchasing agent to favor
his firm’s product.
III. Cross-Country Corruption Measures: Perceptions
and Surveys
Combating corruption is possible only if one has some way to document the status quo and to measure
change.22 Corruption includes a wide range of different activities, and because most corrupt actors
seek to conceal their actions, objective measures are difficult to find, but even perceptions can be
valuable. If observers believe that corruption is endemic, that belief may influence economic
decisions and indicate fundamental problems in the legitimacy of the state’s institutions and practices.
It places a burden of proof on the state to demonstrate the contrary.
Yet, country-level measures can take one only so far. Once citizens and international actors are
alerted to the overall problem, reform requires more than a general sense that corruption exists. A
high level of corruption indicates that something is wrong with the state’s underlying institutions and
incentives; it signals a need for structural reform – not just more vigorous law enforcement.
Measurement needs to discover how corruption operates in particular sectors and to estimate how it
undermines public programs. Such measures, if properly designed, can help one to recommend
reforms and to track progress over time.
In the chapters to follow we will focus on empirical studies of particular sectors in particular
countries. We believe that such research is the key to effective reform at the country level. However,
before considering corruption at the microlevel, this chapter provides an overview and assessment of
the cross-country data. We describe the methodologies, present some data, and explain their
limitations as measures of corruption. Our goal is to provide the reader with a rudimentary
understanding of each measure, in order to evaluate the inferences drawn in academic studies and the
popular press. In this section, we describe TI’s widely cited CPI and the similar Control of
Corruption Indicator (CCI) of the World Bank Institute. The appendix to this chapter provides more
details and covers other cross-country measures of corruption.
A. The Corruption Perceptions Index and the Control of Corruption Indicator
The most popular measure of corruption is TI’s CPI, which it has published annually since 1995 and
which is available on the TI website (www.transparency.org). The CPI is a compilation of data from
other sources that are merged to generate a single number for each country.23 The CPI is now
measured on a scale of 0 to 100, with a higher score signifying less corruption.24 Certain countries –
the Nordic countries, New Zealand, and Singapore, in particular – have consistently scored near the
top, while others are ranked less well year after year. CPI scores tend to persist over time, with only
a few countries showing marked improvement or deterioration. This persistence is due partly to the
periodicity of the underlying data – some sources are not available on a yearly basis, so the same
year is used to calculate various editions of the CPI – and partly to the circular nature of the surveys.
Although some surveys instruct respondents not to consider the CPI when responding, it is likely that
the previous CPI scores for a country influence the perceptions of corruption of the respondents.
Furthermore, corruption tends to persist because participants expect it to do so. Expectations are
often based on previous experience, so if a particular public service has required bribery in the past,
those seeking the service will anticipate that this practice will continue. As we explain in Chapter 7,
culture plays a role in the persistence of such expectations.
The other major cross-country index is the World Bank’s CCI. The CCI is also a compilation,
including most of the same sources and countries as the CPI (Kaufmann, Kraay, and Mastruzzi
2010).25 The methodology for constructing the CCI is somewhat different, but the two indices are
highly correlated,26 and scores generally fall within the margin of error of each other. The CCI is
reported as a normalized distribution, with a zero mean and a standard deviation equal to one. This
form has the advantage of not imposing arbitrary cutoff points at the top and the bottom of the scale,
but it is centered at zero each year. Hence, it cannot measure global trends,27 but can only show how
countries fare relative to each other.
Figure 1.2 shows the results of the CPI and the CCI side by side for 2013.28 The least corrupt
countries according to the CPI were Denmark (92), New Zealand (91), Finland (89), and Sweden,
Switzerland and Norway (tied at 86); the most corrupt were Somalia and North Korea (tied at 8),
Sudan (11), Afghanistan (12), and South Sudan (15). On the CCI, the least corrupt were Denmark
(2.41), New Zealand (2.35), Sweden and Norway (tied at 2.29), and Finland (2.19); the most corrupt
were Equatorial Guinea (−1.61), Somalia (−1.58), Libya (−1.52), Sudan (−1.49), and
Afghanistan(−1.43).29 For illustrative purposes, we highlight six countries: the United States, Russia,
Mexico, China, India, and Sudan. Note that in each graph, the United States is ranked best of the six
countries and Sudan last. Russia, India, Mexico, and China are in the lower half of each graph, but
whereas India ranks better than China and Mexico on the CPI, India is below these two countries on
the CCI.
Figure 1.2. Corruption indices for 2013: The Corruption Perceptions Index vs. the Control of
Corruption Indicator.
Sources: Based on data from Transparency International, Corruption Perceptions Index 2014
and World Bank, World Governance Indicators 2013. Note: The CPI is listed by TI as for 2014,
but the underlying data are actually from 2013. TI data used with permission.
The data come from surveys or questionnaires, applied to residents, business leaders (CEOs), or
“country experts,” sometimes complemented by “hard statistics” drawn from official sources. The
CCI uses a broader concept of corruption, covering victimization and anticorruption institutions such
as electoral integrity and freedom of the press, whereas the CPI is more tightly focused on concepts of
corruption associated with bribery, embezzlement, and political influence. The addition of these
factors likely explains India’s fall in the rankings as one moves from the CPI to the CCI. (See the
Appendix to this chapter for more details on the sources.)
The CPI performed the important function of helping to put corruption control on the agenda of
international organizations and domestic reformers in the 1990s. Through dissemination by the
popular press, it also raised the awareness of citizens around the world, who in many countries have
demanded greater accountability and transparency. The indices have been used extensively by
researchers to identify the causes of corruption, or conversely, to determine the effect of corruption on
variables of interest, such as GDP or growth rates.
Before discussing some of these results, however, it is important to keep in mind the limitations
of composite indices (Andersson and Heywood 2008). First of all, it is not clear exactly what is
being measured. Many different data sources are included in each index, but not every country has
data available from each source.30 Hence, “corruption” may be more indicative of grand corruption
in some countries and of petty corruption in others; it could suggest a greater risk of political
instability resulting from corruption in some and a higher probability that businesses will have to pay
bribes in others. As macroindices, they tell one nothing about the details of how corruption operates.
Just as gross domestic product (GDP) per capita masks the income distribution by region, economic
sector, and social class, the CPI and CCI make no distinction between corruption in the police force
or customs, and political corruption; nor do they differentiate between corruption that only represents
a transfer of funds and corruption that also distorts the allocation of resources. Similarly, these
indices do not directly measure the volume of bribes, the incidence of corruption, or its impact.
Second, most of the sources behind the corruption measures are subjective and can be influenced
by visible scandals that do not reflect underlying conditions.31 As a result, a worse score may reflect
freedom of the press rather than necessarily higher “real” levels of corruption. Furthermore, the
underlying methodology used to produce some of the component parts is proprietary and not
transparent. (See the discussion of “expert surveys” in the appendix.)
Third, a country’s score is not expressed in cardinal units, such as dollars. Rather it is a unit-less
constructed number that tries to capture a country’s position on a continuum from high to low levels of
corruption. Yet, in empirical work the CPI is often used as if it were a cardinal number, so that a one-
point difference is taken to be the same, no matter where on the distribution that difference falls. Thus,
the sizes of coefficients should be given little weight; the direction and significance of correlations
are what matter.
Finally, some criticize the index for being culturally biased and not recognizing that some
transactions viewed as corrupt in wealthy, market economies are acceptable in other countries, and
vice versa. That may indeed be true, as we discuss in Chapter 7, but some actions are universally
understood to be corrupt. Even countries that tolerate grease payments of various kinds do not legally
condone huge kickbacks paid to political leaders in connection with major contracts and concessions.
The only exceptions would be states that are the personal fiefdoms of the ruler and his family. Of
course, the indices are not an overall measure of the impact of private wealth on public power. An
index that tried to capture those interrelationships, many of which are perfectly legal in developed
countries, would produce a different ranking (cf. Sandoval-Ballesteros 2013).
Given the range of behaviors covered by the concept of corruption, it is not clear what it means
for a country to rank poorly on a corruption index.32 Does it mean that bribes are a large share of the
value of contracts and government services? Does it mean that the proportion of deals influenced by
bribery is high? Does it mean that self-dealing in all its forms has an especially distortionary impact
on economic and political life? How important are outright payoffs compared to more subtle types of
influence such as cronyism and lobbying? Cross-country indices tell us something about dysfunctions
in state/society relations, but little about the details. Empirical studies that reveal the mechanisms at
work usually focus on single countries or sectors. They cannot be easily generalized. The level of
bribes is not the critical variable in any case. One wants to know not just how much was paid, but
also what was purchased with the payoff. For that, one needs detailed country-by-country and sector-
by-sector analyses. This book is an attempt to set the agenda for such efforts and to draw lessons from
the work that already exists. Only if we look at the fine structure of political and economic systems,
can we go from a showing that “corruption” is harmful to an understanding of how it operates in
different contexts.33 Given that knowledge, reform programs can attack corruption where it has the
worst effects and where marginal gains are high relative to marginal costs. We draw on existing work
in individual countries to illustrate our arguments concerning the causes and consequences of
corruption and to recommend reforms. However, the existing collection of cases is not sufficient. We
need more systematic knowledge of how corruption and self-dealing affect the operation of
government programs and private markets.
In short, the index scores are not policy tools in and of themselves. The links between reform
policies and the index numbers are complex and unclear. No government ought to have as its goal an
improvement of X points in its CPI score. Reform requires more focused measurements leading to
targeted policies. In response to this need, many country- and sector-specific instruments have been
developed since the late 1990s. These include microsurveys of firms and individuals (which permit
the identification of characteristics associated with corrupt behavior), experiments in behavioral
laboratories and in the field, and audits. These data have allowed greater insight into the causes and
consequences of corruption and informed anticorruption policy in ways that country-level indices
cannot. Nevertheless, cross-country work, if interpreted with a degree of caution, can help set the
stage for the more focused sectoral work that we discuss in subsequent chapters, and that is the key to
setting reform priorities.
B. The Global Corruption Barometer
Popular polls are one response to the criticism of composite indices and elite surveys. Survey firms
conduct polls through face-to-face, telephone, or online interviews or questionnaires. The questions
may be concerned with perceptions of corruption or actual experience. For example, the Global
Corruption Barometer (GCB), published by TI, asks respondents – ordinary people – both types of
questions. “To what extent do you think that corruption is a problem in the public sector of this
country?” is a perception question. The responses are coded from 1 (“no problem at all”) to 5 (“very
serious problem”). This same question is also asked about specific aspects of public-sector service
delivery, the media, NGOs, and business.34 Strikingly, the vast majority of countries have a score
between 3.5 and 5. Indeed, the least corrupt country by this measure is Rwanda, with a score of 2,
followed by Denmark (2.2), Sudan (2.6), Switzerland (2.7), and Finland (2.9); the most corrupt are
Mongolia and Liberia (tied at 4.8), Zimbabwe, Serbia, Russia, Paraguay, Nigeria, Mexico, and
Indonesia (tied at 4.7). Only 107 countries are represented, however, excluding many small countries
and many of the countries considered most corrupt on other indices.
Global results (based on 114,000 responses in 107 countries in 2013) by subsector are
presented in Figure 1.3.35 By institution, on a global level, political parties were perceived as the
most corrupt institution, while NGOs were perceived as the least corrupt. What is particularly
worrisome in these data is that the institutions perceived to be most corrupt – political parties, the
police, public officials and civil servants, parliament or the legislature, and the judiciary – are the
very institutions charged with creating and upholding the law.
Figure 1.3. Sector-specific results from the 2013 Global Corruption Barometer.
Source: Transparency International, Global Corruption Barometer 2013. Results are based on
114,000 respondents in 107 countries in 2013. TI data used with permission.
The survey also tabulates experiences by asking about respondents’ use of various services in
the past year, and in the cases in which the service was used, if they paid a bribe. The number of
bribers divided by the number of users (multiplied by 100) yields a bribery incidence index.36 The
global results from this question are presented in Figure 1.4. Country-level results are presented in
the Appendix.
Figure 1.4. Global Corruption Barometer: Incidence of bribery in subsectors.
Source: Based on data from Transparency International, Global Corruption Barometer 2013
Report, page 11. Results are based on 114,000 respondents in 107 countries. TI data used with
permission.
C. Perceptions vs. Incidence
Given the results from the popular polls, we can ask whether elite surveys are “out of touch.” Figure
1.5 plots the GCB’s question regarding how much of a problem corruption is (5 = very serious
problem), against the CPI (100 = very clean).37 The negative correlation we would expect is present,
but very weak. Most countries score between 4 and 5 on the GCB scale, while there is a much greater
variance in the CPI data. In other words, most residents believe that corruption is a serious or very
serious problem, while those with some cross-country experience see a good deal of variability
around the world.
Figure 1.5. Public opinion (GCB) vs. expert opinion (CPI).

Source: Based on data from Transparency International, Corruption Perceptions Index 2013
and Transparency International, Global Corruption Barometer 2013.Note: The t-stat for the
coefficient is −4.16; p-value 0.000. TI data used with permission.
Figure 1.6 plots corruption incidence reported in popular surveys (GCB) (i.e., the percentage of
users of a public service who report paying a bribe for that service) against expert opinion (CPI).
Here the negative relation is much stronger. The difference between these two graphs highlights the
subjectivity of the perception question, which is made clearer in Figure 1.7 comparing residents’
perceptions with their experiences, both from the GCB. The relationship between people’s direct
experience with corruption and their perceptions of corruption is quite weak. Even in countries with
low corruption incidence (x-axis), residents tend to perceive that corruptionis a serious problem (y-
axis). Why might this be so? There are at least four possibilities (Mocan 2008; Morris 2008).
1. Perceptions reflect the difference between grand and petty corruption: although people may
not have to pay bribes for public services, they may be aware of high-level corruption, which
leads them to report that corruption is a serious problem.
2. Perceptions take into account more information. Most incidence surveys ask whether the
respondent or someone in the respondent’s family has paid a bribe in the last twelve months.
Even if this is not so, the respondent may know someone who has paid a bribe, and that
knowledge leads to a higher perception of corruption. Perceptions are also swayed by scandals
in the media. This leads to the “paradox of distance.” People perceive government in general to
be corrupt, but they have a more positive opinion of those government programs that affect them
directly and of the bureaucrats with whom they interact (Frederickson and Frederickson 1995).
3. Perceptions change more slowly than incidence. If an anticorruption campaign is undertaken,

the impact should be reflected rather soon in the incidence of bribery, but for psychological
reasons, people still hold on to their previously formed perceptions. Perhaps they have not used
the reformed services since the anticorruption campaign started. Furthermore, for statistical
reasons, the CPI and CCI change slowly: some sources are collected less than annually, so
previous years are used when calculating these indices. As a result, it is not surprising that the
average changes only slowly, because some of the source data is held constant over two or more
years.
4. Respondents interpret the perception question to mean “How much of a problem is corruption
when it occurs?”
Figure 1.6. Incidence (GCB) vs. expert opinion (CPI).
Source: Based on data from Transparency International, Corruption Perceptions Index 2013 and
Transparency International, Global Corruption Barometer 2013.Note: The t-stat for the
coefficient is −8.41; p-value 0.0000. TI data used with permission.
Figure 1.7. Incidence (paid a bribe) vs. public perception (how much of a problem is corruption?).
Source: Based on data from Transparency International, Global Corruption Barometer 2013,
http://www.transparency.org/gcb2013/in_detail.Note: The t-stat for the coefficient is 2.58; p-
value 0.0114. TI data used with permission.
For all of these reasons, it is important to consider what each measure of corruption represents.
The best index to use depends on the questions one seeks to answer. Perceptions and incidence are
distinct measures, and it matters whose opinions or experiences are taken into account. It would be
inappropriate, for example, to use the GCB’s bribery incidence in a discussion of grand corruption.
Likewise, we cannot infer from the CPI how much ordinary citizens or firms pay in bribes each year.
IV. The Costs and Causes of Corruption: An Overview
of Cross-Country Empirical Results
Having critiqued the cross-country data, we now step back and ask if these data sets can,
nevertheless, teach us something. The indices appear to capture underlying aspects of the relationship
between the state, on the one hand, and citizens and private businesses, on the other.38 In spite of
some anomalous individual cases, the general patterns show that some countries are persistent high
achievers in terms of good governance and economic and social progress and that others are
persistent laggards. In the middle are a large number of ambiguous cases in which the correlation is
less powerful, but the pathologies of corruption are felt in particular sectors and aspects of
government performance. The indices do not explicitly indicate what policies might be effective, but
they do highlight problems – both where the incidence of bribes is high (e.g., the police) and where
perceptions are high, whatever the reality (e.g., political parties, many very poor countries).
Many empirical studies undertaken in the past twenty years try to determine both the causes and
consequences of corruption. At first, most studies used cross-country analysis, but an increasing
number of microanalyses have used more specific corruption data. Figure 1.8 provides an overview
of the most robust findings from these studies, many of which we cite in subsequent chapters. There
are a host of causes that generally interact with each other. In this diagram, we have divided the
causes into “incentives” and “institutions,” but personal ethics, of course, also plays a role.
Corruptionoccurs at the intersection of situation-specific incentives, society-wide institutions, and
personal ethics. It should be clear that the consequences of corruption are costly for many individuals
and businesses, as well as affecting governmental stability and the effectiveness of government
spending. In many cases the arrow may, in fact, go both ways. For example, poor rule of law
contributes to corruption, but corruption also undermines the rule of law. Corruption enables
trafficking in drugs, arms, contraband, or humans, but traffickers also actively try to corrupt the
authorities. For simplicity, we have used one-way arrows, but the reader should be aware that the
relationships among these variables are much more complex.
Figure 1.8. Causes and consequences of corruption.
Source: Authors.
The cross-country data indicate underlying connections between the quality of government
institutions and other variables of interest. In spite of the limitations of these data, they provide a
useful place to begin.39 Figure 1.9 illustrates the simple relationship between the UN’s Human
Development Index – an index that takes account of education and health as well as gross national
income (GNI) per capita40 – and perceived levels of corruption in 2012 as measured by TI’s CPI.
This correlation is one of the most robust relationships to have emerged out of corruption research
(Johnston 2005; Akçay 2006; Reiter and Steensma 2010; Askari, Rehman, and Arfaa 2012). Countries
with higher levels of corruption have lower levels of human development. Similarly, as a rule, richer
countries and those with high growth rates have less reported corruption and better functioning
governments (Kaufmann 2003).
Figure 1.9. Corruption and development.
Sources: Based on data from United Nations Development Programme, Human Development
Index and Its Components and Transparency International, Corruption Perceptions Index
2014.Note: the t-statistic for the coefficient is 13.26; p-value 0.0000. TI data used with
permission.
Efforts to explore the mechanisms at work suggest that corruption reduces the effectiveness of
industrial policies, making running a business more expensive, and thus encourages business to
operate in the informal sector in violation of tax and regulatory laws.41 As more individuals and
firms evade taxes, the government finds it necessary either to raise tax rates or to engage in
seigniorage, leading to inflation42 (Al-Marhubi 2000; Blackburn and Powell 2011), a depressed
national currency (Bahmani-Oskooee and Nasir 2002), and, if fixed exchange rates are in place, a
higher black market premium (Bahmani-Oskooee and Goswami 2005). It negatively affects the
business and investment climate so that FDI is discouraged by high corruption levels (Wei 2000;
Habib and Zurawicki 2002; Egger and Winner 2006) and by differences in the corruption levels of the
host country and country of origin (Habib and Zurawicki 2002). Corrupt countries tend to suffer from
more bureaucratic red tape, which may be intentionally created by rent-seeking bureaucrats.43 Asian
economies are not an exception – those with high corruption levels would have attracted more FDI if
corruption had been lower, and their industrial policies would have been more effective.44
Consequently, corruption depresses economic growth (Mauro 1995; Aidt 2009).
Estimates of the magnitude of these effects vary and in any case are difficult to interpret.
Considering only GDP per capita, which is a narrower measure of development than the HDI and
does not include measures of education and health, Dreher and Herzfeld (2005) find that an increase
of corruption by one index point (on a scale from 0 to 10) dampens GDP growth by 13 basis points
(i.e., 0.13 percentage points) and lowers per capita GDP by around $425. Gyimah-Brempong (2002)
estimates the effect to be between 75 and 90 basis points or just under one percentage point. Mo
(2001) estimates the elasticity of real GDP with respect to corruption to be −0.545. According to
Haque and Kneller (2009), the correlation is nonlinear: it becomes more negative below the 4th
percentile of GDP per capita and above approximately the 75th percentile.45 Estimates of the
relationship between corruption and GDP or GDP growth may be sensitive not only to the years and
control variables used, but also to the countries included. Notice, however, that the measure of
corruption is an index with no natural units. Thus, it is unclear how one should interpret coefficients
on that variable and the elasticity measures that result. Furthermore, these studies do not resolve the
issue of causation and the possibility of vicious and virtuous cycles.
To further complicate matters, some countries do manage to have high levels of human
development and growth despite high levels of corruption, showing that the relationship is far from
deterministic. High levels of corruption are more destructive under some conditions than others
(Wedeman 1997: 459). For example, it can be especially detrimental if the rule of law is weak (Méon
and Sekkat 2005) or in nondemocratic countries (Drury, Krieckhaus, and Lusztig 2006). Although
countries with strong institutions are usually resistant to corruption, if it does get a foothold, it can be
especially destructive as it undermines those institutions (Aidt, Dutta, and Sena 2008).
Some analysts argue that, under specific conditions, corruption even improves economic
outcomes. If businesses and individuals face onerous amounts of red tape, for example, corruption
helps them to reduce their costs, both monetary and temporal, allowing for more innovation, business
creation, trade, and economic growth (Leff 1964). This is known as the “greasing the wheels”
hypothesis. For countries with poor institutions, some empirical studies found that corruption is not
detrimental to growth46 and may even increase efficiency (Méon and Weill 2010) or entrepreneurship
(Dreher and Gassebner 2013). However, these results contradict the findings of Méon and Sekkat
(2005), in which corruption was more costly for growth when the quality of governance was poor.47
Neeman, Paserman, and Simhon (2008: 30) conclude that “corruption is negatively correlated with
output in open economies, but not in closed economies.” With relation to bilateral trade, Dutt and
Traca (2010) find that, although corruption reduces trade when tariff rates are low, the opposite is
true for high tariffs. Thus, there is some evidence that if the state imposes very restrictive rules,
corruption helps firms and individuals circumvent them, but one should always remember that this a
second-best option. The best policy is an overall reform that reduces the incentives to pay bribes in
the first place.
Even when corruption and economic growth coexist, payoffs introduce costs and distortions.
Corrupt high-level officials support too much unproductive public investment and undermaintain past
investments. Corruption encourages excessive public infrastructure investment (Tanzi and Davoodi
1997, 1998, 2002) that “crowds out” private investment. At the same time, the public infrastructure
may be of low quality, so that the expectation of higher growth and job creation are not realized.
Highly corrupt countries tend to underinvest in human capital by spending less on education, and they
degrade environmental quality (Mauro 1998; Esty and Porter 2002; Transparency International
2011a). In a corrupt regime, economic actors with few scruples, such as those engaged in illegal
businesses, have a comparative advantage and may dominate the business and political sectors.
Some studies have examined the relationship between corruption, on the one hand, and
inequality and poverty, on the other. High growth rates can coexist with rising inequality, with those at
the bottom of the income distribution receiving few benefits and the majority of the income growth
accruing to the top of the distribution. If corruption-fueled growth does not translate into improved
education, health care, and public infrastructure, inequality can persist over generations and can
eventually slow growth. Aidt (2011) constructs a broad index of sustainable development and shows
that corruption has a detrimental effect. Corruption in Aidt’s formulation might spur investment and
growth in the short run, but this could have negative effects in the long run if the projects chosen do
little to enhance long-term growth and poverty reduction. Other work explicitly focuses on inequality.
One study found a curvilinear relationship between corruption and the Gini coefficient, a widely used
summary measure of inequality (Li, Xu, and Zou 2000). The Gini coefficient ranges from zero to one
with higher numbers representing higher inequality. Over most of the range, as corruption increases,
inequality increases. This relationship holds for all regions, but is strongest in Latin America,
followed by Africa (Gyimah-Brempong and Munoz de Camacho 2006). This is consistent with You
and Khagram (2005),48 who argue that economic elites make high level payoffs to maintain their
privileged position in very unequal societies, resulting in a vicious circle of corruption and
inequality. Similarly, Gupta, Davoodi, and Alonso-Terme (2002) find that corruption both increases
inequality and depresses the income growth of the poorest 20%. However, Li, Xu, and Zou (2000)
find that in very corrupt countries, corruption can lower inequality. This is not, however, a defense of
corruption. Rather, it suggests that corruption can be so entrenched that it not only lowers overall
GDP but also wipes out the rents that benefit the political and economic elite; everyone is equally
poor.
The effects of corruption on the quality of life can be extreme. Although there are likely to be a
multitude of causes, it remains troubling that “83% of all deaths from building collapse in earthquakes
over the past 30 years occurred in countries that are anomalously corrupt”49 (Ambraseys and Bilham
2011: 153). Poorly constructed roads (Tanzi and Davoodi 1998; Olken 2007, 2009) are made even
more dangerous by drivers who obtain their licenses through bribery (Bertrand et al. 2007).
Corruption is correlated with deforestation (Barbier 2004; Bulte, Damania, and López 2007; Kishor
and Damania 2007; Koyuncu and Yilmaz 2009) and environmental degradation, both of which
contribute to global warming. Access to potable water, education, medical services, and basic
utilities may be compromised (Transparency International 2006, 2008, 2013c). For a set of public
services in Peru, Recanatini (2011a: 53) finds that more corrupt services tend to be of lower quality.
Corruption plays a key role in migrant smuggling, drug trafficking, human trafficking,50 arms
trafficking, and general violations of human rights (Levi, Dakolias, and Greenberg 2007; Chaikin and
Sharman 2009; Europol 2013; Organization of American States 2013a, 2013b; UNODC 2013; U.S.
Department of State 2014). Corruption has also played a critical role in laying the groundwork for
financial crises (Tillman 2009). Corruption undermines the legitimacy of government (Canache and
Allison 2005; Sandholtz and Taagepera 2005) and its credit rating (Connolly 2007), as well as the
trust that people place in one another (Rose-Ackerman 2001a; Rothstein and Stolle 2003).
There is some debate over the relationship between the size of government and the extent of
corruption. Downsizing through program elimination and privatization may reduce corruption because
some programs no longer exist. However, if a program is merely cut back, payoffs may increase in
size and extent as applicants compete for the scarce supply (Rose-Ackerman 2000: 99). Pointing to
the examples of the Nordic countries, where low corruption and high government budgets coexist,
Friedman et al. (2000) show that, in a set of 69 countries, higher tax shares are associated with low
corruption. According to them, low corruption induces more economic activity to occur in the formal
economy where it is taxable, and in democracies citizens are willing to support high levels of public
expenditures only if the government is honest and competent.51 The connection between government
size and corruption is modeled by Acemoglu and Verdier (2000) who develop a game-theory model
to show how the correction of market failures causes government to grow, as regulations are
introduced and inspectors are hired; ultimately, there is a trade-off on the margin between market
failure or “government failure” – corruption or other types of government malfunction. However, the
costs of enforcing regulations are only a small share of country budgets – dominated by the military,
pensions, education, health, and so forth. As we discuss in Chapter 2, in assessing regulatory
corruption, the key variables are the details of the legal regime and the capacity of the bureaucracy,
not simply budget totals. It is also unclear whether corruption is more prevalent under centralized or
decentralized bureaucracies and government structures. We discuss the contrasting research results in
Chapter 12 as part of a general discussion of forms of accountability.
Other studies switch the direction of the causal arrow and try to explain cross-country
differences in the level of corruption on the basis of country characteristics. Sandholtz and Koetzle
(2000), for example, find that corruption is lower in countries with high levels of per capita GDP,
high levels of economic freedom, openness to trade, a Protestant tradition, and, more weakly, with
democratic structures, especially long-lasting ones. The use of e-government is associated with less
corruption, as transparency and accountability are increased and discretion decreased, often by
eliminating direct contact with civil servants (Andersen 2009). Some research, which we discuss in
Chapter 7, finds that the participation of women in politics lowers corruption, but, as we show, that
result is not very robust and its policy implications are unclear.
Most cross-country work is not based on an adequate structural model of the way corruption
interacts with other features of the environment. The studies highlight important empirical
regularities, but the direction of causation is often unclear. For example, are low levels of income and
growth a consequence or a cause of corruption, or both? Sometimes the causal link is simply asserted,
not demonstrated. In reality, it seems likely that the causal arrow runs both ways, often creating
vicious or virtuous spirals (Lambsdorff 2006; Rose-Ackerman 2006b, 2008a; Treisman 2007a). A
country may be caught in a corruption trap where corruption breeds more corruption and discourages
legitimate business investment. Corruption limits growth and destroys trust in government, and low
growth and distrust of the state fuel and seem to justify corruption. Conversely, low corruption aids
growth, and high growth creates a societal demand to lower corruption even further. Vicious spirals
are not, of course, inevitable, but they are a risk, and escaping them is usually difficult. Such spirals
will not be evident in cross-country analyses although they may be behind some of the results.
A related empirical issue concerns the relative power of political versus economic actors in
determining the divisions of corrupt gains. Cross-country indices provide no direct evidence of how
the benefits are shared. Following John Joseph Wallis, one can distinguish between “Systematic
corruption ... when politics corrupts economics ... [and] Venal corruption ... when economics
corrupts politics” (Wallis 2006: 25, italics added). If those with political power distribute economic
power, systematic corruption may exist; when those with economic power influence policy or law, it
is venal.52 Of course, few systems will be pure examples of either type – systematic and venal
corruption tend to coexist – but more research on the division of gains would be extremely
worthwhile.
Unfortunately, even when the statistical difficulties are well-handled, empirical regularities
based on cross-country indices are of limited use to policy makers. They can raise consciousness
about the negative impact of corruption on growth, productivity, and the distribution of wealth, but
they are of little use in designing anticorruption strategies. Designing policies around such studies,
with their imperfect data sets and aggregated measures, seems problematic.53 In what follows, we
will focus, instead, on the costs and benefits of reforms in particular sectors and for specific types of
government actions.
V. Plan of the Book
We analyze the problem of corruption along four dimensions. The first takes the basic institutions of
state and society as given and asks how corrupt incentives arise within public programs. We identify
pathologies that recur across sectors, drawing specific examples from a range of concrete
situations.54 We show that corruption can create inefficiencies and inequities and is, at best, inferior
to legally established payment schemes. Reforms can reduce the incentives for bribery and increase
the risks of engaging in corruption. The goal is not the elimination of corruption per se but an
improvement in the overall efficiency, fairness, and legitimacy of the state. The total elimination of
corruption will never be worthwhile, but steps can be taken to limit its reach and reduce the harms it
causes.
The second dimension recognizes that corruption has different meanings in different societies.
One person’s bribe is another person’s gift. A political leader or public official who aids friends,
family members, and supporters may seem praiseworthy in some societies and corrupt in others. As
economists, we cannot provide an in-depth analysis of the role of culture and history in the
development of corruption, but we can point out when the legacy of the past no longer fits modern
conditions. Our aim is not to set a universal standard for where to draw the legal line between
praiseworthy gifts and illegal, unethical bribes. Rather, we isolate the factors that should go into the
choice. Culture and history are explanations, not excuses. Every country has experienced high levels
of corruption at some point, but many have found a way to reduce both the amount of corruption and
the impact it has on society.55 At the same time, we recognize that corruption can influence culture,
especially trust and honesty. If corruption increases, it has an adverse impact on societal values,
leading to cynicism.
The third dimension considers how the basic structure of the public and private sectors produces
or suppresses corruption. We examine the relationship between corrupt incentives and democratic
institutions and discuss the relative bargaining power of public and private organizations and
individual actors. Reform at this level may well require changes in both constitutional structures and
the underlying relationship between the market and the state.
The final section of the book turns to the difficult issue of achieving reform. Even if a
government is aware of corruption, it may have no incentive to undertake reform, unless domestic or
international actors exert pressure to do so. Proposals for reform lead to the problem of domestic
political will. Good ideas are useless unless someone is willing to implement them. Which domestic
conditions are most likely to convince leaders that fighting corruption is worthwhile? We draw some
lessons from successful and sustainable policies carried out in the past. Although no two countries
face the same set of background conditions, modern-day reformers can learn something from the
historical record. We bring in the international community, aid and lending organizations, cross-
national civil society groups, such as TI or Global Witness, and multinational economic and political
bodies. For some countries, especially those at low levels of development, the role of multinational
businesses is critical. If these firms collaborate in maintaining corrupt regimes, they undermine
development goals. Finally, we assess international efforts to control money laundering, often
associated with high-level corruption.
This book does not end with a compilation of “best practices.” Instead, it suggests a range of
alternatives that reformers must tailor to the goals of reform and the conditions in individual countries
and sectors. Combating corruption is a means to an end. That end may be efficient production and
development, impartial and equitable government, human development and flourishing, or goals
related to the performance of a particular sector such as health, education, or national defense. The
appropriate reforms need to be tailored both to the immediate incentives surrounding the corrupt act,
and to the broader institutional context – both formal political and market institutions and the informal
institutions arising from a society’s culture.
We stress one fundamental lesson. Reform should not be limited to the creation of “integrity
systems” or “anticorruption agencies.” Instead, fundamental changes in the way government operates
ought to be at the heart of the reform agenda. The primary goal should be to reduce the underlying
incentives to engage in corruption ex ante, not to tighten systems of ex post control. Enforcement and
monitoring are needed, but they will have little long-term impact if reforms do not reduce the basic
conditions that encourage payoffs. If these incentives and institutions remain, the elimination of one
set of “bad apples” will soon lead to the creation of a new group of corrupt officials and private
bribe payers.
1 World Bank, “Poverty Overview (Results),”

http://www.worldbank.org/en/topic/poverty/overview#3 (accessed June 20, 2014).
2 Income is measured in real purchasing power parity U.S. dollars with a base year of 2005. See
World Bank, “Poverty Overview (Context),”
http://www.worldbank.org/en/topic/poverty/overview#1 or
http://www.un.org/millenniumgoals/pdf/Goal_1_fs.pdf (accessed June 20, 2014).
3 Convergence models argue that, as less-developed countries tend to grow faster than more-
developed countries, the former catch up with the latter. Such convergence was expected to occur
in the latter half of the twentieth century, but was not realized for many countries, so that the gap
between rich and poor grew rather than shrank.
4 United Nations, “Sustainable Development Goals,”

http://www.un.org/sustainabledevelopment/sustainable-development-goals/ (accessed July 22,
2015).
5 The exact goal is for no more than 3% of the world’s population to live on less than $1.25 per
day measured in 2005 dollars. See, e.g., World Bank, “Poverty Overview (Strategy),”
http://www.worldbank.org/en/topic/poverty/overview#2 (accessed September 3, 2015).
6 “Free Exchange: Poverty’s Long Farewell,” The Economist, February 28, 2015.
http://www.economist.com/news/finance-and-economics/21645220-goal-ending-poverty-2030-
worthy-increasingly-out-reach-povertys (accessed September 3, 2015). The World Bank (2015)
recognizes that the goal is unrealistic and urges a focus on both overall growth and its distribution.
A World Bank working paper, Yoshida, Uematsu, and Sobrado (2014), demonstrates some of the
flaws in the earlier projections. Lakner, Negre, and Prydz (2014) show how a combination of
policies that promote growth and provide targeted benefits to the very poor can combine to
produce substantial reductions in the number in absolute poverty.
7 “Institutions are the humanly devised constraints that structure political, economic and social
interaction” (North 1991: 97). These include constitutions, laws, rules, customs, and taboos. We
also include entities that are commonly referred to as institutions such as bureaucracies,
legislatures, courts, schools and other educational institutions, banks and other financial
institutions, etc.
8 Kilby (1995) found that World Bank projects were more likely to be given an unsatisfactory
rating by the Bank’s Operations Evaluation Department if borrower countries ranked poorly on
cross-country measures of political instability and corruption. Knack and Keefer (1995) examine
the impact of government institutions on investment and growth. Their measure of government
quality combines indices of corruption, expropriation risk, rule of law, risk of contract repudiation
by the government, and the quality of the bureaucracy. The study examined rates of economic
growth for 97 countries over the period from 1974 to 1989. The authors show that measures of the
quality of government institutions do at least as well as measures of political freedoms, civil
liberties, and the frequency of political violence in explaining investment and growth.
9 The specific goal is “Goal 16: promote just, peaceful, and inclusive societies.” The subgoal
reads: “Substantially reduce corruption and bribery in all its forms” and the goal also calls on
countries to fight money laundering and organized crime. United Nations, “Sustainable
Development Goals,” http://www.un.org/sustainabledevelopment/sustainable-development-goals/
(accessed July 22, 2015). We explain the importance of combatting all three together in Chapter 9.
10 See, e.g., FATF, “High-risk and Non-cooperative Jurisdictions: FATF Public Statement – June
26, 2015,” http://www.fatf-gafi.org/publications/high-riskandnon-
cooperativejurisdictions/documents/public-statement-june-2015.html (accessed September 27,
2015) for money laundering and financing terrorists; U.S. Department of State, Directorate of
Defense Trade Controls, “Country Policies and Embargoes,”
http://www.pmddtc.state.gov/embargoed_countries/index.html (accessed September 27, 2015) for
arms trade; The White House, “Presidential Determination – Major Drug Transit and Drug
Producing Countries for FY 2014,” http://www.whitehouse.gov/the-press-
office/2013/09/13/presidential-determination-major-drug-transit-and-drug-producing-countri
(accessed September 3, 2015).
11 The law is the Foreign Corrupt Practices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494.
12 TI was founded in 1993 as a NGO committed to exposing and combating corruption worldwide.
Its Corruption Perceptions Index, a central part of that effort, is described in greater detail on their
website and later in this chapter. The international role of TI is also discussed in Chapter 14. See
www.transparency.org for further information.
13 The Washington Consensus, articulated by Williamson (1990), includes standard

macroeconomic prescriptions (reducing barriers to trade, establishing an independent central bank
with a goal of controlling inflation, investing in human capital and infrastructure, etc.) plus
privatization and deregulation. “Washington” here stands for the World Bank and the IMF, not the
U.S. government. See Rodrik (2006, 2008) for a critique, a richer theoretical framework, and the
incorporation of a broader range of policy options.
14 Ironically, although self-interest is a basic assumption in economics, macroeconomic models

typically assume a disinterested “benevolent social planner.” Constructivists look more carefully at
how policy decisions are made on both personal and political levels.
15 See, e.g., Tillman (2009) and Argandoña (2003).

16 For a more complete list of terms with definitions and examples, see Transparency
International, 2009, “The Anti-Corruption Plain Language Guide,” available at
http://files.transparency.org/content/download/84/335/file/2009_TIPlainLanguageGuide_EN.pdf
(accessed June 28, 2014).
17 Banerjee, Hanna, and Mullainathan (2013) and Hodgson and Jiang (2007) make rule breaking
the central feature of their respective definitions. We wish to be clear, however, that the benefit
provided in return for a bribe may not break any formal rules. Rule breaking might only consist of
the payment of the bribe and the corresponding distortions in the distribution of the benefits and
costs of public policies.
18 See, e.g., Slackman (2011) on Egypt under Mubarak.
19 Corruption that undermines detestable laws is referred to as “noble cause corruption” (Miller
2005). One example of noble cause corruption is bribery to save Jews in Nazi Germany (Rose-
Ackerman 1978: 9; Hodgson and Jiang 2007: 1049). If “noble cause corruption” is widely seen as
acceptable, or when corrupt acts are interpreted as “noble,” this indicates a need to change the
underlying institutions, but, of course, in such cases, governments are very unlikely to want such
change. They may focus on high-profile prosecutions instead.
20 Easterly (2013) includes many examples of corrupt acts in the process of exposing worldwide
oppression, but he stops short of labeling the norm violations themselves as “corrupt.”
21 See Yao (2002), who intentionally expands the definition of corruption and argues that these
other forms of corruption are at least as harmful to society. Explicit corruption refers to bribes, in
which the quid pro quo is well-defined, while implicit corruption refers to nepotism and
cronyism, in which the employee hired by virtue of connections receives wages in excess of his or
her productivity. Notice, however, that Yao’s analysis focuses on what is essentially another form
of personal benefit. The main distinction is the long-term and vaguely defined nature of the
transaction.
An excellent example of the difficulty of distinguishing implicit corruption from acceptable
business practices is the controversy over Western banks’ hiring practices in China. Several of
these banks had special hiring tracks for the sons and daughters of top Chinese officials. In
condemning this practice, Chinese law enforcement officials point to the possibility that these hires
were either quid pro quos for the approval of particular deals or else improved the banks’ future
prospects. J. P. Morgan’s practices hit the newspapers in the summer of 2013, and in May 2014
Hong Kong’s Independent Commission against Corruption arrested Morgan’s former head of
investment banking. One internal e-mail mentioned the “existing and potential business
opportunities” that could arise from hiring the son of a key official. See Neil Gough and Michael
Forsythe, “Former Chair of JP Morgan China Unit Is Arrested,” New York Times, May 21, 2014.
http://dealbook.nytimes.com/2014/05/21/former-top-china-jpmorgan-banker-said-to-be-arrested-
in-hong-kong/ (accessed September 27, 2015). The time line with links to other articles in the New
York Times is at “Inquiries of JP Morgan’s Hiring in China,” New York Times, March 23, 2014,
http://www.nytimes.com/interactive/2013/11/14/business/dealbook/14chase-asia.html (accessed
September 27, 2015). Deutsche Bank has also been investigated for similar practices and other
international banks have been implicated as well. See Arno Schuetze, “Regulators Investigate
Deutsche Bank in China ‘Princeling’ Probe,” Reuters, June 5, 2014; AFP. “US agencies probe big
banks on China nepotism,” The West Australian, June 4, 2015,
https://au.news.yahoo.com/thewest/business/world/a/28331871/us-agencies-probe-big-banks-on-
china-nepotism/ (accessed June 9, 2015).
22 Lord Kelvin is attributed with saying, “If you cannot measure it, you cannot improve it.” (“Lord
Kelvin/On Measurement,” Quotations, http://zapatopi.net/kelvin/quotes/#meas, accessed
September 27, 2015).
23 Each source index is normalized to have the same mean and standard deviation; then a simple
average is taken for each country and the CPI is rescaled to fit the 0–100 range. The methodology
was somewhat different before 2012.
24 Before 2012, the CPI was reported on a scale from 0 to 10, where 0 meant “highly corrupt” and
10 meant “very clean.” TI is an international organization that advocates for the control of
corruption worldwide. TI collects data from a number of different surveys that mostly report
business and expert perceptions of corruption in various countries. Some of the underlying data
sources also cover the overall business environment – asking about red tape, the quality of the
courts, etc. Respondents rank the countries on a scale from excellent to poor. See Transparency
International, “Corruption Perceptions Index 2012: Technical Methodology Note,”
http://www.transparency.org/files/content/pressrelease/2012_CPITechnicalMethodologyNote_EM
BARGO_EN.pdf (accessed September 27, 2015). For an assessment of the new methodology and
comparison to the old methodology, see Saisana and Saltelli (2012), available at
http://files.transparency.org/content/download/534/2217/file/JRC_Statistical_Assessment_CPI201
2_FINAL.pdf (accessed June 28, 2014).
25 The CCI and related information are available at the World Bank’s Worldwide Governance
Indicators site: http://info.worldbank.org/governance/wgi/index.aspx#doc-sources (accessed
26 For the data collected in 2013, the correlation between the two was 0.987. This is identical to
the correlation between the CPI and the CCI the previous year.
27 Ostensibly, the new CPI methodology allows comparisons over time, but the pre-2012 CPI data
do not.
28 Note that TI uses the year the data are published (2014) while the World Bank Institute uses the
year the data were collected (2013) in assigning a year to the data. Our graph refers to 2013, but
the data from TI are reported as the 2014 index.
29 Note that four of the five worst-ranked countries on either index are postconflict countries; see
Chapter 10.
30 In order to be included in the CPI, three sources must be available; for inclusion in the CCI, one
source.
31 Olken and Pande (2012: 482) cite the example of Indonesia where the CPI fell (indicating
increased corruption) after the fall of Suharto. They speculate that the fall may have been the result
of a freed press that was better able to report scandals. Of course, another explanation is that the
populace became more aware of corruption as its nature changed from centralized to competitive
bribery (Chapter 8).
32 See Méndez and Sepúlveda (2009) for a model that demonstrates the analytic differences among
contrasting definitions. The three they consider are (1) the number of corrupt deals, (2) the ratio of
the number of corrupted to total deals, and (3) the total volume of bribes collected by corrupt
officials. They show how one’s evaluation of the extent of corruption can vary depending upon
which metric is used in the context of their formal model.
33 As an example of the kind of detailed understanding needed for concrete proposals in particular
cases consider Tendler’s (1979) report to the World Bank on graft in rural works programs in
Bangladesh. The paper is an admirable analysis of the impact of graft on different aspects of a
development project and a discussion of the conditions under which local people can be used as
monitors of others’ honesty.
34 Before engaging in cross-national comparisons using the GCB, it is important to note the
limitations of the data. First, the questions only capture low-level petty corruption experiences, not
grand corruption by high-level officials. Second, differences in reported bribery rates might be
driven in part by cultural differences in respondents’ willingness to report illicit behavior.
Corruption is more openly discussed in some societies than others. There may also be cultural
differences in what constitutes a corrupt transaction. A bribe in one country may be considered a
gift in another. We discuss those complexities in Chapters 7 and 8. Third, government institutions
may vary significantly across countries, and “registry and permit services” could represent
something quite different in Turkey and Ireland, or in Venezuela and Malaysia. Any cross-national
comparison assumes that sector definitions hold relatively constant worldwide.
35 Global results are based on the entire sample: one response is one vote. For most countries, the
sample size is approximately 1,000. Countries with significantly fewer respondents are Cyprus
(570), Luxembourg (502), Solomon Islands (509), and Vanuatu (505); those with significantly more
respondents are Afghanistan (2040), Australia (1200), Bangladesh (1822), Bosnia and
Herzegovina (2000), Brazil (2002), Ghana (2207), Japan (1200), Korea (1500), Moldova (1211),
Pakistan (2451), Peru (1211), Romania (1143), and Ukraine (1200). China is not represented. See
http://issuu.com/transparencyinternational/docs/2013_globalcorruptionbarometer_en?
e=2496456/3903358#search (accessed June 11, 2014).
36 The corruption incidence index reported by the GCB measures the user-based incidence: the
percentage of users who paid a bribe, independent of the number of times they used the service.
Some surveys – e.g., the Encuesta Nacional de Corrupción y Buen Gobierno, produced by
Transparencia Mexicana – report a use-based incidence, based on the number of times the service
required a bribe, divided by the number of times the service was used. The resulting figure is the
percentage of uses of a service that were corrupt. The distinction between the two is more than
semantic, and there are advantages and disadvantages to each.
37 We use the 2013 CPI so that both sets of data reflect the same year.
38 This section draws on some of the material in Rose-Ackerman and Truex (2013).
39 We do not attempt to review all the cross-country studies produced since Mauro’s (1995) study.
For early surveys see Bardhan (1997) and Jain (2001). See also Rose-Ackerman and Truex
(2013).
40 For more information on the Human Development Index, see the United Nations Development
Programme’s website at http://hdr.undp.org/en/content/human-development-index-hdi (accessed
41 Mauro (1995, 1997) demonstrates that high levels of corruption are associated with lower
levels of investment as a share of GDP. The corruption indices are highly correlated with other
measures of bureaucratic efficiency, such as the level of red tape and the quality of the judiciary.
As a consequence, Mauro was unable to measure the marginal effect of any one of these measures.
Putting the separate indices together in a measure of bureaucratic efficiency, “if Bangladesh [with a
score of 4.7] were to improve the integrity and efficiency of its bureaucracy to the level of that of
Uruguay [score 6.8] ... its investment rate would rise by almost five percentage points and its
yearly GDP growth rate would rise by over half a percentage point (Mauro 1995: 705).” Mauro
also demonstrates that highly corrupt countries tend to underinvest in human capital by spending
less on education (Mauro 1997). He argues that this occurs because education provides less
lucrative corruption opportunities than other types of more capital-intensive public spending.
Ades and di Tella (1997a) argue that an aggressive industrial policy may be partly motivated by
the corrupt gains the policy makes available. In such cases, the direct positive effect of the policy
can be undermined by its role in increasing corruption and hence, discouraging investment. Their
empirical results demonstrate that in the presence of corruption, the positive impact of industrial
policy is halved. East Asian economies are not immune from this effect. Johnson, Kaufmann, and
Zoido-Lobatón (1998: 389–91) find that higher levels of corruption are associated with a larger
unofficial economy.
42 Braun and diTella (2004) trace the causality in reverse: higher inflation causes corruption,
suppressing growth both directly and indirectly. Cukierman, Edwards, and Tabellini (1992) find
that higher levels of political instability lead to higher rates of inflation. Insofar as corruption
causes political instability – which, in turn, fuels inflation – this is a transmission mechanism for
corruption to cause inflation.
43 See the discussion regarding “greasing the wheels” versus “sanding the wheels” in the section
“Potential Benefits of Corruption” in Chapter 2.
44 Shang-Jin Wei (2000) shows that corruption acts like a tax on FDI. An increase in the
corruption level from relatively clean Singapore to relatively corrupt Mexico is the equivalent of
an increase in the tax rate of more than 20 percentage points. The statistical result holds for East
Asian countries as well as for the others in his sample. By contrast, Egger and Winner (2006) find
that corruption has a smaller effect on inward FDI for large (GDP), more distant, and differently
endowed countries, arguing that China’s size and low wages overcome the negative effects of
corruption in attracting FDI from OECD countries.
45 The authors estimate the effects of lagged GDP per capita on corruption, rather than vice versa.
46 Aidt, Dutta, and Sena (2008). Note, however, that Aidt (2009) argues that any possible short-
term individual gains are outweighed by long-term macroeconomic growth concerns.
47 Méndez and Sepúlveda (2006) find that there is a quadratic relationship between corruption and
growth in free countries, with a nonzero maximum. In nonfree countries, there is no statistically
significant relationship. Although their samples sizes are quite small, their results complement
other results that suggest interactions between the corruption levels and other features of
government.
48 For states in the United States, Apergis, Dincer, and Payne (2010) and Chong and Gradstein
(2007) also find a vicious circle between corruption and inequality. Dincer and Gunalp (2012) find
that corruption increases inequality, but do not test for reverse causality. According to Dobson and
Ramlogan-Dobson (2012), informal sector employment reduces and may even reverse the effect of
corruption on inequality; they argue that for this reason corruption is less costly in Latin America
than in other regions.
49 The authors predict the expected level of corruption based on per capita GDP; “anomalously
corrupt” refers to those countries that are more corrupt than predicted.
50 Transparency International, “Corruption and Human Trafficking,”

http://files.transparency.org/content/download/111/447/file/2011_3_TI_CorruptionandHumanTraff
icking_EN.pdf (accessed October 8, 2015).
51 Early empirical works (Goel and Nelson 1998) found that government size, measured as
government spending, was positively correlated with higher corruption, but others (Gerring and
Thacker 2005; Glaeser and Saks 2006) find no correlation. As Gerring and Thacker (2005: 250)
note: “big government is not necessarily corrupt government.” According to Goel and Nelson
(2011), the effect depends on how both corruption and government size are measured.
52 See also Khan (1996, 2006) and Johnston (2005). In Johnston’s typology influence markets are
an example of venal corruption, while systematic corruption is more characteristic of elite
cartels and official moguls. For oligarch and clan corruption both types of corruption are likely
to be pervasive.
53 There is also some skepticism over whether the corruption and GDP growth correlation is
driven by faulty measurement, specifically the use of perceptions-based corruption measures.
Treisman (2007b) and Aidt (2009) find no strong relationship between corruption experiences and
growth.
54 Those interested in specific sectors are referred to Campos and Pradhan (2007); TI’s Global
Corruption Report series (available at http://www.transparency.org/research/gcr) (accessed
September 28, 2015); Graycar and Smith (2011); Søreide and Williams (2014); Rose-Ackerman
and Søreide (2011); Klitgaard (1988); and the sector-specific sites linked under “Focus Areas” on
TI’s homepage (http://www.transparency.org/) (accessed September 28, 2015).
55 See Glaeser and Goldin (2006a) for a series of essays on how the United States reduced
corruption during the late nineteenth and early twentieth centuries.
Chapter 1 Appendix
Cross-Country Measures of Corruption
In this appendix, we explain some of the individual surveys that are used to calculate the CPI and the
CCI. This is not a comprehensive list of data sources on corruption and related topics: there are now
scores of data sets ranging from cross-country to geographically specific, and more are developed
every year.1 The purpose of this appendix is merely to give an overview by type.2
Table 1A.1 lists, in alphabetical order, the data sources used to calculate the two composite
indices for corruption corresponding to 2013, as well as identifying the type of data and the number
of countries included in each. Almost all sources are expert opinion or executive surveys – commonly
referred to as “elite surveys”; only five public surveys are used in calculating the CCI, three of which
are regional. The sources used in calculating each of these indices change from year to year, so this
list should not be considered definitive. Researchers and policy makers interested in using these
indices should consult the corresponding current methodological documentation.
Table 1A.1. Data sources of the Corruption Perceptions Index 2014 (covering corruption in 2013)
and the Control of Corruption Indicator 2013
Data source Type Countries* CPI CCI
African Development Bank Expert opinion 40/54 • •

Governance Ratings 2013 Africa
Afrobarometer Public survey 22 Africa •
Asian Development Bank Expert opinion 28 Asia •

Country Policy and Institutional
Assessments
Bertelsmann Foundation Aggregate index based on expert 41 OECD •

Sustainable Governance opinion and quantitative dataa and EU
Indicators 2014
Bertelsmann Foundation Expert opinion 129 • •

Transformation Index 2014
Business Enterprise Environment Executive survey 30 •

Survey
Cingranelli Richards Human Expert opinion 194 •

Rights Database and Political
Terror Scale
Economist Intelligence Unit Expert opinion 120 •

Country Risk Ratings 2014
Economist Intelligence Unit Expert opinion 183 •

Riskwire and Democracy Index
European Bank for Expert opinion 33 •

Reconstruction and Development
Transition Report
Freedom House Expert opinion 198 •
Freedom House Nations in Expert opinion 29/69 • •

Transit/Countries at the
Crossroads 2014
Gallup World Pollb Public survey 161 •
Global Insight Business Expert opinion 203 • •

Conditions and Risk Indicators
Global Integrity Index Expert opinion 62 •
Heritage Foundation Index of Expert opinion 183 •

Economic Freedom
IFAD Rural Sector Performance Expert opinion 98 •

Assessments
iJET Country Security Risk Expert opinion 197 •

Ratings
Institute for Management and Aggregate index based on official 60/59 • •

Development World statistics (2/3) and executive
Competitiveness Yearbook opinion survey (1/3)c
Institutional Profiles Database Expert opinion 143 •

International Budget Project Expert opinion 100 •
Open Budget Index
International Research and Expert opinion 71 •

Exchanges Board Media
Sustainability Index
IREEP African Electoral Index Expert opinion 54 Africa •
Latinobarometro Public survey 18 Latin •

America
Political and Economic Risk Executive survey 15 Asia + • •

Consultancy Asian Intelligence USA/17
2014
Political Risk Services (PRS) Expert opinion 140 • •

International Country Risk Guide
Reporters without Borders Press Expert opinion 177 •

Freedom Index
Transparency International GCB Public survey 115 •

Survey
U.S. State Department Expert opinion 185 •

Trafficking in People Report
Vanderbilt University Americas Public survey 26 Latin •

Barometer (LAPOP) America
World Bank – Country Policy Expert opinion 81/136 • •

and Institutional Assessment
2013
World Economic Forum Executive survey 143/144 • •

Executive Opinion Survey
World Justice Project Rule of Aggregate index based on public 99 • •

Law Index 2013–14 survey and expert surveyd
* Where two numbers are presented, the former corresponds to the CPI, the latter to the CCI.
a The expert questionnaire is available at http://www.sgi-network.org/2015/Questionnaire
(accessed September 29, 2015), but it is unclear which quantitative indicators are included in
the index. The latter are transformed to match the 1–10 expert scale, then weighted equally.
b This source has been included in the CPI for some years but was not part of the 2013 CPI.
c See IMD World Competitiveness Center, “IMD World Competitiveness Yearbook,”

http://www.imd.org/wcc/wcy-world-competitiveness-yearbook/ (accessed September 29,
2015).
d These surveys include both incidence and perception questions, as explained in the following
sections. For a full explanation of the methodology and correlations of this index with other
indices and GNP per capita, see Botero and Ponce (2010).
Sources: Based on information from Transparency International, “Corruption Perceptions Index

2014: Full Source Description,” available at
http://files.transparency.org/content/download/1842/12378/file/2014_CPISources_EN.pdf;
World Bank, “Data Sources Used in the 2013 Update of Worldwide Governance Indicators,”
available at http://info.worldbank.org/governance/wgi/table1.pdf. TI data used with permission.
Nonaggregate Measures of Corruption
Nonaggregate measures of corruption can be divided into three broad categories: polls of households
and local firms, elite surveys, and audits of particular programs. Polls use questionnaires, asking
people either what they think or what they have experienced. Elite surveys consist of “expert opinion”
provided by consultants, polls of country experts (such as government or organization employees and
academics), and polls of business executives. In this section, we provide examples and explanations
of the more prominent sources in each category.
Elite Surveys: Expert Opinion

The PRS Group is a consulting firm that evaluates the political stability of countries and assesses
several factors that pose a potential threat to political stability. The data are generated by PRS Group
staff who keep abreast of developments in the countries for which they publish data. For each
indicator, they rate the country on a scale from 0 (no risk) to 6 (extreme risk), with 0.5 intervals. The
resulting International Country Risk Guide (ICRG) data and country reports are available, for a fee
(see https://www.prsgroup.com/about-us/our-two-methodologies/icrg, accessed September 29,
2015). The indicator from the ICRG, which is included in both the CPI and the CCI, is called simply
“Corruption” and defined as
A measure of corruption within the political system that is a threat to foreign investment by
distorting the economic and financial environment, reducing the efficiency of government and
business by enabling people to assume positions of power through patronage rather than ability,
and introducing inherent instability into the political process.3
The emphasis in this definition is on how corruption may affect FDI because multinational firms
are the PRS Group’s principal clients. Hence there is a certain circularity here. The definition
incorporates the harm to FDI so one can hardly use it as an independent measure to “explain” levels
of FDI.
The process used to generate the national assessments is not transparent. One cannot find out
who makes the estimates, where they are located, or what their level of expertise may be. The
measure does not tell us the incidence of corruption or the size of the average bribe; nor does it tell us
anything directly about the costs of corruption to the average citizen or firm. The PRS Group attempts
to represent the threat that corruption poses for FDI through the economic environment and political
instability, no more.
Keeping that caveat in mind, how do the countries we focus on in the text compare? As in the
CPI and the CCI, the United States is in the second decile of the distribution (score 3.5; ranked
26/140); India at the third decile (2.5; ranked 43/140); China and Mexico are tied at the median score
(2.0; ranked 70/140); Russia is in the third quarter (1.5; 105/140), and Sudan is dead last of the 140
countries included (0.5; 140/140). The least corrupt countries are Denmark, Finland, New Zealand,
Norway, and Sweden, tied at 5.5; the most corrupt are Sudan at 0.5, and Haiti, Iraq, North Korea,
Libya, Somalia, Venezuela, and Zimbabwe, tied at 1.0.
Executive Surveys
As an example of an executive survey consider the World Economic Forum’s Global Executive
Survey, which contains more than 100 questions on topics that relate to the business environment
around the world. All responses are subjective and range from a low (worst) of 1 to a high (best) of
7. The question most related to corruption regards the cost to business of irregular payments and
bribes. The United States is ranked best of our six countries, with a grade of 4.96, followed by China
(3.98), India (3.50), Mexico (3.41), and Russia (3.98). (Sudan is not included in the results.) The
least corrupt countries, according to this survey, are New Zealand (6.72), Finland (6.64), Singapore
(6.47), United Arab Emirates (6.43), and Qatar (6.35); the most corrupt are Yemen (2.11), Guinea
(2.12), Lebanon (2.23), and Mauritania and Bangladesh (2.26 each). This survey focuses specifically
on the cost to businesses, so grand corruption may or may not be represented, and it does not consider
the effects of corruption on ordinary citizens. Many analysts argue that such “elite” surveys are out of
touch with the reality of corruption to millions around the world. In response, those who use these
data argue that petty and grand corruption tend to be highly correlated overall in spite of some clear
exceptions.
Popular Surveys
As explained in the chapter popular polls address some of the issues raised by composite indices and
elite surveys. One such poll is the GCB, which measures both perceptions of corruption and bribery
incidence. Specifically, the GCB asks respondents how much of a problem they think corruption is in
the public sector (1 = no problem; 5 = very serious problem). This same question is asked regarding
each of eight specific areas or services. Respondents are also asked whether they used each of these
services in the past year and, if so, whether they paid at least one bribe in relation to that service.
These responses are used to calculate the incidence of bribery in each service and overall.
The incidence of bribery in all eight services – the percentage of respondents who used at least
one service and paid at least one bribe for any of the eight services – is presented by country in
Figure 1A.1. Russia’s value for this question is not included due to “validity concerns” according to
the Report, while China is not included in the survey at all. The United States is the best-ranked of
our six countries, at 7%, followed by Sudan (17%), Mexico (33%), and India (54%). The least
corrupt countries on this index are Australia, Denmark, Finland, and Japan, tied at 1%; the most
corrupt are Sierra Leone (84%), Liberia (75%), Yemen (74%), and Kenya (70%). If one
disaggregates the data in Figure 1A.1 into high- and low-income households, the incidence of
corruption is higher for low-income households in all sectors except for the judiciary (Rose-
Ackerman and Truex 2013: 638, figure 3, based on GCB 2010).4 Corruption, measured both by
perceptions and by actual experience, is more endemic to some sectors than others (Hunt 2006). The
figures report overall averages, but there is also considerable variation across countries in the
particularly vulnerable sectors. (Rose-Ackerman and Truex 2013: 635–7 report the breakdown by
country and sector from the 2010–11 GCB.) Also, note that, for most public services, at least twice as
many people think that corruption is a problem in the sector as have actually paid a bribe.
Furthermore, some categories, such as political parties or legislators, do not typically collect payoffs
from ordinary citizens and may, instead, pay voters to get their support. If they are corrupted, the
sources of funds are wealthy individuals or businesses.
Figure 1A.1. Global Corruption Barometer 2013: Incidence of bribery, by country.
Source: Based on data from Transparency International, Global Corruption Barometer 2013. TI
data used with permission.
The GCB is designed specifically to measure corruption perceptions and incidence, but other
surveys with broader agendas often include questions related to corruption. Examples include the
World Values Survey (WVS), the International Crime Victimization Survey (ICVS), the regional “–
barometer” series (Afrobarometer, Eurobarometer, Latinobarometro, etc.), and the Latin American
Public Opinion Project (LAPOP). The advantage of these surveys is that they provide microdata
(individual-level responses) on corruption, along with attitudes, beliefs, and observations by the
same people, complemented by sociodemographic variables. Thus, these broader surveys may not
offer the same level of detail regarding corruption, but do enable a richer analysis of how people
form perceptions of corruption or which characteristics contribute to participating in corruption. For
example, Mocan (2008) finds in the ICVS that gender, city size, income, education, and marital status
are significant determinants of being asked for a bribe. These results are largely confirmed, using the
same data set, by Chatterjee and Ray (2012), who also contrast them with business bribery using the
World Bank Enterprise Survey (WBES) to show that firms are more likely to bribe than individuals,
although both incidences fall as a country develops. Morris (2008) uses the LAPOP to show that
perceptions of corruption and direct experience with corruption seem to be in a vicious circle in
Mexico. Hunt (2007) uses a household survey specific to Peru to show that victims of crime are more
likely to pay bribes, both because they are more likely to come into contact with the police and
because they have a higher propensity to bribe out of desperation. Using the WVS, Canache and
Allison (2005) show, among other results, that those with low political interest tend to perceive that
corruption is higher than do those with high political interest, especially at low levels of corruption.
Comparing Surveys
Table 1A.2 compares our six countries in terms of several of the surveys we have described. In order
to make this comparison, the percentile rank has been calculated by dividing the nominal rank by the
number of countries in each case (the fraction provided for each country in the graphs). From this
table, we can see that the United States generally lies between the 10th percentile and the 40th
percentile, always better than the other four countries, but never among the best countries in the
world. Mexico and China tend to be near each other, almost always in the bottom half of the
distribution, with China ranked somewhat better than Mexico. The Russian Federation ranks
consistently below the 70th percentile. India’s position varies from the 30th percentile to the 86th,
straddling the middle of the distribution, sometimes better but sometimes worse than Mexico and
China, and generally better than the Russian Federation.
Table 1A.2. Comparing results across corruption indices: Percentile ranks
Country TI’s WB’s ICRG WEF’s GCB: GCB: Paid GCB: Were asked
CPI CCI GES Corruption is a bribe to pay a bribe
a problem
USA 9.7 15.2 18.6 25.0 29.9 22.1 13.1
China 57.1 53.3 50.0 45.8 – – –
Mexico 60.0 61.0 50.0 68.8 92.5 64.2 76.6
India 52.6 64.3 30.7 64.6 43.0 86.3 85.6
Russia 77.7 83.3 75.0 70.8 92.5 – 86.9
Sudan 98.9 98.6 100 – 2.8 37.9 56.1
Sources: Authors’ calculations from PRS Group, International Country Risk Guide, Table 2B
(Average of December 2012–November 2013); World Economic Forum, GCI Dataset;
Transparency International, Corruption Perceptions Index 2014; World Bank, World
Governance Indicators 2013; Transparency International, Global Corruption Barometer 2013.
TI data used with permission.
Sudan is a bit of a puzzle. The percentile ranks for Sudan go the full range, from almost the best
country in the world to the very worst, depending on the index used. Although this country ranks dead
last on the International Country Risk Guide (which measures the threat of corruption to political
security), and very close to the bottom on both the CPI and the CCI, only 38% of citizens reported
paying a bribe on the GCB, only 56% of them report having been asked for a bribe, and Sudan ranks
better than any of the other five countries on the GCB’s question regarding how serious a problem
corruption is for the country. Thus, Sudan ranks poorly on business and political measures, the “elite
surveys,” but well in popular polls. Still, an incidence rate of 38% or 56%, as reported by citizens, is
high enough that it should impose a burden. It is possible that the size of the bribes is small, or that
they have cultural value, so that they are not seen as a problem. (Compared to civil war, corruption
may indeed seem to be a small problem.) Corruption may even be perceived as beneficial, if it
obviates state-imposed costs. Furthermore, the question is open to interpretation. “To what extent do
you think that corruption is a problem in the public sector of this country?” could mean to one person,
“How frequently must you pay bribes?” to another, “How much does bribery cost you?” and to yet
another, “When corruption occurs, how much trouble does it cause in this country?” The cross-survey
discrepancies also suggest that grand corruption is more damaging than petty corruption in Sudan,
with government officials imposing higher demands on wealthy firms, especially multinational firms,
than on the country’s own poor citizens. Taken together, the results may show that corrupt officials
have little impact on people’s daily lives. Individuals and small businesses may make small payoffs,
but they do not see that practice as a problem because officials have little extortionary power.5
1 One list of data sets is available at TI’s Anti-Corruption Research Network, “Datasets,”
http://corruptionresearchnetwork.org/resources/datasets (accessed September 27, 2015).
2 Heinrich and Hodess (2011) identify three stages in the historical development of corruption
measurement: (1) composite indices such as the CPI; (2) “comparative meso-level assessments”
that allow for cross-country comparisons in space and time; and (3) country-specific, sector-
specific microanalyses, which aim to examine the causes of corruption and the effects of policies
in specific contexts. We have not followed this organization because we are more interested in
explaining what the cross-country data represent. There are several methodologies in the third
category that are omitted here, including, but not limited to Public Expenditure Tracking Surveys
(PETS), which compare funds disbursed at one level of government to those received or disbursed
at the next level (Reinikka and Smith 2004; Reinikka and Svensson 2006; Sundet 2008); cost
overruns, which compare projected budgets in public works to actual costs (Engerman and
Sokoloff 2006; Flyvbjerg 2007; Flyvbjerg and Molloy 2011); mismatches between existing
infrastructure and cumulative public expenditure on infrastructure (Golden and Picci 2005);
physical audits of roads, comparing core samples to materials reportedly used (Olken 2007, 2009);
proportional convictions on corruption charges (Corporate Crime Reporter 2004; Glaeser and
Saks 2006); and the number of newspaper articles related to corruption (Morris 1991; Gentzkow,
Glaeser, and Goldin 2006).
3 PRS Group, “Guide to Data Variables,” https://epub.prsgroup.com/list-of-all-variable-

definitions (accessed June 28, 2014). This definition is broader than that used previously for the
same variable.
4 Hunt and Laszlo (2012) refute this for samples of Peru and Uganda, where they find that the poor
bribe pay a larger percentage of their income in bribes, but the rich are more likely to use public
services and to bribe when they do.
5 Another way to measure corruption is through audits, which use hard data for country-specific or
sector-specific studies. These usually look for anomalies or mismatches in the data as evidence of
corruption. Sequeira (2012) refers to this approach as “minding gaps in the data.” We make
reference to some of these audits in later chapters.
Part I
◈
Corruption as an Economic Problem

2
Bureaucratic Corruption
◈
All states, whether benevolent or repressive, control the distribution of valuable benefits and the
imposition of onerous costs. The distribution of these benefits and costs is generally under the control
of public officials who possess discretionary power. Private individuals and firms who want
favorable treatment may be willing to pay to obtain it. Payments are corrupt if they are illegally made
to public agents with the goal of obtaining a benefit or avoiding a cost. Many payoffs are made in
return for actions that violate the rules. However, individuals or firms also pay bribes to get benefits
to which they are entitled or to avoid costs artificially created for the purpose of generating bribes.
These payoffs are corrupt as well. Some languages have distinct words for these different situations.
Thus, Bardhan (1997: 1323) notes the difference in Russian “between mzdoimstvo, taking a
remuneration to do what you are supposed to do anyway, and likhoimstvo, taking a remuneration for
what you are not supposed to do.”
Corruption is a symptom that something has gone wrong in the management of the state. Public
institutions govern the interrelationships between the citizen and the state. If corruption is present,
such institutions are used, not to further public values, but, instead, for personal enrichment and the
provision of benefits to the corrupt. The price mechanism, so often a source of economic efficiency
and a contributor to growth, can, in the form of bribery, undermine the legitimacy and effectiveness of
government. Poorly designed government institutions cause economies to stagnate and inequalities to
persist.1
In this portion of the book, we assume that the law has established clear rules that separate legal
from illegal behavior – labeling some actions as bribery or extortion – and that everyone understands
which acts are corrupt even if they engage in them. Even in this clear-cut world, although some
people will never act corruptly on moral grounds, others will choose to be corrupt seemingly by
habit, and still others will weigh the costs and benefits of engaging in each corrupt act. As detective
Frank Serpico lamented, “Ten percent of the cops in New York City are absolutely corrupt, 10
percent are absolutely honest, and the other 80 percent – they wish they were honest.”2 Tirole (1996)
refers to this last group as “opportunistic”; Beenstock (1979) calls such people “pragmatic.” Miller
(2006: 371) argues (based on a survey in the Czech Republic, Slovakia, Bulgaria, and Ukraine) that:
both citizens and officials explicitly condemn the use of bribes. Nonetheless many confess to
giving or taking them, and still more confess that they would give them if necessary, or would
take them if the opportunity occurred. This is not because their values are irrelevant but because
their internal values have to contend against external pressures. Citizens respond to extortion;
and officials respond to temptation – and these external pressures have more impact than internal
values. Consequently, both citizens and officials should be viewed as more corruptible than
corrupt. (Italics added)
According to the consulting firm KPMG (2008), which specializes in detecting corporate fraud,
on average 60% of a firm’s employees fall in this middle category;3 we can assume a similar figure
for the public sector, unless there is self-selection by the corrupt into government positions with
corrupt opportunities, in which case the proportion of corruptible employees will be higher among
civil servants.
The existence of a large group of opportunists implies that the institutional environment is a key
determinant of corruption risks. We isolate the most important structural situations in which
widespread corruption can determine who obtains the benefits and bears the costs of government
action (or inaction). Although corruption takes many forms, we focus on bribery here because it is the
one act that is universally seen as corrupt.4 We provide a taxonomy of the many reasons why bribes
are paid. This chapter focuses on low-level corruption that occurs when the bureaucracy interacts
with the public. Some refer to this as “petty” corruption, but the aggregate quantities involved and the
costs to society may be very large. The issues covered here should concern heads of departments
interested in reducing the incentives for bribery among their subordinates. In Chapter 3, we turn to
corruption in procurement, privatization, and the award of concessions. Much, but not all, of this is
high-level (grand) corruption that involves top political and government officials; their involvement
raises distinct issues. Chapter 4 returns to the issues raised in Chapters 2 and 3 to suggest some
reform responses. Chapter 5 then explicitly considers the civil service and asks how it might be
organized to limit corrupt incentives. Chapter 6 considers the criminal law. Although our main focus
is on institutional reform that reduces corrupt opportunities, it is important to explicitly confront the
role of the laws against bribery and other forms of self-dealing.
In this chapter, we identify and analyze four key situations in which bribery can occur in the
provision of government goods and services and the imposition of costs.
The government may be charged with allocating a valuable benefit to individuals and firms
using legal criteria other than willingness to pay. The benefit may be fixed in supply, supplied
at the discretion of officials, or nominally open to all who qualify Bribes clear the market
and substitute for nonmonetary qualifications.
Officials in the public sector may have little incentive to do their jobs well, given low official
pay scales and minimal internal monitoring. As a result, they may shirk; worse still, they may
impose delays and other roadblocks on the public. Bribes act as incentive bonuses.
Those engaged in legal pursuits seek to reduce the costs imposed on them by government in
the form of taxes, customs duties, and regulations. Bribes lower costs.
Individuals and firms seek to avoid sanctions for criminal activity. Bribes facilitate illegal
activity.
These categories are not mutually exclusive. A bribe that acts as an incentive payment, for example,
might also allocate a scarce benefit or provide a tax exemption. Nevertheless, each raises distinctive
issues; so it is worth considering them separately.
I. Payments That Equate Supply and Demand
Governments frequently provide goods and services for free or sell them at below market prices.
Often dual prices exist – a low state price and a higher free market price. Firms will then pay off
officials for access to below-market state supplies. In China, for example, some producer goods used
to be sold at both state-subsidized prices and on the free market. Chinese researchers reported that in
1989 the market price of coal was 674% of the subsidized price. The market prices of seven other
producer goods were from 250% to 478% of the prices fixed by the state. Not surprisingly, payoffs to
obtain supplies at state prices were reportedly very common.5 Likewise, access to free public health
facilities or education provides incentives to corruption. Subsidized oil and gasoline prices are
particularly open to price arbitrage. For example, Venezuela’s artificially low gasoline prices have
created incentives for smuggling to Colombia, where it is sold on the black market; until the recent
fall in world prices, the market price was more than 60 times Venezuela’s state-subsidized price.6
Subsidized food prices in Venezuela have produced similar behavior; in September 2014, six million
liters of fuel and seven thousand tons of food were confiscated on their way to Colombia. In August
and September 2014, a total of 847,000 tons of contraband goods were seized.7 This has occurred in
Iran, Iraq, and Nigeria as well, where domestic gasoline prices were fixed at a fraction of
neighboring countries’ prices (McPherson and MacSearraigh 2007: 209). “Price controls on refined
petroleum products represent perhaps the most important, common, and invidious driver of corruption
in this segment of the oil value chain” (McPherson and MacSearraigh 2007: 208).
If the supply of credit and the rate of interest are controlled by the state – and sometimes even
when they are not – bribes may be paid for access. Interviews with business people in Eastern
Europe and Russia during the transition from Communism to capitalism indicate that payoffs were
frequently needed to obtain credit (Webster 1993a, 1993b; Webster and Charap 1993; De Melo, Ofer,
and Sandler 1995). In Lebanon a similar survey revealed that loans were not available without the
payment of bribes (Yabrak and Webster 1995). Personal influence and corruption lead banks into
high-risk lending – sometimes to “borrowers” with no intention of repaying the funds. In Kenya, for
example, one well-placed observer estimated that a third of banking assets were close to worthless in
1992 as a result of political interference in the financial system (Bigsten and Moene 1996: 191). A
similar situation existed at the National Bank of Fiji where political influence was apparently
widespread (Findlay 1997: 54). Corruption in the form of crony capitalism in Japanese banks
contributed to the Japanese crisis and long recession of the 1990s; revelations of a similar situation in
Thai banks spooked investors, contributing to the Asian currency crisis of 1997–8 (Balaam and
Veseth 2008: 160, 252). Around the same time, in Korea bank loans continued to be made to well-
connected companies after they experienced serious financial difficulties. The companies had made
substantial payoffs to powerful politicians, and these same officials pressured the banks to continue
making loans. The bankers were also bribed.8 In Pakistan well-informed researchers calculated that it
would cost the government 10% to 15% of 1996–7 GDP to deal with a banking crisis based on
nonperforming loans provided to friends of the regime (Burki 1997: 9). A study of government bank
loans in that country showed that firms with politically connected board members borrowed more and
had more nonperforming loans than firms without political connections; this relationship did not hold
for commercial bank lending (Khwaja and Mian 2005). In Nigeria, fraudulent loans were made to
“tycoons”; in all, more than $5 billion of debt was owed to five banks when the bank officials were
arrested in 2009.9
Exchange rates sometimes do not reflect underlying economic fundamentals, thus producing
incentives to pay bribes to get scarce foreign exchange at favorable rates.10 For example, Paraguay’s
multiple exchange rate system led to corruption before it was reformed (World Bank 1994b). South
Africa’s twin currency system was a source of payoffs. The financial rand was abolished in March
1995, a policy change that removed one set of corrupt incentives.11 Venezuela’s currency, the bolivar
(B), is subjected to multiple exchange rates. Under Hugo Chávez, dollars were officially available at
a preferential rate of 6.3 Bs per dollar for essential goods such as medical supplies and 11 Bs/$ for
other qualifying imports. The bureaucratic process required to obtain dollars through the official
system was lengthy and complicated, inducing many importers to hire agents – insiders – to speed up
the process.12 One way to achieve speed could be a well-placed bribe. The low official exchange
rate also created incentives to falsify imports in order to purchase dollars and engage in arbitrage on
the black market.13 Two private banks in Venezuela (and, by extension, their owners) earned an
estimated $607 million by purchasing Argentine bonds from the Venezuelan government at the official
exchange rate and reselling them at the black market rate (Coronel 2006: 7). At the same time, fixed
official exchange rates encourage the development of black markets for foreign currency that are often
fed by drug trafficking and other illicit activities as the illicit funds are laundered (Insulza 2013).
The allocation of scarce import and export licenses is a frequent source of payoffs and
patronage, with bribes linked to the value of the benefits conferred. In the Philippines in the early
1950s both methods operated. Those with political connections could easily obtain licenses so long
as they paid a 10% commission (Hutchcroft 1998: 73). In Nigeria, the regime in power in the early
1980s resisted free trade reforms favored by the International Monetary Fund apparently because the
existing system of import licensing was a major source of payoffs and patronage (Herbst and
Olukoshi 1994: 465). The fact that such licenses were valuable indicates the costs of maintaining the
system in the form of higher prices for ordinary consumers. By the late 1980s the import licensing
system had become so discredited that it was abolished. Apparently the Manufacturers Association of
Nigeria, whose members had paid bribes without complaint in earlier years, began to see that they
would be better off without the system. Furthermore, at the same time as the import licensing system
ended, the state introduced other new rent-seeking opportunities (Faruqee 1994: 246; Herbst and
Olukoshi 1994: 481–2). In Mexico, something similar occurred: when import licenses were
eliminated in the context of the North American Free Trade Agreement (NAFTA), a licensed
“customs agent” was created who became a locus of corrupt payoffs (see Box 2.2 in the section on
Taxes and Tariffs, in this chapter).
The incentives to make payoffs are clear enough in these cases, but what are their efficiency
consequences? Do they simply equate supply and demand, functioning much like prices in a legal
market? We consider three cases. First, the public benefit is scarce and fixed in supply. The officials
charged with its allocation have no discretion to increase or decrease total supply. Second, the
benefit is scarce, but officials can influence the quality and quantity available. Third, the service is
available to all who qualify, but officials have discretion to determine who meets the requirements.
A. Fixed Supply
In the first case, where the official must allocate a fixed number of licenses or benefits, the number of
people qualified to obtain the service exceeds the supply. If the corrupt market operates efficiently,
the service will be provided to the applicants with the highest willingness to pay. If there is no price
discrimination, the “market clearing” bribe will be equivalent to the price in an efficient market. The
state could have legally sold the service with the same result, except for the distribution of the
revenue. Bribes increase the incomes of civil servants, while legal payments go into the government’s
treasury. But even that difference may be illusory. If the labor market is competitive, the government
can reduce the pay of civil servants to below private-sector wages because of the payoffs available
to public officials (Besley and McLaren 1993; Flatters and MacLeod 1995); the bribes act like tips or
commissions. The end result is that the government saves on the wage bill, while the civil servants
who accept bribes take home at least as much as they would have if the payoffs were legalized. At the
same time, those responsible for hiring may take advantage of the high illicit returns in public
positions, charging an “entry fee” that may be as high as several years’ salary (Kristiansen and Ramli
2006; Paterson and Chaudhuri 2007: 167). In short, if competitive conditions exist both in the corrupt
market and in the labor market, illegal payoffs are like market prices. The winners are those willing
to pay the most in bribes and the civil servants willing to accept bribes; the losers are those unable or
unwilling to pay bribes: they either pay in other ways, such as time spent in a queue or persistence in
petitioning officials, or forego the benefit entirely.
Consider the ways in which inefficient or unfair results can arise even in this simple case. To
begin, suppose allocation to those with the highest willingness to pay is acceptable to society. Then
one must ask whether corrupt markets are likely to differ much from open competitive ones. In
general, they will not work as efficiently as legal markets (Rose-Ackerman 1978; Gambetta 1993;
Cartier-Bresson 1995; Bardhan 1997). The illegality of bribery induces participants to spend
resources keeping the transaction secret. This, in turn, means that information about bribe-prices will
not be widely available. Prices may be relatively sticky – unresponsive to market forces – because of
the difficulty or risk of communicating market information. Some potential participants may refuse to
enter the market because of moral scruples and fear of punishment, and public officials may limit their
dealing to insiders and trusted friends and relations to avoid disclosure (della Porta and Vannucci
1997a). For all these reasons, a corrupt system will be not only less competitive, but also more
uncertain, than a legal market (Shleifer and Vishny 1993).
Furthermore, payoffs may undermine the goals of a program. Officials would likely focus on the
most “profitable” parts of their jobs.14 If illicit payoffs exist, services designed to benefit the needy
or the well qualified will go instead to those with the highest willingness to pay. Thus, the legal sale
of import and export licenses or restaurant licenses could be efficient (in theory), but the allocation of
subsidized credit, housing, or university admissions by price would undermine the programs’
distributive goals even if those admitted are nominally “qualified” under the law.
For example, corruption has occurred in public housing programs in the United States where the
number of qualified households far outstrips the number of places in subsidized units. In one
Connecticut town, officials operated two lists – one queue for the honest applicants and the second,
faster moving queue, for those who made payoffs (cited in Rose-Ackerman 1978: 96n). In
Washington, D.C., two city officials were convicted of accepting bribes to certify unqualified people
for subsidized housing and to give applicants higher priority on the waiting list than they deserved
(United States v. Gatling, 96 F. 3d 1511 [1996]). Similar corruption has arisen in the allocation of
public housing in Hong Kong and Singapore, where demand also exceeded supply (Lee 1986: 98). In
Hong Kong the amounts paid were a function of the value of the benefit disbursed (Alfiler 1986: 54).
In India, apartments built for war widows were, instead, purchased by retired military officers and
relatives of politicians.15 Similarly, in 2001 the federal government of Malawi purchased land and
turned it over to a local council for redistribution to “land-poor and landless households ... but it later
turned out that many richer persons acquired land on the estates” (Chinsinga and Wren-Lewis 2014:
95).
In parts of education systems, this situation prevails both for scarce university and school places
and for coveted teaching positions in public schools, which may be filled by those with connections
or by the highest bidders, rather than by the best qualified students and educators.16 Teachers who
have obtained their positions through corruption may underserve their students through absenteeism
(Anthony 2007; Duflo, Hanna, and Ryan 2012; Ngwe 2013) and may extort their students for grades.
Such extortion can take many forms: in Botswana, 20% of female students surveyed and reported that
teachers had asked them for sex (Leach 2013: 90); students in Ghana, Kenya, and Mozambique also
reported such behavior (Action Aid International 2013: 29). If corruption-prone individuals are role
models, they perpetuate a culture of corruption through grading practices that do not reflect effort or
ability.17 Students learn that success does not depend on effort. Rather than being a lever to raise the
poor, the educational system maintains the status quo; the country may be unable to attract investment
due to the low quality of its workforce, with the result that unemployment rates and delinquency are
high.
Student admission to schools – both public and private – may be tainted by corruption in the
form of nepotism, cronyism, bribery, and thinly veiled donations. In Liberia, according to The
Economist, none of the country’s 25,000 applicants for university admission passed the required test
after a reform that based admission on real grades instead of bribes and family connections.18 Hyll-
Larsen (2013: 54) reports that in 135 countries where education is nominally free, 110 have schools
that charge fees for admission, exams, titles, lunch, and other services. In Vietnam, parents use
connections or bribes (as much as twice the GDP per capita) to get their children into the best public
schools (Chow and Nga 2013). In Mexico, public school principals may tell parents that no spaces
are available, whether or not this is true. They can then extract rents from the parents, making
admission conditional on the payment of an entry fee.19 The parents are likely to be reluctant to report
the extortion for fear that their child will not be placed.20 The superintendent creates scarcity in order
to extract rents. As long as this practice is profitable, the superintendent may seek to increase the
number of students per classroom beyond the state-approved limits. A school may have a fixed
number of spaces, they are not supposed to be allocated to the highest bidders.
The allocation of irrigation water or land is another case in which assignment to the high bribers
is inconsistent with the programs’ distributive goals. In irrigation projects, payoffs from upstream
farmers to public officials may mean that little or no water reaches the farmers at the bottom of the
system. In some irrigation systems in India and Pakistan, downstream farmers obtain too little water
even for subsistence farming, and some ditches run dry before the end of the system is reached (Wade
1982, 1984; Murray-Rust, Hammond, and Vander Velde 1994; Vander Velde and Svendsen 1994). In
Pakistan, wealthy, politically connected upstream farmers pay bribes to exceed their water quota,
depriving downstream farmers of their rightful water supply. Some upstream farmers grow water-
intensive crops for export, leaving downstream farmers with barely enough water for subsistence. As
a result, downstream farmers must bribe merely to receive what is their due (Transparency
International 2008: 78). If land reform is designed to benefit poor farmers, corrupt payments for the
best plots will favor the more well-to-do and those with connections to the officials administering the
program (Bunker and Cohen 1983: 109). Rather than alleviating poverty and inequality, these
programs perpetuate the problem.
In sum, when the government distributes a good with a fixed supply that exceeds the demand,
illicit price competition in the form of bribery may undermine the goals of the program. In such
circumstances, it is necessary to redesign the program to limit the corrupt incentives that scarcity
creates and to ensure that the benefits reach the intended beneficiaries.
B. Variable Quantity and Quality
Suppose now that officials can influence the quantity and quality of services provided and hence the
“prices” paid by those demanding the service. A single individual may have authority to issue
permits, to overlook violations of the law, or to decide who qualifies for a benefit (Rose-Ackerman
1978; Klitgaard 1988; Findlay 1991; Shleifer and Vishny 1993). At one extreme, corruption can be a
pure transfer from a private firm to an official that enriches the official but does not affect the
efficiency of a public program. Rose-Ackerman (1975, 1978: 109–35) analyzed the case of a pure
transfer in the case of government contracting, but she notes its likely rarity. Corruption harms the
state in any situation in which the official acts in response to the bribe. The problem is not just that the
government receives lower payments, but also that its responsibilities are carried out inefficiently
and unfairly (Rose-Ackerman 1975, 1978: 109–35). Even if the government receives the legal
payment (Shleifer and Vishny [1993] call this corruption without theft), the government employee
earns a bribe (or favor) that raises the total cost for the client. Like a private monopolist, the public
servant sets supply below (or raises the payoff above) the officially sanctioned level to increase the
economic rents available for division. Here there is no direct impact on government revenues per unit
of service, but depending on the size of the illicit payments, fewer may demand the government
service, seek a license, or compete for a public contract. In contrast, if the government has set the
supply below the monopoly level, the corrupt official will seek to provide an increased supply of the
service to maximize his rents, rather than set the optimal level of services. The official’s behavior
depends not only on the total economic rents, but also on the share that the official can extract in
dealing with corrupt beneficiaries. In international trade, for example, customs officials may engage
in corruption with theft (Shleifer and Vishny 1993): the individual or firm pays a bribe to reduce or
eliminate the duty paid to the government; the size of the bribe is smaller than the reduction in the
duty, so total costs for the importer are lower. As a result, the quantity of imports may be higher with
corruption than without it.
Sometimes officials can price discriminate. Svensson (2000) finds that Ugandan firms paid
bribes to obtain telephone lines and electrical connections, and to import and export goods. The
officials were excellent price discriminators: firms with higher profits paid more in bribes, while
those with a credible threat to exit the market paid less. Similarly, Indonesian truck drivers with
newer or heavier trucks paid higher bribes at weigh stations; furthermore, the size of the bribe
increased as the shipment approached its final destination (Olken and Barron 2009).21
If several officials have authority over the allocation of scarce benefits, the problems can
multiply as each tries to extract a share of the gains. Consider, for example, the market for
commercial real estate in Russia in the 1990s (Harding 1995). Local government councils held
ownership rights, but the head of the administration had a great deal of personal discretion in real
estate management. Real estate allocation did not follow commercial principles. Existing occupants
were favored, and rental rates were far below market prices. The low rents created “a huge economic
rent which accrue[d] to local officials” (Harding 1995: 10) and created pervasive excessive demand.
The ambiguity and inconsistency of federal requirements left room for corrupt and self-seeking
maneuvering by local agencies and rent seeking by officials. This process was exacerbated in
Russian cities by the existence of overlapping authorities, each of which tried to extract benefits from
its strategic situation. The result was an inefficient, unfair, and corrupt system.
C. Choosing Those Who Qualify
Now consider a public service – such as a passport, a driver’s license, or an old age pension – that is
not scarce, but is available to all who “qualify.” Unqualified people and firms frequently pay bribes
to obtain such benefits. We give a few specific examples, but the practice is widespread. Thus, in
Turkey members of Istanbul’s fire department took bribes to falsify documents and issue passing fire
inspection audits to new businesses, even when they failed to meet the stipulated standards. In one
case, “operators of a private nursery school paid TL [Turkish Lira] 15,000 to suspects in order to
obtain a report for eligibility for fire safety, despite the building’s incompatibility with fire safety
regulations, such as having a fire exit and stairwell far narrower than those required by
regulations.”22 In Thailand individuals paid to pass the entrance exam for the Police Cadet Academy
and to obtain driver’s licenses without taking any tests (Alfiler 1986: 37, 56). In India, applicants
were failed arbitrarily when taking their driving exams, but were able to obtain their licenses through
an “agent” for a fee (Bertrand et al. 2007). In Korea officials were accused of accepting bribes to
fake the qualifying scores of nursing students, to issue a license to an unqualified bonesetter, and to
approve the regulatory compliance of food corporations and polluting firms (Alfiler 1986: 38, 47). In
the United States officials of the Immigration and Naturalization Service have been bribed to issue
fraudulent working papers.23 U.S. Customs officers have allowed illegal aliens to enter the country in
exchange for bribes; border patrol agents have been involved in smuggling them into the country.24
Clearly, everything else equal, the unqualified may often be those with the highest willingness to pay
because they have no legal way to obtain the service.
Conversely, those who qualify for an onerous responsibility, such as military service, may pay to
be judged unqualified. Thus, in Kazakhstan young men could pay $500 for exemption from military
service and $1,500 for a certificate indicating that they had completed the said service (Werner 2000:
18). In Mexico, some young people bribe their way out of military service.25 A Mexican
businessman, facing charges in the United States, attempted to bribe a federal judge with $1.2 million
to reduce his sentence; it must have come as a surprise when the judge refused and denounced the
attempt.26 In these cases, bribery causes class discrimination: the poor complete their military
service or sentence, while the rich (and unscrupulous) bribe their way out.
Even those who are qualified for a benefit may pay if officials have sufficient monopoly power
to create scarcity either by delaying approvals or withholding them unless paid bribes (Paul 1995).
Alternatively, they might manufacture uncertainty for all applicants. Notice that in the Indian driver’s
license case, discussed in the preceding text, the reported arbitrariness of failure could give everyone
an incentive to pay bribes whether or not they were capable drivers. The seeming randomness of
failure could have been part of a bribe-generating strategy.
Sometimes it is difficult to distinguish this case from one in which scarcity is an underlying
feature of the program, not a condition created by rent-seeking officials. As noted previously, public
schools may differ in quality. Then, even though all students have a right to attend school, places in
desirable public schools are scarce even though every student is placed somewhere. Even if no one
pays for admission, teachers may demand payment at the end of the year, conditioning the delivery of
grades (necessary to register for the next school year) on receipt of a fee. Sometimes such payments
are disguised as parent/teacher association fees, which should be voluntary.27
Another strategy is to maintain vague and uncertain qualification standards. Applicants arrive
with the required documents, only to be told that another document is missing or that there is
something wrong with one of the documents; when that “requirement” is met, it turns out that
something else must be produced. Then officials can withhold services from anyone who does not
make a payoff, but it will be difficult for anyone to prove that they have been unfairly treated.
In general, the greater the discretion of officials and the fewer the options open to private firms
and individuals, the higher the costs of a system that condones corruption even if all who obtain the
service are, in fact, qualified. The costs are the time and trouble suffered by potential beneficiaries
and officials’ efforts to organize and conceal their corruption. The bribes are “only” transfers, but so
long as bribery raises the cost of obtaining the service, they will affect the distribution of benefits in
ways that may undermine the purposes of the public program (Klitgaard 1988; Shleifer and Vishny
1993; Bardhan 1997; Wei 2000).
Sometimes pure extortion occurs when government officials create situations in which they can
demand bribes. In South Africa, some customs officials abuse their authority, extorting bribes and
sexual favors from informal traders from neighboring countries.28 Similarly, a legal case in
Baltimore, Maryland, alleges that two employees of the public housing system withheld repairs if
female residents of the housing refused sex.29 In Kenya, traffic officers routinely stop truck drivers
with the sole purpose of receiving a small payoff; the result is similar to a series of (at least 50) tolls,
summing up to 5,000 Kenyan shillings ($56) from the Ugandan border to the ports at Mombasa.30
Similar fees are paid at checkpoints and weigh stations in Indonesia, even when trucks are not
overweight (Olken and Barron 2009). In Nigeria, the police routinely extort payment from bus
drivers.31 The shakedown of other public transport drivers is also common in Kenya;32 and the
police also threaten citizens with incarceration (or they actually jail them) in order to extort bribes
(Andvig and Barasa 2014). In Mexico City, a field experiment showed that police were more likely
to solicit bribes from the drivers of old and poorly maintained automobiles who would be unlikely to
complain to higher authorities (Fried, Lagunes, and Venkataraman 2010). In Malawi, informal street
vendors were beaten and their goods stolen or destroyed by police in the 1970s and early 1990s
(Jimu 2010: 103). In Venezuela, police officers beat and kidnapped residents of “makeshift”
communities, effectively demanding ransom of thousands of dollars from the poor (Transparency
International 2013a: 12). In many of these cases, the “crime” is informality; in others, the bribe payer
has not violated any laws, but disputing the fine is time consuming and may prove fruitless (in
addition, the victim may be unfamiliar with the necessary procedures) – it is easier simply to pay the
bribe.
II. Bribes as Incentive Payments for Bureaucrats
Because time is valuable, firms and individuals will pay to avoid delay. In many countries a
telephone, a passport, or a driver’s license cannot be obtained expeditiously without a payoff. In the
extreme, the service is available only to the corrupt, but not to the patient but honest citizen.
According to Transparency International’s (TI’s) Global Corruption Barometer (GCB) 2013, 40% of
individuals who paid bribes around the world did so in order to get faster service; for 27%, it was
the only way to get the service at all.33
An Indian newspaper published a list of the standard “fees” for a range of routine public
services.34 In St. Petersburg in 1992 the going rate for a telephone installation was $200 (Webster
and Charap 1993). Individuals report having paid bribes for a wide range of services in several
countries on the website www.ipaidabribe.com: in India, one person reports paying Rs 150 (about
$2) to obtain a death certificate; several report bribes of Rs 500–3,000 for police verification of
passports; Rs 200 for a missing vehicle pollution inspection certificate; and Rs 13,000 (about $200)
to have a residential property title transferred after purchase, with all documents in order.35
A study of the informal economy in the Ukraine lists the payoffs for a range of services needed
by private businesses (Kaufman 1997). Most firms reported paying fees in connection with importing
and exporting inputs and outputs. Phone lines almost invariably involved an “informal payment.”36
Payments to tax, fire, and health inspectors were common, as were unofficial lease fees and payments
for access to credit. The high cost of dealing with state officials through bribery induces many firms
to operate in the informal sector and many others to underreport sales, costs, and payroll to the
authorities (Kaufmann, Mastruzzi, and Zavaleta 2003). The losses to the state are large, and, in
addition, the level of payoffs discourages investment and the entry of new firms (Kaufmann 1997; Wei
2000). In Russia,
One has to bribe when registering a business, when renting premises from state bodies, when
acquiring licenses for their utilization from state bodies, for obtaining low-interest bank credit,
when reporting to tax inspectors, and when completing customs formalities. But it is a problem
not only of and for businessmen. There are “suborners” in educational institutions, in medical
institutions, in administrations and in the police
(Gilinskiy 2005: 159).
Similar corrupt incentives exist if the government does not pay its bills on time. This may occur
for several reasons: there may be inadequate funds, disbursement may require legislative or other
authorization, or civil servants responsible for disbursement may be overloaded. Another possibility
is that those responsible for payment intentionally delay in order to extort bribes (Paterson and
Chaudhuri 2007: 172), or to invest the funds temporarily for personal gain (Klitgaard 1988: 20). In
Argentina, for example, insurance companies bribed to get delayed claims paid by a state-run
reinsurance company. Eventually the scheme degenerated into a system of outright fraud against the
state organized by corrupt state officials and intermediaries, in which the private companies
manufactured false claims and colluded with corrupt officials to be reimbursed by the state company
(Moreno Ocampo 1995). In Mexico, the petroleum company Pemex violated its contract with tanker
truck companies when it stopped adjusting the prices paid for its services in 2009; companies,
nevertheless, continued to provide the service for five years in expectation of pay, despite operating
at a loss.37 The government of Venezuela has accumulated a debt to firms worth billions of U.S.
dollars, refusing to pay out the scarce currency and further feeding incentives for firms to resort to
corruption.38
In highly corrupt countries managers spend many hours dealing with state officials (Fries,
Lysenko, and Polanec 2003). In surveys of business people, post-transition Ukraine is an extreme
case, with proprietors and senior managers spending an average of 30% of their time dealing with
officials in 1996 (Kaufmann 1997). The more procedures and the longer the time necessary to open a
business, the greater the incentive to corruption (Buscaglia and van Dijk 2003). According to the
Global Competitiveness Report 2013–2014, the time to start a business ranges from one day in New
Zealand to 694 days in Suriname (Schwab 2014).39 Figure 2.1 reveals a direct relationship between
the time to open a business and the cost of bribes to business, from the same report. The cost of bribes
is rated from 1 to 7, where 1 indicates that bribery is frequent and 7, that bribery almost never occurs.
Thus, as shown in the graph, the more days it takes to open a business, the worse the country ranks in
bribery.40 Of course, the figure shows (weak) correlation, not causation.41 Perhaps the level of red
tape is determined by other factors beyond the search for payoffs, but the figure at least suggests that a
vicious cycle may exist where red tape encourages bribery and the expectation of bribes encourages
red tape.
Figure 2.1. Cross-country relationship between days to start a business and the frequency of
bribery by firms.
Source: Elaborated with data from Klaus Schwab, ed. The Global Competitiveness Report
2013–2014, World Economic Forum.Note: Suriname was excluded from the graph as an extreme
outlier.
III. Bribes to Reduce Costs
Governments impose regulations and levy taxes. Individuals and firms may pay for relief from these
costs. We first consider corrupt incentives in regulatory programs, followed by corruption in the
collection of taxes and duties.
A. Regulatory Programs
Under public regulatory programs, firms may pay to get a favorable interpretation of the rules or to
lighten the regulatory load. Rules and regulations can be used by corrupt officials as a means of
enriching themselves. Everywhere rules are bent in return for payoffs (see Box 2.1). The loci of
payoffs are remarkably similar throughout the world considering the large differences in culture,
economic conditions, and political organization. Payoffs occur in business licensing, in the inspection
of construction sites and buildings, and in the regulation of environmental hazards and workplace
safety. Whenever regulatory officials have discretion, an incentive for corruption exists.
Box 2.1. The Market for Bent Rules
Consider a case in which officials can provide illegal exemptions to firms from rules or
reductions in taxes or other costs. Thus, in an honest world the supply of these benefits should
be zero. Suppose that many officials can provide these exemptions, but are willing to do so
only for a price. In the market for “bent rules,” the supply of bent rules by public servants is
determined by the size of the bribe offered (b), the wage received relative to the official’s
opportunity wage in the private sector (w), the probability of detection and punishment (p),
and the punishment received if corruption is detected (x), which may include imprisonment, a
fine, and/or losing the government job. The public servant weighs the expected benefit of
accepting a bribe against the expected cost.
Firms’ willingness to pay for bent rules (D) is a function of each firm’s profits (g) and
the costs imposed by honest officials in the form of taxes (t) and regulations (r). Suppose that
as the bribe-price falls, more firms are willing to “purchase” corrupt benefits. Bribes will
only be paid if they increase profits. The officials who supply corrupt services supply more
corrupt services the more they are paid, independently of the nature of the bribe payers. They
deal with whoever is willing to pay.
In the figure we assume a very simple bribery market where D(g,t,r) is the demand for
corrupt services and S(w,p,x) is the supply of services provided by officials in return for
bribes. We have drawn the curves as straight lines, but, in practice, they could take a variety
of shapes, and the connection between the other variables and the S and D curves could be
complex.
In our simple market, the equilibrium is at a “standard” bribe (b0) with q0 illegal
services provided in total. This model, however, assumes perfect competition that produces a
single market clearing price. In reality, public servants may be able to price discriminate,
effectively extorting higher payoffs from firms with higher willingness to bribe (as shown by
Svensson 2000). Furthermore, if public servants exercise discretion, they may artificially
increase the burden on firms in an attempt to extort a larger proportion of their profits. In
doing this, they must take account of the firms’ ability to pay or they may simply drive them
out of the market and into the informal economy. Highly profitable firms are more profitable
to extort in that context than those in competitive markets.
Source: Authors.
For example, in Korea after a department store collapsed in 1995, it was revealed that the
contractors had used substandard concrete and that city officials had taken bribes to allow the
violation of safety rules.42 In Turkey, after earthquakes destroyed many buildings in late June 1998,
construction deficiencies were revealed. Government-built schools and hospitals were especially
hard hit, leading many people to suspect that building inspectors and other government officials had
been corrupted.43 In Bangladesh, agarment factory collapsed in 2013, killing 1,127 people; a follow-
up report found that the factory had been “constructed with substandard materials and in blatant
disregard for building codes,” blaming both the mayor and the building’s owner and inferring
bribery.44 A 7.9 earthquake in China on May 12, 2008, caused approximately seventy thousand
deaths, including those of 5,335 children, when “thousands of classrooms collapsed while buildings
around them remained intact.”45 Corruption apparently had allowed contractors to circumvent
building codes; some allege that contractors embezzled and sold some of the materials destined for
the schools.46 Despite promises of an inquiry, however, the only related arrests were of parents
demanding accountability.47 These allegations will sound familiar to anyone knowledgeable about the
corruption of inspectors of construction projects in New York City (Lagunes and Huang 2015) or of
housing authorities in Russia (Harding 1995; Anechiarico and Jacobs 1996: 26–8). Ambraseys and
Bilham (2011) point out that in 2009, earthquakes of identical magnitude (7.0) occurred in Haiti (near
the bottom of the Corruption Perceptions Index [CPI]) and New Zealand (at the top). The results:
more than 300,000 dead and nearly 100,000 houses destroyed in Haiti48 – 60% of administrative
buildings collapsed and 25% of civil servants died49 – but there were no earthquake-related deaths in
New Zealand. Indeed, in the same year, an 8.8-magnitude earthquake hit Chile (one of the least
corrupt countries in Latin America), with only “hundreds” of deaths.50 The authors calculate expected
corruption levels based on GDP per capita and find that countries that are more corrupt than expected
account for 82.6% of earthquake fatalities between 1995 and 2010 (Ambraseys and Bilham 2011). Of
course, the greater death toll cannot be entirely attributed to corruption. One would expect that the
death toll would be high in a very poor country, even one with low levels of corruption, simply
because people are living in dense and poorly constructed housing. However, the high rates of
collapse of government buildings, such as schools in China and Haiti and administrative buildings in
Haiti, lend credence to the allegations of corruption.
In Mexico payoffs have been common in regulatory agencies that issue permits and licenses
(Morris 1991: 51; KPMG 2008: 24); micro-, small- and medium-sized enterprises reported paying
5.1% of their income to low-level public servants, while large firms paid 3.3% (Centro de Estudios
Estratégicos 2002).51 In Kenya companies connected with the president enjoyed a regulatory
advantage.52 In Indonesia connections to Suharto were important (Robison 1986), and less well-
connected small businesses experienced high bribery demands. One study claimed that small
entrepreneurs made payments that range from 5% to 20% of annual gross income (Sjifudian 1997). In
Pakistan control over the implementation of environmental rules was viewed as a source of rents
(Burki 1997: 16–17). In Colombia, a state program to reimburse hospitals and patients for medication
not covered on the national pharmaceutical lists provided rent-seeking opportunities for
pharmaceutical companies, patients, and hospitals (Hussmann and Rivillas 2014).
China offers an illustrative case, in which the ruling party controls regulation as well as
publicity. When consumers complained of the quality of infant formula in 2008, the reports went
unanswered and the state-controlled media failed to report on it until after the Beijing Olympics.
Dairy farmers had been watering down their milk to boost their profits, adding melamine to increase
protein levels artificially. Inspectors at the infant formula company Sanlu took bribes to overlook the
practice. The melamine in the formula caused kidney stones, resulting in six deaths and health
problems for more than 300,000 children. In this case, the presence of foreign investors did not make
a difference to the company’s behavior: the New Zealand company, Fronterra, which owned 43% of
the stock, voted to issue a recall as soon as the problem was brought to the board’s attention, but was
overruled by the majority. The problem was finally addressed (some believe inadequately) when
New Zealand’s government reported the issue to Beijing. Twenty-two companies were found guilty of
using tainted milk; two executives were executed; and nineteen were sentenced to prison.53
An after-effect of this episode was a broad investigation of possible corruption in China,
especially involving foreign firms. In 2014 the British pharmaceutical company GlaxoSmithKline
was found guilty of bribing doctors and hospital administrators in China to buy and prescribe their
drugs, and to pay inflated prices for them. At least $150 million were paid through travel agencies in
cash, travel expenses, and prostitutes.54 In a similar case covering many countries and both
pharmaceutical and “nutritional products,” Pfizer and subsidiaries settled with the U.S. Securities and
Exchange Commission (SEC) for $60 million. “Pfizer China created ‘point programs’ that could be
redeemed for gifts like cellphones and tea sets based on how many prescriptions the physicians
wrote.”55 This type of bribery, together with salaries tied to prescriptions, has led doctors to
overprescribe medicines and procedures in China56 and India.57
Corruption in the medical and pharmaceutical industries is not, however, limited to China, nor,
indeed, to those countries that rank poorly on corruption indices. In 2005, Serono paid a $704 million
settlement with the U.S. SEC for “kickbacks to doctors and pharmacies, illegal off-label marketing,
and sale of diagnostics for the drug that were not approved by the U.S. Food and Drug Administration
(FDA)” (Cohen, Mrazek, and Hawkins 2007: 30). Johnson & Johnson was penalized in 2012 for
bribing doctors in Europe and the United States. The kickbacks in Greece amounted to 20% of each
product’s price.58 Pfizer and its subsidiaries had corrupt customers in Bulgaria, China, Croatia, the
Czech Republic, Italy, Kazakhstan, Russia, and Serbia and Montenegro, earning “aggregate profits of
$16,032,676 as a result of these improper transactions.”59
However, not all cases of regulatory failure can be attributed to outright payoffs. Take the
example of the overloaded Korean ferry that capsized in 2014, killing 304 people (64% of the
passengers).60 The ferry was top-heavy because the owner had installed marble slabs in an art
gallery above deck. This put the ferry overweight and caused it to sit low in the water, and the owners
counteracted the increased weight of the marble by removing much of the ballast water – essential to
keep the boat steady. The substitute captain on duty tried to turn too sharply, causing the ferry to
capsize. The ferry inspectors had been “wined and dined” by the company and are assumed to have
turned a blind eye as a result, but no quid pro quo has been established.
B. Taxes and Tariffs
Next consider taxes and customs duties. Paying taxes and duties is always burdensome. In addition,
customs agents control something that firms value – access to the outside world or to the domestic
market. Thus businesses and individuals may collude with tax collectors and customs agents to lower
the sums collected and expedite services. As a result, revenue collection may be both inadequate and
distributed unfairly. Sometimes the losses are large. In the Gambia, in the early 1990s, foregone
revenue from customs duties and the income tax amounted to 8-9 percent of GDP (six to seven times
the country’s spending on health). Income tax evasion alone was 70 percent of revenue due. Only 40
percent of small- and medium- sized enterprises (SMEs) paid taxes, and many individuals did not file
returns (Dia 1996: 46-47). More recently, in Egypt, 20% of SMEs reportedly paid bribes when
dealing with tax authorities; 49% when passing through customs (Center for International Private
Enterprise 2009: 13). In Pakistan one study estimated that if the leakages caused by corruption and
mismanagement could be reduced by 50%, the tax-to-GDP ratio would increase from 13.6% to more
than 15% (Burki 1997: 16). In New York City, city employees used their computer skills to reduce or
eliminate tax liability for hundreds of property owners. The officials generally collected bribes equal
to 10% of the tax liability eliminated, but sometimes their share was as high as 30%. Using a similar
technique a city water-meter reader collected bribes in return for reducing water bills.61 Meter
readers, tax collectors, auditors, and inspectors are the main participants in this kind of corruption,
which benefits consumers and firms by reducing their bills, and further benefits firms by reducing
their tax or royalty liabilities.
Tax evasion can go along with customs fraud. Thus, differential post-tax prices on cigarettes in
Europe (ranging from €69 per pack for Marlboros in Ukraine to €8.98 in Norway, in June 2008) have
fueled a smuggling industry – in which corrupted customs officials are complicit – involving an
estimated 99 billion cigarettes per year, costing the respective governments as much as €10 billion
annually (Center for the Study of Democracy 2010: 125-126). Import-export specialists take
advantage of differences in tax rates applied to similar products imported to China from Hong Kong,
misreporting goods in order to pay the lower rate (Fisman and Wei 2004). Fisman, Moustakerski, and
Wei (2008) find evidence that nearly a quarter of goods from the U.S. destined for China is routed
through Hong Kong, at least partially in order to take advantage of “specialized agents” who assist in
evading high tariffs.
Taxpayers and corrupt officials divide the savings in taxes and duties. The costs are born by
those taxpayers who are poorer and less well connected, and by the general public in the form of
reduced services and higher nominal tax rates. In Africa, for example, studies of the Gambia,
Mozambique, and Ghana suggest that corruption permits the rich to avoid taxes (Dia 1996; Stasavage
1996). In general, the wealthy tend to engage in Shleifer and Vishny’s (1993) “corruption with theft”
(tax evasion and avoiding fees and fines), while the poor engage in “corruption without theft”
(extorted for bribes above and beyond official fees). Thus corruption makes taxes more regressive
and exacerbates inequality (You and Khagram 2005). Corruption is especially common when nominal
tax rates are very high, as in the transitional states in Eastern Europe and the former Soviet Union (De
Melo, Ofer, and Sandler 1995; Novitzkaya, Novitzky, and Stone 1995; Webster and Charap 1993).
High nominal tax rates lead to bribes and other types of tax avoidance, which lead to higher nominal
rates, even more avoidance, and so forth in a vicious spiral.
The experience of a number of African countries illustrates how corruption affects the collection
of customs duties. Cargo typically sits in sub-Saharan ports three weeks, versus less than a week in
other regions, while customs brokers negotiate tariffs and bribes in non-transparent customs regimes
characterized by asymmetric information. This represents an informal barrier to trade in a world of
falling tariffs and non-tariff barriers (Raballand and Marteau 2014: 35). In the Gambia, underpayment
of customs was facilitated by the lack of clear guidelines and of published tariffs. The extensive
discretion of officials encouraged corrupt payoffs designed to evade tariffs. In a well-working system
tariff rates could have been lower across the board, compared to selective reductions in return for
bribes (Dia 1996: 94-100). In Mozambique in 1995 the customs service collected 49% of the revenue
it would have collected if no exemptions had been given. Customs officials had discretion to grant
exemptions without guidelines. Officials added extra delays, overestimated the value of goods, and
applied higher rates in an attempt to extract payoffs (Stasavage 1996). In Zaire, much of the country’s
output was smuggled out with the complicity of customs officials. Corruption was also pervasive in
evading import duties and controls. In general, higher customs tariffs and non-tariff barriers are
associated with higher levels of customs fraud (Stasavage and Daubrée 1998; Fisman and Wei 2004).
The Mexican case is particularly instructive because it shows how an effort at reform can go
wrong. As we have already noted, when import quotas were eliminated, customs agents were created
to manage border transactions. The customs agent is an independent professional, licensed by the
government; all imports worth more than U.S. $1,000 must pass through a customs agent, who
completes the paperwork and submits it to customs. Other measures were taken to reduce corruption
in customs, such as randomized inspections and the rotation of customs officers to avoid the
establishment of long-term relationships between importers and officers, but customs agents are
perfectly positioned to identify corrupt opportunities and pass them along (for a price) to importers.
(See Box 2.2.) Customs agents in Mexico have been arrested for aiding clients to evade taxes by
importing inputs “temporarily” under maquiladora tax laws, without exporting the final product;62
and for assisting in the import of pirated virgin CDs.63 Customs officers, agents, supervisors, judges,
and firms were implicated in corruption to import vehicles illegally in 2014.64 Massive replacements
of customs officers took place in 2000–165 and 2009.66 Clearly, eliminating the “bad apples” did not
have a lasting effect.
Box 2.2. Corruption in Mexican Customs
The “Government” wants to maximize revenues and minimize illegal imports. The
government hires the customs officers and their supervisors and sets wages, monitoring
efforts, and technology. The customs officers report to the supervisor. The client pays tariffs
to the government but may pay bribes to the officer (or, in some cases, the supervisor) to
reduce or eliminate the tariff by understating the quantity of goods imported or by
reclassifying them. The Certificate of Origin may also be falsified to obtain preferential
NAFTA tariffs. The customs officer pays a portion of bribes collected to the supervisor if
detected or if such a scheme has been established ex ante.
By rotating officers, the government tries to reduce corruption by increasing the
uncertainty involved in finding a corrupt or corruptible officer. As each truck or ship goes
through the port, it may be inspected. The driver has a low probability of being inspected by
the same officer during each trip, so it is difficult to gauge the officer’s reaction to a potential
bribe. Thus, the probability of detection is more uncertain. Enter the intermediary: the
customs agent. By law, all shipments more than U.S. $1,000 must pass through a customs
agent. Unlike an individual truck driver, the customs agent may have multiple contacts per day
with the customs authorities, enabling him or her to develop relationships quickly and identify
corrupt opportunities. This makes the customs agent a potential corruption facilitator. The
client who wants to evade customs regulations may pay for such services. In effect, the
customs agent absorbs part of the bribe that would otherwise go to the customs authorities.
Source: Palifka (2002).
New corrupt opportunities are one of the growing pains of economic and political
transformation and can undermine otherwise promising reforms by reducing their legitimacy and
fairness. A corrupt tax and customs system that favors some groups and individuals over others can
destroy efforts to put a country on a sound fiscal basis and discredit reform. For example,in
Mozambique interviews carried out in 1996 indicated that corruption had grown since the beginning
of reform efforts in 1986. Overall taxes fell from 20% of GDP in 1993 to 17.6% in 1994 with import
taxes falling from 5.1% to 3.9% of GDP (Stasavage 1996). Similarly, anticorruption efforts in
Bolivia in the 1990s had little impact; for example, in the early 2000s a case of outright fraud was
discovered, in which a domestic company used two fictitious companies and falsified export
documents to claim tax refunds on goods that had never existed (Zuleta, Leyton, and Ivanovic 2007:
246, 355).
IV. Illegal Activity and Corruption
People and firms bribe police officers, court clerks, judges, and prison guards to avoid fines, tamper
with evidence, shorten sentences, or get out of jail. They bribe inspectors to overlook violations of
building codes, employee safety, or the employ of illegal immigrants. They bribe customs officers to
allow them to smuggle artifacts, endangered species, people, contraband, and illegal drugs. In short,
over and above violations of regulatory and tax laws, corruption allows people, firms, and
organizations to establish illegal businesses and to break criminal laws.
Illegal activity includes two broad categories: informal and criminal. Informal businesses are
those businesses that would be legal, if only they were registered. Informal businesses usually sell
goods and services that are not prohibited, but by failing to register their businesses, owners avoid
costly registration and permit fees, taxes, regulations, and state-mandated employee benefits. If the
formal sector is highly regulated and riddled with corruption, the informal sector provides an outlet
for those unwilling to pay bribes (Katsios 2006). Sometimes the owners are unaware of the
registration requirement or ignorant of the registration process (United Nations Economic
Commission for Africa 1988: 20). In one study in Mexico, 41% of respondents saw no benefit to be
derived from registration (Rubio 2012: 67–8). The main damage from informal businesses is the loss
of revenue to the state and their failure to conform to regulatory laws.
Criminal business activity, however, involves the sale of prohibited or stolen merchandise or
services, and may involve other crimes such as theft, kidnapping, and murder. In this section, we limit
our discussion to relatively small-scale operations. Organized crime has more far-reaching
consequences and is treated separately in Chapter 9.
Illegal businesses seek to operate securely by paying off inspectors, the police, politicians, and
judges or by permitting them to share in the profits of the illegal businesses. Criminals try to avoid
punishment by bribing police, court clerks, judges, and prison guards. Countless artifacts have been
smuggled out of their countries of origin with the complicity of customs officials or by disguising the
artifacts as something else.67
Such businesses are also especially vulnerable to extortionary demands. Law enforcement
authorities – from the police to prosecutors and judges – can demand payments to overlook criminal
law violations or limit penalties. If the evidence of criminal behavior is clear, such businesses will
be unable credibly to threaten to report corrupt demands. Even if the business is innocent, evidence
may be fabricated or the justice system may be so ineffective that the quality of the evidence is
irrelevant, leaving space for the law enforcement authorities to extort. It is thus difficult to detangle
the aggressor from the victim.
In Russia, “there are fixed prices of bribes for obstructing an investigation (bringing an action)
in a criminal case – US$1,000 to $10,000; for commutation of arrest for pledge or engagement –
$20,000 to $25,000; for decrease of punishment – $10,000 to $20,000 or 20 to 25 percent of customs
duty” (Gilinskiy 2005: 158, citing Sungarov 2000).
Similarly, whenever a business needs to obtain a license to operate, the ability to corrupt
officials to gain approvals for its own operation and to deny them to its rivals yields an obvious
competitive advantage. Labor unions, with or without organized crime connections, can use this
tactic. For example, an official of the Roofers Union in Philadelphia was convicted of bribing an
official of the Occupational Safety and Health Administration to harass nonunion roofing contractors
(United States v. Traitz, 871 F.2d 368, 375 [1989]). In New York, four businessmen paid $22,000 in
bribes to get permits to open adult day-care centers and legislation to block similar centers from
opening for three years.68
When the police accept bribes to overlook illegal acts – or when they use their power to extort
bribes – the rule of law is undermined. In Mexico, it is common to pay bribes to avoid legal
sanctions. When faced with the prospect of a traffic fine or having a car towed (or to recover a car
after towing), 60% of the time or more, a bribe is paid instead. Bribes are also paid to avoid being
detained.69 If drivers are willing to bribe, thieves, rapists, and murderers must be more so. And as
the idea spreads that any run-in with the law can be readily fixed by greasing a palm, people take the
law less and less seriously. This is compounded when the judiciary system is also corrupt. “Court
users pay just to get their case through the system, to influence the outcome of a given case, or to
delay it. Bribes may be paid to the judge, or to assistant staff or lawyers to remove files or get the
case assigned to a particular judge” (Gloppen 2014: 70).
Corruption in law enforcement is especially problematic. According to the GCB, the police
suffer the highest incidence of bribery (31%) of the government services included in the survey
(Transparency International 2013a: 11). Globally the police are perceived as second only to political
parties in terms of corruption; in 36 of the 107 countries surveyed, the police are perceived as the
most corrupt institution, while the judiciary system is perceived as the most corrupt in 20 countries.70
These results are corroborated by the World Justice Project’s Rule of Law Index, which evaluates the
absence of corruption in four branches – executive, legislative, judicial, and police/military – in 99
countries, on a scale from 0 to 1, where a higher score indicates less corruption. In the Rule of Law
Index 2014, the police received an average score of 0.43, while the other three branches score
between 0.54 and 0.60.71
Several factors converge to make police forces especially prone to corruption. Individual police
act in relative isolation, with virtually no direct supervision in their daily activities. (In Klitgaard’s
terms, they have monopoly power, discretion to exercise that power, and minimal accountability
[Klitgaard 1988: 75].) In most countries, the police are poorly paid and have relatively little
education, so they are not well respected and may feel a need to supplement their income. The lack of
respect contributes to an “outsider” mentality and a strong sense of loyalty within the force.72 By the
nature of their work, they come into contact with criminals, sometimes even frequenting the same
establishments (Center for the Study of Democracy 2010: 88). When anticorruption efforts are
undertaken, they are often abandoned once corruption levels fall, while new corrupt incentives
emerge, causing a cycle of resurging corruption in the police.73 Rather than focus on changing these
incentives and the underlying institutions, most anticorruption campaigns blame personal ethics and
fire the “bad apples” who are caught.
Corruption is also problematic in prisons. In New York, a corrections officer at Rikers Island
was sentenced to eight years in prison for accepting three kilograms of cocaine from a prisoner, in
exchange for reducing the prisoner’s sentence in the computer system.74 At the same facility,
corrections officers were arrested for participating in a scheme to smuggle illegal drugs and other
contraband into the prison; payments ranged from $500 to $900.75 A cell phone is worth up to $2,000;
one guard in California admitted to earning as much as $100,000 in one year smuggling in cell
phones. In the United Kingdom, prisoners use smuggled cell phones, from which they “order drugs,
continue running criminal activities and plot escapes. London’s Metropolitan Police estimates that 1
in 10 prison guards in the UK are corrupt” (Center for the Study of Democracy 2010: 46). In
Baltimore, Maryland, the leader of a prison gang bribed and romanced thirteen female guards, who
engaged in money laundering, smuggling, and racketeering in collusion with the inmates.76
V. Potential Benefits of Corruption
Some scholars have constructed economic models where bribes have desirable incentive properties.
For example, payoffs to the managers of queues can be efficient (Lui 1985). The payments give
officials incentives both to favor those who value their time highly and to work quickly. The
provision of telephone services in India in the 1970s illustrates the point. Officially, an egalitarian
norm prevailed, but businesses paid bribes to obtain preferential treatment in placing calls (Rashid
1981).77 Some argue that in developing countries the corruption of tax collectors can be efficient so
long as the government can impose a binding overall revenue constraint (Flatters and MacLeod
1995). The minister sets a revenue target, a nominal tax liability schedule, and the wage rate of the tax
collector. Corruption gives the tax collector an incentive to seek tax revenue, and the government
tolerates bribery so long as the collector turns in an amount equal to the revenue target. Thus, tax
collection operates almost like a tax farming system where the government gives private individuals
the right to collect taxes in return for a fixed payment. The larger the difference between nominal tax
liabilities and the revenue target, the higher is corruption.
The authors of these studies conclude that routine corruption may be tolerable. We disagree.
First, toleration of corruption in an important agency, such as tax collection or the provision of public
utilities, may encourage its spread to other areas, with harmful consequences. Second, the authors
assume that officials have only limited discretion. For example, the tax collector “discovers” the tax
liabilities of citizens and firms. In reality, he or she might “create” tax liabilities as a bribe extraction
device. If firms’ and individuals’ vulnerability to corrupt demands varies, the result is an arbitrary
and unfair pattern of payments.78 The sum of taxes and bribes would vary across taxpayers in a way
that reflects the collector’s leverage, not the underlying tax rules. If taxpayers differ in their
propensity and willingness to bribe and if the tax breaks given in return for the payoffs are not
publicized, the result can be a system based on special favors given to some, but not others. Similarly,
officials may create corrupt opportunities that harm the government. For example, in India telephone
operators moved from expediting calls to failing to bill customers (Rashid 1981: 456–8). In
Baltimore, Maryland, police officers received kickbacks proportional to services at a certain body
shop; the scheme degenerated into an insurance fraud, in which the officers damaged their cars further
before calling for the tow truck.79 In Italy, where long bureaucratic delays are the rule, officials often
ask for bribes just to do their job. As a consequence, the rest of the public suffers even longer holdups
(della Porta and Vannucci 1997a: 525–6).
Third, corruption can contribute to an uncertain business climate. Risk-averse firms pay bribes
to obtain certainty80 (Søreide 2009) – but the certainty may be illusory because they cannot enforce
corrupt deals. Indeed, in such circumstances, corruption is a deluxe version of the Prisoner’s
Dilemma game (see Box 2.3) and an excellent example of the fallacy of composition: individually, at
any given time, paying a bribe may be the optimal choice, but the more such choices are made, the
worse off society is. The externalities are enormous, not only economically but also in terms of rule
of law and trust. These, in turn, increase costs.
Box 2.3. Corruption as a Prisoners’ Dilemma Game
Take the example of waiting in a queue. Suppose that the people in this example are legally
entitled to the benefit (license, public good, or service), which has a dollar value of 10. Each
individual may follow all necessary procedures and wait her turn, or pay a bribe to gain
access more quickly. For simplicity, we consider only two actors: A and B. Suppose that the
initial waiting time has a dollar value of -4. If neither bribes, the payoff (benefit minus cost in
time) is 6. Suppose that A can cut his waiting time in half to -2 by paying a bribe of 1 and
going to the head of the queue, earning a total payoff of 7. Assume that B now has a wait of -6
units, because the first has gotten ahead of her, and receives a payoff of 4. Note that we are
assuming that the bribe does not reduce overall waiting time, but only shifts it from A to B.
However, if both bribe, then the time is not reduced for either A or B, and they both end up
paying the bribe and spending time in the queue, so each receives 5. The result is a Nash
equilibrium in which all players bribe and all suffer higher costs than if nobody bribed. The
payoff matrix does not capture the temporal dimension of queuing, but it does present the
collective action problem facing A and B if they have no credible way to report the bribe
demands or the other’s payoffs.
The corruption dilemma payoff matrix.
In the short term, bribes may enhance efficiency in tax collection or the provision of services,
but difficulties arise in the longer term. Payments made to increase certainty for individual firms
result in a wide variance in conditions across firms. For example, although they present no direct
evidence of corruption, Pritchett and Sethi (1994), using data from Jamaica, Kenya, and Pakistan,
show how higher tariff rates are associated not only with lower proportional collections, but also
with greater variance in the rates actually paid. Nominal tax liabilities are poor predictors of actual
tax liabilities for the firm and for its competitors. For example, in Uganda bribes impede firm growth
more than equivalent tax collections (Fisman and Svensson2007). Individualized attempts to reduce
uncertainty through corruption can, at the level of society, increase uncertainty. As a consequence,
potential entrants will view the economic environment as risky and unpredictable.
There are exceptions. Indonesia under Suharto offers an example in which corruption increased
certainty. The key was that the corruption itself was centralized, thus avoiding competitive or
repetitive bribery. Once a business was “in,” everything ran smoothly. In such a situation, the
confidence inspired by the corruption contributes to its persistence (Lambsdorff 2002). Cases like
this, however, do not arise from the incentives faced by the civil servants, but rather at the highest
levels of government. These cases are treated in Chapter 3, where we will argue that certainty can go
along with entrenched monopoly power and rampant inefficiency.
Ingrained corruption can also hold back state reform. Firms that have benefitted from payoffs
will resist efforts to increase the clarity of rules and laws. Their allies within the state apparatus will
also oppose reform efforts designed to make the economy more open and competitive (Bigsten and
Moene 1996). In short, although bribes can sometimes be characterized as incentive payments to
public officials, a policy of active tolerance will undermine the prospects for long-term reform. It
will also tend to delegitimize government in the eyes of its citizens. Payoffs that are widely viewed as
acceptable should be legalized, but not all “incentive pay” schemes will improve bureaucratic
efficiency. Some may simply give officials an incentive to create more delays and red tape and to
favor the unscrupulous and the well off.
A number of empirical studies have attempted to determine whether corruption may be
beneficial and, if so, under what circumstances. This is sometimes referred to as the “grease the
wheels” vs. “sand the wheels” debate. The origins of this debate date back to the work of Leff (1964)
and Huntington (1968), who argue that corruption enables individuals and firms to overcome
burdensome rules and, thus, fosters economic growth. Scholars have tried to prove or disprove this
“grease the wheels” hypothesis using data that have become available more recently. Some (e.g., Wei
2000; Fisman and Svensson 2007) find that corruption deters investment or firm growth at least as
much as equivalent taxation: it “sands the wheels”. Similarly, Méon and Sekkat (2005) find that
corruption reduces both investment and economic growth, while Anokhin and Schulze (2009) find that
corruption suppresses innovation and entrepreneurship. According to Méon and Weill (2010),
however, when institutions are very poor (especially when the regulatory burden is high), corruption
encourages – or at worst, does not discourage – macroeconomic growth. At least one study (Dreher
and Gassebner 2013) argues that corruption may increase entrepreneurship.
In short, the economic impact of bribes paid to obtain benefits, avoid regulations, and lower
taxes depends upon the efficiency of the underlying programs that are subject to corrupt distortions.
One must also distinguish between short-run benefits and long-term distortions, as well as the benefits
to those who pay bribes and broader social costs. Suppose a state has many inefficient regulations
and levies burdensome taxes on business. Then given the existing inefficient legal framework, payoffs
to avoid regulations and taxes may increase efficiency (Leff 1964; Méon and Weill 2010). Bribes can
overcome excessive regulation, reduce tax payments, and allocate scarce goods (Rashid 1981). Even
if the corrupt “market” has some of the problems outlined in the preceding explanation, the result may
still be superior on efficiency grounds to compliance with the law. This defense of payoffs is
commonly espoused by investors in developing and transition countries. It is a pragmatic justification
that grows out of frustration with the existing legal order. This argument is important because it
attempts to justify corruption to obtain benefits to which one is not legally entitled. Bribers are better
off than they would be in an honest system in which they had to comply with the law.
But are individuals and firms obligated only to obey laws that they judge to be efficient and just?
81 Clearly, in industrialized countries such conduct would not be tolerable. American and European
firms do not generally try to bribe their way out of environmental and health and safety rules in their
own countries or enlist the help of criminals to evade the law. Instead, such firms work to change the
laws, make legal campaign contributions, lobby public agencies, and bring lawsuits that challenge
laws and regulations. One can complain about the importance of wealth and large corporations in the
political life of developed countries, but at least well-documented lobbying activities and campaign
contributions are preferable to secret bribes in maintaining democratic institutions.
Some of these same firms, however, feel less constraint about violating laws in developing and
transitional economies. The United States, with the passage of the Foreign Corrupt Practices Act
(FCPA) in 1977, was the first country to outlaw bribes paid to officials abroad to obtain business,82
but a series of treaties and conventions administered by the Organisation for Economic Co-operation
and Development (OECD), the United Nations, and regional groups has led many countries to enact
similar laws (see Chapter 14). Hence, multinational firms based in those countries face domestic
legal sanctions for their corrupt activities abroad. But the perceived importance of that constraint
suggests that multinationals do not always feel an obligation to obey the law in the developing
countries where they operate, while the cases brought against firms under the FCPA (and other
national laws against the bribery of foreign officials) demonstrate this fact. Figure 2.2 shows the
results of the 2011 Bribe Payers Index (BPI), published by TI. The BPI ranks the likelihood that
companies from 28 leading economies will pay bribes to win business abroad, with a score from 0
(always bribe) to 10 (never bribe).83 Although one can criticize the methodology of the BPI,84 it is
interesting that no country’s firms seem always to be honest85 and, conversely, even firms from
countries with low scores on the CPI (well below the midpoint, on the “always corrupt” side)
receive scores above 6 (better than the midpoint) on the BPI.86 Perhaps firms from highly corrupt
countries are better behaved abroad than at home. Complementing the BPI, the OECD studied all
cases of foreign bribery that resulted in sanctions (due to conviction or settlement) between 1999
(when the OECD Anti-Bribery Convention went into effect) and June 2014, and found that, while
bribes have been paid in a wide variety of countries, they have been sanctioned disproportionately in
the most developed countries. Tellingly, Turkey and Mexico, OECD countries nearer the bottom of the
BPI, have not concluded any cases to date (OECD 2014: 31, figure 19).87 This may be a reflection on
the strength of the justice system in each of these countries, rather than the number of actual cases of
foreign bribery by firms headquartered there.
Figure 2.2. The Bribe Payers Index.
Source: Elaborated with data from Transparency International, Bribe Payers Index 2011. TI data
used with permission.
Survey evidence indicates a wide range of viewpoints among business people. In one study
30.3% of the American managers surveyed stated that it was never acceptable to pay a “consulting”
fee of $350,000 to a foreign official in return for a contract worth $10 million in profits. At the other
end of the scale, however, 6.1% found the payment always acceptable (Longenecker, McKinney, and
Moore 1988). Of course, it is not just the managers of foreign firms who have such beliefs. Domestic
companies often operate in the same fashion.
There are two difficulties with a policy of widespread tolerance. First, one cannot rely on
investors only to pay bribes to avoid inefficient rules and taxes. They will, instead, want to reduce the
impact of all state-imposed burdens, justified or not. Of course, one can construct models in which
the laws on the books are designed to aid politically powerful groups with no public legitimacy
(Stigler 1971; Brennan and Buchanan 1980). Then avoiding the burdens imposed by such laws might
seem a worthy goal. Unless one is a strong libertarian who believes that all state action is
illegitimate, however, such a criterion would be impossible to implement. Should firms or
individuals be able to defend against a charge of corruption with a showing that the law was unjust or
inefficient? Should they be able to justify the bribery of politicians by claiming that the law they
favored will enhance competitiveness? This would put a policy analytic burden on the law
enforcement system that it is ill-equipped to handle in practice and that is illegitimate to impose on
the courts in theory.
Second, it seems strange indeed to tolerate business firms’ judgments that a well-placed payoff
is justified because it increases their profits. Such an attitude can do serious harm in nations
struggling to build a viable state. These states need to develop effective mechanisms that translate
popular demands into law, that provide a credible commitment to the enforcement of these laws, and
that provide legal recourse to those facing extortionary demands. If investors and ordinary citizens
make individualized judgments about which laws are legitimate, the attempt to create state institutions
will founder. Bribery will determine not only which laws are enforced, but also what laws are
enacted. All states, even those that have most successfully curbed the power of special interests,
enact inefficient laws, but no state could operate effectively if individuals could take the law into
their own hands and justify doing so by reference to cost-benefit criteria.
The discussion thus suggests that corruption may be more tolerable, not when it increases the
efficiency of individual deals, but when it is carried out in clearly illegitimate regimes that can make
no claim to popular support. In such countries, even bribes to avoid taxes seem less harmful than in
other contexts, because the fewer resources available to the state, the less powerful it is. Still, costs
do remain. The beneficiaries of corrupt transactions will be a strong constituency against reform
because they will fear the loss of their special advantages. Furthermore, when a reform regime does
take power, its efforts will be made more difficult if corruption has become systemic. Such was the
case in Egypt: Hosni Mubarak was ousted in 2011 after 30 years of corruption and abuse; his
successor, Mohamed Morsi, was elected on a reform ticket but was undermined by vested interests
who paralyzed the economy, resulting in a coup against Morsi in July 2013.88 Similarly, Yemen’s
Arab Spring forced President Ali Abdullah Saleh to step down in 2011, but his successor, President
Abdu Rabbu Mansour Hadi decided to resign – along with his prime minister and cabinet – in 2015
after months of militant protests against corruption and “economic [in]justice.”89 Likewise, attempts
by international organizations to reform Liberian revenue collection and government spending have
had little long-term impact on civil service corruption (Reno 2008). One of any anticorruption
regime’s first tasks must be to change the behavior of corrupt officials, firms, and individuals.
Tolerating individual efforts to circumvent even burdensome laws is not consistent with state
legitimacy.
Conclusions
One defense of bribery focuses on the inefficiency and arbitrariness of many government rules and
regulations. If administered by underpaid and unmotivated public officials, the incentives to pay
bribes are high, and the benefits seem obvious: private firms and citizens can go about their business.
Individual bribes sometimes not only benefit the payer and the recipient, but also enhance overall
efficiency or fairness. The existence of such cases, however, is not a valid argument for tolerating
low-level official corruption.
First, and most obvious, not all bribes have this result. Consider, for example, tax evasion,
violation of environmental rules, certification of unqualified people for public benefits, and impunity
for criminal acts. Corruption undermines the programs’ social-welfare-maximizing intentions in these
cases. Second, if bribes do serve a valid resource allocation function, they should be legalized and
the fees made public. A market based on illegal payoffs is inefficient due to the costs of secrecy and
the self-selection by dishonest or “opportunistic” individuals and firms.
Third, the defense of bribery as an allocative tool is static. It assumes a given set of laws and
public program requirements. Instead, corrupt officials, seeing the financial benefits of accepting
bribes, frequently have the discretion to redesign their activities. They may create scarcity, delay, and
red tape to encourage bribery. They may threaten the reluctant with arrest and criminal prosecution. In
such cases individuals can justify payoffs as a way to avoid greater harms, but the systemic costs are
serious. Furthermore, toleration of corruption in some areas of public life can facilitate a downward
spiral in which the malfeasance of some encourages more and more people to engage in corruption
over time.
Fourth, pervasive corruption undermines the legitimacy of government. Corruption in the
provision of public goods and services and in the imposition of costs casts a cloud over governments
seeking popular legitimacy. Bribery is not a stable, long-term substitute for law reform.
1 For a recent examination of how this occurs, see Acemoglu and Robinson (2012).
2 Cited in Sam Roberts, “Rooting Out Police Corruption,” New York Times, June 29, 2012,
http://www.nytimes.com/2012/07/01/nyregion/books-on-police-corruption-and-woody-guthries-
haunts-in-new-york-city.html (accessed June 13, 2013).
3 The report cites as the source of this figure Jack Bologna, Joseph Wells, and Robert Lindquist,
The Accountant’s Handbook of Fraud and Commercial Crime, Wiley and Sons, 1993.
4 According to the World Values Survey Wave 6 (10-20-2014), 69.3% of respondents in 52

countries think that “someone accepting a bribe in the course of their duties” is “never justifiable”
– this ranges from a low of 28.6% in Rwanda to a high of 87.7% in Azerbaijan and Qatar. At the
other extreme, only 1% considers it to be “always justifiable,” ranging from 0% in Turkey to 3.6%
in Mexico. The mean is 1.82, ranging from 1.26 in Turkey to 4 in the Philippines (1 is “never
justifiable”; 10 is “always justifiable”). Data downloaded from the World Value Survey’s
interactive Online Data Analysis at http://www.worldvaluessurvey.org/WVSOnline.jsp (accessed
August 20, 2014).
5 Data from the Price Reform Group of the Finance and Trade Institute of China’s Academy of
Social Science. Printed in Zhongguo Wujia (China Price), Beijing, October 1990. For an example
see “China’s Paragon of Corruption,” New York Times, March 6, 1998. On corruption in China in
that period see Gong (1993), Hao and Johnston (1995), and Johnston and Hao (1995).
6 See, e.g., AFP, “Venezuela busca frenar contrabando de gasolina hacia Colombia,”
RCNRadio.com, http://www.rcnradio.com/videos/venezuela-busca-frenar-contrabando-de-
gasolina-hacia-colombia-16657 (accessed October 7, 2014).
7 Agencia EFE, “Venezuela incautó 6 millones de litros de gasolina de contrabando en frontera,”

El Espectador, October 4, 2014, http://www.elespectador.com/noticias/elmundo/venezuela-
incauto-6-millones-de-litros-de-gasolina-de-c-articulo-520641 (accessed October 7, 2014).
8 “Yet Another Shock to South Korea’s System,” The Economist, May 24, 1997; “Hanbo Group
Founder Is Jailed for 15 Years,” Financial Times, June 3, 1997.
9 Owen Fay (Al Jazeera), “Nigeria’s Anti-corruption Crusade,” Daily Motion, August 26, 2009,
http://www.dailymotion.com/video/xqf7bd_nigeria-s-anti-corruption-crusade-26-aug-09_news
(accessed October 5, 2015).
10 Foreign exchange rates can also be manipulated by private-sector banks, even when the rates
are free-floating, e.g., traders at several transnational banks manipulated the Libor and Euribor
international interbank interest rates. See “Libor: A Week of Corruption,” The Telegraph, July 1,
2012, http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9368890/Libor-a-week-
of-corruption.html. As we write, at least five leading banks around the world have been fined over
$5 billion in connection with Libor and foreign exchange manipulation, and they may yet face civil
suits. Nathalie Leighton-Jones, “Giant $5.6 Billion Bank Fines Pave Way for Clients to Sue,” The
Wall Street Journal, May 20, 2015, http://blogs.wsj.com/moneybeat/2015/05/20/giant-5-6-billion-
bank-fines-paves-way-for-clients-to-sue/ (accessed June 28, 2015).
11 Transparency International Newsletter, June 1995. “South African Economy in Global Firing
Line,” Financial Times, March 13, 1995, and “Strong Debut for Unified Rand,” Financial Times,
March 14, 1995. According to the March 13 article, however, South Africans still faced tough
controls on taking funds abroad, a situation that could encourage illegal attempts to circumvent the
controls.
12 A testimonial is available at Francisco Toro, “The Myth of the Bs.6.30 Dollar,” Caracas
Chronicles, December 3, 2013, http://caracaschronicles.com/2013/12/03/the-myth-of-the-bs-6-30-
dollar/ (accessed July 18, 2014).
13 Francisco Toro, “How Venezuela Turns Butter Vendors into Currency Manipulators,” New
Republic, March 4, 2014, http://www.newrepublic.com/article/116856/venezuelas-shortage-
basic-goods-15-years-making (accessed July 18, 2014).
14 This result occurred legally in Great Britain during the eighteenth century where many officials
were remunerated by retaining a portion of the fees they collected. Reformers urged a shift to fixed
salaries (Chester 1981: 139).
15 BBC News, “India Chief Minister Resigns Amid War Widow Scam Probe,” November 9, 2010,
http://www.bbc.com/news/world-south-asia-11715855 (accessed July 12, 2014); BBC News
South Asia, “India’s Corruption Scandals,” April 18, 2012, http://www.bbc.com/news/world-
south-asia-12769214 (accessed July 12, 2014).
16 Diallo (2013) asserts that some teachers in Niger have purchased their college degrees.
17 In an interesting experiment, Armantier and Boly (2011) found that higher bribes increased the
incidence of improper grading, while introducing monitoring of teachers decreased such
corruption.
18 “Liberia: Skin-deep Success,” The Economist, September 7, 2013,

http://www.economist.com/news/middle-east-and-africa/21585017-president-keeps-peace-fails-
reduce-graft-skin-deep-success (accessed October 5, 2015).
19 Guadalupe Gloria, “Denuncian abusos en cuotas escolares,” El Norte, August 17, 2014,
http://busquedas.gruporeforma.com/elnorte/Documento/Impresa.aspx?id=1410368-
325&url=http://www.elnorte.com/edicionimpresa/paginas/20140817/interactiva/NLOC20140817-
001.jpg&text=inscripci%f3n&tit=Denuncian+abusos+en+cuotas+escolares#ixzz3B3JYitQz
(accessed August 17, 2014).
20 One couple in Monterrey, Mexico, reported paying MX$1,600 (approximately U.S.$120) at the
beginning of the 2013–14 school year to the superintendent of the school to which their son had
been assigned; without the payment, their son would not be assigned to a classroom (personal
interview by Palifka with Mexican acquaintances).
21 In the case of truck drivers in Indonesia, most bribes were offered voluntarily, but negotiation
was always an option to be exercised by the official (Olken and Barron 2009).
22 Nazif Karaman, “Probe Finds Rampant Corruption in Istanbul’s Fire Department,” Daily Sabah,
October 9, 2014, http://www.dailysabah.com/nation/2014/10/09/probe-finds-rampant-corruption-
in-istanbuls-fire-department (accessed October 9, 2014).
23 John Sullivan and Clifford Levy, “Immigration Service Keeps a Wary Eye on Its Newark
Office,” New York Times, August 18, 1996,
http://www.nytimes.com/1996/08/18/nyregion/immigration-service-keeps-a-wary-eye-on-its-
newark-office.html (accessed October 5, 2015).
24 See, e.g., Randal C. Archibold and Andrew Becker, “Border Agents, Lured by the Other Side,”
New York Times, May 27, 2008, http://www.nytimes.com/2008/05/27/us/27border.html (accessed
October 5, 2015).
25 Transparencia Mexicana, “Índice Nacional de Corrupción y Buen Gobierno Informe Ejecutivo

2010,” http://www.tm.org.mx/wp-
content/uploads/2011/05/INFORME_EJECUTIVO_INCBG2010.pdf (accessed April 18, 2012).
The incidence decreased from 3.9% in 2001 to 1.5% in 2010; this is one of the lowest incidences
of bribery reported by Transparencia Mexicana.
26 “Suma EU otro cargo a Colorado,” El Norte, March 13, 2014.
27 For a documented case in Cameroon, see Transparency International, “Stealing Futures,”

http://www.transparency.org/news/story/stealing_futures (accessed October 5, 2015).
28 Natasya Tay, “AFRICA: Women Traders Confronting Sexual Harassment at Borders,” Inter
Press Service (IPS) News Agency, September 22, 2010, http://www.ipsnews.net/2010/09/africa-
women-traders-confronting-sexual-harassment-at-borders/ (accessed July 13, 2014).
29 Associated Press, “Maryland: Suit Alleges Sex Was Extorted for Repairs,” New York Times,
September 28, 2015, http://www.nytimes.com/2015/09/29/us/maryland-suit-alleges-sex-was-
extorted-for-repairs.html (accessed October 5, 2015).
30 NTV Kenya, “Regional Graft: Transporters Forced to Bribe Police along the Northern
Corridor,” http://www.youtube.com/watch?v=SROvjZ-kEaM (accessed September 24, 2014).
Conversion made using exchange rate published on XE Currency Converter,
http://www.xe.com/currencyconverter/convert/?Amount=1&From=KES&To=USD (accessed
31 Sahara Reporters, New York, “Bus Passenger Killed By Bribe-Seeking Police in Lagos
Buried,” July 27, 2014, http://saharareporters.com/2014/07/27/bus-passenger-killed-bribe-
seeking-police-lagos-buried (accessed September 24, 2014).
32 NTV Kenya, “Corrupt Policemen Perfect the Art of Taking Bribes,”

http://www.youtube.com/watch?v=HVbSQYhgFlg (accessed September 24, 2014).
33 Transparency International, Global Corruption Barometer, “In Detail,”

http://www.transparency.org/gcb2013/in_detail (accessed July 7, 2014).
34 “Bribe Index,” Sunday Times of India, December 17, 1995. E.g., a driver’s license cost 1000–
2000 rupees and installation of an electric meter cost 25,000–30,000 rupees.
35 Conversion made October 23, 2015.
36 Svensson (2000) found this in Uganda, as well.
37 Alejandra López and Alan Miranda, “Reclaman ‘piperos’ paga,” El Norte, June 3, 2014.
38 Kejal Vyas, “Venezuela cumple con Wall Street, pero en casa les debe a muchas firmas,” El
Norte (The Wall Street Journal Americas), February 13, 2014, Negocios 4.
39 The mean is 28.87 days; the median is 16 days. Suriname is an extreme case, followed by
Venezuela (144 days), Brazil (119), Haiti (106), and Brunei Darussalam (101). The remaining
countries require fewer than 100 days, on average, to start a new business. The number of
procedures ranges from 1 (Canada and New Zealand) to 17 (Venezuela).
40 The World Competitiveness Report includes only 148 countries. Notably, very small countries
are underrepresented, and countries in conflict, such as Afghanistan, Iraq, Somalia, and Sudan, are
absent. The bribery index is an average of responses to questions regarding the frequency of firms
paying bribes in relation to imports or exports, public utilities, taxes, public contracts and licenses,
and the judiciary. Thus, note the low R2 value.
41 Buscaglia and van Dijk (2003) also find a correlation.
42 Other Korean examples include an apartment house that collapsed, killing 28 people, and a
bridge in Seoul that fell apart, killing 31. See “Owner, Son Jailed in Fatal South Korea Store
Collapse; City Officials Also Found Guilty of Accepting Bribes,” The Baltimore Sun, December
28, 1995. “Grease That Sticks,” Far Eastern Economic Review, March 23, 1995.
43 John Barham, “Political Aftershocks Rumble on after Turkish Earthquake,” Financial Times,
July 6, 1998.
44 Jim Yardley, “Report on Deadly Factory Collapse in Bangladesh Finds Widespread Blame,”
New York Times, May 22, 2013, http://www.nytimes.com/2013/05/23/world/asia/report-on-
bangladesh-building-collapse-finds-widespread-blame.html (accessed May 23, 2013).
45 Associated Press, “Sichuan Earthquake Killed More Than 5,000 Pupils, Says China,” The
Guardian, May 7, 2009, http://www.theguardian.com/world/2009/may/07/china-quake-pupils-
death-toll (accessed October 4, 2014).
46 Ibid. See also NTDTV, “Poor Construction Reason Schools Collapsed in China Quake,”
http://www.youtube.com/watch?v=ndZU2Q3I_o8 (accessed October 4, 2014).
47 Malcolm Moore, “Parents of Sichuan Earthquake Victims Arrested in China,” The Telegraph,
June 22, 2010, http://www.telegraph.co.uk/news/worldnews/asia/china/7845556/Parents-of-
Sichuan-earthquake-victims-arrested-in-China.html (accessed October 6, 2014).
48 See Earthquake Hazards Program, “Earthquake Information for 2010,”

http://earthquake.usgs.gov/earthquakes/eqarchives/year/2010/(accessed October 6, 2014).
49 Disasters Emergency Committee, “Haiti Earthquake Facts and Figures,”

http://www.dec.org.uk/haiti-earthquake-facts-and-figures (accessed October 6, 2014).
50 See Alexei Barrionuevo and Liz Robbins, “1.5 Million Displaced after Chile Quake,” New York
Times, February 28, 2010, http://www.nytimes.com/2010/02/28/world/americas/28chile.html
(accessed July 21, 2014).
51 According to KPMG (2008: 23), firms in Mexico pay on average 5% of their income to public
servants.
52 Bigsten and Moene (1996: 182); “American, Other Foreign Companies Selling Off Holdings:
Kenya Corruption Overwhelms Investors,” Los Angeles Times, June 25, 1989.
53 See Jim Yardley and David Barboza, “Despite Warnings, China’s Regulators Failed to Stop
Tainted Milk,” New York Times, September 26, 2008,
http://www.nytimes.com/2008/09/27/world/asia/27milk.html (accessed July 21, 2014); Sharon
LaFraniere, “2 Executed in China for Selling Tainted Milk,” New York Times, November 24, 2009,
http://www.nytimes.com/2009/11/25/world/asia/25china.html (accessed July 21, 2014); Andrew
Jacobs, “China to Investigate French Company over Claims of Tainted Formula,” New York Times,
February 12, 2009, http://www.nytimes.com/2009/02/13/world/asia/13milk.html (accessed July
21, 2014).
54 Keith Bradsher and Chris Buckley, “China Fines GlaxoSmithKline Nearly $500 Million in
Bribery Case,” New York Times, September 19, 2014,
http://www.nytimes.com/2014/09/20/business/international/gsk-china-fines.html (accessed
September 26, 2014). The figure was initially reported as $450 million. David Barboza,
“GlaxoSmithKline Accused of Corruption by China,” New York Times, July 11, 2013,
http://www.nytimes.com/2013/07/12/business/global/china-accuses-glaxosmithkline-of-
corruption.html (accessed July 21, 2014) and Peter J. Henning, “Lessons from the Glaxo Case in
China,” New York Times, July 29, 2013, http://dealbook.nytimes.com/2013/07/29/lessons-from-
the-glaxosmithkline-case-in-china (accessed July 21, 2014).
55 Katie Thomas, “Pfizer Settles U.S. Charges of Bribing Doctors Abroad,” New York Times,
August 7, 2012, http://www.nytimes.com/2012/08/08/business/pfizer-settles-us-charges-of-
overseas-bribery.html?adxnnl=1&adxnnlx=1411757554-iVCQR9qBP2bTA4Hr271EYQ (accessed
56 See Rose-Ackerman and Tan (2015) for a fuller analysis of corruption in the purchase of
pharmaceuticals and medical equipment in China.
57 Aditya Kalra, “New Government Vows Clampdown on Healthcare Graft,” Reuters, July 22,
2014, http://in.reuters.com/article/2014/07/22/india-medical-corruption-tv-sting-
idINKBN0FR0KR20140722 (accessed July 28, 2014).
58 Gardiner Harris, “Johnson & Johnson Settles Bribery Complaint for $70 Million in Fines,” New
York Times, April 9, 2011, http://query.nytimes.com/gst/fullpage.html?
res=9F05E6D91339F93AA35757C0A9679D8B63&ref=gardinerharris (accessed September 27,
2014).
59 U.S. S.E.C. v. Pfizer, http://www.sec.gov/litigation/complaints/2012/comp-pr2012-152-

pfizer.pdf (accessed September 26, 2014).
60 Choe Sang-Hun, Martin Fackler, Alison Leigh Cowan, and Scott Sayare, “In Ferry Deaths, a
South Korean Tycoon’s Downfall,” New York Times, July 26, 2014,
http://www.nytimes.com/2014/07/27/world/asia/in-ferry-deaths-a-south-korean-tycoons-
downfall.html (accessed July 29, 2014).
61 Lynda Richardson, “29 Arrested in Tax Fraud Scheme Described as New York’s Largest,” New
York Times, November 22, 1996, http://www.nytimes.com/1996/11/22/nyregion/29-arrested-in-
tax-fraud-scheme-described-as-new-york-s-largest.html (accessed October 7, 2015).
62 José Reyez, “La corrupción borra fronteras,” Revista Contralínea (n.d.),

http://www.contralinea.com.mx/c17/html/sociedad/la_corrupcion.html (accessed October 7,
2015). Maquiladoras are assembly plants that import much of their inputs and export their final
products.
63 Organización Editorial Mexicana, “Detienen a empresario de Laredo y a agente aduanal por

importación ilegal,” El Sol De México, May 7, 2008,
http://www.oem.com.mx/elsoldemexico/notas/n689444.htm (accessed October 7, 2015).
64 “Corrompen al SAT por autos chuecos,” El Norte, July 7, 2014.
65 José Reyez, “La corrupción borra fronteras,” Revista Contralínea (n.d.),

http://www.contralinea.com.mx/c17/html/sociedad/la_corrupcion.html (accessed October 7,
2015).
66 Marc Lacey, “Mexico Puts New Officers on the Job at Customs,” New York Times, August 16,
2009, http://www.nytimes.com/2009/08/17/world/americas/17mexico.html (accessed October 9,
2015).
67 Fisman and Wei (2009) use mismatches between registries of exports from the country of origin
and imports to the United States to detect smuggled art and artifacts; they find that this smuggling
index is correlated with corruption (the CCI) in the country of origin. For an account of how
artifacts are smuggled (corruption and subterfuge are commonly used in the transport and sale of
artifacts), see Barry Meier and Martin Gottlieb, “LOOT: Along the Antiquities Trail; An Illicit
Journey Out of Egypt, Only a Few Questions Asked,” New York Times, February 23, 2004,
http://www.nytimes.com/2004/02/23/world/loot-along-antiquities-trail-illicit-journey-egypt-only-
few-questions-asked.html (accessed November 12, 2014).
Even heads of state have smuggled artifacts. See The Associated Press, “Tunisia: Ex-President
Is Convicted,” New York Times, July 4, 2011,
http://www.nytimes.com/2011/07/05/world/africa/05briefs-Tunisia.html (accessed August 13,
2014). For a treatise on smuggling throughout history, see Karras (2010).
68 See Benjamin Weiser and Marc Santora, “In 2nd Alleged Bribe Scheme, a Legislator Was in on
the Case,” New York Times, April 4, 2013,
http://www.nytimes.com/2013/04/05/nyregion/assemblyman-eric-stevenson-is-accused-of-taking-
bribes.html (accessed July 29, 2014) and Benjamin Weiser, “Assemblyman From the South Bronx
Is Convicted on Bribery and Extortion Charges,” New York Times, January 13, 2013,
http://www.nytimes.com/2014/01/14/nyregion/assemblyman-from-the-south-bronx-is-convicted-
on-bribery-and-extortion-charges.html (accessed July 29, 2014).
69 Transparencia Mexicana, “Índice Nacional de Corrupción y Buen Gobierno Informe Ejecutivo

2010,” available at http://www.tm.org.mx/indice-nacional-de-corrupcion-y-buen-gobierno-incbg/
70 In some countries, the police or judiciary tied for first place with at least one other institution.
Transparency International, “Global Corruption Barometer 2013,”
http://www.transparency.org/gcb2013/results (accessed November 6, 2011).
71 Calculations from data available at World Justice Project, Rule of Law Index 2014,
http://data.worldjusticeproject.org/ (accessed October 7, 2014).
72 Center for the Study of Democracy (2010: 15) and Clifford Krauss, “Corruption in Uniform:
The Long View; Bad Apple Shake-Ups: A 20-Year Cycle,” New York Times, July 8, 1994,
http://www.nytimes.com/1994/07/08/nyregion/corruption-in-uniform-the-long-view-bad-apple-
shake-ups-a-20-year-police-cycle.html (accessed July 29, 2014).
73 Clifford Krauss, “Corruption in Uniform: The Long View; Bad Apple Shake-Ups: A 20-Year
Cycle,” New York Times, July 8, 1994, http://www.nytimes.com/1994/07/08/nyregion/corruption-
in-uniform-the-long-view-bad-apple-shake-ups-a-20-year-police-cycle.html (accessed July 29,
2014).
74 Bridget G. Brennan, “Correction Officer Sentenced to 8 Years in Prison for Receiving Bribe of
$100,000 in Cocaine,” Office of the Special Narcotics Prosecutor for the City of New York,
September 17, 2013, http://www.nyc.gov/html/snp/downloads/pdf/whitfield_sentencing.pdf. In this
case, the officer made the offer to several inmates in turn; the one who accepted then informed the
authorities, enabling the sting operation (accessed July 29, 2014).
75 Michael Schwirtz, “Officers Charged with Smuggling Drugs onto Rikers Island,” New York
Times, July 29, 2014, http://www.nytimes.com/2014/07/30/nyregion/officers-charged-with-
smuggling-drugs-onto-rikers-island.html (accessed July 29, 2014).
76 Madison Gray, “Racketeering, Smuggling, Sex with Guards: 25 Indicted in Massive Baltimore
Prison Scandal,” Time Magazine, April 24, 2013, http://nation.time.com/2013/04/24/sex-with-
guards-in-baltimore-prison-scandal/#ixzz2RgpXoFqP (accessed October 7, 2014). The gang
leader fathered children with four female guards, who also received expensive gifts, such as
jewelry and cars. Other guards who were involved received prepaid retail cards as payment.
77 According to reports on www.ipaidabribe.com (accessed July 7, 2014), bribes to obtain a

telephone line are still common in India.
78 In Mexico, it is common for traffic officers to stop cars with out-of-state or foreign license
plates, alleging some infraction (speeding – although they do not have radar – or running a red
light), then explain that the law stipulates that the drivers surrender their licenses until the fine is
paid.
79 Theo Emery, “Baltimore Police Scandal Spotlights Leader’s Fight to Root Out Corruption,”
New York Times, May 9, 2012, http://www.nytimes.com/2012/05/09/us/baltimore-police-
corruption-case-tests-commissioner.html (accessed October 8, 2015).
80 Legal and regulatory uncertainty is frequently mentioned by business people interviewed in

surveys in developing countries. See, e.g., Economisti Associati (1994), Webster (1993a, 1993b),
and Webster and Charap (1993).
81 As Henry David Thoreau (1993: 7) wrote, “Unjust laws exist: shall we be content to obey them,
or shall we endeavor to amend them, and obey them until we have succeeded, or shall we
transgress them at once?” He wrote this essay, “Civil Disobedience,” while imprisoned for
refusing to pay his taxes, an act of protest against the U.S. invasion of Mexico.
82 The act is the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78m(b) & (d)(1) & (g)-(h), 78dd-1,
78dd-2, 78ff (a)(c) (1988 & Supp. IV 1992). For a review of the case law see Bixby (2010) and
Thomas (2010).
83 See Transparency International, “Bribe Payers Index,” http://bpi.transparency.org/ (accessed

October 7, 2015).
84 The BPI is a perception survey in which firm executives are asked how frequently they believe
that firms from each of a list of 28 countries (in the 2011 edition) use bribery to obtain contracts or
permits. The 28 countries included are, logically, countries with a large foreign investment
presence in the world. For this reason, small countries – both the very corrupt and the very clean –
are not included. As a perception survey, it is subjective and easily swayed by prejudice and the
media.
85 Søreide (2006) documents that even Norwegian firms engage in corruption, especially abroad.
(Norway is consistently considered one of the least corrupt countries in cross-country surveys.)
86 This observation holds, and is more meaningful, if we use the GCB’s measure of the perceived
corruption in the business sector rather than the CPI. In the 2013 edition of the GCB, the
business/private sector scored 3.3 out of 5, where 5 represents a perception that corruption is “a
very serious problem” in the sector. See Transparency International, Global Corruption Barometer
2013, http://www.transparency.org/gcb2013/in_detail (accessed October 7, 2015).
87 The full sample of cases is limited to those cases that ended in sanctions. Sanctions were
imposed following either settlement (69%) or conviction (31%). There is no information on cases
that ended in acquittal. The data are subject to selection bias, and are especially dependent on
detection. In 31% of the cases, the case was self-reported to the authorities; of these self-reported
cases, more than 60% were discovered through internal audits or due diligence; another 17%
through whistle-blowers (OECD 2014: 15–17, figures 3 and 5). Where the rule of law is weaker,
and especially where the justice system is dysfunctional, firms may be less willing to self-report.
Furthermore, firms with weak internal controls and negligible whistle-blower protection are
unlikely to discover corrupt acts.
88 Ben Hubbard and David D. Kirkpatrick, “Sudden Improvements in Egypt Suggest a Campaign to
Undermine Morsi,” New York Times, July 10, 2013,
http://www.nytimes.com/2013/07/11/world/middleeast/improvements-in-egypt-suggest-a-
campaign-that-undermined-morsi.html (accessed September19, 2014).
89 Shuaib Almosawa and Rod Nordland, “U.S. Fears Chaos as Government of Yemen Falls,” New
York Times, January 22, 2015, http://www.nytimes.com/2015/01/23/world/middleeast/yemen-
houthi-crisis-sana.html (accessed October 7, 2015).
3
Corruption in Procurement and
Privatization
◈
Government contracts, concessions, and the privatization of public assets are often more lucrative
than similar private-sector deals. Corruption can allocate these scarce and valuable benefits.
Kickbacks at the highest levels of government may corrupt the bidding process in public tenders and
privatization processes and hence can affect the cost and quality of major one-of-a-kind infrastructure
projects and the benefits that flow from concession contracts and the sale of key state assets. Such
“grand corruption” transfers monopoly rents to private investors, in exchange for payoffs to elite,
corrupted officials who receive a share of the profits in the form of kickbacks (Moody-Stuart 1997).
It can have a major impact on government budgets, on a country’s growth prospects, and on the
distribution of the gains from government programs and investments. This type of corruption is
apparently quite common. In a 2012 survey of three thousand business executives in 30 countries,
27% believed that they had lost a government contract in the previous year because their
“competition” had paid a bribe to obtain the contract; the responses ranged from 2% in Japan to 50%
in Malaysia.1 Other evidence of serious problems comes from particular countries. In Brazil, for
example, 87% of firms indicated that bribes and nepotism are frequent in government procurement,
more than in any other area studied (Weber Abramo 2004), and in a second survey of firms 62% of
respondents that had bid for public works had faced requests for bribes (Kroll and Transparencia
Brasil 2003: 8).
The deals that interest us the most involve large, multinational corporations operating alone or
jointly with local partners. This is an important class of cases. There is no definitive measure of the
extent and impact of such corruption, but its importance is suggested both by ongoing exposés around
the world and by the salience of the OECD Anti-Corruption Convention (see Chapter 14), which
requires signatories to sanction overseas bribery. The OECD collects data on transnational firms that
were sanctioned in their home countries for paying bribes abroad to get or retain business. According
to their data, 57% of the foreign bribery cases resolved between 1999 and 2013 under the OECD
Anti-Corruption Convention involved public procurement (OECD 2014: 32, figure 20).2 Overall, at
least 60% of the cases involved firms with at least 250 employees (OECD 2014: 21).3 Of course,
small firms and low-dollar-value contracts may simply not be worth targeting for enforcement, so we
do not claim that corrupt deals are particularly concentrated in large, multinational firms. We have, in
fact, already argued in Chapter 2 that bribes may distort the allocation of scarce public benefits and
help determine their quality in a range of day-to-day interactions between the public, local
businesses, and state officials. Kickbacks to obtain routine contracts and concessions can be part of
the ongoing pattern of low-level official corruption – not much different from any type of bribery that
allocates scarce benefits. However, in this chapter we concentrate on corrupt deals that can, by
themselves, affect economic performance and state functioning. Here, we highlight the economic
consequences of grand corruption; subsequent chapters focus on the political implications of
corruption involving elite political and private actors.
Grand corruption is not limited to developing nations dealing with multinational businesses.
Similar scandals are frequent in industrialized countries.4 In Germany bribes were apparently paid to
win contracts worth DM 2.5 billion to build Terminal 2 at Frankfort Airport. According to the public
prosecutor, corruption led to an increase in prices of about 20% to 30%.5 In Italy, before becoming
prime minister, Silvio Berlusconi paid €12 million in bribes to get a law passed that enabled him to
monopolize the airwaves (Center for the Study of Democracy 2010: 161–2). One of the judges in the
Italian Clean Hands anticorruption investigation (begun in 1992) reported that the cost of several
major public construction projects in Italy had fallen dramatically after the anticorruption
investigations of the early 1990s. The construction cost of the Milan subway fell from $227 million
per kilometer in 1991 to $97 million in 1995. The cost of a rail link fell from $54 million per
kilometer to $26 million, and a new airport terminal was estimated to cost $1.3 billion instead of
$3.2 billion (Wiehan 1997). Overall successful bids on public tenders were reported to be 40% to
50% lower in 1997 than five years before (della Porta and Vannucci 1997a: 524).
The U.S. Defense Department has experienced kickback scandals over the years. Recently, the
U.S. Navy faced allegations of kickbacks involving contracts to supply its ships in overseas ports.6
Earlier, Operation Ill Wind, a sting operation of the Federal Bureau of Investigation, led to the
conviction of 54 individuals and 10 corporations for disclosing technical specifications on competing
bids for contracts in return for money and jobs (Noelker, Shapiro, and Kellogg 1997). In another case,
the “kickback” was a job at Boeing subsequent to the official negotiating a $23 billion purchase from
Boeing for the air force. In this case, the procurement official was sentenced to nine months in prison;
the CFO was dismissed, fined $250,000 and sentenced to four months in prison; and Boeing paid
fines in excess of $600 million (Ware et al. 2007: 297, 329).
Corruption in procurement even occurs in international organizations like the United Nations.
For example, a producer of body armor, Armor Holdings, Inc., paid a settlement of almost $16
million over charges of bribing an employee of the United Nations to help the firm subvert the bid
process and obtain contracts to supply the United Nations’ peacekeeping missions between 2001 and
2007.7 As we detail in Chapter 14, there were several irregularities in Iraq’s Oil-for-Food Program,
including corruption in the UN’s purchasing department (Volcker 2006: xxiv).
Furthermore, grand corruption can involve nominally private bodies, such as those that regulate
international sporting events, including the Olympics and the World Cup. Leaving aside match fixing,
national representatives and sports promoters have allegedly bribed the Olympics Committee and
Fédération Internationale Football Association (FIFA) board members to be selected as host
countries. Hosting a major event not only brings tourists and prestige, but also enormous construction
contracts, with the potential for kickbacks.8 Although sports organizations are nongovernmental, they
are subject to national and international law; a 2012 Swiss report on match fixing and corruption in
sports found that both self-regulation and existing conventions had proven insufficient.9 This has
paved the way for tighter legislation;10 Sports ministers from fifteen European countries have signed
the “Macolin Convention” against malfeasance in sports.11 However, the 2015 U.S. case against FIFA
officials suggests the limits of that effort (see Chapter 6).
Discovering and exposing cases of grand corruption is difficult because, as in many cases of
corruption, both those who pay and those who accept payoffs benefit from the corruption. If
corruption is concentrated at the top of government and leaders can intimidate subordinates, there may
be no whistle-blowers forthcoming. Furthermore, the difference between corruption and
incompetence is sometimes subtle (Piga 2011: 149–53), and there may even be a vicious circle
between the two, with patronage or cronyism placing incompetent employees in procurement
positions, possibly with an eye to enabling corruption in public tenders.
Transparency International has estimated that corruption can raise the costs of procurement by as
much as 50%.12 Cost overruns are a clue that corruption may have influenced the choice of
contractor. Specific examples can be found in every country worldwide. Flyvbjerg (2007) finds that
in 20 countries over a 75-year period, the average cost overrun was 44.7% for rail projects, 33.8%
for bridges and tunnels, and 20.4% for road construction; individual projects often run over budget by
several times the original sum approved.13 For example, Boston’s “Big Dig” project, which entailed
building a series of highway tunnels and parks, ran at least 275% over its budget (Flyvbjerg and
Molloy 2011: 84). By comparison, the 2014 Olympic Games in Sochi, Russia, opened with
unfinished support facilities, such as hotels and public restrooms, and ran at least four times the
projected budget, making it the most expensive in Olympics history.14 Figure 3.1 provides a graphic
comparison of these cost overruns.
Figure 3.1. Selected cost overruns.

Sources: Flyvbjerg (2007) cited in Flyvbjerg and Molloy (2011: 83); Engerman and Sokoloff
(2006: 105); calculations based on “Dispute over Costs Halts Panama Canal Expansion,” New
York Times (Reuters), February 7, 2014.
http://www.nytimes.com/2014/02/08/business/international/dispute-over-costs-halts-panama-
canal-expansion.html; and Transparency International, “Major Games: Let Sport Triumph, Not
Corruption,”
http://www.transparency.org/news/feature/major_games_let_sport_triumph_not_corruption.
The problem with this measure is that, although some cost overruns are indeed caused by
corruption, others are the result of unpredictable events, incompetence, and simple miscalculation.
Thus, as most authors who use this methodology are quick to point out, one ought not necessarily to
conflate cost overruns with corruption. Furthermore, Flyvbjerg and Molloy (2011) argue that cost
overruns may be the result of strategic underbidding or manipulation by public officials to gain
approval for their favored projects. However, if that occurs, the practice can provide an opening to
hide corrupt kickbacks, as cost overruns typically require less oversight than the assignment of
contracts.
Furthermore, truly systemic corruption may be incorporated into the contract price so that costs
are inflated before the project begins. One cannot observe the impact of corruption in such cases
unless one can benchmark costs against those incurred in honest polities or, at least, relative to other
deals in same market. Thus, an anticorruption campaign in hospital procurement in Buenos Aires
evaluated each hospital’s contract prices against the city average. The result was a 15% drop in
purchasing prices (Di Tella and Schargrodsky 2003). Corruption that shows up in the initial price has
been documented in many specific cases.15
We begin with the case of procurement and outline the way corruption both raises costs for the
government and distorts the choices of top officials and contracting firms. We then concentrate on the
problems of corruption in the award of concessions and the privatization of state-owned assets. Many
corrupt incentives are similar in the three cases of procurement, concessions, and privatizations, but
we also stress the distinctive features of corruption in each category of grand corruption.
I. Procurement
Some argue that bribery to obtain procurement contracts works like any other auction. However, this
will seldom be true because the very existence of a corrupt system affects the nature of the projects
subject to bid as well as the number of firms willing and able to bid. Both top officials and firms may
modify their behavior in order to maximize overall corrupt benefits from infrastructure projects and
to increase the share that they can appropriate. The result may be a distorted and inefficient choice of
projects up front and of their implementation over time.
Although our focus is on contracts for infrastructure and capital goods, such as armaments, not
all procurement and contracting scandals involve such purchases. Goods that are used up in
consumption are prime candidates for payoffs because it may be difficult ex post to discover whether
or not they actually were delivered. In Malawi, for example, auditors found that millions of dollars of
nonexistent stationary had been “purchased” by the Government Press Fund.16 In Kenya, the
government lost about $1.5 million through irregular drug procurement by the Ministry of Health.17
Grand corruption in procurement arises from the incentives of officials and private business as
they jockey for advantage and divide the gains. The first and simplest case is one in which the basic
parameters of the deal – both cost and characteristics – are known ahead of time, and bribes are used
to give firms a greater share of the net gains. Second, corrupt officials may provide an excessive
budget so that the bribe payments are hidden in the extra funds, which must be provided by domestic
taxpayers both at present and in the future.18 Comparing outputs with inputs, highly corrupt polities
will appear less productively efficient than more honest ones even if the actual production processes
are similar. Thus, Golden and Picci (2005) compare physical infrastructure in the Italian regions to
cumulative public expenditures (controlling for geographic factors that influence the cost of public
works construction). They use this methodology to present a “corruption index” for the 20 regions of
Italy that is essentially a rough measure of the productivity of public spending on basic infrastructure,
such as roads and hospital buildings – in their index the south appears to be generally more corrupt
than the north.
Third, corruption may modify the nature of the project in ways that enrich the corrupt firm and its
public-sector collaborators, hide the illegal payoffs, and create future payoff opportunities. Officials
may also favor firms that have a strong track record as corrupt collaborators, thus limiting
competition. On the other side of such deals, firms may adjust their behavior in an environment where
high-level corruption is the rule. Some firms may simply exit the market, making it easier for the
remaining firms to cartelize and form a bidding ring or otherwise limit competition (on Nigeria see
Ufere et al. 2012). Others may take account of the risks of operating in a corrupt environment by
modifying their investment strategies to limit officials’ ability to extract rents.
In practice, it is difficult to pull apart these disparate effects, but one can locate instances in
which one or another effect seems to dominate. We suppose that the first case will not often arise in
high-level corruption because of the power of top officials to modify the rules of the game. This is
one area where high- and low-level corruption are likely to differ. Many corrupt low-level officials
must take basic program parameters as given. The second case is common. There are numerous
studies of overpriced procurement contracts and of underpriced concessions, land sales, and
privatized firms or other assets. In such cases the winning firm may, indeed, be the most efficient
because it is able to pay the largest bribe, but the benefits to the state are sharply reduced. Even if the
corrupt top officials “get things done,” taxpayers overpay for infrastructure and the treasury receives
too little for giving up valuable resources and assets. The third category of effects includes a large
number of different modifications in state practice. We merely catalogue some of these possibilities
and show how they can distort public choices. We then discuss how the behavior of firms can also
lead to inefficient outcomes as they maneuver around and through demands for corrupt payoffs.
A. The Strategies of Corrupt Top Officials
First, consider the officials’ decision calculus. The impact of high-level corruption goes beyond the
mere scale of public investment and lost revenue for the public budget. Top officials may select
projects and make purchases with little or no macroeconomic rationale. For example, if kickbacks are
easier to obtain on capital investments and input purchases than on labor, rulers will favor capital-
intensive projects irrespective of their economic justification. One empirical study demonstrates that
high levels of corruption are associated with higher levels of public investment as a share of GDP
(and lower levels of total investment and FDI). More corrupt countries spend relatively less on
operations and maintenance and have lower quality infrastructure (Tanzi and Davoodi 1997).19
Corrupt rulers favor capital-intensive public projects over other types of public expenditures20 and
will favor public investment over private investment. They will frequently support “white elephant”
projects with little value in promoting economic development.21 For example, in Spain there has been
so much construction of transportation infrastructure (some of inferior quality) that supply exceeds
demand in many places, resulting in high costs for the government in the form of subsidies. The
winners were politically connected construction firms; the losers are Spanish taxpayers (Bel,
Estache, and Foucart 2014).
The demand for cement is one tip-off. In Nigeria in 1975 the military government ordered
cement that totaled two-thirds of the estimated needs of all of Africa and that exceeded the productive
capacity of Western Europe and the Soviet Union. The price exceeded the international market price
by a wide margin, presumably to make room for kickbacks, and freight companies collected
compensation for having to wait in the clogged Lagos harbor. The cost to Nigeria was $2 billion or
one-fourth of 1975 oil revenues (Lundahl 1997: 40). In Italy the annual per capita consumption of
cement has been double that of the United States and triple that of Germany and Britain. A review of
the “Clean Hands” corruption cases in Italy reveals that many construction projects were poorly
conceived, overpriced, and had little or no justification beyond their ability to produce kickbacks
(della Porta and Vannucci 1997a: 518–19, 523).
For large, capital-intensive projects the time path of net corrupt benefits may be quite different
from the pattern of net social benefits. Suppose, as seems likely, that the benefits of bribery are
relatively more concentrated in the present than those of the overall project. At least some of the
bribes are paid up front, before the project has even begun. Thus, in Nigeria, according to one study,
the standard is that 25% of the bribes are paid up front (Ufere et al. 2012). Even if the rulers and the
populace discount the future at the same rate,22 the rulers will support projects and policies that have
an inefficient time path of net social benefits. For example, with major construction projects, a
country’s leaders will extract bribes in the present and may experience few of the future costs of
shoddy workmanship or an excessive debt burden. If there is no chance of reelection, the leaders may
be long gone by the time these issues become apparent.
Furthermore, corrupt officials may well have a higher discount rate than the country’s citizens.
Even a ruler who has good short-term control over society may not have secure long-term tenure. The
ruler’s very venality may make him or her insecure and subject to overthrow. This insecurity induces
the ruler to steal more, making him or her even more insecure, and so forth. As a consequence, he or
she will have a relatively high discount rate for government projects and will support projects with
quick short-term payoffs and costs spread far into the future. Paradoxically, an active prodemocracy
movement that destabilizes an incumbent autocrat can lead to an increase in corruption and inefficient
rent-generating policies as the ruler reacts to his or her new insecure status.23 In short, corrupt rulers
are likely to support an inefficient time path of social benefits and costs.
B. Investors’ Strategies
Now consider the decision-making calculus of outside investors. The ruler’s corruption introduces an
additional element of uncertainty into the investment climate. Officials may find it difficult to make
credible commitments to stay bought, and the state may be open to domination by criminal interests
that can impose additional costs on legitimate business in the form of demands for protection money.
Lacking credible commitment mechanisms, such as independent law enforcement institutions, corrupt
autocrats may have difficulty convincing investors to make capital investments because they may fear
expropriation or confiscatory tax and regulatory systems. Having paid a bribe in the past, the firm is
vulnerable to extortionary demands in the future up and down the government hierarchy. Its past
corruption makes it subject to blackmail. Even if the ruler does not favor a distorted net benefit
stream and does not discount the future differently from the nation’s citizens, the very existence of
such a person as head of state influences the calculations of investors. The only investors willing to
commit funds may be those with a short-term, get-rich-quick attitude.
C. Nodes of Corruption
In short, officials’ and investors’ interests combine to produce an inefficient time path of public
benefits and costs. The pattern of government contracting and nature of the production functions for
infrastructure are likely to be distorted by systematic grand corruption. The problem is deeper and
more intractable than simple cost inflation to hide kickbacks.
The ruler may favor projects with short-term benefits (for him), and these may be the only type
of project of interest to domestic or multinational investors. The exceptions are countries where an
autocratic ruler has been able to make a credible commitment to stay bought (and stay in power), thus
giving investors confidence. Such countries can experience high levels of investment and growth
although the pattern of investments across sectors is likely to remain distorted. This appears to have
been the case in Libya where Colonel Qaddafi frequently required foreign investors either to pay
“consulting fees” or “signing bonuses” to him or to partner with his sons’ companies. Qaddafi
hoarded cash reserves against the day he might face new sanctions (and reportedly used some of it to
pay mercenaries during his overthrow).24
Indonesia under President Suharto is a case in which many investments, although inefficiently
costly, did, at least, take place. In the later years of Suharto’s regime, however, as the issue of
succession arose, the rent-seeking behavior of Suharto’s children and cronies increased, fueled by
their worries about the future (Schwarz 1994: 133–61; Campos and Root 1996). Fisman and Miguel
(2008) document that news of Suharto’s health problems led to declines in the stock market value of
firms closely connected to his family and associates.
Bribes will be extracted partly from returns that would otherwise flow to the government and
partly from the profits of the winning firm. If the corrupt official has more leverage than the honest
one, he or she will be able to extract a larger share of the profits. In addition, the corrupt official may
be able to structure the deal to maximize the profits available to share between officials and the
bidding firm. In so doing, values may be sacrificed that an honestly negotiated contract would
include.
There are several nodes in the procurement process where corrupt benefits can be created.
Figure 3.2 outlines four stages in which officials and firms can collude to generate corrupt rents:
specification, prebid, bid evaluation, and postbid.25
Figure 3.2. Procurement process.
Source: Authors, based on Ware et al. (2007: 308).
First, firms and officials can select or design projects with lucrative corrupt opportunities even
if they are of little social value. Officials may seek one-of-a-kind projects that are difficult for
outsiders to monitor or evaluate, and seek projects that can generate big payoffs up front that result in
low long-term social benefits. Firms with political connections or insiders in the procurement
process induce officials to underestimate environmental and social impacts or overestimate demand
(Paterson and Chaudhuri 2007: 168–70; Flyvbjerg and Molloy 2011). In Nigeria, for example, firms
reportedly design overpriced projects that are nominally in line with announced development goals,
and then convince government agencies (using bribes and promises of kickbacks) to set aside inflated
budgets for such projects (Ufere et al. 2012). In Spain, due to inordinate overestimation of demand
for freight rail and roads, “[a]ll the concessions awarded since the late 1990s, are on the border of
bankruptcy.” The overconstruction of infrastructure was most likely fueled by Spain’s extraordinary
subsidies to the sector (Bel, Estache, and Foucart 2014: 132–3). Numerous projects all over the
world have either cost much more than forecast or their benefits have fallen far short (Flyvbjerg and
Molloy 2011).
Second, once a project has been proposed, a firm may pay to be included in the list of
prequalified bidders and to limit competition.26 It may also pay for inside information, such as others’
bids, that will help it win the contract.27 For example, in Singapore, a polity with a generally clean
reputation, a senior official of the Public Utility Board was paid to reveal confidential information
about tenders. The case led to the blacklisting of five major multinationals, and the official received a
fourteen-year jail term.28 In Mexico, a contract to provide window blinds for a government high-rise
was won by a bid just under the maximum; other firms claimed that the job could have been done for
half the cost.29 In one Asian country, the winning bid for an urban road construction project was just
$1 under the official – presumably confidential – cost estimate (Ware et al. 2007: 312).
In the extreme, bribes may induce officials to structure the bidding specifications so that the
corrupt firm is the only qualified supplier. In Hungary, for example, a call for bids to purchase 100
cars for the National Tax and Customs authority specified the car’s length to within three centimeters;
the engine and trunk sizes were also designed to eliminate competitors (Jávor and Jancsics 2013). If
such transparent manipulation is not possible, a firm may collude with potential competitors to submit
high bids so that bidding rules are seemingly being followed.
Alternatively, bribery may succeed in circumventing competitive bidding requirements. In the
United States, former Army National Guard officers bribed active officers to avoid competitive
bidding for marketing and advertising contracts. Taking advantage of a law that bypasses competitive
bidding if the contract is awarded to a minority-owned business, individuals in two separate cases
bribed to have contracts awarded to minority-owned businesses, then their own (nonminority)
businesses did the work and received some of the pay (apparently through subcontracting).30 In one
case, $4.5 million in contracts were awarded in exchange for 15% of the profits; in the other, a
$30,000 bribe was paid for a contract worth $3.7 million.31
Some tasks may be intentionally omitted from the specifications, allowing for lower bids. A
10% to 15% “commission” for information that allows bidders to leave tasks out of the contract – and
later submit variation orders for these “unforeseen” tasks, running over the officially awarded budget
– is standard in the petroleum industry (Andvig 1995: 306).
Third, a firm may pay to be selected as the winning contractor among those who submit bids.
Most sealed bidding procedures used for large infrastructure projects award the contract to the
lowest “responsible” bidder. However, in corrupt procurement that condition may be irrelevant
because the bidding firms collude. In other cases, the favored firm marks its envelope discreetly, and
the procurement officer opens it last, “reading” a bid that is lower than all the others. The “winning”
bid is filled in later.
Competitors may collude to rotate contracts at inflated prices, taking turns meeting the
requirements.32 In Hungary:
The typical trick is that your offer will be ranked as the second best because its quality is good
but it is too expensive. One of your friends will win the tender with a cheap offer but
immediately he will declare a withdrawal from the project. Then the second applicant, you, will
do the job. If you pay to Dr. 30%, you buy the whole tender with its all [sic] mechanisms. He
guarantees the votes of the local assembly members to select your firm....
(Jávor and Jancsics 2013: 23)33
Bidding rings in Korea used several methods to determine the winner and the winning price on
projects for the U.S. Army in the 1960s and early 1970s; these included lottery, consensus, and
competitive bidding for the right to win the project at the established price (Klitgaard 1988: 139–43).
Such collusion can occur without any bribes paid to government officials, but, obviously, buying their
complicity can be valuable. Ariane Lambert-Mogiliansky (2011) shows how firms can organize a
cartel and pay off the procurement official to keep the collusive arrangement operating, giving him or
her a share of the excess profits from the project. If a reform simply targets the payment of kickbacks,
the official has less power to extort payoffs, but the firms can still collude to share the market. If
corruption is attacked with no concern for collusion, there may be no social benefits from a
crackdown. An anticorruption drive might simply make the cartel cheaper and more lucrative to
organize, so that the firms still present a united front that forces the state to continue overpaying for
public projects. Therefore, the state must target the risks of corruption and collusion simultaneously –
both in the reform of overall procurement procedures and in the implementation of specific
procurement projects.
Sometimes coordinated bidding is the work of the procurement official providing inside
information: when the difference between the lowest and second-lowest bid is large, the official may
propose that the lowest bidder submit an upward-revised bid before the bid deadline; the firm and the
procurement official share the extra rents generated when the lowest bidder is selected (Ware et al.
2007: 306–7). Andvig (1995) refers to this practice as “uplift.”
In some cases, the winning bidder is a shadow company that does not do the work itself, but
subcontracts to other, nominally competing, companies that collude with the winner, which takes a
percentage of the inflated contract. Sometimes these shadow companies are owned by the public
official responsible for the procurement decision (Ware et al. 2007: 304–5). In the nineteenth-century
United States, for example, it was common for legislators to own or hold stock in transportation and
public works companies (Glaeser 2004).
Of course, firms may try to win a contract using methods that distort competition but fall short of
corruption. An important borderline case is the use of “offsets,” especially in defense procurement.
These are contract provisions that promise to provide specific benefits to the contracting country by
producing some goods and services locally. These may be subcontracts for parts or maintenance that
directly contribute to the fulfillment of the main contract, even though the local supplier may not be
the least-cost firm. However, they also include promises to provide financial and other help to local
businesses with no direct connection to the core of the contract. In defense contracts for specialized
equipment, they can easily become a way to hide corrupt dealings with firms that have strong links to
powerful political figures. To the extent such offsets are substantial and common, they can undermine
competition in the main contract and be as harmful as outright payoffs if they inflate costs and distort
domestic priorities.34
Fourth, once a firm wins the contract, it may pay to get inflated prices, to do “extra” (allegedly
unanticipated) work, or to skimp on quality.35 On the other side of the deal, officials may extort extra
payments from the firm for subsequent regulatory approvals and other benefits. Under a construction
contract, the high briber may anticipate bribing building inspectors to approve work that does not
meet the nation’s safety standards. In fact, the expectation of a long-term ongoing relationship may be
part of the appeal of signing with a corrupt firm in the first place. Alternatively, the corrupt firm may
hold back some promised bribes as a way to guarantee performance by the country’s officials. Thus a
firm might sign a contract to deliver cement to a road-building agency but only pay bribes when
payments are received from the public authority. Frequently, such arrangements take the nominal form
of consulting contracts with payments tied to the receipt of funds under the contract. The “consultant”
may be a government employee or, more commonly, an intermediary.
A winning bidder may make an unrealistically low bid up front and then demand additional
payments ex post or simply fail to deliver. These extra payments may be the deliberate result of the
manipulation of the bid specifications, as we have already explained. The winning contractor might
be the one with the lowest probability of securing a contract elsewhere under competitive conditions.
Here the problem is not overpaying for infrastructure, but rather seeming to underpay in the short run
followed by excess costs ex post. For example, in Naples, Italy, in 2008, the firm that won the bid to
build a waste disposal facility failed to meet the established deadline. “The contract had been won
through unorthodox practices and with a totally unrealistic bid, offering the required service for
extremely low, therefore dubious, prices. The ineptitude of the company contracted led to the
infamous ‘waste emergency’” (Center for the Study of Democracy 2010: 162). In early-nineteenth-
century New York, the Manhattan Water Company exploited loopholes in its franchise to go into
banking rather than water delivery (Glaeser 2004: 149).
Is there anything distinctive about these procurement cases other than the size of the deals? At
one level, they appear analogous to cases in which government disburses a scarce benefit. As before,
systemic corruption can introduce inefficiencies that reduce competitiveness. It may limit the number
of bidders, favor those with inside connections over the most efficient candidates, limit the
information available to participants, and introduce added transactions costs.36 However, the scale of
the corrupt deal and the involvement of high-level officials (and, possibly, politicians) introduce new
concerns. First, if top officials, including the head of state, are concerned primarily with maximizing
personal gain, they may favor an inefficient level, composition, and time path of investment. Second,
investors’ decisions may be affected by the fact that they are dealing with corrupt political leaders.
We turn now to concessions and privatizations. Many of the same issues we have laid out recur
here, so they are treated briefly in what follows, but we also isolate some distinctive features of each.
We conclude with a short section on commercial bribery that involves private firms only.
II. Concessions
Corrupt gains can also be extracted from government concessions that give private firms the right to
exploit resources for a period of time, often on public land. Rulers may create fiscal crises not only
by supporting too many capital projects, but also by failing to obtain adequate returns from
government concessions for natural resources such as hard rock minerals, petroleum, or timber.
Returns that should enter the government budget are instead earned by corrupt officials and private
contractors. The best cure for corruption is not necessarily government exit from that sector, as that
may simply leave the way open for unregulated profit seeking.
Here corruption lowers the revenues earned by the government rather than raising the prices
paid for infrastructure or other goods and services. For example, some countries allegedly have
awarded timber concessions at prices far below market value. Guyana and Surinam in northern South
America and Papua New Guinea and the Solomon Islands in the Pacific Ocean are all said to have
signed very unfavorable contracts with international companies (Environmental Investigation Agency
1996: 5, 9). In Russia, even 20 years post-transition and after several reforms to fight corruption,
forestry concessions were riddled with sales of inside information, collusion among bidders,
conflicts of interest, and unchecked violations of environmental laws (Tulaeva 2014).
Similar incentives to corruption exist in petroleum exploitation and refining, where rents are
extraordinarily high. An Egyptian energy minister allegedly approved a gas supply contract with an
Israeli company at a potential loss of $714 million, in return for kickbacks (Le Billon 2014: 48). The
Libyan government, under Colonel Qaddafi, charged “signing bonuses” of $1 billion to oil companies
in exchange for 30-year leases; he explicitly extorted them to cover the $1.5 billion fine imposed on
Libya for its role in the downing of Pan Am Flight 103.37 President Nazarbayev of Kazakhstan and
his oil minister are said to have received at least $78 million in bribes – channeled through a
“consultant” and Swiss bank accounts – for access to the country’s oil reserves.38 Several companies
settled a case in the United States regarding bribes paid to import drilling rigs, extend drilling
contracts, or influence judges in other countries. In this case, the U.S. subsidiary of Panalpina, a
Swiss freight company, paid nearly $82 million ($11 million disgorgement and $71 criminal fine) for
having paid $27 million in bribes in seven countries, as an intermediary for its clients. Pride
International paid a penalty of $56 million on $800,000 of bribes in Venezuela, India, and Mexico.
Royal Dutch Shell’s penalty for nearly $2 million in bribes in Nigeria was $48 million.39 These oil-
producing countries all rank relatively low on the CPI and CCI, but Andvig (1995) highlights the
common corrupt practices in petroleum procurement in the North Sea (Norway and the United
Kingdom) as well, demonstrating that the corruption in this industry is not necessarily a question of
economic or political development. The French oil company Elf distributed at least €305 million in
bribes around the world – in both developing and developed countries – to secure contracts to import
oil between 1989 and 1993. Elf also made large political contributions at home (McPherson and
MacSearraigh 2007: 200).
Once again we need to ask if the cost of corruption is simply a massive loss of revenue to the
state or whether corruption also distorts production choices and the level of benefits and costs from
exploitation of the resource. To illustrate the responses of private firms when concessionary contracts
are corrupted, consider a logging concession obtained corruptly by a company that out-bribes its
competitors. Suppose, to begin, that the corruption “market” is efficient so that it operates just like an
idealized competitive bidding process and that the corrupt ruler’s rate of time preference is the same
as that of the country’s citizens. Suppose that as a result of corruption, the government obtains less
than fair market value for the resources under its control.40 If corruption does not restrict entry and if
the official cannot affect the size of the concession, the high briber is the firm that values the benefit
the most. It is the most efficient firm that would offer the highest price in a fair bidding procedure.
The only loss is to the government budget so that the state must either levy extra taxes or cut back
public programs. Honest officials, however, receive distorted information about the value of the
concession and may in the future support fewer of them.41 In this simplified competitive case, the
winner is indifferent to whether the concession is won through an honest or a dishonest auction.
Bribes paid do not affect the time path of benefits and costs.
Now consider a firm that has obtained a secure long-term timber concession at a bargain price
even if the bribe is added in. If it operates in the international market, its subsequent actions should
depend upon the market for timber. The fact that it has underpaid for the concession should not affect
its production decisions. It still seeks to maximize profits, and the concession payment is a sunk cost.
If the firm produces to the point where marginal cost equals marginal benefit, the same quantity of
timber should be produced, independent of the price of the concession. The cost of corruption is felt
by the public treasury but no inefficiency has been introduced into the international timber market in
the short run. Even if the total payment is above that expected in an honest system, there should be no
impact.
However, as we noted previously for procurement, the corrupt nature of the deal may give the
firm a short-run orientation.42 There are two reasons for this. First, the concessionaire may fear that
those in power are vulnerable to overthrow because of their corruption. A new regime may not honor
the old one’s commitments. Second, even if the current regime remains in power, the winner may fear
the imposition of arbitrary rules and financial demands once investments are sunk. It may be
concerned that the ruler will permit competitors to enter the market or worry that its contract will be
voided for reasons of politics or greed.43 For these reasons, the corrupt firm with a timber contract
may cut down trees more quickly than it would in more honest countries.44 Like other investors in
risky environments, it may also be reluctant to invest in immovable capital, such as lumber mills, that
would be difficult to take out of the country should conditions change. As a result, exports will have
low value added. Alternatively, investors may install mobile processing facilities. Outside of the
logging sector, electric power producers have built floating power stations on barges. Such stations
have been put in place in several developing countries to make exit relatively inexpensive.45 In short,
both the timing of production and the input mix may be chosen with an eye to the special risk
introduced by the corrupt nature of the system.
Furthermore, corruption will seldom be limited to a one-time payment to top officials. Instead,
the winner may be a firm more willing than others to engage in ongoing corrupt relationships up and
down the hierarchy in order to protect its interests. This firm may not be the most proactively efficient
investor. The corrupt firm may win the initial concession because of its willingness to engage in
downstream payoffs.
The inefficiencies of corrupted concession contracts also extend beyond the firm’s time path of
exploitation and its unwillingness to invest in fixed capital. In addition, corrupt payments may permit
firms to violate environmental, archeological, and social standards. “In the area of agriculture and
rural development, corruption in the forestry sector has arguably the most devastating and long-lasting
impact on the environment and, by virtue of its links to organized crime, to society” (Campos and
Bhargava 2007: 9). Studies of the forestry industry indicate that corrupt payoffs have frequently been
used to enhance the profitability of forestry concessions over and above the price paid to the
government (Roodman 1996).46 Bribes are paid not only to obtain concessions, but also to exceed
permitted logging limits, log outside the concession area, log in protected forests, mislabel logs, and
evade customs duties and other taxes.47 For example, if the timber concession includes a royalty per
log that is calibrated by the type of timber, the firm may pay inspectors to misgrade the logs. It may
also pay to cut down more trees than the concession permits.48 The result has been a 25% reduction
in forest area over the past 50 years and the consequent changes in climate patterns (Magrath 2011:
170). Illegal logging49 is estimated to represent more than half of total production in many countries,
reaching a maximum of 90% in Cambodia, although by sheer volume, Brazil leaves the rest far behind
(ibid.: 173). The rate of deforestation has been shown to be highly correlated with corruption indices
(Barbier 2004; Kishor and Damania 2007; Koyuncu and Yilmaz 2009),50 but is not limited to less-
developed or highly corrupt countries: even in Canada, illegal logging has occurred in 55% of
protected areas (Kishor and Damania 2007: 90). Illegal logging causes severe environmental damage
and loss of biodiversity, as well as loss in revenue via tax evasion; it also affects markets by
depressing the international price for timber products, making legitimate forest exploitation less
profitable (Magrath 2011: 171–2). As Kishor and Damania (2007: 93, italics in original) explain,
“[U]nlike other resources, forests provide a wide range of public benefits (watershed protection,
carbon sequestration, biodiversity protection, and ecosystem resilience) only when they are
preserved; and they provide private benefits (timber rents) principally when they are harvested.”
Several international initiatives51 are attempting to curb deforestation and slow or reverse
climate change. The United Nations has created a program denominated Reducing Emissions from
Deforestation and Forest Degradation (REDD) to subsidize forestry, but even this program is
potentially vulnerable to corruption (Elges 2011; Larmour 2011; Transparency International 2011a).
The World Bank has promoted Forest Law Enforcement and Governance (FLEG) Ministerial
Processes, under which participating countries (organized into regional groups) agree to specific
actions to curb illegal logging and trade in the derived products (Kishor and Damania 2007: 107–8).
Attempts at certification of legal timber products, similar to the Kimberley process in the diamond
industry, however, have been relatively fruitless due to the lack of consumer demand for certified
timber: the price differential does not justify the cost of certification (ibid.: 100).
Regulations that surround the exploitation of forest and other natural resources are particularly
open to corruption because bending the rules will often produce high profits. Examples include
regulations regarding the protection of endangered species, the containment of toxic waste, the quality
of airborne effluence, and “policies on wastewater disposal or on workers’ exposure to chemicals”
(Le Billon 2014: 49). Illegal exploitation of mineral and agricultural resources offers large short-run
payoffs but imposes extraordinary long-run costs on society. Even when civil society is able to
identify and denounce illegal logging or mining, however, governments may be ill-equipped to
reduce, or simply not interested in reducing, such activity. The very profitability of these illegal
activities may encourage high-level officials to benefit personally and to suppress transparency in
government (Williams 2011). A large number of scandals – past and present – involve the
exploitation of mineral resources. Consider just two recent high-profile cases. In Guinea, a very poor
country in Africa, the Simandou iron-ore mining project has been mired in accusations of corruption
for many years. The cost of the project, including the cost of getting the ore to market, is estimated at
$20 billion. A lawsuit alleges that $100 million dollars in bribes were paid to get a concession to
develop part of the site for an overly favorable price. The legal wrangling will go on for many more
years.52 In Congo, a report by an expert panel chaired by former UN Secretary-General Kofi Annan
examined five large mineral deals. It found a gap (favoring the firm) of $1.36 billion between the
price paid and independent assessments of their value between 2010 and 2012.53
The nation’s patrimony may also be sacrificed for a few well-placed bribes. In Peru, private
land developers use “fraud and political connections” to encroach on protected archeological sites,
destroying them in the name of progress and profit.54 Walmart apparently used bribery in Mexico to
obtain permits to build a store on land within the archeological zone of Teotihuacan, one of Mexico’s
most iconic sites. Excavation was undertaken without the legally required supervision by official
archeologists; witnesses saw shards and an ancient wall destroyed.55 In Russia, timber concessions
become de facto privatizations, depriving local communities of traditional mushroom- and berry-
picking areas (Tulaeva 2014).56
III. Privatization
Privatization has slowed since the mass privatization movement of the 1980s and 1990s; a large
proportion of world production and assets still remains in state control. One study reveals that
roughly 10% of the top 2,000 publicy traded firms are state-owned enterprises (SOEs) (Kowalski et
al. 2013), and SOEs that are not publicly traded continue to play a very important role in many
economies and industries. This implies a latent potential for large-scale privatizations at any time. In
particular, as China moves increasingly toward market orientation, and other countries contemplate
privatizing their petroleum or mineral exploitation, privatization may reemerge as an important area
for corruption.
Privatization can reduce corruption by removing certain assets from state control and converting
discretionary official actions into private market-driven choices.57 However, the process of
transferring assets to private ownership is fraught with corrupt opportunities.58 Many corrupt
incentives are comparable to those that arise in the award of contracts and concessions. Instead of
bribing a parastatal to obtain contracts and favorable treatment, bidders for a public company can
bribe officials in the privatization authority or at the top of government (Manzetti and Blake 1996;
Manzetti 1999). Bribes may be solicited for inclusion on the list of prequalified bidders, and firms
may pay to restrict the number of other bidders. However, other corrupt incentives are more specific
to the privatization process. Three factors seem particularly important.
First, when large state enterprises are privatized, there may be no reliable way to value their
assets, and the tax and regulatory regime that will prevail ex post may be poorly specified. The
uncertainties of the process create opportunities for favoring corrupt insiders by giving them
information not available to the public, providing information early in return for payoffs, or giving
corrupt firms special treatment in the bidding process. Even the assessment process can be corrupted
by compliant insiders or by outside assessors with close ties to the multinationals seeking to bid on
the assets.59In extreme cases no assessment is made, and no auction occurs. The firm is simply
awarded to those with the best political connections: “Sales, at unstated prices, have sometimes been
made to dubious purchasers, such as ruling party politicians and others lacking in business
experience” (Nellis and Kikeri 1989: 668).
Consider Brazil under President Fernando Collor de Mello. When it became clear that an ally of
his of was in line to receive a privatized firm, others withdrew their offers (Manzetti and Blake
1996). Collor sought to use market reforms to create a financial empire of his own (Manzetti 1999).
Similar examples come from Argentina, Zaire, Ivory Coast, Thailand, and Slovakia (Van de Walle
1989; Manzetti 1999; Pasuk and Sungsidh 1994).
Weak conflict of interest laws make insider dealing easy. In Argentina several officials who
designed the highway privatization bidding process were on the staff of companies that acquired the
highways (Manzetti 1999). In Venezuela, an American consulting firm organized the privatization of
the state airline in spite of its close ties to the Spanish airline, Iberia (Manzetti and Blake 1996).
Later, Iberia was involved in valuing the airline in spite of the fact that it also planned to bid on the
company and did eventually end up purchasing the airline (Celarier 1996: 65). According to Russia’s
senior prosecutor, the privatization process in that country was undermined by bid rigging by banks
that both arranged and won privatization auctions.60
Second, corrupt officials may present information to the public that makes the company look
weak while revealing to favored insiders that it is actually doing well. The insiders then are the high
bidders in what appears to be an open and aboveboard bidding process. Similarly, corrupt bidders
may be assured of lenient regulatory oversight, something an outsider cannot rely upon. Ex post
evaluations reveal that the privatization was a huge success with the newly private company earning
very high rates of return. Observers in both China and Ecuador have noted cases of this type. In
Venezuela a major bank was undervalued by the minister of national investment amid payoff
allegations (Manzetti and Blake 1996).
Third, a privatized firm is worth more if it retains whatever monopoly power was available to
the public firm. To an economist the retention of monopoly rents undermines the justification for
privatization. To an impecunious state and its bidders, however, assuring monopoly power is in the
interest of both. Thus the conflict between revenue maximization and market competition arises for all
privatization deals. If a state gives lip service to competitive principles, however, it may be unable to
endorse monopolization openly. Corrupt back channel deals can then accomplish that objective, but
with some of the benefits transferred to individuals rather than the government. Luigi Manzetti (1999)
argues that many Latin American privatizations increased, rather than decreased, market
concentration. He argues that the privatization of the telephone company in Argentina and the
electrical utility in Chile were carried out in a way that generated monopoly rents for the winners.
Subsequent regulatory oversight has been weak. Such deals are not inevitable. Apparently, the
privatization of telecommunications in Chile and of electric power in Argentina did encourage
competition and limit monopoly rents (Manzetti 1997).
Although they provide no direct evidence of corruption, John Nellis and Sunita Kikeri (1989:
668) list several examples of special benefits firms may obtain.
In one African country ... the new private cigarette manufacturer received heavy protection, with
confiscatory taxes on competing production and a monopoly on imports. An 11 year monopoly
on the sale of Coca Cola was obtained by a privatized distributing firm, and production limits on
other soft drinks were imposed on competitors. High rates of protection have been granted to a
leased (and thus partially privatized) steel mill in another country.
Even if corruption occurs during the privatization process, the end result can still be a
competitive private firm (or firms) subject to market discipline. But moving a firm into the private
sector does not assure this outcome. First, the firm, especially if it retains some monopoly power, is
likely to maintain a close relationship to the state. After all, outside the former socialist countries,
most public enterprises are in industries with substantial economies of scale and in areas that are
viewed as being closely associated with the national interest, such as public utilities or transportation
(Yotopoulos 1989: 698). Corrupt incentives are high for newly privatized state enterprises dealing
with fledgling regulatory agencies without a track record. Squeezed by a competitive bidding
process, a firm may try to increase its gains ex post by using bribes to secure a favorable business
climate. Bribery of regulators may simply be a substitute for the self-dealing that prevailed under
state ownership. Conversely, Clarke and Xu (2004) find that new firms trying to compete with the
privatized firms in 21 countries in Eastern Europe or Central Asia are more likely to pay bribes
related to utilities. Second, frequently the state only sells off a portion of the state firm, often retaining
control, at least in the early years. Such hybrids may be especially subject to corrupt inside
arrangements (Kaufmann and Siegelbaum 1997: 442). In China, Calomiris, Fisman, and Wang (2010)
find that the stock of partially privatized firms falls when the government announces the sale of the
remaining state share and rises when the sale is cancelled; they conclude that government ties are
valuable because they receive preferential treatment. Private shareholders in a firm that is partially
owned by the state may attempt to shift losses onto the state with the connivance of public officials. In
Italy, for example, a joint public-private venture in the chemical industry seems to have involved just
such a transfer. Bribes were apparently paid both to benefit the private firm when the venture was
formed and to obtain a high price for the same assets when the venture broke down and the firm was
renationalized (Colazingari and Rose-Ackerman 1998). This also appears to be the case in public-
private coalitions in the Spanish transportation sector in which the state is expected to absorb the
losses associated with poor planning or overestimation of demand (Bel, Estache, and Foucart 2014).
Third, the fully privatized firm may continue to engage in corrupt behavior. In many countries,
public utilities have been privatized since the 1980s. Some degree of regulation is usually retained,
which implies incentives for corruption. But deregulation will not necessarily reduce corruption in a
privatized sector, and may even open up new corrupt opportunities. In California in the 1990s,
electricity generation was privatized, while the state retained control of the electrical lines. This
move was intended to improve efficiency and reduce prices to consumers. Instead, the newly created
private companies – most prominently, Enron – lobbied for deregulation, then engaged in fraudulent
behavior designed to increase both the prices of electricity and the value of the companies’ stock. In
essence, “California’s electrical energy market was transformed from a highly regulated, staid
industry operated by conservative public utilities into a corrupt casino run by large energy
companies” (Tillman 2009: 78; see also Gulati and Rao 2007: 154–5). This is a complex case
involving both economic and political corruption, but the bottom line is that executives were
responding to incentives: they were compensated in part with stock options, which gave them strong
incentives to inflate the value of the companies. This same incentive exists in most large corporations,
even if they are not in sectors that have been privatized. As a result, the overstatement of profit or
revenue is not uncommon, and strategically biased assessments of a stock’s value are sometimes
issued (Tillman and Indergaard 2007; Tillman 2009).
Corrupt incentives may mean that the most efficient bidder loses out to a corrupt insider. Even if
the most efficient firm does win, corruption in the tendering process assures that the government
receives too little from the sale. This implies higher taxes, increasing debt, or lower public spending.
Of course, some of these issues may arise even if the industry has not been privatized, that is, if
it has been in the private sector all along. Firms will be willing to pay to increase or maintain their
market power. If they can, they will obtain a local or national monopoly in order to extract monopoly
rents. Conversely, they may pay to gain monopsony power over a natural resource, such as petroleum,
minerals, or key agricultural products. For example, United Fruit Company (and related brands) paid
bribes and engaged in political manipulation in several countries in Central America. By the mid-
twentieth century, it held more land than any other private property owner in Guatemala, Honduras,
and Costa Rica. The vast majority of the land was not cultivated, but rather held to keep out the
competition. United Brands allegedly played an important role in at least one Central American coup
(McCann 1987: 38–9, 43–60).
IV. Corruption and Fraud in the Private Sector
As a greater part of the world’s economy moves into the private sector, corruption that occurs
exclusively between private firms is becoming increasingly important. This monograph concentrates
on corruption that involves the state. However, governments and their employees or representatives
are not necessarily more corrupt than private actors. Indeed, in most of the deals discussed so far,
private individuals and firms are involved as bribe payers. In the cases we will discuss here,
government is not involved except in the prosecution. Furthermore, corruption in the sense of bribes
and kickbacks should be compared with other types of private-sector malfeasance such as fraud and
the excesses of monopoly power. If a reduction in payoffs simply makes it less costly to commit fraud
or establish a monopoly, society will have gained little from an anticorruption crackdown.
One common area for private corruption is purchasing. Suppliers may offer “gifts” to purchasing
agents in exchange for buying from them. These gifts are essentially kickbacks, but unless the firm has
a strict code of ethics, the employee may consider them “free samples” or niceties. In many parts of
Asia, gift giving is a long and valued tradition. Even in Western societies it is common to offer
dinners, vacations, and other lavish gifts to those in a position to affect one’s profits. Such corruption
often results in higher costs for the purchasing firm and higher prices for its customers. Structurally,
such payoffs are identical to bribes paid to public officials to get favors.
In franchise operations, to take another example, franchisees may bribe for preferential
treatment. Thus, some Honda agencies in the United States paid distributors to receive the most
popular colors and models. Apparently, this behavior was tolerated until an economic downturn
caused the payoffs to degenerate into outright embezzlement. Twenty-two U.S. executives (none of
them Japanese) were found to have exchanged $50 million in bribes over fifteen years.61 Such
payoffs are analytically very close to bribes paid by private firms to the state to get preferential
regulatory or tax treatment or to qualify for a public subsidy.
Private-to-private kickbacks likely increase costs for consumers and distort their choices. For
example, some medical sector cases, discussed in Chapter 2, involved doctors or hospital
administrators in private hospitals. Pharmaceutical companies commonly fund doctors’ research,
sponsor conferences, and pay travel expenses and speaking fees. In exchange, doctors may feel
obligated to promote the firms’ drugs and devices as a condition for obtaining future benefits.
“Companies have repeatedly settled allegations that they paid kickbacks to doctors in the United
States to induce them to prescribe drugs for, or implant medical devices in, patients who are unaware
of their doctors’ financial incentives.”62 More blatantly, in India, doctors allegedly received
kickbacks of up to 50% of the value of services, for referring patients to certain private diagnostic
laboratories.63
Sometimes private firms simply engage in fraud without making any payoffs, but such behavior
can be facilitated by private kickbacks. The example of the drug maker Serono illustrates the close
connection between these two types of behavior:
Since 1986, judgments and settlements for fraud under the U.S. False Claims Act have totaled
$12 billion, with most of these being against well-known drug makers. One of the largest of such
settlements was against drug maker Serono, which agreed in October 2005 to pay $704 million
to settle a fraud case involving its product Serostim (a human growth hormone product); the
charges against Serono involved kickbacks to doctors and pharmacies, illegal off-label
marketing, and sale of diagnostics for the drug that were not approved by the U.S. Food and
Drug Administration (FDA)
(Cohen, Mrazek, and Hawkins 2007: 30).
According to the consulting firm KPMG, corporate fraud occurs at the confluence of pressure for
results, opportunity (lack of oversight), and rationalization (KPMG 2010: 13). Most of it is illegal,
even criminal, but not necessarily overtly corrupt in the sense of payoffs to individuals to violate their
legal or employment responsibilities. Thus, just as some firms have organized corrupt bidding rings
for public-sector contracts, others may collude to set prices and divide markets in the private sector.
Additionally, firms may sell substandard products by falsely claiming that they are high quality.
For example, hazelnut and sunflower oils from various non-European countries have been used as
adulterators and sold as Greek or Italian olive oil, in part for the higher prices, and in part to obtain
European Union subsidies to olive oil production.64 Counterfeit or substandard pharmaceuticals are
another important example, estimated to comprise one-quarter of the drug market in poor countries
(Cohen, Mrazek, and Hawkins 2007: 33).
Private quid pro quos are often structured to hide their underlying corrupt nature. For example,
in what might be considered a case of influence peddling and insider trading, when AT&T
complained to Citigroup (where it was an important customer) about an employee’s rating of AT&T, a
Citigroup executive pressured the employee to change the rating from “hold” to “buy” for several
weeks before the initial public offering (IPO) of AT&T wireless; in exchange, the executive then
made a donation on behalf of Citibank to a private school, connected with the employee’s daughter’s
application (Argandoña 2003; Tillman and Indergaard 2007).
Taken together, corporate malfeasance can be very costly. Many investment banks manipulated
the prices of stocks offered in IPOs during the late 1990s and early 2000s, feeding the dot-com boom
(Tillman and Indergaard 2007: 480–1). Corporate scandals between December 2001 (when Enron
declared bankruptcy) and July 2002 (when WorldCom did) are estimated to have cost $35 billion in
GDP the following year; corporate restatements between 1997 and 2002 cost investors more than
$100 billion (Tillman and Indergaard 2007: 476). The subprime mortgage-backed derivatives at the
heart of the 2008 Great Recession in the United States offer another lesson in how private-to-private
collusion and deception can damage the macroeconomy. Complex financial products were poorly
understood by most people, including analysts; rating firms were under undue influence to overrate
these instruments; regulation was absent or lax; and regulators dismissed the warnings voiced by
some insiders (Patterson 2010). Goldman Sachs allegedly attempted to manipulate subprime
derivatives prices in 2007.65 At the same time, at least six banks were involved in manipulating
international interbank interest rates in Europe before and during the financial crisis.66 Five banks
have pleaded guilty to manipulating the value of the U.S. dollar and the Euro on foreign exchange
markets between 2007 and 2013.67 These collusive acts contributed to the worst economic
downswing in the United States and elsewhere since the Great Depression. Of course, they were not
the only relevant factor. Rather, fraudulent behavior often can flourish undetected when times are
good and growth rates high. A slowdown then reveals the underlying violations and these revelations
can fuel a downward spiral into recession.
We concentrate in this book on corruption that occurs at the interface between the public and the
private sectors, but one should keep in mind that other types of malfeasance occur without the
involvement of any public-sector officials.68 Absent government oversight and enforcement, private
actors face multiple incentives to act outside the law and to violate norms of good business practice.
Those who argue that the cure for corruption is a reduction in the role of the state have a narrow view
of corruption and of the broader problem of ethical business practice. Self-dealing can take the form
of public-sector bribery and kickbacks, but it can also show up as commercial fraud and monopolistic
practices that require regulation.
Conclusions
Corruption that involves top-level officials can produce serious distortions in the way government
and society operate. The state pays too much for large-scale procurements and receives too little from
privatizations and the award of concessions. Corrupt officials distort public-sector choices to
generate large rents for themselves and to produce inefficient and inequitable public policies.
Government produces too many of the wrong kind of projects and overspends even on projects that
are fundamentally sound. Even when much-needed projects are completed on time and on budget, they
may be of poor quality and poorly maintained.
Privatization does not necessarily solve these problems, however. Corruption reduces the
revenue-raising benefits of privatization and the award of concessions. Firms that retain monopoly
power through bribery and favoritism undermine the efficiency benefits of turning over state firms to
private owners. Privatized firms may bribe legislators to influence laws or regulatory inspectors to
violate them. If the privatized firm sells to the government, it may overcharge for its products. If it
uses government-owned assets, or buys goods or services from the government, it may underpay for
them. Tax evasion is another risk. Furthermore, corruption may continue among firms operating in
private markets. In the case of concessions, corruption undermines both the government’s aims and
those of society. By underpricing access to natural resources, corrupt deals encourage
overexploitation, environmental damage, and encroachment on indigenous or archeological sites.
Grand corruption of this sort exacerbates the maldistribution of resources and power. Politically
connected firms and those in positions to assist them increase their own wealth and power, while
imposing costs on the rest of society. The projects most likely to be completed well are those that
benefit this elite; those destined to help the poor are more likely to be abandoned or of inferior
quality. Rather than improving medical and education facilities, for example, the government spends
on “white elephant” projects with little or no apparent benefit. The primary beneficiaries are the
government officials and the corrupt firms.
1 See Transparency International, “Putting Corruption out of Business,”

http://blog.transparency.org/2012/09/06/bribery-is-bad-for-business/ (accessed August 13, 2014).
2 The data include these categories: public procurement, customs clearance, other preferential
treatment, favorable tax treatment, license/authorization, access to confidential information, travel
visa, and unknown. Table 11 lists the officials who took the bribes: state-owned enterprise
officials make up 80% of the bribes by value, slightly more than 10% of the cases. The data do not
permit one to isolate corruption in connection with privatization or concession deals.
3 Four percent of firms had fewer than 250 employees; for 36% of the cases, firm size was not
available (OECD 2014). The OECD gathers this data under its Anti-Corruption Convention, which
requires signatories to make overseas bribery an offense under domestic law. We discuss the
Convention in Chapter 14.
4 Of the OECD cases of foreign bribery resolved between 1999 and 2014, at least 43% involved
payments promised, offered, or made to officials in countries that are high or very high on the
Human Development Index (OECD 2014: 30, figure 17). Note, however, that not all of these cases
involve public procurement and that cases ending in conviction or settlement are not necessarily
representative of all cases of bribery or corruption.
5 “German Airport Corruption Probe Deepens: Five Jailed and 20 Companies under
Investigation,” Financial Times, July 2, 1996; “German Corruption Wave Prompts Action,” Reuter
Business Report, September 25, 1996.
6 Christopher Drew and Danielle Ivory, “Contracting Overhaul Is Promised for Navy,” New York
Times, December 20, 2013, http://www.nytimes.com/2013/12/21/us/politics/amid-scandal-navy-
secretary-announces-contracting-overhaul.html (accessed October 10, 2015).
7 U.S. Securities and Exchange Commission, “SEC Charges Armor Holdings, Inc. with FCPA
Violation in Connection with Sales to the United Nations,” July 13, 2011,
http://www.sec.gov/news/press/2011/2011–146.htm (accessed November 12, 2014).
8 Thus, the 2010 Commonwealth Games in India were plagued by poor planning, missed
deadlines, and spending fifteen times the original estimate. BBC News South Asia, “India’s
Corruption Scandals,” April 18, 2012, http://www.bbc.com/news/world-south-asia-12769214
9 “Lutte contre la corruption et les matchs truqués dans le sport: Rapport en réponse au postulat
11.3754 déposé le 28 juin 2011 par la Commission de la science, de l’éducation et de la culture du
Conseil des Etats,” available at
http://www.baspo.admin.ch/internet/baspo/fr/home/aktuell/bundesrat_genehmigt_korruptionsberic
ht.parsys.83108.downloadList.89797.DownloadFile.tmp/28530.pdf (accessed October 2, 2014).
10 Simon Bradley, “Swiss Set to Get Tough over Sports Corruption,” SWI, October 2, 2014,
http://www.swissinfo.ch/eng/swiss-set-to-get-tough-over-sports-corruption/40801520 (accessed
October 2, 2014).
11 Office Fédéral du sport OFSPO, “Les ministre responsables du sport signent la convention
contre la manipulation des compétitions sportives,” September 18, 2014,
http://www.baspo.admin.ch/internet/baspo/fr/home/aktuell/sportminister_unterzeichnen_konventio
n_gegen_wettkampfmanipulation.html (accessed October 2, 2014).
12 Transparency International, “Public Procurement,”

http://www.transparency.org/topic/detail/public_procurement (accessed September 26, 2014).
13 For further discussion of this study, see Flyvbjerg and Molloy (2011).
14 Calculations based on Transparency International, “Major Games: Let Sport Triumph, Not
Corruption,” posted February 5, 2014,
http://www.transparency.org/news/feature/major_games_let_sport_triumph_not_corruption
(accessed February 13, 2014). The International Olympic Committee’s coordinator for the games
commented: “I don’t recall an Olympics without corruption.” Vasilyeva, “Sochi Olympics Have
Been Undermined by Widespread Corruption, Says Russian Critic,” The Huffington Post, May 30,
2013, http://www.huffingtonpost.com/2013/05/30/sochi-olympics-2014-corruption-
russia_n_3359666.html (accessed June 7, 2014).
15 In Nigeria, two projects budgeted at N100 million each, involved kickbacks of N65 million and
N60 million, respectively, a markup of more than 100% (Ufere et al. 2012: 2446, 2448). In
Paraguay, during the regime of President Alfredo Stroessner (1954–89), corruption helped inflate
the cost of the Itaipú dam on the Brazilian border and led to the construction of projects that
exceeded domestic needs (Nickson 1996: 244–45; Straub 2014). One can assume that large bribes
translate into inflated contract costs. Thus, in Indonesia in the 1970s two German companies
reportedly paid bribes to an official of the state-owned oil company, in the amount of 20% of the
value of construction contracts for a steel mill (Schwarz 1994: 138). While he was the head of the
Peruvian National Intelligence Service, Vladimiro Lenin Montesinos Torres received an 18%
kickback on arms purchases and a kickback of $10.9 million for three planes purchased for the
Peruvian air force (Levi, Dakolias, and Greenberg 2007: 402–3). In India, an army general
denounced a bribe offer of $2.7 million in return for purchasing low-quality trucks (BBC News
South Asia, “India’s Corruption Scandals,” April 18, 2012, http://www.bbc.com/news/world-
south-asia-12769214, accessed July 17, 2014). In Mexico, Hewlett Packard had paid $1.6 million
to obtain $6 million worth of contracts with the parastatal oil company, PEMEX (Vania Guerrero,
“Multan a HP por sobornos,” El Norte, April 10, 2014).
16 Transparency International Newsletter 12/95, reporting on a story in Saturday Nation,

October 14–20, 1995.
17 Transparency International Newsletter 6/96, reporting on a story in Daily Nation, May 3,

1996.
18 Corruption in procurement is one of the reasons that governments go into debt, passing the
liability to future taxpayers and administrations.
19 As Tanzi and Davoodi (1998) point out, this may be encouraged by the conventional wisdom
that borrowing to finance infrastructure is permissible, while borrowing to finance day-to-day
operations and maintenance is not. Furthermore, in some cases, maintenance contracts are also rife
with corruption (Paterson and Chaudhuri 2007).
20 Liu and Mikesell (2014) find that more corrupt U.S. states spend more on construction projects
and less on social issues.
21 A study of structural adjustment lending in seven African countries concluded that much
investment spending was of dubious worth. “‘White elephant’ projects, inflated contracts, flight
capital, and other associated ills became rampant before – and eventually contributed to – the
[government fiscal] crisis in each case. A major aim of adjustment programs has been to weed out
these undesirable investments (particularly in the public sector) and to improve overall efficiency”
(Faruqee and Husain 1994: 6).
22 Economists use the term discount rate to refer to the fact that people tend to value a given thing
in the present more than the promise of it in the future. People or societies who are more focused
on the present have a higher discount rate. Hofstede’s cultural dimensions include “long-term
orientation,” which approximates the inverse of a discount rate and ranges from zero in Puerto
Rico (completely focused on the present) to 100 in South Korea. Data downloaded from Geert
Hofstede & Gert Jan Hofstede, “Dimension Data Matrix,”
http://www.geerthofstede.com/media/2583/6%20dimensions%20for%20website%202015%2008
%2016.xls (accessed October 10, 2015).
23 A former minister to Hosni Mubarak, Rachid Mohamed Rachid, was convicted in absentia of
smuggling $71,400 out of Egypt during the unrest that led to Mubarak’s downfall. El Sayed Gamal
El-Din, “Ex-minister of Trade and Industry Gets 15 Years in Prison for Graft,” Ahramonline,
August 20, 2014,
http://english.ahram.org.eg/NewsContent/3/12/108850/Business/Economy/Breaking-Cairo-
Criminal-Court-slaps-former-ministe.aspx (accessed August 20, 2014).
24 Eric Lichtblau, David Rohde, and James Risen, “Shady Dealings Helped Qaddafi Build Fortune
and Regime,” New York Times, March 24, 2011,
http://www.nytimes.com/2011/03/24/world/africa/24qaddafi.html and James Risen and Eric
Lichtblau, “Hoard of Cash Lets Qaddafi Extend Fight against Rebels,” New York Times, March 9,
2011, http://www.nytimes.com/2011/03/10/world/africa/10qaddafi.html (accessed October 12,
2015).
25 For a more detailed list of steps in the process, see Kühn and Sherman (2014: 7).
26 Diaby and Sylwester (2015) find that increased competition for public contracts leads to higher
bribes (as a percentage of sales or of the contract value), as firms bribe to block the competition. In
Zimbabwe collusion between senior ministers in Posts and Telecommunications and a Swedish
telecommunications company may have circumvented local tender board procedures. Kickbacks
were reported to be as high as $7.1 million. Economist Intelligence Unit, Zimbabwe Quarterly
Report, 6/95.
27 Many Italian cases involve payoffs to obtain confidential information about minimum and
maximum price thresholds, average-offer prices, and project evaluation criteria. Corruption in the
divulgence of information is difficult to prove in court, but it is also difficult for a firm to be sure
that it is the only buyer. “Thus, the value of ‘confidential’ information is inversely proportional to
the number of people who possess it” (della Porta and Vannucci 1997b: 9).
28 “Singapore Exposes Tip of Corruption Iceberg,” Financial Times, February 15, 1996.
29 José García, “Gastará Estado $7 millones en accesorios. Pagará Gobierno más del doble de
acuerdo a 4 cotizaciones,” El Norte, June 30, 2014.
30 Tom Ramstack, “Six Charged with Bribery in Grant U.S. National Guard Contracts,” Reuters,
October 1, 2014, http://www.reuters.com/article/2014/10/01/us-usa-crime-nationalguard-
idUSKCN0HQ5D020141001 (accessed October 5, 2014) and Associated Press, “6 Implicated in
National Guard Bribery Scheme,” ABC News, October 1, 2014,
http://abcnews.go.com/Politics/wireStory/implicated-national-guard-bribery-scheme-25898021
31 Federal Bureau of Investigation, “Five Army National Guard Officials and One Civilian
Charged with Bribery,” Washington Field Office, October 1, 2014,
http://www.fbi.gov/washingtondc/press-releases/2014/five-army-national-guard-officials-and-
one-civilian-charged-with-bribery (accessed October 5, 2014).
32 Doree (2004, cited in Wells 2014: 30) argues that collusive bidding of this sort may be
beneficial insofar as it creates stability and reduces the costs of preparing the bid.
33 Dr. 30% is the nickname of an official who handles the corruption tender. The nickname implies
that the official keeps 30% of the winning bid.
34 Carola Hoyes, “Defense Pledges Come Home to Roost,” Financial Times, October 10, 2013;
Hite-Rubin (2015).
35 For a more complete list of corrupt acts in construction procurement, see Global Infrastructure
Anti-Corruption Centre, “Examples of Corruption in Infrastructure,”
http://www.giaccentre.org/documents/GIACC.CORRUPTIONEXAMPLES.pdf (accessed October
10, 2015).
36 Lien (1990a, 1990b) canvasses these difficulties and shows that a corrupt official who
discriminates in favor of some bidders will frequently select an inefficient contractor. See also
Rose-Ackerman’s (1978: 121–32) model of corruption in public contracting.
37 Eric Lichtblau, David Rohde, and James Risen, “Shady Dealings Helped Qaddafi Build Fortune
and Regime,” New York Times, March 24, 2011,
http://www.nytimes.com/2011/03/24/world/africa/24qaddafi.html (accessed October 10, 2015).
38 Ron Stodghill, “Oil, Cash and Corruption,” New York Times, November 5, 2006,
http://www.nytimes.com/2006/11/05/business/yourmoney/05giffen.html (accessed September 23,
2015).
39 See Edward Wyatt, “Oil and Gas Bribery Case Settled for $236 Million,” New York Times,
November 4, 2010, http://www.nytimes.com/2010/11/05/business/global/05bribe.html (accessed
September 1, 2014) and U.S. Securities and Exchange Commission, “SEC Charges Seven Oil
Services and Freight Forwarding Companies for Widespread Bribery of Customs Officials,”
November 4, 2010, http://www.sec.gov/news/press/2010/2010–214.htm (accessed September 1,
2014).
40 Evidence that this frequently happens is presented in Environmental Investigation Agency
(1996: 5, 8). A similar result could occur if suppliers form a cartel. In Indonesia one source
estimates that the government has been losing $500 million a year in royalty revenues on logging
concessions because of the political power of the Indonesian Plywood Association (Schwarz
1994: 140).
41 A similar situation can arise for government contracts. The most efficient firm will be selected
under competitive bribery, but the benefits to the government are reduced. Part of the cost of the
bribe is hidden in the value of the contract.
42 For an example of the short-run orientation of corrupt timber concessionaires in Malaysia see
Vincent and Binkley (1992). A Malaysian company operating in Guyana was reported to be logging
its concession twice as fast as planned (Environmental Investigation Agency 1996: 28). Deacon
(1994: 415) reports studies showing that security of tenure is negatively associated with
deforestation rates, and he points to case studies showing that if property rights are poorly
enforced, deforestation is more rapid. Of course, corruption is only part of the reason why firms
might have a short-run orientation. Deacon (1994) shows that deforestation rates are associated
with political variables reflecting insecure ownership, but the explanatory power of his model is
low.
43 In Malaysia firms involved in the privatization of both electricity and telecoms have
complained that the government has subsequently admitted numerous additional competitors with
strong political links. See Kieran Cooke, “Malaysian Privatisation Loses Allure,” Financial
Times, October 13, 1995. In Liberia, in the mid-2000s, outstanding timber concessions amounted to
more than 250% of Liberia’s “timbered territory” (Reno 2008: 389).
44 Using a panel of tropical countries, Barbier (2004) finds that corruption contributes to
increased deforestation both directly and indirectly through an interaction with the terms of trade.
This model, however, does not identify cause and effect: the corruption variable (CCI) is
contemporaneous with the other variables.
45 Examples are the Puerto Plata barge-mounted power plant in the Dominican Republic and a
similar plant in Ghana. In a 1996 article, one company involved in this business mentioned India,
Haiti, and the Gaza Strip as possible locations for future projects. The company’s president
claimed that “in the long term they’ll be liquid assets like a tanker or a 747.” In addition to
reducing risks in the developing world, U.S.-built projects are eligible for guarantees from the U.S.
Maritime Administration. William M. Bulkeley, “Energy, More Power Plants Are Floating Off
Developing Nations,” Wall Street Journal, May 22, 1996. Currently, a Turkish company,
Karadeniz, is reportedly “the world's only manufacturer of self-propelled floating power stations,”
with a fleet of seven “power ships” providing energy in places like Gaza, Lebanon, and Iraq.
Reuters, “Turkish shipbuilder Karadeniz to send floating power station to Gaza,”
http://www.reuters.com/article/2014/08/19/us-mideast-gaza-turkey-powership-
idUSKBN0GJ0RU20140819 (accessed October 10, 2015).
46 For an overview see the reports from Global Witness, an NGO that has had a particular focus
on illegal logging and corruption especially in Southeast Asia;
https://www.globalwitness.org/campaigns/forests/ (accessed October 10, 2015). Conversely, in
Indonesia, 25% of bribes and informal payments for logging are estimated to be paid for legal
logging activities. This reduces the profitability of those firms from 45% to 15% (Kishor and
Damania 2007: 92).
47 For a more complete list of corrupt acts in the forestry sector, see Kishor and Damania (2007:
90, 99, 109–10),
48 For numerous examples see Environmental Investigation Agency (1996). In Indonesia

environmentalists claim that the country’s tree-felling rules were routinely violated under President
Suharto in part because of the influence of a close associate who headed the Plywood Association
(Schwarz 1994: 140). Tulaeva (2014: 51) documents a case in Russia where concessions to
“prune” forests in nature reserves resulted in clear-cutting and an official reduction in the size of
protected areas. “The government officials consider the apparent reduction of protected territory to
be the result of mistakes in previous surveys.”
49 Deforestation occurs either to sell the timber or to convert the land to agricultural purposes;
sometimes both. See, e.g., Kummer and Turner II (1994). Barbier (2004: 1347) provides data from
the UN’s Food and Agricultural Organization (FAO) showing that 58% of tropical deforestation is
for land conversion.
50 Bulte, Damania, and López (2007) argue that this is due, at least in part, to wealthy landowners
bribing or lobbying to receive subsidies, which in turn encourage the expansion of agricultural land
use rather than forest.
51 See Elges (2011: 141–5) for a summary of several projects; Larmour (2011) for REDD-specific
information.
52 The details are too complex to recount here. For an overview see “Mining and Corruption:
Crying Foul in Guinea,” The Economist, December 6, 2014; Tom Burgis, “Steinmetz Unit Won
Guinea Mining Riches Corruptly, Says Inquiry,” Financial Times, April 10, 2014.
53 “Business in the Democratic Republic of Congo: Murky Minerals,” The Economist, May 18,
2013. The report (Africa Progress Panel 2013) was issued by the Africa Progress Panel, an expert
group, chaired by Annan, that issues annual reports on various topics of concern to Sub-Saharan
Africa.
54 William Neuman and Ralph Blumenthal, “New to the Archaeologist’s Tool Kit: The Drone,”
New York Times, August 13, 2014, http://www.nytimes.com/2014/08/14/arts/design/drones-are-
used-to-patrol-endangered-archaeological-sites.html (accessed October 18, 2014).
55 David Barstow and Alejandra Xanic von Bertrab, “The Bribery Aisle: How Wal-Mart Got Its
Way in Mexico,” New York Times, December 18, 2012,
http://www.nytimes.com/2012/12/18/business/walmart-bribes-teotihuacan.html?_r=0 (accessed
October 10, 2015). For more background, especially on the reaction of Walmart, see David
Barstow, “Vast Mexico Bribery Case Hushed Up by Wal-Mart after Top-Level Struggle,” New York
Times, April 22, 2012, http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-
bribe-inquiry-silenced.html (accessed March 19, 2014).
56 Similar destruction may also occur in less corrupt countries. In Portsmouth, New Hampshire
(U.S.), an eighteenth-century archeological site was sacrificed to build an ice-skating rink. This
seems to be a case of negligence rather than corruption, but the original plans – which specified
digging in a less sensitive area – were changed after approval, causing public outcry. Jeff
McMenemy, “Skating Rink Construction Damages Historical Artifacts,” Seacoast Online,
November 14, 2014, http://www.seacoastonline.com/article/20141114/NEWS/141119406
(accessed March 30, 2015). Palifka thanks Samuel Blake for pointing out this case.
57 For an argument in favor of public ownership (rather than privatization) as a corruption-

reducing policy in U.S. history, see Glaeser (2004).
58 Celarier (1996) provides several examples from Latin America, especially Mexico. Manzetti
(1999) argues that the privatization of public enterprises in Peru reduced corruption in the public
sector, but then goes on to detail several problems in the privatization process including lack of
transparency. His studies of Argentina and Brazil contain similar examples.
59 See Antonia Sharpe, “CVRD Sale Shows Limits of World Bank Adviser Rules,” Financial
Times, December 18, 1995.
60 “Russian Privatisations Face Crime Probe,” Financial Times, February 6, 1996. See also
Celarier (1996: 66).
61 James Benet, “Corruption Is Called Broad in Honda Case,” New York Times, April 4, 1995,
http://www.nytimes.com/1995/04/04/business/corruption-is-called-broad-in-honda-case.html
(accessed March 30, 2015).
62 Gardiner Harris, “Johnson & Johnson Settles Bribery Complaint for $70 Million in Fines,” New
York Times, April 9, 2011, http://www.nytimes.com/2011/04/09/business/09drug.html (accessed
63 Aditya Kalra, “New Government Vows Clampdown on Healthcare Graft,” Reuters, July 22,
2014, http://in.reuters.com/article/2014/07/22/india-medical-corruption-tv-sting-
idINKBN0FR0KR20140722 (accessed July 28, 2015).
64 Tom Mueller, 2007, “Slippery Business,” The New Yorker, August 13, 2007,
http://www.newyorker.com/magazine/2007/08/13/slippery-business (accessed August 19, 2014).
65 Christine Harper and Joshua Gallu, “Goldman Traders Tried to Manipulate Market in 2007,
Report Says,” Bloomberg Business, April 13, 2011,
http://www.bloomberg.com/news/articles/2011-04-14/goldman-traders-tried-to-manipulate-
market-in-2007-report-says (accessed June 3, 2015).
66 Antoine Gara, “Deutsche Bank Pays $2.5 Billion to Settle LIBOR Manipulation Suit,” Forbes,
April 23, 2015, http://www.forbes.com/sites/antoinegara/2015/04/23/deutsche-bank-pays-2-5-
billion-to-settle-libor-manipulation-suit/ (accessed November 24, 2015).
67 Dustan Prial, “Five Major Banks Plead Guilty to Felony Charges over Currency Rigging,” Fox
Business, May 20, 2015, http://www.foxbusiness.com/industries/2015/05/20/five-major-banks-
plead-guilty-to-felony-charges-over-currency-rigging/ (accessed October 10, 2015).
68 A series of documents outline the U.S. Department of Justice’s positions regarding corporate
malfeasance, available at http://www.justice.gov/usam/usam-9-28000-principles-federal-
prosecution-business-organizations (accessed October 10, 2015).
4
Reducing Incentives and Increasing Costs
◈
Corrupt incentives exist because state officials have the power to allocate scarce benefits and impose
onerous costs. Because scarcity lies at the heart of corrupt deals, basic insights derived from
microeconomics can help structure efforts to reduce corruption. Some benefits and costs are not
limited in amount, but public officials decide who gets the benefits or must bear the costs. For those
allocations as well, economic analysis can provide insights. This chapter and Chapter 5 focus on
incentive-based reforms that reduce the benefits or increase the costs of malfeasance. Chapter 6
discusses the criminal law as a deterrent. Here, we consider the following reform options.
program elimination or legalization of payments,
reform of public programs,
reform of procurement systems, and
privatization as an anticorruption tool.
Anticorruption measures must first locate where corruption takes place and identify the
underlying incentives to pay and to accept payoffs. Reform efforts will be inefficient and wasteful
unless the costs of corruption outweigh the costs of reform. We build on the previous chapters to
outline the basic incentives for corruption and to set the stage for an assessment of alternative reform
strategies.
The following incentives encourage corruption on the part of public servants: power over the
distribution of a public benefit or the imposition of a cost, discretionary rather than rule-based
decision making, low wages, lack of professionalism, lack of monitoring, low or ineffective
punishment, lack of accountability, poor transparency, and the proportion of one’s peers who are
(perceived to be) corrupt. On the demand side, the high costs of government policies – both
regulations and taxation; complex or confusing rules; the desire to limit competition; and acquiring
valuable government contracts are all incentives to engage in corruption. In addition, those who
commit crimes may also seek to make payoffs to avoid arrest and prosecution. In short, individuals
will seek to minimize the costs imposed on them by government, while firms try to maximize profits.
It is difficult to estimate the relative importance of each of these factors, but as Klitgaard (1988: 75)
writes, corruption is more likely when a public official has monopoly power over a service
combined with discretion to exercise that power and a lack of accountability. Although an
oversimplification, Klitgaard’s formulation highlights situations in which corruption is likely to occur
when several risk factors occur together. For example, when a traffic officer stops a motorist, there is
probably no other traffic officer nearby to whom the driver can appeal; the officer has the discretion
to let the motorist go with a warning; and there are typically no witnesses. The first condition can be
constrained by partnering officers so that they must collude in order to take bribes, increasing costs
and the risk of discovery. The last condition can be overcome in some cases by smartphones and
social networks; some police departments now require cameras on vehicles and officers. The second
condition – discretion – is essentially eliminated if the officer is removed completely and radar-
activated cameras record traffic violations and issue tickets automatically.
The bureaucratic reform proposals that follow are important, but knowing which types of
corruption are most prevalent in any polity is not always a simple task. Internal audits and
information gathered from insiders can be extremely useful (Klitgaard 1988). In addition, a general
survey, such as the Global Corruption Barometer (GCB) or similar country-level surveys, can
identify areas of concern to citizens and businesses. Reformers can also encourage public reporting
by setting up anonymous whistle-blower hotlines, but they must be able to sort out false or malicious
accusations so that reporting does not produce a witch hunt. In many cases, anticorruption reform
cannot stand alone but needs to be part of a general governance reform effort, involving civil
servants, private firms, civil society organizations, and citizens.
I. Elimination or Legalization
The most straightforward way to limit corruption is to eliminate corruption-laden programs. If the
state has no authority to restrict exports or license businesses, this eliminates a source of bribes.1 If a
subsidy program is eliminated, the bribes that accompanied it will disappear as well. If price
controls are lifted, market prices will express scarcity values, not bribes. In general, reforms that
increase the competitiveness of the economy will help reduce corrupt incentives (Ades and Di Tella
1995, 1997b: 514).
Some public programs work so poorly that they function principally as bribe-generating
machines for officials. Structures that allow officials unfettered discretion are particularly likely
sources of payoffs, especially if citizens and firms have no recourse. In such cases program
elimination is sometimes better than more subtle reform strategies. For example, the licenses and
permissions needed to set up businesses and continue them in operation may have no sound policy
justification. In India, dozens of permits are required to open retail stores. “Stores that want to sell
thermometers, for instance, usually have to obtain approval from a department in charge of weights
and measures.”2 Studies of Africa, Latin America, and Eastern Europe suggest that this is the case in
many countries and that such programs are often very corrupt (Stone, Levy, and Paredes 1992; Bigsten
and Moene 1996; Kaufmann 1997). In Egypt, for example, in a 2009 survey, 42% of small- and
medium-sized enterprises (SMEs) indicated paying bribes to get the necessary permits to open; 29%
paid bribes in the course of doing business (Center for International Private Enterprise 2009). In the
late eighteenth and early nineteenth centuries, incorporation and banking were very tightly regulated
in the United States, resulting in a corrupt system of bank chartering and incorporation. Allowing free
banking and incorporation in New York not only reduced corruption, but also spurred
entrepreneurship (Bodenhorn 2006). Rather than deregulating business entirely, eliminating some
rules and streamlining and clarifying others seems a good policy response.
In many countries, obtaining official documents or paying bills often leads to demands for bribes
or favors. Modern technologies have provided a possible solution. Using websites and public kiosks,
documents such as birth certificates, identification cards, and land titles can be obtained free of
charge; property and income taxes can be paid without human interference. Making appointments for
passports and other official business is also fully automated in some countries. This removes the
discretion once held by the “gatekeepers.”3
Subsidy programs can also become permeated with corruption. Because both bribers and
bribees are better off with a dishonest system, detection will be difficult, and program elimination
may be the only feasible option. For example, an Argentine program in the 1980s to encourage the
growth of underdeveloped regions through export subsidies was very ineffective because of fraud and
corruption. A given product could “be exported several times through southern ports,” and “close-to-
fake” factories were set up in favored regions that did little or no processing of products
manufactured elsewhere. A World Bank–sponsored study concluded that the program was ineffective,
with an estimated 25% of the subsidy lost to fraud (Nogués 1989: 25–7). This seems to be an
example of a program that the government ought simply to eliminate.
One way to reduce corruption is to legalize formerly illegal activities. Frequently, when a
product is outlawed, production continues but with illegal businesses paying off the police to stay in
operation. Then policy makers need to ask if the benefits of illegality outweigh the costs. For
example, after a short experiment with Prohibition, the United States repealed the Eighteenth
Amendment to the Constitution outlawing the manufacture and sale of “intoxicating liquors.” Its time
in force between 1919 and 1933 was a period of widespread illegal production and sale of alcohol
and the corruption of law enforcement officers. The worldwide debate over legalizing drugs turns on
the feasibility of controlling the industry through the criminal law when law enforcement authorities
are vulnerable to corruption.4 Gambling, formerly outlawed in many American jurisdictions, was
also an important source of corrupt receipts for the police. The response in many jurisdictions has
been to turn gambling into a legal business – albeit under heavy state supervision and even, at times,
state ownership.5 In fewer places, legalization and regulation have been applied to prostitution, as
well.6
Sometimes removing one set of corrupt incentives may create new opportunities elsewhere.
Eliminating nine of the ten licenses needed to open a business may just give the remaining official
access to higher bribes. Removing entry barriers for private firms may induce managers to pay off the
police to harass their competitors.7 Deregulating in one area may increase corruption elsewhere. This
will be especially true if a profitable activity must go through a series of “checkpoints.” For example,
a successful effort by the U.S. Agency for International Development to reduce corruption in the
transport of agricultural products in one African country increased corruption in neighboring
countries on the same transport route. The project reduced the number of bribe-extraction checkpoints
established by police and customs officials along onion transport routes in Niger. Unfortunately, this
led to an increase in payoffs and tax levels in Côte d’Ivoire as the onions neared their destination –
the food markets of Abidjan (Rogers and Iddal 1996). Such examples highlight the importance of
taking a systemic approach, which may mean tracing the impact across national boundaries.
Although eliminating corruption-prone programs can limit the incentives for payoffs, a general
program to shrink the size of government will not necessarily reduce corruption (Rose-Ackerman
1996c). The key is to reduce overly restrictive regulations with few social benefits, not government
spending.8 Recall that scarcity produces corrupt incentives, and notice that reductions in government
spending can produce scarcity when spending programs are cut or when regulatory budgets fall with
no change in the underlying statutes. Even worse, if a government under fiscal pressure cuts back
spending, it may at the same time seek to maintain its influence by increasing regulations and
mandates. The result can be increased corruption (Chhibber 1996: 127). Program elimination
removes the corrupt incentives that accompanied it, but budget cutbacks that leave the program intact
may not. For example, suppose that subsidies for higher education had previously been available to
all students who passed an entrance exam, but that they are now given only to the top 50%. The
scarcity created by the cutbacks creates corrupt incentives where none existed before. So long as
exam grading is free of taint, the corruption-reducing solution is to raise the passing grade so the
shrunken program retains its entitlement character. Other ways of reducing demand – such as complex
applications, long queues, and cutoffs based on need – all generate corrupt incentives.
If government spending falls, the contractors who benefitted in the past from public contracts
may suffer – especially firms so specialized that they cannot change direction easily. Domestic
military contractors are usually in this category. Multinationals are likely to be less affected both
because of their diversified product mix and because they can sell in other countries. Firms that have
trouble shifting direction may bribe to obtain a share of the shrinking pie of government business. The
total quantity of bribes might fall, but the bribe per project can rise. Once the government is locked
into dealing with a particular contractor, bribery can still be used to get inflated prices, to overcharge
for materials, or to skimp on quality.
Similarly, suppose budget cutters halve the budget of a regulatory agency with no change in the
underlying statute. First, consider a statute that permits firms to act unless the state finds a violation.
In that case few business people will complain about budget cutbacks. Inspections and other checks
will be reduced – a benefit for firms, but a potential cost for society. A firm’s manager still has an
incentive to bribe an inspector but will do it less often because inspectors come less often. The same
result may arise from an increase in activity with no increase in the capacity of the regulators, as has
occurred in recent decades with the increase in international trade. Only twelve cases of corruption
were reported at the Amsterdam airport between 1999 and 2002: because of the large volume of
traffic, smugglers apparently rely more on the low probability of inspection than on corrupting
customs officials (Center for the Study of Democracy 2010: 177–8).
Second, in contrast, suppose that a law requires firms or individuals to obtain a license. Then a
budget cutback with no change in the underlying statute increases corrupt incentives. Firms and
individuals will be encouraged to pay bribes to get the scarce attention of the regulatory authorities or
to get to the head of a long queue. Bribes paid by some lead to more delays for others; this may
induce more to pay bribes, and so on – producing a vicious cycle (Rose-Ackerman 1978: 85–108).
Just as in the case of cutbacks in subsidy programs, shrinking government regulatory activity may
increase, not decrease, corruption unless the statutes are changed to reflect the lower budget totals. In
short, low corruption levels in some contexts may mean that officials do not have the capacity to
enforce the law, while in other contexts high corruption levels may exist because bribes are a
necessary condition for weak enforcement.
The different degrees of regional liberalization offer an interesting natural experiment. Europe
chose full integration, with goods, people, and finances flowing freely within the designated blocs of
countries.9 Once goods enter one country, they can be “re-exported” to another without paying
customs duties; once a person becomes a citizen of one country, migrating to another is
straightforward. Although this may increase the incentives to bribe at entry, it eliminates the
incentives to bribe at national borders within Europe. Corruption in customs is associated with
smuggling, not tax evasion (Center for the Study of Democracy 2010: 16). North America, by
contrast, chose a more limited integration, allowing the free movement of goods that meet regional
origin requirements and maintaining restrictions on the movement of people. This model introduces
incentives to falsify the certificate of origin and to bribe customs agents to allow false declarations
concerning both goods and people.
In short, the elimination of spending and regulatory programs can be a potent corruption-
reducing strategy. However, policy makers must check to be sure that the payoffs do not just reappear
elsewhere. Furthermore, an overall contraction in the size of the government budget makes
government benefits scarcer. Corruption may then increase as potential beneficiaries compete for the
increasingly scarce pool of benefits. Spending cuts accompanied by increases in regulations may
simply shift the locus of corruption. It is not enough for a country to get its macroeconomic totals in
line with IMF guidelines. Nations should be concerned with the underlying structure of public
programs, not just the size of government.
II. Reform of Public Programs to Limit Rents
Many regulatory and spending programs have strong justifications and ought to be reformed, not
eliminated. Corruption in the collection of taxes cannot be solved by failing to collect revenue –
except in the rare cases in which the government owns vast marketable resources. Other programs are
responses to market failures or to citizens’ demands for public goods and social justice (Markowitz
and Rosner 2002).10 If such programs generate corrupt payoffs, one solution is to clarify and
streamline the necessary laws to reduce official discretion and to make monitoring simpler and less
arbitrary. Rules can be made clearer with publicly provided justifications. Government might favor
simple, nondiscretionary tax, spending, and regulatory laws. Another solution, used in public utilities
and transportation infrastructure, is “unbundling”: separating procurement and infrastructure
investment from day-to-day functions. The success of unbundling, however, depends on the level of
professionalism, transparency, and accountability at each stage (Gulati and Rao 2007: 132; Paterson
and Chaudhuri 2007: 166).
Any public policy where the costs or benefits are tailored to the buyers’ characteristics creates
incentives to defraud by falsely qualifying for the lower price or higher benefit. For example, Fisman
and Wei (2004) find evidence of goods misclassified as close substitutes (e.g., chickens labeled as
turkeys) in order to pay lower tariffs when entering China. At least some of this misreporting was
allowed by corrupt customs officials (Fisman and Miguel 2008: 56–7). Similar misrepresentation has
been reported in steel products imported into the United States.11 If higher income households and
firms face higher tax rates they have incentives to find “loopholes” and exemptions, in order to pay at
the lower rate.12 This may be facilitated through corrupt payoffs to tax auditors. Sliding scales in
health care benefit the poor, but also create incentives to bribe in order to “qualify” for a lower price.
Discretion and a lack of transparency encourage such corrupt deals by making them difficult to
discover.
Here, we outline some of the most relevant reforms for revenue collection, regulatory agencies,
and social benefit programs. We then review how e-governance can help improve government
communication, service delivery, revenue collection, transparency, and accountability.
A. Revenue Collection
Tax reform frequently involves simplifying taxes and levying them on bases that are difficult to hide
or underestimate. Business taxes can be fixed independently of a firm’s actual profitability. The
reduction in corruption and tax evasion is traded off against the reduction in fairness. For example, in
the 1990s Mexico introduced an alternative minimum tax of 2% on the real value of firm assets. A
firm paid the maximum of the value of this tax and the corporate tax otherwise due. Small business
paid a lump-sum tax per person employed, and medium-sized businesses were taxed on turnover. All
these reforms raised additional revenue through reductions in tax evasion and in corruption. Some
companies complained of unfair treatment, but the tax was upheld in the courts (Das-Gupta and
Mookherjee 1998: 311–12). Such reforms are, however, unlikely to be sufficient if officials have no
incentive to work effectively and if the underpayment of tax is not punished. For example, tax
simplification in the Philippines apparently provided few benefits because steps were not taken to
improve the incentives facing tax collectors and taxpayers (ibid.: 410).
Tax simplification can be coupled with modern technologies to maximize impact. In Latvia,
Lithuania, Estonia, and Russia, the introduction of flat income and corporate taxes, combined with
direct deduction from paychecks, triggered a turnaround not only in tax revenue, but also in economic
growth in the early 2000s.13 The flat tax makes calculating tax due straightforward, while the payment
of income tax directly by the employing firms takes the discretion out of the hands of employees and
tax officials. The economic growth should be attributed not to lower tax rates, but rather to lower
levels of corruption and extortion.
Another way to simplify taxes is to reduce the complexity of the task. In the reform of the
Mexican customs service in the 1990s, the number of steps in the customs process at the Mexico City
airport was reduced from sixteen to three. The system was streamlined to reduce delays, and staff
was significantly reduced. Officials who remained were paid higher salaries, and monitoring was
made more credible and effective.14 Although Mexico’s past experience suggests the difficulty of
sustaining initial gains (Morris 1991: 91), one government official claimed that these reforms had
increased customs revenues significantly,15 and businesses reported that both waiting times and
corruption and theft fell. At the border, to handle the increased traffic associated with NAFTA trade
and to reduce corruption, the government implemented a randomized stoplight system, introduced
computerized documentation, and rotated the staff every six months to avoid the development of
reputations or long-term relationships. An optional “express” service was also introduced under
which imports could be inspected prior to shipment, the sealed containers passing through customs
without further inspection (Graham and Méndez 1997). Governments around the world have
employed private firms to carry out such preshipment inspections, essentially privatizing customs
inspections. In many countries, this practice has reduced falsification of documents and increased
customs revenue (Yang 2008), but in some countries the use of private inspection services is
associated with increased customs fraud (Anson, Cadot, and Olarreaga 2006). Obviously, the private
services must operate with high integrity, and tariff bills must still be paid.
Successful reform of a country’s system of revenue collection should permit a reduction in
nominal rates of tariffs and taxation. High tax rates are an incentive to engage in corruption in order to
evade the taxes. Empirically, if tariffs are high, corruption goes along with higher bilateral trade (Dutt
and Traca 2010). Reducing nominal rates may permit an escape from the trap where high rates lead to
evasion, and evasion leads to higher nominal rates and even more evasion. A case study of India
provides a classic case (Das-Gupta and Mookherjee 1998: 101–2). Despite an increase in rates, total
revenue declined because of both an increase in corruption and a shift into off-the-books activity.
Nothing short of a thoroughgoing reform of the structure and administration of the tax system would
allow a breakthrough. Simply raising the wages of tax collectors and increasing surveillance are
unlikely to be sufficient (ibid.).
B. Regulation and the Allocation of Government Services
Economists have long recommended regulatory reforms that limit the discretion of regulators. In
environmental regulation, for example, they support market-based schemes such as effluent charges
and tradable permits. They also recommend user fees for scarce government services. These reforms
often have the additional advantage of reducing corrupt incentives by replacing bribes with legal
payments. The sale of water and grazing rights, tradable pollution rights, and the sale of import and
export licenses can improve the efficiency of government operations while limiting corruption.
Queues can be managed through a set of differential fees based on the value of speed to the applicant
(Lui 1985). The U.S. passport office, for example, provides expedited service for a fee. Surveys of
private individuals and firms in Pakistan and India indicate that, when corruption is widespread,
domestic businesses and quite poor people would be willing to make legal payments for improved
service (Paul 1995). In such schemes, the services go to those who value them the most, and payments
are legal prices, not bribes. As long as the goal of the program is not explicitly redistributive, and
prices are low enough not to exclude the poor, legalizing payments may be a solution.
Properly designed incentive schemes represent, not deregulation, but regulatory redesign that can
permit the more cost-effective achievement of statutory goals. The use of more decentralized
incentive mechanisms for regulation differs both from simple agency inaction and from a slavish
devotion to business interests. In areas such as pollution of the air and the water, market tests and
efficiency imply regulation, not deregulation.16 The use of financial incentives such as effluent fees
and markets for pollution rights may mean that higher levels of cleanup are possible than with
command and control regulation enforced by fines for noncompliance. Such schemes could produce
genuine reform, not a sellout to regulated firms. As a consequence, they may be opposed by the very
firms that praise the virtues of the market in other contexts. Efficient regulation implies a concern for
both costs and benefits; it does not necessarily imply less regulation (Schultze 1977; Lave 1981; Law
and Economics Symposium 1988).
In corrupt systems, market-based reforms may substitute legal payments for bribes.
Unfortunately, the regulated firms may object to reforms that in less corrupt countries would be
viewed as cost reducing. Thus in Mexico businesses have not generally endorsed proposals to
substitute incentive-based schemes for command and control regulation of environmental pollution.
According to one commentator, “[W]idespread alleged corruption among environmental inspectors
means, says one businessman, that ‘usually it is cheaper to pay off the official than to make the
improvements.’”17 Furthermore, corruption may undermine reforms just as it can undermine more
conventional command and control efforts. Firms may still bribe officials to misrepresent monitoring
reports. Clearly, civil servants still need to be properly trained, motivated, and monitored. However,
incentive systems simplify the job of those bureaucrats who interact with regulated firms. For
example, in the environmental area, the government need not issue firm-specific compliance orders.
The public agency monitors the pollution discharges and fee payments of firms.
Private agencies might help administer such programs. In the United States, for example, the
Chicago Board of Trade provides a forum for the purchase and sale of federal government rights to
discharge pollutants that contribute to acid rain.18 In Europe, emissions allowances for carbon
dioxide, nitrous oxide, and perfluorocarbons (known as “greenhouse gases”) are distributed or
auctioned by the European Union’s Emissions Trading System; subsequently they are traded in
markets similar to commodities exchanges.19 In Cambodia, the NGO Global Witness (and,
subsequently, Societé Generale de Surveillance) was enlisted as an independent inspector to fight
illegal logging alongside two government offices (Kishor and Damania 2007: 103).
Reforms that give firms a legal means of paying for scarce benefits or avoiding costs can limit
corrupt incentives. Even if firms are harming others, as in the environmental area, market-based
reforms can help allocate the burden of cleanup more efficiently and limit corruption. However,
corrupt dischargers will have no incentive to support such reforms if they are presently avoiding most
liability through payoffs.20 Before such reforms are possible, the state must establish its credibility as
a regulatory watchdog.
C. Reform of Social Benefit Programs
User fees are obviously an inappropriate way to allocate services designed to benefit the poor. But if
the service is already being allocated through bribes, a legal system of charges may be a reasonable
second-best response to scarcity. As an alternative, vouchers for the public services could be given to
the needy, who could resell them if they wished. In contrast, if the goal is to assure that the poor
actually use a public benefit, such as health care or education, more direct anticorruption techniques
will be required. Once again, program simplification can be a potent anticorruption strategy. One type
of simplification involves the determination of eligibility – every open-ended judgment risks
corruption. At the limit, a service might be allocated through a lottery – although this may be unfair to
those who lose, at least the lucky winners stand a good chance of actually gaining access to the
benefit.
A second sort of simplification concerns the nature of the program itself. If an in-kind benefit
program is riddled with corruption, conversion to a direct cash grant may remove a range of corrupt
incentives. For example, in a review of programs to reduce the often-bloated civil service in
developing countries, the World Bank recommends direct cash payments to those who lose their jobs.
The Bank argues that such payments “bypass the rent-extracting bureaucracies sometimes encountered
in more elaborate retraining and directed credit schemes” (World Bank 1991: 21). Cash payments
may backfire, however. In a study of a guaranteed work program in India, Niehaus and Sukhtankar
(2013a) found that when the state-stipulated wage was raised, the civil servants responsible for
assigning work kept 100% of the increase. The use of postal or bank accounts may improve
transparency and accountability and therefore reduce corruption in such cases.21
Alternatively, if cash payments are not a viable option, the difficulty of monitoring suppliers may
push the government toward simple criteria that are difficult to fake. Although they may not be ideal
in a bureaucracy with strong oversight, they may be the only feasible option. Sometimes, however,
incentive systems that use marketlike devices can be helpful. For example, if the government uses
private providers to supply subsidized services, it could establish a proxy shopping system. A
provider would only receive capitation payments for subsidized clients if it was also able to attract
paying customers. The paying customers would thus act as “proxy shoppers” for the needy clients.
This method of monitoring would only be successful if paying customers demand the same type of
services as the needy and are not repelled by the prospect of consuming the service alongside the
poor. It also must be hard for providers to discriminate between paying and nonpaying customers in
the provision of services. Nor can they be allowed to pay people under the table to act as fake proxy
shoppers. Nonetheless, it may well be possible to reproduce these conditions in a rather wide range
of medical and educational contexts (Rose-Ackerman 1983). Even if it is feasible, however, proxy
shopping is a response to only one kind of fraud. Suppliers will find it difficult to cut quality and still
be eligible for subsidy payments, but the plan does nothing to limit fraudulent attempts to enroll for
benefits – which must be dealt with by other means.
Obviously, the value of these reforms depends upon the costs of limiting the flexibility of public
officials. Sometimes a certain risk of corruption must be tolerated because of the benefits of a case-
by-case approach to program administration. But even in such cases transparency and publicity can
help overcome corrupt incentives.
D. E-governance
Modern technology enables governments to improve transparency, accountability, and the
dissemination of information. It also enables citizens and interest groups to monitor government more
thoroughly and carefully, and the government to collect a greater proportion of taxes due. The term e-
government – short for electronic government – refers to the incorporation of information and
communication technologies (ICTs) in government processes, and the ways in which the government
interacts with society using electronic media. E-government schemes and better access to information
can help to limit corruption (DiRienzo et al. 2007). There are three major benefits of e-government:
making information available, simplifying applications and requests, and improving accountability.
Websites, blogs, social media, and kiosks can serve the functions of public offices and libraries,
reducing costs to the government and to users. As Basu (2004: 110) writes:
E-governance is more than just a government website on the Internet. The strategic objective of
e-governance is to support and simplify governance for all parties; government, citizens and
businesses.... In other words, in e-governance electronic means support and stimulate good
governance. Therefore, the objectives of e-governance are similar to the objectives of good
governance.
The development of e-government is complex and usually advances in stages, from information
provision, to interactive applications, then to online payment of government fees, and finally
information sharing among the various branches and departments of government (Basu 2004). A
prototype is usually introduced, then modified and expanded to other areas. One relatively early and
successful e-government initiative was introduced in Seoul in 1999 (see Box 4.1).
Box 4.1. OPEN Initiative in Seoul
On the heels of several corruption scandals, Mayor Koh was elected in 1998. Part of his
anticorruption approach was the creation of a Chief Information Officer and the introduction
of Online Procedures ENhancement for civil application (OPEN). This project put a series of
application processes online, with real-time tracking of their progress, accessible by Internet.
OPEN was launched in 1999. Applications for various types of licenses and permits were
captured by civil servants, whose name would be attached to the corresponding process in the
system and visible online. Korea improved on several corruption measures between 1999 and
2006, and was ranked number one in e-government by Brown University in 2003 and 2005,
and by the UN in 2010, 2012, and 2014.
The success of this program was based largely on strong leadership, strong regulation,
and an audit process to follow up. Mayor Koh also enlisted the support of civil society by
framing it in terms of modernization and universal values of transparency.
Source: Based on Kim, Kim, and Lee (2009) and data from UNPACS (2014).
Governments can publish laws, edicts, and application requirements for public documents, such
as passports, using websites and public kiosks. Individuals and firms benefit by arming themselves
with this knowledge. In Egypt, for example, a survey found that owners of SMEs predisposed to resist
bribery took less time and bribed less frequently than those with an ex ante expectation to bribe or
who were willing to bribe if necessary; the authors surmise that those willing to resist are better
prepared. “It seems that the predisposition of business owners toward bribes relates to a large extent
to their knowledge and understanding of the laws and regulations governing their type of business
(including those governing the registration process itself), and not only to their compliance with
ethical standards” (Center for International Private Enterprise 2009: 12). Hence, Internet resources
that make knowledge about government operations easier to obtain ought to limit not only corruption
but also fraudulent efforts to mimic government enforcement efforts.
Interactive applications may also serve both to inform the public and to gather information from
individuals and firms. These tools may be as simple as sending an e-mail or submitting a query, but
they may be more complex. For example, Indonesia has introduced an interactive video-game-like
smartphone app that educates players about bureaucratic corruption and bribery, and includes quizzes
that enable users to test their knowledge.22 The use of customer databases, electronic billing, and
usage data transmission by satellite reduces the scope for theft and corruption in public utilities
(Gulati and Rao 2007: 141, 150). Online submission of tax documents and automated selection of
audit subjects were part of a successful overhaul of the tax system in Bolivia (Zuleta, Leyton, and
Ivanovic 2007: 349); income taxes are also submitted electronically in Mexico, where since 2014
electronic invoicing is a requirement for all tax-related spending, so that declared tax deductions can
be verified.23
Transparency improves when the government publishes not only requirements, but also its own
actions and their results. In the pharmaceutical industry, for example, the regulatory agency should
publish lists of applications for drug approvals and their status, as well as a list of all drugs that have
been approved (Cohen, Mrazek, and Hawkins 2007: 40). Public tenders should be disseminated on
the related government websites, as well as in newspapers (available in print and electronically); the
detailed specifications, bids, and winning firm should also be available in the same place once the
tender has been closed.24 Any follow-up activity, such as inspections, should be included, as well, so
that both government and the public can monitor whether poorly performing firms continue to win
bids (Gulati and Rao 2007).
E-government can also improve transparency by facilitating the sharing of information. For
example, after a fiscal crisis in the health sector due to the abuse of policies guaranteeing the right to
health care, Colombia enacted a National Pharmaceutical Policy that established a national database
of pharmaceutical prices. This public information helped curb corrupt deals in which hospitals had
paid up to twice the market value for some drugs in return for kickbacks from the pharmaceutical
companies to purchasing agents (Hussmann and Rivillas 2014). In public procurement, the process of
prequalification could be standardized and a database of prequalified suppliers could be made
available to all levels of government, thus saving suppliers the cost of submitting multiple
requirements to municipal and state governments: “the legal, commercial, and financial data of firms
in the database are compared with the qualifications profile of a project, and a list of eligible firms is
generated together with a list of those firms not qualifying and the reasons for disqualification”
(Paterson and Chaudhuri 2007: 180). As a follow-up, evaluations on the same database could rate the
work done by each supplier in terms of keeping within the budget and respecting deadlines, as well
as required postcompletion maintenance or repairs. Rather than limiting government to using only
firms with an established record as a good supplier, this would enable governments to avoid those
firms who have performed poorly in the past, either locally or in work for other governments.25 By
making such a database available to the public, the media and civil society could hold governments
accountable for their procurement decisions. Such a system was established in Chile, saving an
estimated $150 million per year and enabling more small businesses to participate (Bertot, Jaeger,
and Grimes 2010: 265–6).
Databases can be instrumental in improving public service, reducing costs, improving the
collection of taxes and other fees, and increasing accountability. For example, in Cameroon, the
customs service was reformed using an automated database to measure and track performance,
including the timing and tax collected on each shipment. When this database was used to evaluate
individual customs officers, waiting times and corruption fell, while tax revenue increased by $25
million per year (Raballand and Marteau 2014: 43). In Sierra Leone, a database of digital
fingerprints was used to combat the practice of a single teacher collecting multiple salaries (Poisson
2014: 61). Similarly, a number of countries have limited fraud in the operation of antipoverty
programs by publicizing lists of beneficiaries online and using payment systems tied to biometric
information or to the beneficiaries’ mobile phones.26
Accountability can be improved by the use of video cameras and other technologies. This has
been used effectively in customs administration and police cars. Some police officers now clip
cameras to their uniforms.27 Global satellite data can be used to monitor forests and detect illegal
logging (Campos, Pradhan, and Recanatini 2007: 432; Kishor and Damania 2007: 102). Of course,
the use of cameras is an effective deterrent only if there is a reasonable chance that someone will
watch at least a significant portion of the footage. This is where society can fill the gap. If full
transparency is achieved by making the video available to the public, the probability that someone
will see and report misdeeds increases. Furthermore, individuals have used the cameras on their
laptops, tablets, or phones to record and then publish the extortion of bribes by traffic officers.28 In an
interesting variant, the government of the Punjab in Pakistan is taking advantage of the wide use of
cell phones to canvass citizens’ experience with corruption through random calls to those who sign up
for the program. Citizens do not make individualized accusations. Rather, the overall data from
survey responses are used to identify particular hot spots for graft.29 As the system becomes
established, the aim is to let corrupt officials know that they are being monitored and hence to
convince them to limit their payoff demands.
In some cases, these technologies make it possible to omit human discretion entirely. For
example, people and firms can now pay a variety of taxes and services online in many countries,
reducing the possibility of extortion. (The threat of an audit may still be an option, but one more
difficult to implement.) In some places, speeding tickets are generated automatically by systems of
velocity-detecting video cameras that read the license plate of the offending vehicle, cross-check the
address of the owner, and prepare the ticket for mailing. The use of radio-frequency identification
(RFID) tags (becoming popular in the pharmaceutical industry) can automate the calculation of
customs duties, as each product is identified electronically (Cohen, Mrazek, and Hawkins 2007: 38).
When payroll or sales taxes are deducted automatically by firms and sent to the government,
evasion is much more difficult, at least in the formal sector, although requiring such measures imposes
fixed costs on formal businesses and creates a new incentive to informality. Getting an appointment
for a passport or visa is free of discretion or discrimination when the process is online; applicants
are further aided by a printable checklist of required documents in order to avoid wasting time and
making unnecessary multiple trips. For those who are not Internet savvy, firms have appeared to help
guide applicants through the process. Technology could take some processes to the next level: in the
application of driving exams, for example, a simulator30 could take the applicant’s photo and
fingerprints; run background checks; administer the vision, written, and driving exams; and print the
license if all exams are passed. Similar processes could be created for other applications.
Vulnerability to hacking and viruses might be a problem now and then, but corruption would be
severely reduced or eliminated. Even falsification of documents should be reduced as verification by
cross-checking online databases becomes easier. Government employment and budgets would also
potentially be reduced, as low-level bureaucrats would be replaced by (proportionally fewer)
programmers, database managers, and kiosk maintenance staff.
When implemented successfully, e-governance not only improves efficiency and reduces loss
due to corruption, but also increases citizens’ trust in government and changes their attitudes regarding
transparency (Bertot, Jaeger, and Grimes 2010).
E-government is not, however, a guarantee of clean and transparent processes, and can have its
own pathologies in weak or autocratic governments. E-procurement systems may still be vulnerable if
qualitative evaluations must be made, and the best bidders can be eliminated in postqualification
(Ware et al. 2007: 315). Websites and databases can be hacked from the outside and manipulated by
insiders.31 Software can be written to allow access only to those with inside information; if ready-
made software is used, it may be in English (or the dominant national language) only. To those lacking
Internet access or computer skills, e-government may mean further marginalization. The “agents”
meant to facilitate these processes may also sell falsification services or backdoor access. Video
footage may be manipulated or fabricated to entrap the innocent. In short, while e-government is
promising, it does not eliminate all corrupt opportunities and may create new ones. Furthermore, the
use of ICTs is not justifiable in its own right: it must be a logical part of an overall strategy to
simplify processes and make them more transparent, taking into account the government’s and
society’s needs and resources. E-governance should be embedded in other reforms to improve
governance in general.32
A fundamental issue for advocates of e-government is the problem of balancing privacy rights
and national security against the anticorruption benefits of transparency and lack of discretion. For
example, public tenders for high-tech military equipment might be best kept out of the public eye.
Surveillance systems that help the public observe the behavior of police and other officials can be
used instead to intrude into private life and encourage blackmail and the release of information that is
embarrassing but not illegal or corrupt. In some cases the balance has been struck in ways that seem
to ignore the anticorruption benefits of transparency, but in other cases the machinery of state
surveillance – now enhanced by the Internet – has been used to maintain incumbents in power and
punish political opponents or simply concerned citizens. The many promising developments that we
have outlined in this section need to be assessed in light of these potentials for abuse.
III. Procurement Reform
Within any given sector, the procurement process is perhaps the single most corruption-prone
area. But it also presents the most promising area for which a set of concrete, quantifiable
indicators can be developed, from the initial planning phase all the way through to contract
award and implementation.
(Campos, Pradhan, and Recanatini 2007: 430)
Corruption scandals frequently involve government procurement of goods and services. Bribes can
determine not only who obtains a contract but also the size and specifications of government
purchases. Anticorruption reforms should focus not just on reducing malfeasance, but on improving
the efficiency of government purchasing decisions.
Procurement reform highlights the trade-offs between avoiding corruption and giving officials
the flexibility to make decisions in the light of their own knowledge. According to one study,
procurement should be rules based, competitive, transparent, accountable, economically efficient, and
time efficient (Ware et al. 2011: 68–9). But how can these multiple desiderata be achieved?
Discretion increases corrupt incentives but critics of elaborate procurement codes point to their
excessive rigidity. Nevertheless, even skeptics do not call for the complete abandonment of such
codes. Many scandals involve situations in which no codes exist or tender boards are simply
overruled by corrupt or self-seeking political leaders. Especially if impartial courts enforce the rules,
codes protect the process against improper high-level influence.
How then should the balance be drawn? In this section, we lay out some factors to take into
account.
Piga (2011) argues in favor of more discretion in public procurement, exercised by competent,
professional procurement officers, coupled with ex post monitoring by the public through transparent
Internet publication of procurement processes. Thus, transparency and accountability are both
increased, but so is the ability of the decision-maker, who should have enough technical knowledge to
design tenders and evaluate bids. The detection of low quality by the public or high prices by
competitors may lead to punishment, if the law allows. The development of reputation – perhaps
using a point system based on past performance – is also valuable, although Piga warns that such a
system may also be vulnerable to manipulation.
A. Reform in the United States
We can divide the procurement problem into four stylized categories: purchases that require
specialized research and development, such as newly designed military aircraft; purchases of
complex, special purpose projects, such as dams or port facilities, that do not involve advances in
technology but require managerial and organizational skills; purchases of standard products sold in
private markets, such as motor vehicles or medical supplies; and customized versions of products
sold privately, such as special purpose computer systems or fleets of police cars.
Traditional procurement doctrine recommends a different process for each of the first three
categories. The first, of great concern to the U.S. Department of Defense, involves the difficult
question of how to write a contract for a product that has not yet been developed and may require
advances in the state of the art. We leave this category to one side because it is not very important in
developing countries. For the second category, a sealed bidding process is the accepted standard of
fairness and economic efficiency. International Competitive Bidding (ICB) of this type used to be
required by the World Bank under its infrastructure loans and has influenced the development of
procurement codes worldwide.33 The process is appropriate for a project, such as a dam, that is
capital intensive, self-contained, and uses known and tested technology.
Procurement advice in the third category is straightforward – purchase the good with the best
price/quality combination, given the government’s needs, taking into account discounts that may be
available to large purchasers. The fourth category – customized products also sold privately –
requires new approaches. The procurement problem in this case is less difficult than the first
category, in which research and development are required, but neither sealed bidding nor off-the-
shelf purchase is appropriate. Procurement processes need to be rethought for government purchases
of such new goods and services.
In that category, much emphasis has been put on the risks of corruption and cost inflation that
arise from sole-source contracts and from negotiated deals even when several potential suppliers
exist. The problem is how to encourage vigorous competition, given that no clear private market
benchmarks exist. If sole-source contracting is a high percentage of the total, contractors may earn
monopoly rents that they share with procurement officials. For example, in 2003, two-thirds of the
Iraqi reconstruction projects (by value) awarded by the U.S. government were not subject to
competitive bidding. At least some of the U.S. firms allegedly subcontracted to local firms for a
fraction of the cost, keeping the difference as profit (Le Billon 2005; Leenders and Alexander 2005).
Empirical work based on European contracts linked to European Union projects have documented the
massive scale of sole source contracts with the consequent concern for corrupt payoffs and excess
contractor profits (Fazekas et al. 2014).
However, the nature of much government purchasing in our fourth category means that
competitive bidding procedures have definite limits as a way to produce high-quality public goods
and services at fair prices. The perceived disjunction between standard procurement techniques and
the realities of public purchasing was central to the Clinton administration’s attempts to reform the
federal system in the 1990s.34 The effort was spearheaded by Steven Kelman, a professor at the
Kennedy School at Harvard, who served as President Clinton’s director of the Office of Federal
Procurement Policy. Kelman’s preparation for the job was his in-depth case study of federal
government computer procurement (Kelman 1990, 1994). Computers are in the fourth category.
Kelman’s case study was very critical of government practices, arguing that existing rules were too
cynical about bureaucrats – assuming that they will be lazy and corrupt if given a chance.
Procurement processes then in use resembled the sealed bid system. Kelman argued that negotiated
sole source contracts would be better and that reforms were needed to encourage discretion and
improve incentives for good performance. Fundamental to the old system was a rigid reliance on
contractors’ written responses to specifications. In a complex area such as computer procurement,
Kelman concluded that this system failed to look at the bidders’ records on previous government
contracts and so gave firms no incentive to point out problems in the government’s specifications.
Computer firms may have experience in installing systems similar to the one the government wants.
They should be rewarded for helping the government avoid mistakes. Furthermore, if suppliers know
that a strong performance on one contract will help them obtain others, they will make investments
and innovations that are specific to their government work.
Kelman attempted to put his recommendations into practice. He developed a system to
prequalify a subset of potential contractors who would then form the pool from which actual sellers
were chosen for particular projects. One of Kelman’s first experiments was new regulations for the
purchase of computers by the government. Sixty teams applied, and twenty were selected to compete
for specific orders over four to seven years. He also supported experiments with performance-based
contracts and a number were used for services from grass cutting to restoration of nuclear production
sites.
Kelman argued that procurement officers should be given very specific instructions about the
goals of procurement and be held accountable for the contractor’s ability to fulfill them. They should,
however, have considerable flexibility to determine the means. Agencies would still be required to
justify their decisions in writing, and multimember evaluation panels would still be used to make
procurement decisions. Contractors would be evaluated in terms of outcomes, not inputs. Agencies
must define outcomes carefully and reward contractors on the basis of performance. The government
would favor top performers when new contracting opportunities arise.
The use of past performance as a factor in awarding new contracts has proved difficult to
implement because there is no generally accepted technique for evaluating performance. Kelman’s
office worked to develop a system to record quality, timeliness, cost control, business relations, and
customer satisfaction (Laurent 1997), but the process was controversial, and early agency efforts
were successfully challenged in the U.S. federal courts (Miller 1997a).
Also difficult to implement was Kelman’s idea of letting contractors help determine the
specifications. This is a controversial part of the revised part 15 of the Federal Acquisition
Regulation (FAR) that governs all negotiated government procurements. The revised rules encouraged
prebid communication between vendors and agencies for negotiated procurements, a practice that
was not previously permitted. Restrictions remain in force for competitive procurements (Noelker,
Shapiro, and Kellogg 1997). The controversy surrounded the potential for favoritism under this
practice. Critics worried that the revisions would encourage cronyism and other types of abuse,
especially because certain forms of bid protests were eliminated or restricted (Miller 1997a, 1997b).
As the controversy over prebid communications indicates, Kelman did not fully confront the
corruption implications of his proposals. He treated malfeasance as a problem for the criminal law,
not procurement regulations. He argued that the current American record-keeping system for
procurement is almost useless against miscreants with any degree of subtlety and skill. He has a
“rotten apple” view of the problem – some bad people exist, and the criminal law should deal with
them. The penalties for corruption should be increased and more resources should be put into public
investigations (Kelman 1994: 121–2). Of course, increasing the expected costs of paying and
receiving payoffs is one line of defense against corruption, and Kelman may well be correct about the
ineffectiveness of record-keeping requirements. However, it does not follow that the best solution is
to detach anticorruption strategies from procurement practice.
Instead of delinking the control of malfeasance from other procurement practices, government
purchasing specifications should take account of the risk of corruption. This can be done without too
much sacrifice of the flexibility that Kelman favors. Goods sold in international markets where
benchmark prices exist should be favored over custom-made or state-of-the-art products for that
reason. In fact, Kelman recommends just such a shift, arguing that it is closer to the practices of
private firms. Statutory reforms encourage purchasing officers to do market research and favor
commercial items.35 The state can look to private market prices as benchmarks and state their
specifications in terms of standard off-the-shelf items to lower the cost of submitting a bid. Kelman
did not stress the anticorruption benefits of such off-the-shelf purchases, but they are clearly one
reason why the use of standardized products can save the government money (Rose-Ackerman 1978:
132–5; Ruzindana 1995). The basic idea is to replace competitive bidding with negotiation and
haggling on the basis of background market conditions (Behr 1997). Competitive pressures are
introduced by the private market, not the bidding process. After the U.S. Navy admitted to corruption
and overbilling in overseas supply contracts, one reform was to move toward the purchase of more
standardized products using private market prices as benchmarks. The Naval Secretary claimed that
only 1% of the contract value should be for non-fixed price items. In practice, at least one contract
had more than 50% in the non-fixed price category – inviting cost overruns.36
Performance evaluations that influence future prospects are also consistent with anticorruption
goals. Debarment processes based on corruption and organized crime connections are a widely used
form of performance evaluation. Kelman focused not on crimes committed but on the quality of work
done. This can also be an indirect anticorruption device because it prevents public officials from
favoring weak but well-connected firms that have performed poorly in the past. However,
performance measures must be objective and must make provision for new entrants. Otherwise they
can cement the position of entrenched contractors (Gray 1996).
Worries about prebid communications are not easily resolved. The open-ended communication
that Kelman favors as a way to exchange information can also be a way of exerting illegal influence.
Of course, if illicit contacts are already common, legalizing them may favor competent and honest
firms that previously lacked a legal means of access. Kelman convincingly argues that such contacts
will improve contracting performance in a range of public procurement areas, but the balance in an
individual case will depend upon the relative risks and benefits. Nevertheless, in the United States a
move in the direction that he recommends seems worth trying if it is combined with stronger efforts to
reward firms on the basis of their ultimate performance.
B. Lessons for Developing Countries
Some of Kelman’s proposals could be adopted by developing countries, but others are not suitable
for export to countries with less well-developed legal systems and weak private markets. In fact, in
later writing Kelman (1994) recognizes that his proposals should not be applied to cases in which
corruption is systematic and pervasive.
Kelman’s proposal to use past experience with contractors could be adopted by countries where
corruption of the procurement process is believed to be serious. It could both reduce malfeasance and
improve efficiency. In contrast, under ICB principles, the lowest “responsible” bidder must be
accepted. If followed mechanically, this rule can lead to low-quality work and collusive bid rigging.
For small aid-dependent countries, the reputation of bidders could be drawn from the international
arena. An international organization might keep a roster of contractors with information on their past
performance.37 The controversy surrounding the use of performance ratings in the United States,
however, suggests that such a system should focus on a few key variables that can be measured and
compared across countries. Relevant indicators might include evidence of fraud or corruption, cost
overruns, and time delays. Such a roster could be integrated into the World Bank’s Procurement
Guidelines, which state that the Bank will declare firms ineligible for Bank contracts “either
indefinitely or for a stated period of time” if it determines that the firm has engaged in corrupt or
fraudulent practices in connection with Bank-financed projects [Section 1.15(d)].38 More recently,
cross-debarment (see Chapter 14) implies that malfeasance with one international lender leads to
blacklisting with others. Furthermore, revisions approved in mid-2015 take a more realistic view of
the nature of development contracts. They stress the need for integrity and provide for stronger direct
involvement of WB staff and oversight by NGOs, such as Transparency International. At the same
time the policy recognizes that selecting the lowest bid is not always the best option and that other
selection methods may be superior so long as they can be protected from improper influence and
corruption.39 A common abuse, which may be a particular risk under the new framework, involves
procurement orders written so that only one firm can qualify. For example, an African country
reportedly once set its telephone specifications to require equipment that could survive in a frigid
climate. Only one telephone manufacturer from Scandinavia could satisfy this obviously worthless
specification.40 In a system where government is publicly accountable, such favoritism would not be
possible if the specifications were made public. Although firms may be able to provide useful
information regarding technology and other specifications, too great an intertwining of contractors and
public officials invites corruption. Systems that are more transparent and accountable can afford to
give procurement officers more discretion than others with less accountability. The problem is most
serious when the choice of a contractor depends on the technical characteristics of the product. In
contrast, if the government sets an output or goal-oriented set of specifications, this could minimize
the problem of insider influence. At the very least, goal distortion would be clearer.
As Kelman suggests, procurement reform can complement civil service reforms that provide
incentives to officials to perform effectively. Bonuses earned by officials who achieve procurement
goals could substitute for illegal payoffs. But civil service reforms are only necessary, not sufficient,
for success in routine procurement. Scandals frequently have implicated top government leaders who
profited from their inside knowledge and connections. Kelman’s proposals are not much help in
dealing with such “grand corruption.” They focus instead on middle-level procurement decisions
under the control of professional civil servants. They are, however, consistent with reforms that shift
procurement decisions to career officials and tender boards. If rulers wish to insulate themselves
from the demands of political supporters, they should create impartial bodies with independent
procurement authority.
The basic reorientation of American reforms away from perfecting the bidding process toward
making the overall purchasing environment more efficient and effective is a fundamental shift in
perspective. It seems an especially valuable innovation for developing countries with limited
capacity to carry out complex bidding procedures, especially when working with international
financial institutions. Although competitive bidding sounds like a good idea, notice that bidding does
not play a role in a truly competitive market. Instead, the market price is set through the multiple
interactions of many buyers and sellers. Of course, frequently governments do need to make special
purpose deals using a well-organized bidding process to minimize costs. But the U.S. experiments
indicate that the benefits of competition can often be achieved if the government becomes a market
participant. Decisions about what to procure are as important as decisions about how to carry out the
procurement. Corrupt systems not only use bad processes; they also frequently procure the wrong
things. For example, if a fair and transparent bidding system is not possible, this should push
procurement choices toward goods and services where benchmark prices exist or that can be
purchased in the private market. A government that demands customized products risks creating room
for corrupt payoffs.
Benchmarking may be relatively easy for those countries and subnational governments that are
small relative to the markets in which they operate. If they purchase standard products in the
international market, market prices are excellent benchmarks because the small government’s own
demand is unlikely to affect prices. One way to obtain rough benchmarks is through data on U.S.
trade. Two studies have calculated average prices and variances for goods using U.S. trade statistics
(Pak and Zdanowicz 1994; Paul et al. 1994). Because of product differentiation even within quite
detailed categories, these price estimates are guesses, but they could give developing countries a
starting point for negotiating with suppliers.
Of course, not all procurement can be redirected toward standardized products in international
commerce. Developing countries will be making large investments in special purpose infrastructure
for years to come. These projects are unlikely to require sophisticated new technology, but they are
one-of-a-kind undertakings. Thus the effectiveness of contracting procedures will remain a central
concern. Even given the new flexibility of the World Bank’s procurement framework, countries will
still benefit from robust competition among bidders. The same is true for competitive systems that
make use of the prescreening processes that Kelman favors. There are two problems – the possibility
of collusion and the difficulty of attracting bidders.
Consider collusion first. Robert Klitgaard (1988: 134–55) describes a case in which repeat
players used the openness and transparency of competitive bidding processes to maintain a cartel to
fix prices and share markets. The case involved the supply of goods and services for the American
army in South Korea in the 1960s and 1970s. The Korean contractors were highly organized and held
meetings to decide who would be the low bidder and how profits would be divided. Intimidation was
used to enforce decisions and discourage entry. The U.S. Army could not prosecute the Korean
businessmen themselves, and its own practice of publicizing the bids after they were opened helped
maintain the cartel by informing everyone of the results.
In Japan a prequalification process that seems close to Kelman’s ideal helped maintain a similar
cartel. Procurement officers selected a qualified pool of bidders based in part on past performance.
In practice, the process limited the number of bidders to a small group and excluded new firms,
especially foreign ones. A legal requirement that new tenders be issued each year, even for capital-
intensive projects, produced pressures to collude on multiyear projects to assure continuity. A small
number of repeat bidders divided up the contracts in a cartel-like arrangement (Mamiya 1995; Gray
1996).
In the Korean case benchmarking by the U.S. Army helped reveal overcharges of 10% to 30%
that occurred as a result of the cartel. Because the Army was unsuccessful in introducing competition
in contracting, it instead began to rely on negotiation with a sole source. Similar to Kelman’s
preferred reforms, the aim was to use the Army’s bargaining power to secure a favorable price.
Information about prices in the private market or for similar goods and services in other countries
helped set the stage for negotiation. The situation of the U.S. Army in Korea, however, may be a
special case in which an organization representing a foreign government is directly involved in
procurement. As already mentioned, U.S. military procurement abroad has faced this same problem
on other occasions.
Collusion in the Japanese case may have been harder to avoid because public officials as well
as firms helped maintain the collusive arrangements (Mamiya 1995). In addition, the use of past
favors rather than concurrent payments to determine the winner (Ishii 2009) makes collusion more
difficult to detect. The only solution may be a more open and competitive process combined with
credible law enforcement. In fact, Japan has tried both strategies. In 1995, prosecutors, in an
unprecedented move, charged nine companies with bid rigging in connection with an electrical
project. In a criminal case brought under Japanese antimonopoly law, the firms were convicted and
fined. At the same time the government introduced an open-bidding system for federal public-works
contracts in an attempt to make collusion more difficult. Major company bids fell 20% below the
Construction Ministry’s estimates, but part of the drop may have been due to the recession, not a
decline in collusion. At least one firm reported a large drop in the funds set aside for payoffs.41
Despite these moves, however, bid-rigging continued. In 1999, twelve oil companies were charged
with colluding to manipulate bids upwards in tenders to supply the Defense Facilities Administration
Agency between 1995 and 1998; the companies were eventually found guilty and fined, with several
individuals receiving short prison sentences (Arai 2012). Over the period from 1996 to 2005, 173
cases involving bid rigging were decided by the Japan Fair Trade Commission (Arai, Ishibashi, and
Ishii-Ishibashi 2011: 4). In 2002, Japan passed a law that regulates conflicts of interest in bids,
specifically the practice of Kansei Dango: employing former members of a bureaucratic agency to
ensure selection (ibid.: 3, n. 14).
One response to these concerns is to attack corruption directly by requiring all potential bidders
and the responsible authorities to pledge to refrain from fraud and corruption. Such Integrity Pacts
also generally include clauses covering transparency and monitoring by civil society groups, enabling
competing firms and outside parties to ensure fairness both in the bidding process and in the delivery.
The international nonprofit organization Transparency International (TI) (1995) was an early
proponent of this practice, and World Bank procurement guidelines now permit them. TI has
supported Integrity Pacts signed for 300 projects in fifteen countries.42 The no-bribery pledge is a
variant of the prequalification processes described previously but with a special anticorruption twist.
TI has prepared sample bidding documents and descriptions of bidding procedures that inform firms
of the procedure. Firms are required to pledge to refrain from bribery and to have an internal
compliance program in place. Payments to agents must be disclosed (Eigen 1998). Although such
pledges look redundant because corruption is, in any case, illegal, they have the advantage of
highlighting the issue. As part of the process, TI recommends that countries express a commitment to
impose sanctions (ibid.). If the Integrity Pact is signed in the context of a contract with the World
Bank or with another international financial institution (IFI) and if a public servant tries to extort
bribes, the firm can point to the Integrity Pact and the threat of debarment if it engages in bribery.
Thus, especially if IFI funding is involved, the pact can be a powerful tool for firms to resist extortion
by public servants.43
However, some fear that too few firms will bid on major projects with prequalification
procedures, including Integrity Pacts. However, information on the actual number of bidders may be a
misleading signal of competitive conditions. Submitting a bid is costly. Firms compare the fixed costs
of a bid with the expected benefit – that is, the profit multiplied by the probability of winning the bid.
If the profit on a contract falls too low, the number of bidders may fall. For example, according to an
experienced observer, when the profits on international construction contracts fell to 4%, many
multinationals found bidding too costly if they had to compete against five or more equally qualified
competitors (Strassmann 1989: 789). If low expected profit margins cause the number of bidders to
be small, then it will be difficult to infer anything about the strength of competitive pressures by
looking at the number of bidders on individual projects. A small number of bidders may just mean that
the developing country is viewed as especially likely to assure a fair, competitive bidding process. If
a large number of bids is submitted, this may indicate that excess profits are anticipated perhaps
through corrupt arrangements with officials. However, a contract with a very high rate of return and a
small number of bidders should be especially suspect because it may indicate a deal based on
patronage or corruption. Firms argue for bid preparation subsidies or insurance for bidding costs.
This seems unwise. The goal should be to prevent collusion and to increase the state’s bargaining
power, not simply multiply the number of bids. If specifications can be reasonably well determined
beforehand and if collusion can be avoided, a process with three or four bidders does not seem
obviously worse than one with seven or eight. The real problem is a state that is too weak or too
venal to bargain successfully with outside contractors. Kickbacks then assure monopoly profits for
successful bidders, with a small share of the gains going to corrupt officials.
IV. Privatization as a Reform: Strengths and
Weaknesses
As Chapter 3 made clear, privatization is both an anticorruption reform and a new potential source of
corrupt gains. Privatization places production decisions in the private market, often resulting in more
efficient and less corrupt provision. For example, in Cote d’Ivoire, privatization of water utilities
reduced corruption between the public and private sectors (Plummer and Cross 2007: 247).
Although privatization is desirable in a wide range of cases, reformers ought to design the
process to reduce the incentives for rent seeking that remain.44 The process should assure the widest
level of participation rather than favoring consortia with strong ties to local elites and must be
transparent and well publicized, especially in the valuation of assets (Kaufmann and Siegelbaum
1997; Manzetti 1999; Nellis and Kikeri 1989: 669).45 When an inside deal appears inevitable,
privatization is not likely to be worthwhile because a public firm is easier to monitor than a private
one. However, sometimes even a transfer to an insider may be desirable if the new owner is insulated
from some of the political pressures that interfere with efficient performance.
If privatized firms will retain monopoly power, new regulatory institutions must be created that
are not subject to improper influence. It is important to set up the regulatory framework in a credible
way before tendering begins. Developing and transitional economies with newly private public
utilities must set up strong apolitical regulatory agencies with transparent and open processes
(Tenenbaum 1996). This will both reduce the uncertainty associated with tendering and reduce the
possibility that the winning bidder can manipulate the process by which regulatory institutions are
created (Nellis and Kikeri 1989: 670; Manzetti 1997).
Regulatory models from developed countries may not be directly transferable to those with less
bureaucratic capacity and more risk of corruption and capture by the regulated firms. New institutions
must be designed with this crucial variable in mind. Discretion must be both limited and managed.
New regulatory agencies need relatively clear, simple, and enforceable guidelines, and regulatory
employees should become more professionalized. Training and professionalization were an important
part of reforming the pharmaceutical regulatory agency in Nigeria (Cohen, Mrazek, and Hawkins
2007: 41).
Case studies of telecommunications regulation in six diverse countries demonstrate the need for
restraints on discretion, a stable legal environment, and enforcement institutions (Levy and Spiller
1996). The authors conclude that an independent judiciary is a necessary condition for effective
regulation of privatized industries. Even if an independent judiciary exists, however, it will be
ineffective unless the political process can establish binding legal constraints. If either of these
conditions is missing, privatization may generate few benefits for the public. Only firms with corrupt
insider connections to political leaders may be willing to bid when public firms are put on the auction
block. The result will be low bids and excessively favorable treatment in the future.
Finally, if credible commitments are possible, the strength and quality of the bureaucracy
determines whether a country ought to settle for simple regulatory rules. Jamaica, for example, has a
respected independent judiciary,46 but its weak administrative capacity counsels the use of simple
rules (ibid.: 7–9). Some discretion will inevitably remain. Regulators must therefore be protected
from improper influence through a transparent appointment process, limits on conflicts of interest, and
security of tenure that insulates them from political pressure. Some recommend that a single agency
should be given a broad jurisdiction over several regulated industries – both to conserve on
resources and expertise and to limit improper political interference. In a government with some
degree of public accountability, a broad-based agency will benefit from a higher political profile so
that the stakes of inappropriate political interference will be higher (Smith and Shin 1995: 7). The
regulatory system could also be organized to give consumers a stake in an effective regulatory system.
For example, telecommunications regulators in New Zealand and the United Kingdom set up systems
to give consumers rebates if firms failed to meet clearly defined performance obligations (ibid.: 8).
The use of “report card” evaluations has proven successful in public utilities (which may be
privatized and regulated) in several countries (Campos and Bhargava 2007; Plummer and Cross
2007). Such checks on bureaucracy are important because even simple regulatory tasks can be
influenced by corruption.
The integrity of the privatization process during the transition in Eastern Europe and the former
Soviet Union offers valuable lessons. These lessons may be most relevant for the handful of countries
that still embrace a command economy, but also offer insight for any privatization process. In these
states, because the state owned all or most production facilities, large portions of the national
patrimony were privatized. To limit corruption both at the point of sale and in postprivatization
operations, greater care should have been taken to establish a transparent and reliable legal
environment before privatization took place. This did not happen in most countries, with predictable
results (Rose-Ackerman 1994; Shelley 1994). In general, voucher-based mass privatization and
liquidation appear least susceptible to corruption,47 with management-employee buyouts and
spontaneous privatization most conducive, because of their slow pace, high levels of discretion, and
lack of transparency. Initial public offerings, public tenders, and trade sales are intermediate options
whose slow speed is balanced against their transparency and independent administration (Kaufmann
and Siegelbaum 1997). Countries in the midst of a large-scale privatization effort need to balance
speed against the long-term value of clear legal rules and of a wealth-transfer process that is viewed
as legitimate by the population.
Conclusions
Structural reform should be the first line of attack in an anticorruption campaign. If a public program
is not serving a legitimate public goal, the bottlenecks and constraints it imposes do nothing more than
create corrupt opportunities. The remedy here is elimination, not reform. Many other programs serve
important goals and should be redesigned to limit official discretion. In some others, the
administrative system should be reoriented to reduce the private gains available to officials.
Procurement reform serves as another basic component of an anticorruption strategy. It provides
an opportunity to rethink what the government buys as well as how it goes about making purchases.
Although reforms in the United States should not be mindlessly transferred to other institutional
contexts, they can provide a framework for thinking about the redesign of procurement processes.
Developing countries could experiment with experience rating for contractors, the adoption of more
transparent processes, and more reliance on bargaining. In developing countries with a scarcity of
skilled procurement experts and weak public accountability the case for benchmarking and the
purchase of standard items is even stronger than in the United States. Privatization can be an anti-
corruption strategy, but it is fraught with difficulties.
In Chapter 5 we turn to civil service reform. Corrupt and incompetent officials can defeat all
other efforts. How, then, should a state structure its bureaucracy so that honest government service is
a plausible career choice for educated citizens?
Chapter 4 Appendix
Economic Analysis of Anticorruption Reforms
In this appendix we revisit the simple economic model of the market for “bent rules” that was
presented in Chapter 2 in order to analyze the expected results of common anticorruption reform
prescriptions. Like most graphical models, this is an oversimplification, intended for illustrative
purposes, but it helps to show that reforms often have unexpected and unintended consequences.
Recall that the demand curve shows the willingness to bribe to obtain a corrupt benefit and the supply
curve shows the willingness of officials to provide this benefit in return for payoffs of different
amounts. Thus, in this case the only way to obtain the benefit or to avoid a cost is through bribery.
Some reforms change the incentives from the supply side: a policy might raise the wages of
public servants (so that the opportunity cost upon firing is higher); increase the probability of
detection and punishment; or increase the punishment applied when corruption is detected. The shape
of the new supply curve depends upon the nature of the reforms. Figure 4A.1 represents one case in
which there is no threshold for bribery, but the supply curve rotates upward. In contrast, if the curve
shifts up in parallel, the marginal effect of a rise in bribes remains unchanged, but there is now a
threshold that sets the minimum acceptable bribe. In either case, equilibrium occurs with a lower
number of corrupt transactions (q1), but a higher bribe-price (b1). This may increase or decrease the
total funds collected in bribes by all officials depending upon the elasticity of demand.1 The higher
bribe-price is sufficient to compensate the more corruption-prone individuals, even as some drop out
or start to act honestly. The social cost of bribery, however, is not the volume of bribes but rather the
distortions in the allocation of the public benefit.
Figure 4A.1. Supply-side reforms.
Source: Authors.
Another proposal is to replace all the existing personnel with those who have a stronger
commitment to honesty – admittedly a daunting task in many cases. This is also a costly strategy that
may be accomplished with a thorough background check and reliable references for reputation, or
using psychometric testing. Hiring those who pass through such a screening mechanism will not
necessarily push corruption to zero, but it should effectively increase the slope of the supply curve
because at any bribe-price, fewer officials are willing to accept payoffs, and some may remain honest
in the face of substantial temptations. The equilibrium effects of such a policy are quite like those in
Figure 4A.1. Of course, even such a system is open to abuse if the higher bribe size provides an
incentive for job applicants to misrepresent themselves as honest when they are not, thus shifting the
supply curve back toward the right.
Other reforms focus on shifting down the demand curve (Figure 4A.2). If taxes (t) or red tape
and regulations (r) are reduced, firms and individuals will have less need or desire to pay bribes. In
addition, law enforcement efforts can be directed at bribe payers. Under these policies, the result
ought to be both fewer corrupt transactions and a lower bribe in equilibrium. As Figure 4A.2 shows,
this case is straightforward – the bribe-price falls, the quantity allocated through bribery falls and
overall bribe revenue falls.
Figure 4A.2. Demand-side reforms.
Source: Authors.
The analysis is more complex when corruption helps some firms develop local monopoly
positions in their own markets. Now bribery by some firms convinces officials to deny the public
benefit (e.g., a license to open a restaurant, bar, or gas station) to others who are not just low bidders,
but who are also competitors. Hence, a reform that limits officials’ discretion, provides applicants
more than one place to obtain a license, or allows rejected applicants to effectively appeal the
rejection, could limit the size of bribes offered because one type of benefit cannot be assured.
If anticorruption policy targets both demand and supply, one cannot be sure of the nature of the
equilibrium. The quantity of corrupt transactions falls but the bribe-price and overall corruption
revenue could rise or fall depending upon the relative shifts in the curves and on their underlying
shapes. Anticorruption policy for bureaucracies that serve multiple firms and individuals needs to
consider the relative costs and benefits of alternatives that target officials and potential bribe payers.
Later in discussing the criminal law, we bring in another complicating factor, that is, the need to give
actors an incentive to reveal corrupt deals to law enforcement authorities, especially in cases of quid
pro quo bribery where both sides benefit relative to a legal transaction.
1 Gary Becker, e.g., urged: “To Root Out Corruption, Boot Out Big Government,” Business Week,
January 30, 1994.
2 Vikas Bajaj, “India Unit of Wal-Mart Suspends Employees,” New York Times, November 23,
2012, http://www.nytimes.com/2012/11/24/business/global/wal-marts-india-venture-suspends-
executives-as-part-of-bribery-inquiry.html (accessed October 11, 2015).
3 Bussell (2013) provides a detailed study of the costs and benefits of one-stop shops for small
businesses in India. Some government approval procedures were contracted out to private
businesses under a general reform to streamline procedures.
4 For arguments in favor of decriminalizing certain substances, see the series of reports produced
by the Global Commission on Drugs, available at
http://www.globalcommissionondrugs.org/reports/ (accessed June 2, 2015).
5 Legalization has not always been corruption free. See Johnson (2002: 177–95) on the
legalization of gambling in Atlantic City. Keys to winning the state referendum permitting gambling
were private, not state, ownership; earmarking taxes on gambling for subsidies to the elderly and
disabled; and a costly marketing campaign toting the economic benefits to the state. Some were
provided private benefits to get out the vote and to support the referendum.
In many neighborhoods it takes paid Election Day workers to knock on doors, drag people out of
their homes, drive them to the polls and, when necessary, buy them lunch, give them a bottle, or slip
them a few dollars. [Pro-gambling interests] saw to it that there was enough money on the streets of
every major city in the state to guarantee that when these voters finally did get to the polls, they
pulled the right lever (ibid.: 195).
6 Germany and New Zealand, among others, have legalized prostitution in recent years. Cathy
Reisenwitz, “Why It’s Time to Legalize Prostitution,” The Daily Beast, August 15, 2014. The
World Health Organization (2012) recommends legalization to reduce violence against women and
cites several studies that find that result.
7 An example from the private sector: several taxi companies were accused of bribing taxi ticket
agents inside the Monterrey, Mexico, airport to promote their service. The typical ruse is to say
that the competition is of lower quality or doesn’t have cars available. Ángel Charles, “Manipulan
a pasaje en guerra de taxis,” El Norte, February 11, 2014.
8 Empirically, Gerring and Thacker (2005) find that openness to trade and low regulation are
associated with lower levels of corruption, but public spending has no correlation. (ibid.: 250).
9 Goods flow freely within the European Union, people are free to move among the members of the
Schengen Agreement, and a common currency is used by members of the Euro Zone (and a few
nonmembers). While there is considerable overlap, the membership is not identical in the three
zones.
10 The stock market has proven to be a poor disciplinary device to avoid defective products. On
the case of the automobile industry see Marcus (1989).
11 Robert Guy Matthews, “Steel Smugglers Pull the Wool over the Eyes of Customs Agents to
Enter U.S. Market,” Wall Street Journal, November 1, 2001,
http://www.wsj.com/articles/SB1004565116710302480 (accessed October 11, 2015).
12 Registering companies in low-tax countries is one such loophole, which requires international
cooperation to overcome. See “Inequality and the Narrowing Tax Base: Too Reliant on the Few,”
The Economist, September 20, 2014, http://www.economist.com/news/leaders/21618784-taxes-
are-best-raised-broad-base-many-countries-it-worryingly-narrow-too-reliant?fsrc=nlw|hig|18-09-
2014|53c93d949dbcd4763a001330|NA (accessed September 18, 2014).
13 Arthur Laffer, “The Laffer Curve: Past, Present, and Future,” The Heritage Foundation,
http://www.heritage.org/research/reports/2004/06/the-laffer-curve-past-present-and-future
(accessed August 26, 2014).
14 “Airport Customs Harnesses 3 Billion Mexican Pesos Per Year,” El Economista, February 13,
1992.
15 “Mexico Fine-Tuning Customs Area Ahead of NAFTA,” Reuters News Service, February 24,
1993.
16 In Colombia, deregulation of the drug market – in a regime of guaranteed health care and
reimbursements for drugs not on the official lists – led to widespread fraud, including double-
charging for the same prescription, paying more than twice the market price for drugs, and
reimbursements to “ghost hospitals” (Hussmann and Rivillas 2014: 118–19).
17 “Passage to Cleaner Air,” Financial Times, April 10, 1996.
18 “Pollution Auctioneer Chosen: Environmental Protection Agency Chooses Chicago Board of

Trade to Conduct Auction of Permits Allowing Power Plants to Emit Sulphur Dioxide,” The New
York Times, September 28, 1992. The first auction was in 1993, and the program is still in use but
price levels have collapsed, and it plays a less important role than was initially envisaged.
http://www.epa.gov/airmarkets/participants/allowance/index.html (accessed July 18, 2015).
19 European Commission, “The EU Emissions Trading System (EU ETS),”

http://ec.europa.eu/clima/publications/docs/factsheet_ets_en.pdf (accessed September 26, 2014).
This market suffered a price collapse presumably because too many allowances were available.
For background and updates see the web page of the EU Emission Trading System at:
http://ec.europa.eu/clima/policies/ets/index_en.htm (accessed July 18, 2015).
20 In Nairobi, “small-scale private operators pay local government officials to allow them to
dump waste on inappropriate sites irrespective of health and environmental consequences”
(Plummer and Cross 2007: 235).
21 India has embarked on a campaign promoting direct deposit as a tool to fight corruption. The
accounts have no minimum balance and provide a small government-funded life insurance policy to
the account holder, attracting “tens of thousands” of applicants in the first two weeks. See Katy
Daigle, “India Urges Millions of Poor to Open Bank Accounts,” Associated Press, August 28,
2014, http://bigstory.ap.org/article/india-urges-millions-poor-open-bank-accounts (accessed
October 11, 2015).
22 PHYS.ORG, “Indonesian Graft Busters Launch Anti-Corruption App,” October 2, 2014,

http://phys.org/news/2014-10-indonesian-graft-busters-anti-corruption-app.html (accessed
October 2, 2014).
23 See Servicio de Administración Tributaria, “Factura Electrónica,”

http://www.sat.gob.mx/informacion_fiscal/factura_electronica/Paginas/default.aspx (accessed
October 11, 2015).
24 Gulati and Rao (2007: 141–2) find that the use of websites for disseminating such information
is more effective than publication in newspapers. Of course, these are not mutually exclusive
outlets.
25 In order to avoid a single well-connected individual from winning contracts under multiple firm
names, it would be necessary to include all associates and the physical address of each firm in the
database.
26 “Targeting Social Spending: Casting a Wide Net,” The Economist, January 10, 2015. On
biometric identification see Gelb and Decker (2011).
27 This measure has been used in the United States to counter police brutality, but could be equally
effective in combating corruption. See von Drehle, “Who Do You Trust? Police ‘Body Cams’ Raise
Brave New Questions along with Transparency,” Time, October 6, 2014, 21.
28 See, e.g., “Traffic Cop Allegedly Taking Bribe Caught on Video,”

http://www.youtube.com/watch?v=h_-8yToH7Pg (accessed October 11, 2015); NTV Kenya,
“Regional Graft: Transporters Forced to Bribe Police along the Northern Corridor,”
http://www.youtube.com/watch?v=SROvjZ-kEaM (accessed October 11, 2015); “Gringo graba
soborno a Policia en Mexico,” http://www.youtube.com/watch?v=VtG_VOb7v_s (accessed
October 11, 2015); “Usuario Simulado Monterrey – El oficial del cambio,”
http://www.youtube.com/watch?v=4-DCUZcnCyw (all accessed October 11, 2015).
29 “Zapping Mosquitos, and Corruption,” The Economist: Technology Quarterly, June 1, 2013.
Now called the Citizen Feedback Model, the idea originated with Zubair Bhatti, a former Pakistani
government official now at the World Bank. See: http://www.punjabmodel.gov.pk/ (accessed
October 11, 2015).
30 Google has developed a car that drives itself, although it still needs improving. This leaves
open the possibility of designing a car that would administer the driving test on real roads, with the
ability for the car to take over if the applicant’s driving represents a danger. For an evaluation of
the Google car, see Lee Gomes, “Hidden Obstacles for Google’s Self-Driving Cars,” MIT
Technology Review, August 28, 2014, http://www.technologyreview.com/news/530276/hidden-
obstacles-for-googles-self-driving-cars/ (accessed October 11, 2015).
31 As but one example: a certain payroll was computerized in order to eliminate ghost workers,
but a computer operator added 30 ghost workers and collected their salaries in addition to his own.
See Heeks (1998: 4).
32 A good “how-to” guide for developing countries and international donors is Heeks (2001).
33 See World Bank (1997a). The World Trade Organization’s (WTO) Agreement on Government
Procurement and related documents are available on the Internet at
https://www.wto.org/english/tratop_e/gproc_e/gp_gpa_e.htm (accessed October 11, 2015). The
WTO agreement and the United Nations Model Code are discussed in Hoekman and Mavroidis
(1997).
34 Three acts were passed: The 1993 Government Procurement and Results Act, the 1994 Federal
Acquisition Streamlining Act [10 U.S.C. 2305(b) (5) (A) and 41 U.S.C. 2536(e) (1)], and the 1996
Clinger-Cohen Act (41 U.S. C. 423). The statutory reforms have been incorporated into the revised
part 15 of the Federal Acquisition Regulation (FAR).
35 Laurent (1997). The Clinger-Cohen Act’s provisions dealing with post-employment restraints
and disclosure of information are discussed in Noelker, Shapiro, and Kellogg (1997).
36 Christopher Drew and Danielle Ivory, “Contracting Overhaul Is Promised for Navy,” New York
Times, December 21, 2013, http://www.nytimes.com/2013/12/21/us/politics/amid-scandal-navy-
secretary-announces-contracting-overhaul.html (accessed October 11, 2015).
37 Terry (1997a), generally a critic of Kelman’s reforms, supports performance rating but argues
that it should be centralized with a grading system based on companies’ entire contractual
workload worldwide. He also recommends giving government contracting officers access to
commercial data bases on financial fraud that would also tell the government if the contractor
owed back taxes. He would give vendors access to data on their own company and give them an
opportunity to challenge the data.
38 World Bank, Procurement Guidelines Introduction, section 1.15 (d) at:

http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/PROCUREMENT/0,,contentMDK:2
0060842~menuPK:93304~pagePK:84269~piPK:84286~theSitePK:84266,00.html (accessed
October 14, 2015).
39 See, “New World Bank Procurement Framework Approved,” July 21, 2015.
http://www.worldbank.org/en/news/press-release/2015/07/21/world-bank-procurement-
framework (accessed July 22, 2015). The press release provides a link to the underlying report
where integrity is included in III.D, paras. 48-53. Because this document was released just as we
were submitting our manuscript for publication we do not attempt an analysis of the new
framework, but it appears to be a positive development that is consistent with much of what we
argue here.
40 Private conversation with Rose-Ackerman at the World Bank in 1995–6.
41 “Bid Rigours,” Far Eastern Economic Review, March 23, 1995. In November 1996 the newly
established Special Investigation Department of the Federal Trade Commission brought a second
case against manufacturers and retailers of water meters (The Daily Yomiuri, November 17, 1996).
42 Transparency International, “Integrity Pacts,”

http://www.transparency.org/whatwedo/tools/integrity_pacts (accessed June 19, 2015). See also
Transparency International, 2009, “The Integrity Pact: A Powerful Tool for Clean Bidding,” Berlin,
Transparency International,
http://www.transparency.org/files/content/tool/IntegrityPacts_Brochure_EN.pdf. (accessed
October 15, 2015).
43 Palifka thanks participants in the “Drivers of Corruption” Roundtable (Law, Justice, and
Development Week, October 23, 2014, World Bank, Washington, D.C.) for this insight.
44 During the late nineteenth and early twentieth centuries in the United States, public ownership –
not privatization – was promoted as a means to combat corruption in the form of underpricing of
public goods, overpricing of goods sold to the government, and the abuse of subsidies designed to
promote activities with positive externalities (Glaeser 2004).
45 The costs to a country of lack of transparency are illustrated by the case of privatization in
Brazil as described in a speech by Chase Manhattan managing director Charles Wortman. He
advised foreign investors to take on local partners because little public information was available.
According to Wortman,
Investors typically receive the bid package ... 30 to 45 days and sometimes as little as 15 days
before a company is sold. The information is skimpy and not necessarily reliable.... Not much
due diligence is allowed. Don’t expect a company to open its books and allow your
accountants to come in. Few representations and warranties are given. If surprises come up
later, they are your problem.
Based on a report on the speech in Rosemary H. Werrett, “Brazil: Privatization Program Throws
New Curves at Foreign Investors,” Development Business, January 16, 1996.
46 Jamaica has a score of 4.5 (where 7 is “best”) on judiciary independence in the World
Economic Forum’s Global Competitiveness Index. This is equal to the average score on the same
indicator for high income countries. World Economic Forum, “GCI dataset,”
http://www3.weforum.org/docs/GCR2014-15/GCI_Dataset_2006-07-2014-15.xlsx (accessed
August 4, 2015).
47 An apparent exception occurred in Georgia, where low trust in government, poor understanding
of the program, and high rates of poverty drove down voucher prices, enabling organized crime to
capture privatized state assets. The process itself was not (in principle) corrupt, but rather led to
corruption. The criminal groups did have (probably corrupt) access to credit (Kukhianidze 2009:
221).
1 The elasticity of demand expresses the percentage change in the quantity (q) demanded for a
percentage change in the bribe-price (b). A demand curve of the form: q = α/b, where α is a
constant, has an elasticity of minus one so that at any market-clearing bribe-price, the revenue
collected in bribes would be the same. In the straight-line curves in our diagram, revenue at first
increases as the bribe falls from the vertical axis (demand is elastic), peaks at the midpoint, and
then falls as the bribe-price falls toward zero (demand is inelastic in that range). Figure 4A.1 has
been drawn so that between b0 and b1 the bribe-price rises, but the total collected falls.
5
Civil Service Reform and Bureaucratic
Reorganization
◈
A strong and competent public sector is the necessary backbone of anticorruption policies that target
the provision of government services.1 Cross-country research supports the view that a well-
functioning bureaucracy contributes to economic growth (Mauro 1995; Evans and Rauch 1999: 750–
3; Rauch and Evans 2000). Furthermore, other public-sector goals, such as redistribution to the poor,
equitable and impartial service delivery, public security, and effective procompetitive regulation,
will not be effective unless the state is capable of administering complex public programs.
A personnel system based on patronage and political loyalty undermines the efficient delivery of
services and leads to the unfair administration of tax and regulatory laws.2 If corruption and self-
dealing are embedded in a government that is otherwise democratizing and promoting market
competition, this can delegitimize political and economic reform. An apolitical civil service can
smooth changes in political leadership by maintaining continuity in service delivery (Adamolekun
1993: 41–3). The goal is not to isolate public administration completely from politics – an
impossible task in any event – but to find ways to mediate the relationship. The Weberian ideal is a
professional civil service that is politically neutral, has security of tenure, is paid a decent salary, is
recruited and promoted on merit, and does not have property or business interests that conflict with
the fair performance of its duties (ibid.). Some reformers question aspects of this traditional model,
but even they support the principle that civil servants should not be hired and fired for political
reasons (Reid and Scott 1994; Scott 1996).
There are several interlocking ways in which the public administration can perform poorly, over
and above the corrupt incentives created by particular rent-generating programs, discussed in
previous chapters. The main sources of failure are the lack of professionalism in the civil service;
vague, complex, and confusing legal rules; poor management of government finances; and the risk of
corrupt hierarchies. Corruption and self-dealing are symptoms of these underlying roots of failure.
A first key to the functioning of the modern bureaucratic state is the separation of roles. Modern
government officials do not own their offices and must distinguish between actions appropriate to
their roles as public agents and their roles as family members, friends, and members of larger ethnic,
religious, or other groups. One way to facilitate such role division is specialized professional
training that separates decision-making procedures inside government from one’s day-to-day life
outside it.3 Thus, officials may use cost-benefit analysis to make choices or refer to an agency manual
for guidance on the job but use very different criteria in organizing their private lives. Without such
training, civil servants may use the same decision-making criteria on the job that they do in their
personal lives. Internal bureaucratic rules forbid favoring friends and family or taking gifts in return
for favors, but such practices may be common outside government. In cases of conflict, the
indoctrination of professional norms and technical expertise may not be sufficient. It is also important
that civil servants have the technical capacity to evaluate competing options, so that they are not
forced into the default option of using contacts. For example, a civil servant contracting for a road-
building project will be unable to evaluate proposals unless he is trained in civil engineering. In such
cases, incompetence and corruption may be indistinguishable.
Separation of roles will be very difficult if official salaries are far below private-sector
equivalents. Low pay is an inducement to moonlighting and corruption. Adequate pay is a necessary
condition for competent bureaucratic performance, and rules must constrain conflicts of interest with
other sources of wealth in the official’s family. However, adequate pay is clearly not sufficient, as
documented by evidence of corrupt and self-serving officials at the highest government levels.
Second, even if the civil service is exemplary, the underlying legal structure may be either
vaguely defined or overly complex. Resources of money, time, or expertise may be scarce relative to
the tasks assigned to officials. Then temptations to corruption, capture, and shirking will be high.
Bribes are a shortcut around such laws; capture favors those with political influence; and shirking
reflects officials’ hopelessness in the face of a chaotic legal reality. Accepting bribes or favoring the
powerful may even be seen as a reasonable way to carry out an otherwise impossible set of tasks.
However, if a weak civil service combines with a poor legal framework, officials face the temptation
to create additional arbitrary rules and regulations and use them to extort payoffs or justify inaction.
Third, if the government has no unified budget and does not audit and track spending either
inside the bureaucracy or through an independent controller, room is opened up for inefficiency
caused by self-dealing. If officials need not account for their spending, some will be tempted to keep
a portion of their budgets for themselves or to spend it on unnecessary official perks. Of course, a
professional civil service can help ameliorate this problem, but when the temptation is high, a
government cannot rely on prior training and moral norms as the only defense. A self-selection
mechanism may filter those likely to succumb to temptation into the civil service. Further, key
positions in the bureaucracy may be filled mostly by those with close links to powerful interests – be
they legitimate economic interests, politicians, or, in truly pathological cases, organized crime
groups.
Finally, one needs to acknowledge the particularly serious problems that arise when corruption
or capture reaches the top of the bureaucratic hierarchy to include senior civil servants or political
appointees – bringing the state to the edge of outright failure and undermining the economy. In some
cases, a branch of the public sector may be organized as a bribe-generating machine. For example,
top police officials may organize large-scale corrupt systems in collaboration with organized crime
groups, who are given a de facto monopoly on illicit activities. Policing is probably the most
dramatic example, but tax collection agencies and regulatory inspectorates can also degenerate into
corrupt systems where high-level officials manage and share in the gains of their inferiors. In other
situations, governments engage in projects that have a significant effect on the wealth of domestic and
foreign businesses. High-level politicians can then use their influence to collect kickbacks from
private firms.
Public administration reform needs to link the corruption, waste, and inefficiency observed in
practice with the underlying economic and political incentives that make them possible. Criminal
prosecutions and exhortations to observe high moral standards in both the public and private sector
are all very well, but they cannot be the only responses to problems that are fundamentally structural.
In previous chapters we stressed structural reforms in the delivery of public services; this chapter
focuses on overall reform of the system of public employment. We begin with the basics of civil
service restructuring, including pay and recruitment; New Public Management; conflicts of interest;
incentive systems – both carrots and sticks; the control of corruption in hierarchies and other
organizational forms; and the role of middlemen. However, there is a second option. The state can
distance itself from the actual provision of services by contracting with private firms. The chapter
concludes with a brief discussion of how the private sector can be used to limit corruption through
contracting out, although we stress that such reforms may generate new corrupt opportunities that
parallel our discussion of corruption in contracting for infrastructure and the privatization of public
firms.
I. Pay and Recruitment
Many developing countries have very poorly paid civil servants. At independence, most former
colonies inherited civil service pay scales that exceeded private-sector wages, but this advantage has
generally eroded over time. A similar pattern prevails in Eastern Europe, the former Soviet Union,
and Latin America (Reid and Scott 1994: 52; Haque and Sahay 1996: 11).4 However, low pay is not
a problem everywhere or at all levels of pay. According to several focused studies, public-sector
wages are significantly lower than private-sector wages in Ukraine (by 24% to 32%)
(Gorodnichenko and Sabirianova Peter 2007) and the United States (Bender and Heywood 2010) but
are higher in Latin American countries (Panizza and Qiang 2005) and Zambia (Nielsen and Rosholm
2001).5
Public-sector wage scales are often compressed, meaning that skilled workers earn too little
relative to other options, and low-skilled workers do better in the public than the private sector.
When budgets are tight, governments often reduce the pay of those at the top of the scale. In the
postcolonial period, in all but one of thirteen African countries high-skilled wages declined more
than low-skilled wages between 1975 and 1985 (Haque and Sahay 1996: 6). By the mid-1980s, the
salary of the top civil servant was less than ten times the lowest-paid rank in many African countries
(Nunberg and Nellis 1995: 28). In such cases highly skilled employees will be difficult to attract, and
there may be excess demand for low-skilled jobs. Reform programs have frequently sought to
decompress salaries. Thus in Ghana the ratio moved from 2.5 to 1 in 1984 to 10 to 1 in 1991 – short
of the reformers’ goal of 13 to 1, but substantial progress nevertheless (ibid.: 27). At the same time,
low-skilled workers may earn a premium over the comparable private-sector wage. For example,
public managers, engineers, and accountants in Trinidad and Tobago earned less than their private-
sector counterparts, while low-skilled workers earned more than twice the minimum wage in the
private sector (Reid and Scott 1994: 48).
If public-sector pay is very low, corruption is a survival strategy. One should be careful,
however, not to exaggerate the public/private disparity. In most cases total remuneration includes not
just formal wages, but also perks such as housing, health care, or coupons for groceries or gasoline.
These in-kind benefits are generally tax-exempt and become especially valuable during periods of
high inflation. World Bank figures from studies in the 1990s show that benefits ranged from 20% to
more than 80% of total compensation in the countries studied (Reid and Scott 1994: 50; Nunberg and
Nellis 1995: 26).
But even a generous estimate of the value of perks would not close the pay gap in all countries
(Reid and Scott 1994). In these cases, officials are likely to take second jobs or accept payoffs as
salary supplements. Some may even operate businesses that can profit from their government
positions. The problem is an old one. In Great Britain during the late eighteenth century a government
commission worried that reducing the salary of officials would “recoil upon the public, by creating
new claims for consideration [that is, payoffs], which must in justice be satisfied” (quoted in Chester
1981: 144).
A cross-country study from the 1990s finds a negative association between civil service wages
(relative to private-sector wages in manufacturing) and the level of corruption (Van Rijckeghem and
Weder 2001).6 Another piece of indirect evidence is the disparity between civil service pay and
income or consumption. For example, under President Mobutu in Zaire salaries made up only 33% of
the income of officials in 1986, down from almost 100% in 1969 (MacGaffey 1991: 14). A study in
India compared income and consumption for those employed in the public and the private sectors.
Despite earning lower incomes, public officials’ consumption of durables was not statistically
different from that of private-sector workers in upper quartiles. The result suggests that the officials
were supplementing their income through payoffs or off-the-books employment (Saha, Roy, and Kar
2014). A similar study in Ukraine found that public-sector employees spent as much on consumption
goods as their private-sector counterparts, despite earning 24% to 32% less; the authors estimate that
bribes constitute 20% of public-sector compensation (Gorodnichenko and Sabirianova Peter 2007).
If payoffs make up the wage gap, people may pay to obtain jobs that on the surface seem quite
undesirable. In some developing countries there is a lively market for positions in the bureaucracy
that generate large bribes (Wade 1982, 1984). As many as 80% of public officials in Paraguay
reported that payments were frequent in hiring; in seven other countries the rate ranged from 15% to
30% between 2001 and 2005 (Recanatini 2011a: 47). All civil servants surveyed in Indonesia by
Kristiansen and Ramli (2006) had paid to be hired, but this may be a result of their snowball
sampling methodology.7 Positions in corrupt police departments are likely to be especially valuable
(Alfiler 1986: 39; Pasuk and Sungsidh 1994: 99–129). Jobs in departments with few such
opportunities, such as foreign service, may attract few qualified applicants.
Corruption of this type can pervade the bureaucratic hierarchy. Higher-ups may open a market
for the bribe-rich positions, in which only those who pay an “entry fee” (bribe) will be hired,
independent of their qualifications. The higher levels of the hierarchy will try to capture as much of
the surplus as possible in the process, reducing the benefits for the civil servants. For the first year of
employment, at least, the main beneficiary of the program will be the hiring officials. Kristiansen and
Ramli (2006) document that in post-Suharto Indonesia, civil servants paid on average 2.5 years’
salary to obtain their posts, with positions in certain sectors demanding twice as much. Systemic
bureaucratic corruption can affect even honest workers by lowering civil servants’ intrinsic
motivation to serve the public interest. To the extent that the quality of service is lower or the
reputation of the department is tarnished, morale may suffer (Klitgaard 1988). Although, in general,
civil servants have higher intrinsic motivation than private-sector workers, this is less likely to be
true in more corrupt countries, as has been shown in a cross-country study using the World Values
Survey (Cowley and Smith 2014).
If government pay scales do not reward those with specialized skills, a selection bias will
operate. Some people, qualified for public-sector work, instead seek jobs in the private sector at
home or abroad. Skilled workers, even those trained explicitly by the government, exit, leaving the
less qualified and the less scrupulous behind. Under such a corrupt system, those with less intrinsic
motivation select public employment for its lucrative corrupt opportunities. In the absence of
corruption and moonlighting, a labor market equilibrium arises with those of low skill concentrated in
low-paid government jobs that they are unqualified to perform. Of course, some applicants may be
especially committed to government service in spite of the corruption of others, but there may not be
enough of them to staff the bureaucracy, and the public-spirited may not be well qualified on other
grounds. If the system is in equilibrium, the marginal worker will be one who finds a government job
at least as good as a private-sector job, but there may be many inframarginal workers who are not
employable at the private-sector wage.8 After many years have passed, the civil service will be
disproportionately staffed with two kinds of workers – low-productivity workers who are not
employable in seemingly “comparable” jobs in the private sector and those willing to accept bribes
(Besley and McLaren 1993).
Given this distribution of talent, production processes and service delivery systems may be
designed both to require few skills and to produce corrupt opportunities. Under such conditions, civil
service reform must be thoroughgoing if there is to be any hope of success. Increasing pay and
improving working conditions may have little impact on performance. In addition, new hires must
replace much of the existing workforce. A careful redesign of public programs will also be needed to
reduce incentives for corruption and create incentives for productive activity.
II. Weberian Bureaucracies versus New Public
Management
Although low civil servant pay continues to be a pressing issue in many parts of the world, evidence
suggests that merely raising wages across the board is not a sufficient response and might lead to a
corrupt market for such jobs. Thus, Rauch and Evans (2000) and Dahlström, Lapuente, and Teorell
(2012) found that merit recruitment and overall professionalism were keys to good performance.
However, merit recruitment and a professional cadre of civil servants are not possible unless salaries
are adequate. Although the aforementioned studies share the limits of all cross-country work, they do
suggest that reform must include efforts to motivate and reorganize the public administration. Pay
increases may be a necessary part of such reforms, but across-the-board pay raises are a poorly
targeted solution. Pay needs to be tied to other, deeper reforms.
Country-specific studies corroborate these findings. For a sample of health care workers in
Tanzania, Lindkvist (2014) finds that salaries do matter if one corrects for skill levels. However,
consistent with the cross-country work, honest and competent management has an even greater impact
on the health workers’ attitudes toward the acceptance of payoffs (ibid.). Similarly, higher salaries
alone do not seem to influence teacher absenteeism (Patrinos and Kagia 2007: 74).9 In Georgia, a
major reform of the police in 2004 increased salaries up to 1,000% (ten times the original salaries),
but this was accompanied with mass dismissals, large investments in equipment and police stations,
and training by experts from the United States and the European Union. Higher salaries were a
necessary but not a sufficient condition for producing a better police force and an increase in trust in
the Georgian police (Kukhianidze 2009: 227–8). In Mexico, police wages were raised more than
30%, with benefits including health insurance, pensions, and low-interest mortgages, but these
incentives were combined with professionalization: higher required education levels, training in
evidence collection by international experts (noncorrupt role models), and merit-based promotion as
an incentive to stay clean.10
Rauch and Evans build on a Weberian model of bureaucracy. In contrast, another influential
school of thought, the New Public Management (NPM) School, emphasizes the role of public servants
as suppliers of services to “customers.” There is an ongoing debate about the appropriate model for
civil service reform. We do not attempt to adjudicate this debate here, but a few examples will
illustrate what is at stake.
Successful reform in Latin America had a mixed character. The example of Brazil’s NPM reform
program is instructive. Studies suggest that it has had real benefits, some of which were sustained
over time. Although some public-sector employees were recruited on a merit basis as early as 1937,
it took the 1988 constitution to mandate a comprehensive federal civil service system and the
Cardoso administration to obtain a further amendment and to implement the new program (Gaetani
and Heredia 2002; Echebarría and Cortázar 2007: 127–8). The reform “tried to avoid the pitfalls of
the Weberian civil service model and promoted greater flexibility, greater managerial autonomy,
decentralization and results-based forms of administration and control” (Gaetani and Heredia 2002:
2). It also promoted: “(1) an alignment between public and private sector wages; (2) bonuses based
on performance; (3) more flexible allocation of public personnel; and (4) the National School of
Public Administration for training all types of public employees in all areas” (ibid.: 15). Beginning in
1996 the share of new civil servants with a university degree jumped dramatically: from 39.2% in
1995 to 63.6% in 1996, rising to 94.1% in 2001 (ibid.: 6, table 5). However, there were few short-
term benefits from the reform. Rather the gains were in an improved system of human resource
management and the strengthening of career paths that helped pave the way for more effective reforms
that occurred later.
Chile has also implemented reforms based on management agreements and evaluation by results
plus a system, established in 2003, that created a merit-based system of selection for senior civil
servants and a professional career path. The gradual introduction of reforms gave them staying power
(Echebarría and Cortázar 2007: 128, 131–2).11 Reform in Uruguay and Mexico appear to have had
positive results. In Uruguay, the number of public employees fell, as did the number of operational
units in the central government. The state established an evaluation system although its
implementation may lack consistency (Panizza and Philip 2005: 676–7). Reform in Mexico has
sharply reduced the number of patronage positions in the central government from tens of thousands to
a few hundred. The aim is to develop a career civil service although incumbents are given some
priority if they receive training and favorable job evaluations (ibid.: 677). Many patronage positions
in Mexico, however, are distributed by the constitutionally protected syndicates rather than directly
by government; even after privatization, most trade unions remain highly politicized (Clifton 2000).
The theory behind the NPM model is plausible, and it has apparently been successful in New
Zealand, where it has been most intensively implemented. However, its role in improving service
delivery and citizen satisfaction relative to more conventional bureaucratic models has not been
rigorously tested in middle income countries, such as those mentioned in the preceding text. In Brazil,
hints that all is not well, in practice, come from the data in the World Bank’s Doing Business index,
which suggest that, at least for the business community, the state continues to impose costly obstacles.
In any case, many of the most urgently needed anticorruption reforms do not turn on the relative merits
of the Weberian and NPM models.12 A more professional, merit-based civil service that is paid and
trained well and rewarded for competence is the bedrock on which any anticorruption reforms must
be built.
III. Conflicts of Interest
Conventional civil service systems attempt to insulate career officials from politics and to pay them
adequate salaries. These are important goals, but they are only part of the task of creating a
professional civil service. Even if pay is at parity with private-sector earnings and political
involvement is forbidden, officials may face incentives to use their positions for private economic
gain. Some countries, even though they outlaw bribery, have done little to control economic conflicts
of interest.
Financial conflicts of interest arise from a confusion of roles. If public officials make decisions
that can affect their private wealth or that of business firms in which they or their families have a
stake, they may skew their choices in favor of these private interests. No bribery is necessary to
create problems. Officials simply follow their own economic self-interest (Della Porta and Vannucci
2012: 124–5).
Conflicts of interest were rife in the early days of the American republic. Postmasters published
newspapers – treating themselves to free postage; whiskey tax collectors owned taverns and waived
taxes on their suppliers; and some customs officials were prominent merchants (Prince 1977).
Similarly, in postcolonial Africa, many countries encouraged public officials to engage in business
activities that overlapped with their official duties. The resulting conflicts of interest and corruption
seriously undermined state efficiency (Adamolekun 1993: 39–40, 42). In China, where many joint
ventures involve government partnerships with private business, the government initially urged
cadres to “drop into the sea of commerce” (Burns 1993: 358). The problem of divided loyalties is
obvious (Chow 1997).13 Since taking office in 2013, President Xi Jinping has unleashed a far-
reaching anticorruption campaign that includes investigations of conflicts of interest (Fu 2015).14
Because of conflict-of-interest concerns, most developed countries forbid civil servants from
involvement in decisions in which they have a financial interest. In many cases, both civil servants
and top political appointees must disclose their financial assets at least to a public agency, and top
officials may be required to place their assets in a blind trust. Acceptance of gifts or honoraria is also
regulated (OECD 2003).
Ethics-in-government rules and legal constraints developed gradually in the United States but
today are pervasive (Roberts and Doss 1992; Gilman 1995). The first code of ethics in the United
States was promulgated by the postmaster general in 1829 (Gilman 1995: 64–6). Today a mixture of
ethical codes and statutory requirements constrains public officials. The criminal law applies to both
public officials and those who might try to influence them illicitly. Both the payment and receipt of
bribes are criminal offenses. The receipt of a salary from sources outside government is against the
law, as are payments to officials for representing a private party in a “particular matter” in which the
United States has an interest.15
The Ethics in Government Act (5 USC app. 4, §§ 101–111, 401–408, 501–505) created the
Office of Government Ethics (OGE, http://www.oge.gov/), to deal with the disclosure of assets.
Principles of Ethical Conduct for Government Officers and Employees are contained in a fourteen-
point Executive Order that remains in force (Executive Order 12674, April 12, 1989, as amended by
Executive Order 12731, October 17, 1990). Many of the Executive Order’s provisions were given
teeth by the Ethics in Government Reform Act of 1989, amending the 1978 act, and regulations issued
by the OGE in 1992 (5 CFR 2635).16 The act and the Executive Order deal with both the acceptance
of benefits and the discharge of duties. Officials are not permitted to “use public office for private
gain” and are not to hold financial interests that conflict with their duties, use inside information for
personal profit, or accept gifts. Other provisions deal with the responsible performance of duties and
require officials to avoid the appearance of violating the law even if their conduct technically
complies with it.
By way of comparison, French and British conflict-of-interest restrictions have similar goals,
but use different methods. France only passed a statue dealing with conflicts in 2013, in light of a
State Commission report, “For a New Public Ethic.” According to Paris (2014), the rules and statutes
in place before 2013 expressed broad principles, but were too general and abstract to be effectively
enforced. Writing in 1991 Rohr (1991: 284–6) found French restrictions less stringent than in the
United States. Financial disclosure of assets was not required as a routine matter, and
postemployment restrictions were poorly enforced. The 2013 statute borrows some principles from
those that apply to the judiciary such as a requirement of impartiality and a procedure to permit an
official to withdraw from a matter touching on his or her private interests (Paris 2014: 148).
Unlike the United States, the United Kingdom relies on broad principles, voluntary codes, and
guidelines rather than enforceable rules. Civil servants and high officials are subject to a
decentralized body of practices, not statutes, and the Committee on Standards in Public Life keeps
ethical issues on the agenda (Stark 1992: 429; Rose 2014: 162–5; National Audit Office 2015).17 The
National Audit Office points to the risks of conflicts when the government contracts with private
firms with ties to public officials, especially in the delivery of health and education services. It rather
mildly concludes that government bodies need to strengthen their efforts to manage conflicts, but the
examples they provide suggest a growing concern with existing practices.
The United States restricts the political activities of civil servants to avoid making public
servants dependent on political party connections. In contrast, in France a common career path is to
move from the civil service into electoral politics. Civil servants can run for office without losing
their civil service status and can hold local office. If they win election to the French parliament, they
must take a leave of absence but can return to civil service employment with no loss in rank. In the
National Assembly in 2015, 31% of the members were public-sector employees, including teachers
and university professors.18 This seems typical; between 1958 and 1986, 33% of the members of the
National Assembly came from the civil service (Rohr 1991: 287). The value of such a system
depends upon the existence of a respected civil service. In developing countries with such a tradition,
the French model may have merit. In others, where the civil service is corrupt and patronage ridden, a
stricter separation of administration and politics along American lines seems preferable.
In practice, the most difficult enforcement problems concern job seeking. Although in the U.S.
federal government outright quid pro quos seem fairly well controlled by antibribery laws and by the
code of conduct and the legal sanctions behind it, officials are often hired after they leave government
by firms that have business with their previous governmental employer. The code of conduct states
that “Employees shall not engage in outside employment or activities, including seeking or negotiating
for employment, that conflict with official Government duties and responsibilities.” Subject to
several conditions, former officials cannot represent others before their former employer within two
years of termination. The ban is not absolute, however, but only applies to issues on which the person
worked within a year of leaving government (18 USC § 207 (a)-(d); Chakrabarti, Dausses, and Olson
1997: 608–12). President Obama increased the ethical burdens on appointees by issuing Executive
Order 13490, “Executive Commitments by Executive Branch Personnel,” right after taking office on
January 21, 2009. The Executive Order requires most noncareer appointees to take an ethics pledge
that bans gifts from lobbyists, imposes revolving-door limitations with respect to former and
subsequent employment, and requires the appointee to hire people based only on their competence.19
The most stringent postemployment constraint forbids appointees from lobbying any official covered
by the Executive Order for the duration of the Obama administration.
The American mix of codes of conduct, ethics pledges, and criminal, administrative, and civil
sanctions is complex and not always easy to understand and interpret. Some critics argue that
American conflict-of-interest laws are intrusive and counterproductive (Roberts and Doss 1992;
Anechiarico and Jacobs 1996). According to these critics, the rules introduce too much red tape,
stifle creativity, and discourage qualified people from joining the public service. Even if the U.S.
model is too complex to be readily exported, however, it can still provide guidelines for countries
beginning to develop norms of professional bureaucratic behavior. The harshest critics of the
American system do not seriously argue that procurement officers ought to be allowed to own shares
in their contractors or accept salaries or large gifts from firms with which they do business. Yet in
many developing countries such practices have only recently been recognized as troublesome. To
prevent government service from becoming a cynical route to easy wealth, all countries need a basic
conflict-of-interest program that stresses ethical conduct backed up by legal sanctions. But simple and
basic rules of behavior are the best place to start – especially if one wishes to avoid turning the
oversight process itself into a locus of corruption.
IV. Carrots and Sticks
Pay reform, merit recruitment, management reforms, and controls on outside interests and political
involvement are necessary first steps. As discussed in previous chapters, sometimes reformers can
change the nature of the service to reduce corrupt incentives, but this is not always possible. Tax
collectors, policemen, procurement specialists, and regulatory officials will always face corrupt
incentives. Thus effective corruption control also requires a credible system of rewards and
punishments. Formal legal sanctions provide an important backup, but changes within the bureaucracy
can also reduce the incentives for corruption. The state needs both carrots and sticks to encourage
efficiency and to limit payoffs. Incentives can stress individual performance or provide rewards and
punishments tied to group performance.
The most obvious background condition is a credible, apolitical monitoring system that searches
out corrupt officials. If civil service employment is well paid, corrupt officials suffer real pain if they
are caught and forced out. But such oversight is not enough. Loss of a job is a one-time penalty that is
not tied to the marginal benefits of individual corrupt deals, or to the number of such acts. Improved
pay reduces the value of accepting bribes but may not reduce the value to zero. High pay may simply
increase the bribe an official demands in order to overcome the risks of losing what is now a
desirable job. Officials may go from being “lean and mean” to being “fat and mean.”20 The incidence
of bribery may fall as fewer officials solicit or accept payoffs, but the size of each bribe increases. A
stronger sanction is a pension that will be received only if the worker retires under honorable
conditions (Becker and Stigler 1974). This makes the cost of accepting bribes an increasing function
of time in service, counteracting the end-game phenomenon. But again, it may simply increase the size
of an acceptable bribe to the point that the bribe replaces the pension.
Thus some rewards and punishments should be tied to the bureaucrat’s level of performance, but
civil service systems are often managed in a way that undervalues performance. For example, in many
Latin American countries rigid rule-bound systems set wages using technical criteria unrelated to
market realities. This is an attempt to rein in discretion and favoritism, but the result is a lack of
incentives to work well. Nonwage allowances, distributed with little concern for productivity,
exacerbate the problem. If managers were granted greater discretion, they might abuse it by hiring
“unqualified personnel simply to keep politically important clients satisfied ... [and] dispense wages,
promotions and other perquisites on the basis of favoritism rather than employee performance” (Reid
and Scott 1994: 45). The answer is not rigid and overreaching input controls but reforms that stress
performance and reward managers who achieve public sector goals (ibid.: 46–7).
For example, one study, using data from Buenos Aires, considers a control strategy tied to
officials’ behavior (Di Tella and Schargrodsky 2003). Rather than directly seeking evidence of
corruption, supervisors monitored officials’ performance. The officials were hospital purchasing
agents buying homogeneous inputs. The city’s supervisors recorded the prices paid for each product
and announced that they would give a high priority to checking up on officials who paid high prices
for these products. The implication was that high prices likely signaled malfeasance – corruption or
simple shirking. The program both lowered overall average prices and reduced their variance.
Variations in base wages had no impact on officials’ behavior so long as the monitoring program was
credible.21 Similarly, merit-based promotions both improved performance and reduced corruption
among health workers in Tanzania (Lindkvist 2014).
Rather than gearing oversight to evidence of poor performance, bonuses can be tied to the value
of the public service provided. Recall that bribery sometimes acts as an incentive fee for bureaucrats.
Unlike the hospital contracting case in Argentina, where corruption’s only efficiency cost stems from
its illegality, the payments could be legalized. The effectiveness of such a strategy depends upon the
extent to which the officials “own” a portion of the payments so that they have an incentive to speed
up service. For example, an agency might establish dual tracks – expensive fast tracks for those who
value speed and a slower track for the rest. A share of the “speed” payment could then be used to
reward officials for good performance (Paul 1995: 163). In law enforcement, for example, allowing
police departments to keep assets seized in relation to drug arrests increased the number of such
arrests (Mast, Benson, and Rasmussen 2000), but, of course, such a policy could also lead to false
arrests if the judicial system functions poorly. Police officers might invent charges in order to keep
the accused’s assets, confident either that the accused will not appeal or that the judge can be easily
swayed to favor the police.
Many public and private agents are responsible for making decisions with financial
consequences that far exceed their pay levels. In such cases it is unrealistic to suppose that incentive
bonuses can equal a high proportion of the value of the benefit dispensed. The evidence presented in
Section I on overall pay levels and corruption suggests, however, that it is sufficient to make officials’
wages comparable to those earned by workers with similar skills in the private sector. Officials
would earn both a base pay and an incentive bonus tied to performance such that their overall
earnings would equal their expected pay in the private sector. If there is some uncertainty about the
connection between effort and measurable outcomes, the division of earning into base wage and
performance pay would depend upon employees’ willingness to accept uncertainty (Weitzman and
Kruse 1990: 100–2).
Incentive systems can be effective, but they must be designed with care to avoid giving
monopoly power to bureaucrats that they can use to extract increased levels of rents (Rose-Ackerman
1978: 85–108). Officials must be unable to create onerous new conditions that they can then waive in
return for payments. Thus British reformers in the 1830s urged that salaries be substituted for fees as
a means of remunerating public officials. A parliamentary committee worried that accepting fees
exposed a high official “to the suspicion of occasioning impediments to the exercise of [official]
functions” (quoted by Chester 1981: 135). In the U.S. the shift to salaried civil servants, partly for
that reason, is documented in Parrillo (2013).
Absent stringent monitoring, systems of “tax farming” are unlikely to function well because tax
collectors have an incentive to extract excess revenue from taxpayers (Azabou and Nugent 1988;
Stella 1992; Das-Gupta and Mookherjee 1998: 256). For example, the Ottoman Empire relied heavily
on tax farming, auctioning off the rights to the high bidders. As the power of the state weakened, the
system was subject to abuse (Azabou and Nugent 1988: 686–9). In contrast, a study of tax farming in
Tunisian municipalities demonstrates that it can function well by shifting the risks of fluctuating
revenues from the government to the tax farmers. Abuses were limited by several factors: tax rates
were uniform and well publicized; abused taxpayers could appeal to the courts or complain to
municipal authorities; and tax farming franchises were of limited duration so tax collectors needed to
protect their reputations (Azabou and Nugent 1988: 700). As this example demonstrates, incentive
schemes can only be used if the level of performance can be measured by external monitors. Incentive
payments do not eliminate the need for oversight, but they redirect it to the review of outputs, not
inputs. Monitoring and sanctions for corruption must remain as a backup.
As an alternative to individualized incentive pay systems, rewards can be given to work groups
or public agencies based on their overall performance. For many public services this may be the best
solution. If joint efforts are decomposed into individual rewards, the result can be a hostile,
adversarial work environment (Mitchell, Lewin, and Lawler III 1990: 64–7). This concern has led
some students of the private labor market to argue in favor of rewarding workers for the achievement
of group goals. Such incentive systems work best if employees participate in setting working
conditions (Blinder 1990). But sometimes teamwork is the problem to which individualized incentive
pay is the solution. Public officials can work together to provide high-quality services or to maximize
bribery revenues. Teamwork among officials is the hallmark of many cases of police corruption. If
performance can be measured, individualized incentive pay systems can be a tool to break up circles
of corruption.
Public enterprises ought to be obvious candidates for institutional rewards based on
performance. Although some might argue for outright privatization, this option is not always
available. If such enterprises are selling goods and services to private customers, outcome measures
will usually be available. Both New Zealand and Korea tied rewards to performance with positive
results (World Bank 1991: 28; Scott 1996: 21–9). In Korea the annual incentive bonuses earned by
the firm are distributed to all staff, but the firms have also introduced internal evaluation systems.
Thus the state rewards the enterprise as a whole, and the firm’s managers establish internal reward
structures. Such techniques look promising but require comprehensive and reliable data on the
performance of public enterprises. This information condition must be satisfied before rewards for
good performance can be instituted in developing countries.
Both individual and group-based incentive payments will frequently be more difficult to
administer in the public sector compared to the private sector. Outside of public enterprises selling
commercial products, good performance is often hard to judge. As a consequence, government
agencies may develop measurable output indicators that are not the ultimate goals of policy (Scott
1996: 30–43). If pay is tied to these output measures, officials may try to game the system to earn high
bonuses. The experience of developed countries with performance pay in government has been mixed
at best. New Zealand is usually seen as a success story, although implementation problems arose
there, as well. There are trade-offs between allocative efficiency and technical efficiency. Individuals
may spend too much time negotiating over what outputs to measure and how performance will be
rewarded (Scott 1996; Campos and Pradhan 1997: 443). Past efforts to institute performance
evaluation and incentive pay in Britain and the United States have apparently not been notably
successful (Perry 1988–9; Ingraham 1993, 1996: 260; Madron 1995). A particularly dramatic failure
of performance evaluation occurred at the U.S. Veterans Administration and suggests the difficulties
of implementation. Reforms were supposed to improve performance by tying personnel evaluations to
“objective” measures, such as waiting times for appointments. Given a serious lack of resources and
an antiquated computer system, the result was a massive effort to game the system by falsifying the
information transmitted up the chain of command.22
As for group incentives, empirical evidence from the private sector suggests that a participatory
workplace will succeed best under certain conditions: stable aggregate demand, low unemployment,
wage and salary compression, and long investor time horizons (Levine and Tyson 1990: 214). In
short, the conditions for successful worker participation may not be met in public employment
systems. Furthermore, stable employment and wage compression are in conflict with the need for
many public-sector agencies to reduce employment and provide pay parity with the private sector.
Clearly, designing an effective incentive system can be difficult and is not always the best
solution. Nevertheless, there are cases in which it will be a valuable anticorruption tool. There have
been some success stories particularly in the revenue area. Most of the tax collection reform efforts
studied by Das-Gupta and Mookherjee (1998: 257) combined the creation of a relatively autonomous
bureaucracy with a budget linked in part to its success at collecting revenue. Reforms of revenue
collection services in several African countries had similar features (Dia 1996). For example, Ghana
in the 1980s tried an enclave approach to tax and customs reform by creating a new National Revenue
Service (NRS). Prior to the reform, tax revenues were 4.5% of GDP. Corruption, moonlighting, and
other inefficiencies were common. Salaries were low and accountability, poor. Under the reform, the
most corrupt existing officials were dismissed or retired. Pay and working conditions were
improved. Increased salaries were accompanied by incentive systems to reward strong performance
by individuals and by the agency as a whole. Revenue targets were established, and the NRS was
given a bonus of 3.5% of tax revenue and 2.5% of customs revenue. Between 1984 and 1988 tax and
customs revenue rose from 6.6% to 12.3% of GDP. The reforms illustrate the importance of
combining improved base pay with incentives for good performance. The program was a relative
success, but it was not without problems. The rest of the civil service chafed at the special treatment
afforded tax collectors. After all, the bonuses received by the NRS increased not only if effort
increased, but also if taxes rose because of an exogenous increase in GDP.23 Furthermore, the
Ministry of Finance objected to its loss of authority. In 1991 revenue collection was again placed
under the authority of the Ministry of Finance although it retained some of its independence (Terkper
1994; Dia 1996: 86–90).
A successful customs reform in the Philippines in the 1990s included computerization;
simplification of processes; targeting high-risk shipments for detailed clearance procedures, rather
than passing all shipments through the same time-consuming procedure; employing an independent
auditing firm; reduced interpersonal interaction; increased transparency; and the elimination of cash
transactions. The reform was carried out by direct order of the president, who was committed to
reducing corruption in order to maximize revenue, under the watchful eye of the media, and with the
support of the Philippine Chamber of Commerce. Despite initial resistance from customs employees
and a change of heart when a new president was elected, the reforms (and eventual trade
liberalization) had lasting success in reducing corruption (Hors 2001: 35–44).
After unsuccessful reforms in the 1990s, Bolivia undertook a new reform of the tax revenue
administration in 1998. The reform included the creation of technical (professional) job profiles,
approximately 80 hours of training, and salary increases of 36% on average. In 2003 the tax code was
reformed to eliminate exceptions and simplify processes. A new computer system was introduced, so
that starting in 2005, the bulk of the taxes (by value) could be submitted electronically. Additionally,
discretion in deciding which firms to audit was removed (Zuleta, Leyton, and Ivanovic 2007: 348–9).
In general, incentive payments based on performance will be more likely to be successful if
additional effort actually does produce substantial gains, if employees are not too risk averse, if effort
and results can be measured, and if officials have sufficient discretion to respond to incentives
(Klitgaard 1997: 19). Widespread corruption is evidence that monetary payments can buy something
valuable from officials. Thus incentive-based plans might begin with those systems now permeated
with corruption. A successful reform would both limit illegal payoffs and improve performance.
V. Corruption in Bureaucratic Hierarchies
Bribery frequently occurs in complex public organizations, which adds an important dimension to the
analysis. This section considers government hierarchies; the following sections analyze systems with
multiple potential corruption points and the role of middlemen.
Corruption in hierarchies depends upon the relationship between high- and low-level corruption
(Wade 1982). There are two variants. In the “bottom-up” variety low-level officials collect bribes
and share them with superiors either directly or indirectly through the purchase of their offices.
Initially, payoffs to superiors may be a means of buying their silence, but if payments are
institutionalized, they become a condition of employment, organized by superiors for their own gain
(Cadot 1987).24 In some cases, a pyramid operates – each tier purchases its positions from the one
above it. If “street level bureaucrats” have the most discretionary interactions with the public, the
bottom-up pattern holds. Police corruption frequently originates with the power that officers on the
beat exercise over businesses – both legal and illegal. For example, in Nepal policemen involved in
the transport of hashish and the enforcement of highway regulation collected illegal fees that were
shared with district officers (Alfiler 1986: 46). In tax and customs agencies lower-level officials
dealing with tax payers frequently must share their payoffs with superiors. In one Korean case
officials explained the size of the bribe requests by claiming that the payoff must be shared with their
director, division chief, and section chief (ibid.: 41).
By contrast, a “top-down” pattern may operate in which corrupt superior officials buy the
silence of subordinates by sharing the gains through high pay and perks or under-the-table benefits.
Low-level officials, who may be difficult to monitor in their day-to-day activities, may be given
bribery quotas that must be paid to superiors as a condition of maintaining employment or in return
for good working conditions.
In Korea, where top officials view their subordinates as “family,” it used to be considered
appropriate for heads of government offices to raise illicit funds and openly give a share to
subordinates (Lee 1986: 86). Higher-ups may also tolerate the petty corruption of subordinates to
assure their complicity in a corrupt system. At the same time, high-level officials set the tone for the
department: if the superior openly accepts payoffs, the lower-level workers are more likely to do so,
as well (Lindkvist 2014: 110). If most major decisions are made at the top, but low-level officials
provide essential inputs, the top-down pattern should prevail. For example, the award of major
contracts is likely to be the preserve of top officials, but they will need help in assessing bids and
overseeing implementation. Thus in Nepal higher-level officials arrange “commissions” on public
contracts that are collected by field representatives who take their cut and pass up the rest (Ostrom
1996: 212). Alternatively, top officials may collect most of the illicit income but assure that low-
level officials earn high legal salaries to buy docility and peace.
If corruption pervades a hierarchy, solutions that appear reasonable in other contexts can be
counterproductive. For example, reformers have frequently recommended rotating officials so that
they are unable to develop the close, trusting relations needed to reduce the risks of accepting
payoffs. In a corrupt hierarchy, in contrast, higher-ups can use this personnel policy to punish those
who do not join the corrupt system by sending them to poverty-stricken and remote locations.25 A
study of corruption in an irrigation system in India found that such practices were common (Wade
1982, 1984), and they have been observed in corrupt police forces in the United States and Thailand
(Sherman 1974; Pasuk and Sungsidh 1994: 99–120). Rotation of Indian tax audit officials makes it
impossible to follow up on assessments that are appealed by taxpayers. This makes it difficult to
reward these officials on the basis of their success in ferreting out tax evasion (Das-Gupta and
Mookherjee 1998: 178). The basic problem is that lower-level officials are at the mercy of their
superiors and have no way to appeal transfers linked to their failure to join a corrupt system.
Several theoretical efforts have tried to capture aspects of corruption in hierarchies. In one
model of bottom-up corruption, high-level officials can cover up corruption of subordinates in return
for a share of their gains (Cadot 1987). The superiors are not active in organizing the system, but
simply wait for inferiors to be denounced and then decide whether to accept the proffered payoff. “As
high-ranking officials cover up lower-level corruption in exchange for bribes, corruption at high
levels of an administration feeds on lower-level corruption, while at the same time shielding it, and
each level is encouraged by the other” (ibid.: 224). The model has two possible equilibria. In the
first, only low-level bribery occurs. Subordinates are not willing to pay enough to eliminate the risk
of being detected and fired. They simply accept the risk as part of the cost of obtaining payoffs. In the
second, the rewards of corruption are higher, and corruption permeates the hierarchy. Low-level
bribes are high enough to be used, in part, to pay superiors who receive information about corrupt
deals. As Cadot (1987: 239) asserts:
Once the incentive for petty corruption is created, the latter tends to develop upstream through
self-interested complicity. This, in turn, creates through impunity a favourable environment for
the growth of bribery. Corruption thus creates complex relationships of vassalage, protection
and clientelism, based on bribery and blackmail. These relationships, though originally based on
the civil service’s hierarchy, tend to bypass it and to distort normal channels of power and
information. This is one of the most perverse effects of generalized corruption.
In a similar model, Bac (1996) differentiates between internal and external corruption: external
corruption is a bribe or other inducement that comes from outside the hierarchy (a supplier or client),
while internal corruption is collusion among the various levels of the hierarchy. In Bac’s model, as in
Cadot’s, only the lower levels of the hierarchy engage in external corruption; internal corruption is a
mechanism used by the lower levels to undermine the supervisory duties of the upper levels. In this
model, middle management is least likely to engage in corruption, but this result may be a construct of
the assumptions. “Overcentralization and overstaffing are among the most cited reasons of internal
corruption in the informal public administration literature” (ibid.: 279) so decentralization may be
one way to reduce corruption.
In another bottom-up model, low-level corrupt officials calculate the chance that superiors will
hear of their corruption and demand a bribe (Basu, Bhattacharya, and Mishra 1992). If they do not
satisfy this payoff demand, they must also figure in the risk of criminal penalties. This problem either
can be modeled as an infinite chain or as a finite hierarchy with an honest official at the top. The
model is structured so that officials always make deals, and the penalty is never paid. Nevertheless,
the level of the penalty increases the threat point of higher ups, thus reducing the benefits to the
official at the bottom and thereby deterring bribery. Because expected penalties imposed on bribe
takers are not a function of the size of the bribe, they will deter corruption and simultaneously raise
the level of individual bribes that are paid. The high bribes that are occasionally paid are evidence of
the success, not the failure, of the strategy.
In such a system, a reforming chief executive might remove and punish the official at the top of
the corrupt hierarchy and install an honest agency head. For example, a newly elected mayor might
remove a corrupt police chief and install a person of known integrity. Will such an action limit
corruption or will it simply decentralize bribery and make it less visible? The answer depends on the
nature of low-level corruption and on the role of those higher up the hierarchy. A corrupt police chief
may have more power to extract rents and better information about their level than any other
individual official. In that case centralization will be especially harmful (Rose-Ackerman 1978: 167–
83). Such a top official may be able to increase overall payoffs by, for example, giving low-level
officials petty monopoly power, increasing the level of red tape or the discretion of officials, or
issuing threats to potential bribers that enhance the extortionary power of underlings. Then, removing
a corrupt head ought to limit the level of corruption and the harm that it causes. A new, honest agency
head can spearhead reforms to limit corrupt opportunities.
In contrast, if the corrupt top official simply presides over a bribe extraction machine, then
replacing him or her will not change the underlying structural features that produce corrupt incentives.
However, the policy could still have a positive effect if an honest chief can instill norms of honesty in
subordinates and improve monitoring and oversight. In the worst case, suggested by Olson (1993),
Shleifer and Vishny (1993), Choi and Thum (2004), and Olken and Barron (2009), deterring
corruption at the top might increase it at the bottom as officials compete and “overfish” the pool of
rents, leading to greater social harms. Centralized corruption produces an inefficient and perhaps
unfair system as the bribery monopolist maximizes rents, but it avoids the risk of complete
breakdown. Under a decentralized system, where officials do not have to share their gains with
superiors, more street-level officials might become corrupt. This assumes, of course, that corrupt
superiors were simply rent extractors who provide few benefits to inferiors and merely threaten and
intimidate them.
Halfway measures are unlikely to be successful. If reformers cannot simply start over with a
new collection of public officials and a new set of rewards and punishments, the best solutions are
those outlined in the previous chapters that change the nature of public service provision and reduce
the number of civil servants. Officials who remain need to have avenues for lodging complaints and
some assurance that the state will follow up. If corruption pervades the bureaucratic hierarchy,
ordinary civil service reform measures are too limited. Instead, solutions that improve the public
accountability of government are necessary. We discuss these later when considering the political
sources of corruption. Another option is to turn over certain government tasks to private firms. As we
argue later in this chapter, however, this is unlikely to be a valuable tool unless state agencies are
reformed, as well.
Despite the vulnerabilities of hierarchies to corruption, anticorruption agencies (ACAs) are
often organized as hierarchies. Heilbrunn (2004) argues that the hierarchical transmission of
information is more transparent than an inspector or ombudsman who reports directly to the
executive.26 Without independent oversight, however, even ACAs can succumb to the corrupt
temptations in any hierarchy.
VI. Multiple Corruption Points
Pyramids are not the only organizational form relevant to the control of corruption. A second
possibility is an activity that requires the potential briber to interact with different public officials.
These may be in a fixed order, as when a trucker faces multiple checkpoints on a highway, or they
may not have a fixed order, as when a business needs multiple permits to operate. Call these
sequential and fragmented systems, respectively (Rose-Ackerman 1978: 167–73). A third option is
one where there are multiple officials available to provide the same public service and then to permit
applicants to decide whom to approach. We discuss the strengths and weaknesses of these options.
A. Sequential and Fragmented Systems
Sequential systems are sometimes used to combat corruption. For example, in U.S. Army
procurement, usually one officer issues the call for bids, another selects the winning bid, and a third
oversees delivery.27 Because the process can be suspended at any point in the sequence, a corrupt
applicant would need to pay multiple bribes – assuming that each bureaucrat is corrupt – in order to
complete the process. The operation of a sequential corrupt system in which applicants must
approach officials in a fixed order depends upon the precise model specification.28 Thus, one model
assumes that applicants bargain with officials and share any surplus in a manner proportional to each
participant’s exogenously determined “bargaining power”, designated by 1-x for the citizen and x for
every official. In that model, assuming that all officials have the same bargaining power, the last
official can extract the highest bribe because that is where the surplus is highest. Olken and Barron
illustrate the basic intuition with a simple example using their empirical study of truckers in Indonesia
(Olken and Barron 2009).29 Suppose that there are two checkpoints and that the value of a successful
delivery is V. At any checkpoint the official can confiscate the shipment at zero benefit to both. At the
last checkpoint all past bribes are sunk costs, and the choice is either paying a bribe of xV (to
complete delivery) or getting zero. Moving back one step the next-to-last official can only extract a
bribe of x(1–x)V. In other words, the trucker and the first official, looking ahead to future
checkpoints, anticipate the second official’s bribe demands. The empirical work confirmed this
prediction for one of the trucking routes in this study (ibid.).
Lambert-Mogiliansky, Majumdar, and Radner (2007, 2008), using a sequential bribe model,
show that, under some conditions, no applicant even starts the process because all believe that they
will lose money. Olken and Barron only study the behavior of truckers already on the road. They do
not try to determine if corruption has reduced the volume of trucking. Sunk costs, however, play the
same role in both models; at each stage in the sequence the applicant/trucker looks ahead to future
checkpoints to determine the level of rents at any checkpoint. However, in the Lambert-Mogiliansky,
Majumdar, and Radner model officials are more powerful but less knowledgeable. They do not know
the value the applicant places on bureaucratic approval, but they try to extract the entire surplus in
expected value terms, and this produces cases in which the bribe demand exceeds the surplus. There
are no honest bureaucrats in their models, so the applicant cannot gamble on the chance of confronting
officials who do not demand bribes. Hence, in the one-shot case no project is ever approved, and all
applicants, anticipating what is to come, simply stay home. From the point of view of conformity with
the law, this can be beneficial if applicants are not legally qualified to obtain the benefit, but it is
harmful if they are qualified. Barron and Olken’s truckers are, in contrast, all qualified to use the
roads, although most trucks can be legally fined for being overweight, a factor that influences the size
of their bribe payments. If the process is repeated, however, players remember their own actions and
those they dealt with, and they learn what other actors have done. Here, there can be equilibrium
paths of “normal” bribes where any defection would cause the whole corrupt system to unravel
(Lambert-Mogiliansky, Majumdar, and Radner 2007; Yoo 2008). Even if the game is not repeated in
the traditional sense, the use of an intermediary (see ”Agents and Middlemen” later in this chapter)
can turn it into a repeated game of sorts, because the intermediary has knowledge of prior corrupt
interactions (Lambert-Mogiliansky, Majumdar, and Radner 2009). These equilibria impose different
degrees of social harm depending upon the pattern of bribes.
In contrast, the first official might have the most bargaining power and extract most of the rents.
That result could occur if the bargaining power of subsequent officials is a function of the remaining
level of positive profits. Officials and applicants “suffer” from the sunk cost fallacy in the sense that
once the first official has taken most of the surplus, subsequent officials accept the argument that the
applicant has no more profits to share. This argument might work especially well if the applicants are
repeat players who can credibly threaten not to return to the corrupt system if charged too much.
In a fragmented case in which the order is not fixed in advance and applicants can keep the order
secret, the officials receive lower payoffs. If one modifies the Olken and Barron model in this way,
no official knows that he is all that stands between the applicant and final approval and hence he
cannot extract the last checkpoint rent. This model obviously does not fit highway truckers; rather it
might apply to a builder seeking permits to start a project from numerous government offices.
Similarly, in the second, sunk-cost fallacy case, if the order is not predetermined, no official will
know that he or she is the first to be approached by the applicant. The result could be a complete
breakdown in the system as officials compete for bribes and applicants become discouraged.
This theoretical and empirical research sheds some light on two contrasting policy proposals.
The first advocates a “one-stop shop” for the registration of businesses or other bureaucratic
approval processes. This is equivalent to the centralized solution in a hierarchical system. In both
cases, as discussed previously, a single official replaces a multiplicity of potentially corrupt
individuals, and the key question is whether “overfishing” occurs in a decentralized system. If so, a
centralized system, even if corrupt, will be less harmful. Alternatively, if centralization goes along
with greater power over applicants for legal services, the one-stop shop may simply permit greater
rent extraction in a way that distorts the allocation of resources and the fairness and legitimacy of
public programs. In the intermediate case analyzed by Lambert-Mogiliansky, Majumdar, and Radner
(2007), a one-stop shop may permit officials to consolidate their extortionary power. It may then
cause bribe payments (and social welfare) to either decrease or increase, depending upon the
equilibrium situation that prevails in the absence of that reform. Recall, however, that in the Lambert-
Mogiliansky, Majumdar, and Radner model, officials are corrupt and face no risk of punishment for
their actions. There is some evidence that one-stop shops can be beneficial, at least for business
registrations. A study of the Indian case shows their benefits, especially if combined with
computerized procedures to further streamline the process and to limit corrupt opportunities by
reducing discretion (Bussell 2013).
B. Competitive Bureaucrats
The second proposal advocates the appointment of multiple officials, only some of whom must be
approached. In the competitive model, officials compete for a share of the bribes, and this behavior
may constrain the overall level of payoffs. Even in that case, of course, the anticorruption benefits of
competition among officials depend upon the nature of the public benefits (Rose-Ackerman 1978:
137–66). Overlapping jurisdictions can limit the level of bribes paid to get legal benefits and hence
discourage officials from asking for handouts.
The usual picture of a bureaucracy is a tree, with each official responsible to his or her
superiors for completing a unique task.30 For example, officials might all provide the same service,
issuing building permits, for example, but each be assigned a different geographical area. So long as
officials must exercise discretion, this form of organization gives every official some degree of
monopoly power over clients. The bureaucratic structure is clear and well organized, but the result
can be pervasive corruption. This pathology can be avoided if officials provide the same,
interchangeable service. They can be given overlapping jurisdictions that permit clients a choice of
which bureaucrat to approach. Because clients can apply to any of a number of officials and can go to
a second one if the first turns them down, no one official has much monopoly power. Thus, no one can
extract a very large payoff. Over time, each official could develop a reputation as either honest or
corrupt. Some of the e-government techniques outlined in Chapter 4 can help to permit citizens to
express their views of the service they have received and to denounce corrupt services.
Under what conditions is competitive bureaucracy a realistic reform strategy? The best case is a
public benefit available to all comers. Consider something as mundane as the sale of postage stamps
(Alam 1991). Anyone can purchase them without demonstrating his or her worth as a citizen. This
means that official discretion is low. If a clerk demands a bribe, customers can simply go to another
sales window or another post office. Of course, clerks could take tips in return for dispensing free
stamps, but the nature of the product makes financial controls relatively easy to establish. This simple
case illustrates the basic requirements for a successful introduction of competitive bureaucracy.
People should be entitled to the benefits, and it should be difficult for officials to give away more
than clients deserve. The possibility of reapplying to a new official will then limit the bribe potential
of any single bureaucrat. If these conditions do not hold, clients and officials are in a collusive
relationship that both prefer to continue. The size of the bribe will be reduced by the existence of
other corrupt officials, but the loss to the state remains large. Thus, the feasibility of competitive
bureaucracy depends importantly upon the ability of higher bureaucratic levels to monitor outcomes.
They do not need to be able to observe the bribes, but they must be able to monitor output. In the
postage stamp example, higher authorities must be able to track the number of stamps sold and hold
low-level officials accountable for the revenue collected. Hierarchy is still needed, but its function is
shifted toward the monitoring of results, not behavior.
Conversely, the civil servant might overcharge the citizen for the government good or service,
extorting extra payment. Again, the amount that the civil servant can extort will be limited by the cost
of seeking out another option. For example, in public education, allowing families to choose among
several nearby schools should limit extortion by the administration, but the extent of this constraint
depends on how far away the other schools are, and the quality of education offered. Thus, such
extortion may be more prevalent in rural settings than in cities. Postage stamps are a commodity that
is very easy to evaluate: the consumer can verify immediately whether the transaction was within the
rules. Foreign currency is also easily verifiable, as long as the client is careful to check the quantity
and validity of the bills exchanged at the point of sale. Other commodities, however, are not so
transparent or easily verifiable. Gasoline is one such commodity. In Mexico, it is commonly known
that many gasoline stations defraud customers by adjusting the pumps to expend less than the meter
shows, or by mixing low-grade into high-grade gasoline, or mixing other liquids into both grades of
gasoline.31 In such cases, the customer cannot easily verify the quality and quantity of the gasoline,
and government entities charged with detecting and sanctioning such fraud are an unreliable source of
information. Investigative journalism has at least partially filled the gap – one such report discovered
stations overstating quantity by between 0.5% (the maximum discrepancy legally allowed) and 10%32
– but for the most part, consumers rely on reputation and word of mouth, avoiding stations that are
“known” to be corrupt.33
In cases in which officials must decide whether an applicant is qualified to receive a benefit
such as a license or a permit, competitive bureaucracy has promise under some conditions. Suppose
that the benefit, like a passport or a driver’s license, is not scarce, but is restricted to qualified
applicants. The criteria for receiving the benefit are clear and known to both clients and officials.
Unqualified applicants cannot obtain the benefit without bribery; qualified applicants can report
corrupt demands and reapply to another official if the first demands too high a bribe. Suppose that
citizens do not know whether or not an official is corrupt until they are actually approached for a
bribe. With a competitive bureaucracy, qualified applicants will pay no more than the cost of
applying to another official, taking into account that the next official may also demand a bribe. Now
the honesty of some officials increases the cost to unqualified applicants and may drive them away,
reducing bribe revenues, and inducing some formerly corrupt officials to switch, further increasing
the risk of detection, and so forth. Bribery is a gamble both for citizens and for officials who must
consider the possibility that the citizen will report the corrupt demand. If the stakes become too
unfavorable, officials will no longer demand bribes and will not service unqualified applicants
(Cadot 1987). An example of this case occurred in Indonesia in the 1970s among officials competing
for the privilege of approving investment offers from foreign investors. Competition was so great that
the benefits of paying “speed money” eroded and corrupt demands could not be sustained.34 Later
President Suharto appeared to have solved this “problem” by consolidating such decisions in his own
office.
Even if bribers are not qualified for the benefits they seek, competitive bureaucracy may still
yield some benefits. Although the unqualified will still pay bribes, even they will not pay much so
long as they, too, can try other officials (Rose-Ackerman 1978: 155–9). Unfortunately, a benevolent
spiral will not occur in this case. Consider, for example, corruption in the award of drivers’ licenses.
The honesty of some officials in the Motor Vehicle Department increases the gains to the corrupt,
inducing more officials to become corrupt in the next period. As more become corrupt, the gain to
accepting bribes falls so that a stable intermediate solution can result. The lower bribe-price
produced by competition, however, induces more unqualified applicants to make payoffs. The social
costs of such a system can be high, as the unqualified take to the roads with their new licenses.
Competitive bureaucracy has limited value in cases in which officials, such as tax collectors and
police officers, impose costs rather than benefits. Nevertheless, it can, at least, reduce the level of
payoffs. Police officers seeking to control illegal businesses can be given overlapping enforcement
areas. That way gamblers and drug dealers will not pay much to an individual policeman because a
second one may come along later and also demand a payoff. No individual policeman is able to
supply protection and so cannot credibly demand a large payoff. The low level of reward available to
policemen may induce some to remain honest after balancing the risks and benefits of accepting
payoffs (ibid.: 159–63).
Officials charged with enforcing regulatory laws or fairly administering benefit programs are a
little like policemen. Regulators can be paid by businessmen to overlook violations, and program
administrators can be paid to violate the rules of distribution. Thus overlapping enforcement areas
can be a solution here as well. For example, in Brazil in the 1970s corruption was limited in a land
reform program in one town because of interagency rivalries. Those who complained of extortion by
officials from one agency could go to officials from another agency to seek redress (Bunker and
Cohen 1983: 109).
Of course, policemen, factory inspectors, and program administrators may respond by organizing
themselves into collusive groups to extort payoffs from businesses. This has happened often enough to
be a realistic concern. But it is sometimes possible to break up such cartels by involving law
enforcement officers or inspectors from different political jurisdictions – local, state, and federal.
Although collusion sometimes occurs even in this setting, it is generally more difficult to organize. In
the Brazilian case described in the preceding paragraph, collusion was limited because officials from
the different agencies had little direct contact. In a second town, where this was not true, corruption
was rife (ibid.).
Although competitive bureaucracy may drive down the level of bribes, and thereby discourage
some potentially corrupt officials, the lower bribe-prices will also encourage more individuals and
businesses to enter the illegal market. The key question in this case is whether the social costs of
bribery are inversely related to the size of the bribe. Consider, for example, the case of tax officials
in India. Each tax office is organized so that officials have overlapping jurisdictions. Those offices
with large numbers of support staff performed poorly compared with offices with fewer staff. Das-
Gupta and Mookherjee (1998: 236) speculate that in bigger offices more officials are competing for
the bribes paid by taxpayers to reduce their liabilities. This keeps bribe levels low. Given the low
chance of being punished, low payoffs do not induce many officials to behave honestly, but they do
encourage more taxpayers to pay for special treatment. Assuming a fixed downward-sloping demand
curve for corrupt services, a shift outward in the supply of potentially corrupt support staff leads to
lower bribe-prices and more corrupt transactions. A similar situation was reported in Nepal, where
subcustoms officers competed to provide reduced customs fees in return for payoffs. Traders flocked
to the cheapest entry points, where the sum of fees and bribes was lowest. Some officers tried to limit
competition by hiring bandits to harass traders using routes favorable to other corrupt officers
(Alfiler 1986: 48). Notice the important way in which these situations differ from the law
enforcement case. A gambler or drug dealer could never feel secure because a new policeman may
arrive at any time to arrest him or demand a payoff. In the tax case, officials may compete to provide
tax breaks but once a taxpayer has paid off a low-level official, no one at the same level has the
authority to step in. Monitoring from above is necessary to increase the risks to corrupt civil servants.
This could take the form of randomized audits: if the taxpayer knows that it may be necessary to
produce the supporting documents after tax payment, there are fewer incentives to bribe.
VII. Agents and Middlemen
A familiar feature of many corrupt systems is the private middleman with “connections” who
promises to smooth one’s route through the bureaucracy for a price. In cases brought by signatories of
the OECD Anti-Bribery Convention, 427 cases of foreign bribery ended in settlement or conviction
between 1999 and 2013. Of these, 304 (71%) involved an intermediary (OECD 2014: 29, figure
16).35 The payments are used both to bribe public officials and to compensate the agent. Many
countries’ bribery statutes criminalize payments to such agents as well as the acceptance of payments
by agents. However, there is considerable cross-country variation in legislation.36
Why are such agents so common even when everyone recognizes that they are paying bribes?
Why not eliminate the middleman and pay the official directly? The key point is that middlemen are
repeat players compared to most of those seeking the benefit. They function in systems in which
applicants either have little or no recourse to honest complaint mechanisms or are seeking something
valuable to which they are not entitled. The middleman is often either a former official or a current
one on a day off. He or she knows the going rate for the service, can save the applicant time by
eliminating a wait in line, and/or can help avoid bothersome extra visits to government offices.
Especially in fragmented systems they can cut through complex official procedures. They seem to be
performing a useful service by speeding up bureaucratic processing and reducing the time and hassle
for citizens and firms. Notice, however, that the better this corrupt system works, the greater the
incentive of the officials and the middlemen to work together in order to increase the time and trouble
imposed on honest citizens and firms as an inducement to corruption. They also have an incentive to
refuse service to the honest but qualified applicants or even to invent offenses.
Hasker and Okten (2008) draw on earlier efforts by Bayar (2005), Lambsdorff (2002), and
Oldenburg (1987). In their model intermediaries undermine such standard enforcement techniques as
increased monitoring or higher penalties. Rotating bureaucrats through different offices, far from
limiting corruption, can increase the impact of intermediaries, resulting in increased corruption
(Hasker and Okten 2008). Because they are not civil servants, they may be especially hard to control.
A policy of firing corrupt officials may backfire. For example, as described in Fjeldstad (2003: 172),
the Tanzanian government launched an anticorruption campaign by firing one-third of the bureaucrats
in the tax administration. Private businesses hired these former bureaucrats because of their
knowledge and insider contacts. New corrupt networks soon emerged. “What seemed like a simple
solution increased the problem because the government ignored the market for intermediaries”
(Hasker and Okten 2008: 114).
Two experimental studies in India illustrate how such systems can work. One studied the
issuance of drivers’ licenses, often to people unable to drive, and the second looked at the issuance of
ration cards for subsidized food (Bertrand et al. 2007; Peisakhin and Pinto 2010). The former
concerned unqualified people who obtained the credential and the qualified who could not obtain the
credential unless they paid a bribe; the latter was just about the delay. Both showed how the use of
middlemen sped up processing compared to those who simply waited their turn, but the ration card
experiment had an additional twist. Applicants who filed a Freedom of Information Act request
concerning their application under a new Indian law received relatively speedy service and did not
need to pay a middleman. This result, if it can be reproduced in other contexts, suggests a promising
avenue for reform.
VIII. The Rediscovery of Contract
In the last several decades, reformers have rediscovered the virtues of contract as a means of
separating administration from politics and reducing costs. In the United States, Great Britain, and
elsewhere, efforts to deregulate and downsize government have led to a rethinking of public officials’
role. The aim is to keep the civil service as small as possible, eliminate many government activities,
and contract out the remaining tasks to private firms, both for-profit and nonprofit. The best
candidates for outsourcing are those services that do not affect the public directly, for which there are
several competing firms (no monopoly), and that imply low costs of switching vendors (low private
investment) in the case of poor performance or vendor bankruptcy; but even high-risk services can be
outsourced, as long as they are managed properly (Padovani and Young 2008). This implies
establishing measurable objectives and monitoring progress toward those objectives – both activities
that require government employment. Even when a natural monopoly exists, under certain conditions
– many of which occur more often in advanced economies – it is better to outsource and charge a
franchise fee than for the government to operate the service directly or privatize and regulate (Auriol
and Picard 2009).
Through outsourcing, private firms provide not only such mundane services as trash collection
and street maintenance, but also prisons, security services, and check writing (DiIulio 1994). During
the U.S. occupation of Iraq and Afghanistan, private firms provided security and reconstruction
services. Some federal agencies employ more contract employees than civil servants (Ingraham 1996:
257; DiIulio 2014).
Although this movement has been greeted with praise, the historical record suggests the need for
caution. Nineteenth-century New York, for example, used private firms to clean the streets, provide
water, run the subways, and collect the trash, but private contractors failed to provide even minimally
acceptable service. Patronage and payoffs dominated the award of contracts, and the city was not
able to hold private firms to the terms of their contracts. The system was no better than a public
bureaucracy dominated by patronage employment. Service only got better when the system was taken
over by a strong, independent public official (Darrough 1998; Glaeser 2004). Of course, this case
does not demonstrate that contracting out can never work, but it does caution against trading one form
of corruption and self-dealing for another.
Indeed, outsourcing government is not a panacea. Massachusetts discovered the risk involved in
outsourcing check writing, when the vendor went bankrupt and “several hundred thousand” Medicaid
checks were not sent (Padovani and Young 2008: 221). A USAID audit found that one contractor had
billed the agency nearly $1 million over the course of a sixteen-month contract, without providing the
service at all.37 Employees of the security firm Blackwater tarnished the Iraq-U.S. relationship when
they opened fire in a crowded square during the U.S. occupation of Iraq.38 And private contractors
bungled the responses to Hurricane Katrina and the online launch of Obamacare (DiIulio 2014). The
ultimate goal of outsourcing is to improve the quality and reduce the cost of service provision;
reducing corruption is but one part of that. If governments in the United States have had mixed results,
at best, with contracting out, it has the potential to be even more problematic in fledgling governments
with poorly developed judicial systems.
Similarly, Bussell’s (2013) study of an Indian reform stresses the way politics and reform are
intertwined. The overall reform sought to limit the red tape involved in licensing and operating small
businesses. Rather than having to go to multiple offices, the reform created one-stop shops. In some
Indian states these were run by private entrepreneurs under contract. Bussell found that the private
shops performed better overall than government shops in terms of the time spent getting licenses.39
Looking across the Indian states, she found that politicians’ support for the reform was highest where
the rents they had earned from petty corruption were lowest. In other words, the reform was most
likely to occur in places where the problem was least acute. This is a general problem with achieving
reform that we discuss in Chapter 13.
One promising option is to use not-for-profit firms (NGOs) as service providers. Loevinsohn
and Harding (2005) review ten evaluations of contracting out in the delivery of primary health and
nutrition services in developing countries. Compared with government provision, several showed
positive results from management contracts as measured by coverage of the program. One of the cases
was in rural Guatemala, where benefits also flowed from service delivery contracts. Even there,
where the researchers faulted the government’s management of the contract, implementation still
succeeded and over time the program expanded to cover more than one-quarter of the country. The
authors, however, point to factors that limit the generality of the results. Of particular importance is
the nature of the services provided – primary care and nutrition services. These are services where
outputs are quite easy to monitor so that the contractors can be held to account not only by public
officials but also by the beneficiaries. The authors conclude that contracting out should be considered,
but that rigorous evaluation should go along with experiments. The results also suggest the value of
combining contracting out with some type of bottom-up public accountability.
If contracting out is not a quick fix and leads to organized political opposition, state ownership
is likely to continue. This political reality gives even more urgency to programs of internal state
reform. Although the public corporations that operate state enterprises are frequently not formally part
of the civil service system, the issues of personnel training, motivation, and pay arise there as well.
Perhaps a combination of contracting out some activities to NGOs, civil service reforms, and
improved external monitoring can produce favorable results.
In some cases the current push to deregulate, privatize, and contract out has been combined with
improvements in the provision of core government functions. In others, downsizing has had the
unfortunate consequence of furthering corrupt relationships, establishing private monopolies, and
undermining the legitimate functions of government.40 Poorer countries, especially those with very
unequal income and wealth distributions, need to create an effective civil service system at the same
time as they decentralize and downsize (Adamolekun 1993: 43). They should not rush to downsize
government if the result will be to concentrate wealth further while maintaining corrupt relationships.
Instead, for core government services such as street repair, sewage treatment, or trash collection, they
should work first to reform the operation of the public agency. Privatization might come later if the
government has the capacity to provide effective oversight of public contracts. Otherwise the result
will simply be the creation of new sources of private gain at the expense of the general public. More
generally, the development of a vibrant private sector requires a well-functioning government to
protect property rights and regulate security markets, banking, and commodity exchanges (Collins
1993: 329).
Conclusions
Civil service reform is expensive and politically difficult, and it may appear beyond the capacity of
many poor countries. Yet it cannot be avoided. In many countries government pay has fallen rapidly in
recent years as fiscal pressures have led governments to cut spending. Sometimes World Bank and
IMF insistence on reductions in the wage bill as a condition for assistance has unwittingly contributed
to corruption. Under pressure from international institutions, borrower countries carry out across-the-
board pay cuts or wage freezes because they are politically easier to manage than the selective firing
of workers (World Bank 1991: 16). The newly impoverished public employees turn to bribery as a
way of regaining some of their lost wages. Obviously, the World Bank and the IMF should not support
these counterproductive policies. But many difficulties are internal to the politics of developing
countries. Nations making good progress on achieving fiscal balance may jeopardize their success by
bowing to pressure from civil servants for broad-based pay hikes. This is what happened, for
example, in Ghana in 1992 when civil servants’ wages were increased across the board by 80%
(World Bank, Operations Evaluation Department, 1995: 20). Pay increases may indeed be necessary
for good performance, but only if the increases are tied to productivity and are accompanied by a
reduction in the overall level of public-sector employment. Reductions in the number of officials,
however, are likely to be feasible only if jobs are available in the private sector. Policies that
encourage the development of a well-functioning private sector can make civil service reform
feasible.
The reforms discussed here and in Chapter 4 will work best if combined. As Merilee Grindle
(2004: 534) writes:
Civil service reform, for example, should improve pay and conditions of work for government
officials, and it may even reduce corruption and patronage, but may mean little to the poor unless
other conditions are in place, such as political mobilization to ensure that public officials treat
them fairly or organizational cultures that encourage a service orientation among public officials.
Entrenched corruption needs to be fought both by the reform of the civil service and by changes
in the nature of government work. If the underlying legal framework remains unchanged, a fall in
corruption may yield few benefits. Della Porta and Vannucci (1999) claim that corruption has fallen
but that the bureaucracy is performing poorly by mechanically enforcing restrictive rules. If the
underlying cause of corruption is the type and level of public intervention, reforms will be needed
there as well. A reforming state should reduce the underlying incentives for payoffs by eliminating
programs and simplifying tax laws and procurement requirements. It should also improve both
positive and negative incentives in the form of civil service, procurement, and law enforcement
reform.
Many successful reforms have included computerization and training as important elements, but
modernization is not enough. In customs administration in Afghanistan, for example,
The trucks pass a giant X-ray machine delivered by the United States military. Western-trained
officials assess their cargo for import duties. The paperwork is entered into a computer system
paid for by the World Bank. American-financed surveillance cameras monitor the crossing. Yet
for Afghan officials, every truck represents a fresh opportunity for personal enrichment.
Border guards pocket a small fee for opening the gate, but that is just the start. Businessmen
and customs officials collude to fake invoices and manipulate packing lists. Quantity, weight,
contents, country of origin – almost every piece of information can be altered to slash the
customs bill, often by up to 70 percent.41
When, as here, corruption is pervasive, everything cannot be done at once, but the best place to
start is with the demand for and supply of corrupt services. This means restructuring programs that
generate corrupt incentives and reorganizing the civil service to allow professionals to make an
honest living. Reform could begin with one or two key agencies – such as tax administration – or with
a credible effort to carry out a key privatization in an open and transparent manner. Beginning with a
narrow focus is pointless, however, unless it is eventually broadened. Otherwise, officials outside the
reformed agency will resent the special treatment accorded one small group, and the reform will
likely be overwhelmed by the background level of corruption.
A large task is to change public attitudes and to convince ordinary people that the government is
serious about tackling corruption. This suggests an emphasis on reducing corruption where it is most
obvious to citizens. It should begin with services that people are entitled to obtain for free. If the
service is not a basic necessity, people may accept the introduction of a user fee to substitute for
bribes. A next step is the reform of corrupt systems that permit people to avoid taxes or violate laws
with impunity. In those cases credible reform must start at the top. A crackdown should reach the rich
and powerful. If large taxpayers are required to pay their taxes, others may be more willing to go
along. Focusing only on ordinary citizens generates resentment that can undermine the entire effort.
Civil service reform is part of many reform projects supported by international organizations; at
least at first, they were often poorly designed (Nunberg and Nellis 1995; United Nations
Development Programme 1997b). To succeed, reformers need to know the value of perks and their
distribution; the relationship between public-sector wages and family income for civil servants; the
importance of corruption and conflicts of interest in affecting public decisions; the productivity of
comparable public and private workers; macroeconomic conditions; and the size and role of the
informal economy. The government needs to know whether a modest offer of severance pay will be
taken up by a significant number of government workers. If so, wages can be raised and employment
cut without undue strain. In some past reform programs, absorption of dismissed workers into the
agricultural and informal sectors has been less difficult than some anticipated, especially in Africa
(World Bank 1991: 16).
The strain of reform can be reduced by complementary policies to create jobs in the private
sector and to encourage businesses to come out from underground. A good start might focus on the
creation of an honest tax collection system. This would both assure revenue for the state and
encourage firms to join the formal economy. One might then follow by cutting the civil service as
private-sector growth permits. Unfortunately, economic growth will cause its own problems –
because existing corrupt officials will seek a share of the new wealth by imposing new restrictions on
private firms. This problem may require unorthodox solutions. Reformers may need to take away
work from already underutilized officials in order to reduce their access to bribes. As underemployed
officials spend less time on public-sector work, they are likely to get “second jobs” in the private
sector. Once this happens, it may be easier to ease them out entirely. Structural changes in the
operation of government should be combined with more conventional proposals to raise pay and
improve working conditions. The goal is not only to deter corruption among existing officials, but
also to attract more qualified applicants for public-sector jobs.
1 Some of the material in this chapter is drawn from Rose-Ackerman (2010a). Paul Lagunes aided
Rose-Ackerman in the preparation of that book chapter.
2 As the British Treasury noted in 1723: “Officers who themselves or whose kinsmen or political
friends were canvassing for votes for parliamentary elections were hardly likely to be conspicuous
in prosecuting defaulting maltsters and inn-keepers” (quoted in Parris 1969: 25).
3 Dahlström, Lapuente, and Teorell (2012) find that an index of professionalism derived from an
expert survey is strongly associated with low levels of corruption in a cross-country study
including up to 50 countries. They go on to show that meritocratic recruitment is an especially
important component of that index.
4 Consider two other well-documented examples. In Peru in 1987 salaries in the tax administration
had fallen to 33% of their 1971 level. During the same period the number of employees more than
doubled (Das-Gupta and Mookherjee 1998: 265). In North Yemen salaries declined in real terms
by up to 56% between 1971 and 1986 (Sultan 1993).
5 Gorodnichenko and Sabirianova Peter (2007) found a larger wage gap at the higher end of the
distribution in Ukraine. After controlling for personal characteristics, Panizza and Qiang (2005)
found that similarly endowed workers earned less in the public sector in Bolivia, Panama, and
Venezuela, but significantly higher than private-sector wages in Brazil, Colombia, Costa Rica,
Ecuador, and El Salvador. The gender pay gap is smaller in the public sector in both Latin
America (Panizza and Qiang 2005) and the European Union (Arulampalam, Booth, and Bryan
2007). In Germany, women enjoy a public-sector premium, while men suffer a wage penalty in the
public sector (Melly 2005).
6 More recently, a laboratory experiment found that, in a stylized setting, poorly remunerated
subjects were more likely to take a bribe and to carry out an action that imposed a large cost on a
“charity” (van Veldhuizen 2013).
7 In other words, they obtained survey respondents by asking the first group surveyed to suggest
additional subjects.
8 One caveat is in order here. In some very poor countries estimates of the wages of skilled
workers in the urban sector may not be very meaningful because the sector is very small and wage
levels are affected by multinationals’ pay scales, determined outside the country. Such jobs are
rationed, and their wages do not represent the opportunity wage of public employees. Information
on earnings in the informal sector may provide a more accurate measure of private opportunities.
This is indicated by successful efforts to reduce civil service employment levels in some African
countries. Furthermore, the state may have a policy of guaranteeing jobs to all high school or
college graduates or use public employment as a way to soak up excess labor that would otherwise
be unemployed. The problem in such cases is not low pay, but excess employment (Nunberg and
Nellis 1995: 15–16).
9 Linking pay to verifiable attendance – using tamper-proof digital cameras – does seem to work
(Duflo, Hanna, and Ryan 2012).
10 John Lyons, “México asume el desafío de formar una fuerza policial preparada e incorruptible,”
El Norte, October 26, 2009.
11 Peru also attempted reform of a somewhat different sort in 1995–7, but it was not implemented
(Echebarría and Cortázar 2007: 128, 131–2).
12 Compare Evans and Rauch (1999) who follow a Weberian model and study merit recruitment
and professional career paths with Echebarría and Cortázar (2007) who include these factors along
with a broader range of measures. Evans and Rauch (1999: 752, n. 9), however, mention other
factors related to NPM, but they do not measure them in their expert surveys.
13 David Barboza, “Billions in Hidden Riches for Family of Chinese Leader,” New York Times,
October 25, 2012, http://www.nytimes.com/2012/10/26/business/global/family-of-wen-jiabao-
holds-a-hidden-fortune-in-china.html (accessed October 13, 2015).
14 The city of Shanghai enacted a law prohibiting the spouses and children of high-level local
officials from engaging in business in Shanghai, so that they cannot take advantage of their
influence in the local public administration. Michael Forsythe, “Shanghai Enacts Curbs on
Business Dealings of Officials’ Relatives,” New York Times, May 5, 2015,
http://www.nytimes.com/2015/05/06/world/asia/shanghai-enacts-curbs-on-business-dealings-of-
officials-relatives.html (accessed October 13, 2015).
15 18 USC §§ 201–209; Chakrabarti, Dausses, and Olson 1997: 597–605; the law is summarized
in Lapidus (2010: 937–60).
16 The OGE was established in 1978 by Pub. L. 195–521, codified at 5 USC app. 4, §§ 401–408.
In 2012 the act was amended by the Stop Trading on Congressional Knowledge Act, Pub. L 112-
105, as amended in 2013 by Pub. L. 113–7 (STOCK). STOCK particularly focused on conflicts of
interest affecting members of Congress and their staff, but also imposed new requirements on some
executive branch officials. The legal materials referenced in this paragraph are all available at the
OGE website: http://www.oge.gov (accessed October 13, 2015).
17 The payment and acceptance of bribes is, of course, a criminal offense now subject to the UK
Bribery Act 2010. That act does not, however, mention conflicts of interest, which are only
mentioned in passing in the Guidance document (Rose 2014: 160).
18 The data are available on the website of the National Assembly: http://www.assemblee-
nationale.fr/qui/xml/cat_soc_prof.asp?legislature=14 (accessed July 20, 2015). Omitting university
professors, the proportion is 29%.
19 Available at http://www.oge.gov/Laws-and-Regulations/Executive-Orders/Executive-Order-
13490-(Jan--21,-2009)---Prescribing-Standards-of-Ethical-Conduct-for-Government-Officers-
and-Employees. The Executive Order followed President Clinton’s lead under Executive Order
12834 of January 20, 1993 (Gilman 1995: 75) that asked senior officials to pledge to avoid
dealings with government for five years after leaving their respective administrations (accessed
October 13, 2015).
20 “India: Belt Loosening,” The Economist, August 2, 1997. See also, “India: Taxing Again,” The
Economist, September 29, 1997. Additionally, Karahan, Razzolini, and Shughart II (2006: 223)
find evidence of this claim among corrupt county supervisors in Mississippi.
21 When monitoring decreased, lower wages were associated with higher corruption (Di Tella and
Schargrodsky 2003).
22 The resulting scandal is outlined in David A. Fahrenthold, “How the VA Developed Its Culture
of Coverup,” Washington Post, May, 30, 2014.
23 In Britain during the eighteenth century, chief clerks shared one-third of the fees received. Their
income from that source rose from £330 a year in 1711 to £700 in the 1750s to £1278 at the height
of the American War of Independence. Fees were often unrelated to the amount of work involved
(Chester 1981: 134).
24 Dey (1989) and Rose-Ackerman (1978: 170–9) note that interactions may also occur between
officials with no formal hierarchical connections. Thus, a person trying to build a house may need
to obtain the permission of several different government offices. Dey suggests that networks of
corrupt officials can develop under such conditions.
25 In addition, rotating officials has an ambiguous impact on the social costs of corruption even if
superiors are genuinely interested in reform. There is a trade-off between the benefits of stability,
even in a corrupt system, and the ability of job rotation to disrupt corrupt relationships and hence
limit corruption. For analyses of two closely related cases see Choi and Thum (2003, 2004).
26 New York Governor Andrew Cuomo shut down an ACA that he had created and that reported to
him, when it began investigating a firm that had worked on his gubernatorial campaign. Susanne
Craig, William K. Rashbaum, and Thomas Kaplan, “Cuomo’s Office Hobbled Ethics Inquiries by
Moreland Commission,” New York Times, July 23, 2014,
http://www.nytimes.com/2014/07/23/nyregion/governor-andrew-cuomo-and-the-short-life-of-the-
moreland-commission.html (accessed October 13, 2015). Anticorruption investigations continued,
but under the leadership of the attorney general.
27 Ginger Thompson and Eric Schmitt, “Graft in U.S. Army Contracts Spread from Kuwait Base,”
New York Times, September 24, 2007,
http://www.nytimes.com/2007/09/24/world/middleeast/24contractor.html (accessed October 13,
2015).
28 These models are derived from Nash equilibrium models in game theory.
29 In the model, at each stage one participant makes an offer that the other participant may accept
or reject. If the offer is rejected, the second participant may make a counteroffer or wait for the
first to make a new offer. Once an agreement is reached, the truck goes on to the next checkpoint. In
the Olken and Barron (2009) study, officers accepted the initial bribe offer 87% of the time; the
other 13% resulted in bargaining.
30 This is the Weberian ideal of a modern meritocracy but, insofar as people are “both selfish and
social,” it contradicts human nature; overlapping jurisdictions can provide the necessary “checks
and balances” to increase accountability (Felson 2011: 14–16).
31 See, e.g., Alejandra López, “Dan litros de menos y adulteran gasolinas,” El Norte, August 9,
2014. Kerosene is used to adulterate gasoline and diesel fuel in several countries (McPherson and
MacSearraigh 2007: 209).
32 Osvaldo Robles and Alberto Rodríguez, “Detectan gasolineras que dan de menos,” El Norte,
August 8, 2014.
33 A clarification is in order. Gasoline stations are privately owned franchises in Mexico, leased
by the parastatal petroleum company, PEMEX, and gasoline prices are determined by the state.
Nevertheless, it is not difficult to imagine similar practices in countries where filling stations are
state owned. In either case, the manager of the station keeps the extra profits derived from these
corrupt practices.
34 Theodore Smith, “Corruption, Tradition and Change,” Indonesia, April 11, 1971, cited in
Cariño (1986: 179).
35 In 14% of the 304 cases, the intermediaries were not involved in the bribery; in 15% of the
cases, this information was not available. Of the intermediaries that were involved, 41% were
agents, 35% corporate vehicles (“subsidiary companies, local consulting firms, companies located
in offshore financial centres or tax havens or companies established under the beneficial ownership
of either the public official who received the bribes or the individual or entity paying the bribes”),
6% lawyers, 3% family members of public officials, 2% associates, 1% accountants, and 12%
“unknown” (OECD 2014: 29).
36 Council of Europe (1999a) Article 12, Trading in Influence, and the reservations to this article
taken by, e.g., Belgium, Denmark, France, Switzerland, and the United Kingdom. The crime of
trading in influence is intentionally giving or offering an “undue advantage” to someone who will
exercise “improper influence” over a public official.
37 Scott Higham and Steven Rich, “Whistleblowers Say USAID’s IG Removed Critical Details
from Public Reports,” The Washington Post, October 23, 2014,
http://www.washingtonpost.com/investigations/whistleblowers-say-usaids-ig-removed-critical-
details-from-public-reports/2014/10/22/68fbc1a0-4031-11e4-b03f-de718edeb92f_story.html?
hpid=z1 (accessed October 23, 2014).
38 Omar Al-Jawosy and Tim Arango, “Sentences in Blackwater Killings Give Iraqis a Measure of
Closure,” New York Times, April 14, 2015,
http://www.nytimes.com/2015/04/15/world/middleeast/sentences-in-blackwater-killings-give-
iraqis-a-measure-of-closure.html (accessed July 16, 2015).
39 Bussell has no direct evidence of corruption, but she found that those using the private shops
were not very happy with them, partly, it seems, because the government imposed a seven-day
minimum waiting period that could not be overcome with a bribe.
40 For a critical view of the U.S. government’s use of outsourcing, see DiIulio (2014). He says (p.
5): “today’s American government is a debt-financed, proxy-administered, superficially antistatist
form of big government.”
41 Declan Walsh, “At Afghan Border, Graft Is Part of the Bargain,” New York Times, November
12, 2014, http://www.nytimes.com/2014/11/12/world/asia/in-afghanistan-customs-system-
corruption-is-part-of-the-bargain.html (accessed November 12, 2014).
6
Using the Criminal Law to Deter Bribery
and Extortion
◈
Laws against bribery, extortion, and self-dealing are necessary, but will never be sufficient to deal
with widespread corruption.1 The previous chapters have argued that fundamental redesign of the
relationship between state and society is needed to control systemic corruption. Nevertheless, well-
designed and enforced laws against bribery and extortion are a necessary backup to any broader
reform, and economic analysis can contribute to the assessment of their operation and effectiveness.
That is our focus in this chapter.
All countries draw the line somewhere between illegal bribery and acceptable “gifts of good
will,” and we will discuss the difficulties of making that distinction in Chapter 7. Here, we take that
judgment as given and seek effective deterrence strategies using the criminal law. The sanctioning
strategies that are consistent with economic analysis often differ from the actual legal penalties, even
in developed countries. A law and economics approach focuses both on improving the deterrent effect
of arrest and punishment and on providing incentives for people to come forward with documentation
of corrupt deeds. One conundrum for anticorruption efforts is the possible tension between the goals
of signaling credible expected punishments and using the law to induce perpetrators to provide
evidence.
Given the costs of law enforcement, the optimal level of corruption is not zero, even if society
values the bribers’ benefits at zero.2 Once one takes the costs of prevention into account, the level of
deterrence expenditures should be set where the net benefits are maximized, that is, where marginal
benefits equal the marginal costs (Becker and Stigler 1974; Rose-Ackerman 1978: 109–19).3 A
higher level of deterrence would not be worth the extra costs; a lower level would sacrifice the net
benefits of increased enforcement. For example, a recent audit of expenses claimed by Canadian
senators revealed CAD840,000 in questionable expenses (less than 1% of the annual budget); the
inquiry cost CAD24 million.4 Obviously, the benefits go beyond the money recovered, insofar as the
findings may drive political change, deter future malfeasance, or bolster the political standing of
those who ordered the audit, but on a cost-effectiveness basis, this audit was not worthwhile.
The deterrence of criminal behavior depends on the probability of detection and punishment, and
on the penalties imposed – both those imposed by the legal system and more subtle costs, such as
shame or loss of reputation (Becker 1968). Low penalties upon conviction can still deter crime if the
chance of apprehension is high, and high penalties can compensate for weak enforcement so long as
the enforcement process is not unduly biased. Becker (1968) first argued that the probability of
detection was more important than the punishment, in deterring crime; this result has been
corroborated by a large empirical literature (Eide, Rubin, and Shepherd 2006: 221–7).5
Successful detection of corruption depends upon insiders to report wrongdoing. Citizens and
businesses victimized by extortion demands may report bribery attempts, but they may not be able to
offer enough proof for prosecutors to act. Instead, effective law enforcement often requires officials
to promise leniency to one of the participants. This creates an important paradox for law enforcement
efforts. High expected punishments ought to deter corruption, but a high probability of detection may
only be possible if some are promised low penalties.
We begin by discussing bribery deterrence based on expected punishment, measured by
multiplying the probability of apprehension by the punishment imposed. We then consider strategies
that take account of the interaction between punishment and the probability of apprehension. We
include a separate section on private-to-private bribery because it raises some distinct issues.
Finally, we consider how bribery and extortion in law enforcement can affect the enforcement of all
types of law.
I. Punishment
Because it takes two to enter into a corrupt deal, the transaction will not occur if the law can deter at
least one of the parties. Legal language frequently distinguishes between “active” and “passive”
bribery, where the former refers to the briber and the latter to the bribee.6 This language seems to
imply that bribe paying is worse than bribe acceptance. However, both are generally criminal
offences, and most statutes impose parallel punishments. National statutes and international
conventions generally recognize that the distinction between actively organizing a corrupt transaction,
on the one hand, and passively acquiescing, on the other, is not a viable one. Neither side is truly
passive because both parties must agree before corruption can occur. Furthermore, in practice, public
officials might actively organize a corrupt bureaucracy that presses citizens or firms to make payoffs.
However, in some countries asymmetries in the law do exist. For example, in Taiwan paying off
an official is only a crime when the payment is made to obtain an illegal service. Otherwise, the
payer is not subject to criminal sanction. However, the recently amended law makes it an offense for
the official to accept a bribe in all cases, including those in which he or she does not otherwise
violate his or her official duties.7 In India, according to the 1988 Prevention of Corruption Act, giving
or receiving a bribe is punishable by up to five years in prison and a fine, but Section 24 grants
immunity to whistle-blowing bribe payers (Basu 2011). Under Romanian law, making a payoff is not
a crime if “the briber has been coerced in any way by the one who received the bribe,” and, in
addition, such a briber can claim restitution of his payments (Romanian Criminal Code, 255 (3), (5);
discussed in Schroth and Bostan 2004: 650, 661). In other countries the reverse is true. For example,
in Chile in the 1990s payment of a bribe was a criminal offense, but accepting a bribe was not unless
accompanied by other wrongdoing (Hepkema and Booysen 1997: 415).8
The legal distinction between bribery and extortion is not straightforward, and in many situations
a person can be guilty of both (Lindgren 1988, 1993). Statutes usually define extortion without any
specific reference to public officials. Coercive extortion can refer to payments obtained by threats,
whether made by an official, a mafia member, or a private individual. Violent threats are often
punished more severely than other types.9 Extortion can occur in the United States and England
“under color of office,” a condition that need not involve an outright threat but is rather associated
with the bargaining power that comes from one’s official position. Thus, in many cases the official
can be guilty of both accepting a bribe and of extortion (Lindgren 1988, 1993).
The law and economics literature recognizes the two-sided nature of corrupt deals, but it refers
to bribe payers and recipients, not active and passive corruption. Some scholars distinguish between
the payer who receives “better than fair treatment,” on the one hand, or someone who must pay to be
treated fairly, on the other (Ayres 1997). More narrowly, Polinsky and Shavell (2001) categorize
extortion as a bribe paid to avoid being framed by an official for a trumped-up offense. These bright-
line rules are useful for analytic purposes, but they map imperfectly onto the legal concepts. American
law is quite confusing in defining these concepts (Lindgren 1993), and the proposed distinctions
would be difficult to implement in practice. They require a clear benchmark of fair treatment and
raise difficulties when the person subject to extortion has, in fact, violated some other law (Lindgren
1988, 1993).
In deciding how to allocate law enforcement resources, the degree of social harm should be the
key variable, not the location of payoffs in the public or the private sector. In general, highest priority
should be given to preventing the allocation of illegal benefits or the imposition of illegal costs. For
legal benefits the social costs depend upon the damage done by using willingness-to-pay criteria and
the inefficiencies and inequities of officials’ efforts to create bottlenecks and scarcity. These issues
will loom especially large when officials or organized crime groups use threats of physical violence
or property damage (Konrad and Skaperdas 1997, 1998). Extortion that involves organized crime is
especially harmful for that reason. These groups seek to shift the reversion point for anyone who
resists paying to an outcome that is worse than the original status quo. Furthermore, corrupt systems,
especially if supported by credible threats, have distributive consequences even if resources and
services are allocated efficiently. Corrupt officials share in the profits of private firms, and
households may obtain few benefits from a public program. The effects may be purely distributive, or
they may have long-term impacts on entry into the corrupted businesses or activities.
A ranking of the social harm of different kinds of corruption should help set enforcement
priorities. However, the penalties actually levied on the convicted need not be tied to these social
harms but rather should concentrate on the benefits received by the corrupt. To deter bribery, at least
one side of the corrupt transaction must face penalties that reflect its own gains. Because the chance
of detection and conviction is far less than one, those convicted should sacrifice a multiple of these
gains. To deter payoffs, either side of the corrupt deal can be the focus of law enforcement efforts.
From the point of view of public acceptability, however, bribers who seek legal benefits, which are
otherwise denied them, may arouse public sympathy, not blame. Such offenses may be de facto
decriminalized through prosecutorial inaction. Whatever the focus, actors should face expected
penalties tied to their own benefit from corruption.
In practice, the briber and the bribee may bargain over the size of the bribe in light of the
expected penalty functions that each one faces. These functions depend both on the chance that the
deal will be uncovered and on the penalty levied upon conviction. Most models of corruption do not
include this aspect of the problem and assume either a fixed bribe-price or an equal division of the
rents. If the briber faces a fixed maximum penalty X, while the bribee’s expected penalty is an ever-
increasing function of his or her gains, the division of the benefits will be affected by these differing
conditions. At some point the bribe recipient will reach his or her maximum bribe, beyond which the
costs outweigh the benefits. In contrast, the briber in this example may be willing to contemplate very
large corrupt deals because, beyond some point, the penalties are not well tailored to the scale of the
deal. The law not only deters some bribery schemes altogether; it can also influence the division of
gains from corrupt deals.
To deter, officials’ penalties should be an increasing function of the payoffs they receive and an
inverse function of the probability of detection. If expected penalties are not a function of the size of
the bribe, an anticorruption drive will quickly confront a paradox. A high fixed penalty will lower the
incidence of corruption but increase the average size of bribes paid. Low bribes are not accepted, but
once the threshold is crossed, the penalty has no deterrent effect. If the penalty is high, officials must
receive a high return in order to be willing to engage in bribery. Thus, the expected penalty should
increase by more than a dollar for every dollar increase in the size of the bribe (Rose-Ackerman
1978: 109–35; Shleifer and Vishny 1993). This could be accomplished either by tying the penalty
levied upon conviction to the size of the bribe or by increasing the risk of apprehension as the size of
the bribe increases. However, if the probability of detection is lower for small payoffs, the penalty
for each detected offense must reflect that fact. This could mean that those convicted of petty bribery
could face more severe penalties than those found to have taken larger bribes. That outcome,
however, is not likely to be politically viable. Hence, two alternatives are possible: increasing
surveillance and redesigning the program to lower corrupt incentives by limiting the discretion of
officials.
On the other side of the corrupt transaction, a fixed penalty levied on bribers will lower both the
demand for corrupt services and the incidence of bribes. However, so long as the probability of
apprehension does not depend on the size of the bribe, it will have no marginal impact once the bribe
passes the corruption threshold. If the probability of apprehension and/or the penalty rises with the
size of the bribe, then the level of individual bribes may fall as well. That result does not necessarily
follow, however, if higher bribes provide higher benefits. Suppose, for example, that the benefits to
bribery are an increasing function of the size of the bribe so that, say, a bribe of $1,000 provides
benefits of $1,500, but a bribe of $5,000 provides benefits of $20,000. Then expected penalties that
are set at twice the size of the bribe will deter the smaller bribe but not the larger one.
More fundamentally, bribes represent a cost to those who pay them; penalties for bribers should
not be tied to these costs unless they are a good proxy for the briber’s benefits. In the example, they
are an imperfect proxy. To have a marginal effect, the penalties should be tied to the briber’s gains
(e.g., excess profits derived from the corrupt act), not to the size of the bribe. In procurement, if the
potentially corrupt firms are repeat players, one option is a disbarment procedure that prohibits
corrupt firms from contracting with the government (ideally, with any government) for a period of
years. To have a marginal effect, the disbarment penalty should be tied to the seriousness of the
corruption uncovered.10
Under American law the maximum penalties are symmetric for those who make and those who
accept corrupt payments. The offender can receive a maximum sentence of “three times the monetary
equivalent of the thing of value [given or promised to the official] ... or imprisoned for not more than
fifteen years, or both, and may be disqualified from holding any office of honor, trust, or profit under
the United States” [18 U.S.C.S. §201 (b)].11 Thus, the maximums do not explicitly recognize the
asymmetries in gains between bribe payers and recipients. However, the federal sentencing
guidelines do permit judges to incorporate the benefits received by bribe payers into their
calculations. According to the guidelines, the fine levied on an organization for bribery and related
offences should consider the value of the unlawful payment, the value of the benefit received or to be
received in return for the unlawful payment, and the consequential damages resulting from the
unlawful payment. The fine should be set equal to the largest of these values [U.S. Federal Sentencing
Guidelines, §2C1.1(d)(1)]. Thus, it can either reflect the gain to the firm or the loss to society. This
seems a reasonable compromise with the principles we have outlined, except for one glaring
weakness. It does not account for the fact that, ex ante, the chance of being caught is far less than one.
To properly deter, the penalty should be a multiple of the figure produced by this formula. The statute
permits a fine that is three times the bribe paid, but the benefit to bribe payers may far exceed even
that total, especially when viewed ex ante.
In the sentencing guidelines, the base penalty for individuals is a number of months in prison that
is not tied directly to the level of benefits received by paying or accepting a bribe. The penalty is
increased if a public official is bribed, if more than one bribe is involved, or if the value exceeds
$5,000 [US Federal Sentencing Guidelines, §2C1.1(a)-(c)]. In addition, civil fines can be imposed on
those convicted of bribery and related offenses. The fine can be either a maximum of $50,000 or the
bribe amount, whichever is larger. Thus, individuals can be punished with both fines and jail time,
but the marginal expected increases in punishment are unlikely to exceed the marginal benefits for
large bribes once one takes account of the low probability of apprehension. It may be that the
penalties have little deterrent effect on large bribes.
The law, however, does permit the president to rescind any contract or other benefit if there has
been a conviction under the statute governing bribery, graft, and conflicts of interest. The United
States can also recover, in addition to any penalties, “the amount expended or the thing transferred or
delivered on its behalf, or the reasonable value thereof” (18 U.S.C. § 218). This right of recovery is
designed to avoid losses to the government. It is a weak deterrent to corrupt payoffs because the
recovery is not multiplied by a factor that reflects the probability of detection.
Outside the United States the legal penalties bear only a weak relationship to the deterrence
priorities outlined here. Of the cases examined, admittedly not a comprehensive list, both those who
pay and those who accept bribes face the possibility of fines and imprisonment and, as in the U.S.
statute, the maximum penalties are generally symmetric for both groups. The statutes fail to link
penalties either to the social harm of corruption or to the private benefits obtained by those who
engage in bribery. In some statutes there are special increased penalties for aggravated instances of
corruption, but these are trigger strategies not explicitly tied to marginal gains and losses. It seems
quite likely that large-scale corrupt deals are only slightly deterred by the formal legal penalties.
For example, under a new statute passed in April 2010, the United Kingdom can impose prison
terms up to ten years and fines of an unspecified amount.12 Australia punishes “unwarranted
demands” with twelve years of imprisonment, while the payment or receipt of bribes without threats
has a ten-year maximum, and lesser related offenses receive five years.13 Botswana sets the maximum
penalty at £500,000, ten years in prison, or both.14 Punishment for extortion in Ethiopia includes
prison terms ranging from three months to five years, and a fine that is not specified in the law.
Finland distinguishes between the ordinary offense of giving or receiving bribes and an aggravated
offense with somewhat higher penalties, but the top prison term is four years. Fines can also be levied
but the law provides no guidance on their level. In France, the maximum punishment is seven years in
prison and a fine of up to 100,000 euros.15 Germany can impose prison terms up to ten years in
especially serious cases, but for ordinary offenses of paying or receiving bribes the maximum penalty
is three years imprisonment or a fine.16
If expected penalties do not increase along with the benefits of corruption for bribers and
bribees, governments may be caught in a trap where high corruption levels beget high corruption
levels. An equilibrium with low corruption may also exist but be unreachable in small steps from the
status quo. High corruption can be a stable equilibrium when the net rewards of corruption increase
as the incidence of corruption increases. This might occur, for example, if law enforcement officials
discover a smaller proportion of corrupt deals when the incidence of corruption is high, and if
penalties levied upon conviction are not adjusted to take account of that fact. Any multiple equilibria
case, however, can be converted into a single equilibrium, low-corruption case with the appropriate
choice of law enforcement strategy or a change in the information conditions. Strategies that tie
expected penalties to marginal gains can remove a society from a high-corruption trap. Doing so,
however, may require a large increase in law enforcement resources to tip the system to a low-
corruption equilibrium. Fortunately, such a sharp increase in enforcement resources need not be
permanent (Lui 1986: 21–2). A concentrated cleanup campaign can change expectations about others’
cooperation in the corrupt system. Once a new low-corruption equilibrium has been established, it
can be maintained with reduced enforcement resources so long as the honest are willing to report
corrupt offers, and law enforcement officials follow up on reports of malfeasance (Rose-Ackerman
1978: 137–51; Cadot 1987; Andvig and Moene 1990; Bardhan 1997: 1330–4). One problem with this
optimistic scenario, however, is the possibility that the corrupt will collude with each other to lie low
during the crackdown and reemerge later to resume their corrupt activities. The models summarized
here assume, in contrast, that there is no collusion and that both officials and bribers act on the basis
of their most recent past experience.17
If a sector of the state is caught in a high-corruption trap, one response is to completely eliminate
the corrupt department, replacing it with a new one that is staffed with new hires. This approach was
used successfully in Georgia after the Rose Revolution: many of the older state employees, including
judges, were replaced wholesale by young, idealistic adherents to the reform agenda. Judicial
corruption has thus been severely reduced in Georgia, although the state apparently still exerts undue
influence over some judicial decisions (Kupatadze 2012: 26).18
An important aspect of grand corruption is the complicity of large private corporations.
Individuals organize the corrupt deals, but they are acting in the interests of the firms that employ
them. There is much debate over whether it is appropriate to hold business firms criminally liable
(Arlen 1994; Laufer 2008). Corporations have legal personalities. This does not turn them into real
human beings, and some commentators insist that this lack of humanity implies that firms cannot have
moral obligations. They believe that it is not appropriate to hold business firms criminally liable
because they do not have mental states and because criminal liability would give corporations the
same rights as individuals with less justification for these protections (Thompson 1987: 76–78;
Khanna 1996).19 There is no legal corporate equivalent to imprisonment, although a sufficiently high
fine could drive a firm to bankruptcy.
National legal systems vary widely in whether firms can be convicted of crimes. In the United
States criminal cases against business firms are commonplace, with sentences consisting of fines and
sometimes debarment from public contracting. The decision of whether to bring a civil or a criminal
case is often a strategic one in which the greater stigma of a criminal conviction is balanced against
the higher standard of proof. Many cases against corporations end in settlements that impose fines and
require internal reform but avoid debarment from government contracts. A recent innovation is the
“nonprosecution [or deferred prosecution] agreement” under which the government agrees not to
pursue the case so long as the firm reaches an agreement with the law enforcement agency to reform
its internal oversight structures to limit corrupt dealings. The firm may also agree to admit guilt and
pay a fine. After a probationary period the case is dropped.20
Under the 2010 U.K. Anti-Bribery Act corporate criminal liability can result from a weak
internal control system that fails to prevent a case of bribery. Top management does not need to be
actively involved in the corrupt transaction. Conversely, unlike the United States, a firm can entirely
escape liability if the firm has in place “adequate procedures designed to prevent” corruption so that
any corrupt deals uncovered by the prosecutors are seen as aberrations.21 As Alldridge (2012) points
out, the 2010 law is a welcome shift from the traditional view of corruption as a form of disloyalty to
an emphasis on its negative impact on market competition. So far, the limits of this statute have not
been tested, with only a handful of cases initiated and brought to judgment. Some commentators worry
that the law permits overly aggressive enforcement against firms; others argue just the reverse both
because of a defense based on a corporation’s internal procedures and because of actual U.K.
practice.22
Other legal systems, such as Germany’s, simply rule out corporate criminal liability by fiat. We
believe that this is a mistake because organizations are more than the sum of the individual actions of
their employees. Corporations can have moral responsibilities (Donaldson 1989; De George 1993).
These obligations cannot always be reduced to individual responsibilities. Instead, they stem from
“the practices of the organization – the internal and external patterns of relationships – that persist
even as the identities of the individuals who participate in them change” (Thompson 1987: 76; see
also French 1979 and Cooper 1968). Deterrence requires that the organization and its owners (i.e.,
stockholders) expect to bear costs if its agents are corrupt. Of course, civil fines can sometimes serve
the same deterrence function, but even if firms cannot “feel” guilty, a criminal conviction can
stigmatize a firm in the eyes of customers, investors, and potential employees. Going beyond stigma, a
conviction appears to affect a firm’s bottom line. Thus, Baucus and Baucus (1997) find that in the five
years following a corporate conviction, convicted firms experienced lower financial returns, sales,
and stock prices. Other studies (e.g., Aguzzoni, Langus, and Motta 2013; Zeidan 2013) find similar
effects at least in the short run. Unfortunately, however, conviction does not necessarily act as a
deterrent to future criminal acts (Baucus and Near 1991), and neither the severity of the crime nor
repeated conviction has a marginal effect on firm behavior (Baucus and Baucus 1997; Zeidan 2013).
These results suggest that a criminal conviction or settlement is not sufficient to turn around many
firms involved in corrupt deals. In the worst case, it is just seen as a cost of doing business, not a
wake-up call to rethink corporate behavior. Laufer (2008: x) argues that “[a]voiding the strictures of
corporate criminal law is too often a matter of gaming both prosecutors and regulators with a mix of
cooperation, disclosures, and audits.” Furthermore, as we discuss in Chapter 11, outright bribery is
not the only or even the most important way that firms influence government behavior. Campaign
contributions to elected politicians and implied job offers for top bureaucrats may skew public policy
decisions as effectively as an under-the-table payoff and with less risk of punishment for either firms
or their management.
II. Gathering Evidence: Promising Leniency and
Rewarding Whistle-Blowers
Effective deterrence is impossible unless law enforcement authorities can obtain relevant evidence –
a difficult task because often the participants are the only ones who know of the corrupt deal. In such
cases, the probability of detection is a function of whether any of the participants has an incentive to
report. Those subject to extortion may report attempts, but promises of low penalties or even rewards
are often essential to encourage self-reporting. However, such tactics are frequently criticized by
anticorruption commentators as inconsistent with the goals of the criminal law. For example, the
Group of States against Corruption (GRECO), a European group, criticized a provision in Romanian
law exempting bribers from punishment if they inform authorities of their activities before a formal
investigation begins [Romanian Criminal Code, Art. 255(3)(5)]. The GRECO report recognized that
this could be a means to gather evidence and initiate criminal proceedings against officials, but it
worried that it would weaken enforcement of the law against active bribery (GRECO 2002).
Standard work on the economics of crime does not confront the problem of obtaining evidence
from perpetrators. In those models, detection is uncertain but independent of criminals’ actions. That
assumption does not hold for bribery and extortion, where a prime source of evidence is information
obtained from those engaged in the same corrupt transactions that they reveal.
To proceed, suppose, first, that the benefit obtained in return for a bribe is legal and would be
available in an honest world to those who now pay bribes. Because the bribers receive benefits to
which they are legally entitled, they believe that they are extortion victims who would be better off in
an honest world. Such bribe payers are potential allies in an anticorruption effort and will likely
cooperate in efforts to eliminate payoffs. They should not be punished heavily because leniency will
give them an incentive to report corrupt demands and will encourage beneficiaries of public
programs to demand services that are free of payoff demands. Thus, Basu (2011) has proposed that
bribes paid in this context should be legal so that it will be costless for extortion victims to report
their payoffs, thus increasing the risk to corrupt officials. Basu’s proposal has provoked outraged
critiques, and it does indeed raise serious problems of distinguishing pure extortion from bribes paid
for special treatment. Furthermore, given the time and trouble, not to mention the personal risk, of
exposing entrenched corruption, few may bother to report bribe demands. In response, Dufwenberg
and Spagnolo (2014) modify Basu’s proposal: one must report his or her payoff to the authorities
before detection by law enforcement bodies. This modification often reflects actual prosecutorial
practice and is the law in some polities. It is common for law enforcement agencies in the United
States to promise leniency, if not outright exemption from prosecution, for those who either report
corrupt arrangements or agree to help gather evidence of ongoing activities. They may do this even
for bribe payers who do not fit the case of pure extortion.
Of course, such strategies, whether or not incorporated into formal law, only make sense if the
background probability of being caught and the level of punishment are high. Otherwise, the incentive
to report will not operate. For example, Hungary has strong anticorruption laws on the books and
legal exemptions for whistle-blowers, but they have little effect because the overall expected cost of
corruption (i.e., the chance of detection and conviction multiplied by the penalty) is very low (Batory
2012).
Moving beyond pure extortion, consider next a scarce but legal benefit that is corruptly allocated
to those willing to pay bribes. Neither those who pay nor those who receive bribes will voluntarily
report the corrupt transaction unless law enforcement is very aggressive and credible. A “cooperating
witness” involved in payoffs may appear, however, if he or she is found to have violated other laws,
such as failing to pay taxes. In the U.S. case against officials in the Fédération Internationale Football
Association (FIFA), for example, a key source of information is Chuck Blazer, who was originally
targeted by the Internal Revenue Service for tax evasion. In 2011, he agreed to cooperate with the
authorities, secretly recording conversations with other FIFA officials.23 When he secretly pled guilty
to tax evasion and corruption in 2013,24 he volunteered $2 million of an estimated $11 million in
illicit wealth, and his cooperation with the Federal Bureau of Investigation has bought him time, and,
one assumes, a reduction in the overall penalty when he is sentenced.25
In addition, disappointed bidders shut out of a public contract have grievances and may report
corrupt demands to law enforcement authorities (Alam 1995). They should be rewarded for coming
forward with evidence even if the reason they lost the bid was not moral scruples, but their own
unwillingness to make a large enough payoff. The reward offered need not equal their lost benefits
from losing the contract because one consequence of revealing corruption will be a rebid contract in
which the whistle-blower can compete.
Bribes paid to obtain illegal services are likely to be the most difficult to control. Bribers are
often also engaged in other illegal activities, and those who fail in their corruption efforts can hardly
come forward to claim that they should have been the ones obtaining the illegal benefit. Nevertheless,
the very vulnerability of bribers can be used to uncover corruption. They may accept lenient treatment
with respect to, say, a violation of the drug or tax laws, in return for providing evidence in a
corruption trial. Here, the law with respect to cartels in restraint of trade can provide useful
parallels. Leniency for the first firm that comes forward to report a cartel is a common feature of the
law in the United States and in Europe, and analysts study ways to structure the rewards to maintain
the deterrence effect of punishment. Thus, one study recommends increasing average penalties and
making leniency conditional on the quality of the evidence provided (Wils 2007).
An alternative system protects and rewards honest whistle-blowers who come forward with
evidence of wrongdoing. Reporting the peculations of others can be dangerous. If corruption is
systemic, one risks being disciplined by corrupt superiors and attacked by co-workers. One study of
corruption in China suggests that this is a serious problem (Manion 2004). The whistle-blower may
even end up accused of corruption. Short of this, whistle-blowers are likely to be fired or ostracized
at work. If fired, it may be difficult to find new employment. Any reward for providing evidence will
probably be forthcoming only after the case goes to trial and results in a conviction or settlement with
the payment of a fine, a percentage of which goes to the whistle-blower. The reward may not be
worth the wait. As a result, the OECD (2014) reports that only 2% of the cases concluded since 1999
in the signatory states to the OECD Anti-Bribery Convention have been brought to the attention of
investigators by whistle-blowers. If we add to this figure the self-reported cases that were
discovered by internal whistle-blowers, the figure rises to 7%.26 By comparison, law enforcement
discovered 13% of the cases.
The United States has two relevant statutes. The False Claims Act rewards those in the private
sector who report irregularities in government contracts and protects whistle-blowers from reprisals
(31 U.S.C. Sections §§ 3729–3731; Howse and Daniels 1995; Kovacic 1996). The act pays whistle-
blowers a share of the total penalties and other damages levied against firms for wrongdoing that has
injured the federal government. The second protects whistle-blowers inside government agencies
from retaliation but does not give them a financial reward [Whistleblower Protection Act, Pub. L. No.
101–12, 5 U.S.C. § 2302 (b)(8)]. Such statutes can help prevent malfeasance so long as they do not
induce potential whistle-blowers to create compromising situations, and so long as the search for
misdeeds does not lower the quality of public services. Thus, the value of such statutes depends both
on the likelihood of corruption and on the opportunity cost of whistle-blowing activity.27
Sometimes public officials claim that firms virtually force bribes upon them. To the extent this
claim is credible, public officials could come forward with evidence of corrupt offers and seek
protection under the Whistleblower Protection Act. Firms would predictably defend themselves by
arguing that the official demanded the payoff. The distinctions in American law may be useful here.
Under the False Claims Act, the court can reduce the award for a whistle-blower who was involved
in wrongdoing, but only if he or she planned or initiated the wrongful conduct. The award need not be
eliminated, however, unless the whistle-blower is convicted of a crime [31 U.S.C. § 3730 (d) (3)
2006]. Prosecutors with the authority to grant criminal immunity can thus set up a kind of a race in
which the first to report the corrupt transactions will be rewarded while the others are punished.28
Alternatively, the law might impose penalties on anyone who is part of a corrupt deal and who
failed to report it promptly. Then all participants would worry that the other participants will report
their corruption to authorities as a way of avoiding future penalties. Just as with a reward system, the
idea is to create a race to the prosecutors that will deter corruption ex ante.29 Both carrots and sticks,
however, depend on the existence of a credible system of law enforcement that might discover the
corrupt deal on its own.
If any of these techniques is used, it is important to publicize the means by which whistle-
blowers can report corruption. Many victims of extortion and unwilling participants in the bribery of
officials would like to report the crime, but they do not know how. All offices that deal with the
public, and each public tender, should feature prominent announcements of hotlines and websites
where questionable behavior can be reported, with the option of anonymity. If fear of reprisal is a
real concern, electronic reports of corruption are ever more important. Social media have also
become a means of revealing corruption, as victims surreptitiously record requests for or payment of
bribes and post them on YouTube or send them to news outlets. While such evidence may not be
admissible in court, it can be a lead for investigators, who can then target the alleged corrupt public
servant, through either increased monitoring or a sting operation.
Finally, carefully orchestrated sting operations can be a valuable tool so long as the criminal
behavior they target is relatively clear-cut.30 The possibility of a sting can encourage those offered or
pressured for bribes to come forward. If they do not, they will worry that the corrupt offer may be a
trap set by law enforcement authorities. Although the defendant may raise the defense of entrapment,31
this is rarely successful in the United States, especially if the defendant offered a bribe (69 A.L. R. 2d
1397).32 The U.S. Federal Bureau of Investigation has made good use of sting operations in its efforts
to ferret out domestic corruption, but it has been less successful in applying the technique to the
Foreign Corrupt Practices Act (FCPA, in 15 U.S.C. § 78). The most famous case is probably the
Abscam sting, involving an elaborate hoax that snared several members of Congress into corrupt
transactions involving a supposed Middle Eastern sheikh.33 Less encouraging was a sting that led to
22 arrests in January 2010 for alleged violations of the FCPA.34 Unfortunately, the evidence was not
sufficient to convince a jury in two trials, and the Department of Justice dropped the subsequent cases
against the remaining defendants.35 This is not to say that stings are not possible in the future, but only
to highlight their costs and risks.
III. Private-to-Private Bribery
Sometimes bribes are paid in dealings between private firms or individuals with no official
government involvement (see Figure 1.1 in Chapter 1). Commercial or private-to-private bribery
occurs when the agents or employees of one firm bribe the employees of another for favorable
treatment. Many cases are similar to those that arise in the corruption of civil servants. Thus, a
salesperson may bribe a purchasing agent to get business or to accept low quality goods. Thus, a
tomato vendor paid Kraft Food buyers to accept substandard tomatoes contaminated by mold and
other defects. Bribes also helped undermine bidding processes designed to select suppliers by
inducing several firms’ purchasing agents to supply information on other firms’ bids.36 In similar
fashion, a franchisee might pay a bribe to violate the terms of its contract. For example, in the 1980s
and 1990s, car dealers in the United States bribed Honda executives for leases to open showrooms,
or to receive popular models; they were prosecuted under the criminal law when they began engaging
in outright embezzlement.37 As with public corruption, private-to-private corruption often distorts
markets, reduces competition, and thwarts regulations.
Some legal systems have special statutes criminalizing private-to-private bribery, but many
jurisdictions have no such laws and thus prosecute the offenses under other legal provisions, like
antitrust laws or breaches of fiduciary duty. Sometimes interfirm payoffs are not against the law
unless they involve another illegal offense, such as extortion, money laundering, or operation of an
illegal business.38 Tort law or employment law sometimes provides a form of enforcement, but they
may be rather cumbersome tools39 and may not be a sufficient deterrent. There are two linked issues.
First, the threat of criminal penalties may provide a more effective deterrent than civil penalties or a
firm’s internal disciplinary procedures. The possibility of a prison sentence and the stigma of a
conviction may deter such corruption, even if the higher standards for proof and the defendants’
greater procedural protections mean that conviction is less likely. Second, some private-to-private
bribery can have broader systemic consequences. If widespread, it may spill over into interactions
with government bureaucrats, and it may provide a way for a firm to cement a monopoly position that
harms other customers and suppliers. For example, Russia’s bid to host the 2014 winter Olympics,
which some claim was accompanied by corruption, led to further corruption in procurement and
concessions in the construction of the facilities and improvements to roads and the power grid,
causing costs to exceed four times the original estimate.40 Bribes may be paid not just to get business
but also to dilute product quality, enforce cartels, and limit entry. Thus, the motivation for enforcing
the law in this area goes beyond its direct impact on private business and merges with the discussion
of public sector corruption.
The line between commercial bribery and public-sector bribery may be blurred in practice for
newly privatized firms or those with monopoly power. Many legally “private” firms have some level
of public ownership. Even if they are entirely privately owned, the firms’ officials, including top
management, may collude with powerful outsiders to favor customers, suppliers, or creditors at the
expense of shareholders, especially minority shareholders.41
Especially problematic are international bodies with specialized governance responsibilities
that are organized as private, nonprofit associations subject to little oversight. Switzerland hosts 65
international sports federations, including the Olympics and FIFA, in part because Swiss law allows
such associations to operate with little transparency and with tax leniency.42 The problems with this
model have come to light with a U.S. case that led to fourteen indictments, nine of whom are FIFA
officials, including seven taken into custody in Switzerland in May 2015.43 FIFA, although organized
as a private, nonprofit association, is, in practice, a hybrid organization that both makes profits from
media sales and other activities around the quadrennial World Cups and performs a quasi-public
function in allotting World Cup rights and overseeing preparations. It straddles the line between a for-
profit firm and a public entity. The World Cup confers prestige and profits on host countries and
media outlets, and hence creates corrupt incentives for officials, promoters, and media companies.
The mix of public benefit and private gain combined with a set of vague choice criteria make the
process of selecting World Cup venues especially open to corruption. FIFA operates with great
opacity and with none of the normal constraints for both private, for-profit firms and government
agencies. Allegations of corruption have surfaced frequently over the years and led FIFA to create an
Independent Governance Committee that recommended changes. Its 2014 report strikes a balance
between praising positive steps and being clear that reform has not moved far enough (FIFA
Governance Reform Project 2014).
Because the officials of FIFA are not public officials, ordinary antibribery laws do not apply,
leaving prosecutors to rely on other legal violations. Officials were charged, not with outright
acceptance of bribes, but with a variety of crimes, “including racketeering, wire fraud and money
laundering conspiracy,”44 terms usually applied to organized crime (see Chapter 9). The Swiss
arrests, however, may indicate a shift in Swiss legal thinking and practice. Some Swiss politicians
are recommending reform that would impose more transparency and accounting oversight on such
associations.45 On the one hand, Marc Pieth, a Swiss lawyer and academic, recommends that FIFA be
treated as a for-profit company under Swiss law (FIFA Governance Reform Project 2014).
Alternatively, FIFA executives and board members might be designated as “public officials” with
regard to the application of anti-bribery laws; the officials of other international bodies with decision
making and oversight responsibilities for major international events could have the same status. Such
a designation would permit them to be charged under ordinary bribery laws.
IV. Corruption in Law Enforcement
So far we have assumed an honest system of law enforcement that deters corruption. Unfortunately,
corruption in law enforcement is widespread and can affect the incidence of all types of crime. As we
showed in Chapter 1 (Figure 1.4), the Global Corruption Barometer (GCB) reveals that worldwide,
the police and the judiciary have the highest levels of bribery incidence of the eight services
included: 31% and 24%, respectively.46 Obviously, if such corruption reduces the expected costs of
breaking other laws, it will encourage criminal behavior (Becker and Stigler 1974; Bowles and
Garoupa 1997; Polinsky and Shavell 2001). The optimal deterrence strategy should take into account
and seek to deter the corruption of enforcers, such as the police (Bowles and Garoupa 1997). This
could be done through a mixture of organizational and personnel reforms combined with better
oversight.
However, it is at least possible that a corrupt system operates so that the cost of breaking the law
is higher under a corrupted law enforcement system in which officials exercise their opportunities for
illicit private gain. Potential corrupt payments can be thought of as a common pool in which the
police all try to “fish” for private gain. No individual police officer takes account of the fact that his
or her extraction of payoffs limits those available to others. They all race to collect payoffs, and their
uncoordinated actions may lead them to “overfish” for corrupt rents, thus deterring other forms of
illegality (Pashigian 1975). This effect is strongest when officers have overlapping jurisdictions and
weakest when each is assigned to a specific “beat.”
Polinsky and Shavell (2001) model law enforcers as having three options: first, soliciting bribes
from offenders not to report a violation (or to reduce the sanction); second, extorting a payment from
an innocent person by threatening to frame him or her; and, third, actually framing the innocent. Thus,
their distinction between bribery and extortion, although it does not track the use of these terms in the
criminal law, captures the distinction between potential payers who are innocent or guilty of the
underlying offense. The control of corruption in law enforcement is justified in their model because
corruption limits the deterrent effect of the law. They follow work on the law and economics of crime
that recommends the use of maximal fines up to the criminal’s wealth constraint (Becker and Stigler
1974). They recommend the use of fines because they are much cheaper for the government than
putting people in prison and should have equivalent deterrent effects for those able to pay the fine.
Becker and Stigler demonstrate the social value of maximally fining both law enforcers and offenders
who engage in bribery as well as enforcers who frame the innocent.47 Of course, law enforcement
officials, especially in developing countries, are not well paid and cannot be deterred by fines that
exceed their family’s wealth.
Polinsky and Shavell’s most surprising conclusion is that pure extortion, the second option,
should not be punished. This is because its punishment will push corrupt enforcers either to frame the
innocent or to demand higher extortion payments from the innocent. This result arises from the
structure of their model in which the victims of extortion have no escape route. They are caught in a
trap in which outside law enforcement can do no more than raise the costs to extortionists, hence
encouraging them to demand higher payoffs. This seems an extreme and unrealistic conclusion. A
better response would be to make it easy for bribe payers to report such extortion and to be granted
leniency for helping law enforcement to catch the extortionists.
For Garoupa and Klerman (2004) bribery is a second-best way to introduce monetary penalties
when nonmonetary sanctions (e.g., imprisonment) predominate. They show that, in the presence of
corruption, nonmonetary sanctions generate high bribes – equivalent to fines – paid to avoid prison.
In practice, ordinary crime is deterred by the expectation of bribe payments. In a fully corrupt system
no one goes to prison, and the state benefits from the resulting cost savings. This model, of course,
assumes that bribe demands actually deter crime rather than simply being a way of sharing the
monopoly profits of criminal activity between the police and the criminals. As Garoupa recognizes in
later work, it neglects the possibility that the unequal opportunities for payoffs across different types
of police work will distort enforcement priorities (Echazu and Garoupa 2010).
The economic models of corruption in law enforcement are also consistent with research that
looks favorably on privatizing law enforcement. Under this view, tolerating the bribery of enforcers
is worse than policies that legally incentivize enforcers by giving them private incentives to work
diligently to enforce the law. For example, Becker and Stigler (1974); Benson, Leburn, and
Rasmussen (1998); and Polinsky and Shavell (2001) suggest that bounties be paid to enforcers for
successful law enforcement activity. This is supported by the empirical work of Mast, Benson, and
Rasmussen (2000) that finds that asset forfeiture laws create incentives for police departments to
enforce drug laws.48 However, these authors then claim that privatizing law enforcement through
corruption could be a desirable second-best result in a world where enforcers must be paid a fixed
salary. That tolerant view, however, is overly optimistic. If penalties are low, bounty hunters might
induce people to submit to arrest in return for a share of the bounty.49 If one adds in the possibility of
coercive extortion and intimidation combined with threats of violence, the quasi-privatization of
enforcement, as Polinsky and Shavell recognize, increases the incentives to extort and frame the
innocent. Their analysis points to the importance of establishing credible checks so that those subject
to extortion or framing have a safe and effective way to file complaints. Moves toward a legal bounty
system or toleration of corruption could tilt the entire system into a violent, rent-seeking free-for-all.
The system could end up dominated by powerful criminal mafias able to organize corrupt payoffs and
intimidate rank-and-file officials and ordinary citizens, whether or not they engage in criminal
activity.
An extreme alternative would be to legalize the criminal activity, thus removing the incentive to
corrupt the police and the courts. Such a decision should balance the costs of corruption versus the
costs of decriminalizing the activity. For example, the crux of the argument for legalizing certain
narcotics is that their criminalization imposes higher costs on society – in terms of associated
violence, imprisonment of small-scale users or dealers, related health problems, and the corrupting
effect of organized crime – than the underlying drug use (Global Commission on Drug Policy 2011).
Short of the legalization of some corruption-prone markets, privatization of law enforcement does not
appear to be a desirable option given the downsides highlighted here.
Conclusion
As we argued in prior chapters, the criminal law should not be the first or the only line of attack
against corruption. Rather, programs should be redesigned or eliminated, and government should
operate in an accountable and transparent manner. This is especially true in law enforcement and
judicial systems in which corruption undermines the laws on the books. That said, it remains true that
law enforcement against bribery and extortion has a backup role to play as a disincentive to
corruption. Economic analysis can help with the design of optimal law enforcement strategies.
Looking at a range of cases, it appears that the laws on the books are often quite far from the
recommendations of law and economics. Penalties seem poorly tied to the marginal benefits of
bribery, both to those who pay and to those who receive bribes. Small bribes seem to be more
effectively deterred than larger ones, unless prosecutorial discretion makes up for the legal language.
The penalties levied on bribers are not well tied to their gains. The tension between obtaining
evidence to bring a case and deterrence ex ante has seldom been recognized and has been imperfectly
resolved. There is no solid evidence to determine if giving corrupt individuals leniency in return for
their evidence and testimony limits corruption or encourages people to participate ex ante. Many
countries have difficulty deterring organizations as opposed to individuals because the criminal law
only applies to individuals. Reform of the law of bribery and extortion remains a necessary, if not
sufficient, area of reform where economic analysis can help guide the debate.
1 This chapter is an updated and expanded version of portions of Rose-Ackerman (2010b). Miguel
de Figueiredo provided very helpful research assistance for the original article.
2 Some of the work on the economics of crime counts the benefits and costs to the criminals as part
of the overall social calculus. See, e.g., Andrianova and Melissas (2009) and Bowles and Garoupa
(1997). In contrast, we argue that if the state criminalizes some activity, that is a judgment that the
benefits to the criminal ought to be omitted from the social calculus. An offense should be treated
as a civil matter under, say, tort or nuisance law, if society wishes to trade off the benefits to the
perpetrator against the costs. Of course, it is open to debate whether or not to include corrupt
benefits in the social welfare function. If a policy maker believes that the gains should be counted,
that is an argument for decriminalizing the offense.
3 See Box 2.1, in Chapter 2.

4 Ian Austen, “Canadian Senators’ Expenses under Investigation after Auditor’s Report,” New York
Times, June 9, 2015, http://www.nytimes.com/2015/06/10/world/americas/canadian-senators-
expenses-under-investigation-after-auditors-report.html (accessed June 15, 2015).
5 Specifically, the rate of arrest consistently has a deterrent effect on crime in these studies; the rate
of conviction given arrest has a less robust effect. The effect of the severity of punishment on crime
is sometimes negative, sometimes insignificant, and sometimes positive (typically for risk lovers).
The vast majority of these studies use U.S. data, however, where corruption is less likely to
influence the rate of arrest or conviction, and where both rates are significantly different from zero.
6 See, e.g., the Council of Europe’s Criminal Law Convention on Corruption (Council of Europe
1999a), Articles 2 and 3.
7 Taiwan Criminal Code, Article 122 (III); Taiwan Anti-Corruption Act, Article 11 (I). For a
payoff to be an offense under the act, it must lead to the recipient “performing or omitting against
his or her official duties.” Article 11(2) of the act was amended June 7, 2010 to read: “With regard
to persons engaging in an act belonging to his or her duties mentioned in Article 2 [i.e., Public
Servants], such as making unlawful demands, promising or taking bribes or engaging in other
malpractices for unjust gains, he or she shall be punished by imprisonment for a term of less than
three years, detention, and may also be punished by a fine not to exceed NT$500,000.”
8 At present, Chilean law treats bribe payers and bribe recipients more symmetrically. However, if
the payer responded to a bribe request instead of volunteering the payment, the maximum prison
term is reduced. The official’s penalties can also be higher if his or her action in response to the
bribe is also a crime. Chilean Criminal Code, December 2, 2009, Article 248–251, available
under “Código Penal” at http://www.bcn.cl/lc/lmsolicitadas/cr (accessed October 14, 2015).
(Thanks to Fernando Munoz, Yale LLM ‘09, for information on the Chilean law.)
9 A few examples show the range. In Australia the criminal code includes an offense called
“unwarranted demand with menaces” by or of a public official. Such demands are not limited to
violent threats but are defined as direct or implied threats of detrimental or unpleasant conduct
meant to induce an individual or an organization to act “unwillingly” (Criminal Code Act of 1995
as amended, part 7.5). Botswana states that a “detriment of any kind” can qualify as a threat
(Corruption and Economic Crime Act, Chapter 8:5 of the Laws of Botswana,
http://www.laws.gov.bw/, accessed October 14, 2015). French law, in contrast, emphasizes a
threat of violence or constraint as a key feature of extortion (French Penal Code 312-1). Similarly,
in Ethiopia, the standard to define extortion is “uses violence or grave threats against a person, or
in any other manner renders such person unable to resist” (Ethiopian Criminal Code, Article 713,
http://www.ilo.org/dyn/natlex/docs/ELECTRONIC/70993/75092/F1429731028/ETH70993.pdf,
accessed October 14, 2015). The Finnish statute includes an offense of aggravated extortion that
includes the following criterion: “the offender takes unscrupulous advantage of the special
weakness or other insecure state of another” (Finnish Criminal Code, Chapter 31,
http://www.finlex.fi/en/laki/kaannokset/1889/en18890039.pdf, accessed October 14, 2015). The
Canadian statute includes “induced attempts” (Canadian Criminal Code, Section 346,
http://laws.justice.gc.ca/eng/C-46/page-6.html#anchorbo-ga:l_IX-gb:s_343, accessed October 14,
2015).
10 To get around disbarment, sometimes firm owners simply close the disbarred firm and open
another in the same industry.
11 A lesser offense of giving or accepting “anything of value ... for or because of any official act”
merits only a maximum of two years, plus a fine or both. The maximum fine is not specified [18
U.S.C.S. §201 (c)].
12 United Kingdom, Bribery Act 2010, ch. 23,
13 Australian Criminal Code as amended, parts 7.5, 7.6.
14 Botswana: Corruption and Economic Crime Act (Chapter 8:5 of the Laws of Botswana,
http://www.laws.gov.bw/, accessed October 14, 2015).
15 See the sources cited in note 9.
16 German Criminal Code, Chapter 30, §§ 331–334, http://www.gesetze-im-

internet.de/englisch_stgb/englisch_stgb.html (accessed October 14, 2015).
17 Rose-Ackerman is grateful to Miguel de Figueiredo for suggesting this possible complication.
18 Palifka thanks Elena Helmer for pointing out this example.
19 In many civil law countries organizations are excluded from criminal liability although the trend
may be changing with the introduction of corporate criminal liability into the French criminal code
in 1992 and with its incorporation into the Council of Europe’s Criminal Law Convention on
Corruption (Council of Europe 1999a, Article 18). After the French Revolution, France was the
source of the prohibition on organizational criminal liability. Its code was adopted widely in
Europe and has influenced the criminal law in parts of the world where the civil law tradition has
been exported (Orland and Cachera 1995: 114). A translation of the 1992 French criminal code is
in an appendix to Orland and Cachera. The Dutch have permitted corporate criminal liability since
the mid-1970s. Italy and Germany have constitutional provisions precluding corporate guilt, and
the Belgian courts have refused to find corporations guilty of crimes. In Germany, however,
administrative bodies can impose fines on corporations as well as natural persons (ibid.:116;
Khanna 1996: 1488–91).
20 The practice originated in 1994 with cases against Wall Street firms not necessarily involving
corruption. “A Mammoth Guilt Trip,” The Economist, August 30, 2014. See also Garrett (2014).
The advantage for prosecutors is that they can impose a penalty without getting the approval of a
court. The disadvantage is the lack of transparency for the public about what kind of wrongdoing is
being sanctioned and at what scale. Furthermore, little is known about the ultimate impact of such
arrangements.
21 See Lippman (2012–13) and Jordan (2010-2011). Jordan provides a comparison with the
United States, especially with respect to overseas corruption to be discussed further in Chapter 14.
22 For an alarmist view see Bean and MacGuidwin (2013). Lippman (2012–13), in contrast,
points to the possibility of a defense based solely on the adequacy of internal controls and argues
that U.K. Serious Frauds Office appears to be enforcing the law without being overly strict or
imposing undue burdens.
23 Matt Apuzzo, “A U.S. Tax Investigation Snowballed to Stun the Soccer World,” New York
Times, May 29, 2015, http://www.nytimes.com/2015/05/30/sports/soccer/more-indictments-
expected-in-fifa-case-irs-official-says.html (accessed May 30, 2015).
24 Dubbed “soccer rat” by the New York Daily News in a report that predates the arrests by six
months. Teri Thompson, Mary Papenfuss, Christian Red, and Nathanial Vinton, “Soccer Rat! The
Inside Story of How Chuck Blazer, Ex-U.S. Soccer Executive and FIFA Bigwig, Became a
Confidential Informant for the FBI,” New York Daily News, November 1, 2014,
http://www.nydailynews.com/sports/soccer/soccer-rat-ex-u-s-soccer-exec-chuck-blazer-fbi-
informant-article-1.1995761 (accessed October 13, 2015).
25 Alexander Smith and Erin McClam, “Ex-FIFA Official Chuck Blazer Admitted Corruption
Charges in 2013: DoJ,” NBC News, May 27, 2015, http://www.nbcnews.com/storyline/fifa-
corruption-scandal/former-fifa-official-chuck-blazer-admitted-corruption-charges-2013-doj-
n365161 (accessed October 15, 2015).
26 Thirty-one percent of the cases came from self-reporting – due diligence – and 17% of these
were discovered by the firm thanks to a whistle-blower (OECD 2014: 15, 17; figures 3 and 4).
27 For a somewhat different model of whistle-blowing that exploits a similar trade-off between ex
ante effort and ex post revelation see Ting (2008).
28 This would be very similar to the Prisoners’ Dilemma game.
29 Ian Ayres suggested this option in a private conversation. Wils (2007) discusses it in the context
of anticartel policy and critiques it because of a concern that it will be less effective in obtaining
truthful evidence than leniency.
30 A British media sting operation put FIFA corruption in the spotlight, just as U.S. agencies were
heightening their own investigation. Matt Apuzzo, “A U.S. Tax Investigation Snowballed to Stun the
Soccer World,” New York Times, May 29, 2015,
http://www.nytimes.com/2015/05/30/sports/soccer/more-indictments-expected-in-fifa-case-irs-
official-says.html (accessed May 30, 2015).
31 The defendant argues that he or she was enticed by the undercover authorities to engage in an
illegal activity in which he would not otherwise participate.
32 For a discussion of entrapment in a wide range of situations see McAdams (2005) and Hay
(2005). One argument for the entrapment defense is that it acts as a check on overzealous law
enforcement activities and improves the “quality” of arrests. However, the liberal acceptance of
this defense would make bribery cases harder to prosecute given the difficulty of obtaining
evidence by other means. It would also limit the deterrence effect outlined in the text.
33 For an overview that cites many of the background documents see Grossman (2003: 1–3).
34 Mike Scarcella, “DOJ: Undercover Sting Nets 22 Arrests in Large-Scale FCPA Case,”
Law.Com, http://www.law.com/jsp/article.jsp?id=1202439204610 (accessed April 25, 2010).
35 “Justice Department Drops FCPA Sting Case,” Wall Street Journal, February 12, 2012,
http://blogs.wsj.com/law/2012/02/21/justice-dept-drops-fcpa-sting-case/ (accessed June 4, 2015).
Three of the 22 defendants pled guilty, but the defendants in the two cases that went to trial were
either acquitted or faced a hung jury. The government decided to drop the cases against the other
defendants.
36 William Neuman, “Hidden Sweetener: Bribes Let Tomato Vendor Sell Tainted Food at Premium
Prices,” New York Times, February 25, 2010,
http://www.nytimes.com/2010/02/25/business/25tomatoes.html (accessed October 15, 2015).
37 James Benet, “Corruption Is Called Broad in Honda Case,” New York Times, April 4, 1995,
http://www.nytimes.com/1995/04/04/business/corruption-is-called-broad-in-honda-case.html
38 See Council of Europe 1999a, Articles 7 and 8 and the exception to these articles taken by, e.g.,
Belgium, Czech Republic, and Poland. See the German Criminal Code for an example of a statute
that criminalizes both the payment and the receipt of commercial bribes (German Criminal Code,
Chapter 26, §§ 299–300, http://www.gesetze-im-internet.de/englisch_stgb/englisch_stgb.html,
accessed October 14, 2015). The United States has no federal commercial bribery statute, but many
individual U.S. states have such statutes, and commercial bribery is prosecuted at the federal level
under statutes that deal with fraud, conspiracy, restraint of trade, or the denial of honest services
and that cover certain specific areas, such as banks. See Gevurtz (1987–8, at 366, n. 2).
39 See Heine, Huber, and Rose (2003) for an overview of the law and practice of commercial
bribery in thirteen countries at the turn of the twenty-first century, sponsored by the International
Chamber of Commerce.
40 Nataliya Vasilyeva, “Sochi Olympics Have Been Undermined by Widespread Corruption, Says
Russian Critic,” The Huffington Post, May 30, 2013,
http://www.huffingtonpost.com/2013/05/30/sochi-olympics-2014-corruption-
russia_n_3359666.html (accessed June 7, 2013).
41 In Russia there are reports of criminal elements forcing firms into bankruptcy and ousting
existing management through corruption of the legal system. For a detailed case that was publicized
through a failed effort to obtain judicial review in the United States see Volkov (2004).
October 2, 2014); 13th Council of Europe Conference of Ministers Responsible for Sport,
“Adopted Resolutions,” September 18, 2014, http://www.coe.int/t/dg4/epas/resources/Macolin-
2014/MSL13_10rev_Adopted-resolutions.pdf (accessed October 15, 2015).
43 Matt Apuzzo, Stephanie Clifford, and William K. Rashbaum. “FIFA Inquiry Yields Indictments;
U.S. Officials Vow to Pursue More,” New York Times, May 27, 2015,
http://www.nytimes.com/2015/05/28/sports/soccer/fifa-officials-arrested-on-corruption-charges-
blatter-isnt-among-them.html (accessed May 27, 2015).
44 Matt Apuzzo, Stephanie Clifford, and William K. Rashbaum, “FIFA Inquiry Yields Indictments;
U.S. Officials Vow to Pursue More,” New York Times, May 27, 2015,
blatter-isnt-among-them.html (accessed May 27, 2015); Matt Apuzzo, “A U.S. Tax Investigation
Snowballed to Stun the Soccer World,” New York Times, May 29, 2015,
http://www.nytimes.com/2015/05/30/sports/soccer/more-indictments-expected-in-fifa-case-irs-
official-says.html (accessed May 30, 2015).
October 2, 2014); 13th Council of Europe Conference of Ministers Responsible for Sport,
“Adopted Resolutions,” September 18, 2014, http://www.coe.int/t/dg4/epas/resources/Macolin-
2014/MSL13_10rev_Adopted-resolutions.pdf (accessed October 15, 2015).
46 The GCB is published by Transparency International. The latest edition, 2013, surveyed
114,000 people in 107 countries. See Transparency International, “Global Corruption Barometer
2013,” http://www.transparency.org/gcb2013/report (accessed October 15, 2015). More detailed
survey evidence from Peru shows that the incidence of reported bribery is highest for those who
used the judiciary, followed by those who interact with the police (Hunt 2006).
47 The notion of a “maximal fine” comes from work on the law and economics of crime that views
imprisonment and other nonmonetary sanctions as a waste of resources so long as convicted
criminals have monetary resources that can be expropriated by the state. The maximal fine is the
largest fine that an individual can pay given his wealth constraint (Becker 1968; Becker and Stigler
1974).
48 Benson, Leburn, and Rasmussen (2001), however, provide a cautionary note in their empirical
study demonstrating that such incentives cause law enforcement to shift toward the enforcement of
drug laws, away from other enforcement activities, leading to higher rates of other crimes.
49 Outside the corruption area, Garoupa and Klerman (2010) provide an example from eighteenth-
century England where bounty hunters induced people to accept arrest for vagrancy in return for a
share of the bounty. The penalty of a few days in jail was a price that some people were willing to
accept.
Part II
◈
Corruption as a Cultural Problem

7
Culture and Corruption
◈
Some claim that “culture,” not economics or politics, is the primary determinant of corruption.1 This
claim takes two basic forms. First, cultures differ, and hence the meaning of “corruption” as the
misuse of power for private gain differs across the world. In particular, transactions that are labeled
corrupt in highly developed economies and well-established democracies may be perfectly
acceptable and even normatively required in other societies.2 Second, one may acknowledge that
corruption – as defined in this volume – is damaging but believe that the only route to reform is
through a thoroughgoing change in prevalent social norms, moving beyond narrow economic models
of self-seeking individuals:
If we want to really get at corruption, ... we need to build up ... values of honesty and integrity in
society.... Honesty, prosocial preferences and a sense of right and wrong constitute a part of the
human psyche ... , even though we can create societies where such traits are barely visible.
(Basu 2011: 10)
The first critique argues that not all societies aspire to the ideal of state/society relations
implicit in our earlier chapters, and that this disjunction needs to be respected by outsiders. The
second acknowledges that corruption undermines economic and political development but
concentrates on efforts to change norms, especially through the transformation of elite attitudes.
We, of course, recognize that entrenched social norms affect the incidence of corruption and the
definition of acceptable behavior. However, the study of “culture” is one part of the larger analytic
effort to understand the causes and consequences of corruption. Some behavior – trust in others, for
example, or bestowing “gifts” on public servants – may be determined by cultural mores, but it may
also be triggered by strategic calculations and guesses about the interests of other actors. One goal of
this chapter is to demonstrate that some behavior that appears on the surface to be generous and other-
regarding, may, in fact, be based on strategic calculations of self-interest. A second goal is to
highlight the way certain traits, often seen as normatively desirable, such as trust, may, in some
contexts, undermine beneficial public policies. Before considering these complex cases, however, we
begin by asking if certain relatively easy to measure traits, such as gender and religious faith, are
linked to the acceptability of corrupt bribes and kickbacks.
Culture is a collection of informal institutions (customs and taboos) that a group of people hold
in common.3 These norms change over time and space, but change is usually slow, so many
researchers take “culture” as an exogenous, static variable.4 For example, UN diplomats in New York
City were more likely to have unpaid parking and traffic tickets if they came from relatively corrupt
countries (Fisman and Miguel 2007), and newly arrived undergraduates in the United Kingdom had
propensities to bribe related to the level of corruption in their countries of origin (Barr and Serra
2010). However, cultural norms can change. Thus, the relationship between country of origin and
propensity to bribe for students tended to weaken the longer they had been in the United Kingdom; for
graduate students, the correlation disappeared entirely (ibid.).5 Conversely, the level of corruption
can influence people’s beliefs and attitudes. Living in a relatively corruption-free environment may
lead to changed attitudes about its acceptability. “[T]o use the existence of corruption as proof of the
influence of culture inevitably becomes a circular argument: certain cultural norms cause corruption
because corruption exists; corruption exists because of certain cultural norms” (Dalton 2005: 244).
Expectations shape actions, and expectations may derive from a shared culture. For example, a
crown signals power in some societies, while a staff accomplishes the same purpose in others
(Myerson 2004). As long as everyone understands the signals correctly, they will converge on a
solution even if they do not communicate directly. According to Myerson (2004: 93), the “details of
cultural traditions may be decisive in games with multiple equilibria” – games that reflect real-world
situations. Culture affects behavior, including the payment and acceptance of payoffs. Applying this
insight to interactions with public officials, if people expect justice and fair treatment from these
officials, they are likely to act honestly (Rothstein 2011).
In this chapter we seek to unpack the culture/corruption interface. We begin in Section I with the
vexed problem of definition and its dependence on culture. If something of value is transferred in
return for a benefit, is it a price, a bribe, a gift, or a tip? Legal rules and cultural norms help assign
transactions to one or another category, but the standards are not fixed across either time or space. If a
payment is legally a bribe but is viewed as a tip, should the law be changed to remove the offense, or
does the payer’s tolerant attitude undermine important policy goals? In other words, cultural or social
practices are not immutable and can be normatively unacceptable. They can vary not just across
countries but within countries and regions as well.
Section II begins our examination of cultural measures and their links to corruption. It
summarizes cross-country empirical research that links cultural factors related to gender and religion
to honesty and resistance to corruption across countries. We critique this research and cast in doubt
the policy recommendations sometimes taken to be implied by these findings.
Section III goes beyond personal characteristics, such as gender and faith, to focus on trust – a
complex concept that can cut both ways. Trust and distrust can arise from deep-seated cultural
factors, but they can also be rational responses to particular situations. Here, it is important to
distinguish among generalized trust in other people; trust in particular individuals who are family
members, friends, or colleagues; and trust in the impartial behavior of institutions and officials. Some
trust, as between officials and their families and friends, can fuel corrupt deals. Other types of trust
make honest and competent government possible.
Public bodies and private individuals and firms might seek to generate trust, not through claims
of personal integrity and a culture of honesty, full stop, but rather by building up a reputation over
time for trustworthy behavior. They are trusted not because others see them as inherently good and
virtuous but rather because it is in the self-interest of these actors to behave in a way that generates a
reputation for trustworthiness. In other words, we argue that trust can arise not just through deep
cultural traits but also through strategic interactions. Students of the relationship between culture and
corruption need to ask themselves how social norms interact with strategic calculation in explaining
behavior.
Section IV then considers how aspects of culture, independent of corruption, per se, can interact
with corrupt opportunities to exacerbate or dampen the incidence of corruption. Values can be
entrenched through vicious or virtuous cycles in which widespread corrupt opportunities can
undermine values of honesty and integrity that, in turn, breed more corruption in a feedback loop that
entrenches those values. Equally as destructive can be vicious cycles based on strong bonds of trust
between those operating illegally through corruption and other types of illegal behavior.
Finally, Section V deals with the claim, sometimes made by outside investors, that they are being
culturally sensitive when they pay off elites to get business. We illustrate the self-serving character of
this claim by showing that, even if ordinary citizens find payoffs necessary to survive, they
disapprove of corruption. Such behavior is not viewed as a positive cultural feature, especially when
outsiders make payoffs to influence rulers. We demonstrate that, paradoxically, big business and
anthropologists both sometimes argue that corruption is culturally determined, but ordinary people
largely condemn payoffs, gift-giving, nepotism, and cronyism. Most people see such behavior as a
detour around the constrictions of a dysfunctional state, but they do not generally trumpet such
dealings as reflecting deep cultural mores.
I. Bribes, Prices, Gifts, and Tips
Bribes, prices, tips, and gifts represent different types of reciprocity. The difficulty of distinguishing
gifts and tips from bribes has its roots in their fundamental similarity. In none of these cases will the
legal system enforce a quid pro quo, that is, a claim that the payment was made as part of an exchange
relation. For gifts and tips the quid pro quo is implicit, not written into a formal contract. For a bribe,
the quid pro quo may be quite clear, but its illegality makes it legally unenforceable. There are many
borderline cases so that categorizing a particular payment as corrupt may differ across cultures and
legal systems.
Payments, whether in money or in kind, can be characterized along two dimensions. First, does
an explicit quid pro quo exist? If so, the transaction can be labeled a sale even if there is a long time
lag between payment and receipt of the benefit. Both market sales and explicit bribes involve
reciprocal obligations. Gifts to charities or loved ones often do not explicitly involve reciprocity –
although many do generate implicit obligations. The second dimension considers the institutional
positions of payers and payees. Are they agents or principals? A restaurant bill is paid to the owner; a
tip, to the waiter. A speeding ticket is paid to the state; a bribe, to the police officer. Employers, sales
agents, and customers can pay agents. Bosses give Christmas gifts to their employees, sales
representatives give gifts to those in firms’ purchasing departments, and customers tip salespeople for
favorable service. Some of these payments skirt the borderline between bribes and generous tokens of
appreciation.
Some people have duties to the general public – an amorphous group that lacks well-specified,
sharp-eyed principals. Politicians, for example, can be described as the representatives of the public
interest or of the citizens who elected them. Under either view, they have considerable discretion.
Where permitted, the desire for reelection is a constraint, but one that does not always prevent
lucrative side deals. Because the quid pro quo is often vague, campaign contributors commonly say
they are giving gifts. Others disagree.
Concentrating on these two dimensions – the existence of a quid pro quo and the presence or
absence of agents – produces the four categories in Table 7.1: bribes, tips, gifts, and market prices.
Although the categories include the morally loaded terms bribes and gifts, the table identifies
payments only in terms of the agency relation and the existence of a quid pro quo. However, even if
no explicit trade is involved, there may be an implicit expectation of reciprocal behavior.
Table 7.1. Payments by clients or customers
quid pro quo no explicit quid pro quo
payment to principal price gift
payment to agent bribe tip
Source: Authors.
Although gifts differ from prices because of the lack of an explicit quid pro quo, there may be
more subtle links between gifts and beneficiaries’ behavior. A university may start a new professional
school in the hope of attracting donations, and a child may work hard in the hope of attracting parental
gifts. Nevertheless, many gifts are purely altruistic transfers with no expectation of a material reward.
They may provide psychological benefits such as the “warm glow” of sympathy, or the satisfaction of
living up to a moral commitment (Sen 1977; Andreoni 1988; Rose-Ackerman 1996a) but no tangible
gains. Some self-sacrificing gifts harm the giver, as when a person imposes sacrifices on family
members or, in the extreme, gives up his or her life for another person or for a cause.6
In terms of standard economic analysis, gifts come closer to being prices as they move down the
scale from gifts to charitable organizations and causes; to gifts to needy, but unknown individuals; to
gifts to friends and relatives; to gifts to people and institutions in a position to benefit the giver.7 But
simple economics is only part of the story. Personal relations between giver and receiver or buyer
and seller are an important dimension of many transactions that have intrinsic value independent of
their role in regulating the transaction.8
Now consider the two agency relationships displayed in the table. Agents are generally paid by
their principals, not outsiders, such as customers or sales representatives. The principal develops a
system of remuneration and monitoring that gives agents an incentive to perform well. Most
discussions of the relative merits of alternative remuneration schemes assume that laziness and
shirking are the problem, not payoffs offered by a third party. There is a two-sided relationship
between principal and agent operating with given background conditions.9 Some scholars have
brought in a third party and use their models to analyze the problem of corruption (Rose-Ackerman
1978; Tirole 1986, 1996).
Pervasive bribery may indicate that society has structured the agency relationship inefficiently. If
customers commonly bribe agents, perhaps it would be more efficient to have the customers hire the
agents to deal with their old principals. For example, suppose an automobile company provides free
repair service to those who purchase its cars. In practice, customers eager for good service bribe
repairmen to provide speedy, high-quality work. The fact that the customer is better at monitoring the
repairman than the automobile company suggests that the service can be more efficiently provided by
a contract between the customer and the repairman than by a contract between the repairman and the
automobile company. In spite of this incentive for commercial bribery, the automobile company might
continue to provide repairs as part of the warranty provided ex ante to buyers. Warranties improve a
firm’s competitive position by reducing the risk faced by customers, but like all insurance policies,
they create monitoring costs ex post (Cramton and Dees 1993: 366–7). Similar issues arise in many
professional service industries where customers buy the expertise of others. They can judge output –
good health, a large damage award in a lawsuit – but cannot directly observe the quality of inputs. Is
it more efficient to hire the professional directly or to pay a lump sum to a large organization (say an
insurance company) that then monitors and reimburses the professionals? Should the outright sale of
lawsuits to attorneys be permitted, thus avoiding the agency/principal problem altogether? Should the
state subsidize legal services across the board?
To see the difficulties of the last possibility, suppose that the state provides free lawyers to
anyone who brings a lawsuit and pays the lawyers a fixed fee. Suppose further that many clients make
secret payments to their lawyers to induce greater work. If this type of commercial bribery is
common, it implies that the sale of legal services should be privatized with a residual subsidized
program for the indigent. In contrast, evidence that the parties to a lawsuit are paying judges to get
favorable rulings does not imply that one should legalize such payments. They undermine the very
idea of the rule of law. The judge is not the agent of the parties but has sworn to uphold general legal
principles. This is in the long run interest of those who use the courts. Recognizing this, even private
commercial arbitration services structure their payment systems to avoid links between substantive
decisions and the arbitrators’ financial rewards.
The state’s lack of organizational flexibility limits its ability to reorganize the agency
relationship. A government uses agents where private businesses would simply sell their services
directly. Conversely, the public sector uses contracts where private firms would vertically integrate
because of monitoring difficulties. Sometimes deregulation and privatization can correct these
difficulties, but some constraints are inherent in the special nature of government services. Legitimate
public functions cannot by their nature be organized like private markets. This fact implies that not all
incentives for corruption in public programs can be eliminated.
In some contexts, it may be difficult to distinguish between bribes and tips. Both are informal
payments by customers to compensate agents for their services. Even the size of these payments may
be similar, and they are often made in cash. Furthermore, in many societies, both supplement the
wages earned by those in low-paid positions.10 The main difference between bribes and tips lies in
the agency relationship: while tips reinforce the principal’s objectives, bribes subvert them.11 With
tips, the quid pro quo is vague and service is usually delivered before the tip is paid. They are
“legally optional, informally bestowed, the amount unspecified, variable, and arbitrary” (Zelizer
1994: 91). Tips permit customers to pass judgment on the quality of service in situations in which
business owners may have difficulty evaluating quality. If customers are better monitors than
managers, tips make sense. In contrast, if management can infer good service from high levels of
individual sales, it can reward the employees directly (e.g., in commissions). A restaurant might
reward its waiters on the basis of the number of meals served, much as tips do. But such a scheme
would be less effective than tipping. Tying rewards to a mixture of volume and quality is more
efficient, and allowing customers to pay agents directly for good service is one way to accomplish
this. A public-sector example occurred in Myanmar where one clean traffic cop (among the many who
try to extort payments from drivers) directed traffic effectively. In gratitude, drivers on the crowded
streets showed their appreciation with food, beverages, and cash.12
Both tips and gifts can become bribes. Many would describe their payments to service providers
as gifts for good service, not tips or bribes. However, either can function like a bribe. Suppose, for
example, that tips led agents to discriminate between customers in a way that undercuts the revenues
flowing to the principal. Imagine that waiters, like corrupt customs agents, gave diners discounts on
their meals or served extra dishes in return for payoffs or that the concierge took tips for reserving a
table when the restaurant has no openings. These payments are similar to paying a police officer to
avoid a parking violation fee or a speeding ticket, or paying a detective for solving the homicide case
of a loved one rather than following the priorities set by his or her superiors. Bribes are paid for
access to hospitals or schools in some countries; tips, often posing as gifts, are made to health care
workers or teachers out of gratitude for their service or as an expression of respect, but the line
between the two is often murky, especially when the intention is difficult to gauge. In transitional
Russia, for example, doctors in maternity hospitals resented bribes – which they identified as large
payments made before birth, to “guarantee” good service – but appreciated small gifts of thanks
offered after a successful birth; eventually, as real salaries fell and the hospital bureaucracy came to
be viewed as corrupt, doctors welcomed both types of payment (Rivkin-Fish 2005).13
Corrupt officials and private individuals may structure their interactions to blur the line between
bribes and gifts in order to avoid prosecution and to overcome resistance from those on the other side
of the transaction. Publicly listed “tips” or “gifts” may publicize the benefits that some obtain from
making payments. The quid pro quo is often paid in the same “currency” as the initial benefit – e.g.,
votes on bills or favoritism on contracts. Taken in isolation the behavior looks like favoritism, not
corruption. A gift has been given or a favor done that some may view as inappropriate. The gain to
the person who does the favor is not easy to identify. Only the reputation for doing well by people
who have helped you in the past sustains the system.
A disadvantage of bribes is that their illegality may make it hard to establish a reputation for
favoring those who make payoffs. Suppose, for example, that the official price is uniform, but that
agents can provide special favors or benefits to some customers. If they do this, others may
experience declines in service. Then gifts from some customers may induce others to give as well.
This seems to be the aim of parking garage attendants who publicly listed gifts from monthly parkers
(Tierney 1995). The spiral in gift giving would be especially powerful if there is a scarcity of
desirable parking spots; parkers are engaged in a “war of attrition.”14 They are induced to give not
only to avoid a stingy reputation, but also to assure good service. Parking lot owners may try to
capture some of these gains by charging different prices for different quality spaces. The inevitable
discretion exercised by the attendants, however, means that owners will not be able to extract all of
the gains.
Some corrupt “markets” operate the same way, but are less effective because bribes cannot
usually be posted for all to see. Campaign contributions frequently skirt the narrow line between gifts
and bribes and fall on one side or the other depending upon the vagaries of campaign finance laws.15
Potential contributors may be more likely to donate if they are informed about the donations of others.
The possibility of an escalating spiral of donations suggests that politicians might publish lists of their
contributors even if the law does not require it. The effectiveness of such a list, however, depends
upon the motivations of contributors. If they are only concerned with the election of a particular
person, information on the generosity of others could discourage further gifts. In contrast, if
contributors, like the automobile parkers, seek an advantage over their rivals, news of their rivals’
gifts could spur them to give more. Paradoxically, the closer a gift is to a bribe in this context, the
more useful publicity can be as a spur to donations.
Developed market economies draw many formal and informal lines between impersonal market
trades and official functions, on the one hand, and personal ties, on the other.16 Conflict-of-interest
and campaign finance laws regulate the links between money and politics. Norms of behavior limit
the intrusion of the market into family relationships and friendship. Journalism standards prevent
reporters from accepting money to write particular stories. Yet, even so, the distinctions between
prices, bribes, gifts, and tips are difficult both to draw and to evaluate normatively. In developing
countries the problem is much more vexing. The line between market and family and between the
public and the private sectors is often blurred, uncertain, and in flux.
II. The Impact of Gender and Religion on Corruption
In distinguishing bribes from their close cousins – gifts, tips, and prices – we stressed the element of
choice and evolution. Both formal rules and tolerated practices vary over time, space, and sector.
This variation makes it difficult to measure both corruption and culture and to track their
interrelationships. Nevertheless, there have been some efforts based on individual surveys and cross-
country data sets. Most empirical attempts to identify the effects of “cultural” values on corruption
have focused on two easily identifiable aspects: gender and religion.
A. Gender
A number of studies have found that women are, on average, less corrupt than men, holding a
country’s background level of corruption constant.17 The definition of “corrupt” varies from one study
to another, but, in general, women are found to be both less tolerant of corruption (Swamy et al. 2001)
and less prone to engage in it (Frank and Schulze 1998; Swamy et al. 2001; Alatas et al. 2009a). At
worst, women are not more corrupt than men (Sung 2003; Alatas et al. 2009b; Armantier and Boly
2014).18 The explanation typically offered is that women exhibit more “feminine” traits, such as
looking out for the greater good and quality of life, while men exhibit more “masculine” traits like
competitiveness and materialism. Using Hofstede’s measures of culture,19 at least three cross-country
studies (Husted 1999; Davis and Ruhe 2003; McLaughlin 2013) have found that “masculinity,” as
defined by Hofstede, is associated with higher levels of corruption.
Both Swamy et al. (2001) and Dollar, Fisman, and Gatti (2001) find that lower levels of
corruption are associated with higher participation of women in politics or, equivalently, female
labor force participation, a highly correlated variable. However, there is likely an interaction
between the effect of gender on corruption and the institutions of political life. Thus, Sung (2003)
finds that the gender effect disappears when the rule of law and freedom of the press are included, so
that both lower corruption and higher participation of women in politics may be the result of societal
evolution. Chaudhuri (2012) notes that in several studies, the gender gap is weaker in developing
countries – where corruption tends to be more of a problem – than in wealthier countries. In a more
detailed study (Esarey and Chirillo 2013), the gender gap in attitudes toward corruption was larger in
democracies than in autocracies, and female participation in government was inversely related to
corruption in democracies only. That result is, of course, in some tension with Sung’s conclusion that
gender differences disappear when societies have press freedom and the rule of law. Goetz (2007)
argues that, if women in politics and bureaucracies are less corrupt than men, it is mainly due to lack
of opportunity because they do not have the same access to patronage networks. In addition, women
may not seek to be insiders if such inclusion could expose them to sexual innuendo and harassment. In
her fieldwork in South Asia, Goetz observed women engaging in and encouraging illicit or borderline
practices with other women, but not in male-dominated environments. The implication of these
studies is that institutions shape human behavior, whether the person is male or female.
Of course, reverse causality is possible. As Goetz (2007) indicates, many women in South Asia
have entered politics due to their family ties and the inability or unwillingness of parties to generate
independent female candidates. Many are, for example, the widows of former politicians. If,
however, women choose to enter politics, and if women find corruption more distasteful than men do,
we would expect to find more women self-selecting into politics in countries where corruption is
lower. Therefore, lower corruption would cause the female proportion in politics to increase. This
argument fits well with the results reported by Esarey and Chirillo (2013), noted previously, who find
that female political participation is higher in democracies that are less corrupt.
Furthermore, even if a gender bias does exist in the population at large, it does not necessarily
follow that filling parliamentary seats with women will alleviate the problem of corruption.
Presumably, the distribution of traits among women and men overlaps even if the means are different.
Because politicians are not randomly drawn from the male and female populations, one cannot
presume that those who self-select into political life will differ very much by gender. For example,
female mayors in the United States do not seem to produce better results compared to their male
counterparts; the gender of the mayor has no impact on crime rates, municipal spending, or
employment (Ferreira and Gyourko 2014). In addition, if women join existing political networks or
parties, they may have little impact on outcomes whatever their underlying beliefs. If female Members
of Parliament are divided along party lines, they will find it difficult to form a coalition that can
promote honesty in government even if they favor such policies. In Afghanistan, for example, the 2004
Constitution establishes that women must hold at least two parliamentary seats in each province.20
This requirement has not significantly changed the legal landscape. Not only are women a minority,
but some argue that many women in parliament merely vote as instructed by male party members.21
Similarly, Mexico’s constitutional quota for female candidates in congressional elections has been
undermined by the common practice of a victorious woman stepping down to allow her – male –
substitute to take her place.22
In contrast, favoring women in public-sector employment has been more effective, although even
there difficulties arise. On the plus side, placing women in positions where they interact with citizens
can limit payoffs. For example, female cashiers introduced in the water sector in Benin and Cote
D’Ivoire were less susceptible to bribery and fraud than men (Plummer and Cross 2007: 250).
Similarly, in parts of Mexico, Peru, and other Latin American countries, police reforms have included
hiring female police officers to reduce corruption, with some success (Karim 2011).23 Because
citizens perceive women as more honest and trustworthy, the expectation of bribery is lower. Some
female Peruvian traffic officers equated bribery to prostitution, indicating that they would feel
uncomfortable accepting or demanding bribes. The long-term results of these programs, however,
point to the difficulties of simplistic solutions. In Peru, women entered the police force full of hope
and pride, only to find themselves in dead-end jobs with low pay, few benefits, and discriminatory
policies. Efforts to address corruption higher up the hierarchy (in procurement, pensions, and
benefits, where men dominate) were met with resistance (ibid.). The police force in Peru is still
perceived as highly corrupt. According to the 2013 Global Corruption Barometer, 80% of Peruvians
believed the police to be corrupt or extremely corrupt; 44% of respondents who had had contact with
the police in the previous year admitted to paying a bribe. Furthermore, simply hiring women for the
lowest street-level positions can fuel resentment among women denied promotions. One of the ironies
of placing more women in positions where they interact with the public is that their very honesty may
prevent them from rising in the ranks.
In general, gender quotas may help increase the fairness of political and bureaucratic life, but
they do not appear to be a robust way to overcome pervasive corruption.24 Such “hard power”
policies may offer a short-term solution, but will not necessarily lead to the desired outcome. Indeed,
such policies may deepen the us-versus-them mentality that often contributes to corruption.
Instead, “soft power” measures to change the culture appear to be a better option, although the
empirical evidence is spotty. Rather than discriminate by gender, a long-term attempt to instill more
“feminine” traits in the populace is more likely to yield lasting results – a strategy that would need to
view these traits as universally desirable, not gender specific.
The basic point is that if an easily measured trait – for example, gender – is associated with less
corruption, it does not follow that simply focusing on that trait will do much to solve the problem.
The association, if it exists, likely depends on complex issues related to family life and education that
vary across individuals, and the nature of state institutions that vary across countries. The impact of
culture is probably too subtle to be captured by simple metrics, such as gender. Furthermore, it is
possible that the empirical findings reflect the effects of long-run evolutionary processes that have led
some countries to be both more egalitarian and less corrupt.
B. Religion
Similar concerns arise in reviewing the evidence on religion. Following Weber’s hypothesis
regarding the Protestant ethic and economic development, many researchers have included
Protestantism (the percentage of the population that is Protestant, or was so at some point in time) in
regressions of corruption. Some find that Protestantism is associated with lower corruption (Treisman
2000; Paldam 2001; Haque and Kneller 2009); others do not (Lambsdorff 2002; Quinn 2008). To the
best of our knowledge, no study has found Protestantism to be associated with higher corruption.
Expanding on this, some include other religions in an attempt to identify those religious traditions that
influence corruption levels, for better or worse.25 Paldam (2001) tests the effects of eleven religious
groups on corruption levels, controlling for GDP per capita (measured in terms of purchasing power
parity). He finds that only the Reformed Christian (Protestant and Anglican) and tribal religions are
associated with lower corruption, while Catholic, Orthodox Christian, and Islamic countries have
higher levels of corruption.26 The correlation between Protestantism and corruption may, however, be
another case of reverse causality:
One of the key purposes of the Reformation (almost 500 years ago) was precisely to fight the
corruption (broadly defined) of the Catholic Church.... It is thus arguable that reverse causality
entered into the Reformation process. It was the more “moralist” countries, who [sic] chose the
various “Reformist” denominations, while those more “tolerant” remained with their old
denominations. However, this happened long ago. In the meantime there have been many changes
within all denominations – including “moral reforms” also within the Catholic Church. So it is
amazing that such a large gap in “ethics” still remains.
(Paldam 2001: 404)
All religions condemn corruption. “Islam preaches good governance and prohibits corruption”
(Askari, Rehman, and Arfaa 2012: 5), especially bribes (Kristiansen and Ramli 2006: 226).27
Confucianism contains elements that vitiate corruption, but the same cultural norms can be used to
justify practices that may be interpreted as corrupt; in Korea, Confucianism has inspired both corrupt
acts and anticorruption movements (Dalton 2005). Catholicism is based on almost the same text (the
Bible) as Protestantism. Furthermore, the nominal predominance of one religious tradition does not
necessarily imply that the majority of people in the society continue to observe the mandates of that
religion, or that they interpret those mandates in the same way. Religiosity – strength of faith or of
identification with one’s religion – is associated with lower corruption across cultures (Swamy et al.
2001; Armantier and Boly 2014). Furthermore, the introduction of Western concepts regarding
markets and wealth may have undermined non-Western traditions. Therefore, studies that find any
given religion to be more or less prone to bribery or corruption are likely using “religion” as a proxy
for something else. The so-called Protestant countries are mostly ones where actual levels of belief in
the tenets of particular Christian denominations are very low. Hence, one should interpret with
caution the results associating religion and corruption.
Our conclusion, after this review of the evidence, is that neither gender nor faith, taken as stand-
alone independent variables, can provide much insight into the root causes of corruption. Rather, they
are factors that interact with others to determine behavior and social mores. Furthermore, most of
these studies share the weaknesses of all cross-country studies. They assume that intrastate variation
is not substantial, and they neglect the way conditions in one state may influence those in their near
neighbors or perhaps in their former colonies or their close allies.28
Moving from easily measured factors, we turn to consider trust and its role in both limiting and
facilitating corruption. Trust reflects the relationship between social actors. It is connected with
trustworthiness, that is, with the behavior of individuals and of institutions over time that seek the
trust of others (Hardin 2002).
III. Trust
Trust is an individual trait, but its presence can depend both upon the “cultural” context and on one’s
strategic situation.29 The relationship between trust and corruption is not as straightforward as it
might seem. A common view holds that in societies with low levels of trust, corruption flourishes as a
way to overcome pervasive distrust of the motives of others. At least if they benefit financially, so the
argument goes, officials have a self-interested reason to respond to the demands of citizens and
businesses. However, the payment of a bribe and receipt of the promised benefit may be separated in
time, and the formal law of contracts obviously provides no protection for such deals. Thus, there
must be some degree of trust between those who pay and those who receive bribes for all but the most
mundane, low-level corrupt deals. Hence, interpersonal trust is not always compatible with
efficiency and good government. It can facilitate corruption and undermine attempts to improve the
operation of the state (della Porta and Vannucci 1997a).
We need to unpack the multifaceted concept of “trust” to see how it interacts with the incentives
for corruption. We distinguish three types of trust that can operate at cross-purposes with each other –
call them: generalized trust, interpersonal trust, and institutional trust.30
A. Generalized Trust
The first form of trust describes general social attitudes and avoids any mention of specific state
institutions, individuals, or social groups. Surveys – such as the World Values Survey – ask whether
and to what degree the respondent agrees with the following statement: in general, people can be
trusted. Such generalized trust seems to build up over time, through a series of reciprocal exchanges
(Offer 1997). General levels of trust tend to persist – parts of Africa that were especially victimized
by the slave trade during the nineteenth century still exhibit lower levels of trust than other areas
(Nunn and Wantchekon 2011). Empirically, higher generalized trust is associated with lower
perceptions of corruption at the individual level (Canache and Allison 2005; Chatterjee and Ray
2012)31 and higher investment at the macrolevel (Knack and Keefer 1997). This type of trust is
reflected in the claim that social trust and low levels of corruption go together for society as a whole.
We recognize that deep historical and social attitudes shape present-day behavior and
perceptions of corruption, but to the extent they are important, they are a constant that reformers must
take as given. Perhaps some polities are so steeped in generalized distrust, that reform is unlikely, but
we claim that most systems can, at least, be subject to marginal improvements if the institutional
conditions of life are changed to make corruption a less lucrative and acceptable option. Thus,
focusing on the second and third types of trust, we discuss how institutional reforms can move a
system in the direction of trust based on impartiality and honest dealings and away from one based on
trust in connections and personal favors.
B. Interpersonal Trust
The second type of trust is based on strong interpersonal ties of family, clan, friendship, or love that
affect some interactions but not others (Sturgis and Smith 2010).32 One trusts another person to
behave in a trustworthy way, not out of self-interest, but instead through ties of mutual affection and
obligation. A person may trust his powerful friend to help him, not because the friend will apply the
law fairly, but because he plays favorites.33 Obviously, the converse holds as well. Those who do not
have powerful friends do not obtain benefits, even those to which they are entitled.
Societies based on strong interpersonal relations may have little notion of formal
agency/principal relations and the obligations they impose on agents. The idea that one has distinct
responsibilities to a superior – separate from ties of loyalty, friendship, and kinship – may seem
strange and unnatural. Such societies will have difficulty establishing modern bureaucracies, with
civil servants hired on the basis of skills who are expected to separate their role as official from their
role as friend or relative. Citizens expect that personal ties with officials are needed to get anything
done and think it quite appropriate to reward helpful officials with gifts and tips that, in practice,
operate much like bribes. They trust their family, friends, and co-workers and distrust the state.34 The
difference from a pure case of bribery is that these reciprocal dealings are only open to those with
proper connections.
In societies with embedded interpersonal networks, people may believe they should give freely
to others in their family or group and expect that “gifts” will be made in return. Although an outsider
may observe what appears to be an active trading culture, those within the system may not see it that
way. Trade, for them, is legitimate only with particular partners. A society based on such highly
personalized relations will have difficulty developing large-scale capitalist enterprise or supporting
active cross-border trade, but it may produce a viable autarky. Attempts by development experts to
introduce more formal and impersonal mechanisms may not succeed, and even if they do, a shift
toward more market-friendly attitudes can have costs as well as benefits. As Titmuss (1970) argued
with respect to the supply of blood for transfusions, a greater role for the market may be accompanied
by a lower sense of obligation to help relatives and friends. Cooperation to solve common problems
may fall, and those in need may suffer (Dia 1996).
In the private market, if people deal only with their friends, this will limit entry into the market
to insiders and lead sales and purchasing agents to favor relatives and friends. The monitoring and
quality control provided by personalized links comes at the cost of increased entry costs for those not
“in the loop.” If private economic interests have personal links to public officials, patrimonial or
clientelistic systems develop where favors and payoffs are exchanged that undermine the transparency
and effectiveness of public and private institutions.
Such interpersonal trust, far from deterring corruption, is often an essential element of corrupt
deals; it provides assurance of performance when payment and quid pro quo are separated in time
(Lambsdorff 2002). Hence, a public official may favor his own relatives in allocating concessions
and other public benefits in return for a share of the benefits. He may do this not only because he
cares about them, but also because they care about him and will be less likely than strangers to reveal
the corrupt deal or to renege on the agreement. The interdependency of utilities reduces the risks to
both participants (Schmid and Robison 1995).
This type of trust might extend beyond family and clan to members of one’s ethnic group, to the
exclusion of outsiders, and can produce a paradox; Olken (2009: 962) argues that “ethnic
heterogeneity lowers the level of trust in the village – resulting in higher perceived levels of
corruption, more monitoring, and lower actual corruption.” In other words, in his study low trust
tends to bias perceptions of corruption upward, while exerting downward pressure on real levels of
corruption. That study, however, depends upon the claim that higher perceived corruption leads to
more monitoring – not a universal tendency, especially in systems based on personal connections. In
contrast, a vicious cycle could result where higher perceptions provide incentives for more
individuals to become corrupt and so forth, as we discuss in Section IV.
One risk in a system based on interpersonal trust is that disgruntled family members or former
colleagues may be especially dangerous. The interdependency of utility can mean that a bitter relative
or estranged friend gets special pleasure in exposing the corrupt kinsman or former close associate.35
A corrupt ruler may end up wishing he had dealt with a cool-headed, opportunistic business leader
who is unlikely to upset a lucrative arrangement. However, in a corrupt environment, where the law
cannot be used to enforce contracts, there may be no alternative to dealing with friends and family
members. The risk of trust turning to anger is part of the uncertainty of extralegal deals. And, of
course, family and clan members with a reputation for personal vendettas will gain bargaining power
so long as they also control valuable benefits. A reputation for maiming defaulters will help assure
performance of corrupt deals. It will also discourage people from contracting with you in the first
place.
The use of relatives is not always necessary. Ufere et al. (2012) stress the importance of trust
between Nigerian entrepreneurs and bureaucrats in sealing corrupt procurement deals. For this
reason, ex-military or former officials from the same agency are often hired as intermediaries, and
“kick-forward” payments (bribes paid in advance to gain trust) are common. In Liberia, networks of
former combatants organized economic activity and influence the types of corruption that are
prevalent (Reno 2008). Hungarian “corruption network” services are sold to firms with trust built
into the product: “Actors who buy the services of a corruption network obtain a complete social
system with trustworthy personal ties, corruption legalizer functions, and inactivated control
mechanisms. There are no further costs of partner searching, trust building and problem management”
(Jávor and Jancsics 2013: 22).
In a society in which generalized trust is low, and impartial state action is not expected,
interpersonal trust may be all that is available. Then nepotism and cronyism may be a response to the
uncertainty involved in dealing with strangers. Furthermore, even if day-to-day government activity is
carried out impartially, high-level policy making may be subject to the special influence of the well
connected. In the context of lobbying, John Boehner (2006, cited in Bertrand et al. 2014: 3891),
former speaker of the U.S. House of Representatives, wrote: “Many lobbyists are of the highest
integrity.... But there’s every incentive for those with more questionable ethics to shortchange us and
the House. And absent our personal, long-standing relationships, there is no way for us to tell the
difference between the two.” The same argument could be made for high-level appointments in both
the public and the private sectors. If honesty and trustworthiness are not widely shared values or are
difficult to assess, personal references become that much more important. Notice the paradox here.
Politicians claim to want unbiased, competent advice, but because they have inadequate techniques
for identifying such advice, they rely instead on personal connections to filter out unethical lobbyists.
However, using friendship to sort out whom to consult introduces its own biases and can be ethically
problematic.
C. Institutional Trust
The third kind of trust has nothing to do with close personal ties. Here one trusts individuals or
institutions to behave in a neutral, competent, and impartial way. Trust results from the individual’s
belief that personal affections will not affect the others’ actions. This trustworthiness might arise from
a business firm’s rational calculation of its long-run self-interest, but it can also be a feature of a
well-working public bureaucracy. The relationship may be entirely arm’s length and based on clear,
public rules. One’s trust in the state may be higher if officials are dispassionate and objective and are
not swayed by personal feelings.36 Customers may trust a business not to cheat them if they think that
honest dealings contribute to profit maximization.
The ideal of impartiality expressed by the third form of trust is seen most clearly in the standard
neoclassical economics model that assumes away personal ties between buyers and sellers and
argues that the impersonality of the market is one of its advantages. Interpersonal trust is not
necessary. Trade is efficiently carried out by individuals who base their trading decisions on the
characteristics of products and the prices charged. Markets conserve on information, and their
impersonality assures that sales are made to those who value the goods the most. One does not need
to like or respect a person in order to trade with him or her. The process of trading is not, in and of
itself, a source of utility. Either trades are simultaneous, or else a well-functioning system of contract
and property law governs trades that take place over time. All one needs is confidence or trust in the
background legal rules that set the framework for market activities. The individual identity of buyers
and sellers is unimportant.
This ideal, however, clashes with the real world, where the identity of buyers and sellers is
often an important piece of information that establishes reputation and trust. In many actual situations
one cannot simply assume that buyers and sellers engage in anonymous trades against a background of
legal rules that enforce such behavior. Instead, personal relationships between buyers and sellers can
help facilitate trade. Unfortunately, relationships that further trade in some contexts can degenerate
into the kinds of pathologies outlined in the preceding section. Connections based on affection and
respect can exclude otherwise qualified traders, and those based on fear and intimidation can
severely distort private choices. The key issue is determining when an effort to create a reputation for
honest and trustworthy behavior, which avoids corruption, will be in the interest of those economic
actors who simply want to maximize their profits and of officials who want to further their
bureaucratic careers. If commercial relations are relatively easy to establish between strangers,
problems of fraud and shoddy merchandise can be reduced by efforts to create a reputation for quality
and fair dealing. Free rider problems can be overcome by cooperation among interrelated groups
(Bardhan 1993; Ostrom and Gardiner 1993; Ostrom and Walker 2003). Trust arises, not from ethnic
or family ties, but from repeated honest and fair dealing with customers and suppliers. Thus the
identity of traders is important to their market counterparts, but only because it permits an assessment
of their past behavior as traders. The trader is trusted because he or she is, in fact, trustworthy.
Notice, however, that the corrupt can also establish good reputations for fair dealing over time.
In fact, trust is especially important for such actors because legal guarantees are not possible. But
such reputations may be difficult to establish. Deals in which the bribe must be paid before the bribee
performs may be too risky without the type of interpersonal trust outlined previously, based on ties
such as family or clan. The corrupted official who fails to deliver can claim that the payment he or
she received was just a gift. Similarly, the recipient of a gift with implicit strings can characterize it
as a bribe if the relationship sours. Both sides to the deal have an interest in blurring the meaning of
the payment in the eyes of the outside world while keeping it quite explicit between themselves.37
Hence, bribes will frequently be disguised as gifts to limit criminal liability.38 But duplicity may
make it difficult to insist that the official follows through.
In a legal market repeat play and a public reputation for honest dealing and high-quality service
can give one a competitive advantage. A reputation for generously rewarding anyone who helps you
will induce others to do you favors (Barney and Hansen 1994: 178–9). Such open efforts at reputation
building are not usually available to the corrupt. That fact is likely to limit corrupt deals to
individuals who have some interpersonal connection unless payoffs are so entrenched as to be
routine.
A study of land reform in two towns in Brazil illustrates the way interpersonal (type two) trust
can maintain a corrupt system. In one town a corrupt program administration became entrenched
because of personal relationships between agents from different agencies who all lived close to each
other and established friendships outside of the work environment. In the second town the program
was generally administered honestly because officials had few interpersonal links, so that officials of
one agency were willing to respond to citizen complaints about those in other agencies. In some cases
they helped the local people organize formal protests (Bunker and Cohen 1983).
D. Trust and Anticorruption Reform
A particularly pathological case occurs when neither interpersonal nor impartial trust exists. Such a
situation contributes to the development of protection rackets as a substitute (Center for the Study of
Democracy 2010: 145). Gambetta’s (1993) case study of Sicily illustrates this situation.39 The state
lacks competence and legitimacy so that people do not trust it to resolve disputes fairly and
efficiently; hence, they look to alternatives. However, in Sicily personal trust is similarly lacking.
Gambetta emphasizes how the failure of trust in either sense produces a demand for private protective
services such as the Mafia.40 Of course, Sicily may score poorly on measures of generalized trust as
well, but the mechanisms at work are linked to failures of trust in the specific interactions among
individuals and between individuals and the state. To move toward reform, the challenge is not just to
change attitudes but also to change the day-to-day incentives facing citizens and business firms.
Following Rothstein (2011), the best case for reform is one in which interpersonal trust that
fuels corruption can be countered by improvements in the fairness and impartiality of state service
delivery and market regulation. There will still be incentives to get around even well-justified rules
and to benefit at others’ expense in accessing public benefits, but such opportunistic corruption can be
deterred without having to engage in a massive shift in public attitudes.41
IV. Vicious and Virtuous Cycles: Corruption’s Impact
on Culture
Corruption can affect culture just as culture can encourage or deter corruption. Expectations of
corruption can affect public attitudes that fuel corruption. According to Tulaeva (2014: 58): “Faith in
the ubiquity and effectiveness of corrupt actions gives rise to a certain style of behavior. The latter
has a cyclical effect, ensuring the continuity of corruption.” In other words, past experience of the
efficacy of corruption helps to maintain it over time. If Anti-Corruption Agencies (ACAs) and other
anticorruption policies or schemes are seen as ineffective (or when they are not in place), people are
likely to distrust the government (Sandholtz and Taagepera 2005; Martínez Coral 2011).
Corrupt reputations can grow over time so that one can “trust” in the stability of corrupt
arrangements. Thus, in office settings, and particularly in hierarchies, Tirole (1996) demonstrates that
a reputation for bribery may be “inherited” by new hires. As long as the public cannot observe when
civil servants were hired, a reform that replaces some of them may not change the reputation of the
office, and the expectation of bribery will persist. Corruption will tend to increase over time, not
decrease. Nothing short of an amnesty or the wholesale replacement of the department can accomplish
a reduction in corruption. Welsh et al. (2015) demonstrate that the same dynamic works at an
individual level: once a person crosses the ethical line, it becomes easier to engage in even less
ethical acts. Such individual choices can generate a vicious spiral even without a corrupt institutional
base.
Even when the government announces a new crackdown, behavior may not change (much),
especially if previous announcements have proven to be hollow. Hence, there is a symbiotic
relationship between trust in government and anticorruption efforts. Trust in government impartiality
is essential for anticorruption efforts to be effective, because distrust in government contributes to
corruption: distrust and corruption can be caught in a vicious circle (Rose-Ackerman 2001a).42
Corruption can also help maintain other cultural patterns. Suppose that membership in a
particular ethnic group or class gives one a privileged position. This position might be maintained
over time through corruption in spite of the existence of outsiders who might seek to challenge the
status quo. In Northern India, for example, corruption in the sugarcane market helped to perpetuate
class differences, as the higher class producers enjoyed illicit preferential access to sugar mills using
corrupt state institutions. The upper classes also used bribery to capture state contracts, public-sector
jobs, and control of government grants. As a result, they continue to have higher incomes than lower-
class producers (Jeffrey 2002).
If culture and corruption feed on each other, then reducing corruption requires wrenching social
and economic changes. “Culture” may, indeed, need to change as institutions adapt to new realities.
Suppose that a country’s leaders decide to introduce free market institutions and governance
structures adapted from those of developed states. What impact will these new institutions have on
underlying public attitudes?43 The transition from a situation in which personal ties are the norm to a
more impersonal society with strong market and public-sector institutions may be a painful one. Both
vicious and virtuous cycles are possible.
The very process of cultural change can fuel new types of corruption, and this corruption can
influence public attitudes, leading to cynicism and demoralization in a vicious spiral. Strong networks
based on trust and reputation can be invaluable during periods when formal state institutions are weak
and ineffective. In the early postrevolutionary period in the Soviet Union, for example, informal
social networks substituted for formal organizational structure (Easter 1996). Cadres who had been
members of tight-knit underground organizations carried their loyalties and connections over into the
new Soviet state. Over time, these networks became sources of corruption and favoritism. Stalin
complained that informal social structures undermined formal ones, and Gorbachev’s efforts at reform
in the 1980s were hampered by informal networks that reduced the center’s capacity to implement
policies (ibid.: 574, 576–7).
Similarly, in the post-1989 period of flux and change in Eastern Europe, corruption facilitated by
personal ties expanded as the formal structures disintegrated. Loyalty to other members of the
organization was as important as – or more important than – good administration. According to a
study of Bulgaria in the mid-1990s, “civil servants from the core ministry of finance in Bulgaria still
feel that they have to protect their colleagues at the customs offices, rather than launch a serious
inquiry into what seem to be corrupt practices by customs officials” (Verheijen and Dimitrova 1996:
205–6). The long-run consequences of this situation appear to be profound and continue to impede the
creation of effective state structures.
The introduction of new formal institutions that fit poorly with underlying norms can produce
pathologies that make gradual changes in attitudes less likely as people observe the costs of markets
and bureaucracies. Unlike established market economies, complex and subtle boundaries between
market and nonmarket activities do not exist in countries that have relied little on the impersonal free
market in the past. If such countries dramatically increase the role of the market and, at the same time,
try to establish a modern bureaucracy and a democratic polity, the resulting system may not be stable
and may degenerate into a vicious cycle.44 Payoffs to state officials may be common; many market
trades may be based on personal connections; and state purchases and personnel appointments may
continue to be part of a web of patronage.45 On the one hand, the market may lose its fragile
legitimacy by intruding into areas where it is viewed as illegitimate even in developed market
economies. On the other hand, the market may have difficulty becoming established even in those
areas where it produces clear efficiency gains elsewhere.
Corruption influences the level of trust. Sometimes corruption begins at the top: the rulers
establish a culture of corruption (Paterson and Chaudhuri 2007). The existence of (or perception of)
grand corruption contributes to a culture of impunity, in which citizens perceive that anything goes
(Levi, Dakolias, and Greenberg 2007). According to a report from the Organization of American
States (2013a: 82)
[P]ervasive impunity ... explains the existence of an equally pervasive culture of disdain for the
state, which coincides with high rates of criminal violence in those [highly corrupt] countries,
which, also coincidentally, tend to be drug transit countries. That culture triggers a vicious circle
in which the community opts not to turn to institutions (crimes are not reported, disputes are
settled privately, people take justice into their own hands) because the police do not go after
criminals, the courts do not hand down judgments, and prisons not only fail to rehabilitate, but
often serve as shelters from which criminals continue to operate.
Widespread corruption contributes to an overall lack of regard for the law and honesty. Laws
are considered “suggestions” rather than obligations, and those who are able to accomplish tasks –
such as getting a license or passing an exam – by quicker, cheaper, dishonest means are considered
cunning rather than dishonorable. The result is a culture in which all claims are questionable and
many resources must be spent in verifying product quality or in the overpayment for substandard
goods and services.46 Such cycles can persist over generations as parents pass on their values and
behavior to their children, reinforcing corrupt trends over time.47
For example, if it is straightforward to obtain falsified documents and identification because the
police are complicit or ineffective, every credential presented by a job applicant must be double-
checked. In Mexico City, educational degrees, professional licenses, identification cards, passports,
and vehicle titles are routinely falsified for a price, despite sanctions of more than five years of
prison and fines up to “five thousand days of the minimum wage.”48 Some of these fake credentials
have been used – successfully – to apply for government positions or employment at the parastatal
petroleum monopoly, PEMEX.49 Similarly, fake college degrees and other credentials have been
documented in studies of Niger (Diallo 2013), Nepal, and India (Hallak and Poisson 2007: 235). A
recent surge in Chinese applicants to universities in the United States and Europe has been tainted by
falsified transcripts, essays, test scores, and even interviews over Skype, all services offered by
certain placement agencies; some Chinese school administrators apparently receive kickbacks for
referring students to the agents.50
Several international athletes have been disqualified from competition after testing positive for
clenbuterol (a prohibited steroid); they claimed that the positive result was due to ingesting beef in
China or Mexico.51 A source close to the beef industry in Mexico52 indicates that many cattle
ranchers still use clenbuterol to increase muscle and decrease fat, but inject their cattle with another
substance that yields a negative result on the inspectors’ blood test. In China, dairy producers used
melamine to cover up the fact that they had watered down the milk; the melamine caused kidney
damage and death in babies that drank formula made from the milk.53 In contrast, in Germany, a coin-
toss experiment carried out by telephone revealed that the majority reported truthfully, even when
there were incentives to lie and zero probability of detection (Abeler, Becker, and Falk 2014).
Virtuous cycles are also possible. Cultural change can help entrench anticorruption norms, thus
making corruption both more risky and less socially acceptable. The resulting reduction in corruption
can help further entrench honest behavior of both officials and the public in a virtuous spiral. If those
operating in the modern, differentiated sector benefit, others may be induced to try it out, however
reluctantly. In the early years of liberalization in China, for example, the success of regions that
liberalized their economies encouraged other, more conservative regions to copy them (Shirk 1994).
A successful small and medium-sized business sector operating free of excessive controls can
encourage others to try their luck as entrepreneurs. Robert Scalapino (1989: 77) worries that
entrepreneurs drawn from the ranks of Chinese officialdom will continue long-established habits and
depend “extensively upon political contacts and an exchange of favors.” The trend toward virtuous
cycles is being undermined by vicious cycles where the treachery and corruption of some breeds
more of the same in others.54
V. Cultural (In)sensitivity
So far we have simply taken “culture” at face value.55 The “culture of corruption” takes paradoxical
forms when applied to the relations between multinational businesses and low-income countries that
obtain low scores on the international corruption indices. There are odd parallels between the
seemingly disparate views of free market libertarians and of ethnographers who study corruption as
an aspect of the relations between state and society. Although their views are fundamentally different
in many respects, they are both skeptical of the modern state and frequently see “corruption” as a
superior alternative to abiding by the formal law. In this section we especially explore how free-
marketeers and cultural ethnographers confront what is called “grand corruption” – involving
political leaders and multinational firms. Here, a marked reversal sometimes occurs. Corporate
interests, which in other circumstances emphasize the value of the free market, here may invoke local
cultural practices as an excuse for making payoffs. In contrast, it is the scholars of local cultural
practices who invoke the predominance of economic incentives – that is, the greed and the profit
motive of multinational firms – to condemn grand corruption.
A. Libertarians and Corruption
To oversimplify a bit, libertarians view corruption as a symptom of an intrusive, meddling state that
systematically reins in the free market and undermines entrepreneurial activity and competition. Their
solution is to reduce the state to its bare bones so that it does little more than protect private property
and provide security. They argue that market actors who pay bribes to avoid complying with the rules,
to lower tax bills, or to get favors, limit the harm that the state can do and consequently enhance the
benevolent operation of the free market as a locus of individual freedom.56 Although in the libertarian
view the best solution would be a drastic cutback in the state, bribery is considered a second-best
technique that permits free markets to function in a rough-and-ready fashion.
Libertarians are less concerned with the legality or illegality of quid pro quo deals. The primary
issue is whether the transaction furthers economic freedom. A bribe to get around a costly regulation
would be approved, but one to induce the police to harass your competitors would not. A natural
implication of this approach is that a small government with few responsibilities is best. Gary
Becker, a prominent University of Chicago economist, was a strong advocate of this view with essays
titled To Root Out Corruption, Boot Out Big Government, and If You Want to Cut Corruption, Cut
Government.57 Work based on the Heritage Foundation’s Index of Economic Freedom echoes
Becker’s libertarian view. One essay notes the correlation between the Index of Economic Freedom
and low levels of corruption. The authors “believe economic freedom is intrinsically connected to the
level of government activity in an economy. The fewer resources (including assets and regulatory
power) a government controls, the fewer the opportunities for corruption” (Chafuen and Guzman
2000).
This perspective sees the state as a kleptocracy that makes no pretense of operating in the
interests of its citizens (Andreski 1968). Laws against bribe taking by underlings only permit higher-
up officials to extract more for themselves. These laws do nothing to further any notion of “good
government.” Brennan and Buchanan (1980), for example, borrow Thomas Hobbes’s description of
the state as a Leviathan and model it as a hungry beast seeking to maximize its control over revenue.
For them, taxation and regulation are equivalent to theft, and although they recognize the need for a
minimal state, they argue for constitutional limits on taxing, spending, and regulating. They assume
that political power, not outright corruption, is the problem, but if government officials are self-
interested revenue maximizers, it seems consistent with their model for those with political power to
extract private benefits for themselves, risking a descent into outright kleptocracy. The libertarian
approach seldom takes public institutions seriously as reflections of democratic and constitutional
choices. The libertarian defense of bribery as a way to avoid the demands of public officials is an
approach that trivializes and undermines democratic institutions.
B. Ethnography and Corruption
Cultural anthropologists also tend to be sympathetic to gifts and favors that others call corruption, but
they reach that conclusion by a very different route. They study payments or gifts given to officials
and the mutual exchange of favors, including electoral quid pro quos. They look to traditions that
emphasize loyalties to friends, family, region, tribe, religion, or ethnic group. These practices
privilege informal, friendly social contacts over arm’s-length, rule-bound transactions. Scholars in
this tradition often refuse to label transactions as corrupt if they are based on affective ties, or they
claim that, even if formally illegal, the practices are socially acceptable, economically beneficial,
and compensate for the imperfections of government and of electoral institutions.
Many ethnographers have studied societies where corruption is intertwined in citizens’ day-to-
day experience with the public sector. Payoffs are not arm’s-length transactions but are part of a
social interaction. They mix economic motives and social practices.58 However, even if social norms
help to justify the behavior, economic motives – for example, getting a government contract or
issuance of a business license – often motivate the transaction. Citizens may be paid to vote and pay
to get access to education and health care. If they wish, for example, to register a property deed,
obtain a telephone line, or obtain their pension checks, payoffs are routine in some societies.
Avoiding costs, such as taxes and tariffs, often requires a bribe. Actual or invented violations of the
law lead to bribery demands from police or inspectors. In judicial proceedings, bribes assure a
friendly judge, lower fines, and can lead to the “loss” of key documents. Thus, whatever the cultural
explanations, the negative consequences for government functioning that we outlined in previous
chapters remain a concern.
Olivier de Sardan (1999) develops these themes in the African context. Social norms support
interactions that outsiders see as corrupt but that the participants view as acceptable or even moral.
The politically powerful are expected to receive tribute from their subjects. If politicians or public
officials have the opportunity to enrich themselves, they have an obligation to do so and to share
generously with those who helped them to advance. This puts civil servants in a bind. Their
professional legitimacy arises from their training as public administrators on the European model, but
their social legitimacy depends on conforming to local norms that clash with their training. Research
on Ghana and Nigeria confirms this basic pattern.
In Ghana, Hasty (2005) describes corruption as “an intensification of contact with the vital
flows coursing through the political body” and she notes the prevalence of metaphors of eating and of
the flow of blood to describe the practice. Corruption is not seen as the impersonal market invading
the state but rather as hyperengagement in already existing sociopolitical flows. In Nigeria, Smith
(2001) finds corruption embedded in “everyday instances of patronage” that are related to networks
of kin, community, and other interpersonal associations. Corruption that helps one’s friends and kin
“can look like moral behavior from local perspectives.” As Smith concludes, a feedback loop
perpetuates corruption. State offices are unreliable in delivering basic services. Yet, the use of
clientelistic networks to deliver public resources based on “moral obligations and affective
attachments” fuels a cycle of corruption (Smith 2001: 361).
Nevertheless, anthropological accounts report that most people recognize corruption as a deep
problem even as they affirm the social bonds that it expresses. In Africa corruption is “as frequently
denounced in words as it is practiced in fact” (Olivier de Sardan 1999: 29). “There is a continuum ...
between bribing someone and thanking someone for services rendered” (ibid.: 35). Even though the
briber often claims to have “good reason” for his or her actions, he or she also condemns the
behavior of others who obtain benefits through payoffs and connections. Nigerians and Ghanaians are
extremely critical of the level of corruption in their country, and they believe that it promotes the
inequality of wealth and power (Smith 2001: 346; Hasty 2005: 279). Ordinary people condemn
corruption at the elite level, but they participate in networks that socially reproduce corruption.
Similar ambiguity exists in China around the concept of guanxi, which literally means social
relationships or social connections. Official pronouncements equate guanxi with bribery that
undermines the public interest. However, “embodied in the popular discourse is the contradiction of
the condemnation of guanxi on the one hand, and admiration and even approbation on the other”
(Yang 1989). Even as they condemn its prevalence, people brag about how they used guanxi to obtain
benefits and refer to the ethics of obligation and reciprocity. In Korea, similar relations exist,
including obligations for politicians and others in power to bestow gifts to celebrate special
occasions or events. Confucian traditions there have inspired both corrupt practices and
anticorruption sentiment (Dalton 2005).
One can surely sympathize with a person caught in a personalistic system based on bribery.
Sympathy need not imply acceptance, however. Corruption is not the inevitable result of history and
culture. Social norms may be deeply embedded and self-reinforcing, but they do sometimes change;
they are not necessarily frozen in time. As Dalton (2005: 244) argues, “culture is a dynamic amalgam
of indigenous and foreign as well as ancient and modern elements.” Furthermore, if a society is ever
to build a legitimate democracy, norms must change. Otherwise, pervasive corruption will inexorably
undermine respect for the rule of law, generating serious distortions in the efficiency and fairness of
service delivery. Ethnographic research tends to concentrate on cultural and social expectations to
explain the prevalence of personalistic ties and quid pro quo transactions, but these interactions are
also tied to the bargaining power of officials. One must take both factors into account.
Ethnographers and libertarians who move beyond positive, empirical analyses of state/society
relations often espouse strikingly similar normative positions. Both stress the way payoffs to public
officials permit nonstate institutions to flourish in spite of a set of formal rules that constrain private
behavior. However, each gives a different set of institutions priority – social ties for one and the
market for the other. Libertarians espouse a universalistic model of the idealized free market in
contrast to the meddling state. They prefer a minimal state, but absent that condition, some types of
payoffs may helpfully unleash market forces. The ethnoculturalists reject universalistic models of a
good society and often criticize the corruption literature for its ideal of an impartial, professionally
competent government. For both groups, corruption is an understandable response to a dysfunctional
reality. Citizens may engage in rhetorical condemnation, but they cannot function as economic or
social actors without such quid pro quo transfers.59 Libertarians and ethnographers frequently find
common ground in arguing for the functionality of at least some payoffs, but they differ sharply on the
values that these payoffs may further.
C. Grand Corruption
Corruption occurs in people’s day-to-day lives and in routine business activities as people navigate
their relationship to the state. However, as we argued in Chapter 3, it is particularly important to
confront corruption at the top of the state hierarchy that involves political leaders and their close
associates and concerns the award of major contracts, concessions, and the privatization of state
enterprises.
Profit-oriented multinational firms sometimes invoke cultural arguments as a justification for
making payoffs to top officials. They may defend their payoffs in reference to the host country’s
traditions of gift giving and deference to leaders. For example, a 2006 international arbitration
dispute involved a $2 million cash bribe paid to then President Daniel Arap Moi of Kenya to get a
contract to operate duty-free shops in the international airport. No one disputed the bribe, but the firm
claimed that it was respecting the local East African custom of harambee and that gifts of this type
were “fashionable” in Kenya. The Kenyan government, now under different leadership, contended
that because of the bribe, no valid contract existed, implying that it was not guilty of breach. The
arbitral tribunal sided with Kenya.60 A Transparency International-Kenya study demonstrates that
harambee, originally a type of communal self-help, has been converted into a form of patronage
politics. It is common for politicians who seek reelection to pay for harambee events that may or may
not actually take place.61 The multinational firm’s claims to being culturally sensitive ring hollow,
especially in cases, such as this, in which the nation’s citizens bore most of the costs of the bribe and
the unfavorable contract terms that it produced.
On the other side of such deals, top officials may go beyond a general invocation of local mores
to justify their acceptance of payoffs as a tribute due to them because of their high official rank. They
may use such arguments even if the scale of the gains is much beyond anything seen in traditional
practices (Olivier de Sardan 1999: 42). These self-serving arguments conflict with established
traditions in many societies, according to Granovetter (2007). In his view, top political leaders
would honor tradition by rejecting bribes as insults, especially from multinational firms lacking
traditional ties. But this is not what happens in cases of grand corruption. Instead, the bribe is often
cloaked in traditional practices and facilitated by local agents.
A more straightforward cultural argument sees high-level or “grand” corruption as an import
from wealthy, capitalist countries. Capitalism substitutes pure financial incentives for a dense
network of in-country connections. Payoffs induce top leaders to sell out their political supporters in
return for private gain or, in a somewhat more benign view, to benefit their own supporters at the
expense of the broader public. A polity may already operate in a winner-take-all fashion with rotating
in-groups using the state to benefit themselves and their supporters. If so, the opportunity to benefit
from contracts, concessions, and asset sales can drastically increase the size of the pie. A resource
discovery or a massive aid package supporting infrastructure construction may undermine a stable
system of low-level rent-seeking by top politicians. It increases the rents available and tempts leaders
to collude with investors to share the wealth at public expense.
Ethnographers point to the power of the multinational firms’ profit motive as well as the
traditional perquisites of political power in developing countries. However, most scholars with deep
knowledge of particular cultures do not confuse explanation with excuse. For them, culture enters the
argument once again, but now it is the culture of the business community with its profit-maximizing
goal. The very motivator that the libertarian sees as central to the development of society is
excoriated as the corrupter of the traditional culture of the contracting country.
Of course, sophisticated ethnographers do not have such a romantic view of “culture” and
recognize the interpenetration of Western and traditional values and practices. Reformers in
developing countries criticize their compatriots who too easily blame an alien culture introduced by
colonial powers for present-day realities. As an Indonesian journalist put it recently: “If corruption is
embedded in the culture, then it is not the fault of the Indonesians themselves – rather, it can be laid at
the feet of those nasty Dutch colonialists.... Not only does this fable get people off the hook for failing
to solve the problem, ... it also absolves the entire nation of guilt because the blame lies elsewhere in
a long-distant colonial past.”62
The cultural sensitivity card can be played both by those who accept and by those who pay
bribes when it serves their own interests. One needs to be cautious in accepting at face value
assertions that seemingly corrupt transactions reflect entrenched cultural practices acceptable to most
people. Those with something to gain will invoke culture as an excuse when it serves their self-
interest. If the scale of the tribute paid to a leader rises to a new plane as a result of the involvement
of international investors, tradition and culture are not adequate frames for analysis. The widespread
condemnation of bribery and corruption in the studies of Ghana and Nigeria mentioned earlier seems
to confirm that citizens generally do not accept glib references to “culture” or “social norms” as
sufficient justification.
Conclusions
The definition of bribes and gifts is a cultural matter, but “culture” is dynamic and can change over
time. If behavior labeled “corrupt” by some observers is, nevertheless, viewed as acceptable gift
giving or tipping within a country, it should simply be legalized and reported. If, however, these
practices are imposing hidden or indirect costs on the populace, analysts should clarify and document
these costs before defining a policy position. Definitions of acceptable behavior may change once
people are informed of the costs of tolerating payoffs to politicians and civil servants. This is one of
the tasks that NGOs like Transparency International and Global Witness have undertaken. Conversely,
experts may learn something new about the organization of economic and social activity by studying
systems in which “implicit contracting” is the only form of contracting that exists and interpersonal
relationships are central to economic life.
Anticorruption reformers must decide whether to accept the presence of greed and existing
cultural practices and to seek to channel them into less destructive paths; whether to sideline them
through substitute institutions that require other values and skills; or whether to seek to transform
social norms. These issues must be confronted from the perspective of political legitimacy, not
through the lens of either market fundamentalism or cultural preservation. One needs a realistic
appreciation of the strains facing modern states that seek to justify their legitimacy. Corruption can
undermine governments even if it aids market participants and supports traditional cultures. However,
aggressive and punitive anticorruption campaigns can also undermine governments’ ability to tap into
the loyalty and goodwill of their populations.
Many critics of anticorruption reforms have not adequately confronted the role of the state in
society. At the extremes, they have a romantic view of an idealized society with a minimal state. For
libertarians, the minimal state respects “the rule of law,” a concept that in their formulation stresses
the preservation of private property rights and the enforcement of private contracts, on the one hand,
and the assurance of law and order, on the other. For ethnographers, social networks are the key to
understanding how individuals interact with public officials. This literature seldom acknowledges the
modern state’s role in producing and maintaining these networks. Rather, the state is frequently seen
as a hostile or interfering force that personal networks can domesticate through exchanges of favors.
In contrast to both the libertarians and the ethnographers, we urge a straightforward
acknowledgment of the centrality of the modern bureaucratic state and the institutions of
representative government. Furthermore, even authoritarian regimes seek popular legitimacy and
support. Given those premises, one can locate areas of broad international agreement, both at the
grassroots level and among the elite, on certain desirable characteristics of the modern state that can
help curb corruption. Anticorruption policy can start with these areas of agreement and later confront
the more contested dimensions of the problem. In subsequent chapters we develop a reform approach
that goes beyond the need for law enforcement, civil service reform, and program redesign discussed
in the previous section of the book. The additional strategies are linked to state legitimacy and are
based on transparency, public participation, external oversight, a free media, and limits on conflicts
of interest.
Do efforts to limit personalized dealings by public officials and market actors undermine the
desirable features of interpersonal links based on trust and respect? If a trade-off exists, it does not
appear to be a stark one.63 In spite of the jeremiads of some writers, the United States has a
remarkably dense network of nonprofit organizations and a strong tradition of private gift giving both
to charities and to relatives.64 Many private business relations rely on trust and reputation to assure
high-quality performance. Regulation of political campaigns and bureaucratic behavior limits self-
dealing, although private wealth, of course, still remains an important influence on political life.
In Africa some observers, frustrated with past development failures, have urged a more careful
study of indigenous institutions. Mamadou Dia (1996: 29) argues that Africa faces a crisis of
institutions. The crisis is “mainly due to a structural and functional disconnect, or lack of
convergence, between formal institutions that are mostly transplanted from outside and informal
institutions that are rooted in African history, tradition, and culture and that generally characterize the
governance of civil society.” Dia provides a number of case studies of successful efforts to integrate
local cultural values and practices into modern development efforts. For example, the public electric
company in Côte d’Ivoire made a systematic effort to reconcile corporate and societal culture without
an unquestioning devotion to either (ibid.: 222–7). In Dia’s view the aim is to ask how new and old
institutional forms and practices might be blended, drawing on the best of both traditions to promote
economic growth.
Reformers should not start with a presumption against the state born either of excessive faith in
the market or of a deeply conservative respect for tradition. The study of corruption can help mediate
the state/society boundary but cannot eliminate it. The state is here to stay, whatever romantics on the
libertarian right or on the cultural-studies left might wish. Part III will develop these themes. Chapter
8 takes up the interaction between politics and corruption. Chapter 9 focuses on organized crime and
its role in corrupting state institutions, and Chapter 10 discusses the special problem of corrupt
incentives in postconflict peace building. Then in Chapter 11 we deal more specifically with
democratic governments and borderline activities where private wealth influences public choices
short of outright bribery. Chapter 12 concludes Part III with the reform potential of institutions that
increase government transparency and accountability.
1 We are grateful to Kyle Peyton for very helpful comments on this chapter including directing us to
some current research.
2 See Wade (1982) for a study of irrigation projects in Southern India where farmers distinguished
between bribes to get officials to act and payments they extorted for not inflicting penalties.
3 Laland and Hoppitt (2003: 151) define cultures as “group-typical behavior patterns shared by
members of a community that rely on socially learned and transmitted information.” We recognize,
however, that some members of a community, e.g., women, may have cultural norms that differ from
others in the same community, e.g., men. We hope to avoid the use of “culture” as a residual
category, introduced to “explain” any remaining variance after accounting for purely economic
factors. See Banuri and Eckel (2012), summarizing varieties of the culture/corruption link in social
science.
4 Of course, countries may contain more than one “culture” and, therefore, more than one
corruption level. In the United States, for example, “Southern states were found to be more corrupt,
ceteris paribus” (Goel and Nelson 2011: 172; also Liu and Mikesell 2014); in the Ukraine, one
study found that the Eastern region was more corrupt than the rest of the country (Denisova-Schmidt
and Huber 2014). Southern Italy also has higher levels of corruption than Northern Italy (Golden
and Picci 2005).
5 See also the experimental studies of Cameron et al. (2009) carried out in Australia with Chinese
immigrants: convergence toward Western norms increased with time spent in the country. In-group
trust fell and trust in Australians increased with time.
6 See Monroe (1996), who interviewed people concerning their altruistic behavior and
distinguishes between entrepreneurs, philanthropists, heroes, and rescuers. Those in the last
category included rescuers of Jews in Nazi Europe, who suffered extreme personal and familial
sacrifices.
7 If individual gifts are large enough to have a marginal impact on the recipient’s behavior, a quid
pro quo is implicit. This will be true of many gifts to family members and some large donations to
charities. In that case there is little functional difference between gifts given to further announced
goals and those given under the condition that such goals are established. If conditional gifts create
enforceable obligations, they are like sales except that the benefit given in return must be something
that accords with the charity’s purpose (Gordley 1995). Such gifts belong in the “price” box.
8 In sociological analyses, personal connections are the key to gift giving. Donations to charitable
organizations are not labeled gifts because they do not involve a personal connection (Zelizer
1994: 77–85).
9 For citations to this work see Rose-Ackerman (1986); Tirole (1986); Laffont (1990); Rasmusen
(1990: 133–222).
10 Indeed, the origin of tips seems to have been class based (Azar 2004).
11 Banerjee, Hanna, and Mullainathan (2013) make this explicit in their definition of corruption:
“The breaking of a rule by a bureaucrat (or an elected official) for private gain.”
12 Thomas Fuller, “Yangon’s Hero, Wielding Power of Stop and Go,” New York Times, November
21, 2014, http://www.nytimes.com/2014/11/22/world/asia/myanmar-yangon-traffic-cop-khin-
myint-maung.html (accessed November 22, 2014).
13 Some report that paying a taxi driver to go faster is considered a tip in the United States, but a
bribe in China. Since this “service” often involves breaking the law (speed limit and possibly
traffic signals), perhaps the Chinese interpretation is more correct.
14 War of attrition games are analyzed in Bishop, Cannings, and Smith (1978); Krishna and
Morgan (1997); and Rasmusen (1990: 74–6). Rose-Ackerman thanks Peter Cramton for pointing
out this connection.
15 See Jane Fritsch, “A Bribe’s Not a Bribe When It’s a Donation,” New York Times, News of the
Week in Review, January 28, 1996, http://www.nytimes.com/1996/01/28/weekinreview/the-
envelope-please-a-bribe-s-not-a-bribe-when-it-s-a-donation.html (accessed October 15, 2015).
16 For a discussion of this issue focusing on the role of money see Zelizer (1994).
17 For an excellent overview of the literature, see Chaudhuri (2012).
18 Alatas et al. (2009b) ran the same experiment in Australia, India, Indonesia, and Singapore. Of
these four countries, they found women to be less tolerant of corruption in Australia only. When
they changed the words bribery and punishment for more “neutral” language, the tolerance gap
disappeared in Australia, too, although Australian women still were less likely to accept a bribe
than Australian men.
19 Social psychologist Geert Hofstede has developed six measures of national culture, available at
http://geert-hofstede.com/national-culture.html (accessed October 15, 2015). “Masculinity” refers
to competitiveness, bravado, and placing importance on material things, while “femininity” refers
to compassion, cooperation, and placing importance on quality of life.
20 Islamic Republic of Afghanistan, The Constitutions of Afghanistan, Article 83, p. 25,

http://www.afghanembassy.com.pl/afg/images/pliki/TheConstitution.pdf (accessed November 11,
2014).
21 Aryn Baker, “Afghan Women and the Return of the Taliban,” Time Magazine, August 9, 2010,
http://content.time.com/time/magazine/article/0,9171,2007407,00.html (accessed November 6,
2014).
22 “Frena Congreso a ‘Juanitas,’” El Norte, September 4, 2009, Nacional p. 2.
23 On Mexico, see also BBC News World: Americas, “Traffic Police Get Female Force,” July 31,
1999, http://news.bbc.co.uk/2/hi/americas/408622.stm (accessed November 6, 2014) and Carrie
Kahn, “Mexican State’s Anti-Corruption Plan: Hire Female Traffic Cops,” NPR, September 28,
2013, http://www.npr.org/2013/09/28/226903227/mexican-state-s-anti-corruption-plan-hire-
women-traffic-cops (accessed November 6, 2014).
24 In the corporate world, several European countries have legislated quotas requiring that women
constitute 30% or 40% of a corporation’s board of directors, and some corporations in the United
Kingdom and the United States have voluntarily increased the proportion of women on their
corporate boards. This move was not designed to reduce corruption, but it might have been
expected to improve the environment for women. Unfortunately, this has not usually translated into
higher executive representation, better pay, or family-friendly policies for women in those
corporations. See Alison Smale and Claire Cain Miller, “Germany Sets Gender Quota in
Boardrooms,” New York Times, March 3, 2015,
http://www.nytimes.com/2015/03/07/world/europe/german-law-requires-more-women-on-
corporate-boards.html (accessed March 10, 2015).
25 Persson, Tabellini, and Trebbi (2003) included Confucianism, Catholicism, and Protestantism in
their regressions, but did not report the coefficients in their results.
26 Another interesting finding in this study is that religious diversity (measured using a Herfindahl
index) is associated with lower corruption. It is unclear what drives this correlation.
27 Note, however, that positions in the Ministry of Religion are among those that command the
highest hiring fee in Indonesia (Kristiansen and Ramli 2006: 224).
28 For a critique of cross-country studies of culture and corruption that stresses regional variation
see Becker, Egger, and Seidel (2009).
29 Much of the argument here was developed in Rose-Ackerman (2001a, 2001b), written as
background papers for the Collegium Budapest project on Honesty and Trust in Post-Socialist
Societies.
30 Compare Uslaner (2002), who has developed a similar threefold categorization – generalized
trust in strangers, particularized trust in groups of people, and trust in government. Our second and
third categories are somewhat different from his, as we discuss.
31 Morris (2008) finds, for a survey in Mexico, that higher interpersonal trust increases
perceptions of corruption but decreases participation in corruption. His interpretation is that those
with higher trust may condemn corruption more when they encounter it.
32 Our second category differs from Uslaner’s “particularized trust” because he includes officials,
professionals, and public officials where there is no reciprocal trust. The public officials and
professionals do not necessarily trust those who trust them.
33 Consider the following Latin American quip: “A los amigos todo, a los enemigos nada, al
extraño la ley” (For my friends everything, for my enemies nothing, for strangers the law).
34 See, e.g., Kochanek’s (1993) discussion of Bangladesh. Scalapino (1989: 4) argues that
Western colonizers in Asia faced a daunting task in creating a new civilian elite “in the image of
the Western civil servant” because such concepts “as considering office holding to be a public
trust, applying rules without fear or favor, and abiding by the verdict of the people as expressed
through their elected representatives” were foreign to traditional Asian officials. This task was
made more difficult by the inconsistency of Western efforts as colonizers whose legitimacy was
dependent on military power.
35 In Brazil the corruption of President Fernando Collor de Mello was revealed by a disgruntled
brother angry at Collor’s attempt to create a newspaper to rival the one that he owned (Manzetti
and Blake 1996).
36 Empirical work has found that in the workplace trust can only be created by “procedural
justice.” Decisions must be fair and must be seen to be fair with opportunities for appeal (Kim and
Mauborgne 1995).
37 For a game-theoretic model in which the use of indirect speech, including veiled bribery, is an
equilibrium, see Mialon and Mialon (2013).
38 In Japan great care is taken to differentiate “gifted” monies by using only new bills and special
envelopes. As a result, “bribes are often disguised as gifts by placing clean bills in a money
envelope or by using properly wrapped gift certificates sold by department stores” (Zelizer 1994:
117). In Japan, the merging of bribes and gifts apparently has a long history. Writing about the
Shogunate in the early part of the nineteenth century, Johnson (1991: 805) claims that every official
had his hangers on and that “all had to be bribed to get any action. Officials and courtiers
constantly gave each other costly presents.”
39 In discussing the Sicilian Mafia, Gambetta (1993) emphasizes the pervasive lack of trust in the
Italian state. Other observers view the rise of “mafias” in Russia as due to a similar weakness of
the state (Varese 1994).
40 Barney and Hansen (1994: 184–6) call this “strong form trustworthiness” and discuss how it
can give firms a competitive advantage. Hood (1996: 211–14) discusses how “contrived
randomness” in the form of staff rotation and division of authority can help break up systematic
cooperation that produces corruption and other “anti-system ‘networking’ activity.”
41 Our approach is different from that of Putnam (1993, 2000), who argues for the civil benefits of
voluntary organizations that build up social capital and are incubators of democratic cooperation.
Of course, we do not deny that the mechanism that he describes sometimes operates in practice. We
only claim that the link is neither necessary nor necessarily benevolent. Putnam recognizes the dark
side of social capital in Bowling Alone (2000), but he has not analyzed the link to corruption.
Rose-Ackerman (2001a, 2001b) discusses Putnam’s work in connection with trust. See also
Delhey and Newton (2003), who use representative samples from at least 60 countries to show that
participation in voluntary associations does not explain variations in social trust.
42 Similarly, Warkentin et al. (2002) show that trust in government institutions may be an important
element in successful e-government initiatives.
43 According to Scalapino (1989: 107): “One must reject the argument that the cultural as well as
economic changes required for [a more open and democratic Japanese society] are too great to be
expected. Rapid cultural change is an inextricable aspect of the era in which we live, especially
within the avant-garde societies.” Studies of political culture suggest that attitudes are subject to
change as circumstances change. A study of Costa Rica and Nicaragua concluded that “political
culture is far more contingent, utilitarian, and malleable than has previously been assumed”
(Seligson and Booth 1993: 790). As Diamond (1993a: 9) writes, in summarizing work by Gabriel
Almond, “the cognitive, attitudinal, and evaluational dimensions of political culture are fairly
‘plastic’ and change quite dramatically in response to regime performance, historical experience,
and political socialization. Deeper value and normative commitments have been shown to be more
enduring and change only slowly.”
44 See, e.g., Rivkin-Fish (2005) on the Russian interpretation of the market.
45 An article on China argues that the reallocation of resources from the state to private hands
increases efficiency and improves productivity. However, “the line between corruption and the
more acceptable transfer of resources has not been clearly defined” (Goodman 1996: 241). An
important task for government is to redraw “the distinctions between legitimacy and corruption in
the private sphere ... in a new atmosphere, and as a new entrepreneurial class emerges” (Scalapino
1989: 114–15).
46 This is a variant of what Akerlof (1970) calls the “lemons” problem, where lemons are
substandard merchandise, especially used cars. If people cannot judge quality, sellers may claim
that low-quality goods are high-quality. As a result, customers will not pay high prices because of
the risk of buying a “lemon.” Hence, high-quality goods will not be available, creating a vicious
spiral that may destroy the market.
47 See Hauk and Saez-Marti (2002) for a theoretical model making this point.
48 RocíoTapia Hernández, “SEP detecta miles de títulos ‘pirata,’” El Universal, January 21, 2014,
http://www.eluniversal.com.mx/primera-plana/2014/impreso/licenciadospor-santo-domingo-
44127.html (accessed August 13, 2014).
49 AlbertoMorales, “Burlan con títulos falsos al gobierno,” El Universal, January 22, 2014,
http://www.eluniversal.com.mx/primera-plana/2014/impreso/burlan-con-titulos-falsos-al-
gobierno-44142.html (accessed August 13, 2014).
50 One study “concluded that 90 percent of Chinese applicants submit false recommendations, 70
percent have other people write their personal essays, 50 percent have forged high-school
transcripts, and 10 percent list academic awards and other achievements they did not receive.”
Tom Bartlett and Karin Fischer, “The China Conundrum: American Colleges Find the Chinese-
student Boom a Tricky Fit,” The Chronicle of Higher Education, November 3, 2011,
http://chronicle.com/article/The-China-Conundrum/129628/ (accessed July 17, 2014). The study
was based on interviews with 250 students (already admitted to U.S. universities) and their parents
in Beijing, and a small number of agents, so the results are not representative of Chinese students in
general. See also Karin Fischer, “In International-Student Recruitment, Questions about Integrity
Persist,” The Chronicle of Higher Education, July 15, 2014,
http://chronicle.com/blogs/worldwise/in-international-student-recruitment-questions-about-
integrity-persist/34085 (accessed July 17, 2014).
51 “Mexico Targets Use of Clenbuterol in Livestock,” Fox News Latino, October 19, 2011,
http://latino.foxnews.com/latino/health/2011/10/19/mexico-authorities-target-use-clenbuterol-by-
livestock-industry/ (accessed October 15, 2015); “Clembuterol; qué es, cómo funciona y por qué
es tan polémico,” CNN México, August 6, 2013, http://mexico.cnn.com/salud/2011/06/13/lo-que-
necesitas-saber-sobre-el-clembuterol (accessed October 15, 2015). See also Simon MacMichael,
“Belgian Rider Jonathan Breyne Attempts Suicide after Positive Result for Clenbuterol,” road.cc,
December 21, 2013, http://road.cc/content/news/103851-belgian-rider-jonathan-breyne-attempts-
suicide-after-positive-result-clenbuterol (accessed October 15, 2015); UCI Press Release,
“Michael Rogers Goes Positive for Clenbuterol,” Cyclingtips.com, n.d.,
http://cyclingtips.com.au/2013/12/michael-rogers-returns-adverse-analytical-finding-for-
clenbuterol/ (accessed October 15, 2015); and Associated Press, “Mexico Soccer: 5 Players Pass
2nd Test,” ESPN, June 15, 2011, http://espn.go.com/sports/soccer/news/_/id/6663355/five-
mexican-players-suspended-clenbuterol-found-clean-second-test (accessed October 15, 2015).
52 Personal interview (Palifka).
53 Jim Yardley and David Barboza, “Despite Warnings, China’s Regulators Failed to Stop Tainted
Milk,” New York Times, September 26, 2008,
http://www.nytimes.com/2008/09/27/world/asia/27milk.html (accessed December 17, 2015).
54 See Seth Faison, “China’s Paragon of Corruption,” New York Times, March 6, 1998,
http://www.nytimes.com/1998/03/06/business/china-s-paragon-of-corruption-meet-mr-chu-a-hero-
to-some-an-embezzler-to-others.html (accessed October 15, 2015). According to the article:
“[V]irtually any multi-million-dollar company, striving to become modern in a system that remains
stubbornly old-fashioned, is wide open to so much corruption that success almost inevitably leads
to financial shenanigans that can spoil any chance of efficiency or genuine profitability.”
55 This section is derived, in part, from Rose-Ackerman (2010c).

56 Huntington (1967); Leff (1964). However, even strong critics of the state recognize that
corruption is a second-best response. Greater privatization and a smaller state would be better. See
Boycko, Shleifer, and Vishy (1996).
57 The former was published in Business Week, January 31, 1994, 18. The latter was published in
Business Week, December 11, 1995, 26. They are reprinted in Becker and Becker (1996: 210,
203).
58 See Scott (1969); Granovetter (2007).
59 Olivier de Sardan (1999: 28–35, 38–41); see also Hasty (2005: 274–8) (making the same point
with respect to Ghana); Smith (2001: 346–9) (similarly, for Nigeria).
60 The tribunal did, however, require the parties to split the tribunal’s costs and to bear the costs
of their own lawyers. World Duty Free Co. v. Republic of Kenya, ICSID Case No. Arb/00/07
(October 4, 2006), available at www.Transnational-Dispute-Management.com (accessed October
15, 2015). See also Chapter 14.
61 See Transparency International–Kenya (2001); Waiguru (2006).
62 James Van Zorge, “Cut Red Tape and You Cut Corruption,” Jakarta Globe, November 30,
2009, http://jakartaglobe.beritasatu.com/archive/cut-red-tape-and-you-cut-corruption/ (accessed
October 15, 2015).
63 Zelizer (1994: 71–118) stresses the coexistence of different forms of exchange in modern
societies.
64 The U.S. consistently ranks among the top five countries on the CAF World Giving Index. In
2014, 63% of respondents in the U.S. donated to charities and 76% helped a stranger (Charities
Aid Foundation 2015: 11). Historically, private generosity has been relatively high in the U.S.
(Hodgkinson and Weitzman 1994; Rose-Ackerman 1996a).
Part III
◈
Corruption as a Political Problem

8
Politics, Corruption, and Clientelism
◈
Corruption describes a relationship between the state and the private sector.1 Sometimes state
officials are the dominant actors; in other cases private actors are the most powerful forces. The
relative bargaining power of these groups determines both the overall impact of corruption on society
and the distribution of the gains between bribers and bribees.2
Analysis of corruption is part of the ongoing and inconclusive debate about which form of
government is most conducive to economic growth. Although wealthy countries do tend to be
democracies, there is no simple statistical relationship between growth and democratic government.3
The reason for this is not difficult to fathom – “democracy” is simply too general a term to capture the
range of government forms that come under that rubric. Furthermore, a government structure that
works well in one country may be dysfunctional in another context. Widespread, entrenched
corruption is one form of dysfunction.
Is the establishment of democracy an anticorruption strategy? The desire for reelection
constrains the greed of politicians.4 The protection of civil liberties and free speech, which generally
accompanies democratic electoral processes, makes open and transparent government possible. In
contrast, nondemocratic states are especially susceptible to corrupt incentives because their rulers
have the potential to organize government with few checks and balances. But this contrast is too
sharp. One need look no further than some state and local governments in the United States to find
well-established corrupt systems that compare quite well with autocratic systems. For example, the
former mayor of Detroit, Kwame Kilpatrick, helped drive the city into bankruptcy with his
racketeering, including directing at least $84 million in city contracts to a personal friend.5 Rod
Blagojevich, former governor of Illinois, was impeached and is currently serving a prison sentence
(the fourth recent Illinois governor to go to jail) for trying to “auction off” the Senate seat left open
when Barack Obama became president.6 Payoff scandals have implicated elected politicians in
Brazil, Mexico, Venezuela, Italy, Korea, and Japan, to name just a few. Corruption is common at the
local government level in France and Germany. The former prime minister of Croatia, Ivo Sanader,
was found guilty of accepting more than $13 million in bribes from an oil company and a bank, to
dominate the respective industries in Croatia.7 Clearly, democratic forms do not always succeed in
checking corruption. Thus it is worthwhile asking what features of democratic government help limit
self-dealing and which contribute to corruption.
Before moving to a deeper consideration of this issue in Chapter 11, we begin with a more
general analysis of the bargaining power of government officials versus corrupt private actors. We
abstract from the details of political systems, stressing instead the “industrial organization” of
corruption. The nature of corruption depends not only on the organization of government but also on
the organization and power of private actors. The critical issue is how much bargaining power the
government and the private sector have in dealing with one other. One basic conclusion can be stated
at the outset. To the extent that a democratic government disperses power among officials, it may give
each one little bargaining power vis-à-vis powerful private interests. A successful democracy may
need to encourage the creation of competitive private markets as well as establish a competitive
system of politics. Otherwise powerful private interests may control the state for their own ends.8
Here we distinguish among four stylized cases that stress the competitive relationship between
(private sector) bribers (those who pay bribes) and (public sector) bribees (those who receive
bribes) as reflected in their power relationships. With respect to the government, we compare a state
where corruption is centralized – organized at the top of government – with other states where
bribery is the province of a large number of low-level officials. The other side of the bribery
“market” must be specified, as well. Are there a small number of major corrupt private actors or is
the payment of bribes decentralized across a large number of people and firms? Figure 8.1 illustrates
the four polar cases: kleptocracy,9 bilateral monopoly, mafia-dominated states, and competitive
bribery. We begin with kleptocracy and then discuss the two cases in which the bribers in the private
sector have monopoly power – bilateral monopoly and mafia-dominated states. The final case, in
which bribes play the role of prices in a decentralized market, requires separate treatment. A corrupt
“marketplace” can be costly even if no one exercises any monopoly power over its operation.
Figure 8.1. Types of corrupt governments.
Source: Authors.
I. Kleptocracy
Consider first the case in which a kleptocratic ruler faces a large number of unorganized potential
bribe payers. In the extreme, a powerful head of government can organize the political system to
maximize its rent extraction possibilities. Such a “stationary bandit” (in Mancur Olson’s phase) can
act like a private monopolist, striving for productive efficiency, but restricting the output of the
economy to maximize profits (Olson 1993). A private monopoly underproduces output because it
earns profits from the difference between selling prices and costs. If a kleptocrat, like a private
monopolist, sold private goods to individuals and firms, it too would restrict output (Findlay 1991;
Przeworski and Limongi 1993: 58–9; Shleifer and Vishny 1993). For example, if the state runs the
railroads and the telephone system it may set monopoly prices, restricting supply to maximize rents.
Similarly, a kleptocratic ruler of a country that dominates the world supply of some raw material or
agricultural product would restrict production to keep world prices high and extract the profits. At the
same time, he would seek to isolate this business from everyday politics. The ruler will sacrifice the
benefits of patronage and petty favoritism to obtain the profits generated by a well-run monopoly
business. Thus if the key export sector is in state hands, the ruler will favor a meritocratic system of
recruitment and promotion that rewards high productivity and good business practices.10 The
kleptocrat will favor policies that transfer the most resources into his pocket while maintaining the
economy’s productivity. The kleptocrat will oppose policies that distribute benefits widely
throughout society with little opportunity to extract payoffs at the center. Corrupt rulers will support
policies that produce personalized gains even if they result in lower overall social wealth.
Most kleptocrats, however, are not as all-powerful as Olson’s stationary bandit. Their goal is
personal wealth maximization, but the tools at their disposal are imperfect. They control the state but
not the entire economy. They may have a weak and disloyal civil service, a poor resource base, and a
vague and confusing legal framework. The ruler must work with the levers at hand, and these may be
quite inefficient rent-generation devices. He or she supports some interventions that do not increase
overall national income because they provide personal benefits to him or her as head of state. Even
the kleptocrat, however, eventually reaches the point where the inefficiencies of additional
government intervention become so large that marginal bribe revenues fall. The weak kleptocrat is
likely to favor a bloated and inefficient state to maximize corrupt possibilities. Citizens in a weak
kleptocracy prefer a smaller-than-optimal government when the government is corrupt, but they get
one that is too large.11
Examples that illustrate this model quite well were the long-running dictatorships of President
Alfredo Stroessner of Paraguay (1954–89) and Mobutu Sese Seko of Zaire (1965–97), and the rule of
François and Jean-Claude Duvalier in Haiti (1957–86). In North Africa the rule of Presidents Hosni
Mubarak in Egypt (1981–2011) and Zine El Abidine Ben-Ali in Tunisia (1987–2011) also fit the
pattern.
In Paraguay, according to one scholar:
The public sector was viewed as Stroessner’s personal fiefdom. The administration of state
assets revealed a lack of differentiation between the “economic” and the “political” sphere and
the absence of any clearly defined boundary between public and private property. The result was
that Stroessner and his retinue of military and civilian acolytes disposed of public sector
resources as if they were their own
(Nickson 1996: 239).
The key point here is not Stroessner’s kleptocratic aims per se, but his “retinue” that insisted on
accumulating wealth for itself. Instead of running an efficient monopoly state, Stroessner ensured
military support by allowing the top brass to engage in contraband, narcotics trafficking, and trade in
arms (ibid.). Projects such as a dam, an unneeded cement plant, and an airport produced corrupt gains
for Stroessner and his associates but were not wealth-maximizing choices for the country as a whole
(ibid.: 244–5).
Similarly in Zaire, President Mobutu and his associates “looted” the state. Mobutu placed a third
of the state budget under his control and reportedly siphoned off a quarter of gross receipts from
copper exports. But Mobutu also had to share his corrupt gains with both high-level cronies and low-
level customs inspectors and other officials. Corruption and predation undermined the formal private
sector, and grandiose infrastructure projects were used as sources of payoffs for the president and his
associates (Wedeman 1997: 462–5). Clearly Zaire, with its kleptocratic ruler, was not run like a
productively efficient profit-maximizing monopoly.
In Haiti the dictatorship benefitted “just a few thousand people connected by marriage, family
ties or friendship to those in power.” Political instability arose “not so much from popular movements
... but from fellow members of the elite seeking a larger share of the spoils of power” (Grafton and
Rowlands 1996: 267). According to the U.S. Department of Commerce, in 1977–8 government
misappropriation of funds was 63% of government revenue (cited in ibid.). The kleptocratic aims of
the top rulers produced an inefficient scramble for gains. Institutions were created that impeded
development; state monopolies were used as “cash cows,” and the state discriminated against people
of motivation and ability (ibid.: 268–9).
This same situation played out in Egypt under Hosni Mubarak (1981–2011), where international
firms had to pay large “consulting fees” and engage in joint investment with the dictator’s sons, and
politically connected development projects were granted on very favorable terms, while widespread
development failed to reach the populace (Adly 2011). Empirical studies of the fate of firms
connected with Mubarak and his family before and after his downfall reveal the extent of favoritism
involved (Chekir and Diwan 2014). In Tunisia, Zine El-Abidine Ben-Ali (1987–2011) was fined $66
million and sentenced in absentia to 35 years imprisonment for the “embezzlement and misuse of
public funds.” Investigators found $27 million worth of jewels and cash at one of his homes.12
Statistical analysis of the relative economic success of firms connected and unconnected with him and
his family revealed large benefits to being in the favored group (Rijkers, Freund, and Nucifora 2014).
As these cases demonstrate, a corrupt ruler influences not only the size of government but also
the mixture of taxes and spending priorities. Taxes, regulations, subsidies, price fixing, and
privatizations are examples of public-sector activities that kleptocrats can manipulate for their own
benefit. Because tax breaks can be awarded to corrupt individuals and firms in return for bribes,
kleptocrats may set high nominal tax rates to encourage payoffs. They may set heavy duties on
necessities used by the poor and exempt luxuries. In Haiti between the 1910s and the 1970s, for
example, goods such as expensive liquor were almost untaxed, but duties were high on cotton,
textiles, soap, and kerosene (Lundahl 1997: 35).
Kleptocrats view the regulatory system as a source of personal profits. Thus regulations and
licensing requirements may be imposed that have no justification other than to create a bottleneck that
firms will pay to avoid. Efficient regulatory reforms will be opposed by the kleptocrat if the reforms
would convert illegal into legal pricing systems. The kleptocrat will focus subsidies on individuals
and business firms willing to pay for them. Of course, even corrupt autocrats may need to satisfy the
mass of the population in order to maintain power, but they will also promulgate programs that induce
the wealthy to pay for benefits. The ruler, for example, might institute a system of investment
subsidies with discretion to distribute these benefits. No one can obtain these benefits as a matter of
right. Everyone must bid to obtain them from the ruler. The allocation of scarce foreign exchange and
access to credit are additional sources of rents for rulers.
A kleptocratic ruler can affect the benefits of privatization. He or she is likely to be especially
eager to privatize monopolies that earn excess profits so long as he or she can extract a share of the
gains. But it is one thing for a kleptocrat to want to privatize a state firm, and quite another for private
investors to make bids. A private firm will have little value to investors if it can be taxed out of all its
profits, renationalized at will without adequate compensation, or excessively and arbitrarily
regulated. Only if the state can credibly commit to a reasonable future policy, will the firm be worth
more as a private entity. But a corrupt ruler faces special difficulties because he or she is committed
only to personal enrichment. Furthermore, even if he or she can somehow write binding contracts,
investors may worry that a corrupt ruler risks overthrow. A change in regime can lead to the canceling
of previous understandings.
A kleptocrat may oppose some privatizations that an honest regime would view as efficient and
support others that are inefficient but produce corrupt payoffs up front. The ruler’s inability to make
credible commitments lowers the value of the firm to private investors, tipping the scales toward
continued state ownership. In addition, state ownership is associated with opportunities for rent
seeking over and above the profits of the enterprise. If the state enterprise can be used to generate
rents through such devices as the sale of jobs, favorable contracting deals, and special treatment for
customers, then the stream of benefits is higher for the kleptocrat than for the honest ruler. Sometimes
the distinction between the public fisc and the private funds of the ruler is erased. In Haiti under the
Duavaliers, checks were simply written out to members of the presidential family and other private
citizens from various state monopolies (Lundahl 1997: 39–40). Public control of large enterprises
can be a way of increasing one’s chance of remaining in power in spite of one’s corruption. Such
rulers create a web of obligations and can threaten to expose their corrupt counterparts if they are
overthrown.
However, under other conditions, the kleptocrat may become an overenthusiastic privatizer. He
or she may, for example, be able to engineer the privatization so that it involves a forced sale to the
ruler or to his or her family and cronies at a below-market price. In Indonesia, for example, Suharto
supported a number of privatizations that involved the transfer of assets to firms controlled by his
children and cronies (Schwarz 1994: 148–9). Even if the sale is to an outsider, a kleptocrat may
support some privatizations that a benevolent social wealth maximizer would oppose. By accepting
present gains, he or she gives up a future stream of revenue. This may be rational if the ruler has a
short time horizon because he or she fears being overthrown, that is, the kleptocrat has a higher
discount rate13 than private investors. The kleptocrat may value the up-front benefits of selling the
public firm more highly than the private market.
In some ways, a kleptocrat is like a stock broker or a real estate agent who makes money from
turnover. Corrupt gains can be earned, not just from the ongoing level of government intervention, but
also from one-shot changes. The ruler can extract a share of the gains from any type of transaction
involving the state and thus may support the privatization of some firms while supporting the
nationalization of others. The ruler can be bribed either to privatize efficient state firms at low prices
or to nationalize inefficient private firms at high prices. Without credible commitments to refrain from
one-shot changes, private investors will be reluctant to enter into deals that risk being reversed in the
future.
In short, the strong kleptocrat runs a brutal but efficient state limited only by his or her own
inability to make credible commitments. The weak kleptocrat runs an intrusive and inefficient state
organized to extract bribes from the population and the business community.
Some analysts, however, are relatively sanguine about the corruption of high-level officials,
arguing that the most serious problem is low-level corruption under which officials “overfish” a
“commons” in their search for private gain (Olson 1993; Shleifer and Vishny 1993; Rodrik 1994). If
no one owns the common pool, an inefficient amount of effort will be spent fishing (Hardin 1968).
One way to extract rents is to create extra rules and regulations. Especially destructive, according to
Shleifer and Vishny (1993: 606), is the possibility that new bureaucratic entrants will try to obtain a
share of the rents. If a ruler has relatively little day-to-day control over state ministers, their freelance
behavior can indeed be costly. With more control, he or she may be interested in limited
“liberalization” and perhaps accompanying civil service reform to strengthen his or her control. The
ruler will back reform so long as it is consistent with his or her own income maximization.
Just because a ruler favors some types of reform, however, it does not follow that higher-level
corruption is less destructive than low-level peculation. A ruler seldom literally controls all the
resources of the state, and the size of the common pool under state control is not fixed by external
forces. Instead, officials may have the power to expand the resources under their control, and higher-
up officials will generally have more power to increase the reach of the state than lower-level ones.
Furthermore, corrupt rulers generally must work with imperfect tools. Instead of simply expropriating
all private property and organizing it to produce efficiently, those at the top may only have inefficient
options. They can increase the level of taxes and regulatory authority, grant exemptions in return for
payoffs, and nationalize industries. They can introduce general protectionist policies that are beyond
the reach of lower-level officials. They can propose expensive, complex, capital-intensive projects
that can be used to generate bribes.14 In Haiti, for example, dictatorial governments favored
institutions that impeded development because they were the most effective way to siphon off rents in
the Haitian context. As a result, the assets of the wealthy were invested either overseas or in secure,
but unproductive, investments. State polices that impeded development encouraged talented Haitians
to emigrate (Grafton and Rowlands 1996). No ruler can be absolutely confident of remaining in
power for ever. Those who became rich from the ruler’s favor will not wish to expose all their assets
to the risk of regime change.
Of course, some powerful rulers manage to avoid such inefficient policies. They enrich
themselves and their families, but do not push rent-generating programs so far as seriously to
undermine growth. Countries with a high degree of corruption that are politically secure and tightly
controlled from the top may suffer from fewer static inefficiencies than those with an uncoordinated
struggle for private gain (Lundahl 1997).15 They have a long-run viewpoint and hence seek ways to
constrain uncoordinated rent seeking so that long-term gains are maximized. This type of regime
seems a rough approximation to some East Asian countries that have institutional mechanisms to cut
back uncoordinated rent seeking by both officials and private businesses (Campos and Root 1996).
Even in that region, however, countries with less corruption are better able to attract foreign direct
investment than their more corrupt neighbors (Wei 2000). Furthermore, as the preceding discussion
indicated, many corrupt rulers are not so secure, and their very venality increases their insecurity.
Kleptocrats may face additional problems of bureaucratic control not faced by benevolent
rulers. Corruption at the top creates expectations among bureaucrats that they should share in the
wealth and reduces the moral and psychological constraints on lower-level officials. Low-level
malfeasance that can be kept under control by an honest ruler may become endemic with a dishonest
ruler. Kleptocratic rulers may be unable to create the conditions needed for an honest bureaucracy to
flourish (Lundahl 1997: 43). Yet many rent-generating possibilities cannot be achieved without staff
to collect the bribes. Thus the presence of venal civil servants makes the corrupt ruler less
enthusiastic about increasing the size of the state because he or she obtains a smaller share of the
gains than with honest subordinates. The efficiency with which the ruler can extract private benefits
from society is reduced by a corrupt bureaucracy not completely under his or her control (Coolidge
and Rose-Ackerman 1997). If the ruler can develop an honest civil service and share the gains with
only a small number of trusted subordinates, he will be better off, but this will often be impossible.16
Corrupt low-level officials introduce inefficiencies in the form of additional delays and red tape
and cross-agency interference. As a result, national income net of the ruler’s corrupt earnings will be
lower than with an efficient bureaucracy at any level of state intervention. At least some of the
efficiency losses of having a corrupt civil service are shifted to citizens. Would citizens prefer a
kleptocrat able to ensure an honest bureaucracy or a kleptocrat who must contend with a corrupt civil
service? No clear answer is possible. In the former case, the ruler can select the level of state
intervention that maximizes his or her gains given a well-working state apparatus. In the latter, he or
she chooses a lower level of intervention, but services are provided inefficiently by corrupt officials
(Coolidge and Rose-Ackerman 1997).
II. Bilateral Monopolies
We now turn to cases in which powerful private interests can resist corrupt demands and exert power
over the state. The cases differ depending upon whether or not the state is organized specifically to
collect bribes. In the first of these cases, discussed here, a corrupt kleptocratic ruler faces a single
major opponent across the table. In this situation, similar to a bilateral monopoly, the rent extraction
possibilities are shared between briber and ruler. Their relative strength will determine the way gains
are shared (Kahn 1996). It will also determine the overall size of the pie. If some rents can only be
created with state help, but if the ruler fears losing all the gains to his adversary, he or she will not
act. Each side may seek to improve its own situation by making the other worse off through
expropriating property, on the one hand, or engaging in violence, on the other.
Of course, in most cases there is not literally one individual who wields private power. Rather,
the image of a mafia captures the oligarchic nature of powerful private actors. Gambetta (1993)
defines a mafia as an organized crime group that provides protective services that substitute for those
provided by the state in ordinary societies. In some bilateral cases the state and the mafia share the
protection business and perhaps even have overlapping membership. A powerful corrupt ruler in this
context extorts a share of the mafia’s gains and has little interest in controlling criminal influence.
Because the criminals seek to increase their wealth, optimists might contend that if criminals actually
control the government, they will modify their ways (Olson 1993). But this seems utopian. One would
expect that those in control would seek to limit entry through threats of violence and the elimination of
rivals as they have done in the drug business. Furthermore, organized crime bosses may be more
interested in quick profits through the export of a country’s assets and raw materials, than in the
difficult task of building up a modern industrial base. The end result is the delegitimation of
government and the undermining of capitalist institutions. We discuss this case further in Chapter 9.
Alternatively, some states are economically dependent on the export of one or two minerals or
agricultural products. These countries may establish long-term relationships with a few multinational
firms. Both rulers and firms favor productive efficiency, but the business/government alliance that
results may permit managers and rulers to share the nation’s wealth at the expense of ordinary people.
The division of gains will depend upon the relative bargaining power of the parties. If the firm has
invested in fixed capital or if the product they produce is a raw material available in only a few
places on earth, the country’s rulers are in a strong position to extract a large proportion of the
benefits. In contrast, if the firm produces an agricultural product, such as bananas, and can easily go
elsewhere, or if the raw material is available to the firm in many different locations, it has a
bargaining advantage and can require the country to provide useful infrastructure, guarantees of labor
peace, and low taxes. One may not see much overt corruption in such regimes, but the harm to
ordinary citizens may, nevertheless, be severe. The country becomes an appendage of the large
investor.
Bilateral monopoly conditions can arise for particular contracting deals. In fact, a kleptocrat has
an incentive to create such conditions through decisions about which projects to support and what
firms to favor. Contracts with firms in competitive markets are undesirable because there are no
excess profits to appropriate. The ruler distorts contracting priorities by favoring projects that can
only be produced by firms in industries earning monopoly profits. Of course, a strong kleptocrat
operating with impunity would not have to worry about such a “cover story.” He or she can just take
public funds or aid monies, send them to his or her offshore bank accounts, and earn international
rates of return. This contrast between weak and strong kleptocrats recalls a familiar joke, repeated in
various versions in the development community. The ruler of A shows off his new mansion to the
ruler of B. Pointing out a new highway, A’s ruler explains his new house by saying: “thirty percent.”
Later the ruler of A visits the ruler of B at his even more lavish mansion. Asked how it was financed,
B’s ruler says, “See that highway out there?” A’s ruler looks puzzled because no highway can be
seen. “That’s just the point,” says A’s ruler, “one hundred percent.”
This story is usually used to demonstrate that corruption is less harmful if the road is actually
built. But that conclusion is not always justified. If the ruler supports projects designed to hide his
kickbacks easily, the distortionary effect of such decisions may be large. A new highway seems like a
valuable piece of infrastructure, but if it just improves access to the ruler’s country house, there is not
much to be said for it. If no road is built, fraud has been committed and development goals
undermined, but the country is not littered with costly “white elephants.” Taxpayers and foreign aid
institutions have financed an increase in the ruler’s wealth and seen their funds diverted from legal
purposes. This is unfair and provides citizens with a strong justification to oppose the government; it
also may lead international financial institutions to cut off aid. Under prevailing economic conditions,
however, it is not as inefficient as actually constructing such projects with no social value so long as
the funds reenter the capital market.
If a kleptocrat faces a single bribe payer across the table, they negotiate a deal to share the
economic gains. Corrupt payments may be lower in a bilateral monopoly situation than in a one-sided
kleptocracy. The briber has bargaining power and uses it to extract profits. However, the end result is
not necessarily superior. The size of the bribes is not the key variable. Instead, the economic
distortions and the high costs of public projects measure the harm to citizens. In some cases, part of
the deal may be the continued protection of the monopoly. Private monopoly profits and bribes enrich
both parties to the deal with ordinary people still the losers.
III. Mafia-Dominated States
Now consider the case in which officials of a weak and disorganized state engage in freelance
bribery but face a monopoly of power in the private sector. The state might be a poorly functioning
democracy or an autocracy with a weak head-of-state. As in the case of bilateral monopoly, the
monopolist could be a domestic mafia, a single large corporation, or a close-knit oligarchy. In each
case, private power dominates the state, buying the cooperation of officials. The private actor is not,
however, powerful enough to take over the state and reorganize it into a unitary body. The problem
for the private sector is that the very disorganization of the state reduces the ability of the private
group to purchase the benefits it wants. Making an agreement with one official will not discourage
another from coming forward. Such a state is very inefficient as officials compete with each other for
the available rents. Individuals may be unable to create substantial rents on their own, but they
compete with each other for a share of the gains produced by the dominant private firm. Facing such
freelance rent seeking, however, the private firm will produce less. The activities of the corrupt
officials are like taxes on outputs or inputs that reduce the firm’s profit-maximizing level of output.
Ukraine, with its currently weak government, is a good example of this case. Powerful oligarchs
have directly challenged state authority; for example, one used his private militia to try to prevent the
government from regulating his business. The oligarchs may have amassed their wealth in a bilateral
monopoly situation, but now they are challenging the weak state authority.17 Although we
characterized Indonesia as a kleptocratic state under Suharto, in recent years it has apparently moved
into the category of a weak state dealing with a powerful oligarchy of private business interests. The
legal and administrative system is unpredictable and inconsistent; corruption and rent seeking are
reportedly rampant. Political arbitrariness inhibits the development of a legal, productive private
sector. Some business leaders obtain special favors, but the overall effect on commerce is reportedly
negative.18
IV. Competitive Bribery
In the fourth case many low-level officials deal with large numbers of citizens. As in the case of
mafia-dominated states, this situation could occur in a democratic state with weak legal controls on
corruption and poor public accountability. It might also be the way a weak autocrat dispenses public
services.
We discussed this case in detail in the first part of the book. There we made clear that the
competitive corruption case is not analogous to an efficient competitive market. Here, we stress a
serious, systemic problem that can arise from competitive corruption – the possibility of an upward
spiral of corruption. The corruption of some encourages additional officials to accept bribes until all
but the unreconstructed moralists are corrupt. Several theoretical models produce this result along
with a second equilibrium with little corruption – a low level of corruption in one period encourages
even fewer to be corrupt in the next period.
Suppose, for example, that some people are committed to honesty under all conditions, some are
always willing to bribe, and a large intermediate group decides how to behave by observing what
others are doing and balancing the benefits and costs. They judge their own corrupt acts by asking
how common they are in society. Each person has a tipping point; he or she will bribe if a certain
proportion of others are paying bribes. This model, identical to Thomas Schelling’s models of
neighborhood tipping in the housing market,19 can produce a cascade over time as more and more
people opt into the corrupt regime until all but the extremely honest are involved. Conversely, there
may be an equilibrium where the honesty of some breeds honesty in others. Bardhan (1997) graphs
this to make clear the multiple equilibria nature of such a corrupt market. If the corrupt equilibrium
prevails, the only solution is a massive effort to shift the system to the “good” state. The good news,
however, is that once the new equilibrium has been established, it will be stable – no ongoing
coordination is needed.
A somewhat more subtle version has people imagining an honest society that they view as better
than one riddled by corruption. Even when they engage in corruption, they understand that it is wrong
from the point of view of society, but they feel trapped in the corrupt status quo. This model appears
to describe people’s feelings, at least in some societies where interview studies have been conducted
(Persson, Rothstein, and Teorell 2012). This is a somewhat more hopeful situation because people
could be induced to move away from corruption – if given plausible options – even if many others are
still corrupt. In other words, they do not actually believe that the moral value of corruption is reduced
just because it is widespread.
Another model can produce multiple equilibria on the basis of standard law and economics
calculations, with no appeal to moral scruples. Suppose that there are a fixed number of enforcement
officers. This model has the same structure as the previous ones except for the reasons that people
follow the rules. If few officials are corrupt, anticorruption resources can be used efficiently to
collect evidence, and law enforcement efforts will apprehend many of the offenders, convincing more
people to behave honestly in the next round. Conversely, if there is widespread malfeasance, only a
few people are likely to be caught, convincing even more to break the law next time around as the
probability of detection falls and so on in a deteriorating spiral (Andvig and Moene 1990: 75).20
In a corrupt environment, honest officials might turn in those who offer bribes and honest citizens
may report extortion demands. Then, it is risky to pay or demand bribes if potential bribers and
bribees are ignorant about who is corrupt. However, the higher the proportion of corrupt officials, the
lower the risk of offering a payoff (because it is easier to encounter a corrupt official), and the greater
the number of individuals who expect to benefit from paying a bribe. The dynamic is the same as
described in the preceding text but with one important additional consequence. Ordinarily, one would
expect that as bribe-prices increase, fewer people would be willing to pay them. However, in this
case, if the proportion of corrupt officials increases with the level of bribes, an increase in the bribe
level could increase the proportion of private individuals who pay bribes because it sends a signal
about the high level of impunity. High bribes signal a low probability of being caught.
In all these models, under plausible assumptions about the distribution of corruption costs across
officials, both high and low corruption equilibria exist. Temporary but large changes in underlying
conditions are needed to produce long-run shifts in the level of corruption by moving the system from
the high- to the low-corruption equilibrium (Andvig and Moene 1990; Bardhan 1997). Reform then
requires systemic changes in expectations and in government behavior to move such a state from a
high-corruption to a low-corruption equilibrium. Unfortunately, the nation-states that fall into this
fourth category are precisely those that lack the centralized authority needed to carry out such
reforms. The decentralized, competitive corrupt system is well entrenched, and no one has the power
to administer the policy shock needed for reform. Thus, the unfortunate conclusion is that corruption
may be at least as hard to control in states where public and private power is widely diffused as in
polities with tightly organized power centers inside and outside the state.
V. Johnston’s Syndromes of Corruption
To conclude, contrast our taxonomy with that of Johnston (2005, 2014), who also presents a fourfold
typology. He posits four types of states (Figure 8.2), whereas we posit four types of highly corrupt
states, rather than aiming for a comprehensive taxonomy. In Johnston’s model, the type (“syndrome”)
of corruption that prevails in a given society is determined by the development of economic
institutions versus state institutions. Thus, corruption exists in all societies, but manifests itself as
political influence in more developed societies (Influence Markets), as groups of economic-political
power (Elite Cartels) in somewhat developed state economies, and as either kleptocracy (Official
Moguls) or states with political and economic power defined along ethnic or loyalty lines (Oligarchs
and Clans) where both state and economic institutions are poorly developed, for example in
nondemocracies and states in conflict or postconflict.21 Notice that Johnston’s cases all lie on a
single line, where weak and strong economic institutions go along with corresponding state
institutions. He does not consider cases with strong economic institutions and weak states, weak
economies and strong states, or states in which the economic institutions advance faster than the
political institutions, or vice versa, resulting in a combination of moderate with weak or strong.
Perhaps they do not exist,22 but it would be enlightening to know why not.
Figure 8.2. Johnston’s “Syndromes of Corruption.”
Source: Based on Johnston (2005: 40, Table 3.1), Syndromes of Corruption, Cambridge
University Press.
Kleptocracy encompasses Johnston’s Official Moguls, and our Bilateral Monopoly case is
similar to his Elite Cartel and Oligarchs and Clans cases, which he develops in more detail than we
do here. Johnston’s Influence Markets are states where outright bribery is not central to the exercise
of political power but where wealthy private actors, nevertheless, have a disproportional influence
on public policy. We will discuss some of the concerns highlighted by his discussion of Influence
Markets in Chapter 11, but readers wishing a fuller description are directed to his two important
books (Johnston 2005, 2014). Johnston does not explicitly discuss our competitive bribery case: he is
more focused on influence in all of its various forms.23
One important difference between Johnston’s syndromes and our taxonomy is that his framework
is explicitly normative, while ours are based on the loci of power. States that are “weak” on either
dimension fail to conform to good governance ideals. Thus, Johnston’s Official Moguls have both
weak economic institutions and weak state/society capacity to channel economic activity. In contrast,
we stress the power of kleptocrats over state resources compared to private actors. The state does not
conform to the ideal of a well-functioning polity, but it is not “weak”; rather, its leader is too
powerful and unconstrained. We do not disagree with Johnston’s normative appraisal of such states,
but our framework in more rooted in economic analysis and political economy and stresses
differences in opportunities and bargaining power.
Conclusions
Kleptocracy will seldom be equivalent to private monopoly. There is no simple correspondence
between the level and consequences of corruption and the organization of government. One cannot,
for instance, claim with confidence that corruption at the top is less harmful than low-level
corruption. The impact of corruption depends upon the strength and lack of scruples of the private
firms and individuals that pay bribes. Under bilateral monopoly, powerful public and private actors
divide the economic gains. A powerful kleptocrat facing weak private actors not only extracts rents,
but also organizes the state to create rents. In contrast, large corrupt private firms facing a weak state
can extract high levels of benefits without paying high bribes. The incidence of corruption is high, but
the size of bribes is low. The cost of tolerating payoffs is likely to be very high once one considers
the benefits that flow to the powerful private actors in return for payoffs.
With multiple payers and recipients of bribes, complex markets can arise. Frequently, in a
competitive environment, bribery breeds more bribery until the system is permeated with corruption.
Under other conditions, however, honesty breeds honesty. Reformers in competitive environments
have the difficult task of encouraging beneficial spirals while avoiding destructive ones.
Subsequent chapters will develop some of the themes raised in this chapter. We begin, in
Chapter 9, with the serious problem of the overlap between organized crime and corruption in mafia-
dominated or bilateral monopoly cases. Then, Chapter 10 turns to states emerging from civil war or
other forms of destructive civil unrest. These states usually either have very weak political and
economic institutions or else have strong but dysfunctional polities and weak economic institutions as
a legacy from the past. They are prime loci for pervasive corruption. Next, we turn to the important
case of established democracies in Chapter 11. We go beyond outright bribery to consider other ways
in which private wealth influences public power through the kinds of Influence Markets studied by
Johnston. Finally, Chapter 12 deals with accountability beyond the ballot box, relating to the
transparency and accountability of state action.
1 This chapter is derived, in part, from Coolidge and Rose-Ackerman (1997) and Rose- Ackerman
(1998b).
2 As we discuss in previous chapters, sometimes private-sector agents accept bribes from other
private entities. The underlying conditions are similar to the conditions that produce corruption in
government, and with the privatization of some previously public activities, such corruption is
likely to be of growing future importance.
3 Huber, Rueschemeyer, and Stephens 1993; Przeworski and Limongi 1993; Knack and Keefer
1997; Treisman 2000; Glaeser et al. 2004; Drury, Krieckhaus, and Lusztig 2006; Lederman,
Loayza, and Soares 2006; Haque and Kneller 2009; Johnston 2012. Acemoglu et al. (2008) find
that higher income does not cause democracy to arise, but rather that both higher income and
democratic governance are the result of a path chosen at some point in history. Their result holds
both for the post–World War II period and over a century-long period.
4 For a game-theoretic model of how this plays out – often with the corrupt reelected – see Aidt
and Dutta (2004).
5 Mary Chapman, “Former Mayor of Detroit Guilty in Corruption Case,” New York Times, March
11, 2013, http://www.nytimes.com/2013/03/12/us/kwame-kilpatrick-ex-mayor-of-detroit-
convicted-in-corruption-case.html (accessed October 11, 2015).
6 Monica Davey, “On Eve of Prison, Blagojevich Keeps Talking, but Some Tune Out,” New York
Times, March 14, 2012, http://www.nytimes.com/2012/03/15/us/blagojevich-to-begin-prison-
term-for-corruption.html (accessed October 11, 2015).
7 “Croatia Jails ex-PM Ivo Sanader for Taking Bribes,” BBC News, November 20, 2012,
http://www.bbc.com/news/world-europe-20407006 (accessed October 11, 2015).
8 Using Forbes data on billionaires, Gandhi and Walton (2012) developed a crude index of what
they call “crony capitalism,” which includes both gains from monopoly power and undue influence.
The index is based on the total wealth relative to world GDP of billionaires who are active in
industries that are likely to include high levels of “rents” or excess profits that can be skimmed off
by business people and their political allies. Twenty of India’s billionaires were in “rent thick”
industries such as construction, mining, real estate, etc.
9 The term kleptocrat appears to have originated with Andreski (1968). It refers to a ruler or top
official whose primary goal is personal enrichment and who possesses the power to further this
aim while holding public office.
10 This is the case that Rose-Ackerman (2015) discusses in arguing that it is not necessarily true
that “the fish rots from the head down.”
11 These points are developed in Coolidge and Rose-Ackerman (1997). See also Kurer (1993:
270). Mukum Mbaku (1994: 31–7) argues that when autocrats or narrow interest groups win
control of the state in Africa, many have used the state apparatus to expand the role of the state in
an effort to enrich themselves. He argues that military coups are often motivated by rent seeking.
12 David D. Kirkpatrick, “Ex-Tunisian President Found Guilty, in Absentia,” New York Times,
June 20, 2011, http://www.nytimes.com/2011/06/21/world/middleeast/21tunisia.html (accessed on
October 11, 2015).
13 See note 22 in Chapter 3.
14 Tanzi and Davoodi (1997) show empirically that high levels of corruption are associated with
high levels of public investment. Their data, however, do not permit them to distinguish between
countries where corruption is relatively more pervasive at the top of government. Nevertheless, it
is reasonable to suppose that most countries that foreign business firms and outside observers rank
high in corruption are those with relatively kleptocratic rulers.
15 See, e.g., “Indonesia: When Trouble Brewed,” The Economist, February 10, 1996: 37, for an
example of how such conflicts have been handled in Indonesia in a controversy involving Suharto
family members with interests in the beer and hotel industries.
16 See Mehmet’s (1994) discussion of the Indonesian system in which a small cadre of top
officials divided the rents of government operation with a small group of outsiders and family
members.
17 “Ukraine’s Future: President v. Oligarch,” The Economist, March 28, 2015. It should be added,
however, that the president did respond by removing the oligarch from his position of regional
governor.
18 See Bardhan (2006); Kristiansen and Ramli (2006); Kishor and Damania (2007); Olken (2007);
Olken and Barron (2009).
19 However, in Shelling’s model, neighbors’ characteristics are readily observable, while the
corruption of others is not necessarily so. Thus, the perception of others’ corruption is key.
20 Another model focuses on the principal’s hiring choices (Tirole 1996). Corruption is a function
of agents’ behavior and the kind of task they are given. High government officials can assign agents
to perform an efficient or a less efficient task. Each period a different agent appears at the public
agency’s door asking to be hired. All the agents are part of a well-defined group of people in the
society eligible for these positions. One might think of a tax collection agency hiring collectors
who may accept bribes from tax payers. The task might be either a complex tax collection system in
which agents must calculate taxpayers’ ability to pay or a simple fixed-head tax. The group of
potential tax collectors has a reputation based on the proportion who are always honest, the
proportion who are always corrupt, and the proportion of opportunists, who balance the economic
benefits of corruption against the economic costs. The principal also has limited information about
the track record of the agent before him or her. Multiple equilibria exist under some conditions. In
the low corruption equilibrium, the opportunists are all honest. If they maintain an honest track
record, they will be hired for the lucrative, high-efficiency task. In contrast, a high-corruption
equilibrium also exists where all the opportunists are corrupt. This is sustainable because the
overall corrupt reputation of the group makes it pointless for any one opportunistic agent to become
honest. Short-run attempts to control corruption may be ineffective. A one-period crackdown will
not work. In this model, the possibility of a high-corruption equilibrium is an argument for hiring
policies that permit principals to monitor individual agents from period to period rather than
relying on group reputation and weak information about individual applicants.
21 Morris (1991) offers a similar model, in which the existence of corruption or extortion – or
their absence – is determined by the balance or imbalance between the state’s ability to offer
economic advancement and society’s ability to do the same. Where the state has more power,
extortion prevails; where society has more power, bribery does. When the two are in balance,
there is neither bribery nor extortion.
22 Johnston uses factor analysis on a sample of 168 countries to identify four clusters (98
countries), which he associates with the four syndromes (Johnston 2005: 49–58). The remaining 70
countries are not discussed.
23 This may be a case that falls in the upper right corner of Figure 8.2, with a weak state but well-
developed economic institutions.
9
Organized Crime, Corruption, and Money
Laundering
◈
Corruption and organized crime often go together. The existence of large-scale illegal businesses is
likely to have a corrupting influence on government, especially law enforcement and border control.
Corrupt rulers and illegal businessmen feed on each other. Bribes reduce the cost of illegal business
ventures and help them raise capital, fueling their growth relative to legal businesses and generating
more corrupt arrangements.
Both corrupt officials and organized crime groups (OCGs) often need to send funds across law
enforcement boundaries. Hence, three criminal phenomena – organized crime, corruption, and money
laundering – are often closely related. Each may occur individually. For example, a criminal
organization may operate with complete impunity, with no need to launder its funds or engage in
corruption (either because the state is absent or because the criminal organization uses violence and
intimidation instead of corruption). The cash stolen from a bank by common thieves needs to be
laundered, but no public official has to be bribed. The proceeds of bribery and kickbacks may be
spent outright, without laundering, especially when the bribes are small or there is no legal
requirement to justify extraordinary income or spending. In many cases, however, one leads
inevitably to another, with vicious circles or spirals between organized crime and money laundering,
organized crime and corruption, corruption and money laundering, and among all three. It is essential,
therefore, to take their interactions into account.
The chapter is organized as follows. Section I shows how organized crime networks harm
society through their illegal business dealings, such as the drug trade and human trafficking. Section II
then goes on to argue that organized crime can corrupt the state and undermine its legitimacy, leading
to a vicious cycle. If a strong symbiotic relationship exists, Section III claims that anticorruption
policy needs to target the impact of organized crime explicitly. Otherwise it will ignore one key root
of the problem of corruption. Finally, Section IV argues that, although state-level reforms are
necessary, a comprehensive approach ought to include efforts to make it more difficult for both
organized crime bosses and corrupted politicians and officials to launder their illicit earnings. Law
enforcement bodies that target public corruption, organized crime, or illicit financial flows will be
more effective if there is cooperation and coordination among them.
I. Organized Crime
The term organized crime refers to a wide variety of activities, including trafficking in drugs, arms,
counterfeit or contraband (prohibited) goods, human organs, human beings, artifacts, and endangered
species; smuggling illegal immigrants, cash, and contraband (to avoid taxes); racketeering; identity
theft and cybercrime; money laundering; fraud; prostitution; theft; kidnapping; and the extortion of
individuals and businesses. An OCG has the following elements (Buscaglia and van Dijk 2003: 5):
“such a group is structured, has some permanence, commits serious crimes for profit, uses violence,
corrupts officials, launders criminal proceeds and reinvests in the licit economy.” The European
Police Office (2013: 6) (commonly referred to as Europol) has identified approximately 3,600 OCGs
operating in the European Union. Due to globalization and the Internet, many of these groups are
international in membership, crimes, products, markets, and routes. Ethnic diasporas are often
fundamental in the development of global OCG networks (McIllwain 1999; Thoumi 2003; Europol
2013), although Varese (2015) also documents the diverse backgrounds of those engaged in systems
of illicit monetary transfers in Europe and Asia.
The emergence and persistence of organized crime are influenced by historical, societal, and
cultural factors. Organized crime often has political roots, traceable to a point in history when some
groups were underrepresented or disenfranchised, such as during foreign occupation, civil war, or
mass immigration. In these circumstances, political groups have employed criminal elements to
advance their agenda, and OCGs have used the political system to advance theirs, or else have taken
over government functions from a weak state (Gambetta 1993; Beare 1997; Schneider and Schneider
2005; Center for the Study of Democracy 2010; Feldab-Brown 2011). In Northern Mexico, for
example, OCGs have taken advantage of the rapid population growth from those seeking work in
maquiladora factories.1These recent migrants live in areas without supporting infrastructure, and they
experienced high unemployment rates during the economic downturn of 2008–10. OCGs stepped in to
provide patronage, public goods, and economic status to those living in marginalized neighborhoods.
Feldab-Brown (2011) documents cases in the northern cities of Tijuana and Ciudad Juárez and in the
central-western state of Michoacán in which OCGs provide a more legitimate and effective justice
system (in the eyes of community members) than the state, and where paying “protection” is a more
predictable cost to business than the traditional bribes paid to inspectors. This parallels the earlier
experiences of Palermo, Italy, and Youngstown, Ohio, documented by Schneider and Schneider
(2005).
Buscaglia and van Dijk (2003) have studied the conditions under which organized crime
flourishes. In cross-country research they found that high levels of organized crime were associated
with a weak state, high tax evasion, an ineffective customs service, protectionism, high financial risk
ratings, lack of democracy, a poorly functioning judicial system, politicization of the civil service,
and state capture. Where organized crime is stronger, there tend to be more police officers and
prosecutors, yet fewer arrests for drugs and lower conviction rates overall. They argue that
ineffective law enforcement encourages organized crime, as ordinary people distrust formal
institutions, turning, instead, to “illegal organizations, such as mafia-type groups, to deal with minor
crimes” (Buscaglia and van Dijk 2003: 10). Likewise, when the banking system fails to serve the
needs of citizens, they turn to underground options for loans. Although a strong state can resist
infiltration by organized crime, the causal arrow could go the other way, with organized crime
undermining the effectiveness of the state and producing a vicious cycle.
Although organized criminal groups operate on the margin of formal markets and outside legal
norms, they behave very much like business firms:2 they produce where costs are lowest and sell
where the return is highest, using accounting methods and ledgers to keep track of their goods and
money. Instead of paying taxes, they make direct payments to government representatives, in the form
of bribes. They tend to be organized hierarchically, although horizontal networks have started to
develop (Center for the Study of Democracy 2010) and frequently, those in the lower ranks do not
know who their superiors are (Thoumi 2003: 80). They face competition, but their methods are often
violent, rather than based on advertising and creative marketing. Not all are violent: in the Republic
of Georgia, the mafia bosses use bribery and connections alone to accomplish their goals
(Kukhianidze 2009: 220) although a threat of violence may give them bargaining power (Reuter
1987). Because the environment in which they operate changes constantly, OCGs must be
entrepreneurial, adapting their business to develop new and better products and delivery methods.
For example, in response to consumers’ reduced purchasing power during the 2008–11 economic
crisis, organized crime in Europe increased trafficking in counterfeit and substandard consumer goods
(Europol 2013: 11).
Some OCGs traffic in humans and human organs. This activity has a clear impact on society. The
United Nations Office on Drugs and Crime (UNODC)3 estimates that there are at least 2.5 million
victims of human trafficking worldwide at a given time. Of these, 79% are sold into the sex industry,
which is also managed in part by OCGs; 18% become enslaved in sweatshops or agriculture. Other
victims, especially children, are exploited as beggars. Human trafficking is facilitated by corruption
at every stage: in the countries of origin, transit, and destination (see Box 9.1.) Migrant smuggling is
another lucrative activity exploited by OCGs: each illegal migrant pays thousands of dollars up-front
and the OCG pays an employee of a trucking company to “moonlight” so that, even if the truck is
caught or abandoned, the OCG faces zero risk. Sometimes migrant smuggling is used to lure victims
into human trafficking: they are promised safe (illegal) passage to another country, but find
themselves enslaved, instead.
Box 9.1. Organized Crime and Prostitution
Many OCGs are involved in prostitution, which requires corruption at each stage. First, in
primarily low-income, high-unemployment countries, women (and men) are recruited, often
under false pretenses: arranged marriages, help in obtaining immigrant documents, or
fabricated job offers. (Once the victims are in another country and the sham is revealed, they
are helpless.) The OCGs help them to obtain the necessary documents to enable them to cross
borders. Often the documents are falsified, which may involve payments to immigration
officials. In other cases, the recruits are smuggled across borders, which may require
corrupting border officials and transportation companies.
Along the transport route, OCGs manage safe houses operated under the eyes of
corrupted local police. At the final destination, OCGs pay to have properties rezoned (if
brothels are legal), obtain work permits for their recruits, evade taxes, and operate illegally.
Some prostitutes are used to influence police, judges, and politicians, either through sexual
favors or blackmail once a public servant has used their services.
The proceeds from prostitution also need to be laundered, which involves either bribing
legitimate businesses or investing directly in legitimate businesses. If the latter, firms owned
by OCGs might obtain permits without compliance, and tax evasion is likely. OCGs may also
bribe the police or regulators to harass both other brothels and other firms that compete with
their laundering interests.
Source: Based on Center for the Study of Democracy (2010: 131–136).
Sometimes OCGs engage in socially responsible behavior as a way of co-opting local
populations. There are many examples of philanthropic kingpins or “dons” who have built clinics,
schools, and roads, and extended loans or gifts to needy members of their communities. In Colombia
in the 1990s, guerrilla groups controlling marijuana-producing areas “taxed” marijuana sales at one-
third of its value, but half of this sum was spent on “communal projects” (Thoumi 2003: 83).
However, because their illegal businesses are not subject to environmental regulations, they often
impose severe harms, especially related to the drug trade. As much as 2.5 million hectares of
rainforest in Peru and 1 million hectares in Colombia may have been destroyed for coca cultivation
(Organization of American States 2013a: 33). Cocaine, heroin, and methamphetamines production
lead to significant quantities of toxic waste (ibid.: 42), and government programs of eradication
frequently use toxic herbicides, adding to the harm to the environment. At the transportation stage, to
take just one example, 40,000 hectares in Guatemala’s Mayan Biosphere Reserve were destroyed to
build airports for transit from South America to Mexico, en route to the United States (ibid.: 49).
Because the underlying business is illegal, the basic problem is not so much payoffs to government
environmental monitors or forest rangers, but rather the overall level of impunity supported by the
ongoing corruption of law enforcement personnel and politicians who thus share in the profits of the
illegal businesses.
Because many organized criminal groups use violent means to achieve their goals, the impact on
society can be enormous. In Latin America, organized crime may be responsible for 25% to 45% of
homicides (ibid.: 76n2). The homicide rate in Colombia rises with the value of Colombian coca
leaves (Mejía and Restrepo 2011) or the international price of gold, which stimulates illegal mining
(Idrobo, Mejía, and Tribin 2014). Similarly, reductions in the supply of Colombian cocaine caused by
increased state intervention have been linked to increased violence in Mexico between 2006 and
2010 (Castillo, Mejía, and Restrepo 2014). According to the World Health Organization
(Organization of American States 2013a: 83), in Mexico there were 137 deaths in 2010 due to drug
overdose, but “15,273 OCG-related violent deaths.”
II. Organized Crime and Corruption: Plata o Plomo
Established OCGs can corrupt and undermine state institutions and, once they have infiltrated public
institutions, the result can be to institutionalize criminal enterprises, creating a vicious cycle.
Although the threat of violence lies behind businesses dominated by organized crime, violence
may actually fall in mafia-dominated states compared to ones where the power of competing mafias is
contested. New criminal groups tend to be more violent than well-established ones because their only
recourse is violence as a way to enter the illegal marketplace. As they mature and become
increasingly intertwined with civil society and the state, organized criminal groups first use petty
corruption, then engage in state capture, manipulating the law to favor their business. This includes
customs duties, regulation of mafia-dominated sectors, and laws that limit the illegality of certain
activities or reduce the applicable statute of limitations (Beare 1997). Eventually, this relationship
may evolve into a mafia-dominated state (see Chapter 8).
Organized crime and corruption go hand in hand. In Italy whenever an investigation into either
corruption or organized crime is undertaken, it inevitably leads to the other (Center for the Study of
Democracy 2010: 18). In Mexico using plata o plomo (bribe or bullet) techniques, drug cartels have
thoroughly corrupted the police, judges, politicians, prison guards, and bureaucrats in many parts of
the country. In an effort to override corrupt local officials, the military and federal police have been
moved from one hotspot to another in an attempt to capture key members. This policy, which
effectively reduced the impact of the mafia in the United States during the twentieth century, has
proven less effective in Mexico. As of March 2015, police and military forces had captured or killed
90 of 122 previously identified high-level members of the various OCGs, including 12 group leaders
and 25 financial operators, but cartel-related violence continues.4 This may be due to the differing
natures of OCGs in the United States and Mexico. In the United States, the mafia has traditionally
been run by “families” with selective recruitment; Mexican OCGs have recruited en masse from the
burgeoning group of uneducated, unemployed youth living in Mexico’s cities. In Johnston’s (2005)
terms, the mafia in the United States operate as “elite cartels,” while the Mexican drug cartels are
“oligarchs and clans” with close corrupt ties to law enforcement and politicians.
The links between corruption and organized crime can be gleaned from the Global
Competitiveness Report, which asks international business leaders about the conditions (costs to
business) in 144 countries; responses are recorded on a scale of 1 (very poor) to 7 (very good). In
Figure 9.1, each dot represents a country. Several suggestive relationships emerge: higher bribery is
correlated with the higher costs associated with organized crime, higher costs to business of violence,
and lower levels of trust in the police. There is also a relationship between public-sector
embezzlement (one type of grand corruption) and organized crime. Because the data are cross-
sectional, these graphs do not reveal cause and effect, but they are suggestive of the vicious circles or
spirals present when OCGs are strong.
Figure 9.1. Corruption and organized crime.
Source: Generated using data from World Economic Forum, Global Competitiveness Report
2014–2015 data set, http://www3.weforum.org/docs/GCR2014-15/GCI_Dataset_2006-07-
2014-15.xlsx.
If OCGs have infiltrated, corrupted, and undermined the state, this opens up several types of
profit-making opportunities beyond their core illegal businesses, such as drug trafficking. One very
lucrative activity is extortion. Legal businesses that benefit from prime urban locations are especially
at risk in countries with weak or corrupted police forces. This includes restaurants and shops serving
tourists and business travelers. Manufacturers can hide in out-of-the-way locations (Webster and
Charap 1993), but service businesses cannot “go underground.” If the police are bought off or
unreliable, criminal groups may demand protection money where the funds are, in part, protecting the
business from attacks by the same group (Webster 1993a, 1993b; Webster and Charap 1993; De
Melo, Ofer, and Sandler 1995).5 This reduces the profitability of such businesses and may lead
business owners to close shop or move to another city or country. In Northern Mexico, due to
violence-backed demands for payment (called piso, literally “floor” but implying the right to occupy
the space) in 2008–11, many businesses closed and many entrepreneurs moved to the United States or
less-affected parts of Mexico, rather than pay or risk kidnapping or execution. In some cases,
businesses had to pay multiple OCGs for protection.6
A second option is to engage in legitimate business activity backed by the threat of violence to
discourage competition. This strategy will only succeed if public officials have been paid off or
intimidated to look the other way. Even in developed countries some legitimate businesses are
especially vulnerable to criminal infiltration. In the most stable cases of infiltration, the legitimate
businesses that operate under mafia protection earn sufficient monopoly rents to make them supporters
of continued organized-crime influence. Gambetta and Reuter provide a list of the factors supporting
the emergence of mafia-controlled cartels (Gambetta and Reuter 1995: 128). In the most favorable
cases, product differentiation and barriers to entry are low; technology is unsophisticated and labor,
unskilled; demand is inelastic; and the industry consists of a large number of small firms. In other
words, cartelization would not be possible without the threat of violence as a backup. Private
garbage collection provides a good example. Entry is inexpensive – one need only purchase a truck.
However, because garbage trucks operate alone on the public streets, it is relatively easy to
intimidate unwanted rivals by attacking their trucks without attracting police attention. To minimize
their risks, the mafia pay the police to look the other way (Reuter 1987). This practice was common
in American cities at the end of the nineteenth and into the twentieth century (Menes 2006).
Third, OCGs may take over the sale of legal but pirated goods, for example, the sale of
unauthorized copies of music, movies, and other products. The sale of stolen merchandise often feeds
the coffers of organized criminal groups either directly through ownership and distribution, or
indirectly using extortion. OCGs maintain such businesses and limit competition by bribing public
officials, such as the police and other inspectors. The profits, earned without paying taxes, can then
be reinvested in legitimate business and in obtaining public contracts through payoffs (Gambetta
1993; Varese 1994).
Fourth, OCGs can become government contractors, using their criminal muscle to win tenders.
Businesses, such as road repair and building construction, which do a heavy business with the state,
are prime candidates for organized crime influence. If a government has been corrupted by organized
criminals seeking protection for their illegal businesses, it may be a relatively short step to make
payoffs to obtain public contracts on favorable terms. For example, drug cartels in Mexico have used
both extortion and campaign funding to obtain government contracts on very profitable terms.7 In the
extreme, OCGs manage cartels that share contracts and pay off public officials to buy their complicity
or at least their silence. In Southern Italy, for example, a 1990s survey of small and medium-sized
businesses found that more than half reported that they had withdrawn from a public tender after
pressure from criminal groups or their political allies.8
Finally, consider the special case of the collapse of the Soviet Union. The benefits to both
legitimate investors and OCGs were extremely high as nothing less than the entire wealth of the state
was up for grabs. The value of sharing in the privatization of a socialist state dwarfs the benefits of
sharing in the privatization of a public utility in Western Europe or a steel mill in a developing
country. Both criminal groups and legitimate businesses sought to share in the wealth. In some cases,
organized crime managed to create an atmosphere of uncertainty and the threat of violence that drove
competitors away – especially Western firms – leaving the criminal groups with a free field (Shelley
1994). Foreign direct investment from legitimate business was slow to venture into the countries of
the former Soviet Union; it varied widely across countries and over time and did not really take off
until a decade later.9 One explanation for this behavior is the weakness of state institutions, which
created an environment ripe for the development of organized crime and allowed them to use
corruption to infiltrate government and business. In Georgia, for example, in spite of success in
limiting corruption in some parts of the bureaucracy, organized crime took advantage of a voucher
program – designed to enable citizens to participate in the privatization process – to obtain privatized
assets (Kukhianidze 2009). As the Center for the Study of Democracy (2010: 40) concludes, “[i]n its
most advanced form, organised crime is so thoroughly integrated into the economic, political, and
social institutions of legitimate society that it may no longer be recognizable as a criminal
enterprise.” An important way that organized crime and corruption interact is by producing a general
disregard for the rule of law that helps to delegitimize the state. According to Europol (2013: 15),
“Social tolerance towards certain crimes reduces risks for OCGs and increases public demand for
illicit commodities.” In coca-, poppy-, or marijuana-producing countries, the criminalization of
traditional activities calls into doubt the legitimacy of the state and further marginalizes indigenous
groups (Organization of American States 2013a: 25). If the production of traditional crops is
criminalized and prosecuted while more powerful criminals or corrupt economic and political actors
are allowed to continue operating, the populace loses faith in the government as an advocate for the
people (ibid.: 82).
Organized crime also corrupts private businesses into facilitating their illicit production or
smuggling operations. For example, cigarette, clothing, or medicine manufacturers could be paid to
produce after-hours to supply OCGs with goods; truck drivers to smuggle illicit goods or people; and
the employees of restaurants, night clubs, bars, and retail stores to allow the sale of counterfeit or
contraband cigarettes, alcohol, and drugs (Center for the Study of Democracy 2010: 113–16).
Alternatively, OCGs may take advantage of other widely accepted illegal activities. For example, in
Colombia, drug-trafficking organizations used existing contraband networks to launder their drug
proceeds (Thoumi 2003: 85). As private businesses cross the line into illegitimate activity, and the
public welcomes access to these goods (e.g., low-cost contraband or new psychotropic substances),
the law in general becomes less relevant.
Organized crime needs corruption. The Center for the Study of Democracy (2010: 14) argues
that “[p]olitical corruption is organised crime’s most powerful tool.” Corruption is an “enabler” of
some organized crime: if not for corruption, the illicit activities would not flourish (Europol 2013). In
the Americas, drugs play a more prominent role in OCG activity10 and many governments are weaker
than those of the European Union. Thus, the Organization of American States (2013a: 55) takes a
stronger position than Europol regarding OCGs and corruption:
[T]he illegal drugs economy ... and organized crime cannot survive without corruption. Both
violence and corruption can only thrive in a context of extensive impunity, in which there is no
certainty that the law will be enforced and the State lacks the capacity to identify and try those
responsible for breaking the law.
At the same time, organized crime feeds corruption. OCGs often actively try to corrupt customs
officials, immigration authorities, law enforcement, the judiciary, procurement processes, and access
to sensitive information. They seek not only immunity from prosecution for themselves but also
assurance of monopoly power in the illegal market. In many parts of Italy, OCGs control local
politics and, by extension, police forces (Center for the Study of Democracy 2010: 90). In Thailand
some local public authorities sheltered criminal enterprises both from competition and from the law
(Pasuk and Sungsidh 1994: 51–97). In transitional Russia those involved in illegal businesses
sometimes engaged in outright intimidation of potential rivals, often paying off the police not to
intervene in their private attempts to dominate the market (Handelman 1995). Mexican cartels have
more public officials on the payroll than rank-and-file traffickers or foot soldiers: information from
confiscated ledgers indicates that a single plaza (controlled area) in Mexico may have 1 to 600
“employees” but 109 to 1,000 officials on the payroll (Organization of American States 2013b: 24–
5). Thus, OCGs corrupt low-level bureaucrats, law enforcement, and politicians alike, as they extend
their reach and debilitate institutions (Organization of American States 2013a).
OCGs commonly use bribery, threats of violence, and blackmail to corrupt the police, customs
officials, judges, politicians, and military in order to gain not only prosecutorial immunity, but
outright cooperation and assistance, especially in smuggling operations (Center for the Study of
Democracy 2010).11 As some parts of government become corrupt, transparency becomes
increasingly difficult, thus enabling more corruption in other sectors and feeding a vicious spiral
(Organization of American States 2013a: 56).
Our goal here is not to try to resolve the problem of organized crime’s infiltration of the state in
some polities. Rather we simply want to warn those involved in designing anticorruption policies to
incorporate the possibility that corruption is a symptom of deeper problems in the relationship
between government and society. When organized crime has a strong foothold, many of the reform
proposals we have outlined in previous chapters will be of only minor consequence. Deeper changes
are needed.
However, there is one cross-cutting set of policies that can reduce the appeal of both grand
corruption and organized crime. Most of the proceeds of organized crime and corruption eventually
end up in the legitimate economy, either deposited in financial institutions or invested in real estate or
business ventures. Much of it flows across national borders into assets and financial institutions
located in money centers in wealthy countries or so-called financial paradises. Hence, the
international control of money laundering to make such transfers more difficult and costly could, at
least, make both corruption and organized crime more expensive and troublesome even if domestic
law enforcement is weak.
III. Money Laundering
Money laundering is the process by which illicitly gained funds are made to look legitimate –
facilitating illicit activity by hiding it. These illicit activities include corruption, organized crime,
petty crime, and terrorism.12 The magnitude of money laundering, like all secretive activity, is
difficult to measure. Drug-related money laundering alone is estimated to represent 0.4% to 0.6% of
world GDP (Organization of American States 2013a: 56, 2013b: 6). Global Financial Integrity (Kar
and Spanjers 2014) estimates that illicit financial outflows from developing countries totaled U.S.
$991.2 billion in 2012, more than ten times the official development assistance received by these
countries; over the period 2003–12, nearly $6.6 trillion left these countries illicitly. The flow of
illicit funds increased by 9.4% per year in this period, faster than the growth of these economies. The
UNODC (2011) estimated that 2.7% of global GDP is “available” for laundering, including 1.5% of
global GDP laundered in connection with drug trafficking and organized crime. Reuter (2013) argues,
however, that it is not only impossible to measure money laundering, but also useless because money
laundering per se has not been shown to cause significant damage on a macroeconomic scale. The
real damage, according to Reuter, is perpetrated by the crimes that money laundering supports. But
tracking down, arresting, and prosecuting criminals successfully is difficult, so Anti-Money
Laundering (AML) efforts offer a trail and a means to apply justice that may be more cost-effective
than seeking out the predicate offences. The Organization of American States (2013b: 32) argues, in
contrast to Reuter, that money laundering does cause economic damage, including price distortion,
unfair competition, speculative bubbles and crises, and considerable movements in the value of
currencies, leading to either “Dutch disease” (e.g., exchange rate appreciation in offshore financial
centers) or rapid devaluation.
The traditional model of money laundering involves three steps: placement, layering, and
integration. The entire process may absorb some 15% of the value of the funds laundered (ibid.: 27).
In the placement phase, illicit funds are introduced into the financial system. Funds may be deposited
(in cash) in a bank or invested in another financial institution, or transferred from one account to
another. AML efforts have identified certain red flags and persuaded some countries to place a limit
on the size of transfers permitted without providing identification or filling out additional paperwork.
To escape scrutiny, the launderer may make many small deposits and employ a third party, rather than
make large deposits directly. During layering, the funds are transferred among multiple – often
offshore – accounts, sometimes using shell companies or fake NGOs to create the illusion of payment
for services. This helps to obscure the source of illicit funds. With integration, the funds are
delivered to the final beneficiary in a form that seems perfectly legitimate. Even if the financial
industry has not broken any laws, it facilitates the underlying crime, be it the illegal drug trade or
bribery, by allowing individuals to establish firms or open accounts without identification of the
owners (Platt 2015).13 Figure 9.2 illustrates the traditional financial money laundering processes.
Figure 9.2. Money laundering flows.

Source: Authors, based on Levi, Dakolias, and Greenberg (2007).
Money laundering takes many forms other than bank accounts, especially in the layering and
integration phases. Investment in real estate, art, or other assets is one example. If the lifestyle of a
public servant seems to exceed his or her means, he or she can point to these investments as a
justification. Likewise, organized crime can be masked by construction companies, car dealerships,
import-export businesses, jewelry stores, casinos, hotels, and foreign exchange traders.14 Businesses
where frequent cash exchanges take place are preferred for obvious reasons. The term may have
originated with “the (possibly apocryphal) story of Al Capone’s strategy of using laundromats and
other small businesses to disguise profits from bootlegged alcohol during the prohibition era”
(Chaikin and Sharman 2009: 14). Recently, mining has been a major source of money laundering in
Latin America: metals and metallic jewelry are easier to transport (by value) than cash (Organization
of American States 2013b: 6). Thus, otherwise legal businesses and individuals are often part of the
money-laundering chain of connections (Organization of American States 2013a: 56).
Offshore banks are responsible for large volumes of laundered money. So-called financial
havens are countries that do not tax interest on deposits, have low or nil corporate taxes, and have
minimal controls on financial flows. In many cases, the owners of the accounts or companies
registered in these districts need not even identify themselves. The Cayman Islands, the British Virgin
Islands, and the Bahamas are well-known examples.15 Historically, institutions such as the Financial
Action Task Force have identified countries such as the Cayman Islands, the British Virgin Islands,
and the Bahamas as “uncooperative jurisdictions” based on their lax laws and minimal efforts to
restrict money laundering;16 recently, however, the FATF has removed all three countries from its
blacklist and has replaced them with rogue states such as Iran, North Korea, and Myanmar.17 In
addition, the Caribbean countries received “largely compliant” ratings from the OECD Global Forum
on Transparency and Exchange of Information for Tax Purposes.18 Famous European tax havens, such
as Monaco and Liechtenstein, were listed by the OECD as uncooperative in the early 2000s; by 2015,
the OECD Commission on Fiscal Affairs listed no uncooperative jurisdictions.19
Readers may be surprised to learn that these classic tax havens are no longer listed as
uncooperative. In reality, however, it is possible for a country, such as the United States, to meet the
formal requirements of the OECD or FATF, and still have large amounts of money laundered in its
financial institutions. Thus, the relative paucity of blacklisted jurisdictions may reflect weaknesses in
the criteria rather than any overall decline in international money laundering. The Basel Institute on
Governance calculates and publishes an Anti-Money-Laundering index (The Basel AML Index),
which ranks a country’s vulnerability to money laundering from 0 (low risk) to 10 (high risk).
Afghanistan is listed as the highest-risk country, with a score of 8.56; the lowest-risk country, Finland,
scores 2.51. With a score of 6.01, the Bahamas ranks 72 of 162 countries, where higher ranks indicate
less risk. By comparison, the United States scores 5.2 and ranks 110.20
While Swiss banking secrecy has a storied reputation, it seems its power is waning.21 Since
1934, banking secrecy has been an integral part of Swiss law; however, “Swiss banking secrecy has
never been absolute. The bank’s statutory duty of confidentiality does not apply in the context of
domestic or international criminal proceedings… Swiss banking secrecy has always been subject to
exceptions.”22 In the wake of the financial crisis and the resulting international pressure, those
exceptions have increased. In 2009, the Swiss Government announced that it would follow OECD
standards concerning the exchange of tax-related information between countries and eliminate the
former distinction in Swiss law between tax fraud (a positive misrepresentation) and tax evasion (a
failure to represent). In 2013, Switzerland signed the OECD Multilateral Convention on Mutual
Administrative Assistance in Tax Matters. The convention requires signatories to comply with other
signatories’ requests to turn over tax information unless this compliance would violate the domestic
laws of the state; banking secrecy laws must be enforced in all cases.23 By signing the convention,
Switzerland no longer requires foreign authorities to receive a Swiss prosecutor’s consent to get
access to bank account information. Thus, banking secrecy law has been largely undermined by
international agreements, requiring banks to cooperate in international tax investigations between
states. Third parties, however, such as journalists or whistleblowers, are still prohibited from
divulging confidential information. Furthermore, Swiss prosecutors are especially eager to pursue
individual bankers who have leaked confidential information.24
Even within the United States, certain states offer corporate registration and tax options that are
attractive to both legitimate businesses and criminal elements: in Delaware, because “the identity of
the flesh-and-blood ultimate beneficial owners is not disclosed to the authorities at the time of
registration” and corporate taxes are low, the firm-to-population ratio is greater than one (both
Facebook and Google are registered there), and corporate registration fees account for approximately
25% of the state budget (Platt 2015: 58).25 Internationally, one common practice is to establish a shell
company in a favorable district of this sort; payments are made to the shell company for “services
rendered” and the shell company makes payments to Politically Exposed Persons (PEPs) or others.
Incorporation creates the illusion of distance between the responsible parties and the money.
The large commercial banks of the United States and Europe are also involved in money
laundering. Indeed, many critics in developing countries argue that the OECD countries are
responsible for both generating bribes and laundering the funds (Levi, Dakolias, and Greenberg 2007:
407). For example, ill-gotten funds deposited in a subsidiary in Mexico can be moved to an account
in New York. Conversely, funds could be deposited in the United States, then transferred to accounts
in Mexico to pay for drugs delivered. In the wake of a major money-laundering scandal involving
London bank HSBC in Mexico (HBMX), it was alleged that HBMX was responsible for 60% to 70%
of laundered funds in Mexico (Platt 2015: 16). Between 2005 and 2007, U.S. bank Wachovia
reportedly transferred $14 billion in cash from Mexico to U.S. branches on behalf of foreign
exchange houses “and other foreign correspondent bulk cash customers”; HBMX laundered $881
million or more from Mexican and Colombian drug cartels in the same period (ibid.: 75–6).
Large deposits in cash trigger new AML protocols of “know your client” due diligence. As a
result, according to the Organization of American States (2013a: 56), “the organizations involved in
money laundering have diversified their procedures, and are now using other economic sectors, such
as insurance companies, securities brokers, foreign exchange dealers, remittance firms, casinos,
minerals and precious stones merchants, real estate, and independent professionals, such as notaries,
accountants, and attorneys.” Prepaid store or credit cards are popular payment methods (for petty
bribes or wages) because no identification is required to purchase them. They are also used to move
funds across national borders because they are not subject to the requirement to declare cash in
excess of $10,000 (Ribando Seelke and Finklea 2014: 40). Identity theft is another mechanism used to
open or gain access to accounts without revealing the beneficiary’s true identity. Contraband in cash
has become increasingly important as the financial systems have put in place controls on large cash
deposits (Organization of American States 2013b: 6). This is also true where exchange rate controls
are in place, such as in Venezuela and Argentina, creating a black market for dollars or euros.
“Criminal organizations can convert dollar proceeds to local currency equivalents directly or through
third parties with relative ease and speed” (Organization of American States 2013b: 28).
Although organized crime profits are a major source of funds that are laundered, in many small
developing countries corruption may be the most important source (Chaikin and Sharman 2009: 27).
Some laundered funds are profits that were made possible by bribes paid to government officials.
Both the bribes and the illicit gains they made possible may end up being laundered through money
center banks with severe consequences for the states subject to these illicit outflows. Corruption,
organized crime profits, and money laundering feed on each other and should be attacked
simultaneously (Figure 9.3).
Figure 9.3. Corruption, organized crime, and money laundering.
Source: Authors.
As Chaikin and Sharman (2009: 151) state, “the proceeds of grand corruption end up in
international financial centers, such as New York, London, Zurich, and Geneva.” Under their own
names or those of associates or shell companies, corrupt high-ranking officials or PEPs open
accounts in these banks and receive deposits using a wire transfer. Procurement officers, police
chiefs, members of the legislature, and heads of state have the potential to receive large quantities of
cash and other “gifts” in return for their influence. For instance, in 2012 a former governor of the
Mexican state of Quintana Roo pled guilty in a U.S. court to charges of money laundering. He had
apparently accepted bribes from the Juárez drug cartel and laundered them through Lehman Brothers
(Platt 2015: 69), a major financial investment bank in New York.26 Heads of state facing the
possibility of overthrow or the end of their legal term want to safeguard their illicit funds offshore so
that they can live in luxurious exile. For example, Riggs Bank in New York laundered millions of
dollars for the Chilean dictator Augusto Pinochet, set up shell companies for him, and transferred
funds from London to the United States after his arrest in 1998, in violation of orders to freeze his
assets (Levi, Dakolias, and Greenberg 2007: 398; Platt 2015: 94). Teodoro Nguema Obiang Mangue
(“Teodorin”), the son of Equatorial Guinea’s president and a high-ranking member of the government,
amassed a fortune in overseas real estate and other assets with the assistance of estate managers and
lawyers, who helped him set up shell companies and bank accounts (Platt 2015: 84–95).
It may not be necessary for the PEPs to launder the funds themselves. In a study of 21 (not
necessarily representative) cases from around the world, Gordon (2011: 5; italics in original) finds
that in the majority, “the proceeds of corruption had already been laundered before they were
received by the PEP.” Since most of the cases in his sample also involved kickbacks, he recommends
that all government payments to firms be flagged by financial institutions and traced, to determine
whether any eventually end up in PEP accounts. Given the current levels of due diligence, however,
this may be asking too much.
Organized crime often owns the institutions used to launder funds in the “layering” phase and
supports informal international money transfer systems. Money launderers in the Middle East use
hawala networks (informal, but not necessarily illegal, money transfer systems) to make payments
internationally (Varese 2015); heroin traffickers based in Afghanistan have used these to circumvent
an international financial blockade (Platt 2015: 70). The system is neither illegal nor corrupt, but it
can be a route for the transfer of illicit funds.
In the formal sector, casinos offer an especially attractive option for OCG ownership because
cash transactions are large and common, hence accounts are easy to manipulate. Where gambling is
illegal, OCGs work to change the laws and legalize gambling. In some cases, OCG members actually
run for elected positions to change the laws from the inside (Johnson 2002; Center for the Study of
Democracy 2010). In order to guarantee returns in gambling on sports, OCGs corrupt professional
and amateur athletes, as well as sports officials, persuading them to engage in match fixing (Europol
2013);27 these funds may need to be laundered. Money laundering also leads to corruption in private
businesses, as the launderers bribe employees to turn a blind eye to their unusual practices (Center
for the Study of Democracy 2010: 17). At the same time, OCGs and money launderers corrupt the
police, the judiciary, customs officials, and other public servants to allow them to conduct their
business or even help them to do so. In many of these cases, the corrupt funds (bribes) also need to be
laundered.
International initiatives historically have focused on one or two of these phenomena, without
considering the other(s), although this has improved in recent years as the links are more fully
appreciated (see Chapter 15). More problematically, national bodies still tend to be limited to the
jurisdiction of one of the three. Yet combining efforts could lead to economies of scale, higher
conviction rates, and more funds recovered to be used in further law enforcement efforts. Countries
and International Organizations should encourage interagency cooperation by training the members of
all agencies in anticorruption, AML, and antiorganized crime laws and procedures. Judges and
prosecutors should be aware of the links and laws should reflect the connections, enabling
prosecutors not only to convict the guilty but also to recover the corrupt or criminal funds to
compensate victims or fund public programs.
Introducing legislation is necessary, but not sufficient. As we have explained elsewhere, if the
judiciary is corrupt or otherwise ineffective, no amount of legislation or policing will reduce illicit
activity. It is essential, therefore, to take measures that promote a professional, trustworthy judiciary
and require transparency in judicial proceedings. A professional police force, trained in all three
areas, will be better prepared to collect evidence that can be used by the prosecution. In short, much
of what we have laid out as necessary for combatting corruption will also serve to combat money
laundering and organized crime. Knowledge of AML and anti-organized crime protocols will enable
the law to more effectively detect, arrest, prosecute, and convict the guilty. Ending impunity is
essential.
Engaging civil society in combatting organized crime may be difficult or impossible. Those who
buy pirated, smuggled, or stolen goods – including drugs – are unlikely to report the activity from
which they benefit. The victims of theft, botched migrant smuggling, or human trafficking are likely to
be fearful of reprisals if they approach the authorities, as will most witnesses. Especially when the
police are considered untrustworthy, victims or witnesses will be reluctant to report any crime.
Likewise, although financial institutions are required to report suspicious movements of funds,
credible threats will likely be sufficient to keep bank employees silent.
Conclusions
One of the greatest dangers of corruption is that a vicious spiral will enable organized crime to
establish a foothold and propagate. Once some of the police, legislators, court clerks, and judges are
identified as “for sale,” members of organized criminal groups will take advantage of this weakness
in the rule of law and such activity will escalate. Some of their most lucrative businesses will be
illegal – such as drug trafficking and prostitution. Others may be legal, either because they also
provide high profits (running casinos or “winning” public tenders) or because they are a way to
launder their ill-begotten gains.
The wealth, unscrupulousness, and international connections of many organized criminal groups
suggest the difficulty of control by any one country. The danger is that, rather than being a stage of
development that will wither away over time, criminal activity may become so intertwined with
politics and legitimate business, that it is difficult to tell them apart.
Our goal here is to emphasize that anticorruption reforms may need to contend with organized
crime networks if they seek to design realistic reform strategies. Some policies will be infeasible if
those who pay bribes are members of OCGs and if public officials have become their collaborators.
However, as we have explained here and argue further in Chapter 15, some progress may be possible
through limits on money laundering. This is an indirect approach that targets neither corruption nor
illegal business directly, but rather concentrates on a factor that makes each one profitable – the
ability to transfer funds across borders and invest illicit gains in global financial markets.
1 Maquiladoras are assembly plants in Mexico that import parts, assemble goods, and export the
finished products. They enjoyed duty-free status for bilateral trade with the United States even
before the signing of the North American Free Trade Agreement (NAFTA) and were promoted as a
way to create employment for Mexico’s abundant low-skilled workers. Most maquiladoras are
located in the north, near the U.S. border.
2 From an industrial organization perspective, OCGs are similar to franchises or multilevel

marketing companies.
3 UNODC, “Human Trafficking FAQs,” http://www.unodc.org/unodc/en/human-

trafficking/faqs.html#How_widespread_is_human_trafficking (accessed March 15, 2015). These
data should be interpreted cautiously because they cover only those cases that result in prosecution
in 155 countries.
4 Benito Jiménez and César Martínez, “Capturan a capos ... y persiste la violencia,” El Norte,
March 15, 2015, 1. According to the Institute for Economics and Peace (2015a: 23, figure 10),
homicides related to the drug war have decreased since 2011, but remain four times as high as the
level in 2008, before the escalation in violence.
5 Olken and Barron (2009) document Indonesian truckers paying organized crime to allow them
safe passage, or paying to travel in convoys protected by the military or police.
6 See, e.g., Feldab-Brown (2011). In Russia the same type of extortion payment is called a “roof”
or “krysha” rather than a floor (Varese 2001).
7 “Entran los narcos a construir en el Sur,” El Norte, October 13, 2012.
8 “Still Crooked,” The Economist, February 5, 1994.
9 World Bank, “Foreign Direct Investment, Net Inflows,”

http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD/countries?display=default (accessed
January 24, 2015). Pivovarsky (1999) cites data from the World Investment Report showing that in
1996 three countries in Eastern Europe (the Czech Republic, Hungary, and Poland) accounted for
68% of inflows in the whole region of Central/Eastern Europe and the former Soviet Union and
73% of the region’s accumulated capital stock from FDI. In 1996 FDI stock per capita ranged from
$6 in Belarus, $25 in Ukraine, and $40 in Russia to $1,471 in Hungary and $556 in Estonia.
10 Although drug trafficking is the most common activity of OCGs in the European Union, only
about one-third of OCGs in Europe are involved in the drug trade (Europol 2013: 19, 33).
11 In Afghanistan, e.g., organized criminals have used bribery and kidnapping of customs officials
to enable their smuggling activities. See Special Inspector General for Afghanistan Reconstruction
(2014).
12 While terrorist groups and criminal organizations use similar methods, their motivations are
distinct. Organized crime uses violent threats to intimidate rivals – to increase market share – and
potential extortion victims: their ultimate goal is to maximize profits. Terrorist organizations, on the
contrary, use illicit market activities to fund their terrorist acts; their goal is usually to effect
political or societal change. Both groups use corruption to keep law enforcement out of their way.
13 Platt (2015) provides excellent step-by-step examples of laundering schemes. He challenges the
traditional model, arguing that it is too narrow, and proposes instead a nonlinear (“enable,
distance, and disguise”) model in which money laundering allows “disconnects” between the
criminal and the crime, the crime and the property, or the criminal and the property. In either
model, the financial sector may or may not play a prominent role.
14 In Varese’s study of international transfers of drugs and cash in connection with the drug trade,
the contact in Italy operated a barber shop (Varese 2015).
15 More recently, Dubai has become an important money laundering and tax fraud center (Europol
2013: 13).
16 Financial Action Task Force Annual Report, 2000, http://www.fatf-

gafi.org/media/fatf/documents/reports/1999%202000%20ENG.pdf (accessed October 12, 2015).
17 Financial Action Task Force Public Statement June 26, 2015, http://www.fatf-
gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-june-
2015.html (accessed October 12, 2015).
18 OECD Global Forum on Transparency and Exchange of Information for Tax Purposes,
http://www.oecd.org/tax/transparency/the-global-forum-releases-new-compliance-ratings-on-tax-
transparency.htm (accessed October 12, 2015).
19 OECD List of Uncooperative Tax Havens, http://www.oecd.org/countries/monaco/listofunco-

operativetaxhavens.htm (accessed October 12, 2015).
20 Basel Institute on Governance, “Public Basel AML Index: Country Risk Ranking,”
http://index.baselgovernance.org/index/Index.html#ranking (accessed October 10, 2015).
21 Until recently, Switzerland did not require identification to deposit or access funds and was a
popular destination for corrupt funds paid to or embezzled by the political leaders of various
countries. Also in Europe, the island of Jersey has been the subject of criticism.
22 For more on the intricacies of Swiss banking secrecy law, see “Past, Present and Future of
Swiss Bank Secrecy,” Interview with Cyril Troyanov,
http://www.altenburger.ch/uploads/tx_altenburgerteam/CT_2014_Past_Present_and_Future_of_Sw
iss_Bank_Secrecy.pdf (accessed on October 12, 2015).
23 Article 21(4) of the OECD Convention on Mutual Administrative Assistance in Tax Matters,
http://www.oecd.org/ctp/exchange-of-tax-information/ENG-Amended-Convention.pdf (accessed
on October 12, 2015).
24 For a description of Rudolf Elmer’s “legal hell,” see “A Whistleblower’s Woes,” The
Economist, July 19, 2014, http://www.economist.com/blogs/schumpeter/2014/07/swiss-bank-
secrecy (accessed on October 12, 2015).
25 Interstate competition to attract business goes back at least to the end of the nineteenth century,
when the state of New Jersey introduced a more liberal incorporation regime, triggering the great
corporate merger movement of that time. See Wallis (2006).
26 Lehman Brothers went bankrupt in 2008 in the wake of the subprime mortgage crisis.
27 See also “Lutte contre la corruption et les matchs truqués dans le sport: Rapport en réponse au
postulat 11.3754 déposé le 28 juin 2011 par la Commission de la science, de l’éducation et de la
culture du Conseil des Etats,”
http://www.baspo.admin.ch/internet/baspo/fr/home/aktuell/bundesrat_genehmigt_korruptionsberic
ht.parsys.83108.downloadList.89797.DownloadFile.tmp/28530.pdf (accessed October 9, 2015).
10
Corruption in Postconflict State Building
◈
State building in the wake of conflict is difficult – whether the conflict stems from street protests or
civil war.1 Prime examples come from countries that experienced the “Arab Spring,” especially
Egypt and Yemen, where newly elected governments were also overthrown. Establishing the
legitimacy of the new postconflict government is of utmost importance both to avoid renewed unrest
and to attract investment and foreign aid.2 However, the task of state building can fail if an
environment of distrust prevails among the various political, religious, or ethnic subgroups. One
source of ongoing distrust can be embedded corruption that impedes efforts to build a participative,
representative government; to ensure security; and to deliver services efficiently.
States emerging from conflict are particularly susceptible to corruption, which makes
reconstruction especially challenging. Many of the factors that create corrupt incentives in any society
are likely to be present simultaneously in postconflict environments. Key among these are poverty,
weak institutions, lack of trust in law enforcement, a poorly functioning judiciary, and the
marginalization of minority groups. Furthermore, if a civil war left widespread destruction, funds
from donors for rebuilding arrive into an environment with weak controls, thus encouraging the
diversion of funds into private pockets. The cumulative effect of these factors may be greater than the
independent effect of each one taken separately.3 In many cases, several types of corruption were
already endemic before the outbreak of conflict; the corruption may even have triggered the unrest, as
in the case of Tunisia and Egypt during the “Arab Spring.” In most cases, the disintegration of the rule
of law during the conflict contributes to a deterioration in state-private relations and promotes
increased corruption. The nature of the conflict and the conditions under which it ended help
determine the relative importance of the different types of corruption that emerge.
To demonstrate these points, we provide a litany of postconflict case studies that indicate how
the sources of postconflict corruption differ depending upon the roles of former combatants, the
existence of natural resource rents, the presence of organized crime, and the involvement of
international actors. We conclude with some reform proposals that seem consistent with the case
study evidence and are tailored to the particular problems of weak, postconflict states.
Although the corrupt opportunities that arise in the wake of domestic conflict mirror those in
other high-corruption environments, the particular variants that emerge are linked to the nature of
conflict and the resulting peace deal. Figure 10.1 shows the Control of Corruption Index (CCI) for 40
countries that ended a conflict between 1997 and 2007.4 Only two countries (the United Kingdom and
Israel) had CCIs in the positive range, indicating above average levels of integrity. Of course, these
data do not indicate causality, only that corruption tends to be a problem in countries that have
recently experienced conflict. Of these countries, half improved in the CCI in the following years,
while the other half lost ground.5
Figure 10.1. Control of Corruption Indicator in the year immediately after conflict ended.
Sources: World Bank, “World Governance Indicators Database 2013,” www.govindicators.org,
created by Kaufmann, Kraay, and Mastruzzi (2010) and “UCDP/PRIO Armed Conflict Dataset
Version 4-2009,” https://www.prio.org/Data/Armed-Conflict/UCDP-PRIO/Armed-Conflicts-
Version-X-2009/, created by Gleditsch et al. (2002).
To provide some concrete context for our discussion, four of Rose-Ackerman’s students studied
the cases of Guatemala, Angola, Mozambique, and Burundi, all of which have emerged from civil
conflicts.6 In characterizing the nature and extent of corruption in these cases, the most important
dimensions appear to be the nature of the government in power during the conflict, the level of
destruction and displacement caused by the conflict, the form of the peace deal, underlying economic
and social conditions, and the role of outsiders: other states, international institutions, and organized
crime.
First, almost by definition a country emerging from civil war had an existing regime that did not
represent the interests of a substantial portion of the population. In our cases, the majority of the
population had little political power in all except Mozambique although, obviously, not all those
without power actively supported the rebels.
Second, civil wars leave behind a legacy of physical destruction, internal displacement, and
widespread loss of life, at least in some portions of the conflict zone. In our cases, all faced the task
of rebuilding infrastructure and reintegrating both former fighters and displaced people into society.
Following ethnic conflicts, such reintegration may be especially challenging because distrust remains
high.
Third, peace comes in different ways. Some cases represent brokered peace deals in which
weakened or exhausted rebels agreed to a truce that gave them a stake in the postconflict state but
without political control. Guatemala, Angola, and Mozambique are in that category. In Burundi, in
contrast, the dominant ethnic group, formerly out of power, gained control of the government. Under
the peace accords, the minority Tutsis, formerly in power, were guaranteed a (reduced) role in the
new democracy through quotas and other measures.
Fourth, a country’s economic base helps structure both the conflict and the postconflict
environment, and here the cases show substantial variation. Guatemala, Burundi, and Mozambique
are largely agricultural economies dependent on exports of agricultural goods. Angola’s economy is
largely based on natural resource rents although most of the population is engaged in agriculture.
Fifth, the level and distribution of income may be a consequence of past corruption and self-
dealing, but it can also help determine the nature of present-day malfeasance. Income is very unevenly
distributed in Guatemala, followed by Mozambique and Angola. In contrast, Burundi is more
uniformly poor.7
Sixth, other states influenced the intensity and duration of the fighting, helped broker the peace,
and provided financial and human resources to aid peace building. Angola, mainly because of its oil
wealth, became a pawn in the Cold War. Mozambique’s civil war was financed by its African
neighbors. The Guatemalan conflict played out on the Cold War stage and was fueled by U.S. efforts
to protect the interests of U.S. firms, especially the United Fruit Company, which took advantage of
anti-Communist sentiment (McCann 1987: 43–60). In these cases outside involvement – especially
the distribution of arms – fueled conflict, and withdrawal of support helped end it. Burundi’s citizens
suffered more from international neglect than from active intervention as the world failed to halt the
ethnic violence in Burundi and Rwanda in 1994.
Finally, organized crime may gain a foothold during a conflict and can take advantage of state
weakness with the end of fighting. This appears to be a particular problem in Guatemala. As we
argued in Chapter 9, organized crime can contribute to corruption in all levels of government and law
enforcement if it becomes intertwined with state institutions.
In all cases the conflict and its aftermath both created corrupt incentives and gave domestic and
international actors excuses to overlook corruption. The result, as shown in Figure 10.2, is a set of
governments unable to gain or sustain anticorruption momentum. Incentives were created by the
weakness of domestic institutions, on the one hand, and by the influx of relief and rebuilding funds, on
the other. Institutional weakness is, in part, simply a reflection of the lack of accountability of the
prewar states, but it was exacerbated by the war’s destructive impact on state functioning. Moreover,
in the postconflict period, international organizations, charged with maintaining a fragile and uneasy
peace, have often emphasized internal stability over initiatives to build democratic and accountable
public institutions. The emphasis has shifted in recent efforts,8 but the trade-off between short-term
stability and long-term state building remains challenging. External funds and supplies create a pool
of benefits available for theft and open up opportunities to extort the supposed beneficiaries. The
aftermath of the war and the risk of renewed fighting were sometimes used by domestic politicians
and international aid agencies as an excuse for the lack of financial controls and the consequent
leakage of funds. Emergency conditions that require a quick response were used by international
donors as a further excuse for ignoring financial integrity. Furthermore, besides failing to promote the
financial integrity of the local government, international officials often invoked extraordinary
circumstances to justify their own operation under very loose and flexible rules, which made
supervision almost impossible and corruption likely.
Figure 10.2. Corruption Perceptions Index in four countries vs. world average.
Source: Based on data from Transparency International, “Corruption Perceptions Index,” various
years. TI data used with permission.
Hence, there are common features of postconflict situations that are well known to generate
corrupt incentives. These are overlaid in the individual cases with distinctive features of the
postconflict environment and of underlying economic and social conditions. The common features are
a government in power during the conflict that a portion of the population views as illegitimate and an
urgent need to rebuild infrastructure and integrate former combatants.
To simplify, we characterize the cases in Table 10.1. As we will see, each case represents a
somewhat different set of loci for postconflict corruption. The missing cases are power-sharing cases
dominated by organized crime or resource rents. The former would imply a deal in which organized
crime agrees to stay out of certain aspects of state functioning. The latter seems a plausible outcome
in some cases although the presence of resource rents will raise the stakes and may make compromise
less likely. We now proceed to consider how the nature of the postconflict regime affected the nature
and extent of corruption in each case.
Table 10.1. Nature of postconflict regimes

Old elite in power Power sharing
Organized crime Guatemala
Resource rents Angola
Poverty and influx of aid Mozambique Burundi
Source: Authors.
I. Guatemala: Organized Crime Takes Over
Corruption is a serious problem in Guatemala.9 Impunity, a remnant of the armed conflict, hampers its
effective prosecution (Acción Ciudadana 1999: 12). Poverty and underdevelopment are both a cause
and a consequence of corruption, but the lack of accountability in the wake of the conflict has allowed
corruption to become entrenched. As but one example, former President Alfonso Portillo (2000–4)
was convicted in Guatemala and the United States on bribery and money-laundering charges.10 Weak
and corruptible institutions have permitted organized crime to thrive, and its success in co-opting
some state institutions and public officials has further undermined postconflict state building. The
reduction in the CPI after 2009, evident in Figure 10.2, coincides with an upswing in organized crime
and violence: the World Economic Forum’s Global Competitiveness Index 2014–2015 ranks
Guatemala 142 of 144 countries in “business costs of crime and violence” and dead last in
“organized crime.”11 Thus, it can be placed in the mafia-dominated category in Table 8.1.
During the war, the army controlled all aspects of the state’s administration, and there was little
distinction between state resources and the resources of those in power (Torres 2001). In the
immediate aftermath of the fighting the old elite remained in power and had little interest in
controlling corruption or in questioning the wealth of those who had benefited financially during the
conflict (Altamirano 2006–7: 538–9).
Since the signing of the peace agreement in 1996, politicians have posed as corruption fighters
in an effort to attract support and to undermine the opposition. Recent presidents have pursued
charges against the respective outgoing administrations and against opposition leaders, but at the
same time some in their own administrations have been viewed as corrupt.12
Especially problematic is Guatemala’s poorly functioning judicial and law enforcement system
(Sieder et al. 2002: 32; U.S. Department of State 2008). The police are widely viewed as corrupt
(Sieder et al. 2002: 39), and the World Bank named the judiciary as Guatemala’s most corrupt
institution in its 1997 preliminary diagnostic. The judiciary is not viewed as independent, and the
police are considered unreliable.13 Hence, legitimate prosecutions of corruption are unlikely to
succeed, and false accusations can undercut the political opposition. These weaknesses are, in part, a
legacy of the violence. During the 36-year conflict, the weakness of the justice system, which lacked
independence, apparently amplified and reinforced the violence (González de Asis 1998). The
relative lack of rule of law created incentives for personal deal making and bribes. Twenty-five
percent of judges and 87% of public prosecutors acknowledged that they had been pressured by
superiors or influential parties (Sieder et al. 2002).
Organized Crime Groups (OCGs), particularly those involved in the drug trade (U.S.
Department of State 2004, 2007a, 2007b), have taken advantage of Guatemala’s weak institutions and
legal environment to operate with little constraint and even to collaborate with some who possess
political and economic power and with portions of the police. In addition to Guatemalan gangs
(maras) and OCGs, the Zeta cartel crossed over from Mexico, introducing still more violence. The
weakness of the political parties and the failure to purge the old security apparatuses, “make it easier
for organized criminal gangs rooted in clandestine counterinsurgency structures to maintain and
extend their political influence in the post conflict period” (Sieder et al. 2002: 11). The continued
dominance by organized crime led to the election of General Otto Pérez to the presidency in 2011 on
a platform to control organized crime-related violence. His reforms stalled in Congress, however,
where the opposition held a majority. In an historic move, in September 2015, the Senate stripped
President Otto Pérez of immunity, and he resigned to face charges of corruption and customs fraud.
The vice-president dismissed several high-ranking officials after being sworn in.14 As we write, a
first round of elections was led by “a comedian with no political experience ... campaigning under the
slogan, ‘Not corrupt, not a thief.’”15 By the time this is published, the second round of voting will be
over, and Guatemala will have a new president promising to root out corruption, like many before. It
is a daunting task.
Guatemala illustrates the case of a peace accord that left the old elite in power with few
effective checks on their behavior and little effort to limit the development of links between
criminals, ex-combatants, and state officials. The cycle of impunity feeds into the cycle of corruption.
The growing role of organized crime has undermined anti-corruption initiatives. The lack of strong
law enforcement and judicial institutions feeds into the criminal networks in a “vicious cycle in
which weak institutions create opportunities for the spread of corrupt networks, which in turn seek to
further weaken institutional capacity to combat corruption” (ibid.). The vexed question raised by this
case is whether the international community should have made a concerted effort to buy off and
neutralize the political power of the old elite in the immediate postconflict period, or whether it
would have been better to hold them more rigorously to account. Organized crime’s influence, fueled
by the drug market in the United States, seems a key factor in postconflict Guatemala, and it might
well have been able to undermine whatever fledgling government emerged.
In general, too little has changed since the peace accord was signed. Poverty and inequality
remain near the same levels, despite the use of petroleum income since 2001 to target rural
development. Thousands of weapons distributed in Guatemala during the war are still in circulation,
contributing to violence and insecurity. A lack of development in public education and after-school
activities has left many youth to be recruited into local gangs and OCGs. These more pressing
problems are, at least in part, a consequence of the continued corruption and generally weak state
(World Bank 2011).
II. Angola: The Danger of Resource Wealth
Angola is similar to Guatemala in that a protracted and destructive civil war (Human Rights Watch
2001; Hodges 2004: 21) ended in a brokered peace deal that left the old elite in power with little
interest in the creation of transparent and accountable institutions.16 The conflict lasted from 1991 to
2002, with intermittent violence since then. As in other postconflict states, the former rebels
organized as a political party, but they have had little political influence. The main difference,
however, is the ruling group’s access to a tremendous source of wealth in the form of off-shore oil
reserves and, to a lesser extent, diamonds. Thus, central issues are the management of these resources
in the wake of conflict, the lack of transparency concerning the inflows and outflows of oil revenues,
and continuing inequalities in the distribution of income and wealth.17
In Angola corruption diverts the stream of petroleum rents into private bank accounts. A report
in 2003, soon after the war ended, found that in Angola 39 individuals were worth between $50
million and $100 million, and another 20 were worth at least $100 million, for a total of at least
$3.95 billion. All seven at the top of the list were present or past government officials.18
As in Guatemala, the civil war provided a cover for personal enrichment but on a much larger
scale given the available resource rents. After the conflict ended, government budgets remained large
as the destruction of infrastructure required a widespread rebuilding program (Human Rights Watch
2004: 44). However, transparency did not improve. Many of the state assets that were privatized
ended up in the hands of the political elite (Corkin 2014). Furthermore, the IMF documents the high
level of “unexplained” expenditures from 1997 to 2002, which totaled $4.22 billion over the period
or about 9.25% of GDP per year.19 The state-owned oil enterprise, Sonangol, appears to be at the
center of the corruption involving extra-budgetary operations, especially through its off-the-books
borrowing practices.20 Rather than submit to IMF conditions, the Angolan government turned to the
China Exim Bank for off-budget reconstruction loans, totaling $10.5 billion by 2012. Most of these
loans require hiring and procuring from Chinese firms,21 with a proportion subcontracted to Angolan
firms. At least some of these loans were used to fund projects that were subcontracted to firms owned
by the entrenched political elite, especially generals, with very little benefit to the Angolan
population (ibid.).22
Angola, although nominally democratic, is essentially controlled by the same elite group that
was in power during the civil war (Hodges 2004: 131–40). With so much money flowing into state
coffers and, corruptly, into the private bank accounts of the political elite, talented people select into
public office where they can get rich and ignore the private sector. Angola provides an extra twist on
the story of the “resource curse” related to the long-running civil war. First, the guerrilla group also
had access to a natural resource – diamonds – that was easy to transport and trade (Le Billon 2003;
Hodges 2004: 2). These resource rents along with outside help from sympathetic nation-states helped
sustain the conflict. Second, the security threat provided a cover for the political and economic elite
to enrich themselves. Once the fighting ended, national security continued to be used as an excuse to
limit transparency and even to increase penalties for leaking information. This provides a parallel
with Guatemala but on a much grander scale given the presence of oil resources under state control.
Angola has taken some steps toward reform. The IMF reports some progress in Angola’s
systems of financial management but notes the need for improvement (IMF 2007). Of particular
concern is the continuing lack of transparency of the accounts of Sonangol, which are excluded from
the government accounts. In spite of urging from the IMF, the government has not applied to be part of
the Extractive Industries Transparency Initiative, a civil society effort to require transparency with
respect to payments made to and received by the Angolan government.23 The Angola authorities claim
that “oil companies have positively assessed Angola’s bidding practices” (ibid.: 10). This hardly
seems a sufficient justification because transparency is valuable not simply to generate fairer bidding
processes but also to permit more public oversight of the size and use of government revenues.24 The
problem is not just capacity but also political will. Foreign exchange from oil and diamonds gives
those in power leverage to resist external pressures to improve governance; at the same time
Angola’s weak political system limits the efficacy of domestic protest.
III. Mozambique: Aid-Influenced Reforms
Although Mozambique remains very poor, it is often considered a relative success of postconflict
state building.25 Thus, it is an especially important case for the study of postconflict corruption. Like
Guatemala and Angola, a longtime incumbent political group retained power after the end of conflict
in 1994 and maintains a dominant position to the present. However, the character of the incumbents
appears to be quite different. Hence, corruption, although a serious problem, is not so deeply
intertwined with political power. Furthermore, neither organized crime nor resource rents sustain the
incumbent regime. Rather, foreign aid provides crucial resources, and this aid can be conditioned on
reforms that improve state functioning. Hence, the role of aid and lending organizations is much more
important here than in Guatemala and Angola.
By the time of UN-sponsored peace negotiations, neither of the parties had the capacity to defeat
the other militarily (P. L. Reed 1996: 301–2; Weisburd 1997; Wesley 1997: 87–8, 92, 95). The United
Nations made sufficient funds available to achieve its priorities of “the disarmament, demobilization,
and reintegration into civilian life of government and RENAMO [rebel] combatants” (Newitt 2002:
222). It supported the transformation of RENAMO into a political party and provided special
assistance to ex-combatants (Dobbins et al. 2005: 100, 104). Democratic elections were held after
demobilization of RENAMO in 1994.
In discussing corruption and other under-the-table payoffs, it is important to distinguish between
activities that were part of the initial transition to peace and those that are systemic aspects of the
long-term transition process.
First, some payoffs were closely tied to the process of transforming RENAMO into a political
party. The United Nations created and managed several trust funds to provide financial support for
RENAMO to transform itself into a political party and participate in elections, given that its leader
believed RENAMO would lose the first election (Nuvunga and Mosse 2007: 14–17).26 The
leadership benefited personally from these funds and made increasing demands after the peace
agreement. There was no detailed accounting for the use of the funds ex post although donors did
impose some constraints ex ante on their disbursement (P. L. Reed 1996: 285). The trust funds
benefited RENAMO as well as all the other parties running for office. One official stated that “to
ensure political stability and peace, the ... [United Nations] ‘forgot’ those funds.”27 The empirical
issue raised by this case is whether the payments to RENAMO (and other groups) were a worthwhile
price to pay for peace. Furthermore, even if such payments are a necessary, if unpleasant, policy in
some cases, the United Nations (or other aid agencies) should structure such payments so that they do
the least damage. The emphasis should be on lump-sum payments, not arrangements that permit
people to demand a share of the revenues from ongoing public enterprises or tax collections.
Second, systemic corruption remains a problem in spite of Mozambique’s good record of
economic growth and its relative success in carrying out reforms in the postconflict period (de Sousa
and Sulemane 2008). On the Global Corruption Barometer 2013, 70% or more of respondents
considered the police, public officials and civil servants, health services, and the education system to
be corrupt or extremely corrupt.28
The end of conflict occurred as Mozambique was making a shift from a postindependence
socialist model toward a capitalist economy (Pitcher 2002). Corruption apparently flourished in this
environment because of greater opportunities for private profit as a result of the shift in the economic
model (as also occurred in many post-Soviet countries). Of course, many of the economic
opportunities were completely legal, but some could be enhanced through illicit payoffs. Furthermore,
the need to rebuild the country with foreign aid funds created additional corrupt opportunities. Aid
inflows have been large in Mozambique, totaling about 15% of GDP.29
These sources of corruption were exacerbated by the weakness of state institutions set up to
control the developing market economy and the use of public funds. Unlike Angola’s high-level
kleptocracy, corruption in Mozambique is disorganized and “anarchic.” As in the case of Burundi,
discussed in the next section, each corrupt official seeks personal enrichment, and the result is
multiple demands for payoffs that can be costly in both time and money (Cahen 2000).
Corruption in Mozambique seems intimately tied to the transition to a market economy in a very
poor country with weak institutions and high aid dependency. Corruption seems to have been kept in
check during the earlier period by a combination of moral suasion and the lack of opportunities as a
result of government policy, civil war, and a weak economy. Key features of the postconflict situation
are, first, the weak and untested nature of public institutions in spite of (or maybe because of)
continuity in leadership and, second, the influx of foreign aid that continues to provide major
funding.30 These funds provide resources to convert to private use, but they also are required for state
functioning and have supported some of the new accountability institutions. The conditions imposed
by international institutions appear to have had a major impact on Mozambique’s institutional
development, but these institutions are still too weak to withstand the corrupt incentives that arose
from their creation.
However, Mozambique stands in sharp contrast with Angola and suggests that even weak
institutions, when combined with the oversight of outside donors, have some value. The cases are
similar on a number of important dimensions: (1) both were Portuguese colonies that obtained
independence in 1975; (2) both moved to a state-planned economy right after independence through
nationalizing the properties formerly owned by Portuguese settlers; (3) both experienced long-lasting,
devastating civil wars, which began shortly after independence and were fueled by outsiders based
on international (Angola) and regional (Mozambique) rivalries; and (4) both face the problem of an
inefficient bureaucracy and judicial system.
Nevertheless, the two cases also have important differences. First, Angola is resource rich,
especially in oil and diamonds; Mozambique is not resource rich. Second, although very harmful to
its people and to the economy, Mozambique’s civil war did not last as long as Angola’s. Third, with
the support of the United Nations, the Mozambique peace agreement was successfully followed by
general elections. Fourth, in Angola the peace agreement was made after a military defeat of one of
the factions, UNITA, while in Mozambique the rebel group retained some bargaining power. Fifth, in
Mozambique, although corruption remains a problem, there has been a largely successful effort to
improve the country’s budget system and its system of public financial management, whereas in
Angola reforms have been resisted by a government that is flush with oil revenues and in no need of
outside support.
Thus, the basic policy issue is as follows. In Mozambique the United Nations played a positive
role in bringing the conflict to a close. Disarmament was complete before the first democratic
elections. This was achieved, in part, by providing financial support to the former rebel leaders to
assure their participation in the political process and by assisting former combatants. The World Bank
and the IMF helped smooth the transition to the market and democracy with aid and advice. This
appears to have had many positive effects, but one side effect was an increase in corruption as market
opportunities increased. The case raises the question of whether it is possible to buy off former
combatants with up-front payments at the same time as the transition seeks to control corruption in the
transition to a market and democracy.
IV. Burundi: Ethnicity-Based Power Sharing in a Poor
Country
Burundi is a small, very poor, landlocked African country that has suffered from widespread violence
beginning soon after independence from Belgium in 1962.31 Its transition from civil violence began in
2000 when the Arusha Accords were signed, to be followed by elections in 2005. The Accords
provide constitutional protections for the minority Tutsis, who were formerly the dominant political
group. The constitution mandates political power sharing, reserving 60% of the assembly for Hutu,
and 40% for Tutsi (Bentley and Southall 2005: 32–43; Goldmann 2006: 137; Schweiger 2006; 653–
4; International Crisis Group 2007). The 2005 elections for the national assembly followed the
constitutional provisions, and although the presidential election was marred by violence and
irregularities, President Pierre Nkurunziza, a Hutu, won a decisive electoral victory (Reyntjens
2006).
The Accords provide that corruption is a ground for presidential and legislative impeachment
and that “embezzlement, corruption, extortion and misappropriation of all kinds shall be punishable in
accordance with the law.”32 However, against the background of an insecure, brokered peace and a
power-sharing democratic government, corruption apparently flourishes.33 Most people link
postconflict corruption to the weakness of the state and the destruction of the economy during the
decades of violence and insecurity.34 The long-running crisis gave birth to a system of impunity.35
One report lists poverty as the most important factor accounting for Burundi’s corruption, followed by
impunity, bad governance, especially related to the lack of transparency, the lack of political will to
combat corruption, and traditional practices favoring corruption. The same report ranks the judiciary
as the most corrupt sector, followed by the police and the administration, respectively (Nimubona and
Sebudandi 2007: 15, 27). On the Global Competitiveness Index 2014–2015,36 Burundi ranks 142 of
144 countries in the “reliability of police services,” 143 in “judicial independence,” and 121 in
“favoritism in decisions of public officials.”
Corruption and rent seeking in Burundi have historical roots. Since decolonization, ethnic and
regional groups have manipulated state structures for their own benefit. In particular, portions of the
minority Tutsi ethnic group managed to extend their favored position during the colonial area into
control over most state resources after independence.37 Public corporations were used to collect and
distribute rents to the political elite (Nkurunziza and Ngaruko 2008). The Tutsi-dominated military
enriched themselves through the customs sector, advantageous land holding, and private taxation of
citizens (Bentley and Southall 2005: 179–80). Much of the enrichment occurred through the state’s
legal mechanisms, however, rather than through illegal payoffs.
The advantages held by the privileged elite helped feed the violence, and it gave the formerly
disadvantaged a justification for appropriating state resources for private gain in the postconflict
period. In the three previous cases the lack of change of the group in power fueled corruption; in
Burundi the change in the power structure in favor of the Hutus gave them an excuse for enriching
themselves to compensate for prior losses. The Burundi case shows how the division of power can
fuel a particularly destructive type of corruption in the absence of effective control measures or
ethical constraints (Nkurunziza and Ngaruko 2008: 75).38
The contestation over state power weakened the state. According to a local anticorruption NGO,
“The weakness of the state has increased corruption. Under the authoritarian regime, corruption was
repressed.... The crisis led to a weakness of state power and an increase in civil disobedience.”39
With the end of a conflict the old elite networks no longer operate, and there are more opportunities
for illicit personal enrichment.40 Those in power do not feel secure. Hence, many tend to grab what
they can while they can.41
The two-way relationship between poverty and corruption makes it harder to establish a stable
peace. As Terrance Nahimana, a civil society leader, points out, “If people are healthy and wealthy
today, then it will be easier to make an arrangement about the crimes of the past. It is harder to accept
the present when one is hungry and sees others driving around in fancy cars.”42 As the United States
Agency for International Development states, “in Burundi’s post-conflict situation, therefore,
corruption not only harms recovery and reconstruction, but risks re-igniting the social conflict that has
characterized so much of the country’s history” (Schiavo-Campo 2006: 3). The weak economy makes
a credible anticorruption policy difficult. Indeed, as we write, Burundi is suffering a political and
economic crisis. President Pierre Nkurunziza announced in April 2015 that he would run for a third
term, in violation of the Accords. This provoked violent protests, a failed coup attempt, threats to
withdraw international aid, currency depreciation, and the exodus of over 170,000 Burundians
between April and July. Nkurunziza won reelection in July but the electoral process and the
government’s violent suppression of protests have been condemned by foreign governments, the UN,
and Amnesty International.43 While the conflict has not yet turned ethnic, there is fear that it will
become so. Several members of opposition parties have been killed since the elections.44 Peace and
democracy seem very fragile in Burundi.
One can ask whether international pressure and financial aid helped or hindered the transition in
the 2000s. Trade embargos pressured the government of the time but also – as is often the case –
“stimulated development of a strong illicit economy benefiting those with access to political power
and military protection” (Bentley and Southall 2005: 7).45 International aid was made conditional on
acceptance of the peace agreement and thus played a decisive and positive role in pressuring the
different factions to negotiate and reach agreement (ibid.: 82, 116).
Much of the corruption in Burundi is linked to its poverty and its weakly institutionalized state.
These conditions have been made worse by the ongoing conflict, but the corruption is of a type
common in many poor countries. What makes the case distinctive is the power sharing incorporated
into the peace accords that established a divided government structure to make a return to violence
unappealing.46 As a result, the state has been unable or unwilling to create a set of clear and well-
enforced rules or to limit patronage and self-dealing. Formal power sharing limits the scope for
competitive politics across ethnic lines. Thus the political compromises that helped end the fighting
make corruption particularly intractable, especially in the presence of an influx of aid. Worst of all,
Burundi seems to be on the verge of plunging back into conflict, unless the populace succumbs to
authoritarian rule.
Conclusion: Lessons
Given these disparate but interlocking cases, what can one learn about the control of corruption in
states emerging from domestic conflict? The goal is a well-functioning system in which violence is
seldom intertwined with politics and in which evidence of corrupt self-dealing leads to a scandal that
has political consequences. In such a system, revelations of corruption may tip the balance against
incumbents who are implicated in the wrongdoing. In contrast, if democracy is entwined with
endemic corruption and public order is less well established, elections can be an opportunity for
violence against opponents, individualized payoffs to voters, and corrupt payoffs to politicians.
Much has been made of the importance of “political will” and moral leadership from the top in
establishing effective governments in the postconflict setting. Although strong leadership and good
morals are necessary, they are not sufficient. Political will by itself can breed autocracy, as seems to
be the case in Burundi. Too much moralizing risks degenerating into empty rhetoric – or worse, witch
hunts against political opponents. Policy must address the underlying conditions that create corrupt
incentives, or it will have no long-lasting effects. Furthermore, if the policy does not resonate with
the populace, it will lose momentum.
Peace-building strategies must avoid triggering vicious spirals. An economy that is jump-started
by giving monopoly powers to a few prominent people may produce a society that is both lacking in
competition and unequal. Early stage decisions can lock in the power of a small elite whose vested
interests hold back efforts to increase competition, enhance fairness, and promote transparency.
Although it may be risky and difficult to counter corruption in postconflict peace building, if the
problem is allowed to fester, it can undermine other efforts to create a stable, well-functioning state
with popular legitimacy. Conversely, an open-ended free market solution in a state that lacks basic
government capacity can lead to widespread competitive corruption and rent seeking as individuals
and firms seek to evade the laws, influence or “reinterpret” the laws in their favor, or simply avoid
their strictures.
In postconflict situations, policy recommendations that concentrate only on macroeconomic
aggregates are pointless. No growth can occur unless institutions are restored to at least a minimal
level of competency. Corruption is a symptom that state/society relations are dysfunctional,
undermining the legitimacy of the state and leading to wasteful public policies. Good policies are
unlikely to be chosen or to be carried out effectively without honest institutions.
The cases outlined in this chapter provide a range of experience on the presence of corruption in
state building after civil war and widespread domestic violence. In Guatemala, Angola, and
Mozambique the old elite remained in power after the end of the conflict. In Guatemala and Angola
these elites were widely viewed as corrupt during the conflict. In Guatemala in the postconflict
period the elite benefited from links with organized crime involved mainly in the drug trade. In
Angola the sources of wealth are oil and, to a lesser extent, diamonds, which benefit top officials and
well-connected families through a series of opaque financial arrangements. In both countries these
sources of wealth help keep entrenched corrupt networks in place and limit the development both of
competitive politics and of transparent and effective oversight and law enforcement institutions.
These are cases in which the lack of political will at the top will limit anticorruption efforts even
given international pressures.
Mozambique experienced an increase in corruption after peace was achieved, but this did not
arise from the prior corruption of those in power. Rather it came from the increase in opportunities
created both by the end of hostilities and by the turn to a market economy in the context of a weak
state. The use of donor funds to pay off the former rebels and ease RENAMO’s transition to a
political party may have been an effective way to end the violence, but it also provided an example of
the use of public money for private gain that may have made subsequent anticorruption efforts less
credible.
In Burundi, former fighters against the regime gained control of the government with formal
power sharing. The result is a weak state with widespread competition for illicit gain as members of
each group seek benefits for themselves. Burundi has few oversight institutions and is unable to
provide many constraints on corrupt actors although its overall poverty surely limits the options
available. As a result, violence has been an ongoing problem in Burundi, and it is unclear whether it
can truly be characterized as a postconflict society.47 The reignition of violence may have been at
least partially responsible for the sudden drop in the CPI after 2007, which erased previous gains
(Figure 10.2).
Thus, corruption was and is part of the postconflict situation in all cases, but two distinct
situations seem to be most troubling. The first is the entrenchment of an old elite with access to
significant rents, as in Angola and Guatemala. At least in Angola with a reformed government, the
rents from oil and diamonds could be put to good use inside the state. This is not true for organized
crime proceeds in Guatemala, which depend upon the corrupt use of the police, the customs
authorities, and the army, while they generate no taxes and increase costs to the state. The second
situation is a formal power-sharing deal among multiple groups where politicians have no incentive
to uncover corruption as a way to achieve power. Rather, as in Burundi, the corruption of one group
with a guaranteed share of power simply encourages other groups that are part of the brokered peace
deal to seek personal enrichment as well. Mozambique is a more hopeful case. Corruption there
appears to be a feature of the transition so that the main concern is avoiding a vicious spiral
originating in particular conditions of the postconflict transition.
These cases suggest some general lessons. First, any peace agreement should incorporate
measures to limit corruption. Negotiators might have the leverage to push through anticorruption
reforms, such as establishing an independent judiciary and anticorruption bodies, which might not be
feasible later. Early on, a thorough assessment of vulnerable and underperforming areas is
essential.48
Second, as far as possible, the peace negotiation process should not be viewed as a way to
divide the rents of state control among the different factions. Transitional governments are frequently
constrained by the need to reach a compromise among various groups. The compromise may end the
violence but may entrench or create corrupt structures. Thus, the 40–60 split institutionalized in
Burundi’s constitution has not entirely quelled the ethnic violence there, nor reduced corruption.49
Constitutionalized power sharing like this may actually heighten tensions and lead to new conflict
(United Nations 2007). By contrast, Burundi’s neighbor Rwanda chose to build a participatory
democracy without quotas and has enjoyed relative peace and lower corruption. However, its
postconflict history is not an entirely happy one as businesses with close ties to the president appear
to have disproportionately benefited from public contracts and concessions.50
Third, anticorruption efforts need some early and visible victories and must fit the capacities of
the country. Start simple. For example, be sure primary systems of financial control inside agencies
are in place before creating secondary bodies such as anticorruption commissions (O’Donnell 2006).
Fighting corruption and discrimination in the provision of public services helps to build trust in
government; publishing progress in media and on government portals reinforces that trust (Johnston
2014).
Fourth, international aid, designed to help rebuild and extend infrastructure, can create
incentives for corruption and hence needs to be audited and controlled.51 However, aid that is too
strictly conditioned impedes the state from developing its own agenda and can hamper consolidation
of power (Moore 1998). One option for international actors is to use trust funds in the immediate
postconflict period to administer aid programs with the ultimate goal of turning over programs to
government. For example, the Afghan Reconstruction Trust Fund, operated by the World Bank,
channels funds to the government from 24 countries (Delesgues and Torabi 2007: 17). In Mozambique
a trust fund that funded political parties accepted foreign donations (O’Donnell 2006). Foreign aid
tends to focus on the short-term needs of reconstruction, but should be a long-term commitment. As
Brinkerhoff (2005: 11) observes, “[P]ost-conflict governance reform, whether reconstruction or
building something new, is a complex and long-term endeavour whose requirements are frequently at
odds with attention spans and resource commitments of the international community.”
Fifth, as in Mozambique, international bodies can help buy off rebels who might threaten a return
to violence or dislodge corrupt incumbents. This may involve arranging exile for former leaders or
helping to incorporate them and their followers into the new state as political parties.52 Deeply
corrupt leaders, however, should be exiled, not incorporated into the government (Le Billon 2003). A
weapon buy-back program with a set expiration date can help accomplish the goal of disarmament
and also put financial capital in the hands of the recently unemployed. Skills training can help to ease
the transition into productive economic activity, especially for long-term combatants.
Transfer payments to former rebels may be a condition for obtaining peace, but they need to be
structured as lump-sum benefits that do not permanently distort the operation of the economy or the
government. Don’t give the rebel army turned political party a 50% ownership stake in the national
oil company or promise warring ethnic groups a fixed share of the public pie.53 The aim should be to
buy off such groups with lump-sum payments, not give them an ongoing incentive to stay together and
divide the country. Furthermore, do not give the regular military a stake in nondefense government
programs, and monitor its involvement in defense contracts, or it may use its coercive power to extort
payoffs.
Sixth, international donors can help to review the training and integrity of law enforcement
officers, military personnel, judges, and prosecutors. If these groups carry over from the old regime,
they may be disinclined or unable to prosecute corrupt members of that regime. Ensuring that police
and security forces will not abuse their power, especially in areas with ethnic tension, will increase
confidence in the incipient government. Training (in human rights, anticorruption, and anti–money
laundering) and ethnic balance are especially important as this sector must ultimately be able to
investigate and prosecute corruption charges in an evenhanded manner.
Seventh, local people should be involved in oversight and participation, and the law should
provide safe havens for whistle-blowers. Of course, such protections are needed in any transitional
case. Thus, in Romania, after the fall of the Ceauşescu regime, the public’s “lack of trust in public
institutions, cynicism, unfulfilled high expectations, uneven access to resources and overwhelming
socio-economic problems, poor knowledge of rights, and fragile democratic skills” lagged behind
fast-moving reforms, making implementation of the reforms less effective (United Nations 2007: 26).
Protections for whistle-blowers are especially important if societal violence is still prevalent. The
government can take advantage of information and communications technology, and social media, to
create spaces where citizens can report corruption anonymously; state follow-through is essential.
However, self-help vigilantes should be replaced with regular police.
Eighth, the peace deal should restrict the armed forces’ and other security services’ ability to
participate in legal businesses, to engage in illegal businesses, and to accept kickbacks. Such
conflicts of interest undermine public trust in government and the legitimacy of the state. At the same
time, well-resourced, international peacekeepers may be able to create a space in which reform can
occur (O’Donnell 2006).
Ninth, institutions of oversight need strengthening in most postconflict states, but this may be a
difficult task in the face of limited trained personnel. Both financial aid and foreign personnel – as
well as qualified returning refugees – can help create bodies to administer a freedom of information
law, to audit and monitor government spending, and to strengthen the independence of prosecutors and
courts. The goal, of course, is to improve the capacity and independence of domestic actors so that
foreign assistance can be cut back.
Several international bodies have been helpful in building oversight in the new millennium. In
the Americas, the Union of South American Nations (UNASUR) has issued statements without
directly influencing the internal policies of the member states. In Africa, the African Union (AU) and
the Economic Union of West African States (ECOWAS) have played an active, if limited, role in
postconflict state building in the region, including internal guiding principles that encourage
democratization and transparency. Such regional bodies have the advantage of understanding the local
sources of conflict and specific postconflict contexts (Aning and Salihu 2013). Their emphasis,
however, tends to be on security and avoiding further conflict: corruption is not high on the agenda.
International nonprofits with a specific anticorruption mandate, such as Transparency International,
Global Witness, and Global Integrity, can help to monitor malfeasance on the ground. In addition,
donors’ own internal auditing and oversight bodies also need sufficient funding and support. If
international funders put speed ahead of integrity, they may be institutionalizing structural corruption
problems in just those cases in which aid might otherwise have had the biggest positive impact
(Rose-Ackerman 2009).
Strong leadership from the top is needed as a postconflict state moves toward the goal of a more
legitimate and better functioning government and sidelines those who have used the state as a tool for
private gain. The sheer number of tasks in postconflict reconstruction is daunting (Association of the
U.S. Army and Center for Strategic and International Studies 2002) and the process is complex.
International assistance can, in principle, help, but it needs to be tailored to avoid exacerbating the
underlying problem created by the mixture of corruption and threats of violence from those inside and
outside the government.
1 This chapter is a condensed and revised version of Rose-Ackerman (2009) and Rose-Ackerman
(2008b).
2 Postconflict societies, on average, receive less foreign assistance and suffer higher capital flight
than those fully at peace (Nkurunziza and Ngaruko 2008).
3 Haque and Kneller (2009), however, find no significant robust relationship between internal
conflict and corruption, but they use contemporary conflict, not postconflict. We emphasize the
special vulnerabilities of the transition period.
4 The United States was excluded on the grounds that the “conflict” listed in the database did not
occur on U.S. soil, with the exception of the terrorist acts of 9/11/2001. The database ends in 2007;
we chose the previous ten years for illustrative purposes. “Armed conflict” includes both war and
minor confrontations, as long as one of the parties is the government and at least 25 battle-related
deaths are recorded. See UCDP/PRIO (2009: 1).
5 The CCI is normalized each year around zero, so comparing year-to-year tells us only how a
country rates relative to other countries. See Chapter 1 for further discussion.
6 Rose-Ackerman (2008b, 2009) also includes the case of Kosovo, which at the time seemed a
moderately positive case in which competitive elections were being held. Since her articles were
published, it has degenerated, and it would be worth additional study to determine why.
7 The corresponding Gini coefficients in 2013 were Guatemala, 55.9; Mozambique, 45.7; Angola,
42.7; and Burundi, 33.3. United Nations Development Programme, “Income Gini Coefficient,”
http://hdr.undp.org/en/content/income-gini-coefficient (accessed April 17, 2015). Using the World
Bank poverty headcount, Angola had 67.42% of its population living on less than $2/day;
Mozambique 82.49%; Guatemala 31.19%. Burundi has no data in the new millennium at the World
Bank, but the United Nations Development Programme estimates that 81.81% of Burundi’s
population is poor, using multidimensional poverty, compared to 70.16% for Mozambique (the
United Nations Development Programme has no data for Angola or Guatemala).
8 On the multidimensional role of the African Union in postconflict reconstruction, see African
Union Peace and Security, “African Union Post-Conflict Reconstruction and Development (AU
PCRD),” November 19, 2014, http://www.peaceau.org/en/page/70-post-conflict-reconstruction-
and-development-pcrd (accessed March 31, 2015). For a comprehensive list of postconflict tasks,
see Association of the U.S. Army and Center for Strategic and International Studies (2002). On the
expanded role of the United Nations in postconflict societies, see Rondinelli (2007).
9 Portions of this section are based on a memo prepared by Jael Humphrey, Yale University, JD
‘08, MA ‘08. More details are in Rose-Ackerman (2008b, 2009). We have updated and
supplemented that material. In 2014, Guatemala ranked 115 of 175 countries on the CPI, with a
score of 32.
10 “Ex-Guatemalan President Released from U.S. Prison in Bribery Case,” Fox News Latino,
February 25, 2015, http://latino.foxnews.com/latino/news/2015/02/25/ex-guatemalan-president-
portillo-released-from-us-prison-in-bribery-case/. Portillo admitted to accepting $2.5 million in
bribes from Taiwan for continued diplomatic support (accessed October 9, 2015).
11 World Economic Forum, “The Global Competitiveness Index Historical Dataset,”

October 9, 2015).
12 Global Advice Network, Business Anti-Corruption Portal, Guatemala Country Profile,

http://www.business-anti-corruption.com/normal.asp?pageid=321 (accessed July 22, 2008).

October 11, 2015).
14 Azam Ahmed and Elisabeth Malkin, “Otto Pérez Molina of Guatemala Is Jailed Hours After
Resigning Presidency,” New York Times, September 3, 2015,
http://www.nytimes.com/2015/09/04/world/americas/otto-perez-molina-guatemalan-president-
resigns-amid-scandal.html (accessed September 5, 2015).
15 Elisabeth Malkin, “Next Test for Guatemala’s Protest Movement: Improving Citizens’ Lives,”
New York Times, September 15, 2015,
http://www.nytimes.com/2015/09/16/world/americas/guatemala-protests-president.html (accessed
October 13, 2015).
16 The section on Angola was researched by Rodrigo Souza, Yale Law School, LLM ‘08. More
details are in Rose-Ackerman (2008b).
17 CIA, 2008, The World Factbook – Angola, https://www.cia.gov/library/publications/the-

world-factbook/geos/ao.html#Intro (accessed October 11, 2015).
18 Economist Intelligence Unit, Angola: Country Report, February 2003, 17, reported in Human
Rights Watch (2004: 43).
19 IMF, Angola Staff Report for the 2002 Article IV Consultation, March 18, 2002, 31–3 and
IMF, “Angola: Selected Issues and Statistical Appendix,” July 11, 2003, 107–8, cited in Human
Rights Watch (2004: 44–5).
20 An audit by KPMG in 2002 found a discrepancy of $2.0 to $2.6 billion between the oil
revenues claimed by the Ministry of Finance and those deposited in the Central Bank. KPMG,
Current Assessment of the Angolan Petroleum Sector: Inspection Report by KPMG for the
Ministry of Finance, Government of Angola [Oil Diagnostic Report], July 2002. The report,
performed under an IMF contract, was never formally released, but Human Rights Watch (2004:
21–3, 27) obtained a copy. The Executive Summary of this report, which makes only a vague
allusion to the discrepancy in a footnote, is available at http://www.minfin.gv.ao/fsys/kpmg_en.pdf
21 Similarly, U.S.-sponsored reconstruction in Afghanistan during the 2000s relied heavily on U.S.
firms, some of which were the subject of corruption scandals.
22 In Johnston’s (2005, 2014) terms, Angola is characterized by an Elite Cartel Syndrome, but he
argues (2014: 62) that this is an improvement over Oligarchs and Clans and therefore an
acceptable interim stage. Brinkerhoff (2005), in contrast, considers such arrangements to be
characteristic of failed or failing states.
23 Information on the EITI is https://eiti.org/ (accessed October 11, 2015). Guatemala had been
suspended but is currently compliant with EITI requirements; the United States is a candidate, but
not yet fully compliant. Mexico and Brazil, like Angola, have not applied. Note, however, that
compliance does not imply corruption free: Nigeria is the longest-standing member and has
submitted reports every year since 1999 (except 2013), but has been the subject of numerous
petroleum-related corruption scandals.
24 Of the seven companies surveyed, “only Chevron Texaco disclosed details of a payment with
the agreement of the Government of Angola.” Save the Children, Beyond the Rhetoric: Measuring
Revenue Transparency (2005), http://www.savethechildren.org.uk/resources/online-
library/beyond-the-rhetoric-measuring-revenue-transparency-company-performance-in-the-oil-
and-gas-industries (accessed October 11, 2015).
25 Rodrigo de Sousa, Yale, LLM ‘08 provided research on this case and Caroline Gross
commented on an earlier draft. Mozambique has continued to suffer internal conflict. In 2014, the
government of Mozambique signed into law a ceasefire, and granted amnesty to all those involved
in violent conflict in various parts of the country in 2002, 2004, 2011, and 2012. Assembleia da
República VII Legislatura, Comissão dos Assuntos Constitucionais Direitos Humanos e de
Legalidade – 1ª Comissão, “Parecer relative à Proposta de Lei de Amnistia,”
http://peacemaker.un.org/sites/peacemaker.un.org/files/MZ-143508-MozambiqueCeasefire_1.pdf
(accessed April 2, 2015).
26 As RENAMO’s negotiator stated on June 16, 1992, there is “no democracy without money.”
Quoted by Nuvunga and Mosse (2007: 11).
27 Dr. Armindo Correia, former General Secretary of the Electoral Administration Technical
Secretariat, quoted in Nuvunga and Mosse (2007: 15).
28 The judiciary comes in just under this cutoff, at 69%. In bribery incidence, the police are by far
the most corrupt civil servants, with 65% of those having contact with police reporting having paid
a bribe.
29 IMF, Country Report No. 07/258 (Washington, DC, July 2007), 5, 20, OECD-DAC,
https://public.tableau.com/views/AidAtAGlance_Recipients/Recipients?:embed=n&:showTabs=y
&:display_count=no?&:showVizHome=no#1 (accessed October 11, 2015) and World Bank,
“World Data Bank,” http://databank.worldbank.org/data/views/reports/tableview.aspx (accessed
April 20, 2015).
30 Another concern is the lack of transparency in the many state-owned enterprises. Mozambique
has not even been able to produce a complete, up-to-date list of state-owned enterprises (IMF
2014).
31 Jael Humphrey researched most of this section including interviews in December 2007 and
January 2008.
32 Arusha Peace and Reconciliation Agreement for Burundi, August 28, 2000, Protocol II, Art.
10(2), University College, Dublin Database,
http://www.ucd.ie/ibis/filestore/Arusha%20(Burundi)%20.pdf (accessed October 11, 2015).
33 Interview by Jael Humphrey of Pierre Claver Mbonimpa, Founding President, Association

Burundaise pour la Protection des Droits Humains et des Personnes Détenues (APRODH), in
Bujumbura, Burundi (December 18, 2007); interview by Jael Humphrey of five of the twelve
members of the executive committee including Gabriel Rufyiri, President, Observatoire de Lutte
Contre la Corruption el les Malversation Economique (OLUCOME) in Bujumbura, Burundi
(December 18, 2007).
34 Interview by Jael Humphrey of Terrance Nahimana, President, Cercle d’initiative pour une
vision commune (CIVIC), in Bujumbura, Burundi (December 18, 2007).
35 OLUCOME interview.

October 11, 2015).
37 Not all Tutsi shared equally. A group of Tutsi from one clan maintained a virtual monopoly on
military and political power. International Crisis Group (2003: 6). Thus, as Goldmann (2006)
argues, conflict in Burundi is not so much about ethnicity as it is about power.
38 Interview by Jael Humphrey of a senior UN Human Rights Official, in Bujumbura, Burundi

(December 21, 2007).
39 OLUCOME interview.
40 UN Human Rights Official interview.
41 This is similar to the case of Indonesia pre- vs. post-Suharto.
42 Nahimana interview.
43 Isma’il Kushkush, “Political Unrest Pushes Burundi Closer to Economic Collapse,” New York
Times 22 May 2015, http://www.nytimes.com/2015/05/23/world/africa/political-unrest-pushes-
burundi-closer-to-economic-collapse.html (accessed October 13, 2015); Marc Santora, “Burundi
President Wins 3rd Term in Election Boycotted by Rivals,” New York Times, July 24, 2015,
http://www.nytimes.com/2015/07/25/world/africa/burundi-president-wins-3rd-term-in-election-
boycotted-by-rivals.html (accessed October 13, 2015); The Associated Press, “Burundi: U.N.
Observers Call Presidential Vote Flawed,” New York Times, July 27, 2015,
http://www.nytimes.com/2015/07/28/world/africa/burundi-un-observers-call-presidential-vote-
flawed.html (accessed October 13, 2015).
44 Reuters, “Burundi: Spokesman for Opposition Party Is Killed,” New York Times, September 8,
2015, http://www.nytimes.com/2015/09/09/world/africa/burundi-spokesman-for-opposition-party-
is-killed.html (accessed October 13, 2015).
45 The authors quote Rubin Lund and Hara Lund, “Learning from Burundi’s Failed Democratic
Transition, 1993–1996,” Council on Foreign Relations (ed.), Cases and Strategies for Preventive
Action, 68, 80 (Washington, DC, 1998).
46 According to Goldmann (2006), Burundian power struggles predate the colonial period. Unlike
neighboring Rwanda, which had a consolidated monarchy with a strong army, in Burundi local
princes vied with the monarch and each other for power.
47 According to the UN Peacemaker Peace Agreements Database

(http://peacemaker.un.org/document-search?field_pacountry_tid=Burundi) (accessed October 11,
2015), Burundi signed three internal peace agreements in 2008–9. “In 2009 Burundi’s last Hutu
rebel group, the Forces for National Liberation (FNL), officially laid down arms and transformed
into a political party.” According to Insight on Conflict, the last rebel group disarmed and formed a
political party in 2009, but tensions remain high. See Insight on Conflict, “Burundi: Conflict
Profile,” http://www.insightonconflict.org/conflicts/burundi/conflict-profile/ (accessed April 12,
2015).
48 In Rwanda, e.g., strengthening and professionalizing the armed forces, civil service, and
judiciary were important, while in South Africa consolidating police forces received priority
(United Nations 2007).
49 A similar situation may prevail in Bosnia and Herzegovina, where a quota system requires each
of the three major ethnic groups to participate in the presidency and public service (United Nations
2007: 31).
50 For a good assessment of corruption and governance in Rwanda, see Bozzini (2014).
51 Empirically, Tavares (2003) finds that foreign aid reduces corruption, but Busse and Gröning
(2009) find the opposite. Both use the ICRG database, but Tavares focuses on corruption only and
uses a cross-section of countries, while Busse and Gröning construct a governance index from the
four related indicators and panel analysis.
52 Although amnesty has played a positive role in kick-starting anticorruption in several cases
(David 2012), Lie, Binningsbø, and Gates (2007) find empirically that amnesty is not conducive to
lasting peace, but exile is.
53 Such a division of benefits occurred in the postconflict constitution in Burundi. For a critical
view of the result see Rose-Ackerman (2009: 80–2).
11
Democracy: Corruption, Connections, and
Money in Politics
◈
Democracies based on strong legal foundations provide a stable framework for social life and
economic activity. In order for this framework to operate efficiently and fairly, however, political
actors – be they political parties or individuals – must seek reelection and must feel insecure about
their prospects, but not too insecure.1 This leads to a “paradox of stability.” Too much security of
tenure can further corrupt arrangements. Too much insecurity can have the same effect. Incumbents
must have some chance of returning to power in the next election, but the likelihood must be well
below 100%. Opposition parties – or even individual candidates – can then play the role of monitors,
threatening to make corruption a campaign issue.2
Statutes are the result of political deals. They not only express the preferences and ideals of
voters and elected officials, but also reflect the interests of those who lobby or make donations to
influence provisions in their favor (Laufer 2008; Tillman 2009). Private interests may also provide
jobs to former politicians and their top staff, creating a “revolving door” that is open to abuse.
Advanced democracies remain vulnerable to the excessive impact of private wealth on public
choices in ways that undermine democracy, even if outright bribes are uncommon. Nevertheless, we
begin with bribes that enrich politicians personally and illegal campaign donations. Unfortunately,
they remain all too common worldwide.
Such payoffs may be deterred by the risk of public exposure. For elected politicians the most
immediate form of “punishment” occurs at the polls. Furthermore, the electorate may extract a cost
even if the payoffs are kept secret. Bribes and illegal campaign donations are given in return for a
benefit. The quid pro quo depends upon the relative bargaining power of the politician and those with
whom he or she deals. Many bribes induce corrupt politicians to take actions they would not have
taken without the payoff, but if politicians vote against the interests of their constituents, they can
expect to suffer at the polls. Thus, the strength of the competitive political environment raises the
stakes and reduces the likelihood of corrupt side deals even if bribes are kept secret.
However, some politicians can both be corrupt and please the voters by supporting popular
projects that are padded with kickbacks. The social cost in terms of higher taxes and debt burdens
may not be obvious to voters who see only the new infrastructure.3 Furthermore, elections can be
bought, either through the provision of campaign funds to influence voters that skirt the edge of
legality, or through the direct purchase of citizens’ votes, with incumbents sometimes misusing public
funds to make these payments.
The distinctive incentives for corruption in democracies depend on the constitutional structure,
the electoral process, and the methods of campaign finance. These factors may be intertwined. The
impact of an electoral system may depend upon whether the state has a presidential or a parliamentary
structure. Some electoral systems encourage the development of strong political parties, while others
encourage politicians to develop personal followings. Corrupt possibilities are related to the
relationship between political structure and private wealth.
We begin in Section I by considering how political party organization, electoral systems, and
constitutional structure influence incentives for corruption, in the sense of explicit bribes and
kickbacks.
Then, in Section II, we broaden our focus to outline the impact of money and connections more
generally, whether or not quid pro quos are illegal or even explicit. We do not attempt a thorough
study of the impact of private wealth on public power, but, of course, the study of political corruption
is embedded in the larger theme of money in politics. Some use the label “legal corruption” or
“dependence corruption” to cover quid pro quo activities that stay within the law.4 We recognize the
importance of the phenomena these authors highlight, but, given our comparative focus, we save the
term corruption for activities that violate a country’s laws, including illegal campaign contributions
that include a quid pro quo arrangement. The “legal corruption” label begs the question of just where
to draw the line between valuable and necessary lobbying and harmful influence. True, survey
evidence indicates widespread citizen distress over the role of private wealth in politics,5 but we
believe that those interrelations should be unpacked and studied in all their complexity, not lumped
together as “legal corruption.” All democracies must decide what types of interactions between
public and private actors should be criminalized as “corruption” and which should be permitted or
regulated through civil and administrative law. It may be rhetorically valuable to call all kinds of
questionable actions “corruption,” but we do not think that it furthers the analytic and policy exercise
of understanding the landscape and proposing reforms. Thus, the second section of the chapter
discusses those themes that lie on the border between corruption in our sense and political activities
that skew outcomes toward wealthy individuals and firms.
I. Electoral Rules and Constitutional Structures
In a democracy, constitutional structure and electoral voting rules interact with underlying political
cleavages to affect the opportunities for corruption. The level of corrupt political rent seeking
depends both on the locus of rents and on whether any actors have both the incentives and the ability
to monitor politicians with access to rents. We first consider the way the presence or absence of
political party discipline and ideological voting can influence the cost of corrupting the legislative
process. Then, we add the constitutional structure and assess the likely prevalence of corruption in
presidential as opposed to parliamentary systems. Finally, we ask if the incentive to pay bribes
depends upon the nature of public goods and services supplied by the legislature.
A. Buying or Blocking Legislation
Political party discipline and the expressed ideological positions of politicians can influence the cost
of corruption. Consider, first, the case in which legislators are not organized into powerful blocks by
party or faction and in which an organized group or firm seeks to influence a particular issue. If
politicians are committed ideologues or are tightly constrained by their constituents, they may have
relatively little room to maneuver when voting on particular issues. With no party discipline, a few
legislators may be swing voters with the rest locked into their positions. Those seeking to use payoffs
to influence the vote can focus on those at the tipping point in ideological space, who can demand
high bribes because of their strategic advantage.
In contrast, suppose that most legislators are not committed to any prior position and that the
legislature decides by majority rule. Now a majority must be suborned. Because individual
legislators are not organized, no one can demand a large payoff because he or she is easy to replace
with another legislator. Corrupt businesses might rank politicians who are capable of aiding their
cause on the basis of the minimum acceptable bribe and pay off the cheapest politicians. Everything
else equal, these will be representatives with safe seats (facing little opposition), “sure losers” facing
certain electoral defeat, or those who are planning to retire either voluntarily or through the operation
of term limits. Term limits spur corruption by placing politicians in an end game in which they know
that they will not be reelected (Rose-Ackerman 1978: 15–58). A paradoxical result then holds, in
which a legislature full of ideological members may be easier to influence than a legislature of
opportunists because in the former case only a few swing votes need to be bought. (This result, of
course, depends upon there being numerous members who support the position the corruptors want to
promote, out of pure ideological commitment.) However, the total bribes paid could be higher or
lower in the former case because each swing voter has the bargaining power to extract a large payoff.
But politicians may place ceilings as well as floors on acceptable bribes. If disclosure of
corruption spells political death and if disclosure is more likely the higher the bribe, politicians may
be unwilling to accept large bribes (Rasmusen and Ramseyer 1994). The benefits of higher bribes are
eventually outweighed by higher costs. Thus, some corrupt deals will be impossible to accomplish
because the legislature may not contain enough members willing to vote in return for a payoff, given
the low bribes on offer. Not all politicians, however, may feel so constrained – instead they will
accept the risks of disclosure in return for large enough payoffs. If most elected officials behave this
way, one possible result is a low incidence of corruption, combined with large bribes paid in any
remaining corrupt deals. A corrupt politician demands a large bribe to overcome the severe political
costs he will suffer as a result of both the bribe and the decision he or she takes in return for the
payoff. If the economic gains are large, incumbents may simply announce their retirement and seek to
maximize their corrupt gains as “lame ducks” before they leave office.
Thus, there are two possible outcomes under conditions of low party discipline. Under the first,
bribes are set high enough to compensate for the expected political costs of accepting payoffs. Some
corrupt deals are too expensive for bribers to undertake, and those that occur involve payoffs to the
lowest-priced legislators. Under the second, officials either reject bribe offers or accept only small
ones. If bribery fails, it is not because private groups are unwilling to pay the sums needed, but
because not enough politicians can be bought given the risks.
Now consider cases in which legislators can organize into parties or factions who vote as a
bloc, and that they can use such groups to extract rents. This organization may eliminate the collective
action problem that keeps individual payoffs low. Party leaders may be able to extract a relatively
high proportion of the benefits sought by those making payoffs. The highest bribes will then be paid in
competitive cases in which wealthy interests exist on both sides of the issue. If both opponents and
supporters of a bill are organized to make payoffs, the competition for legislative votes can raise the
earnings of strategically located legislators or their political parties (Rose-Ackerman 1978: 25–32,
45–51).
In a political system with multiple veto points, blocking a law is much easier than passing one.
This is particularly true in the American system of checks and balances: House, Senate, and President
must agree before a bill becomes a law (unless the Congress overrides the president’s veto by a two-
third vote in each house). In addition, there are other veto points that go beyond the formal
constitutional provisions to include the details of each body’s own procedures and voting rules
(Krehbiel 1998). All an opponent of a law needs to do is to stop the legislative process at its weakest
link and corrupt that group or make conditional campaign contributions. Those with the power to set
the agenda and hence keep an issue out of the public eye are especially well placed to benefit.
Empirical work shows that agenda-setters do have an advantage in raising legal campaign funds
(Ansolabehere and Snyder 2000), and, as we discuss in Section II, lobbyists earn more if they have
connections to the chairs of powerful, gate-keeping committees. Agenda-setters may even become
corrupt “entrepreneurs.” Thus, congressional committees might threaten to propose legislation that is
costly to an industry and then withdraw such proposals in return for payoffs. Reports of such behavior
have come from state and federal legislative committees charged with proposing taxes and business
regulations (Rose-Ackerman 1978: 48–51; McChesney 1997).
In the U.S. system, accomplishing something affirmative is much harder both for honest and
corrupt proponents of legal change. In the case of a hidden benefit that is opposed by many voters,
corruption is unlikely to be successful because every decision point must be co-opted. This is both
expensive and risky because just one honest official can undermine the entire corrupt effort. The
exposé will reveal, not just bribery allegations, but also the special treatment it was supposed to buy.
Nevertheless, enough examples exist of special treatment in U.S. statutes to suggest that bargains are
frequently made that logroll a range of private benefits together into a single statute in a way that can
gain majority support.6 In political systems in which ties of family and friendship are more salient
than in the U.S. federal government, such outcomes will be even more common. In these cases, laws
are structured so that almost everyone gets something for his or her powerful constituents or
supporters.
B. Presidential versus Parliamentary Systems
We move now to the way constitutional structures affect corrupt incentives. Drawing on Kunicová and
Rose-Ackerman (2005), we distinguish between presidential and parliamentary systems and between
plurality and proportional electoral systems.
Begin with the voting system used to select the legislature. We contrast two basic forms –
plurality and proportional. In its pure form a plurality/majoritarian system has single-member
districts, voters cast their ballots for specific candidates, and the candidate who obtains the most
votes in his or her district wins.7 Proportional representation (PR) is more focused on political
parties than on individual candidates. Districts elect multiple members; sometimes the whole country
is a single district. Each party provides a list of candidates, and voters select their preferred party.
After the votes are tallied, seats in the legislature are allocated in proportion to the share that each
party obtains in the popular vote.8 There are two basic kinds of PR systems: closed-list systems and
open-list systems. Under a closed-list system, party leaders rank candidates, and voters only cast
votes for parties. Under an open-list system, voters both select a party and rank candidates given the
party’s selection of candidates.9
Kunicová and Rose-Ackerman argue that plurality and PR systems differ in two essential ways.
First, the locus of corrupt opportunities differs. Under PR, the party leadership can more effectively
concentrate corrupt opportunities in its own hands, so individual legislators have relatively fewer
rent-seeking opportunities. Under plurality rule, party leadership does not have as much power over
the individual legislators, so the locus of rents is more evenly divided between the party leadership
and individual legislators. Second, under plurality, voters’ monitoring of rent seekers is likely to be
more stringent than the monitoring of rent seekers under PR because voters have elected an individual
person with local connections whom they can hold to account. Hence, the authors argue that PR
systems are more susceptible to corruption relative to plurality systems because PR leads to more
severe collective-action problems for voters and opposition parties in monitoring corrupt incumbents.
Closed party lists further weaken the link between reelection and performing well in office.10
Now distinguish between parliamentary and presidential structures. The crucial difference is
that the popularly elected chief executive in a presidential system may be of a different political party
from the party (or parties) that controls the legislature. In a parliamentary system the prime minister is
chosen by the political parties that control the parliament.11 One might initially suppose that
presidential systems would be less corrupt because of the organizational complexity of corruptly
managing the legislative process when the president is of a different party from the legislative
majority, and indeed this is what some scholars hypothesize (Persson and Tabellini 2000). However,
Kunicová and Rose-Ackerman (2005) and Kunicová (2006) argue that, overall, presidential systems
would be more subject to corruption than parliamentary ones. They argue that the separately elected
head of state can extract rents by solving the collective action problems facing even a PR legislature.
In other words, a corrupt chief executive can actively seek to organize the state to extract payoffs and
to overcome the political roadblocks that are likely in the absence of a comprehensive corrupt deal.
The basic point is that just because the legislative process looks superficially simpler in a
parliamentary system does not imply that it is easier or cheaper to corrupt. Top-down organization by
a corrupt head of state may be needed to assure a durable corrupt deal.
Kunicová and Rose-Ackerman’s (2005) cross-country empirical findings support the hypothesis
that, for parliamentary democracies, PR systems are associated with higher levels of corruption than
first-past-the-post systems organized into single-member districts. Closed-list PR interacts with
presidentialism to produce particularly high levels of corruption.12 In contrast, Persson and Tabellini
(2000, 2003) expect presidential systems be less corrupt due to their assumed competitive nature and
to checks and balances, but they cannot confirm this prediction empirically except on a subset of old
democracies. When new and fragile democracies are included in the data set, presidentialism
becomes a significant predictor of higher corruption levels.13
Clearly, from the point of view of proposing reforms, more work should be done on the causal
variables to discover if any of them can be treated as separate foci of reform in an otherwise
unchanged electoral system. The results in the studies reported here are reduced-form econometric
results that demonstrate an association. An empirical exploration of the underlying causal mechanisms
is a logical next step in this line of research.
Furthermore, electoral rules and constitutional forms are, in turn, chosen by political actors who
may be opposed to limiting or restricting corruption. Thus, in Robinson and Torvik’s (2008) model
the presence of rents pushes the political elite to support a presidential system. They show that in
Africa 18 of 21 countries that began the postcolonial period as parliamentary democracies shifted to
presidential systems, and a majority of those that switched are resource rich. Most of today’s corrupt
individuals, however, did not design the structure of government under which they operate.
Nevertheless, one can ask if the empirical regularities could have been self-consciously produced by
politicians who are more or less concerned with their ability to extract rents from the state. The fact
that all democracies have not converged on a single equilibrium constitutional form and set of
electoral rules suggests that the goals of political actors differ and the functions served by government
institutions differ. For example, there may be a trade-off between systems that provide targeted
benefits to narrow constituencies and those that foster corruption. The design of constitutional
structures and electoral rules is a balancing act that has produced a wide range of solutions.
C. Public Goods and Private Benefits
In the discussion in the preceding section we focused on the ability of politicians to organize for
corrupt purposes and of voters to monitor politicians. We now consider the link between corruption
and governmental provision of broad-based policies versus narrowly focused private or group
benefits. Some public goods, like national defense, also provide narrowly focused benefits to firms
and regions that obtain defense contracts and military bases. Incentives for corruption are higher if the
state can be induced to provide individualized benefits, but the connection between corruption and
political structure is complex.
First of all, democratic systems that supply narrowly focused benefits do not need corruption to
favor groups with political clout. In a plurality system with weak parties, the beneficiaries of
government programs may be geographically concentrated population groups and local industries.
Under proportional representation, narrow interests may be able to establish national political parties
with pivotal influence. Thus, a system might rank quite low on the scale of political corruption simply
because groups that are willing to pay bribes find that they do not need to do so. These conditions
may prevail in many advanced democracies with well-organized interest groups of all kinds.14
Even in such systems, not all narrow groups have direct political influence. Some may try to buy
benefits either through legal campaign gifts or illegal campaign contributions and bribes. Although
one might expect the incidence of bribery to be inversely related to the level of legal benefits
provided to narrow groups, this may not be true. Instead, society may be divided into two groups:
those endowed with political clout by the structure of the political system – for example, business
people who are closely associated with elected officials through ties of family or friendship – and
those obliged to buy influence through illegal payoffs. Felson (2011) argues that in both traditional
and patrimonial societies, the former is not considered corruption. It may, nevertheless, imply that
government activity favors a narrow elite, not the general public.
Politicians might try to structure policies so that these two groups are not in direct conflict. For
example, a politician could support a project that benefits his or her constituents and then take bribes
from those who want contracts or jobs. Although such practices may reduce the quality or raise the
price of the project, this may not be obvious to most voters. Even if the resulting quality is poor, it
may be difficult to determine whether corruption or incompetence is at fault. Suppose, for example,
that a politician obtains public money to build a port facility in his or her district. The politician
might then give construction contracts to firms that make payoffs. The constituents get their pork
barrel project – a new port that benefits local interests – while corrupt firms obtain favors. Narrowly
focused public projects and illegal payoffs go together.
Next consider a political system with strong party discipline and two evenly matched national
parties. Broadly speaking, this is a scenario that is more likely to supply broad-based public services
that benefit a majority of the population. Wealthy but narrow groups have no way to advance their
political agenda directly without mounting a campaign that can garner broad support. Thus legal and
illegal campaign contributions and corruption might be more, not less, prevalent simply because other
options are closed off. Once again, those who make payoffs are likely to have more success if they
can tie their gains to policies that politicians find attractive for electoral reasons. Corruptly obtained
contracts or licenses to supply public services are an obvious source of payoffs. Operating against the
possibility of high levels of malfeasance, however, is the likelihood that the public will favor a tough
stance against corruption and money in politics generally. They will be better able to make their
beliefs effective if the political scene is highly competitive – so that representatives have little
freedom to act against their constituents’ wishes.15
II. Buying Political Influence and Buying Votes
In democracies, corruption scandals are frequently associated with the financing of political
campaigns. Some countries have little bureaucratic corruption, but suffer from a corrupt political
process. However, money cannot be entirely eliminated from politics. Elections must be financed,
and wealthy interests concerned with legislative outcomes and government policy may be willing to
foot the bill. Financial pressures give politicians an incentive to accept payoffs, thus working against
the corruption-reducing effects of competitive elections. Observers of the U.S. political system worry
that the cost of political campaigns encourages implicit or explicit dependency between funders and
politicians (Lessig 2011; Hasen 2012b; Teachout 2014). The problem arises in all democracies.
Scandals in France and Italy in the 1990s involved illegal campaign contributions and “business-
politicians” (della Porta 1996; Mény 1996: 314). The same was true of the scandals in Korea and
Japan (Park 1995; S. Reed 1996). This prompted electoral reforms in some countries (Persson,
Tabellini, and Trebbi 2003); however, the basic overlap between political and economic power
continues with the line between legal and illegal influence shifting and unclear across countries and
over time.
A. Financing Political Campaigns
Democratic political systems must find a way to finance political campaigns without encouraging the
sale of politicians to contributors. Governments have drawn the line between legal and illegal gifts in
quite different ways, and legal frameworks vary greatly in the limits they place on quid pro quo deals
by politicians.
Even entirely legal contributions from wealthy interests are a source of concern.16 Groups that
give funds to elected officials often expect help in the legislative process. They may also want
special treatment with individual problems in dealing with the bureaucracy or in seeking contracts
and concessions. The interests of wealthy groups or individuals can easily conflict with those of the
general public. The electoral process can discipline politicians to represent the interests of their
constituents, and voters may penalize candidates who seem too deeply beholden to special interests.
But voters cannot act unless they know both how their representatives behave and who has given them
money. Legal gifts can have a corrupting effect if they need not be made public and if the quid pro quo
is not itself obvious to voters.
Sometimes the expectations of a quid pro quo have been quite straightforward. Here are just a
few examples, out of many. As an especially egregious case, consider a North Carolina construction
firm that did not receive the favor it expected in return for a contribution to the incumbent governor’s
campaign and then asked for its money back.17 Over a number of years, energy firm Enron made
political donations and paid lobbyists to influence California and U.S. law, exempting energy
derivatives from regulation. Although a quid pro quo was denied, Wendy Gramm, the head of the
Commodities Futures Trading Commission between 1988 and 1993 and the wife of Senator Phil
Gramm, was subsequently appointed to Enron’s board of directors; Senator Gramm received
campaign funding from Enron and, with little publicity, added an exemption for energy to the
Commodities Futures Modernization Act – he later joined an associated firm (Tillman 2009; see also
Gulati and Rao 2007). In 2012 the mayors of Montreal and Laval, both in the Canadian province of
Quebec, resigned amid allegations of corruption.18 In the Montreal case, the mayor was not accused
of direct involvement, but rather of not taking measures to curb corruption in campaign finance and
procurement kickbacks.19 In Japan in the 1990s, politicians who assisted local firms in obtaining
contracts expected a percentage of the price in return (Qui 1996: 231). In Germany in the 1980s,
contributions disguised as charitable donations were given to political parties in an effort to obtain
legislative quid pro quos. At the time, paying members of Parliament for favors was not a punishable
offense (Seibel 1997: 88, 94). In Spain scandals uncovered in the early 1990s involved politicians
who raised funds for their political party by charging businesses and banks for fictitious consultancy
work (Heywood 1996: 116–17). In Mexico, organized criminal groups have made campaign
contributions in mayoral campaigns in order to win concessions.20 Governor Andrew Cuomo of New
York State shut down an anticorruption commission that he had created, reportedly after he learned
that it was investigating a marketing firm that had worked on his 2010 campaign. In the same state,
House Democrats requested campaign donations from the Real Estate Board of New York, implying a
quid pro quo.21
At the federal level in the United States, the outright purchase of favors occurs but is muted and
difficult to document. As one congressional representative put it, “It would be hard to argue that
contributions don’t open doors. Do I think a vote or a member can be bought by contributions? No.
But there’s always the subtle influence by the contributors” (quoted in Koszcuk 1997: 771).
Contributions seem to be viewed by many donors as long-term investments in developing
relationships of mutual trust (Snyder 1992; Lessig 2011; Hasen 2012b). A study using American data
finds that donations are made not to buy votes but to get sympathetic candidates into office. Once in
office, politicians try to accommodate their supporters. In practice, however, it is difficult to
distinguish between politicians who bend their positions to favor contributors and those who were
elected because they share their contributors’ point of view (Bronars and Lott 1997). Private
contributions influence who runs for office as well as how politicians behave once in office. Even if
donations only determine who will receive an audience, such access can be sufficient to influence
voting outcomes.
The worry about undue influence would be of little concern if campaign funds were unimportant
to electoral success. Then strict legal spending limits could be enforced. However, although
empirical work has not conclusively determined the impact of campaign donations on electoral
success, politicians, and contributors act as if money matters (Snyder 1992). Incumbents have a fund-
raising advantage over other candidates, and those in powerful positions in the legislature are
especially favored (Alexander 1991). However, exactly how influence operates is difficult to
document statistically. A study of roll-call votes in the U.S. Congress found no statistically significant
relationship between votes and contributions (Ansolabehere, Figueiredo, and Snyder 2003).
However, as both Hasen (2012b) and Lessig (2011: 131–46) point out, there are many other routes to
influence that are subtle and hard to document systematically. Hence, the link between campaign funds
and influence remains a persistent concern of critics of the American political system. In spite of the
lack of real competition for many House seats, congressional races are expensive and funds must be
raised from private sources.
These concerns have been exacerbated in recent years by Supreme Court cases that struck down
many limits on campaign finance regulation. The preservation of free speech rights has limited the
options under U.S. law. The case of Buckley v. Valeo, 424 U.S. 1 (1976) articulated a constitutional
rationale based on avoiding quid pro quo corruption or the appearance of corruption – a rationale
that permitted the regulation of direct contributions to candidates and parties. Buckley v. Valeo,
however, did not resolve the status of supposedly “independent” spending – not officially affiliated
with any given candidate or party, even if de facto support is obvious – which began growing fast in
the early twenty-first century (Lessig 2011: 239; Hasen 2012a: 562n40). Attempts to regulate it had
proved difficult, and these efforts experienced a serious setback in Citizens United v. Federal
Election Commission, 130 S. Ct. 876 (2010). That case seriously gutted campaign finance regulation.
Interpreting the First Amendment’s protection of free speech broadly, the Supreme Court disallowed
legislative restraints on independent political spending, including spending by corporations and other
organizations as well as individuals. Analogizing spending with speech, the opinion finds that the risk
of quid pro quo corruption or the appearance of such corruption is minimal for such “independent”
spending. The case’s emphasis on “corruption” (or its appearance) as the only constitutional
justification for regulation has supported the efforts of U.S. legal scholars to develop a category of
“legal” corruption, which, they argue, is just as damaging to democracy as illegal quid pro quos.22
One goal is to expand the justices’ notion of constitutionally legitimate regulation.
The Court, however, has not accepted those arguments yet. A subsequent case from Montana
argued that the state’s history of corruption justified strong regulation but was dismissed by the Court
in a brief holding [American Tradition Partnership v. Bullock, 132 S. Ct. 2490, 2491 (2012)]. In
McCutcheon v. Federal Elections Commission, 133 S. Ct. 1242 (2013) the Court struck down
federal limits on the aggregate total that an individual (including a corporation) can give to all
candidates.23 It allowed limits on gifts to particular candidates, parties, and traditional political
action committees (PACs) that are basically all that remain of campaign finance regulation over and
above outright payoffs to legislators in return for benefits.24
The result has been the formation of Super-PACs,25 which may accept anonymous donations of
unlimited size and produce media campaigns in favor of a political party or specific candidate, as
long as the candidate or party in question is not consulted. This allows corporations and wealthy
individuals to make contributions that exceed the limits on donations to specific campaigns or
candidates, and also to avoid the transparency associated with such direct donations. In theory,
Super-PAC activities are independent of the candidate’s campaign and he or she may not know who
the donors are, so no quid pro quo is possible. However, it is not difficult to imagine ways in which a
candidate might learn of specific donations made to a Super-PAC that has produced a media
campaign on his or her behalf. Furthermore, if candidates do not know the source of funds, neither do
ordinary voters, who ought to be able to learn who is supporting a particular candidate as they make
their choices.26
Government funds can help counteract the impact of private wealth, but such programs are
difficult to administer fairly. In Mexico, a federal fund is available for each party-backed candidate,
and TV and radio stations are required to provide equal airtime to the candidates in a given race
(Duke, Morgenstern, and Nielson 2006: 78). To a certain extent, this levels the playing field, at least
among candidates representing a political party. However, in the 2012 presidential election, there
were widespread allegations of candidates and parties evading the law, but the Federal Electoral
Institute and the special electoral tribunal reviewed the evidence, found the allegations unproven and
upheld the election.27 In the United States, taxpayers have the option to donate $3 to a common
presidential campaign fund when filing their personal income taxes; this fund is then distributed to
eligible candidates in both primaries and the general election.28 However, the amounts available are
swamped by private funds so that many presidential candidates opt out of public funding.
Furthermore, there is no comprehensive public financial support for congressional races.
In all democratic political systems some gifts to politicians violate domestic laws. Even when
the legal restrictions on fund raising seem permissive, politicians and their wealthy patrons may
prefer the anonymity of an illegal gift. Keeping a gift secret can help hide the illicit quid pro quo and
will facilitate efforts to siphon off funds for personal use. Voters cannot be expected to look with
tolerance on tax breaks or contracts granted in return for payoffs. But the testimony of Italian political
operatives in the “Clean Hands” investigations reveals how corrupt practices can become entrenched
in nominally democratic systems. Party leaders placed would-be politicians in positions where the
payment of bribes was routine. The construction industry was a particularly lucrative source of funds.
Specialized “party cashiers” managed the collection of bribes and the distribution of contracts. Such
people generally had no official government positions but were intermediaries for businessmen who
had a problem in dealing with the government. They collected bribes for the party coffers, but some
share of the gains was also kept by individuals (della Porta 1996). A study of one large Italian case
suggests that illegal contributors had quite specific favors they wanted from the state and that much of
the money could not be accounted for. There was a large discrepancy between the amount the firms
reported giving and the amount the political parties reported receiving (Colazingari and Rose-
Ackerman 1998). As the Italian case demonstrates, in many countries, the problem is not the subtle
“dependence corruption” stressed by Lessig (2011) but unambiguous bribes and kickbacks that fuel
political campaigns and enrich candidates personally.
B. Conflicts of Interest
Elected legislators in democracies need to be independent and publicly accountable. But
“independent” of whom? The answer differs across time and space. In the past, when the major issue
was undue deference to the monarch, the ideal was a body of independently wealthy legislators who
were not beholden to the sovereign. Thus in 1911 some members of the British House of Commons
opposed a bill that mandated the payment of salaries to members of Parliament on the ground that
unpaid legislators would be more independent of the crown. In opposing pay increases in the 1970s
some members argued that their pay should not be “so substantial as to make them feel beholden to the
cabinet of the day with its power to dissolve Parliament, nor to the various parliamentary political
parties” (Stark 1992: 433). The common French practice of civil servants taking a leave of absence
to serve as members of Parliament raises similar questions about legislative independence from the
executive without the need for any explicit quid pro quos.29
At present, the main concern is not, of course, legislators’ dependence on the monarch, but rather
the use of public office to further private financial interests. We have already discussed this issue
with respect to civil servants (Chapter 5), but it should be clear that analogous problems arise
whenever a politician or a member of his or her family or staff has an ownership interest in a firm that
does business with the government or that can benefit from state policy. No corrupt payoffs or
campaign donations occur, but the risk of favoritism is the same.
Most mature democracies seek to limit the impact of private economic interests on elected
politicians and, at least, require them to report their financial interests. In the United States, federal
legislators and their staffs face antibribery laws and conflict-of-interest rules that limit outside
earnings and employment on leaving office [18 U.S.C. §§ 201, 203, 207(e)], but the section of the
statute dealing with financial conflicts of interest does not apply to the legislative branch [18 U.S.C. §
208]. Within the European Union every member state has a requirement for parliamentarians, but they
are generally regulated less stringently than other public officials. However, the member states differ
widely in exactly what must be disclosed, whether the reports are public, and what sanctions can be
levied. Some make no provision for sanctions, and some with strong sanctions do not provide public
access to records. Sweden relies almost entirely on informal norms while other countries, especially
in Eastern Europe, have extensive regulation based on both laws and codes (Demmke et al. 2007).
The United Kingdom is distinctive, here as elsewhere, in relying on codes rather than statutes.
Although concern with private financial conflicts of interest increased in the mid-1990s as a result of
the cash-for-questions scandal, the result was a strengthened code, not a statute.30 As Demmke et al.
(2007) point out in comparing the European Union member states, the mere existence of a dense body
of legal regulations for conflicts of interest does not guarantee their efficacy. That study highlights the
many difficult issues that arise in making cross-country comparisons as a result of different histories
and a lack of data on the effectiveness of different approaches. Even in established democracies, the
possibility exists that a politician’s private business interests will collide with his or her role as a
representative of the public.
Going beyond Europe and the United States, Djankov et al. (2010: 182) found that of the 175
countries they surveyed, both democratic and nondemocratic, 109 have some kind of disclosure law.
Those with no such laws included 27 in Sub-Saharan Africa, 12 in the Middle East and North Africa,
and 11 from East Asia and the Pacific. A few others have extensive voluntary systems.31 Public
disclosure appears to be a key aspect of these policies; after correcting for income per capita and
democracy, it is the only measure consistently associated with measures of good governance,
especially for democracies (ibid.: 195–6). The association is particularly strong for democracies,
consistent with their greater degree of public accountability.
Self-dealing by politicians has only recently raised questions in some countries. In new
democracies, conflicts of interest and financial transparency have not been a high priority for
reformers. Yet if uncontrolled, politicians with widespread business interests can undermine
governmental legitimacy as surely as those who do the bidding of large contributors. In the former
socialist countries the problem was particularly acute during the transition because many privatized
firms were taken over by their former managers, who also often have remained active in politics
(Collins 1993: 326). According to one commentator, in Russia “many government officials simply do
not grasp that self-enrichment while in office is a crime” (Coulloudon 1997: 73). In Ukraine 150
businessmen and bankers were elected to the Parliament in 1998, many with economic interests that
would be affected by the legislation they would consider.32 Although some applauded this
development as a way of assuring independence from the executive, it created obvious conflict-of-
interest problems when regulatory and tax laws were at issue. As an extreme case consider Silvio
Berlusconi, the media mogul who as prime minister of Italy modified the laws to reduce the statute of
limitations on corruption charges and the penalties applicable to older citizens. Despite these
reforms, he was eventually stripped of the immunity afforded him as senator,33 tried, and convicted of
tax fraud.34
This is an area where it is difficult to prescribe definitive rules for all political systems.
Nevertheless, at a minimum, disclosure of politicians’ financial interests and those of their families
seems necessary for democratic accountability. Once we add lobbying to the mix, however, it is
important to balance the benefits of openness to outside sources of information against improper
influence – leading to difficult tradeoffs.
C. Lobbying and Political Connections
Businesses influence politics in different ways in different countries depending upon the underlying
levels of corruption and political competition (Fisman 2015). If personal connections are key and
democratic alternation in power is uncommon, those seeking political influence will curry favor with
those in power. For example, in Indonesia under Suharto, business connections to the ruler were
commonplace. One study, for example, found that reports of Suharto’s illness led to declines in the
stock market prices of firms with a high level of ownership by Suharto’s family members and cronies,
measured by a five-point Suharto Dependency Index (Fisman 2001). Similarly, politically connected
firms in Pakistan were found to borrow significantly more from state-run banks, and default more
often, than nonconnected firms. Board members also sometimes sought to create such connections by
running for office (Khwaja and Mian 2005). In contrast, if there are competitive elections and
alternations in power, strategic actors are likely to seek routes to influence that are not dependent on
the partisan composition of government. As an illustration, Fisman et al. (2012) apply the same
technique as in his article on Indonesia to study reactions to health emergencies suffered by Vice
President Cheney. They looked at the stock market valuation of both Halliburton, where Cheney had
been the CEO, and a group of connected firms, and they found no reaction. Of course, this result does
not mean that large firms, such as Halliburton, have no impact on U.S. government decisions, or that
they do not benefit from government decisions. It only indicates that routes to influence are not tied
closely to particular, politically powerful individuals. For example, one study found that in 2003,
under a Republican president, U.S. contracts for Iraqi reconstruction tended to favor large,
Republican-connected firms (Leenders and Alexander 2005: 85). However, it would be difficult to
prove that the firms’ political connections were the key to their success.
Systemic differences in the links between business and government are revealed in a cross-
country study by Faccio of more than twenty thousand firms in 47 countries. She found that when a
firm’s large shareholders or officers took political office, this was valuable for firms in states with
corruption above the median, but not otherwise (Faccio 2006: 383–4). Presumably, such links are
simply less necessary for firms in states with less corruption and better rule of law. These states are
also likely to have stronger conflict-of-interest laws that prohibit certain kinds of explicit
business/political connections. Of course, not all firms benefit from political links. In polities where
political power dominates economic power, these links invite extortion. Top politicians on private
boards may pressure firms to take politically motivated actions that hurt profits and balance any
gains. Thus, in Faccio’s (2006) study firms obtained no net gains in stock market value from adding
politicians to their boards, but did benefit when one of their executives entered politics.
Paradoxically, political connections could be more profitable in states such as the United States
that are not riddled by high levels of bribery and extortion. In such cases, most public officials are not
personally corrupt and do not use their power to extort benefits from firms. Thus, a study of firms in
Denmark, a low corruption country, found that firms connected by family ties with politicians were
more profitable than others. The main source of gain appeared to be better access to government
contracts and other business for firms that are otherwise less productive than other firms (Amore and
Bennedsen 2013). In short, firms in highly corrupt countries may use connections to funnel payoffs to
those in power in return for favorable treatment and monopoly rents. However, there is a risk that the
strength of such connections can lead politicians to extort firms and appropriate most of these rents.
The high level of kickbacks could shift most of the monopoly rents to the politicians. This has led in
some cases to a joint monopoly solution, as in the Indonesian case, where the family of the ruler holds
both political and economic power.
Conflicts caused by politicians’ direct control of assets raise the most explicit tensions between
public power and private wealth. More broadly, lobbying and political pressure challenge the
egalitarian values of democracy. When legislative proposals are drafted and debated, those with an
interest in the outcome will naturally want to communicate with the legislative and executive officials
who are preparing the text. They will want to speak with those in the executive who draft bills as
well as with powerful legislators who can modify the original text and expedite, slow down, or
derail the legislation en route to passage. In a system where power is decentralized and dispersed,
such as in the United States, there are multiple points of entry, so that stopping an initiative is easier
than getting it enacted into law. In all systems, organized groups and powerful individual firms have a
strong interest in monitoring the legislative process and finding points of entry to make their case.
Particularly troublesome are situations in which lobbying and campaign finance overlap, as is
arguably the case in the United States (Lessig 2011; Hasen 2012b).
Research is beginning to measure the marginal value of political connections in democracies
where overt conflicts of interest are uncommon (Fisman 2015 provides an overview). Institutions that
seek influence with democratic legislatures have a choice. Their employees can engage in direct
lobbying, or the firms and groups can hire a professional with good contacts to lobby for them. In both
cases critics of lobbying see it as very close to outright corruption because it gives those with
significant resources more clout than those without such funds. However, politicians must balance the
electoral costs of hewing too closely to the wishes of those able to afford high-priced lobbyists.
Furthermore, some lobbying is carried out by well-organized civil society groups in such fields as
environmental policy, consumer protection, and education; by labor unions; and by associations of
beneficiaries, such as pensioners and veterans. Lobbying is not corrupt in its own right. Rather, it is a
necessary aspect of the relationship between lawmakers and the public, but one that can facilitate
corrupt quid pro quos if not carefully monitored.
The most overt pathology is a lobbyist who is simply a bagman for his or her employer –
providing either private financial benefits or campaign funds to politicians in return for their votes.
The lobbyist is then a conduit for the delivery of benefits to politicians in return for their compliant
actions. Lobbyists, of course, defend their behavior on other grounds. Their contacts assure access
that allows them to provide expertise. Under this view, lobbyists seek to persuade through arguments
and the provision of information. They help assure that laws are competently drafted to achieve their
goals and to avoid unintended consequences. Thus, the value of lobbyists depends on their access to
key politicians, on the benefits the lobbyists provide, and on what politicians do as a result of
lobbying. We can assume that all lobbyists seek legislative results that benefit their clients, and will
concentrate their efforts on those legislators capable of affecting outcomes. There are four stylized
possibilities: (1) access to such politicians is heavily rationed and skewed toward wealthy interests,
and the benefits provided to these politicians are personal or linked to campaign activities; (2) access
is similarly skewed, but the lobbyists provide information and expertise directed toward the interests
of their clients; (3) access is open, and the benefits are personal or campaign related; and (4) access
is open and lobbyists provide information and expertise on all sides of the issue. If time were not
scarce, the fourth possibility is obviously most consistent with the view that lobbying enhances
democratic accountability and improves the quality of statutes. The first is very close to outright
corruption. In most democracies, the reality is somewhere in the middle.
Connections matter. Firms and interest groups either engage in lobbying directly or hire
lobbyists whose greatest value is the connections they have with legislators, perhaps because they are
ex-congressional staffers or ex-legislators (Lessig 2011; Hasen 2012b). One study of lobbyists who
had been staffers in the U.S. Congress found that the revenue they generated was negatively affected
when the senator who had employed them left the Senate – the average drop was 24% (Vidal, Draca,
and Fons-Rosen 2012). The decline was especially acute for members who had chaired key
committees. The study did not measure the lobbyists’ actual influence, however, but only their
perceived clout. Notice that there is no suggestion of overt corruption here. Congressional ethics
rules prevent lobbyists from using their earnings to provide lucrative benefits such as travel and
entertainment.
Of course, if personalized benefits are not available, this might enhance the value of pure
connections based on prior employment and trust. Personal ties can both make it easier to arrange
illegal quid pro quos and make them less necessary. A second study tries to distinguish between the
value of lobbyists’ contacts and their provision of information to members of the U.S. Congress
(Bertrand, Bombardini, and Trebbi 2014). It finds that both matter – “issue experts” are better able to
gain an audience from a broad range of politicians – but connections are more valuable than expertise
on the margin. Some professional lobbyists rely on their substantive expertise; others are more tied to
particular members and change their substantive expertise when “their” members change committees.
The study thus is consistent with the second possibility: access is skewed by connections, but
lobbyists also supply expertise. However, neither of these studies seeks to determine what members
of Congress do in response to lobbying or to link their legislative activities both to lobbying and to
campaign contributions. To the extent that lobbying by firms or industries is associated with campaign
contributions from such entities, the situation may be closer to the first quasicorrupt model.35 A focus
on registered lobbyists is insufficient; the direct actions of lobbyists need to be viewed in the context
of their clients’ overall government relations strategy.
At least in some legislative areas, lobbying seems to benefit those who hire them. Studies have
shown that both domestic and foreign lobbying affect U.S. trade policy and firm-specific trade
preferences. For domestic lobbying the impact is positive but of the same magnitude as social welfare
measures. In contrast, foreign lobbying for trade preferences has a much larger impact, although that
may be the result of differences in methodology.36 This is not, of course, to claim that such efforts are
corrupt, only that they are effective.
D. Buying Votes and Election Fraud
The problem of money in politics is not limited to pressures on politicians. On the other side of the
equation are inducements given to voters. A particularly intractable form of political corruption
occurs when politicians accept illegal campaign contributions and then use them to pay off the voters
on an individual basis. Most commonly, citizens are paid to vote, but cases exist in which political
operatives pay people to stay at home.37 Vote-buying systems are nominally democratic, but they have
much in common with older traditions of patronage.
Direct payments to voters have a long history going back to Great Britain and the United States
in the nineteenth century.38 In those countries reforms have limited such payoffs, but they remain a
feature of electoral politics elsewhere. According to the World Values Survey, globally 41.8% of
respondents believe that voters are bribed “fairly often” or “very often”; responses range from 4.3%
in the Netherlands to 79.2% in the Philippines (Figure 11.1). These data do not reveal the actual
incidence of vote buyingor how respondents understood the question, but the percentages suggest that
some polities face a serious problem of electoral credibility.
Figure 11.1. Percent of survey respondents who believe that voters are bribed “fairly often” or
“very often.”
Source: Authors’ calculations from the World Values Survey Wave 6: 2010–2014, downloaded
from http://www.worldvaluessurvey.org/WVSOnline.jsp on June 15, 2015. Response available
for only 42 countries.
Anecdotal evidence highlights some of the mechanisms. In Italy political “bosses” attempt to get
out the vote not only with campaign funds, but also by mobilizing state resources, patronage jobs, and
other types of government favors to create webs of obligation (della Porta 1996). Similar exchanges
of favors for votes occurred in Spain, where party dues and donations and public subsidies are
insufficient to finance campaigns, and existing laws are poorly enforced (Heywood 1996: 125–7).
The 1996 election in Thailand carried on a long-standing practice of small payoffs to voters. An
original twist included a postelection bonus if the candidate won.39 Similarly, in Bulgaria, payoffs
were coordinated through a pub owner and made conditional on victory.40 Politicians accused of
amassing illegal campaign war chests in Korea and Japan justified their actions by reference to the
financial demands of campaigning in countries where voters expect gifts or other personalized
benefits from candidates (Park 1995; S. Reed 1996). In such political systems, voters may overlook
or even encourage illegal contributions from the wealthy if some of the benefits flow to them from the
politicians’ largesse. The personalized nature of the benefits given to voters by incumbents can make
it particularly difficult for credible opposition candidates to arise. Some might argue that if most
payoffs are spent to benefit constituents, there is nothing to worry about. But this is incorrect. Instead
of a system based on democratic principles, the government is a structure of mutual favor-giving that
benefits those with the most resources and the most political power.
Politicians must be prevented from giving gifts and valuable favors to constituents. If this can be
accomplished, it will level the playing field and help increase popular support for more fundamental
reforms. Once payoffs are just going into the pockets and campaign advertising budgets of candidates,
voters may be less inclined to accept the corrupt system. Publicity can also help. In both Korea and
Italy in the 1990s improved information about the level of payoffs and the size of campaign war
chests convinced people that few of the benefits were filtering down to them (Park 1995; della Porta
1996). If, in addition, the consequences of these payoffs are seen to be harmful to society, the stage is
set for reform.
If a secret ballot exists, vote buying may be engineered through fraud. In especially blatant cases,
political operatives mark ballots for voters, either by abusing absentee or mail-in ballot possibilities
or by going with voters into voting booths. In one case in Florida, an “agent” was arrested after she
entered the nursing-home room of a patient too ill to read, write, or communicate, and emerged with
the patient’s completed absentee ballot. In Kentucky, poll agents changed digital votes after
instructing voters to leave without confirming their choices.41 Even if individual votes are not bought
or stolen, politicians may try to manipulate the results through other types of fraud. This may involve
corrupt payoffs to election officials and monitors to manipulate the voter registration rolls, miscount
or misreport votes, “lose” ballot boxes, limit the opening times of polling stations in hostile areas,
fail to publicize balloting locations, and so forth. Sometimes no outright payoffs are needed; partisan
electoral officials simply misuse their positions to elect their favored politicians – perhaps in
anticipation of future jobs or other benefits.42
Incentives for vote buying and electoral fraud ought to be stronger the more competitive the
election; there is some evidence to support that claim (Lehoucq 2003: 249–51). If a party or
candidate is certain to win or to lose, there is little incentive to engage in fraud. In addition, the
choice of fraud over other techniques depends on the costs of the alternatives. A system where vote
buying is effectively outlawed and where campaign funds are restricted may end up encouraging other
types of fraud as the only remaining, if risky, option for those who seek victory outside of legitimate
appeals to voters.
E. Reform
In a highly competitive system with informed voters who do not expect personal favors for
themselves, a policy of prompt and complete disclosure might be sufficient. Any politician who
relied too heavily on special interest money – and voted accordingly – would be defeated. More
direct restrictions are needed if the system is not very competitive and if voters are poorly informed.
Without spending limits, politicians have leeway to favor large contributors, and the gifts can be used
to mislead voters regarding the candidates’ positions and behavior (Rose-Ackerman 1978: 33–45).
Campaign finance reform must avoid imposing restrictions that encourage illegality. Although
campaign finance laws in many countries are overly permissive, in others the laws are so restrictive
that they practically require off-the-books transfers in order to finance campaigns. Limits on
donations are justified as a way to curb corrupt influences, but strict legal limits can encourage
unreported illegal transfers. For example, some critics of the Japanese system in force between 1975
and 1993 argued that it encouraged illegal payoffs by limiting legal business contributions (Qui 1996:
207–8). Scandals in industrialized countries point to the importance both of clear rules governing the
solicitation of private money and the provision of sufficient legal sources of funds. Furthermore, the
impact of corporate gifts depends upon the ability of politicians to provide individualized favors to
firms. If such favors are not outlawed or otherwise controlled, the difference between bribes and
legal campaign contributions will be blurred and will depend, first, upon reporting requirements and,
second, upon the reaction of voters.
An entrenched system of illegal payoffs may undermine efforts to reform the funding of political
campaigns. In Italy campaign finance rules seem quite permissive. Corporate contributions are
permitted as long as they are made public and approved by the firm’s board of directors. Yet illegal
contributions featured prominently in anticorruption cases. Thus, even if the rules seem permissive
and if public funding is available, law enforcement authorities still need to check for illegal
payments. Reformers will need to look beyond the details of the campaign finance law to seek ways
to limit the discretion of politicians to favor gift givers.
Solutions can approach the problem from four dimensions. First, the costs of political campaigns
could be reduced by reducing the length of time for the campaign. Systems where the date of the next
election is uncertain can enforce such constraints fairly well, but in all systems time limits are hard to
make operational. Restrictions could also be imposed on the methods of campaigning in an effort to
keep costs down. Second, stronger disclosure rules can be established. The United States already has
quite strong disclosure requirements at the federal and state levels for funds donated directly to
political campaigns, even though there is often a time lag. So-called independent expenditures face
only state-level rules. Disclosure permits citizens to vote against candidates who receive too much
special interest money and also makes it possible for scholars to study the impact of gifts on behavior
to see how close to bribes they are. Third, laws can limit individual donations and candidates’
spending. We have seen the limitations on independent contributions loosened by the U.S. Supreme
Court under the guise of protecting speech, but even so, the justices accept the legality of existing
restrictions on direct contributions to candidates and parties. The details of American constitutional
jurisprudence need not detain us here, but the basic issue is important – to what extent can or should a
democratic government interfere with its citizens’ wishes to express their political interests through
gifts to support political parties or individual candidates?
Fourth, alternative sources of funds can be found in the public sector. In the United States the
federal government provides funds only for presidential candidates under certain conditions, and
several American states provide public support for political campaigns.43 When Mexico introduced a
public campaign fund in 1996, it was the most generous (per capita) such fund in the world, designed
to break the cycle of an incumbent president funding his party’s candidates through a secret slush fund
(Duke, Morgenstern, and Nielson 2006: 81). Many other countries provide public funds for political
campaigns or permit tax deductions or credits (Law Library of Congress 2009).
Germany has experimented with various formulas in an effort to satisfy its constitutional
principles. In Germany’s strong party state, the Constitutional Court has been especially concerned
with the negative impact of public funding on new or small parties. The law provides public funding
to parties up to an overall ceiling.44 As a result of a 1992 decision of the Constitutional Court, the
law emphasizes the ability of parties to attract both votes and private donations with a formula that
disadvantages the largest parties relative to their vote-getting power.45 There are no limits on
campaign spending or on private or corporate contributions, but, as a result of legal changes made to
accommodate the 1992 decision, business firms’ contributions are not tax deductible.46 Individuals
may deduct their campaign gifts up to a rather modest ceiling per year or claim a limited tax credit.
Private donations from individuals (Spenden von natürlichen Personen) averaged around 10% of
campaign funds in 2012, but membership fees and payments by elected officials to their parties
brought the share of individual donations up to close to one half for most parties. Donations from
corporations are low, 6% for the combined CDU/CSU47 and 1.4% for the Social Democratic Party,
the two largest parties.48 The impact of business on political campaigns is likely to be understated,
however, if one concentrates only on corporate gifts. Individual elected officials need to obtain funds
to “donate” to the political parties, and they may obtain these funds through second jobs as lobbyists
or consultants. These are publicly recorded, and so can, in principle, be subject to media and popular
critique, but they can create subtle conflicts of interest. Thus, although Germany clearly has a stronger
commitment to public funding and to strengthening political parties than the United States, it is not
clear how effective the law has been in constraining the power of concentrated private wealth. One
indication of the underlying problem was a scandal involving Federal Chancellor Helmut Kohl’s
failure to turn over to his political party, the CDU, donations that he personally had received. The
problem in his case was not personal enrichment but rather political spending outside the regular
party structure, with a notable lack of transparency as to the sources of funds. As a result, accounting
provisions have been tightened, but concerns remain about off-the-book party financing and efforts to
circumvent the legal emphasis on party finance.49 Nevertheless, Germany provides an interesting
contrast to the United States of a parliamentary system that provides public support to parties and
regulates the interactions between private wealth and public power very differently.
A number of proposals have been made for more extensive public funding in the United States.
Those who oppose these reforms worry that public funding and spending limits will protect
incumbents and unduly disadvantage minority parties. Incumbents generally start with an advantage
that only challengers with higher spending levels can overcome. Incumbents are also advantaged in
the competition for funds (Snyder 1992). Public funding formulas could be designed to overcome the
incumbency advantage, but finding a workable system may be difficult given the Supreme Court’s
aggressive stance against state efforts to level the playing field. Thus, in Arizona Free Enterprise
Club’s Freedom Club PAC v. Bennett, 131 S. Ct. 2806 (2011) the Court struck down a voluntary
public financing plan that was tilted in favor of candidates facing high levels of independent spending
targeted against them.
Alternatively, public funds could be given to candidates who can demonstrate substantial public
support. One way to do this is to give vouchers to voters to support the candidates of their choice.
This plan would combine public funding with an egalitarian system for allocating funds. Voters would
receive special “credit cards” that could be used to support particular candidates or signed over to
trusted advocacy or interest groups. Separate vouchers could provide funds for primaries and the
general election and for different races (Ackerman 1993; Ackerman and Ayres 2012). In promoting
democratic values, this plan would reduce the influence of wealthy interests. If not well monitored,
however, it might increase illegal corruption. Wealthy individuals and firms with strong interests in
politics would be left without an important legal avenue to influence. They could lobby members of
Congress, but not support them financially. The result could be more under-the-table payoffs,
especially from the losers in the race for vouchers. Candidates and parties would also have
incentives to bribe voters to assign vouchers to them, thus contributing to patronage politics.
Ackerman and Ayres (2012) propose various strategies for dealing with this problem, but it remains
an underlying concern.50 Conflict-of-interest rules might need to be strengthened and enforced more
stringently because the incentive for politicians to use that route to financial gain would be increased
by the introduction of a voucher system.
The relations with lobbyists and wealthy interests should be disclosed so that voters can judge
whether their representative’s behavior has been affected. Direct restrictions on outside earnings and
lobbying activities by retired members – such as “cooling-off periods” during which former
legislators or officials are barred from lobbying the offices in which they worked – are more
controversial, but will be important in those political systems where the electorate is less educated
and poorly informed. Legal rules can be less restrictive, the more effective the electorate is in
demanding accountability.
Conclusions
Democratic elections are not invariably a cure for corruption, and they may be vulnerable to special
interest influence even if illegal payoffs are uncommon. If narrow groups wield power, some use
legal means, and others are corrupt. The choice of tactics can be influenced by the nature of the
political system and by the way the law defines corruption and illegal campaign donations. We have
argued that parliamentary systems with first-past-the-post electoral systems dominate both
presidential systems and other types of parliamentary democracies. However, that conclusion is not
absolute. Any constitutional structure can coexist with the undue influence of private wealth as long
as those with financial clout want benefits from the state and as long as politicians either must raise
campaign funds or are simply personally venal.
Competitive elections help limit corruption because opposition candidates have an incentive to
expose corrupt incumbents. However, the need to finance political campaigns introduces new
incentives to favor special interests that do not exist in autocratic regimes. The incentives to use
illicit financing are especially high if legal means of support are limited and if politicians commonly
use campaign funds to bribe voters directly.
Illegal campaign contributions and the bribery of politicians can undermine democratic systems.
Even when payoffs from wealthy individuals and firms benefit campaign committees, political
parties, and voters, rather than the personal bank accounts of politicians, the distortionary impact of
secret, illegal payments can be large. Payoffs are often made to obtain legislative or regulatory
favors. Their effectiveness, however, depends upon legislative and executive processes. Corrupt
firms and individuals will focus on obtaining individual and firm-specific favors. Elections are not
sufficient to check payoffs.
Other means of public oversight are necessary to keep government accountable. Democratic
governments must establish explicit policies to limit corrupt incentives. It must also seek to control
the impact of private wealth on public power in other ways that do not place all such activity under
the corruption umbrella.
1 Combating corruption among elected officials through increased oversight is most effective when
they will run for reelection in the short term (Olken 2007: 226).
2 Empirical work based on surveys in a diverse group of sixteen countries shows that citizens have
less trust in government when corruption is high. However, those who support the opposition are
more likely to view corruption negatively than supporters of the incumbents (Anderson and
Tverdova 2003). This can occur because supporters may benefit individually from corruption even
if it imposes overall social costs.
3 In the United States the mayor of Providence, Rhode Island, was jailed for corruption in
connection with a project to revitalize the downtown area. He was released from jail in 2007 and
in 2014 announced his intention to run for his old office. He had been mayor from 1975 to 1984
(when he was convicted of felony assault) and again from 1991 to 2002 (when he was convicted of
racketeering). Although he lost the 2014 election, he received 45% of the vote. Jess Bidgood and
Katherine Q. Seelye, “Ex-Prosecutors Urge Voters Not to Bring a Felon Back as Providence’s
Mayor,” New York Times, October 14, 2014, http://www.nytimes.com/2014/10/15/us/ex-
prosecutors-urge-voters-not-to-bring-a-felon-back-as-providences-mayor.html (accessed October
11, 2015); Dan Barry, “Now Free to Speak His Mind, an Ex-Mayor Is Doing So,” New York Times,
April 28, 2008, http://www.nytimes.com/2008/04/28/us/28land.html (accessed October 11, 2015);
and The Associated Press, “Cianci Defeat Represents Break from Old Providence,” The
Washington Times, November 6, 2014,
http://www.washingtontimes.com/news/2014/nov/6/cianci-defeat-represents-break-from-old-
providence/?page=all (accessed October 11, 2015).
4 See Lessig (2011: 230–46); Teachout (2014); Sandoval-Ballesteros (2013).
5 Lessig (2011: 166–70) reports survey results from the Pew Research Center showing that only
22% of American voters trust the government in Washington. The American National Elections
Studies report similarly low numbers.
6 See Arnold (1990). He argues that omnibus bills may be necessary for the passage of certain
kinds of broad-based compromises in the public interest (ibid.: 131–2).
7 Sometimes a district may elect two or more representatives, using plurality rule separately for
each one. The U.S. Senate is an example of such a case: each Senator from a state runs in the same
statewide district, but they do not compete with each other directly and have overlapping terms.
8 Sometimes there are thresholds, such that a party cannot enter parliament unless its overall vote
share passes a certain minimum percentage.
9 In practice, many systems do not fit comfortably into either category but have aspects of each.
10 In contrast, Chang and Golden (2006) argue that PR systems with large electoral districts should
be less corrupt than systems with lower district magnitude because they encourage party leaders to
be concerned with the reputation of the party as a whole. Using both cross-country and Italian data
they find that at low district magnitude, open-list PR systems are less corrupt than closed-list PR
systems at low district magnitude, but eventually the lines cross, so that open-list systems become
more and more corrupt as district magnitudes increase.
11 Some parliamentary systems also have presidents, e.g., Germany, Hungary, Italy, but they have
very limited power and are usually selected by the parliament. Often these presidents must
nominally appoint the prime minister, but they have no real control over the nomination process or
over legislation. Mixed systems such as France and Poland exist, but we do not consider these
complications here.
12 This finding is consistent with Lederman, Loayza, and Soares (2006), who also find that
corruption is lower overall in parliamentary systems than in presidential systems, all else equal.
13 In an related paper Persson, Tabellini, and Trebbi (2003) find higher corruption the larger the
proportion of seats elected using closed party lists, the lower the district magnitude, and under PR
systems.
14 This encompasses Johnston’s (2005) category of Influence Markets.
15 See Eric Lipton, “Ethics in Play, Voters Oust Incumbents under Inquiry,” New York Times,
November 9, 2012. Many incumbents facing charges of wrongdoing lost in the U.S. November
elections, but some did survive. A nonprofit, Center for Responsibility and Ethics in Washington
(CREW), publishes lists of the “Most Corrupt Members of Congress.” Of the 31 featured in the
years 2010 to 2012, 11 have been defeated or have retired, at least in part due to ethical issues.
CREW complains in its reports about the lack of follow-up by Congressional Ethics Committees
and law enforcement on some alleged ethics violations. For CREW’s contemporary efforts and a
link to their most recent report see http://www.crewsmostcorrupt.org/mostcorrupt (accessed
October 9, 2015). The report, however, is rather vague about exactly how they select the most
corrupt legislators.
16 In the United States this topic is central to current debates over campaign finance. See Lessig
(2011), Hasen (2012a), Mutch (2014), and Teachout (2014). Lepore (2014) provides an overview
and critique of the current debate.
17 Kevin Sack, “A Road-Building Scandal Forces a Governor’s Hand,” New York Times, January
14, 1998, http://www.nytimes.com/1998/01/14/us/a-road-building-scandal-forces-a-governor-s-
hand.html (accessed October 11, 2015).
18 Ian Austen, “Canada: Another Mayor Resigns,” New York Times, November 9, 2012,
http://www.nytimes.com/2012/11/10/world/americas/canada-another-mayor-resigns.html
19 Ian Austen, “Mayor of Montreal Resigns as Corruption Investigation Heats Up, New York Times,
November 6, 2012, http://www.nytimes.com/2012/11/07/world/americas/mayor-of-montreal-
gerald-tremblay-resigns-amid-corruption-inquiry.html (accessed October 11, 2015).
20 El Norte staff, “Entran los narcos a construir en el Sur,” El Norte, October 13, 2012, Nacional.
21 Both of these cases are discussed in Susanne Craig, William K. Rashbaum, and Thomas Kaplan,
“Cuomo’s Office Hobbled Ethics Inquiries by Moreland Commission.” New York Times, July 23,
2014, http://www.nytimes.com/2014/07/23/nyregion/governor-andrew-cuomo-and-the-short-life-
of-the-moreland-commission.html (accessed October 11, 2015).
22 See, e.g., Dincer and Johnston (2015).
23 Lower federal courts have followed the Supreme Court’s lead. SpeechNow.org v. FEC, 599 F.
3d 686 (D.C. Cir.) lifted the cap on donations to “political committees that made no campaign
contributions and operated independently of any candidate or political party” (Smith 2013: 604).
Green Party of Conn. v. Garfield, 616 F. 3d 189, 207 (2d Cir. 2010) struck down Connecticut’s
ban on lobbyist contributions and bundling of campaign contributions as unsupported by an
anticorruption interest. Brinkman v. Budish, 692 f. Supp; 2d 855, 864-64 (S. D. Ohio) threw out
anti–revolving door rules for legislators.
24 However, in 2015 the Supreme Court upheld a Florida statute that prohibited judges and
judicial candidates running for office from personally soliciting contributions [Williams-Yulee v.
The Florida Bar, 135 S. Ct. 1656 (2015)]. Judicial elections occur in 39 U.S. states and in many
localities, although many are nonpartisan or only recall votes; 30 states prohibit personal
solicitations.
25 See Smith (2013) for an overview of PACs.
26 The decision has eviscerated much of the Federal Elections Campaign Act passed in 1971,
primarily to provide public funding for campaigns. It was amended in 1974 in response to the
Watergate scandal, to fight campaign-related corruption and the misuse of campaign funds. See
Mutch (2014) and La Raja (2012) for the history of campaign finance laws in the United States.
27 Lizbeth Diaz, “Update 2 – Mexican Electoral Judges Reject Challenge to Pena Nieto Victory,”
Reuters, August 31, 2012, http://in.reuters.com/article/2012/08/31/mexico-election-tribunal-
idINL2E8JV0BF20120831 (accessed October 11, 2015).
28 The program is outlined at http://www.fec.gov/info/checkoff.htm (accessed October 11, 2015).
29 Rohr (1991: 287–8). The 2015 civil service share was about 30%. The data are on the website
of the National Assembly: http://www.assemblee-nationale.fr/qui/xml/cat_soc_prof.asp?
legislature=14 (accessed July 23, 2014).
30 Investigative reporting revealed an established pattern where some members of Parliament

were paid to ask questions. Although the sums did not appear to have been large, the revelations
ended the careers of a number of politicians and the prime minister established a Committee on
Standards in Public Life (the Nolan Committee) that consists of respected independent individuals
plus representatives of the major political parties. The committee developed a seven-point code of
ethical behavior for public officials and members of Parliament, but the code has no statutory
basis. Philip Webster, “Sleaze Report Condemns Hamilton,” The Times (London), July 4, 1997;
David Hencke, “A Liar and a Cheat: Official,” The Guardian, July 4, 1997. In brief, the principles
are selflessness, integrity, objectivity, accountability, openness, honesty, and leadership. Avoidance
of conflicts of interest is included in “honesty.” The website of the committee with a link to the
principles is https://www.gov.uk/government/organisations/the-committee-on-standards-in-public-
life (accessed July 23, 2015).
31 The authors’ full data set is at http://scholar.harvard.edu/shleifer/publications?page=2

32 “Ukraine’s Businessmen – A New Political Class,” Financial Times, April 17, 1998.
33 Transparency International, “Berlusconi: No Immunity, No Impunity,” Posted November 28,

2013 under Politics and Government,
http://www.transparency.org/news/feature/berlusconi_no_immunity_no_impunity (accessed June
13, 2014).
34 Elisabetta Povoledo, “Milan Court Gives Berlusconi a Year of Community Service,” New York
Times, April 15, 2014, http://www.nytimes.com/2014/04/16/world/europe/milan-court-gives-
berlusconi-a-year-of-community-service.html?ref=topics (accessed October 11, 2015).
35 Bertrand, Bombardini, and Trebbi (2014: 3901–3) consider only lobbyists’ own campaign
contributions. They find that campaign contributions are associated with a higher likelihood that a
lobbyist and legislator work on the same issues, but it seems unlikely that such contributions are a
major source of funds. It would be interesting to study if some lobbyists act as contribution
bundlers or are otherwise linked to fundraising.
36 Kee, Olarreaga, and Silva (2007) study foreign country lobbying for trade preferences and
conclude that lobby contributions are five times more important than foregone tariff revenue. They
also cite the literature on domestic and foreign lobbying and trade, which generally does not show
such a large impact. Unfortunately, the United States is the only country with relatively
comprehensive data on lobbying expenses.
37 Lehoucq 2003. For examples of vote buying and other types of election fraud in the United
States, see David A. Fahrenthold, “Selling Votes Is Common Type of Election Fraud,” The
Washington Post, October 1, 2012,
http://www.washingtonpost.com/politics/decision2012/selling-votes-is-common-type-of-election-
fraud/2012/10/01/f8f5045a-071d-11e2-81ba-ffe35a7b6542_story.html (accessed October 11,
2015). See also Cox and Kousser (1981: 655–61) for an example of the latter option in rural New
York in the late nineteenth and early twentieth centuries.
38 For colorful accounts of voter fraud related to Atlantic City, see Johnson (2002: 68, 73).
39 Seth Mydans, “Thai Civics: New Leader but Votes Are Still for Sale,” New York Times,
November 19, 1996. For background on Thailand see Pasuk and Sungsidh (1994).
40 Transparency International, “The Price of a Vote in a Bulgarian Pub,” posted June 9, 2015,
http://www.transparency.org/news/feature/the_price_of_a_vote_in_a_bulgarian_pub (accessed
June 11, 2015).
41 David A. Fahrenthold, “Selling Votes Is Common Type of Election Fraud,” The Washington
Post, October 1, 2012, http://www.washingtonpost.com/politics/decision2012/selling-votes-is-
common-type-of-election-fraud/2012/10/01/f8f5045a-071d-11e2-81ba-ffe35a7b6542_story.html
42 See Lehoucq (2003) for a review of the literature on electoral fraud. He is also a major
contributor to that literature.
43 See Alexander (1991); “Minnesota Steals the Spotlight on Campaign-Finance Reform,”
Congressional Quarterly Weekly Report, April 28, 1990: 1240; Tanenbaum (1995).
44 The ceiling requires parties to raise at least as much from private donations as from the subsidy.
This is a way to be sure that every party has public support, both in votes and donations. There is
also an absolute ceiling for total overall spending that is set for each election. See §18(2) and (5)
Parteiengesetz (http://www.gesetze-im-internet.de/partg/__18.html) (accessed October 11, 2015).
45 85 Bundesverfassungsgerichtsentscheidungen [BVGE] 264 (April 9, 1992). The law on

political parties states that parties receive state funding according to the following scheme [§ 8 (3)
Parteiengesetz (http://www.gesetze-im-internet.de/partg/__18.html)]: 0.70 euro for every valid
vote given to their party list, 0.70 euro for every valid vote cast in their districts in a state where
there is no list for this party, and 0.38 euro for every euro that the party received as a contribution
(Zuwendung) (individual donations from individuals and corporations, membership fees and
payments by elected officials) although only contributions up to 3.300 euro per individual (natural
person) can count. However, there are absolute limits on state support, and large parties can easily
reach these limits (in spite of the fact that they were increased after a reform in 2011).
46 85 BVGE 264, paras. 157, 178.
47 The Christian Democratic Union (CDU) is the dominant right of center party; the Christian
Social Union (CSU) is a regional party allied with the CDU.
48 The income of political parties is reported in Deutsche Bundestag. 2014. 18.Wahlperiode,

Drücksache 18/3350, Vergleichende Kurzübersichten über die Einnahmen, Ausgaben und
Vermögensverhältnisse der Parteien in den Rechnungsjahren 2003 bis 2012,). It consists of state
funding (Staatliche Mittel), membership fees (Mitgliedsbeiträge), private donations (Spenden von
natürlichen Personen), payments by elected officials to the party (technically voluntary, but
nonpayment might affect further nominations by the party) (Mandatsträgerbeiträge), and other
regular income (sonstige regelmäßige Einnahmen), income from events, distribution, and other
activities (Einnahmen aus Veranstaltungen, Vertrieb und sonstigen Tätigkeiten), donations by
corporations (Spenden von juristischen Personen), and other income (Einnahmen aus sonstigem
Vermögen).
49 Kohl was Chancellor from 1982 to 1998; the revelations occurred in the 1990s (Seibel 1997).
A background story is Imre Karacs, “Kohl Scandal: Europe’s Old Master Admits He Ran Secret
Slush Funds,” The Independent, December 1, 1999.
http://www.independent.co.uk/news/world/kohl-scandal-europes-old-master-admits-he-ran-
secret-slush-funds-1124613.html (accessed July 5, 2015).
50 In particular, they propose that a voter who promises funds in return for a quid pro quo has
several days to anonymously retract his campaign contribution, thus making it impossible for
candidates or brokers to confirm that the deal has been honored.
12
Accountability beyond the Ballot Box
◈
Public accountability is necessary for the control of corruption.1 Both autocracies and democracies
can be deeply corrupt, and each can be held accountable in different ways. Elections can constrain
politicians, but, as we have seen, they are an imperfect tool. Public accountability is possible even in
countries without elections or with a dominant party that always wins the vote. These constraints may
be more difficult for autocrats to accept than for elected officials, but even democratic officials resist
reforms that expose them to public scrutiny and criticism. Corruption can be limited by internal
government structures and organizations that constrain malfeasance and by outside pressure from the
public.
Limits on the power of individual politicians and political institutions, accompanied by
independent monitoring and enforcement organizations, can be potent anticorruption strategies that
also constrain other forms of self-dealing. In a democracy, a key institution is the separation of
powers between the legislative and executive branches that permits each source of power to check
the other (Section I). Even if elections are unimportant, an independent judicial and prosecutorial
system and a federal structure can limit the power of political leaders. But the decentralization of
political power is not necessarily effective. Under some conditions, a system with multiple veto
points is particularly subject to improper influence, and a federal system may simply give state and
local political leaders the leeway to enrich themselves at public expense (Section II). Independent
sources of prosecutorial and judicial power are less problematic although, of course, these
institutions must also be largely free of corruption and patronage. Some degree of independence is
necessary but not sufficient, and too much independence can breed impunity (Section III).
Another group of reforms increases the openness and accountability of government to outside
scrutiny (Section IV). Under this scenario, government collects and provides information; both the
media and citizens’ groups operate freely, and groups and individuals have effective avenues for
challenging official actions. Although such policies are likely to be more acceptable to
democratically elected leaders, these reforms can also have an effect in undemocratic systems whose
leaders nevertheless need public support to retain and exercise power.
I. Accountable Implementation
Legislatures frequently delegate implementation to the executive and often voluntarily limit their own
control over executive policy making and implementation. The statutes leave the development of
precise standards to government agencies, but may include detailed procedural requirements (Moe
1990; Rose-Ackerman 1992: 33–96). The traditional justification for this practice combines a belief
in the expertise of executive agencies with the claim that legislators should not make individual
personnel and procurement choices or decide enforcement priorities. Thus regulation writing is
delegated because the legislature is not competent to carry out some policy-making tasks, and purely
executive or adjudicatory functions are not appropriate for the legislature under separation-of-powers
principles.
In the United States general rules issued by agencies under enabling statutes have the force of
law.2 The rule-making process, however, may be honestly or corruptly influenced to benefit the
regulated industry rather than the general public.
To reduce those risks the procedural constraints of the American Administrative Procedures Act
(APA) seem valuable. Under the APA, agencies must give notice of their intent to issue a regulation,
accept testimony from a broad range of individuals and groups, and issue a statement of reasons along
with the final rule. The rule can be challenged in court if proper procedures are not followed or if the
end result is inconsistent with the underlying statute. Frequently, rules are found wanting, but the
courts seldom correct the problems themselves; rather, the agency is required to reconsider its
decision or follow improved procedures. Although the details of the American administrative process
can surely use reform, the basic principles express the essence of accountable bureaucratic behavior.
The APA requirements not only are consistent with democratic government but also limit the scope
for corrupt deals. Even a country with a weak legislature or a unitary parliamentary system could
limit the opportunities for corruption and other types of influence by adopting more transparent
administrative processes.3
Although the process has been criticized as time consuming and cumbersome, inconvenience is
the price to pay for limiting the arbitrary power of the executive (Rose-Ackerman 1995a; Rose-
Ackerman, Egidy, and Fowkes 2015). In practice, the process does not seem excessively onerous.
Examination of a random sample of 42 rule makings found that the median number of comments was
about 30 (West 2004). Furthermore, advances in communication and information technology can
speed up the comment process. Most U.S. agencies have developed comprehensive and user-friendly
websites, and many permit comments on draft rules to be submitted using e-mail. Of course, the
agencies still need to be able to process comments in an effective manner, but information technology
can make the processing of comments more cost effective.
Of course, the U.S. model may not transfer easily because of differences in political structure
and in the organization of society. Furthermore, partial reforms may not have the expected
consequences. For example, the introduction of greater participation rights without effective judicial
review can lead to policy distortions. Adding notice and an ability to comment may have little effect
if agencies are not required to give reasons and are not subject to judicial oversight.4 Few other
developed countries have adopted American rule-making procedures. For example, German rule-
making procedures are much less transparent than American ones and have been criticized for being
too open to industry influence. Payoffs do not seem to be a problem, but excess influence may be
(Rose-Ackerman 1995a; Rose-Ackerman, Egidy, and Fowkes 2015). Similar criticisms are voiced in
France, where rule making is similarly unconstrained by procedural requirements. One exception is
the area of environmental protection, where the French Constitutional Council has required
heightened public participation (Rose-Ackerman and Perroud 2013). Great Britain has had a less
procedurally constrained administrative process than either Germany or France (Moe and Caldwell
1994). Hence, if interest groups want influence, they can get it in a much more opaque manner under
the procedurally unconstrained British system than in the open lobbying that takes place in the United
States. Recent developments in Britain, as in Germany and France, have moved some aspects of the
regulatory system in an open and participatory direction.5 Moe (1990) may be correct that the United
States imposes too many controls on administrative action. However, an administrative law system
that is more beholden to the current legislative majority and lacks procedural safeguards seems
especially prone to the ongoing influence of narrow groups.6 Thus, from the point of view of
constraining rent seeking by politicians and special interests, weak administrative law constraints
create accountability problems that are more serious than those in a system in which the legislature
has both the power and the incentive to constrain the bureaucracy.
Another set of problems can arise in political systems with weak legislative branches. Critics of
Latin American governments argue that most have overly powerful executives and weak legislatures
(Mainwaring and Shugart 1997).7 As a consequence, incentives for rent seeking and corruption are
high within the executive branch. Presidents often have extensive decree power, may control a secret
financial account that can be used to reward supporters, and are less subject to popular control while
in office because, in most countries, the president cannot serve two consecutive terms. Furthermore,
the judiciary is generally less independent and, until recently, has seldom effectively constrained the
executive (Borner, Brunetti, and Weder 1992: 28–30; Del Granado 1995: 19–20; Manzetti and Blake
1996; Levi, Dakolias, and Greenberg 2007: 409). Latin American presidents have sometimes left the
country when they leave office and their immunity expires. Some Asian countries exhibit a similar
pattern. The lack of executive accountability facilitates corruption by centralizing regulatory power
and giving the executive wide discretion, which is often used to favor certain firms or wealthy
families. In many countries the judiciary is also weak. In the case of Thailand, executive excesses
motivated a coup by the military in 2014 that ended democratic rule.
Whatever the structure of government, the interests of narrow groups can predominate if they
face no credible opposition. If such groups start out in a powerful position, they may be able to block
reform. Thus, in the American states, allegations of improper influence in state regulatory boards
have been common. In these cases, the apparatus of government has been captured by narrow interests
willing to use their financial clout to influence government choices.
The risks of capture and improper influence suggest that administrative law reform ought to be a
part of any anticorruption strategy. The background conditions for policy making in the executive
branch should be examined to assure adequate participation and transparency. The public needs
avenues for appeal to the judiciary if the government has not followed its own procedures or has
acted lawlessly. The goal is to make corrupt deals harder to hide by forcing review of the process
and of the substantive outcome. A review process aimed at achieving good substantive policy and
democratic accountability can indirectly fight corruption.
II. Federalism and Decentralization: Voice and Exit
Decentralization was prescribed by aid agencies during the 1980s and 1990s as a structural reform
for heavily indebted countries and, more recently, in postconflict scenarios. However, whatever the
other benefits of decentralization, it is unclear whether corruption is more prevalent under centralized
or decentralized bureaucracies and government structures. Most cross-country studies find that
decentralization reduces corruption, but some show that a federal structure does not constrain
corruption, and some studies find that corruption increases with decentralization (Lessmann and
Markwardt 2012; Treisman 2007a). The problem arises from two fundamental aspects of
decentralization. Decentralization can imply a hierarchy where government bodies at the apex
monitor and discipline those below them, and so on down the chain. Conversely, decentralization can
create competition between governments at the same level for residents and businesses. A federal
government structure mixes the two models. Each governmental entity has a limited domain within
which it can exercise power. However, higher levels of government provide oversight. The national
government can constrain the states, and the states can constrain the localities, but only within certain
bounds. This means that in considering the incentives for corruption one needs to pull apart these
disparate pressures.
The most obvious positive form of interaction is the enforcement of anticorruption laws against
lower level governments by higher level governments. If the higher-level authorities are both
competent and honest, their independence from lower levels helps assure the credibility of their
actions. For example, the Federal Bureau of Investigation (FBI) is active in the control of state and
municipal corruption in the United States. In the United Kingdom an Audit Commission monitors the
probity of local governments (United Kingdom 1993, 1994, 1996). Sometimes the overlap in
jurisdictions has an international dimension. A defector from the Colombian drug cartel chose the
American justice system over the Colombian. This enabled him to reveal payoffs paid to Colombian
politicians.8 Similarly, the treasurer and the ombudsman of Coahuila state in Mexico both made plea
bargains with U.S. authorities, providing them with embezzlement, bribery, and money-laundering
evidence against two governors of that state.9 Some of the former treasurer’s assets were frozen in
Bermuda and the United States pending repatriation,10 but only one of the former governors has been
charged.11
However, hierarchical authority is only one part of the story. Even with no hierarchy,
competitive pressures between governments at the same level – U.S. states, members of the European
Union – can sometimes be a deterrent to corruption so long as the component governments benefit
from appearing clean to potential citizens and businesses. The threat of exit is then a method of
control. The corruption and ineffectiveness of government officials are limited by the ability of
constituents and business firms to go elsewhere. Firms trying to decide where to locate a
manufacturing plant can limit bribe demands by considering several feasible sites. Residents of a
village whose officials extract large payoffs for routine services can move elsewhere. The mobility
of people and businesses thus limits the ability of officials to extract payoffs for services to which
one is entitled (Montinola, Qian, and Weingast 1995; Weingast 1995).
But mobility is not always helpful if it means that individual jurisdictions find it harder to
control undesirable behavior. Suppose, for example, that one city government has installed an honest
police force that cracks down on illegal gambling. The gamblers may simply move their business to a
friendly suburb or a jurisdiction with weak law enforcement – as has sometimes happened in the
United States.12 The ease with which funds can cross national borders, coming to rest in various
“financial paradises,” is another example of how multiple, competing jurisdictions can make it more
difficult, not less so, to control corruption, fraud, and tax evasion. Because, in practice, it may be
difficult to tell the difference between constructive and destructive competition, the decentralization
of government structures can, at best, make a marginal contribution to the control of corruption.
Furthermore, the mere existence of governments at the same level does not imply that politicians
will face strong pressures to attract businesses and residents through a clean image. Instead, the
government may be captured by a narrow protectionist elite that benefits at the expense of the general
public that is not, in fact, able to migrate easily. Corrupt politicians may also restrict commerce
across state borders (Ma 1995; Gerring and Thacker 2005). The very smallness and intimacy of local
jurisdictions may make corrupt relations possible (Rodden and Rose-Ackerman 1997). Indeed, the
most corrupt and patronage-ridden governments seem to be at the local level in many countries,
including the United States and Germany (Seibel 1997: 85–6). In Sicily the small size of local
governments facilitated the dominance of local politics by individual mafia families (Gambetta and
Reuter 1995: 119). A World Bank study documents the problems in development programs
worldwide that involve local participation. There are, however, positive cases in which local
citizens act as effective monitors of local government officials (Mansuri and Rao 2012).
New corrupt opportunities may be opened up by decentralization. Decentralization fed
corruption in school reconstruction (Poisson 2014) and medical clinics in Indonesia (Hofman, Kaiser,
and Schulze 2009) and textbook procurement in the Philippines (Poisson 2014). Especially when
users are assigned to a specific provider – as is common in education and health care –
decentralization may enable corruption because users have no options (Ahlin 2001).
Thus, it seems difficult to make a general argument in favor of decentralized government
structures. However, it is equally problematic to make the contrary argument that centralized
corruption is less harmful than the decentralized variety. We have already critiqued that argument in
our discussion of kleptocracy in Chapter 8. A centralized corrupt system may increase certainty and
decrease the total cost of corruption, as long as the hierarchical structure provides monetary or
punitive incentives for the rank and file to respect corrupt deals (Shleifer and Vishny 1993) – a
variant of what Johnston (2005) terms “Elite Cartels.” However, a corrupt central state may be very
unresponsive to local needs, and grand corruption can affect the entire country with no exit for those
seeking a corruption-free alternative. For example, if a country’s health system is centralized,
purchases of medicine and equipment are made by the national authority, which may respond more to
kickbacks than to patients’ and hospitals’ needs.
Alternatively, decentralized systems may result in noncollusive bribery that increases both
uncertainty and costs, especially if the lines of authority are multiple and unclear, so that citizens and
firms find that they must pay multiple bribes (Rose-Ackerman 1978: 167–88; Shleifer and Vishny
1993). Decentralization then does not produce interjurisdictional competition for honest government.
Returning to the medical industry example, when the system is decentralized, decisions made at the
local level may respond to local politics and favoritism; at the same time, pharmaceutical companies
have to pay kickbacks to a large number of local hospital administrators rather than a single
purchasing agent, which may ultimately be more costly than centralized purchasing. Many countries
decentralized health care in the 1980s and 1990s as an austerity measure for the central government,
leaving states and municipalities to fund it. The result was underfunding, a decline in quality of
service, and “informal payments” to make up the difference (Berman and Bossert 2000). In China
suppliers of pharmaceuticals and medical equipment routinely paid off local hospital staff to make
sales after the central government decentralized health care and put massive financial pressures on
hospitals to raise their own revenue (Rose-Ackerman and Tan 2015).
One key seems to be whether finances are centralized or decentralized. Centralized finance
lends itself to kleptocracy, in which the governing elite take a portion of the budget for themselves.13
If the decisions are decentralized, but the finances are still centralized, then there may be problems of
“leakages” at the various disbursement levels. This was the situation for education funds in Uganda
that were disbursed from the center but were largely stolen before they reached local schools
(Reinikka and Smith 2004; Reinikka and Svensson 2006). Another important consideration is the
level of accountability: Verón et al. (2006) stress the importance of upward accountability, while
Lessmann and Markwardt (2010: 631) find that decentralization is an effective anticorruption reform
only in countries with a free press. In the Ugandan case the worst effects of corruption were mitigated
by a program of publicizing allocated funds in local newspapers so parents and teachers knew what
funds were due (Reinikka and Svensson 2006; for other positive cases see Mansuri and Rao 2012).
Good government and effective citizen oversight at the local level are essential but, of course, these
features are important higher up as well. Decentralization and federalism, taken by themselves, cannot
be definitively associated with the incidence of corruption, either positively or negatively.
III. Independent Judicial Institutions and
Anticorruption Agencies
Many countries have exemplary anticorruption statutes that are not applied well (United Nations
1990: 22–7; Singh 1997: 636). Even if a nation’s prosecutors are actively engaged, this will mean
little unless the country has an honest judicial system. In the absence of such basic institutions,
specialized bodies focusing exclusively on corruption will be necessary.
A. The Judiciary
Convicting and punishing corrupt public officials and their private-sector counterparts requires an
independent judiciary, that is, one that provides for “the insulation of judges and the judicial process
from partisan pressure to influence the outcomes of individual cases” (Widner 1999: 177–8).14
Independence is necessary both to prevent politicians from interfering with legitimate prosecutions
and to stop incumbent politicians from targeting their political opponents. To make law enforcement
effective against corrupt actors, both inside and outside of government, the judges’ careers must not
depend on pleasing those with political and economic power. Obviously, judges and court officials
also need to be competent and to respect professional norms against self-dealing and conflicts of
interest. Otherwise, an independent judiciary could become a locus of corruption, isolated from
effective oversight. Composite measures of the independence and competence of the judiciary are
positively related to various outcomes, such as higher levels of growth (Feld and Voigt 2003; Voigt
2008; Voigt, Gutmann, and Feld 2015), low corruption, greater protection of human rights (Abouharb,
Moyer, and Schmidt 2013), and higher levels of political and economic freedom.15 A corrupt
judiciary contributes to lawlessness and violence if criminals are backed by wealthy groups willing
to corrupt the courts (Institute for Economics and Peace 2015b). An independent judiciary should
help limit the diversion of public funds into private pockets (see Figure 12.1, which suggests a strong
cross-country relationship between these two variables) and help to settle legal disputes fairly. If the
law on the books protects rights and promotes transparent government, the courts can limit
government overreaching, promote transparency, and be a check both on the state and on irresponsible
or fraudulent private actors.
Notes: Includes 144 countries. Each variable represents respondents’ perception, measured on a
scale from 1 (very poor) to 7 (very good). This graph does not prove causality: there may be other
variables that lead a country toward both greater judicial independence and lower (better) levels
of public embezzlement. A more sophisticated multivariate study would be necessary to explore the
marginal effect of an independent judiciary.
Figure 12.1. The cross-country relationship between judicial independence and diversion of
public funds.
Source: Generated by authors using World Economic Forum, Global Competitiveness Report
2014-2015 dataset, http://www3.weforum.org/docs/GCR2014-15/GCI_Dataset_2006-07-2014-
15.xlsx.
Independence is necessary but not sufficient. Judges must be not only independent but also
respected, competent, and responsible. If judges operate with no outside checks, they may become
slothful, arbitrary, or venal, exploiting their positions for private gain.
The judiciary needs to be able to sort out the strong cases from those that are weak and
politically motivated. Otherwise, even a large caseload that produces many convictions will have
little deterrent effect. Individuals may conclude that the likelihood of arrest and conviction is random
or, even worse, tied to one’s political predilections.
Even respected and independent judges can produce rulings that undercut reform. They may act
as guarantors of special interest deals enacted by past governments.16 They may zealously enforce
government actions that appear legal on their face but that are actually motivated by corruption. An
excellent example comes from the early years of the American Republic. A corrupt land sale
approved by the legislature of Georgia in the early 1800s was upheld by the U.S. Supreme Court in
the case of Fletcher v. Peck [3 L. Ed. 162–181 (1810)]. The Court was unmoved by the fact that all
but one of the legislators had been bribed. When the scandal was revealed, the entire legislature lost
office in the next election, but the Court held that the contract was a legal obligation of the state of
Georgia (Magrath 1966). What better way to encourage payoffs than a legal system that upholds
public contracts no matter what the underlying corrupt deals? This issue has recently been raised in
critiques of international arbitration tribunals where one of the parties claims that the original
contract was awarded through corrupt payoffs (see Chapter 14).
Because of these worries, no country has an entirely independent judiciary. Some form of broad-
based accountability to the government and the citizens is consistent with a well-functioning judiciary,
and such accountability provides a check on corruption and other forms of self-dealing within the
judiciary. Successful political regimes have found various solutions; none seems obviously superior,
but there are some common themes and some promising avenues for the reform.
In emerging democracies, efforts to create competent, independent courts have faced numerous
technical and political difficulties. An index of judicial independence (see Figure 12.1) gives
countries a score between 1 and 7, with 7 the highest score. The average score for the 144 countries
represented is 3.87; the median is 3.62. Worldwide, 43% of the countries score less than 3.5 – in the
lower half of the scoring range – from 4.3% of European countries to 62.5% of countries in Africa.17
Reports from Transparency International chapters in Latin America complain of political influence
over the selection of judges, especially by the executive. Similar problems with political influence
over appointments are reported by Transparency International in the Czech Republic, Georgia,
Pakistan, Russia, Sri Lanka, and Turkey (Transparency International 2007).
Authoritarian states face a particular difficulty with respect to the courts. The nation’s leaders
may want to reassure foreign investors by creating courts that can act independently of domestic
power structures. Independent courts operating at the grass roots may also act as a check on the state’s
bureaucratic hierarchy. However, maintaining credible independence is likely to prove difficult. In
China, judges are pressured to convict even when the defendant insists that his confession was
obtained through torture.18 Of the “nearly 150,000” cases in which the accused was charged with
corruption during the period 2008–13, fewer than 0.1% ended in acquittal in the courts.19 One reason
for a lack of independence in China is that judges are dependent on benefits they receive from
governments. Thus, it is difficult to separate zealous prosecution of the corrupt from biased efforts to
sideline troublemakers. Even though the judges are not necessarily corrupt, their dependence on the
state makes them weak checks on overzealous anticorruption efforts and other abuses inside those
governments (Gong 2004).
In contrast, in small countries with few law schools, legislators, prosecutors, defense lawyers,
and judges may all belong to the same network, as is the case in Bulgaria (Center for the Study of
Democracy 2010: 107). In France and Malta, Masonic Lodge membership has been implicated in
cases of judicial corruption (ibid.: 105, 108).
Several issues surround establishing and maintaining judicial independence. The first concerns
the judges. How are they selected and what are their career paths and tenure? How are their pay and
working conditions set? What specific rules govern conflicts of interest, asset disclosure, and ex
parte communication? How are judges protected from threats and intimidation, and, conversely, what
are the criteria for impeachment and what criminal statutes govern judicial corruption?
The second category is court organization and staffing. How are caseloads managed and how
large are caseloads? What is the role of clerks and other court staff? How is the court system
organized, and where are the prosecutors located in the structure of government? Are there juries or
lay judges, and do the public and the press have access to court proceedings? Are written opinions
common and are dissents and concurrences allowed?
Third, legal systems differ in the rules for getting into court, joining similar cases, dealing with
frivolous cases, and so forth. In addition, civil and criminal procedures differ, as does the role of
precedent, law codes, constitution, statutes, and agency rules. Lawyers’ fees and court costs are
assigned differently in different systems. Finally, the legal profession may be more or less
professionalized and respected, and legal education may not be up to date with contemporary
developments, especially in business law.
The ways these issues are addressed varies from country to country, specifically between civil
law and common law systems. In the former, the judiciary gains independence through professional
training, oversight, and career paths; in the latter, political balance, transparency, and public
participation play a larger role. In civil law systems, judges have little discretion in interpreting the
law, and a judgeship is a full-time, lifetime job, earned by passing a competitive exam, a fact that
limits problems with conflicts of interest, while formal rules also limit acceptance of outside
remuneration. However, cases are often decided by a single judge based on written evidence, behind
closed doors, and hierarchical corruption is a real risk. The use of panels of judges and the presence
of lay judges in some systems help limit corruption. If the judiciary suffers from a lack of resources
and staff, this can produce delays that litigants might pay to avoid. In the extreme, the judges and their
staff can create delays in order to generate payoffs. Finally, because judges are career civil servants
with salaries fixed by the state, they may be vulnerable to financial inducements offered by wealthy
litigants and their lawyers.
In the common law model, courts build on precedent in their effort to interpret the law and apply
it to new situations. Lay juries participate in many trials, providing a form of judicial check, and
trials are public, improving transparency. Civil and criminal procedures protect litigants’ rights but
lead to delays that create incentives for corruption. The judicial selection process is intertwined with
politics, whether judges are appointed or elected. In the United States, federal judges and many state
judges are appointed for life, so even if their nomination is politically charged, once appointed they
are immune to political pressure. Elected judges, by contrast, impose longer sentences as elections
approach (Huber and Gordon 2004; Gordon and Huber 2007), suggesting that election and reelection
may impair impartiality.
Because lawyers often become judges after a long career in private practice, avoiding conflicts
of interest is particularly important. If judges are independently wealthy from prior careers as private
lawyers, they may favor litigants associated with organizations in which the judges have a financial
interest. U.S. law has stringent requirements for disclosure of assets and restrictive limits on
permitted activities while in office.
Furthermore, because in the United States the prosecutor is inside the executive branch, certain
types of corrupt activities may be overlooked if they are too closely associated with the regime in
power. Similar problems may arise in Commonwealth systems if the judges are beholden to
incumbent politicians. Thus dereliction of duty may arise in forms that do not fit conveniently under
the legal definition of corruption but that nevertheless distort the operation of the judicial system.
Other actors, such as jurors and witnesses, are particularly vulnerable to corruption.
Some corrupt incentives are common to both systems. First, if pay and working conditions are
poor, judges and their staffs may be relatively easy to corrupt (Voigt 2007). Judges may be more
vulnerable to these inducements in civil-law systems in which they have few accumulated assets. In
the extreme, judges may be threatened and intimidated by wealthy defendants, particularly those
associated with organized crime or those accused of “grand” corruption at the top of government.
Judges may be offered bribes with the implication that if the offer is refused, the judge and his or her
family may suffer physical harm.
Second, bribes can avoid some of the costs of a judicial proceeding. Bribes can speed up (or
slow down) cases (ibid.).20 Even if judges are not corrupt, low-paid clerks in charge of assigning
cases and managing files may demand or accept bribes.21 The lack of formal court fees creates
incentives for court employees and judges to demand unauthorized fees (Buscaglia 1995).
However, a paradox exists. If the services of the courts improve, more people will use them,
leading to the need for even more resources to maintain service quality. In most markets, prices ration
the quality and quantity of services, but if congestion is a problem, each service user imposes costs
on others (Buscaglia and Ulen 1997: 278–83). If the price of the service does not reflect this cost, the
market will operate inefficiently. Litigants and their lawyers will continue to offer bribes to get to the
head of the queue. Hence, reforms in Argentina, Ecuador, and Venezuela simplified processes and
made them more transparent and eliminated some of the clerks’ discretion (Buscaglia 2001). The most
effective reforms were: (1) use of computer systems for information provision and the reporting of
corruption; (2) reducing the time to disposition and the number of administrative or procedural steps;
and (3) increasing options for alternative public and private methods of dispute resolution.22
Third, the rules governing the relations between judges, lawyers, and litigants can facilitate
corruption. Thus, if judges make a practice of meeting with the lawyer for one side– without the
presence of the other lawyer – this can be an invitation to corruption.
Fourth, if the caseload facing judges raises complex and technical issues not included in their
legal training, there is a temptation to use bribe payments to resolve such issues. In countries that have
just become committed to democracy and the free market, laws governing the private market either do
not exist or are vague and contradictory (Buscaglia and Dakolias 1996: 12). In Latin America one
study refers to the “jungle of laws” governing private contracts and argues that judges’ discretion
creates corrupt incentives that increase the uncertainty of the business climate. “The legislature and
executive produce a multitude of laws [that] make it almost impossible for anyone to know which
ones are actually in force. This uncertainty makes the courts the ideal place for bargaining,
corruption, and rent seeking” (Borner, Brunetti, and Weder 1992: 20, 29–30; see also Rowat, Malik,
and Dakolias 1995; Buscaglia and Dakolias 1996; Dakolias 1996; Buscaglia and Ulen 1997). Often,
it is hard to find the text of statutes and regulations, and there is sometimes a poor fit between the
formal law and the reality of private disputes (Linarelli 1996). Hence, rather than focusing on the
courts as an institution, reform may have to start by redrafting statutes and reforming legal training and
professional credentials.
The goal of reform is not just to improve the operation of the courts, but also to create a secure
legal framework for public policy implementation and private market activity. Corrupt incentives can
be reduced by laws that are well-drafted, relatively clear, and accessible to the public (ideally
online, as well as in public libraries) in the language(s) of the country. Then, not only will cases be
easier to resolve, but fewer disputes will arise.
B. Prosecutors
The organization and independence of prosecutors is another dimension for reform. Some, as in the
United States, are part of the executive branch. In other countries they are part of the judiciary. Either
option can create problems with independence and professionalism.
Among the range of options, one interesting experiment is the Brazilian public prosecutor
(Ministerio Público) system that is largely independent of the rest of government and has been able to
achieve a level of prestige and professionalism unknown under the previous system (Sadek and
Batista Cavalcanti 2003). The prosecutors were professionalized through careful selection of
candidates, inculcation of values and procedures, and detailed evaluation during their first few years
of practice (Coslovsky 2011). Nevertheless, the public prosecutor needs resources to function well
and cannot achieve reform on its own (Sadek and Batista Cavalcanti 2003: 210; Coslovsky 2011: 75–
6). Some prosecutors express frustration with the police, on the one hand, and with the judiciary, on
the other – either or both of which may be underresourced, corrupt, or incompetent. Hence the
prosecutors’ performance varies from state to state (Sadek and Batista Cavalcanti 2003: 211–13).
Some look for creative solutions to social problems, negotiating settlements in some cases to obtain
resources for their own offices, for regulatory agencies, and for social projects (Coslovsky 2011).
Furthermore, the prosecutors’ very independence risks the sort of impunity that can also be a problem
with an overly insulated judiciary (Sadek and Batista Cavalcanti 2003: 217–22; Coslovsky 2011:
71). In spite of the difficulties, the Brazilian case seems worth careful study: positive traits might be
copied elsewhere.
C. Alternative Dispute Resolution
If the law on the books does not mean much and the judicial system operates poorly, people will
avoid bringing disputes before the courts unless they are willing and able to be the high bribers.
Otherwise, they will find ways to circumvent the court system by hiring private arbitrators and using
other methods, such as the protection provided by organized crime. In Latin America, for example,
business people try to avoid using the courts to resolve disputes (Buscaglia 1995; Dakolias 1996;
Hammergren 2002, 2003). Informal Alternative Dispute Resolution (ADR) systems can be one
response. However, because such systems are generally less transparent than courts and harder for the
state to control, they carry their own risks. In Peru, for example, they involved “pseudo-attorneys,
false documents, forged title deeds, nonexistent identities, and virtually no legal guarantees” (Santa
Gadea 1995: 185). In Indonesia the courts are ineffective because of the widespread belief that many
judges are corrupt or incompetent (Das-Gupta and Mookherjee 1998: 427); alternative private
“collection agencies” are used by private creditors to extort payments. According to MacLean (1996:
158) a delinquent debtor in Jakarta may find a basket of snakes or a box of spiders in his home. In
Eastern Europe and Russia murders of businessmen and bankers have been common. Many were
apparently execution-style killings that were part of a brutal private system of “dispute resolution.”23
However, ADR can be a promising reform. One survey showed that ADR helped poor rural
households in Colombia resolve land title disputes (Buscaglia and Stephen 2005). In the survey
areas, few households used the courts, and few obtained a final resolution to the cases they brought to
court.24 The obstacles most mentioned were lack of information, costs in money and time, and
corruption (ibid.: 98). A system of Complaint Boards or Panels, composed of respected local
volunteers, was introduced into parts of rural Colombia in about 2000. The study shows that they
operated much more effectively to resolve land disputes. Even though their decisions are only
advisory, the local governments accepted Board rulings in recording ownership. Land values rose for
those using that system compared to those using the courts, with the relative gains for the poorest
being especially high. These gains went along with much lower costs as a percent of the stakes. The
use of Complaint Boards apparently both raised property values and cost less. Nevertheless, as
Buscaglia and Stephan point out, these results should not lead one to abandon court reform in favor of
a wholesale shift to ADR. Such processes cannot be used for cases in which “the public interest is at
stake and where, consequently, ex ante guidance is required (e.g. civil and political liberties cases)”
(ibid.: 103). The problem of court reform cannot be abandoned but can perhaps be integrated with
bottom-up informal institutions.
D. Independent Anticorruption Agencies
An alternative to relying on existing prosecutors and police forces is the creation of an independent
anticorruption agency (ACA) reporting only to the chief executive or parliament.25 Dozens of
countries have established ACAs in the past several decades. ACAs are partly a response to pressure
from the international community to fight corruption, as we discuss in Chapter 14.26 The European
Union and the United States have supported the creation of ACAs in the new member states of the
European Union, apparently with some positive effects. At least in Romania, press reports suggest
that the ACA, headed by an energetic, courageous lawyer, has begun to have a positive effect and has
earned acceptance from the top of government although her de jure independence is rather weak.27
Although ACAs have become a popular approach to combating corruption, they have yielded
mixed results. There have been notable success stories, but also many countries in which corruption
has persisted despite the establishment of an ACA. They can also be a tool to limit dissent.
The best-known examples are provided by Hong Kong and Singapore, both city-states and
former British colonies. In both cases, the turnaround in corruption combined commitment from the
top, credible law enforcement by an independent agency operating under a strong statute, and reform
of the civil service. Corruption was endemic in Hong Kong in the 1960s (Manion 1996b; Skidmore
1996). Spurred to action by a scandal involving a high-ranking police officer, the governor
established an Independent Commission against Corruption (ICAC) in 1974 that reported only to the
governor and was independent of the police force. Officials in the ICAC were paid more than other
bureaucrats, and were not subject to transfer to other departments. No one in the ICAC could end up
working for a more senior officer who had been subject to investigation. The ICAC was given the
power to investigate and prosecute corruption cases, to recommend legal and administrative changes
to reduce corrupt incentives, and to engage in a campaign of public education (Rahman 1986: 144–6;
Klitgaard 1988: 98–121; Quah 1995; Manion 1996b; Skidmore 1996). To avoid conflicts of interest,
ICAC employees are banned from working for the government after they leave the ICAC, but turnover
is low, so this is not much of a concern (Heilbrunn 2004).
The credibility of the new institution is indicated by the increased number of complaints it
received upon establishment and by the high proportion of complaints that were not anonymous. In
addition to the ICAC’s independence, the government appointed a person of unquestioned integrity to
head the ICAC and instituted an initial policy of investigating and prosecuting “big tigers” (Klitgaard
1988; Manion 1996b). Efforts to clean up corrupt syndicates within the police, however, met with
protests, and the ICAC backed down and granted an amnesty for offenses committed before January 1,
1977.28 This setback was harmful, but the ICAC was able to recover with a vigorous focus on public
education. Surveys of the public carried out between 1977 and 1994 indicate that public perceptions
of corruption fell during the early years of the ICAC. Indirect evidence suggests that corruption did, in
fact, decline along with public perceptions (Manion1996b). However, now that Hong Kong has
reunified with China, business opportunities on the mainland have increased the benefits of
corruption. Indeed, perhaps the most problematic area is Chinese trade through Hong Kong (Fisman,
Moustakerski, and Wei 2008).
Among Asian countries, Singapore stands out as a relatively clean place to do business.
Singapore ranks among the “cleanest” countries on both the CCI (8/210) and the CPI (7/100). But
during the colonial era, it was a very corrupt place. Just after World War II, graft was pervasive,
especially in the police department (Quah 1989, 1994). When the People’s Action Party (PAP)
assumed power in 1959, it strengthened the powers of an existing Corrupt Practices Investigations
Bureau (CPIB), and in 1970 placed it directly under the prime minister’s office. The CPIB has
succeeded in limiting corruption (Rahman 1986: 149–52), but it is not subject to external checks and
those accused of corruption have sometimes accused the agency of heavy-handed behavior that
violated their rights (Quah 1989).
Singapore also reduced corrupt incentives by giving civil servants a stake in their jobs through
high wages, bonuses, and favorable working conditions. The aim is to keep compensation packages in
line with private-sector alternatives (Klitgaard 1988: 122–33; Quah 1989, 1994, 1995).
Successes also sometimes accompany the creation of more specialized ACAs that monitor a
particular government system. For example, the School Construction Authority of New York City
established an internal agency with some independence to both ferret out corrupt contractors and
propose internal reorganizations that reduce corruption. This hybrid form does not focus only on
after-the-fact law enforcement, but also helps design internal control systems. Although some critics
believe that it has been too rigid and intrusive, the New York Authority has apparently paid for itself
by saving the city many millions of dollars.29 This experiment suggests the value of mixing the
benefits of an independent prosecutorial body with an oversight capability located inside a public
agency. This option presents tricky problems of avoiding co-optation, but it promises to make
possible structural reforms that would be beyond the scope of the Hong Kong and Singapore
institutions.
Independent ACAs are a popular reform proposal for developing countries (Recanatini 2011a),
but the widespread powers of an ACA could be abused in systems less committed to the rule of
law.30 As a check on its power, such an agency might report, not to the chief executive, but to the
legislature – as does the Government Accountability Office (GAO) in the United States.31 The GAO
monitors the federal executive branch but reports directly to Congress. It resolves contracting
disputes, settles the accounts of the U.S. government, resolves claims of or against the United States,
gathers information for Congress, and makes recommendations to it.
Another potential problem is an underemphasis on structural reforms. For example, the process
of obtaining a driver’s license in Hong Kong had become very long and cumbersome. The ICAC
discovered that bribes were paid to obtain licenses speedily. Even though the ICAC’s mandate
includes recommending ways to reduce corrupt incentives, the agency focused on enforcing the law
against corrupt drivers and civil servants rather than on reforming the bureaucracy to streamline the
issuance of licenses (Skidmore 1996). An anticorruption policy will not be very useful if it leaves in
place the restrictive laws and cumbersome processes that produced incentives for bribery in the first
place. An ACA ought to be only one part of a larger strategy that includes more fundamental reforms
that go beyond law enforcement.
The necessary conditions for success of an ACA include political support at the highest levels
and also in middle management; the introduction of clear anticorruption legislation; an effective law
enforcement structure; coordination and cooperation among agencies and jurisdictions; and sufficient
funding – guaranteed for the medium term. The ACA should be but one part of public-sector reform,
and should be supported by a publicity campaign to enlist the support of citizens, the media, and
NGOs. Clear performance indicators for the ACA should be announced beforehand and their values
published periodically (websites enable the public to oversee the ACA) to ensure accountability of
the agency, demonstrate that the agency is effective, and guard against politically motivated
prosecutions. Separating the power to appoint from the power to fire the head of the agency provides
checks on authority over the ACA and helps to ensure its independence. International donors should
provide funds for the medium term in order to avoid a strong start followed by limited results
(Recanatini 2011a). Firms should also play a role, reporting corruption to the agency, because they
are in a position to observe corruption in public procurement, customs administration, and tax
collection.
All too often, ACAs are underfunded, understaffed, disempowered, and unpopular in either the
political or social sphere, or both. In some cases, the ACA’s successful identification of corruption
cases among the powerful has led to accusations of corruption within the ACA, resulting in the
imprisonment or exile of the ACA head. In others, the ACA identifies the cases, but then turns them
over to the judicial system, where impunity reigns.
IV. Openness and Accountability
The public can be an important check on the arbitrary exercise of power by government. This check
can only operate, however, if the government provides information on its actions. Citizens must have
a convenient means of lodging complaints and be protected against possible reprisals. Of course,
government officials must also find it in their interest to respond to complaints. There are two basic
routes for public pressure – collective complaints by groups of citizens concerning general failures of
government and objections raised by particular individuals against their own treatment at the hands of
public authorities.
A. Information and Auditing
A precondition for either type of complaint is information. In addition to passively placing
information on a website, agencies can be proactive: circulating posters, fliers, and videos that tell
people what they can expect from honest officials and how to make a complaint.
In addition to basic information on official standards of behavior, citizen activists need more
comprehensive information. Government must tell them what it is doing by publishing consolidated
budgets, revenue collections, statutes and rules, and the proceedings of legislative bodies. Such
practices are standard in developed countries, but many developing countries are seriously deficient.
Former colonies often use systems originally imposed by the colonizer, which may not fit local
conditions. A number of developing and middle-income countries have moved toward greater
budgetary transparency. Several civil society organizations promote transparency and provide
assistance, arguing the shift is often not at all costly because the data are usually already available.
For example, a local group in Nigeria translated opaque budget data into easily understood
graphics.32
Financial data should be audited and published by independent authorities such as the GAO in
the United States or the Audit Commission in Great Britain (United Kingdom 1993, 1994, 1996). The
British Audit Commission audits both local governments and the National Health Service and reports
to the national government. Both institutions are independent of the government agencies they audit – a
necessary condition for credibility.33
Outside of the United States and the United Kingdom, audit agencies vary in professionalism and
independence. Santiso (2007) evaluated the audit agencies in ten Latin American countries. He found
that all have weaknesses, but that overall Brazil, Chile, and Colombia were the best and Argentina
and Ecuador were the worst. He ranks them in terms of independence, credibility, timeliness, and
enforcement. Although most agencies rank fairly well in terms of formal independence and
enforcement powers, they do less well in measures related to actual performance – credibility and
timeliness. Although the number of data points is too small to draw firm conclusions, there is a
positive relationship between the effectiveness of external audit agencies in Latin America and the
quality of fiscal governance defined by the efficiency of the bureaucracy, the control of corruption,
and the strength of public institutions. However, more detailed case study research is necessary to
make any causal inferences. Santiso’s study (2007) of Argentina, Brazil, and Chile and Ackerman’s
studies (2007, 2010) of Mexico provide much more nuance. Even for audit institutions that rank
relatively well, the authors locate serious problems. Santiso even concludes that Chile’s Contraloría
General de la República is too independent, leaving it insulated from political accountability, and
excessively legalistic and procedural.
Ferraz and Finan (2007) took advantage of a natural experiment in Brazil, under which the
federal government randomly audited the accounts of municipal governments and revealed the results
to citizens before elections. Voters lowered their electoral support for mayors of municipalities with
problematic accounts, especially if local radio stations publicized the results. Independent audits and
media exposure helped determine electoral outcomes. The Brazilian federal agency is also an
example of the positive role that a federal structure can play. If federal government monitors are
credibly impartial, they can check the behavior of state and local governments whose own politicians
would not have incentives to establish such oversight themselves.
However, sometimes sitting politicians do pass statutes setting up independent monitors of their
own governments. They may do this in response to scandals or because they fear losing power in the
next election and want to limit the new government. In Brazil, for example, incumbent governors were
more likely to support the creation of independent state audit agencies in competitive polities than in
single-party states (Melo, Pereira, and Figueiredo 2009). Information about mayors’ irregularities
must be publicized in the election year to make a difference in their reelection chances because
corrupt officials may use illicitly obtained funds to buy votes and because corrupt officials have a
strong incentive to stay in office (Pereira, Melo, and Figueiredo 2008).
Another positive case is a field experiment involving road construction in 608 Indonesian
villages, where Olken (2007) finds that an increased probability of being audited reduces missing
expenditures. At the time the study was initiated, all the villages were in the beginning stages of
building a road as part of a nationwide development effort. A randomly selected subset of villages
was told that their projects would be audited by the central government audit agency, effectively
increasing the probability of audit from 4% (the baseline audit rate) to 100%. The audit treatment
reduced missing expenditures by more than 8%. This translates to a net benefit per village of around
$250. Unfortunately, in projects with weak financial controls it may be difficult to establish a cost
benchmark as Olken was able to do in Indonesia. In that case, cost overruns can simply lead the
recipient polity to ask for and obtain more funds.34 Thus, auditing needs to be part of an overall
system of financial controls and benchmarking. In such cases, all that is needed is evidence of cost
discrepancies not justified by differences in background conditions. Other studies also support
auditing as a tool to improve service delivery. Thus, Golden and Picci (2005) compared costs and
physical infrastructure in Italy to generate a rough measure of the productivity of public spending. In
general, infrastructure spending was most unproductive in the poorer southern regions, despite lower
private-sector costs, suggesting higher levels of corruption and waste.
If financing is centralized but administration is decentralized, audits can detect “leakages” on the
path from the central government to the final program for which the funds are destined. For example,
Public Expenditure Tracking Surveys (PETS) compare funds disbursed at one level of government to
those received or disbursed at the next level. Reinikka and Svensson (2006) document the results of
the first PETS that the World Bank carried out in Uganda in 1996: 87% of funds earmarked for
primary education never reached the schools. Similar PETS in Ghana, Peru, Tanzania, and Zambia
between 1998 and 2001 revealed leakages from 10% to 76% (the extremes occurred in Zambia); one
survey of teacher payrolls in Peru was halted due to threats (Hallak and Poisson 2007: 105). Sundet
(2008) laments that many PETS are seen as an end – informative – rather than a means to mobilize
reform.
Such studies could be used as diagnostic tools to allocate both public funds and monitoring
resources. As an example, Di Tella and Schargrodsky (2003) studied a program in Argentina where
the prices hospitals paid for standardized products were monitored. The authority announced that it
would examine closely any prices that were especially high relative to the average. As a result,
prices both fell and converged. Hence, auditors ought to check for links between the price and the
quantity and quality of public services as an indirect way of getting at corruption and a direct way of
achieving better public-sector performance.
In all democratic countries the legislature can play an important role in reviewing the spending
of the executive. In presidential systems, congressional committees, aided in the United States by the
GAO, can provide continuing oversight. In parliamentary systems on the Westminster model, Public
Accounts Committees (PACs), often headed by a leading opposition member of Parliament, perform a
similar function (Chester 1981). In the United Kingdom, for example, the PAC issued a report in 1994
arguing that serious failures in administrative and financial systems had led to money being spent
wastefully or improperly (Doig 1996: 174).
Legislators themselves may misuse public funds. In the UK a 2009 report revealed instances of
“gaming the expense system” with personal expenses unrelated to parliamentarians’ work, resulting in
prison sentences for members.35 An inquiry in Canada found abuses on a smaller scale by members
of the ruling Conservative party.36
In both the United States and in Westminster democracies, the involvement of opposition
politicians in oversight means that the review will have a political cast. The input may be in the form
of accounting documents, but the debate will be influenced by political factors. This is as it should be
in a well-functioning democracy, but it is hardly an unbiased way of uncovering malfeasance. If
violations of the criminal law are uncovered, there must also be an unbiased prosecutorial and
judicial system available to pursue the allegations.
In many countries, outside review is hampered because unaudited, secret funds are available to
the chief executives and top ministers. These funds are an invitation to corruption throughout the
world.37 In the United States, despite the Freedom of Information Act, the budgets of the individual
national security agencies such as the Central Intelligence Agency are not published.38 Oversight is
provided by a special committee of Congress – a level of review that goes beyond many other
countries where the executive essentially has unfettered discretion over a secret account. For
example, before 1989 the United Kingdom simply refused to formally acknowledge that it had an
intelligence service (Shpiro 1998). In Brazil, when President Collor’s impeachment was before the
Congress, observers worried that his allies were seeking to use secret government funds to bribe the
members to obtain a favorable verdict (Geddes and Ribeiro Neto 1992).
In general, however, audit agencies in other polities are not as independent of the governments
they audit, and they report to the legislature. In a parliamentary system the legislative majority selects
the cabinet; hence the two are not really independent of each other. Although audits may help citizens
to evaluate state functioning, they are part of the government structure.
In addition, many countries facilitate direct citizen oversight through freedom of information acts
(FOIAs) that permit citizens and organizations to access government information without having to
give a reason for their interest in the material.39 There has been an explosion in such laws in recent
decades (Ackerman and Sandoval 2006; Neuman and Calland 2007). The earliest example, dating
from 1974, is the U.S. Freedom of Information Act,40 which sets out the basic principles including a
range of exceptions, time limits on bureaucrats, and provisions to help agencies manage the process
including guidelines on fees and record-keeping requirements. The European Union (EU) requires
access to EU “documents” – a seemingly less inclusive term than “information,” but numerous
Member States have more inclusive statutes.41 The U.S. has no government agency charged with
legally resolving disputes. Instead, complainants must go to court or seek mediation through an
ombudsman in the new Office of Government Information Services [OPEN Government Act of 2007,
Pub. L. 110–81, sec. 10]. In contrast, some countries have strong independent agencies that monitor
and manage the implementation of the law. Examples are Mexico, Jamaica, Canada, and Hungary
(Rose-Ackerman 2005: 149–53; Neuman and Calland 2007: 204–5).42
FOIAs are only effective if the government actually collects data that citizens find useful. They
are necessary but not sufficient conditions for accountability. Some FOIAs mandate the collection and
dissemination of particular types of information, including requirements for open web access to
certain materials.43 Furthermore, the cost of complying with information requests encourages
agencies to take steps ex ante to organize their files and to make more of them available online.
Neuman and Calland (2007) outline the implementation challenges. A strong civil society can help
keep pressure on the state to perform, and such groups should concentrate on the procedures for
information management and disclosure. Successful implementation is quite expensive both in start-up
costs and in the ongoing response to requests. Poorer countries will need to find ways to keep costs
down without undermining the law’s purposes. To get a sense of the costs, the authors take the
example of Mexico, one of the few countries where budgetary figures are available. In its first year
the Mexican Federal Institute for Access to Information had a budget of U.S. $25 million (0.033% of
GDP, compared to 0.0007% in the United States and 0.004% in Canada), a new building, a staff of
more than 150, and an advanced Internet-based system “that would make major corporations jealous”
(ibid.: 193).
A FOIA aims to keep government accountable overall, but it can also have specific
anticorruption benefits because the provision of information can be a cost-effective way to limit
corruption (Di Tella and Schargrodsky 2003; Reinikka and Svensson 2006). In particular, a field
experiment in India studied citizens applying for a welfare program. One group of applicants used the
country’s FOIA to check on the progress of their files compared to others who simply waited for
service or paid middlemen, who were presumed conduits for bribes. Using the FOIA reduced waiting
time and was cheaper than paying a bribe (Peisakhin and Pinto 2010). This result was obtained with
the help of a local civil society organization, suggesting that the mere existence of a FOIA is not
sufficient. Groups may need to invent ways to use the law to limit corruption and to publicize and
facilitate its use.
FOIAs can be abused, however. In Texas, a regent of the University of Texas at Austin requested
more than 800,000 pages of documents from university offices, imposing costs of more than $1
million on the university.44 Other individuals and organizations have also “filed many large records
requests” with the university system.45 When resources must be dedicated to fulfilling such requests,
they must be shifted from other duties, and may undermine the primary purpose of a department or
agency.
In the United States, other sources of information are legislative hearings that are open to the
public unless national security is at stake, as well as many executive branch meetings and hearings.
For multimember agencies, the Government in the Sunshine Act gives citizens access to every meeting
that includes a decision-making quorum (5 U.S.C. §552b). Some critics of the act urge that open-
meeting requirements be made more effective through better publicity and the provision of
background materials. Others argue that the act undermines the agencies’ deliberative processes
(Tucker 1980: 547).46 But even critics would retain the requirement that votes and other important
substantive decisions be made in open meetings. At issue is the public’s right to present information
to the executive branch, to learn the reasons for decisions, and to flag those that are most likely
influenced by corruption and favoritism.
But a FOIA has little value if government does not gather much information. Many countries must
first put information systems in order, provide for the publication of the most important documents,
and assure public access to other unpublished material. Similarly, an open-meeting rule is of little
value if the formal law is so vague that any decision can be justified. These measures provide some
measure of accountability, but the value of that accountability depends on the degree of
democratization.
B. The Media and Public Opinion
Even a government that keeps good records and makes them available to the public may operate with
impunity if no one bothers to analyze the available information – or if analysts are afraid to raise their
voices. There are three routes to accountability. If the aim is to pressure government to act in the
public interest, the role of both the media and organized groups is important. If the goal is government
accountability to individuals, avenues for individual complaints must be established. In all three
cases – media, groups, and individuals – there is the problem of fear. If government officials or their
unofficial allies intimidate and harass those who speak out, formal structures of accountability will be
meaningless.
The media can facilitate public discussion if it is privately owned and free to criticize the
government without fear of reprisal. Even undemocratic rulers are likely to be sensitive to public
opinion if they wish to avoid civil unrest. Thus a free press is an essential check, especially in
undemocratic countries that lack other means of constraining politicians and bureaucrats. And if
elections are important, the media is also crucial.
Nominal press freedom will be insufficient if most of the media is associated with political
parties. In Italy corruption only became big news as the Italian press became increasingly
independent from the political system (Giglioli 1996: 386). Government can also keep the press in
line through advertising, printing contracts, and payments to journalists. Mexican newspapers, for
example, have been controlled through these methods. In Argentina, Di Tella and Franseschelli (2011)
found that government advertising in four major newspapers fell when corruption stories were
featured on the front page (or vice versa). More recently, when certain media covered apparent
personal enrichment by presidents Néstor and Cristina Kirchner,47 the latter “began to deprive [them]
of state advertising.”48 Another subtle form of control is to overlook underpayment of taxes by editors
and media companies, retaining the possibility of prosecution as a threat.49
In many countries restrictive libel laws give special protections to public officials (Pope 1996:
129–41; Vick and Macpherson 1997: 647).50 This is just the reverse of what is needed. Politicians
and other public figures should be harder to libel than private citizens, not easier. They should not be
immune to facing charges of corruption, and allegations of libel should be handled as civil, not
criminal, matters. In this at least, the United States provides an outstanding example with a law that
makes it more difficult to libel public figures than private individuals and that almost always treats
libel as a civil offense.51 Those in the public eye have assumed the risk of public scrutiny and have
access to the media to rebut accusations (Vick and Macpherson 1997: 650; Sanders and Miller 2013–
14). The First Amendment protects speech, especially speech that seeks to hold public officials to
account. However, some argue that the distinction between public figure and private individuals has
eroded in the Internet age and that libel should be a civil offence that must meet the high standard of
“actual malice” in all claims (Sanders and Miller 2013–14).52 Threats of lawsuits operate as a
serious deterrent elsewhere. Great Britain has no public figure defense, and some claim that its libel
law deters critical reporting of issues affecting the public interest (Vick and Macpherson 1997: 627,
649–50). Britain repealed the criminal law against sedition and seditious libel in 2009 although the
reform was hardly a major step as, in practice, the law was rarely enforced.53 Free speech
advocates, nevertheless, hailed the reform as a way to pressure other countries to decriminalize
libel.54 The uniform treatment of public and private figures remains in the UK, however, and may
deter certain kinds of political critique.
An especially clear example of the chilling effect of a strong libel law is Singapore, where top
politicians successfully sued both the media and political opponents.55 In Liberia an investigative
reporter was imprisoned in 2013 after being unable to pay a court judgment in a libel suit brought by
a politician who was dismissed for graft.56 In some Latin American countries libel can still be
prosecuted as a criminal instead of a civil action, but this has changed in some states, such as Mexico,
which abolished criminal libel in 2007.57
Political control is usually more subtle than outright censorship. But, in the extreme, a sitting
government may simply buy off the media with regular payments conditional on their subservient
behavior. A study of the regime of President Fujimori in Peru demonstrates the importance of a free
media in maintaining democracy. McMillan and Zoido (2004) studied the tapes made by Vladimir
Montesinos, President Fujimori’s top advisor. The videos recorded his payoffs to legislators, judges,
and the media. The relatively large size of the payoffs to television stations suggests their importance.
McMillan and Zoido show how a state with exemplary formal constitutional rules, providing for
elections and checks and balances, can be undermined by corrupt high-level officials. However, it
was not sufficient to pay off the media; Montesinos recognized that the information available to the
public must be manipulated as well. In fact, the one independent cable station, which was not
corrupted, ultimately brought the system to light and led to the downfall of the government. Another
data point is the Ferraz and Finan (2007) study mentioned previously, where radio broadcasts of
incumbents’ finances were a critical part of a strategy that helped punish corrupt incumbents at the
polls.
But in poor countries with high levels of illiteracy, the media can play only a limited role. Many
people have limited education and little understanding of government operations.58 This has two
implications for reformers. First, government or independent private organizations might provide
educational programs to help people understand what they should expect of a legitimate government.
Some low-level bribery arises because people suppose that they ought to provide gifts in gratitude for
favorable decisions by superiors (Pasuk and Sungsidh 1994). Citizens may have no notion that public
officials owe them anything.
Second, the government needs a means of identifying the concerns of poor and marginalized
groups without making them subject to penalties for speaking out. A free media can help here if it can
sponsor or publicize surveys of popular attitudes. Even if the media plays only a limited role in
telling citizens what the government is doing, it can still tell the government what people think and
what difficulties ordinary people face when dealing with bureaucracies.
C. Private Associations and Nonprofit Organizations as Agents of Change
A free media with good access to government information is not likely to be a sufficient check,
especially in an autocracy. Individuals and groups must push for change, but they face a familiar free-
rider/collective-action problem. Information may be available, but no one may have an incentive to
look at it. The scandals uncovered by investigative journalists may provoke outrage, but no action.
Laws that make it easy to establish private associations and nonprofit corporations will help.
This will facilitate the creation of watchdog groups like Transparency International, a Berlin-based
nonprofit focused on corruption with national chapters in more than one hundred countries.59 These
local chapters carry out a range of activities including participation in Integrity Workshops,
anticorruption training for public servants, data collection and publication, and advocacy for victims
of corruption. Transparency International regularly issues press releases calling for reform in a
particular country or specific action on a particular case.
Some governments limit NGOs or make it very costly for them to organize. Formal legal
constraints may be high, and members may be subject to surveillance and harassment (Carothers and
Brechenmacher 2014). Once registered, nonprofits may face onerous formal reporting requirements.
However, in practice, such rules mean little in many countries because the state lacks enforcement
capacity. Sometimes the very ineffectiveness of the state can be a source of freedom (Bratton 1989:
577–8).
Another problem is co-optation. Some nonprofits organize and administer development
programs for the poor with financing provided by the state or by aid funds administered by the state.
Their very existence depends upon cooperation with public authorities. Hence, they may be reluctant
to criticize officials openly (ibid.: 578–9). To avoid such tensions, an NGO that takes on an
anticorruption mandate should avoid participation in service delivery.
In countries with an honest and independent judicial system, another possibility arises for the
indirect control of corruption. Private individuals and groups can be given the right to bring suits to
force compliance with tax and regulatory laws. The aim of such suits is not to uncover bribery but to
obtain compliance with the underlying substantive law. No evidence of corruption need be presented.
Instead, the focus would be on regulatory or tax law violations. This procedure operates fairly well
with respect to projects funded by the World Bank, as outlined in Chapter 14: affected parties appeal
to the World Bank on the basis of operating rules that have been broken, usually without any proof of
corruption.
Few legal systems provide an opportunity for individuals to sue to protect public values. They
must demonstrate that their own rights or interests were actually injured, and only then can they have
standing before the courts. Of course, sometimes an individual can further public-interest goals in the
process of vindicating his or her individual rights, but many administrative failures are beyond the
purview of the courts in such systems. The U.S., German, and Japanese judicial review processes
share this weakness, with a few exceptions (Fuke 1989; Rose-Ackerman 1995a; Rose-Ackerman,
Egidy, and Fowkes 2015). As a commentator on Japanese law notes, “[C]ertain comprehensive
administrative activities may bring about irreparable damage to the public as well as specific persons
in the long run, without causing any immediate, specific, personal and justiciable injury to anyone”
(Fuke 1989: 232). Some types of corruption that raise the costs and lower the effectiveness of
government are in that category.
Outside of the United States the losing party in a lawsuit commonly pays the legal fees of both
sides. The American innovation is one-sided fee shifting – private plaintiffs who bring citizen suits
against the government or polluters are compensated for their legal fees if they win but are not
required to pay their opponents’ fees if they lose. This is a valuable innovation that could be applied
in the anticorruption context. One-sided fee shifting gives public interest groups an incentive to focus
on the most worthy cases. It has the further advantage of forcing firms that gain from paying bribes to
pay most of the cost of enforcing the law against them. Because accusations of corruption and
malfeasance can be motivated by revenge, the law might include a provision that shifts all legal fees
onto the plaintiff for suits found to be harassing or vindictive – so long as the courts can be relied
upon to apply the rule sparingly. For example, the U.S. law that protects whistle-blowers generally
awards them their legal fees but with an exception for suits that are “frivolous, clearly vexatious, or
brought primarily for purposes of harassment” [31 USCS § 3730 (d)].
In countries with weak courts and ineffective governments, reform efforts can be frustrating. A
group knows that government is working poorly, can document its failure, and speaks out in protest.
The media reports the group’s complaints, and they are the source of widespread public debate. But
the government may not react. In a democracy, political opposition can make corruption a campaign
issue. In an autocracy, political opponents are likely to be relatively weak. An anticorruption
organization can do little without some cooperation from the country’s political leadership. Here
corruption may be an easier issue for citizens to tackle than other controversial topics such as land
reform or labor rights. Although some autocrats operate with impunity, indifferent to domestic public
opinion and criticism from the outside world, others are not so self-confident or powerful. In these
cases, reform may be possible with NGOs pushing the state to change and working with it to make
reform happen.
Nevertheless, serious anticorruption efforts may require a radical realignment of the relationship
between ordinary people and the state. Citizens may be afraid that complaining will only make things
worse for them personally. Greater popular voice may challenge deep-seated views about the
prerogatives of rulers. However, even autocrats have been known to reform when the cost in lost
investment and growth is especially obvious.
D. Avenues for Individual Complaints
Fighting high-level corruption requires national attention and private organizations willing to push
leaders for change. In contrast, limiting low-level bureaucratic corruption is often in the interest of
top officials, who may try to enlist ordinary citizens in the effort. This can be done without organized
citizen activity if individuals can lodge complaints easily and without fear that corrupt officials will
take revenge.
Recall the distinction made in Chapter 2 between bribes made to get around the rules and bribes
made to get a benefit that should have been provided for free. Facilitating complaints will only help
uncover the latter type of corruption. Bribes that permit illegal activities or that soften a legal
regulation or tax assessment are unlikely to be revealed by private individuals and firms unless they
have been arrested and are seeking to mitigate their punishment. In contrast, if bribery demands are a
condition for obtaining a legal benefit, individuals may not go along if they can appeal to an honest
forum.
The appeals processes must be not only honest, but also speedy and efficient. The plaintiff must
have a right to obtain information about his case from bureaucrats. For example, land consolidation in
Uttar Pradesh in India apparently was achieved with relatively low levels of corruption. The keys
were an open process with real participation by those affected, time pressure, and speedy and fair
appeals (Oldenburg 1987).
Complaints are unlikely if people fear reprisals. For this reason, e-government tools such as
toll-free phone numbers and portals for anonymous complaints and presentation of evidence are
important. If telephones and Internet service are not widely available to people in rural areas (in
local dialects) or in poor urban neighborhoods, other methods of collecting complaints must be found.
“Hotlines” must be more than just symbolic. Public officials – the ombudsman, agency oversight
units, or law enforcement agents – must follow up on complaints in a visible way. At the same time, if
the complaints concern individuals, the accused must have a credible way of defending against false
accusations. Otherwise, an anticorruption campaign can degenerate into a collection of private
vendettas with people enlisting the state to settle their private feuds.
Many countries have established ombudsmen to hear complaints of all kinds, not just those
related to malfeasance. These offices can help increase the accountability of government agencies to
ordinary citizens (Antoniou 1990: 68–78; Pope 1996; Noorani 1997). Hence they may generate a
great deal of resistance from politicians and bureaucrats. Although this is regrettable, one should have
modest expectations for an ombudsman. These officials seldom uncover large-scale systemic
corruption and generally lack authority to initiate lawsuits.
Furthermore, the existence of ombudsmen and other complaint mechanisms will not work if
people are unwilling to complain. One way to encourage insiders to come forward is a whistle-
blower statute that protects and rewards those in government agencies and private firms willing to
complain. Important factors are the role of the media, the lobbying of groups seeking change, and
sympathetic legislators in key positions. Whistle-blowers acting with such support can put issues on
the agenda, catalyzing a larger process of change. One study (Johnson and Kraft 1990) details two
early case studies of successful whistle-blowers within the U.S. government. One revealed abuses in
the hazardous waste program in the Environmental Protection Agency; the second protested policy
toward people with AIDS in the Office of Civil Rights in the Department of Human Services. Both
whistle-blowers were policy entrepreneurs who attracted widespread media coverage and used
members of Congress to highlight their concerns. Both could rely on the support of organized interest
groups to back up their efforts. In the field of corruption control a public mobilized against corruption
is essential if a whistle-blowing statute is to do more than provide formal legal protections to
complaining officials and private-sector employees. Thus in developing countries that lack such
organized groups whistle-blower protection cannot be an important feature of a reform strategy until
such groups are in place.60 Even in the European Union, the vast majority of countries have only
partial whistle-blower protection, at best (Transparency International 2013d).
E. Grassroots Oversight of Government Programs
Sometimes public oversight can be more effective if it moves beyond individual complaints to take an
organized local form, perhaps aided by civil society groups. Sometimes this type of oversight is
limited by fear of intimidation, which may be justified by the actions of those in power.61 If the
problem is acute at the local level, higher levels of government need to prevent corrupt local officials
from operating with impunity. Democracies need to ensure that the routes for public oversight and
complaint are open to those at the bottom and that fears of intimidation are addressed in an open and
straightforward fashion. However, long-standing patron-client relationships between politicians and
local elites, on the one hand, and ordinary citizens, on the other, sometimes make independent
monitoring difficult.
Much of the research on the role of grassroots participation draws on cases in South Asia and
Africa (Rose-Ackerman 2004: 316–22). As Deininger and Mpuga (2005: 172) conclude, “both
governments and donors might be well advised to focus on ways by which ordinary citizens can hold
(elected and appointed) bureaucrats to account as a means to improve outcomes in the public sector.”
In Latin America, for example, numerous attempts have been made both to involve rural people in the
design and monitoring of agricultural development programs and to increase the participation of city
dwellers in government decision making. The rural development programs were designed to improve
the targeting of programs to the needs of the farmers and to increase accountability to beneficiaries
(Parker 1995; Das Gupta, Grandvoinnet, and Romani 2000). The urban cases aimed to increase
democratic participation, in order to weaken existing clientelistic structures; the most famous of these
is Participatory Budgeting in Porto Alegre, Brazil (Abers 1998; Sousa Santos 1998; Torres Ribeiro
and de Grazia 2003; Ackerman 2004: 451–2). The successful cases in both settings gave citizens
better information about what to expect from government and developed their capacity to hold public
officials to account. Evaluations of the Porto Alegre case found that it reduced clientelism and
corruption (Shah and Wagle 2003; Gret and Sintomer 2005), but at the state level in Brazil the results
were mixed (Goldfrank and Schneider 2006).
Participatory programs require a long-term commitment from established governments, technical
and organizational help, and sufficient resources for many participants to benefit (Goldfrank and
Schneider 2006). Furthermore, people who are not used to political power need time to learn how to
exercise it responsibly. The variety of experience at both the rural and urban level suggests that a
number of factors must come together before productive partnerships between government reformers
and low-income people can succeed. The successes have proved difficult to replicate elsewhere, but
this experience teaches us something about how to facilitate grassroots participation. Increases in
local control do not necessarily increase transparency and accountability (Das Gupta, Grandvoinnet,
and Romani 2000). In a worst-case scenario, such policies enhance the power of local patrons and
entrenched interests. Grassroots monitoring could mean either that local people obtain a better and
more effective project or that those who make the loudest noise are able to leverage their activism
into a share of the corrupt spoils.
Conclusions
Moving beyond electoral control, corruption can be controlled indirectly by other limits on political
power. We have considered four broad types of limits. The first are administrative law constraints
that require accountable and transparent executive policy making. The second is the checks and
balances that may be introduced by a federal system, although its efficacy as an anticorruption
institution is unclear. Third are independent bodies such as courts and ACAs that limit corruption by
making it less profitable for both officials and bribe payers. The fourth group gives people and
groups a way to monitor and to complain about government and the poor services it may provide. The
government supplies information about its actions; the media and the public can voice complaints; and
private organizations and individuals can push for more public accountability. Such openness,
however, leaves governments vulnerable to popular discontent. Thus, many regimes, even nominally
democratic ones, may view this last group of policies with suspicion. They are, nevertheless, an
essential check on corruption that cannot be replaced by the other forms of oversight.
1 Parts of this chapter draw on Rose-Ackerman (2010a). Paul Lagunes provided extensive
research assistance for that essay.
2 The basic statute is the Administrative Procedure Act, 5 U.S.C. §§551–9, 701–6, passed in 1946.
See Rose-Ackerman, Egidy, and Fowkes (2015: 77–9) for citations to the relevant literature.
Support for the act came both from Republican anti–New Dealers seeking to limit the reach of the
state and Democrats fearful of losing power in the next presidential election and wanting to prevent
the easy overthrow of New Deal achievements. The literature on the APA is, of course, vast. For a
brief overview see ibid., 77–93.
3 See del Granado (1995: 19–23), who argues this point for Latin America.
4 The Taiwanese APA has notice and comment rule making with no requirement for reason giving
and limited judicial review. The act provides only limited public accountability (Chang 2005).
5 This is especially true in telecommunications. See the case study in Psygkas (2013).
6 DiIulio (2014) argues that the large body of incumbents in the United States has the same effect.
7 The same appears to be true of the Philippines. On hyperpresidentialism in Argentina and the
Philippines, see Rose-Ackerman, Desierto, and Volosin (2011).
8 “Informant’s Revelations on Cali Cartel Implicate Colombian Officials,” Washington Post,

January 28, 1996.
9 “‘Moreira robó Dls. cientos de millones,’” El Norte, July 2, 2015.
10 Stolen Asset Recovery Initiative (STAR) database, http://star.worldbank.org/corruption-

cases/node/20310 (accessed October 12. 2015).
11 Chris Martinez, “Former Coahuila Treasurer Pleads Guilty of Laundering Money in San Antonio
Court,” Before It’s News, September 18, 2014,
http://beforeitsnews.com/immigration/2014/09/former-coahuila-treasurer-pleads-guilty-of-
laundering-money-in-san-antonio-court-2449310.html (accessed October 12. 2015).
12 Fort Lee, NJ, across the Hudson River from New York City, was the site of illegal gambling
games, but the mafia made one mistake – they invested in Fort Lee condominium projects. These
projects soon filled up with reform-minded young professionals who voted in a reform government
committed to closing down the gambling industry in their town (Amick 1976: 89).
13 See Askari, Rehman, and Arfaa (2012) regarding corruption and kleptocracy in oil-exporting
countries.
14 This part of the chapter draws on several of Rose-Ackerman’s previous essays, especially
Rose-Ackerman (2007).
15 La Porta et al. (2004). Their measure is limited to the tenure of high court judges and the role of
precedent.
16 On the positive side see La Porta et al. (2004) and Hanssen (2000). On the negative side see
Landes and Posner (1975) and Ramseyer (1994).
17 World Economic Forum, Global Competitiveness Report 2014–2015 data set,

October 12. 2015).
18 Andrew Jacobs, “Conviction Rates Count More in Chinese Justice than Innocence,” New York
Times, May 12, 2015, http://www.nytimes.com/2015/05/13/world/asia/conviction-rates-count-
more-in-chinese-justice-than-innocence.html?_r=0 (accessed October 12. 2015).
19 Terrence McCoy, “China Scored 99.9 Percent Conviction Rate Last Year,” The Washington
Post, March 11, 2014, http://www.washingtonpost.com/news/morning-mix/wp/2014/03/11/china-
scored-99-9-percent-conviction-rate-last-year/ (accessed October 12. 2015).
20 Voigt (2007) notes that the causation might run in reverse. Judges and court officials seeking
payoffs might introduce more time-consuming and arbitrary procedures that cause delays. See also
Feld and Voigt (2003, 2006).
21 MacLean (1996: 157) notes that in Poland judges are reputed to be independent and honest, but
long delays in processing cases led to corruption among support personnel who accepted bribes in
return for expediting case processing.
22 See also Hammergren (2002, 2003) who focuses on the large number of abandoned cases. For
example, in Mexico 80% of the cases did not reach final disposition and in Ecuador only 39% of
controversies had been closed in a three- to four-year period. Hammergren would focus on
facilitating out-of-court settlements and improving the execution of court judgments.
23 In Russia, 269 businessmen and financiers were murdered in 1995 in execution-style slayings.
“Mr. Tatum Checks Out,” The Economist, November 9, 1996.
24 Of those interviewed, 3.75% had attempted to use the courts, and only 0.2% (9 of 4,500) of
households had resolved a land dispute through the courts. In the district with no ADR system the
average case took 3.5 years, and the courts were reputedly corrupt and dysfunctional; the formal
court system particularly disadvantaged women (Buscaglia and Stephan 2005: 97, 99, 101).
25 Antoniou (1990) and Pope (1996: 73–8).
26 Signatories to the OECD Convention on Combating Bribery of Foreign Officials in International

Business Transactions (2011: Art. 11), for example, must designate “... an authority or authorities
responsible for making and receiving requests ....” The UN Convention against Corruption (2004:
Art. 6) also requires signatories to “... ensure the existence of a body or bodies, as appropriate that
prevent corruption ....” Such bodies should be fully independent, funded, and trained, according to
this Convention. Although these conventions do not specifically prescribe ACAs, the establishment
of an ACA sends a signal that a country is making an effort to comply.
27 “Corruption in Romania: Cleaning Up,” The Economist, February 21, 2015. However, her
independence may be questionable because she is nominated by the minister of justice with the
consent of the president.
28 Tirole’s (1996) model suggests that a one-time amnesty may allow a country or department to go
from high corruption to low corruption in equilibrium. David (2012) cites the Hong Kong amnesty
as a positive example of anticorruption policy.
29 Toby Thacher (1995); Diana Henriquez “New York City Builds a Better Watchdog,” New York
Times, March 14, 1996, http://www.nytimes.com/1996/03/14/business/new-york-city-builds-a-
better-watchdog-agency-may-be-a-model-for-business.html (accessed October 12. 2015). A
critical view is expressed by Anechiarico and Jacobs (1996: 129, 136–7).
30 For an example of an anticorruption agency being accused of undermining rather than supporting
reform see “Arrest of Kenya Tax Officials May Hit Donor Funding,” Financial Times, July 25–6,
1998.
31 The GAO’s website is: http://www.gao.gov/ (accessed October 12. 2015).
32 “Government Budgets and Development: Transparent Money,” The Economist, November 2,

2013. Examples of such NGOs are Open Government Partnership
(http://www.opengovpartnership.org/) (accessed October 12, 2015) and International Budget
Partnership (http://internationalbudget.org/) (accessed October 12, 2015).
33 This problem also arises in the private sector. It may prove difficult, e.g., to induce private
corporations to monitor their employees for criminal law violations (Arlen 1994).
34 Numerous examples can be drawn from the rebuilding experiences in Iraq and Afghanistan.
Consult the websites of the Special Inspectors General for Iraq and Afghanistan: www.SIGIR.mil;
www.SIGAR.mil (accessed October 12, 2015).
35 Stephen Castle, “Bruised by Scandal, British Lawmakers Reject Raise,” New York Times,
December 12, 2013.
36 Ian Austen, “Canadian Senators’ Expenses under Investigation after Auditor’s Report,” New
York Times, June 9, 2015.
37 In Venezuela, President Carlos Andrés Pérez resigned from his second term amid charges that
he had misused $17 million in funds from such a secret account during his first term (Little and
Herrera 1996: 268).
38 Steven Nelson, “Obama Won’t Disclose Spy Agency Budgets,” US News & World Report,
February 2, 2015, http://www.usnews.com/news/articles/2015/02/02/black-budget-requests-
remain-secret (accessed October 12, 2015). As the result of a threatened Freedom of Information
Act request, the U.S. Central Intelligence Agency released a one-sentence document in October
1997 listing their 1996 budget at $26.6 billion dollars. “For First Time US Discloses Spying
Budget,” New York Times, October 16, 1997, http://www.nytimes.com/1997/10/16/us/for-first-
time-us-discloses-spying-budget.html (accessed October 12, 2015).
39 Unfortunately, the Chinese FOIA does not have that feature. Nevertheless, it appears to be
having a positive effect. “Freedom of Information: Right to Know,” The Economist, May 3, 2014.
A policy decision in late 2014 supported more disclosure, Jamie Horsley, “Chinese Leaders
Endorse Disclosure Norm,” FreedomInfo.org, November 4, 2014,
http://www.freedominfo.org/2014/11/chinas-leaders-endorse-disclosure-norm/ (accessed October
12, 2015).
40 5 U.S.C. §§ 552.
41 The general EU provision is Article 42 of the Charter of Fundamental Rights. A summary of

FOIAs by country is at the website of Right2info: http://www.right2info.org/access-to-information-
laws/access-to-information-laws#_ftnref7 (accessed October 12, 2015).
42 For updated country-by-country information consult: freedominfo.org at http://freedominfo.org

(accessed October 22, 2015). For an overview of the global trend toward the passage of FOIAs
see Ackerman and Sandoval (2006). The freedominfo website lists several recent troubling
developments in its country-by-country listings that suggest some backsliding from past upward
trends.
43 In 1996 the U.S. Freedom of Information Act was amended to include the requirement for each
agency to set up an Internet “reading room” for its publicly available documents. The provision for
a web portal is at (a)(2)(E).
44 Tony Plohetski, “Report: UT Regent Wallace Hall Should Be Removed from Office,”
KVUE/Austin American-Statesman, March 31, 2015,
http://www.kvue.com/story/news/state/2015/03/31/report-ut-regent-wallace-hall-not-indicted-but-
his-behavior-is-appalling/70714584/ (accessed October 12, 2015).
45 Reeve Hamilton, “UT-Austin Cancels Regent’s Records Requests,” The Texas Tribune, August
6, 2013, http://www.texastribune.org/2013/08/06/pending-review-ut-cancels-regents-records-
requests/ (accessed October 12, 2015).
46 “The questionnaire [Tucker administered] asked whether Sunshine had adversely affected the
ability of agency members to informally discuss agency business and, if so, how significant this
was. Of all the questions asked, this one received the most uniform response with all but one
response being affirmative and a number stating the consequences were significant.”
47 Cristina Kirchner won the election in 2007 when her husband chose not to run for reelection. He
died in 2010.
48 Dexter Filkins, “Death of a Prosecutor,” The New Yorker, July 20, 2015,
http://www.newyorker.com/magazine/2015/07/20/death-of-a-prosecutor (accessed October 12,
2015).
49 “It happened in Monterrey,” The Times, November 29, 1991, discusses the resignation of a
newspaper editor after pressure was put on his paper through the cancellation of government
advertising and printing contracts. When a leading editor was arrested in Mexico City in 1996 for
tax evasion, the editor claimed that the arrest occurred in response to the paper’s newly asserted
independence (Mexico Business Monthly, October 1, 1996).
50 An NGO called Article 19 tracks the status of antidefamation laws. Its website shows the
distribution of defamation laws. It indicates that most countries provide some kind of special
protections for public officials. https://www.article19.org/defamation/map.html?
dataSet=defamation_legislation_2012 (accessed October 12, 2015).
51 There is no federal criminal law of defamation. A few states have criminal libel statutes, but the
Supreme Court has generally found that prosecutions under such laws violate the First
Amendment’s protection of speech (Sanders and Miller 2013–14).
52 To act with “actual malice,” is to “act with knowledge of falsity or reckless disregard of the
truth” (Sanders and Miller 2013–14: 534). Sanders and Miller argue for adoption of an actual
malice standard for all cases and for a shift from the status of the individual who is defamed to the
public interest in the information provided.
53 http://www.legislation.gov.uk/ukpga/2009/25/section/73 (accessed October 10, 2015).
54 “UK Government Abolishes Seditious Libel and Criminal Defamation,” July 13, 2009;
http://humanrightshouse.org/Articles/11311.html (accessed October 10, 2015).
55 See “Singapore Leaders Awarded $5.6m in Libel Damages,” Financial Times, May 30, 1997;
“Singapore Leader Wins Libel Case,” Financial Times, September 30, 1997; and “Throwing the
Book: PAP Launches Legal Barrage Against Opposition Leaders,” Far Eastern Economic Review,
March 6, 1997.
56 “Liberia: Skin-Deep Success,” The Economist, September 7, 2013.
57 Youm (2009: 289) mentions El Salvador, Panama, and Peru as also changing their laws to
eliminate criminal libel.
58 Even in advanced economies, many constituents do not understand basic macroeconomic and
public finance concepts, or why they should concern themselves with such issues.
59 Transparency International, “Our Chapters,”

http://www.transparency.org/whoweare/organisation/our_chapters/0/ (accessed October 12,
2015).
60 For guidelines on establishing whistle-blower protection, see Transparency International,

“International Principles for Whistleblower Legislation,”
http://www.transparency.org/whatwedo/publication/international_principles_for_whistleblower_l
egislation (accessed October 12, 2015).
61 In Mexico in 2000, farmers in Guerrero complained about illegal logging that they claimed
involved corruption. The dispute raised claims that the army and local politicians were acting
outside the law. Unfortunately, many of these allegations could not be proven. “A Farmer Learns
about Mexico’s Lack of the Rule of Law,” New York Times, October 27, 2000,
http://www.nytimes.com/2000/10/27/world/27MEXI.html (accessed October 12, 2015).
Part IV
◈
Reform Agendas: Domestic Political Will

and International Influence
13
Domestic Conditions for Reform
◈
Ideas and moral commitments matter. Reforms sometimes occur simply because a charismatic and
committed leader pushes them through. Strong leaders can inspire people to accept major reforms that
lesser personalities could never achieve.1 But strong leadership is generally a necessary, not a
sufficient, cause of political change. Past practice creates inertia. It is often easiest to go on as before
– especially because the beneficiaries of the status quo will struggle against change. Choices made at
one point in time foreclose other choices in the future. However, although history imposes constraints,
it seldom forces one particular outcome. The challenge is to identify structural factors, apart from
charismatic leadership, that create favorable conditions for reform.
We now have sufficient experience with reform efforts throughout the world to permit some
well-grounded structural observations. The argument in this chapter assumes that developing
countries and those in transition can learn from the historical experience of developed countries as
well as from more recent experience worldwide. Of course, the lessons will have to be filtered
through the particular situation of each state, but some of the underlying political and economic
incentives seem quite universal.
There are two basic models of the reform process – one based on the exercise of political
power and the other based on a contractual model of consensus. Those who expect to lose from
reform can be outvoted and out-maneuvered, or they can be co-opted or compensated to accept
change (Grindle and Thomas 1991: 134). For example, in the 1980s Prime Minister Margaret
Thatcher’s government carried out administrative reforms through a conflictual strategy; in Australia
Prime Minister Robert Hawke sought consensus (Zifcak 1994: 158). A key strategic decision for
reformers is whom to include in their coalition and whom to force to accept the costs of reform.
Should one buy off corrupt officials and private persons and firms, or should one shut them out of the
reformed system? How much will reform goals be undermined by the process of generating a
coalition to support change?
We begin, in Section I, with the links between the institutions of government and incentives for
reform. Powerful politicians must believe that reform is in their interest. This often occurs in
response to pressures by influential private groups who decide that reform will benefit them. In
democracies public pressure can spur reform, but even autocracies can face political incentives to
reduce corruption. Section II discusses how collective action problems can make reform difficult.
However, a scandal or an economic crisis can make it possible to organize a reform coalition in
response to popular outrage. In other cases, reform occurs more gradually over time and may take
many years and several changes of government to take hold. In both cases sustaining reform may not
be easy. Even genuinely beneficial reforms do not always become institutionalized. If the political
conditions that produced reform disappear, the reforms often disappear as well. But in other contexts,
reforms persist despite quite important political shifts. We seek to understand when this is likely to
happen. Sometimes, however, reforms become too well entrenched – to the point of ossification. Then
the problem is to push the system to change without abandoning the remaining strengths of the old
system.
Section III looks at the special cases of natural resource wealth and foreign aid. The existence of
resources not tied to the taxation of citizens can give rulers a free hand to take kickbacks because the
citizenry does not clearly see the costs of grand corruption in their daily lives and is not motivated to
organize for reform. Once again, historical experience provides some suggestive cases.
I. Political Structure and Reform
Realistically, reform will not occur unless powerful groups and individuals inside and outside of
government endorse it. In democracies a political coalition must develop that supports change. In
autocracies the leader is sometimes under reformist pressures from the military and from portions of
the private sector. A state that is overwhelmingly corrupt risks invasion and civil war, or, at least,
domestic unrest or coup threats. Witness the fall of President Mobutu Sese Seko of Zaire and of
presidents Hosni Mubarak, Zine Ben-Ali, and Viktor Yanukovych in Egypt, Tunisia, and the Ukraine,
respectively, once an alternative seemed feasible.2 But the causation is circular. The threat of losing
power can induce high officials to become even more corrupt as a means of co-opting their inner
circle and insuring their own economic well-being once they are out of office.3 Corrupt leaders may
find that reform is risky if it releases opposition forces that undermine the current regime. Thus
successful reformers may need to buy off potential opponents. Reformers also need to worry about
sequencing. If not carefully managed, the beneficiaries of the first stage of reform may become
opponents of broader restructuring.
A. Democracy and Reform
As we have already seen, corruption can coexist with electoral politics. However, corrupt
democratic governments are sometimes able to reform. In the nineteenth century the United States,
Great Britain, and many urban American governments reformed their systems of public employment
and procurement. Some Latin American countries with democratic structures have also had reform
periods. Democratic structures can promote reform under some, but not all, conditions.
Voting Systems and Reform: Barbara Geddes’s work on civil service reform in democracies
(1991, 1994) provides a useful starting point. Her case studies come from Latin America, but her
argument is a more general one. Assume that politicians and parties want to remain in power. They
may then face what Geddes calls the “politicians’ dilemma” where the country as a whole would
benefit from an end to patronage, but no individual politician or political party has an incentive
unilaterally to institute a merit system. Anyone who did so would give up votes to the opposition with
no corresponding political benefit. Geddes then postulates a case in which the public benefits of
reform are recognized by voters. A politician who advocates reform gains political support that can
be balanced against the losses from the reduction in patronage jobs. Obviously, a minority party, with
little hope of becoming part of a future government, can support reform more easily than a majority or
governing party. The minority, with little access to patronage, loses little from its advocacy of reform.
In fact, it may face a paradox. If its reform position is popular enough to give it a real chance of
winning the next election, that very fact may make it a less enthusiastic reformer. Once a party obtains
power, it may violate its electoral promises with the result that voters do not believe subsequent
promises, discouraging such promises in the future.
Although Geddes focuses on reform of the public administration, much of what she has to say
applies to other aspects of a comprehensive corruption-reform strategy. For example, reform of
procurement systems and improvements in the transparency and openness of government both have
features in common with civil service reform. Those in power benefit from corruptly obtained
contracts and secretive government processes, but the legitimacy of the public sector as a whole
would be improved by reform. For many anticorruption policies, the political group that proposes
them suffers costs that exceed the cost borne by those who simply go along with the change. Unless
public outcry is very potent and sustained, there is a first-mover disadvantage. Reforming incumbent
administrations gain support by advocating change, but this is balanced by their disproportionate loss
of corrupt returns.
Geddes suggests that politicians and political parties in Latin America recognize the dilemma of
reform. In her analysis there are two situations in which reform is possible. First, a single party may
have a dominant position, but government inefficiency, caused by corruption and patronage, threatens
its hold on power. Then it may support reform in spite of the costs borne by public officials.
Elections, even if they always return the same party to power, have a constraining effect on the ruling
party. Although the major reforms involved the electoral system, not the public administration, the
case of Mexico is illustrative. Widespread fraud was suspected in the election of Carlos Salinas de
Gortari as president of Mexico in 1988 during the time when the Institutional Revolutionary Party
(Partido Revolucionario Institucional, PRI) was dominant. The resulting controversy generated
support for the creation of several integrity institutions, including the Federal Electoral Institute and a
special court to deal with electoral matters (Ackerman 2007, 2010).4
Second, if several parties are evenly matched in their access to patronage appointments, and if
they will benefit symmetrically from reform, they may be able to collaborate in order to legislate
change. Colombia, Uruguay, and Venezuela provide examples to Geddes of reforms carried out during
periods of balance in access to patronage. In Colombia a further factor encouraging reform was
partisan violence that threatened the democratic framework. All sitting politicians had an interest in
reforms that would help end this violence. Other authors have noted similar reform episodes outside
Latin America. For example, under much less urgent circumstances, New Zealand was able to reform
its government in the 1980s in the face of economic pressures that limited political opposition to
change. The reform was begun under one government and completed by another (Scott 1996: 72).
Balanced political parties are not sufficient, however. Political parties must favor reform in
principle and be willing to work together. If political parties are too far apart ideologically, as in
parts of the former East Bloc, compromise over broad policies is unlikely (Kartal 2014: 948). A
second deterrent to reform is the personalized nature of politics. For civil service reform, the greater
the importance of circles of support tied to patronage jobs, the harder it will be to carry out broad-
based reforms.5 Similarly, if politicians hand out individualized benefits to voters at election time,
essentially to buy their votes, citizens may view political choices in narrow quid pro quo terms. They
may vote for corrupt politicians even though they know that there is corruption at the top of the system
over and above the petty benefits they gain themselves. Voters do not hold elected officials to account
for their corrupt behavior under these circumstances.
The differing nature of the relationship between voters and politicians leads to quite different
predictions about the way political structure can facilitate or impede reform. Geddes assumes that
voters seek personalized benefits from politicians so that a system is easier to reform if such payoffs
are not an important source of political influence. Hence, she argues that in Colombia and Uruguay
voting by closed-list proportional representation (PR) facilitated the reform effort because it limited
the conflicts between individual politicians and political parties that saw nationwide benefits from
reform.6 In an open-list system, patronage ought to be especially difficult to eliminate because
individualized benefits to voters and campaign workers loom large. In fact, the two systems that did
not reform, Brazil and Chile, both had open-list systems. Coalition governments in Chile, whose
members had little in common, were held together by patronage.
Geddes’s contrast between closed- and open-list PR is about necessary, not sufficient,
conditions. Under any system, no reform will occur if party leaders do not favor reform and instead
use their positions illicitly to enrich themselves or their parties. As Kunicová and Rose-Ackerman
(2005) argue (see Chapter 11), if the party leadership is corrupt, it will favor a closed-list system as
a means of controlling members thorough control of positions on the list. Even if those at the top of
the system are not corrupt, the leadership may protect less powerful members to preserve the party’s
image. Thus, contrary to Geddes’s claim, a closed-list system will be less likely to reform because it
can be a vehicle for a corrupt leadership to remain in power. The basic differences between Geddes
and Kunicová and Rose-Ackerman are, first, whether leaders favor reform but face collective action
problems, or whether they benefit from grand corruption, and, second, whether voters monitor
politicians and withhold support from the corrupt or whether they believe that the corrupt system
benefits them personally.
Gabrielle Montinola’s work on Chile illustrates the importance of bottom-up, public monitoring.
Chile was a very corrupt country between 1891 and 1924 but is now relatively clean by Latin
American standards (Montinola 1997). In addition, the business sector does not view the state as
predatory (Stone, Levy, and Paredes 1992). According to Montinola, a change in political alignments
facilitated Chile’s shift to a low level of corruption. In the early part of the twentieth century Chilean
democracy was a complex, multidimensional system that produced the unstable coalitions that
Geddes describes. But in the aftermath of General Pinochet’s regime, Montinola argues that political
preferences are now aligned along a single left/right dimension. This makes it easier for citizens to
hold the government accountable because each government will represent a particular position in
policy space, not a compromise coalition. Such accountability will, according to her, limit corrupt
opportunities and encourage reform.
The Latin American experience has generally been quite disheartening. Geddes shows that a
political coalition for reform is possible, but she goes on to demonstrate its fragility. All of her
“success” stories are followed by periods of breakdown when patronage, corruption, and inefficiency
reappeared. Reforms that persisted affected only a small portion of the bureaucracy, and many were
undermined by subsequent governments. Politically easy reforms that improved the working
conditions of bureaucrats were maintained and extended. Without merit-based recruitment and
promotion, these changes hardly count as reforms on their own. Closed-list systems give party leaders
more power either to be corrupt or to sponsor reform, depending upon their underlying motivations
and the political costs and benefits of corruption.
A similar point can be made about presidents. Executive power can either maintain or reform
corrupt systems. As Geddes argues, a dominant party in control of the executive may reform if
corruption and inefficiency have begun to harm its ability to govern. In Latin America, with its many
strong presidential systems, elected presidents have sometimes pushed through reforms, although
others are notably corrupt. The case of Mexico mentioned earlier is instructive, although subsequent
history shows how reform efforts can deteriorate over time. A study of the preconditions for general
administrative reform in eight cases in Latin America, Asia, and Eastern Europe suggests that policy
and political coherence in the executive are of central importance in getting reform off the ground
(Heredia and Schneider 1998). In those cases, some of the factors discussed in the following
sections, such as crises and the growing dissatisfaction of powerful elites, are central in explaining
the timing of reform.
Thus, we are left with a complex picture and one where empirical regularities are not clear.
Kunicová and Rose-Ackerman (2005) implicitly assume that all politicians are prepared to be
corrupt, or, at least, that this propensity does not vary with government structure. They then argue that
opportunities for corruption are higher under presidential systems with closed-list PR than in
parliamentary systems using plurality rule both because the organizational challenges are lower and
because voters have fewer monitoring opportunities. If, instead, leaders wish to support reform but
will not do so if the political costs are high, the features that facilitated corruption – a powerful chief
executive and powerful party leaders – can permit reform to occur. However, plurality rule is a more
important factor than PR, both in predicting the level of corruption and in the likelihood of reform.
Putting the two strands of work together produces a result that is roughly consistent with reality –
reform in presidential systems with closed-list PR may occur, but it is likely to be unstable and
subject to reversal (Geddes’s Latin American cases), while reform in plurality-rule parliamentary
systems is more likely to be durable (the United Kingdom). The United States is a mixed case – a
presidential system with plurality rule. Anticorruption reform has become quite entrenched at the U.S.
federal level; recent presidents have supported ethical government practices. President Obama, in
particular, entered office with a strong commitment to ethics in government service.7 Debates over the
role of private wealth in subverting public power involve campaign funding, aggressive lobbying,
conflicts of interest, and the revolving door, not the outright siphoning off of public funds by
politicians. Bribes and kickbacks, of course, frequently come to light, but such payoffs are not
systemic, seldom enrich top federal politicians, and are punished.
There are two basic conclusions. First, an increase in “democracy” need not be a prelude to
reform. The details of the electoral system and, in particular, the political incentives to consider
broad public values are critical. As Geddes (1991: 187) notes, “It is ironic that the reforms that
would improve efficiency and fairness in the provision of government services should be impeded by
the same representative institutions whose manifest purpose is to reflect constituents’ interests.”
Montinola’s work adds a concern for the way political party ideologies are distributed in issue space.
The two factors may be related: the nature of the voting system may have an impact on the kinds of
political parties that can survive.
Second, reforms are likely to be fragile if they are the product of temporarily favorable political
conditions. Parity of political interests can produce reforms, but they will persist only if party parity
is an enduring feature of the system. Once again the voting system may help determine the durability
of political alignments. Both the underlying cleavages in society and the way they are reflected in the
structure of government can affect the durability of reform. To be sustained, the first stage of reform
ought to be implemented to produce supporters who push to maintain, monitor, and extend the initial
successes. A look at the history of reform in the United States and Great Britain in the next two sub-
sections helps to shed light on this last issue.
Nineteenth-Century Reform in the United States and Great Britain: Studies of civil service
reform in the nineteenth century in both the United States and Great Britain complement Geddes’s
work on Latin America. There are two issues. Why did reform occur, and how was it maintained?
Geddes’s emphasis on the balance of political forces seems relevant in both countries. When
reform occurred, both used first-past-the-post voting rules that typically produced two balanced
parties alternating in power. No political grouping benefitted disproportionately from its access to
patronage, and all shared in the benefits of reform. Britain’s parliamentary system, with strong party
discipline, limited the scope for individual favor seeking. Even though members represented
individual districts, they had a limited ability to trade favors for votes. The increase in the size of the
electorate in the nineteenth century and the elimination of many small constituencies reduced the
benefits of patronage appointments (Parris 1969: 70–1).
In the United States, party discipline did not prevail – a factor that discouraged reform. Reform
did, in fact, come later in the United States than in Britain. The separately elected president at the
head of the executive branch, however, could view the patronage/service efficiency trade-off from a
national perspective. President Andrew Jackson developed a system of patronage to reward
supporters. He believed that the spoils system he instituted would combat corruption by
democratizing government service and eliminating entrenched officials. Instead, corruption grew
more serious. By the late nineteenth century, a bipartisan political coalition that included President
Chester Arthur supported the Pendleton Act, which started the federal government on the road to
establishing a civil service system (Maranto and Schultz 1991: 30–6, 50–5).
Both countries demonstrate the strains that arise when some constituents care about the
efficiency and fairness of the services provided by the state, while others just want jobs. The strains
are of two kinds – giving out government jobs can become a political cost instead of a benefit, and
managing the conflict between constituents who want jobs and those who want efficient service can
be difficult. If the quality of government services begins to loom large in voters’ minds, politicians,
both legislators and cabinet secretaries, begin to doubt the political benefits of patronage.
In the United States and Britain politicians complained about how much time and energy they
spent dealing with job seekers (Parris 1969: 50–79; Chester 1981: 155–6; Maranto and Schultz 1991;
Johnson and Libecap 1994). If the number of jobs is not expanding rapidly, many applicants will be
disappointed. The number of disgruntled office-seekers and their families may vastly exceed the
number of satisfied patronage appointees. Even successful job seekers may think that they should have
gotten better jobs. Dispensing patronage becomes a nuisance, not a privilege of political office
(Parris 1969: 71; Chester 1981: 155–6). The boss of the Pennsylvania Republican Party complained
that he had so many friends that he faced a serious problem of whom to recommend (Blair 1989: 31).
Neither the United States nor Britain experienced revenue windfalls during the reform period – so
that fiscal constraints made the distribution of jobs politically costly. The situation in Venezuela
provides a useful contrast. There, windfall oil profits undermined reform efforts as the state went on a
hiring spree (Geddes 1994).8 In other countries statist policies require large numbers of state-sector
employees to staff state firms. The very size of the state sector lowers the political costs of patronage,
as it increases the economic costs.9
Reform politicians in America and Britain mobilized powerful business support for a more
efficient public service. Nineteenth-century business interests wanted a post office that delivered the
mail effectively, and they wanted their merchandise to pass through customs quickly. They might be
willing to pay individual customs agents for speedy service, but they generally preferred a system that
eliminated such payoffs (Johnson and Libecap 1994). In the United States, business generally
supported municipal reform (Stave 1972). Business may tolerate a certain level of corruption, but
begin to protest if the level of graft escalates, as it apparently did in urban America in the last several
decades of the nineteenth century. As the economies of scale grew in industry, so did the size and
prevalence of corruption (Glaeser 2004: 132). One author claims that urban reform in the United
States was given a push when graft levels increased from 10% to 15% to 30% of the value of
contracts and benefits (Calvert 1972).10
The Crédit Mobilier scandal was a starting point. During the 1870s depression, as cities
defaulted on their debt, “many state governments passed reforms that limited municipal borrowing....
Everywhere cities were forced to open their books” (Menes 2006: 71). At the same time, the internal
combustion engine increased suburban development, interstate mobility, and trade, while electricity
enabled firms to locate factories without concern for coal delivery. These technological
developments created competition for residents and businesses (ibid.: 72).
In the United States an additional reason for reform derived from the federal structure of
government. Federal politicians supported reform because patronage was increasingly controlled by
state and local party bosses whose interests were not necessarily congruent with those of federal
politicians (Johnson and Libecap 1994: 97). Thus, on the one hand, the jobs that were controlled by
members of Congress were becoming costly to dispense, and, on the other hand, patronage jobs in
their home districts were under local control and brought them few benefits.11 Although, as we have
argued, federalism per se can fuel corruption, here it was conducive to national reform because
reform was a way for national politicians to reduce the power of rivals at lower levels of
government. As the Progressive movement gained steam in the early twentieth century, pressure to
reduce corruption mounted (Glaeser and Goldin 2006b: 4). Corruption fell in the distribution of
welfare benefits when the federal government took these over from state and local governments as
part of the New Deal (ibid.: 19).
In short, the costs of corruption may come to outweigh the benefits for political leaders. In a
democracy not everyone needs to support reform; it can be carried out if enough voters begin to see
that it will be, on balance, beneficial. Reform ought to be more likely in governments with voting
rules that limit the ability of politicians to benefit from patronage and in systems where power is
balanced across political groupings.
B. Autocratic Reformers
Countries with a tradition of autocracy or one-party rule can be corrupt with impunity, but they
sometimes produce reformers as heads of state. Although outside observers might prefer a more
democratic polity, it is not absurd to suppose that such rulers are genuinely concerned with reducing
corruption and promoting shared growth. Indeed, even a single-minded kleptocrat would like to
control the peculation of subordinates. Thus some reform strategies will be supported by autocratic
rulers.
For example, reforms that improve the revenue collection capacity of the state by limiting the
corrupt dealings of subordinate officers are likely to be uniformly popular with top politicians. Tax
and customs reform has been supported by such autocratic rulers as Ferdinand Marcos in the
Philippines (Klitgaard 1988) and Suharto in Indonesia. Suharto contracted with a Swiss company to
take over Indonesia’s customs service, thus cutting out corrupt local officials, at least for a time
(GATT 1991, 1995; Das-Gupta and Mookherjee 1998: 425). In Zaire the World Bank once loaned
funds for an abortive effort to reform customs and tax collection (Dia 1993). In Mexico, under one-
party dominance, the Salinas administration carried out a thoroughgoing reform of the tax system with
strong support from the president (Das-Gupta and Mookherjee 1998: 331).12
But will economic growth be furthered when a ruler operating with little popular accountability
develops a more efficient revenue collection system? A military regime may simply purchase more
equipment for the armed forces. An autocrat may search for expensive capital projects that can be a
source of kickbacks. The Zairean case illustrates the problem. Efforts to collect taxes lacked
legitimacy because the government made large expenditures on projects that promised few
development benefits. In 1990 and 1991 the country planned an uneconomic power plant expansion
and budgeted large sums for a francophone summit conference and a national celebration. World Bank
officials were concerned with the possibility of “large unrecorded extra budgetary outflows,” that is,
corruption. The World Bank project was unable to change existing patterns of fraudulent exemptions
from taxes and duties. An initially successful effort to remove exemptions was soon overturned, and
computers and files were destroyed. The project did not succeed in developing a cadre of
professional tax collectors. Instead, it created its own opportunities for rent seeking, and aid was
eventually suspended (Dia 1993).
A similar irony of reform can occur in procurement. Lower-level officials may sell inside
information on the bidding process, and they may provide favors to winning bidders in return for
bribes. Rulers of all sorts will want to reduce such low-level payoffs except to the extent that they
buy the complicity of subordinate officials. In a kleptocracy, however, reducing lower-level
corruption can simply shift it up the hierarchy. The benefits of reform for the country at large will be
overstated if one only considers the reduced corruption of subordinates. One consequence of corrupt
subordinates is the kleptocrat’s reduced appetite for expanding the size of the government. With that
constraint eliminated, he can be expected to seek higher levels of intervention (Coolidge and Rose-
Ackerman 1997).
In short, reforms that improve the operation of a kleptocratic state will be counterproductive for
ordinary citizens if they just permit the ruler to extract rents more efficiently by squeezing low-level
corrupt officials. A profit-maximizing kleptocrat who is operating a state-owned business will seek
monopoly rents and productive efficiency, but in other cases the kleptocrat may create bottlenecks and
propose unneeded projects to extract additional rents.
Autocrats, however, have sometimes made genuine attempts to achieve reform as a means of
legitimating and consolidating their power. An early example is nineteenth-century Prussia
(Raadschelders and Rutgers 1996: 76); elsewhere the list includes Vargas in Brazil (Geddes 1994),
Fujimori in Peru, Lee in Singapore (Das-Gupta and Mookherjee 1998: 356–81), Museveni in Uganda
(Coolidge and Rose-Ackerman 1997), and a number of East Asian governments, including China
(Campos and Root 1996; Fu 2015). More recently, several countries in the Middle East carried out
limited reforms to forestall possible revolution. Many of these reformers were formally elected, but
they wield more power than a leader elected under competitive conditions, and they are frequently
unsympathetic to claims of individual rights. Nevertheless, a commitment to clean government may be
genuine, not just a cover for private wealth accumulation. Their concern is not only to squeeze out the
rents at lower levels of officialdom but also to provide high-quality public services. The downside is
that an anticorruption campaign can be used to eliminate and intimidate those who oppose their power
both inside and outside government.
Anticorruption campaigns can have political purposes that undermine attempts to develop a
competitive political regime in countries with nominal democratic structures. They can be used both
to blackmail supporters into maintaining the incumbent regime and to discredit and silence opponents.
One study of Mexican politics, for example, argues that the threat of prosecution was used to deter
defectors from the ruling party during its period of one-party rule. Even those who leave government
for the private sector are kept in check by the possibility that if they raise questions about incumbents,
they may be investigated for “inexplicable self-enrichment” (Cothran 1994: 144). In Italy, the
possession of compromising information about one’s own colleagues is a source of power. As one
study concludes, “blackmail becomes one invisible form of cement for a political class condemned to
a lengthy and forced cohabitation” (della Porta and Vannucci 1997b: 14). Then anticorruption laws
are a deterrent, not to corruption, but to the factionalization of the ruling group and the development of
strong opposition groups.
The use of the anticorruption banner as a cloak for repression is an especially worrisome aspect
of reform in autocracies that lack effective outside checks (Fu 2015). In a society where corruption
and self-dealing are entrenched, the law may be enforced against dissenters while the top leadership
is immune from criticism. Robinson (2011) calls this the “Anti-Corruption Paradox.” He discusses
“good governance coups” where the military steps in – in the name of reform – and then uses the
mantle of corruption control to suppress dissent. He gives the example of Bangladesh and Pakistan.
We would add Thailand in 2014 to the list, where a military coup was followed by the introduction of
repressive measures.13 Venezuela under Chávez fits this model, too: although Chávez was no longer a
military general, he maintained tight relations with the military. Chávez was elected by a populace
tired of corruption, as the most vehement challenger to Carlos Andrés Pérez, who had been
impeached for corruption after Chávez attempted a coup against him.
II. Starting and Sustaining Reform
Because efficient service delivery is presumably always of value to some members of the public
while others gain from corruption, what explains the timing of reform? Given that reforms produce
gainers and losers, under what conditions can anticorruption reforms become entrenched and broadly
acceptable, rather than suffering a reverse?
A major scandal or economic crisis can help spur reform, but sometimes the impetus for reform
is much less dramatic. Organizational arrangements that worked well in the past are no longer
satisfactory. In British and American experience two distinct organizational dysfunctions spurred
reform. The first was the growing ineffectiveness of contracting out for public services in the early
nineteenth century. The second was the inefficiency of patronage-based employment as government
grew in size in the latter part of the same century (Raadschelders and Rutgers 1996; Parrillo 2013).
We begin in this section with the motivation produced by scandals and economic crises, then discuss
gradual reform experiences; finally, we explain how some initiatives became entrenched over time.
A. Scandal and Crisis as Catalysts
Corruption scandals fueled by an independent press have spurred reform in a number of political
systems. Economic and political crises that can be blamed on poor public policies can also facilitate
change. Even in an otherwise inhospitable environment, a major crisis can highlight the need for
reform. In the United States the murder of President James Garfield in 1881 by a disappointed office
seeker dramatized the weaknesses of the patronage system and helped spur civil service reform.
Financial panics and hyperinflation have fueled economic reform efforts in many countries. In
Sweden a disastrous military defeat at the hands of Russia in 1809 catalyzed a reform effort, although
it took many decades for the key reforms to become institutionalized (Rothstein and Teorell 2015;
Teorell and Rothstein 2015)
Modest, confined scandals do not appear sufficient. One study of lobbying restrictions in the
U.S. states, for example, found that only visible, long-term corruption or scandals in both the state and
its neighbors spurred political reform (Allen 2002). Ethics reform will not likely be a high priority
for politicians unless pushed into it by well-publicized events that grab public attention.
Unfortunately, however, although scandal and crisis can put corruption on the public agenda, they
do not always direct reform efforts in useful directions. This highlights a central dilemma. If a crisis
produces strong support for change, politicians must act quickly, often without sufficient planning or
expert advice. In contrast, during quiet, stable periods when reform could be thoughtfully
implemented, political support may be lacking (Berensztein 1998). Crises can produce either real
reforms or dysfunctional responses (Corrales 1997–8). If scandals erupt, the media is frequently
criticized for personalizing the news by focusing on the individuals at the center of the scandal and
ignoring the systemic conditions that created incentives for corruption in the first place (Garment
1991). This is a fair criticism, but it hardly lets the government off the hook. Reformers must respond
to scandals by doing more than punishing the guilty. The challenge is to reduce underlying corrupt
incentives. Otherwise anticorruption campaigns become little more than witch hunts that will tend
disproportionately to seek out the regime’s political opponents (Singh 1997: 638). Scandals are an
opportunity to mobilize support for institutional changes that have little glamour in themselves.
A free press can uncover and report on scandals that may produce a public outcry that, in turn,
increases pressure for reform so long as the government has some degree of public accountability
(Miller 1992; Rothstein and Teorell 2015: 10–11). An association between a free press and low
levels of corruption shows up in cross-country research (Brunetti and Weder 2003), but that work
does not explain the nature of the link or what motivates changes in the independence of the media.
For the United States, Gentzkow, Glaeser, and Goldin (2006) provide an economic explanation
derived from the fact that the U.S. press became more independent of political parties and more
competitive and impartial between the 1870s and the 1920s. The authors argue that the shift was
fueled by declining costs (economies of scale) and the rise of urban populations that spurred entry
and competition. The newspapers began to concern themselves with attracting readers, rather than
depending on party patronage, and one way to do that was through in-depth investigative reporting of
scandals, including corruption scandals. Political party affiliation was not needed for survival and
may have become a hindrance to the development of a mass market for news.
However, although this explanation is ingenious, it remains true that even a biased press will
report scandals that are too big to ignore, as long as outright censorship is absent. As Gentzkow,
Glaeser, and Goldin (2006) document, by the 1920s even Republican-affiliated newspapers covered
the Teapot Dome scandal. Furthermore, the press was becoming more professional and committed to
factual reporting; the use of slanderous language had fallen significantly relative to a few decades
earlier.
Coverage of local scandals provided a catalyst for change. For example, scandals in the New
York Customs House and in the Post Office, which preceded Garfield’s murder in 1881, were widely
reported in the press and helped create a climate favorable to reform. It did not hurt that the new
president, Chester Arthur, had been collector of customs in New York City and could not easily
defend the existing system (Josephson 1938: 95–8, 313–22). Similarly, reform of the Boston Charter
in 1949 was fostered by aggressive press reports in 1947 on city council licensing decisions dealing
with a water taxi service (Marchione 1976: 381–3). One councilor proclaimed:
I will take a buck and who the hell does not know it, and I am probably the only one who has
guts enough to say I will take a buck. I would like to see the guy who does not take a buck, let me
know the guy who does not take a buck. Who does he think he is kidding? A lawyer can go out
and take a fee.
This incident was widely publicized in the Boston newspapers and generated an investigation of
the council by the Suffolk County District Attorney. Allegations were made of shakedowns, bribes to
get licenses, and payoffs for widening sidewalks and installing driveways. Although those indicted
were eventually acquitted, the scandal helped generate support for a reform to reduce the size of the
council and change to an at-large electoral system under which councilors would have “a city-wide
rather than a neighborhood viewpoint.”
In New York State, the kidnapping and murder of a renegade Freemason in 1828 led to the arrest
and trial of several other Masons. According to Bodenhorn (2006: 246), “For more than four years,
the public devoured the news, most of which demonstrated Freemasonry’s ... subversion of the
political and judicial system.” Public outrage coalesced into the Anti-Mason Party and fed banking
reform efforts (to fight corruption in bank chartering) in that state long before other states became
concerned with corruption (Bodenhorn 2006).
Even nations with state-controlled media can use corruption stories to teach cautionary lessons.
In the Soviet Union, for example, corruption revelations were commonplace news items. To a
Western economist, they indicated the rigidities and inefficiencies of the planned economy. To the
Soviet officials, they were part of periodic cleanup campaigns that did not challenge the underlying
organization of the economic system.14 The recent anticorruption crackdowns in China show some
similarities. They are designed to punish officials who misbehave and/or are out of political favor.
The cases may lead to the reform of particular sectors, and be presented in the media as cautionary
tales. They are not part of a systemic overhaul (Fu 2015).
Media attention is necessary for scandals to surface, but it is not sufficient. The revelations must
have credibility with the public, and the public must be sufficiently concerned to express outrage and
distress – which can, in turn, be covered by the media. This dynamic may finally induce the
government to investigate the allegations and correct the underlying abuses. Unfortunately, responses
often focus only on personalities – covering up blame, on the one hand, and searching for scapegoats,
on the other. Nevertheless, if political leaders are committed to underlying reforms, the clever use of
scandals can generate public support for costly changes in government operations that would
otherwise be unpopular. Economic crises, like political scandals, can also make reform seem
necessary to the majority of voters even if it implies some pain in the short run. For example, high
inflation might prompt interest groups to agree on economic policy reform more quickly than under
conditions of price stability (Drazen and Grilli 1993). Empirical work based on a sample of
countries with external debt crises supports this claim. Some of these countries, mostly in Latin
America, had high inflation; others, mostly in the franc zone in Africa, had low inflation. The study
shows that countries with high inflation rates were more likely to reduce their public-sector deficits.
Furthermore, very high inflation in the present induced countries to lower inflation in the future
(Bruno and Easterly 1996; Kaplan 2013).
Democracies are sometimes viewed critically by economic reformers who worry that populist
pressures will make reform difficult. As a counterweight, an economic crisis can act like a major
scandal to push reform to the top of the agenda. Thus Das-Gupta and Mookherjee (1998: 450) argue
that severe fiscal crises can make reform possible for a new government that has been elected with a
mandate for change. They point to the examples of Argentina, Bolivia, Colombia, and Peru in the
1980s. They argue that India missed an opportunity for reform in 1991 in the wake of a foreign
exchange crisis and the election of a new government. In Great Britain, Australia, and New Zealand
in the 1980s administrative reforms by newly elected governments were spurred by the stagflation of
the 1970s (Scott 1996: 5–6; Zifcak 1994: 7–8, 17–18, 138–9). Economic crises have also made
reform possible in the United States. For example, a case study of reform in Wisconsin during the late
nineteenth century points to the salient impact of economic depression and financial panic in bringing
people together across divisions of class and status to push for reform (Thelen 1972: 200).
Of course, many economic crises have no clear relationship with the level of corruption, but in
countries where the public fiscal system and the profitability of business have been undermined by
corruption in tax collection and public procurement, economic crises can provide a catalyst for
anticorruption policies as well as macroeconomic adjustment. In fact, if underlying relationships
based on corruption, family connections, and patronage are not changed, standard macroeconomic
prescriptions may not succeed. For example, a study of efforts to reform tax administration in Mexico
and Argentina points to the costs of corruption and inefficiency in the revenue system as an underlying
cause of the fiscal crises of the early 1980s. The weak and arbitrary aspects of the tax system in both
countries contributed to a poorly functioning public sector and inefficiencies in the private sector as
well. The resulting crisis persuaded political elites of the need for reform (Berensztein 1998). The
current debt crises in Greece (CPI = 43; CCI = −0.11) and Puerto Rico (CPI = 63; CCI = 0.50) should
be met not only with macroeconomic reform, but also with reform of government in ways that limit
corruption and promote the effective delivery of services.
Economic and political crises are costly and risky preconditions to reform. They are often
preceded by long periods of slow decline in the effectiveness of the state (Scott 1996: 72; Corrales
1997–8). Crises may produce violence, chaos, and a challenge to state legitimacy (Bruno and
Easterly 1996). Reform may occur, but at great cost to society, or the country may descend into
anarchy. One can hardly recommend the manufacture of crises as a cure for the corruption of state
institutions (Corrales 1997–8). Far better is a political system subject to ongoing pressures to
perform well (Scott 1996: 72). Nevertheless, reformers need to recognize that crises and scandals
can sometimes be used to push reluctant public and private actors toward change, and take advantage
of such opportunities.
B. Gradual Reform: The United States and Great Britain
In Great Britain the model of public office as a benefit-by-contract became unworkable during the
first half of the nineteenth century as the government extended its activities. Few large private
corporations existed that could have provided mass public services. Instead of contracting out for
postal or customs services, the state began to employ a large number of subordinate officials who
earned a salary and were often selected on the basis of loyalty to the ruling coalition. The East India
Company was an exception, a private firm operating as a surrogate for the British government that as
early as the late eighteenth century introduced some measure of training and merit recruitment, but its
personnel system shared many of the other weaknesses of the government (Raadschelders and Rutgers
1996: 84; Marshall 1997). A similar patronage-based system of public employment developed in the
United States. These systems performed poorly, and the lack of viable private-sector alternatives to
state provision made internal reform by the state the only plausible option. The pressure for civil
service reform derived, in part, from the lack of any alternative to public provision.
Johnson and Libecap (1994) argue that in the United States, civil service reform was motivated
by the growing absolute size of the federal bureaucracy. It is a commonplace of the organization
theory literature that loss of control increases with organizational size. In the United States this
happened at the federal level after the Civil War. Direct monitoring became more costly and led those
at the top of the hierarchy to relinquish some discretion in return for the establishment of formal rules.
Johnson and Libecap claim that the combination of large government size and the growing
independence of local party leaders produced support for civil service reform in Congress. The 1883
Pendleton Act only covered the largest federal facilities, and support for the act was indeed stronger
among members of Congress from districts with important post offices and customs houses (ibid.:
105–7). In this case, national prosperity seems to have been unaffected by reform. Neither total nor
per capita measures of GNP were significantly associated with extension of the merit system at the
federal level. The macroeconomy, however, appears to be the wrong level of analysis because a
well-functioning national state would have a different impact on businesses depending upon how
dependent they were on the post office and the customs service. Unlike many countries in the present
day, the federal government had many fewer regulatory and spending responsibilities.15
Experience from some developing countries seems to contradict Johnson and Libecap’s
argument that a growth in the size of government spurs reform. Large governments appear to be
especially hard to reform. If government is very large, it will employ a large proportion of the
workforce. In some poor countries the government sector accounts for a large share of the jobs in the
modern sector. If this is true, reform that requires substantial privatization and massive layoffs may be
politically difficult to achieve. Even if reform will improve job opportunities and facilitate economic
growth over time, public employees will oppose reform because of uncertainty about how they will
fare (cf. Fernandez and Rodrik 1991). Furthermore, the possibility that employees can organize into
unions and pressure groups will limit reformers’ freedom of action. Even if Johnson and Libecap are
correct that inefficiency increases as government grows, that fact may be insufficient to overcome the
political clout of public employees. Johnson and Libecap emphasize the absolute size of government
or at least of some key agencies such as the post office. In contrast, the government share of total
employment is also relevant.
The best case for reform occurs when government employment is large in absolute numbers but a
small share of the labor force. If most jobs are in the private sector, citizens, in general, will care
more about whether the mail is delivered expeditiously, roads are built and maintained, and
schoolsand hospitals function than whether jobs within government are available. Thus, privatization
of some government activities may be prudent before reform, both to improve service and to shrink
government employment. Reform in the United States may have been facilitated by the small size of
the public sector relative to the private sector. Public employees were not a potent pressure group,
and the public generally supported reform. Rosenbloom claims that when the federal civil service
was reformed in the United States, most of the nation was behind the change (Rosenbloom 1971: 71–
86). The same was generally true at the state level (on Wisconsin see Thelen 1972). Before the
advent of civil service systems, jobs were a benefit used to motivate campaign workers, but their
relative value declined as the costs of patronage become more visible to voters (Maranto and Schultz
1991; Johnson and Libecap 1994). Furthermore, if the civil service is small enough so that reform
does not imply layoffs, existing government workers may support reform. Although appointed under
political criteria, they may want to stay in office with a change in government. Even with rather long
terms of four to six years, patronage workers may support creation of a civil service system,
especially if it involves not just job security but also increases in pay and improved working
conditions. Thus American public-sector workers came to support the civil service once it was in
place because they were grandfathered into their current positions.
Kernell and McDonald (1999) provide a somewhat different but complementary take on the
establishment of Rural Free Delivery (RFD) by the U.S. Post Office. They also explain the decline of
rural postmaster positions as associated with the decline of patronage and party loyalty as criteria.
However, they also stress the benefits of reform, not for big businesses, but rather for the multitude of
rural, farm families who were enthusiastic supporters of free mail delivery to their homes. Once RFD
was put in place on a trial basis, it became extremely popular and trumped any remaining political
benefits of appointing postmasters based on their party loyalty. The Post Office, faced with multiple
demands for routes, gave members of Congress a role in nominating new routes, although the Post
Office retained the final say. The empirical work shows that under a Republican president in 1899–
1900 more routes were allocated to Republican districts than to Democratic or Populist ones and that
Republican incumbents in close races were especially favored. These results, of course, depend upon
the particular nature of RFD – the program was instituted gradually over time and the benefits were
individually experienced by rural voters. Thus, RFD was especially suited for a shift from party-
oriented patronage to service in a way that would not apply to less visible public services.
Finally, consider the interaction between reform and the size of government. Johnson and
Libecap treat the size of government agencies as given: increased size makes it difficult to control the
bureaucracy and that in turn leads to reform pressures. However, if government leaders are corrupt,
causation also runs the other way. Corrupt rulers may seek an excessively large government as a
means of extracting benefits for themselves. Recall, however, that if they seek to maximize their
corrupt rents, they may restrict the supply of certain services to extract the scarcity rents (see Chapter
8). Operating against the search for monopoly gains, powerful elected leaders may favor a large
government as a means of increasing patronage opportunities. Leaders use the machinery of
government both to enrich themselves and to provide jobs for supporters. These joint activities often
produce bloated governments. The machine-dominated American cities of the nineteenth and early
twentieth centuries provide an example. One scholar describes a political machine “as a political
party in which a boss oversees a hierarchy of party regulars who provide private favors to citizens in
exchange for votes and who expect government jobs in return for their services” (Menes 1996). A
statistical study of machine and nonmachine cities over the years 1900–20 found that machine cities
spent 18% more than nonmachine cities per capita and that municipal wages for lower-skilled
workers were 8% higher (ibid.). Machine cities averaged 34% higher per capita spending on general
administration and 17% more on police and fire services – all areas with many patronage jobs. To
take one extreme case, the population increased by 22.7% in Boston between 1895 and 1907 while
the number of city clerks increased by 75%. By 1907 salaries in the city were three times more than
for comparable jobs in the state government and the private sector. The number of day laborers on the
city payroll increased 50% between 1895 and 1907 while productivity fell by half. The impact of
machine dominance seems to have been large budgets, civil service wages above the norm, and, as a
consequence, excess spending on services dominated by patronage jobs such as police and fire
departments (ibid.). Another phenomenon that bloats payrolls is the practice of “ghost workers” –
“employees” who do not actually work there – in many government agencies and services. In these
cases, the actual size of government is smaller than it would seem based on the number of public-
sector employees on the books, and government may be downsized simply by improving accounting
mechanisms to eliminate the ghost workers.
Yet eventually most such U.S. cities did reform, cutting expenditures and payroll (Schiesl 1977).
According to Johnson and Libecap (1994: 112–13), in states and urban areas, reform was more likely
as the absolute size of government increased. They point out that the large states of New York,
Massachusetts, and Illinois, which presumably also had large public sectors, were the first to
introduce civil service reform. Boston, New York City, and Chicago, which also employed large
numbers of people, were early reformers, while some rural areas and small towns retain vestiges of
patronage systems to this day.16 Apparently political machines sometimes contained the seeds of their
own destruction as they expanded government to a point where a backlash set in. If a vigorous private
sector feels constrained by an ineffective public sector, conditions may be ripe for reform.
According to one study, reformed cities not only introduced civil service systems and
procurement and tax reform, but also took a more long run view. They spent proportionately more on
infrastructure projects, such as roads, waterways, sewers, and water supply, than unreformed cities,
decisions that were presumably favored by the business community (Rauch 1995).17 Civil service
reform appears to have been good for the growth of manufacturing. In one study of American cities,
reform increased the manufacturing growth rate by half a percentage point – one-quarter of its mean
value of 2% (ibid.). This result is consistent with the finding that manufacturing interests were
frequently in the forefront of the reform effort. Manufacturers resented the costly special deals struck
with other business interests more concerned with government contracts and franchises (Menes
1996). Construction companies and manufacturing interests were often on opposing sides if reform
included not just the civil service, but the contracting process as well. Nevertheless, a coalition for
reform did eventually develop in many cities that elected reform mayors with business support
(Schiesl 1977).
The strength and growth rate of the private sector should help determine the ease of reform.
Perhaps reforming cities and states were those where the private sector was a relatively large share
of total employment and income. In such cases private businesses would be supporters of reforms that
lowered their costs, and public-sector workers might not protest too much with reemployment in the
private sector a viable option. Reform occurred when the government became a large organization in
absolute size while remaining small relative to the private sector. Too few private individuals and
businesses were dependent on government jobs, contracts, and favors to block reform.
C. Sustaining Reform
One way to assure durable reform is to compensate opponents for the losses they would otherwise
suffer. Such solicitude for the losers is not always strictly necessary. The majority can override even
a vocal minority, and an autocrat can simply announce a reform plan. However, in many cases reform
will have a greater likelihood of success if those most affected are compensated. This may be an
unpleasant necessity if the aim is to convince a corrupt ruler to cede power without bloodshed. In
other situations, however, compensating the formerly corrupt may not seem so distasteful. The best
example is civil service reform where salaries and working conditions are improved in return for
officials foregoing bribery receipts. Corrupt high-level officials are relieved of their jobs, but the rest
of the bureaucracy is given an incentive to be honest, perhaps with an amnesty. Such policies are
likely to be needed in poor countries that have a scarcity of educated people capable of performing
some types of public-sector tasks. The wholesale dismissal of corrupt officials is not a viable option
in that case. The danger, of course, is that the concessions made to existing officials are so large that
the very effectiveness of the reform is undermined (Grindle and Thomas 1991: 121–50; Polidano
1996).
Sometimes anticorruption policies include a restructuring of the state to reduce its role through
privatization and deregulation. Because these reforms will reduce the number of public officials
needed, they can be expected to resist the change. One study recommends obtaining bureaucrats’
support for such reforms by giving officials “golden handshakes” in the form of a one-time surge in
bribe receipts. This gives them a financial stake in the success of the long-term reform effort and an
incentive to reveal needed information to the reformers (Basu and Li 1996). The authors give two
examples from China where officials benefitted personally from “sponsoring” new businesses and
approving stock offerings. However, as the authors recognize, toleration of corruption is a risky
strategy. Corrupt officials may take it upon themselves to organize their activities to produce greater
gains, thus undermining economic growth and the legitimacy of government. The government’s past
toleration of corruption will then make it difficult for them credibly to crack down on malfeasance.
Thus, better options are legal incentive bonuses, severance payments, and assistance in changing to
private employment.
Even if opponents can be pacified, reform can be fragile. The history of reform efforts is not
encouraging (Geddes 1991; Grindle and Thomas 1991; Nunberg and Nellis 1995; Klitgaard 1997).
As Geddes (1991, 1994) demonstrates, the new policies are likely to be reversed if they occur
because of a temporary balance of political interests. Too often reformers have contented themselves
with passing laws or announcing new policies without concentrating on the difficult task of translating
reforms into durable changes in government operations (Grindle and Thomas 1991). If the political
and bureaucratic costs of implementation are ignored in the first flush of reformist zeal, the stage is
set for subsequent failure.
The durability of national civil service reform in the United States and Great Britain deserves
study. Their experience suggests the possibility of a benevolent dynamic – in which partial changes
evolve over time into full-scale reform. Although research has focused on civil service reform, the
basic dynamic seems to be a general one. The key is a reform process in which new allies are
produced by the very process of change. Support grows over time as the reach of the reform program
grows. Thus reforms, once started, become self-sustaining.
Reform started slowly at the federal level in the United States and focused at first on parts of the
bureaucracy where the marginal gains would be highest. Important constituencies outside government
benefitted and helped to institutionalize reform. Inside government, the first beneficiaries of civil
service protection favored its preservation. Presidents about to leave office extended civil service
protection to their appointees. Although newly elected presidents did return some positions to
patronage, so that the share of merit employees fell during a few years, the general trend was slowly
upward. The move from 10% to 80% took almost 40 years. The proportion covered by the merit
system increased when overall government employment rose. When public-sector jobs were
increasing, an increased proportion could be covered without great pressure on existing employees.
Although some people might lose their jobs because of incompetence, no large-scale cutbacks were
needed (Johnson and Libecap 1994: 109–11).
Once the number of merit employees became large, they emerged as a potent interest group in
favor of maintaining the system. This could, of course, have been a mixed blessing if the underlying
conditions had changed. At some point, employees with civil service protection can undermine other
reforms designed to improve productivity. The worst situation is a large, well-organized body of
public employees hired on the basis of patronage, but difficult to fire or reform.18 This has proved to
be a particular problem for governments seeking to contract-out services to private organizations.
Contracting out, however, is likely to be less viable in poor countries that lack indigenous private
businesses able to take over state functions.
Progressive reform in urban America is another example of sustainable reform. Even so, in many
American cities reform did not proceed in a straight line. Machine and reform administrations
alternated in power. However, although some backsliding occurred, machines often maintained the
reforms introduced by progressive governments. Reforms were popular with the electorate and hard
to reverse. Property tax reform in some cities led to a fall in the tax bills of homeowners as
businesses paid a larger share. In Jersey City, for example, taxation of railroad properties relieved
the tax burdens on home owners (Schiesl 1977). Clearly, those voters who owned real estate could
see the benefits of property tax rationalization, and even renters may have perceived some benefits.
Reforms were maintained because the gains were obvious to a large number of voters in spite of the
costs imposed on some business interests.
In some cases, reform fails because of bad sequencing. Instead of creating a group of early
winners who support continuing reform, the program’s early beneficiaries fear that they will lose if
reform continues. In the worst case they become a blocking coalition that prevents broad-based
change. According to one study, land reform in Latin America was an example of this reverse process
(De Janvry and Sadoulet 1989). The reforming countries first introduced programs to modernize
medium and large farms as the quickest way to increase productivity. However, the success of these
programs made these farmers more economically powerful, which in turn gave them greater political
power. As a consequence, they engaged in rent seeking to block plans to redistribute lands to poorer
households. The authors conclude that, in spite of the short-term costs, land reform should be carried
out before modernization.
III. Natural Resource Wealth and Foreign Aid
Just as economic crises can spur reform, wealth can make reform seem unimportant. Considerable
evidence suggests that a strong natural resource base does not necessarily promote economic
development (Gelb 1988; Sachs and Warner 1995; Ross 2012). There are two basic explanations for
this: the “Dutch disease” (a strong currency depresses manufacturing exports) and the “Nigerian
disease” (government wastes resource wealth) (Williams 2011). Developing countries such as
Nigeria, Venezuela, and Indonesia that experienced oil windfalls were able to resist political and
economic reform for many years, and the mineral wealth of Zaire helped sustain Mobutu’s corrupt
regime (Geddes 1991; MacGaffey 1991; Diamond 1993b, 1995). Mineral-rich countries with few
other sources of foreign exchange may be unlikely reformers both because the state can finance itself
through royalties (Moore 1998) and because there may be few sources of alternative employment for
laid-off civil servants. The country is rich in natural resources but does not create many private-
sector jobs for its citizens. Instead of promoting growth, the valuable resource may simply make
control of the state attractive. Individuals compete to rule the state in order to use it for their own
benefit and for the benefit of their families and close associates. The same can be true for countries
that are very dependent on foreign aid. In both cases, talented people concentrate their effort on rent
seeking rather than on productive activities (Krueger 1974). The private profitability of rent-seeking
activities is above their social value and may crowd out productive investment (Bigsten and Moene
1996: 192–5).
Natural resource businesses usually just want to be left alone and are not much interested in an
effective public sector beyond the provision of transport and port facilities. The countries least likely
to reform would seem to be those with more natural resources than others in their region. Then
corruption and patronage can extract huge economic costs without a country’s citizens feeling badly
off compared to their more impoverished neighbors (see Dunning 2008 for a nuanced analysis of the
possibilities).
A secure source of foreign aid is a little like a diamond mine or an oil deposit. Countries with
access to such largesse have a cushion that others lack (Moore 1998). If overseas aid lacks
conditionality, it may simply postpone painful decisions by masking underlying problems that would
produce a crisis in less fortunate countries. Bruno and Easterly (1996: 216) speculate that low
inflation countries that did not adjust current-account deficits and budget deficits were able to avoid
reform because of high inflows of development aid and lending.
Weak states may face a paradoxical situation in which increases in resources undermine
political stability and growth. So long as the state is poor, few may care about controlling the levers
of power. If the state acquires a large foreign-aid package or gains control over a valuable mineral
deposit, new political figures may arise to stake their claims. The political struggle becomes a fight
for control of the state’s wealth. Insiders try to prevent outsiders from benefitting except to the extent
payoffs are needed to buy their assent to the status quo. In such perverse scenarios, wealth increases
do not encourage income growth and can lead to subsequent falls in the wealth of ordinary citizens. A
study of the Philippines, for example, argues that rent seeking by an oligarchy of business and
political leaders was sustained by foreign aid from the United States and the presence of American
military bases (Hutchcroft 1998: 23). As President Fidel Ramos noted in his 1992 inaugural address,
the economic system “rewards people who do not produce at the expense of those who do ... [and]
enables persons with political influence to extract wealth without effort from the economy” (quoted in
ibid.).
The case of Nigeria is an extreme example where the state has been described as “a national
cake to be divided and subdivided among officeholders” (Joseph 1996: 195). The situation is
exacerbated by the presence of massive petroleum deposits (Olowu 1993: 94; Herbst 1996: 157–8).
Oil represents 90% of Nigeria’s exports, 35% of GDP, and most of the government’s revenue.19 The
oil reserves are under state control and provide huge windfall gains to those who control them and
their political allies. Nigeria profited handsomely: oil rents have been estimated at $300 billion over
35 years (McPherson and MacSearraigh 2007: 192). Control of the state was a valuable prize worth
fighting for. In 1993, General Sani Abacha overthrew the former military government and
subsequently “appropriated some $4 billion from Nigeria’s treasury through a number of property
crimes, including embezzlement, fraud, forgery, and money laundering.... After Abacha’s death in June
1998, his wife was stopped at a Lagos airport with 38 suitcases full of cash, and his son was found
with $100 million in cash” (Levi, Dakolias, and Greenberg 2007: 200). In a resource-rich
environment, those who seek to get rich struggle for a share of the rents, instead of engaging in
productive entrepreneurship (Diamond 1993b: 220, 1995: 474; Herbst 1996; Lewis 1996: 81). As
Diamond writes, “plainly, the stakes of politics are too high” (Diamond 1993b: 218). According to
Global Financial Integrity, Nigeria was among the top ten sources of illicit financial outflows during
the period 2000–9 (Kar and Curcio 2011). Perhaps the fall in oil prices as a result of the fracking
boom and OPEC’s decision to maintain high levels of production will provide an opening for reform.
In 2015, Nigeria elected a president with an explicit anticorruption agenda, although the task is
daunting, and Nigeria has far to go to deal with its underlying governance problems.20
Corrupt democracies with strong resource bases may have poorer growth prospects than corrupt
autocracies with similar endowments. The autocrat may have both a longer time horizon and a better
ability to control competitive rent seeking by his subordinates. The risk, of course, is that an autocrat
may gradually turn into a thoroughgoing kleptocrat over time. As McPherson and MacSearraigh
(2007: 194) assert:
Certainly weak governance existed before oil development in many countries, and it is arguable
that causality runs from weak capacity to mismanagement of oil. That said, there is growing
evidence in support of the argument that causality runs primarily in the other direction, that is,
that oil itself erodes governance.
Conclusions
Reformers need to be sensitive to domestic conditions that favor or hamper anticorruption efforts.
Good policy ideas are necessary but not sufficient. A reform-minded leader is a valuable ally but is
not a guarantee of success. The lessons of past and present reform efforts demonstrate the importance
of powerful supporters inside and outside of government, but they also show how opponents can be
sidelined or compensated. The most favorable cases are those in which the number of beneficiaries
builds up over time as reforms take effect to create a constituency for the new policies. In particular,
reform is much easier if the domestic and international business communities believe that they will
benefit from a reduction in corruption and patronage, and if ordinary citizens see gains as well. A free
media can help fuel popular support, and, in many cases, a broad constituency may be possible if it is
not blocked by those who gain from the status quo.
Political systems that facilitate the exchange of individualized favors, be they jobs, payoffs, or
government contracts, are tailor-made for corrupt deals. Reform of such polities will depend either
upon a scandal or crisis or upon the slow erosion of the benefits of inside deals. Sometimes an
indirect approach to reform is necessary. Instead of a direct attack on corruption, other structural
changes can be introduced. Credible reform of the civil service, of procurement practices, and of
licensing and regulatory programs cannot occur without fundamental reforms in the way public policy
is made.
Reform in a resource-rich country or one dependent on foreign aid may be especially
challenging. Those who successfully capture these rents are a potent force that will resist reform.
Thus, diversifying the economy may be necessary in order to build a constituency that is not beholden
to the incumbent, the natural resource, or foreign aid, and that will support reforms. But this takes
time.
Under some conditions, even if corruption is pervasive, only partial reform is politically
feasible. Latin American presidents have often selected key government agencies, such as the central
bank or the revenue authorities, and created enclaves of high integrity and professional competence
(Geddes 1994). In Africa, tax reform has frequently involved the creation of insulated revenue
authorities that are given special resources and exempted from civil service rules (Dia 1996). As
Geddes points out, this is unlikely to be a sustainable strategy. A powerful leader can create enclaves,
but if they are dependent on his protection, they will collapse with a change in government. Special
treatment for some creates resentment. Furthermore, even government-wide reforms may founder if
they do not create a growing circle of supporters.
The order in which reforms are introduced matters. Logic may need to give way to political
reality. Under some conditions short-term gains can generate broad public support for more difficult
further steps. Under other conditions, short-term benefits for some can produce a backlash, as those
same beneficiaries seek to maintain their initial gains. These concerns suggest two paths to durable
reform. The first, which will only be possible in times of great crisis and dissatisfaction with the
status quo, is a “big bang” approach in which massive changes are introduced all at once, perhaps by
a new administration. The second, more viable in the absence of crisis, is an incremental strategy in
which the steps are carefully designed to build support over time. Some short-term gains may need to
be sacrificed in order to get the sequencing right. With either approach, if corruption is entrenched,
several rounds of reforms are likely to be necessary, as institutions are adapted to foster a low-
corruption environment.
1 On the importance of moral leaders during the Anti-Patronage and Progressive periods in the
United States, 1870–1933, see Anechiarico and Jacobs (1996: 19–21), Maranto and Schultz (1991:
44–50), Sproat (1982), and White (1958). Das-Gupta and Mookherjee (1998: 302) discuss the
necessity of political will at the top as a precondition for administrative reform. They cite the
example of Uruguay as a case in which resistance from public officials had to be overcome by
political support from the top.
2 Chris McGreal and Jack Shenker, “Hosni Mubarak Resigns – and Egypt Celebrates a New
Dawn,” The Guardian, February 11, 2011, http://www.theguardian.com/world/2011/feb/11/hosni-
mubarak-resigns-egypt-cairo (accessed October 10, 2015).
3 Pereira, Melo, and Figueiredo (2008) find that corrupt Brazilian mayors are only punished at the
polls if the revelations are released during the election year. Hence, if the benefits of corruption
are high and the likelihood of detection is low, even first-term politicians may be corrupt. They
trade off their chances of reelection with the up-front benefits of corruption, and for Brazilian
mayors, the balance for many may tilt toward self-dealing.
4 However, these reforms were limited and truly competitive elections began only after 1996
reforms during the presidency of Ernesto Zedillo. “[T]he 1996 reform provided very generous
campaign funds and extensive free media time to the parties, thereby allowing the opposition to run
professional campaigns for the first time” (Duke, Morgenstern, and Nielson 2006: 78). According
to this study, the old-school PRI members of Congress approved the reform after reducing its reach
and to preempt the possibility that the president would ally with opposition parties to pass the act.
After dominating Mexican politics since the 1920s, the PRI became a minority in Congress in 1997
and lost the presidential election in 2000. Several conditions converged to facilitate reform at that
particular time: an economic crisis began shortly after Zedillo took office, and the previous
president (Salinas) became embroiled in a corruption scandal involving his brother. The Mexican
experience might seem a cautionary tale for elected autocrats, but, in fact, multiparty democracy
still remains fragile – with the PRI back in power since 2013 and patronage politics much in
evidence.
5 Prado (2012), however, provides a counterexample from Brazil where privatization and the
creation of new regulatory agencies for electricity and telecoms was facilitated through patronage
appointments.
6 For definitions of closed- and open-list PR see Chapter 11.
7 See “White House: Campaign to Cut Waste,”

https://www.whitehouse.gov/21stcenturygov/tools/ethics (accessed July 22, 2015).
8 Geddes’s work refers to the high oil prices of the 1970s, but the same could be said of the 2000s.
President Chávez, elected in 1998 on an anti-status quo platform, used high oil prices to finance
populist policies and nationalize several industries, while consolidating executive power and
undermining democratic checks. After changing the constitution, Chávez was reelected three times.
Health and education outcomes improved, but corruption and insecurity increased.
9 Goel and Nelson (2011) find that U.S. states with larger public employment tend to have higher
levels of corruption. Interestingly, they also find that Southern states are more corrupt than Northern
states, suggesting that reform was not uniform. Both of these results corroborate Glaeser and Saks
(2006), who find that more local government employment is related to higher corruption, but
greater state government employment is not.
10 In developing and transition countries businesses have voiced similar objections. Thus, in
Brazil, President Collor’s downfall was hastened by his reputed decision to increase
“commissions” from an average 15% to 20% of the value of deals under the previous regime to
30% to 50% (Manzetti and Blake 1996: 676).
11 In Pennsylvania the leader of the Republican state machine, not the congressional delegation,
was viewed as controlling access to federal jobs (Blair 1989: 81).
12 Mexico is a constitutional democracy, but until recently has often been classified as autocratic
because of the 70-year dominance of the Institutional Revolutionary Party and the strength of the
executive.
13 Thomas Fuller, “Thailand’s Military Stages Coup Thwarting Populist Movement,” New York
Times, May 22, 2015, http://www.nytimes.com/2014/05/23/world/asia/thailand-military-
coup.html; David Streckfuss, “The Contrecoup Threat,” New York Times, January 16, 2015,
http://www.nytimes.com/2015/06/17/opinion/the-contrecoup-in-thailand.html (both accessed July
22, 2015).
14 For an analysis of corruption in Soviet-type systems and some examples of corruption stories in
the Soviet press see Montias and Rose-Ackerman (1981).
15 But see Mashaw (2012), who provides a history of the American administrative state that traces
early developments.
16 Indeed, patronage still occurs in these cities, as well. In Boston, a probation commissioner was
sentenced to eighteen months in prison and fined $250,000 for hiring the friends of state legislators.
The judge justified a lenient sentence on the grounds that such patronage was rampant. Milton J.
Valencia, “Ex–Probation Chief Sentenced as System Decried,” The Boston Globe, November 13,
2014, http://www.bostonglobe.com/metro/2014/11/13/brien-sentenced-
months/uHeOQXxxGcZN5p89BPySzJ/story.html (accessed October 10, 2015).
17 In absolute per capita terms, however, another author found that nonmachine cities did not spend
significantly less on highways (Menes 1996). Because automobile and truck travel were just
becoming important during this period, however, it is difficult to know what the null hypothesis
should be.
18 Grindle and Thomas (1991). See Peirce’s (1994) discussion of reform efforts in Florida and
Philadelphia. Reform in Malta was undermined by opposition from public sector unions (Polidano
1996).
19 Reported on the website of OPEC: http://www.opec.org/opec_web/en/about_us/167.htm

20 For an assessment of the prospects see “Nigeria: Economic Woes to Dominate Buhari’s
Campaign Promises,” Credit Suisse Economics Report, June 1, 2015, https://doc.research-and-
analytics.csfb.com/docView?
language=ENG&format=PDF&document_id=1049107671&source_id=emcmt&serialid=0KeRr%2
F61xVEXpQnMG3lDQEELb3eyzkbk6JSBKZAPzn0%3D (accessed July 22, 2015).
14
The Role of the International Community
◈
Policies to control corruption will always be controversial and contested.1 Those subject to
increased surveillance or limits on their discretion will bewail the lack of trust these constraints
imply. They will complain that the new controls are politically motivated, and that they fail to respect
cultural norms. These objections will be particularly evident if anti-corruption measures are imposed
or supported by international actors – most notably aid and lending bodies, global nonprofits, or
international treaties. The role of international institutions is necessarily limited, given the dominant
position of nation-states. Nevertheless, well-executed international efforts can benefit ordinary
people and may help, rather than harm, domestic and global businesses. The only losers are those
who have benefited from corrupt transactions both in government and in the private sector. The most
difficult cases are polities in which corruption is so deeply embedded that almost everyone is
somehow entwined with the corrupt system.
International institutions, especially the World Bank, began to promote an anticorruption agenda
in the mid-1990s. The end of the Cold War facilitated these initiatives because corrupt rulers could
not continue to play off one bloc against the other. For a time, the anti-corruption agenda of
international institutions and their powerful backers in wealthy countries faced no significant
opposition; the bargaining power of domestic anticorruption advocates also increased.
But recently, the rise of global direct investment and finance from China and other countries that
were not part of the initial “anticorruption consensus” has given some political leaders leverage to
resist reform, especially if the host state is resource rich. As Fariello and Bo (2015: 422) assert,
“[D]eterrence-based enforcement approaches may simply drive some of the Bank’s client countries
(and the private sector) toward projects financed by donors with fewer legal constraints (so-called
black knights).” We do not mean to suggest that the leaders of emerging middle-income countries
actively encourage their overseas investors’ corruption or benefit from it personally. In fact, they may
also be trying to limit its impact. Nevertheless, the growing importance of financial institutions and
other multinationals from countries outside the 1990s anticorruption consensus poses a challenge. On
the plus side, these entities increase competitive pressures on those based in wealthy countries, but on
the negative side, if they use corrupt tactics, their actions increase the pressure on all firms to follow
suit.
Given the harm from corruption to economic development and state legitimacy, we consider the
feasible options for international bodies that are constrained by their own distinctive institutional and
resource limitations. No international institution is prepared to encourage revolutionary regime
change, although they do often assist with state building in a postrevolutionary or postconflict
situation.2 Furthermore, even if the fundamental constitutional structure is fixed, outside experts can
point to particular risks and recommend ways to limit corruption within constitutional constraints.3
International institutions face a linked set of issues. They must characterize the underlying
problems of government capacity in the countries where they operate, and then define corruption and
understand how it can exacerbate (or ameliorate) these problems. They must seek policy levers that
might limit the impact of corruption, and identify appropriate routes for international influence.
Formulating anti-corruption goals at a high level of generality can disguise these complexities and
tensions. But once international actors move to concrete initiatives, limitations of knowledge and
capacity will become apparent, and conflicts between different types of anticorruption efforts will
surface.
The options for international actors range from those likely to generate little pushback from
domestic actors, to efforts to reform a state’s internal methods of operation, to those that depend on
the participation of nation-states and business firms (Wren-Lewis 2013). We begin with information
provision, followed by international efforts to support domestic anticorruption programs of the kind
that have been dealt with in previous chapters. The chapter concludes with international institutions,
from conventions designed to limit corruption, to the treatment of corruption in international
investment arbitration. Hence, the focus is on domestic reform programs promoted and supported by
the International Financial Institutions (IFIs) and on formal international treaties and dispute
resolution mechanisms. However, that is not all there is to the international anticorruption effort.
Chapter 15 turns to two kinds of international efforts: those designed to change the norms and
behavior of multinational firms, on the one hand, and interstate efforts to fight organized crime and
money laundering, on the other. Both of these efforts can complement and make more effective the
explicit anticorruption instruments discussed in this chapter.
I. Information Provision
Information provision seems relatively unproblematic because it simply aids domestic policy makers
and leaves it to them to use or ignore this material as they wish (Wren-Lewis 2013). There is no
conditionality and no direct funding for governments or domestic groups.
However, although information provision is relatively unobtrusive, gathering that information
can be fraught with controversy. Three sorts of information are relevant: social science evaluations of
reform policies, cross-country data on corruption levels and government quality, and investigative
reporting by journalists or advocacy groups.
A. Social Science Information
Information about possible policy initiatives needs to be grounded in valid studies that document the
success or failure of policies in a variety of settings. Results in one country can help establish
benchmarks for reforms elsewhere. To do this, governments must cooperate with donors from the
beginning, in the design of projects that include competent social science evaluations. Unfortunately,
evaluation may seem risky both to incumbent politicians who fear objective data and to donors who
worry that evidence of failure will undermine their credibility. Even when governments and donors
cooperate, studies must comply with social science protocols, including the collection of baseline
data, valid study design, and competent statistical analysis. This will require international institutions
to design, carry out, and monitor pilot programs. Providing information on what works and what does
not is impossible without hands-on projects in countries at risk of corruption.
There is an ongoing debate in economics and political science regarding the best evaluation
methods. Nevertheless, there is widespread agreement on the limitations of many current claims for
policy efficacy. International bodies, possessing staff expertise in evaluation, need to do more to
incorporate evaluation into projects for governance and anticorruption reform. This may require them
to provide some tailored benefits (“carrots”) to governments willing to accept evaluation as part of
an aid program and to incorporate “the stick” of reduced funding if they do not.4 It is not sufficient
merely to provide information about ongoing projects; the projects must be set up with built-in
evaluation processes.
Assuming that these evaluations locate successful interventions, IFI staff should bring these
positive cases to the attention of officials in other countries. At a minimum, IFIs should be
information banks that public officials worldwide can turn to for help.5 IFIs should have a toolkit of
options that developing countries can use to develop their domestic strategies. This does not imply
that one size fits all. Some countries might well reject particular reforms as incompatible with their
own situation, but if they want financial assistance from aid agencies, they should have the burden of
explaining why they won’t adopt good governance and anticorruption reforms shown to work
elsewhere. The difficulty, of course, is that corrupt officials and contractors will try to neutralize and
undermine programs designed to improve government accountability and transparency.
Representatives of donor agencies may be similarly reluctant to support serious and systematic
evaluation, especially after working closely with host governments over the years.
At present, we still do not have good data on the relative effectiveness of most reform programs.
After decades of effort to promote anticorruption and good governance, it would be valuable to
consolidate experience across projects sponsored by aid and lending organizations – sharing
successes, failures, and ambiguous cases. A fundamental problem here concerns public information
that names countries and projects. Specific context is needed to be able to decide if a program that
worked in one country will succeed elsewhere. Domestic policy makers need to know how to
evaluate programs that worked in other countries in order to generate local buy-in. Yet, country
leaders often object to publicizing projects that will put them in a bad light. Publicizing an
anticorruption program, even a successful one, may suggest that corruption is a particular problem in
that country. Alternatively, incumbent politicians may be too eager to flag the malfeasance of the
previous government in the hope of consolidating their own power. Newly elected leaders may use an
anticorruption campaign to justify a purge of government offices, placing loyal subjects in those
positions. Thus, some evaluations will be easier to accomplish than others, and some political
contexts will simply be impossible to use as sites for evaluation studies.
In particular, to enhance government legitimacy, institutions that promote accountability and
transparency need more study. At a theoretical level, their role in promoting anticorruption and good
governance seems clear, but we do not know much about their practical operation, and about what
conditions are required to make them effective. Complicating efforts at solid analysis, both country
officials and representatives of donor agencies may benefit from the lack of solid data on the effect of
good governance programs. Suppose, for example, that an anticorruption program involves a series of
seminars and workshops for public officials with per diems set to encourage attendance. Given the
lack of hard measures of corruption, attendance at these events is reported as a measure of success
(Skage, Søreide, and Tostensen 2014). The World Bank has, however, also launched broad initiatives
to promote the demand for good governance, and it can point to some positive cases, over and above
the contested case of Anti-Corruption Agencies (ACAs).6 Nevertheless, more research is needed both
to conceptualize the way accountability institutions operate and to understand how these institutions
behave in different national settings.
Whatever other strategies are pursued, the compilation and distribution of project-level
information provide valuable background information. But knowledge alone may have little impact.
Corrupt officials and contractors may ignore the information and continue to undermine development
projects. They may announce programs to improve government accountability and transparency, and
even draw on information provided by international actors, but it all may be a sham designed only to
produce good publicity.
B. Cross-Country Data
Cross-country data can and should be produced independently of individual country governments.
These indices are likely to provoke criticism from governments that score poorly on the control of
corruption, voice and accountability, and money laundering. We discussed the weaknesses of country-
level corruption measures in Chapter 1, but these data have, nevertheless, helped to spur the global
debate and have given reformers in poorly ranked countries a lever to push for change. The more
important these indices become in shaping policy, the more important it is to be sure that they bear
some relationship to reality and do not imply a false sense of precision (Davis, Kingsbury, and Merry
2012).
Anticorruption programs, even seemingly successful ones, do not quickly translate into improved
index numbers. Unlike some measures of macroeconomic performance, the link between policies and
index numbers is weak. The indices are imperfect and the causal links between policies and
corruption levels are poorly understood. Indices that measure perceptions of corruption may even
reveal a deterioration, as reformers put corruption in the spotlight and the populace becomes more
aware of the issue. Cross-country data will continue to be produced, and they help keep the issue
before the public, but they should be supplemented by project-level research that looks in detail at
causal links.
Sometimes organizations that publish cross-country information go beyond the simple production
of indices to apply direct pressure on countries that score poorly.7 Similarly, civil society
organizations, such as Transparency International and Global Integrity, use their own and others’ data
as a way to argue for reform. They go beyond the simple provision of information to advocate for
change through local chapters or through alliances with local actors.
However, one wonders if international bodies could produce data that are more closely linked to
policy options. Objective cross-country information about the possible results of corruption and
government waste could help spur reforms in individual countries. International bodies might compile
benchmark data on the cost and performance of public projects to alert potential whistle-blowers and
to provide ammunition to reformers.8 Data on the costs of power projects, road building, hospital and
school construction, or port renewal, for example, could be assembled from multiple sources and
used to identify unusually high-cost projects. Defense spending is one area of particular concern
because of the secrecy that accompanies such purchases.9 Nevertheless, even there, egregious
examples of overpricing may surface.10 Of course, the data would be quite rough and could not be
used to prove corruption on their own, but if the cost of one country’s project is far out of line with
the global benchmark, this could be a red flag that triggers an investigation.
Another way to share data has been developed by several IFIs that are beginning to share lists of
debarred firms. The debarred firms may be local or multinational; and they are debarred from bidding
on contracts funded by the debarring IFI in all the countries in which the multinational operates.
Several IFIs have begun cross-debarment: if a firm is debarred by one bank, the other banks also
debar the same firm. In 2010 the World Bank and four regional development banks (the African
Development Bank Group, the Asian Development Bank, the European Bank for Reconstruction and
Development, and the Inter-American Development Bank) signed an “Agreement for Mutual
Enforcement of Debarment Decisions among Multilateral Development Banks”;11 the Nordic
Investment Bank is not a party to this agreement, but unilaterally debars firms that other banks have
debarred (Zimmerman and Fariello 2012). The World Bank publishes a list of firms that it has
debarred – including those debarred under this agreement – on the World Bank website.12 This
information can, in principle, also be used by local governments when making procurement decisions
that are not funded internationally.
C. Investigative Reporting
If the local media are weak and dependent on either the government or wealthy private interests, then
outside actors can help to support any remaining independent outlets and can engage in reporting
activities independent of local entities.13 These groups might supply well-researched stories to local
outlets. They can be a place for whistle-blowers to report and could provide anonymity to those who
reveal corruption when that is a risky activity. They can seek reform in libel laws that subject
journalists to fines and imprisonment if they “insult” the political and economic elite in ways that the
law finds a “violation of national sovereignty.” International media watchdogs can defend journalists
under these laws, publicize cases, and attempt to raise popular awareness of the harm caused by such
restrictive laws.14 These actions will be controversial. Sitting governments are unlikely to welcome
investigative reporting and whistle-blowing from any source, unless it reveals malfeasance by
political opponents. International actors may be accused of meddling in domestic politics, and their
domestic counterparts may be labeled enemies of the state and tools of external interests. They may
even be imprisoned or killed,15 and NGOs working in these areas may be subjected to unreasonable
requirements or funding restrictions (The Observatory for the Protection of Human Rights Defenders
2013). Such intimidation puts a high premium on getting the facts right and providing documentation
that insiders can use to work for reform. Otherwise, news reports risk manipulation by insiders eager
to discredit each other. The basic reality is that anticorruption strategies always have political
overtones even if the targets are low-level officials. The stakes are especially high, however, if the
targets are political leaders, private-sector elites, or multinational firms.
International actors may also be able to help local media make effective use of new electronic
sources of communication and to help members of the public participate in news gathering and
dissemination. A move away from conventional media to “social media” leads to what Rusbridger
calls “the mutualization of the news.”16 Although its influence is deeply dependent upon its
indigenous local character, outsiders can help with training, hardware, and software for the media
outlets that wish to take advantage of these trends.
D. Links between Information Provision Strategies
In practice, the three forms of information provision are interrelated. Journalists publicize research
results and help make the data salient. They use cross-country indices and evaluation reports to
suggest where to probe further. Conversely, scandals uncovered by journalists and advocacy
organizations can prompt more systematic social science research. Activists and the media may be
impatient with the caution that academic researchers display in expressing strong conclusions, but
over the past two decades, social scientists have given credibility to the alarms raised by
investigative reporting. Furthermore, “grand” corruption at the top of the state is not amenable to
statistical analysis, but may be especially harmful to a country struggling to escape from poverty or
the ravages of war. It can be revealed both by investigative reporting by journalists and NGOs and by
lawsuits that reveal the operations of corrupt actors.
II. Anticorruption Projects and Programs
Corruption can have a devastating impact on the efficacy of development projects; a possibility that
has spurred interest in anticorruption programs at IFIs – both to enhance the value of the projects and
to improve government functioning overall. To highlight the problem, suppose, as a thought
experiment, that 20% of aid funds is lost to corruption. The 20% represents, not bribes per se, but the
inflated contracting costs and the loss of equipment and other inputs that result from tolerating
bribery.17 In this scenario, a $100 million project would have cost only $80 million in an honest
system. Suppose further that the investment must earn a return of 10% one year in the future to pass
muster. Then an honest project needs to generate benefits of $88 million, while the corrupt project
requires $110 million, a difference of $22 million. A project that should have cost $80 million must
return $110 million in order to be worthwhile – a rate of return on productively used resources of
37.5%. Even in developed countries, not many projects have such a high return. In short, corruption
can dramatically reduce the number of projects that seem worth undertaking. Worse yet, if corrupt
opportunities vary across projects, a country’s corrupt officials will favor those with large
opportunities for private gain – skewing the ranking of projects even further. An aid agency will not
merely support too few projects, but the wrong ones.
Given these potential problems, funders from IFIs, bilateral donors, and private foundations
have intervened to support government reform and to limit waste and corruption. They do this
directly, by supporting specific programs, and indirectly, through “policy based” lending that
provides budgetary support conditional on domestic government safeguards or “good governance”
policies.18 Nonprofits and the media play a subsidiary role in keeping anticorruption on the agenda of
IFIs and in helping in the design and monitoring of programs.
Some anticorruption strategies are consistent with general development principles. These
include fair bidding procedures for government procurement, improved financial auditing, transparent
public decision-making processes, streamlined and simplified bureaucratic procedures, civil service
reform, easy access to information, and prompt and easy-to-use appeals processes. As we argued in
previous chapters, such reforms can both limit corrupt incentives and reduce other forms of waste and
inefficiency. If espoused by IFIs, they may be less threatening to national leaders and more difficult
for these leaders to oppose if the benefits are improved service delivery and more effective
implementation of tax and regulatory laws. Of course, procedures that increase transparency and
invite public participation can lead to delay and invite controversy – so there may be trade-offs
between more government accountability and speed. But quick action is not a virtue if it means that
public officials can easily satisfy their own aims without concern for public or expert opinion.
International institutions are likely to have a more limited impact when they try to promote overall
government legitimacy. A corrupt elite can simply condemn the IFIs as outside meddlers seeking to
undermine state sovereignty. Nevertheless, there are a few points of entry.
We have already indicated the utility of information-generating strategies. Going beyond the
mere provision of information, IFIs could condition their loans and grants on the host country’s
adoption of anticorruption policies shown to work elsewhere under similar conditions. These must be
real reforms, not just shams set up for international show,19 and the IFIs must enforce the
conditionality.20 Furthermore, such conditionality will not be credible unless donors control
corruption in their own projects and send a signal to suppliers and contractors that corruption will not
be tolerated (Dubois and Nowlan 2013).
A first point of entry is the procurement process for IFI-funded projects. For example, the World
Bank in 1996 revised its guidelines to state explicitly that corruption and fraud would be grounds for
canceling a contract if the borrower has not taken appropriate action. The 2014 revision explicitly
includes the following within the category “misprocurement”: conflicts of interest, collusion,
coercion, and obstruction, as well as fraud and corruption.21 As noted in Chapter 4, major revisions
approved in mid-2015 stress the need for integrity and provide for stronger direct involvement of
World Bank staff and oversight by NGOs. At the same time, as we also argued in Chapter 4, the
framework recognizes that the lowest bidder should not necessarily be chosen so long as the use of
other criteria can be protected from improper influence and corruption.22 The Bank will cancel a
contract if corrupt or fraudulent practices are revealed later on. Firms found to have engaged in such
practices will be declared ineligible for further contracts (debarred) “either indefinitely or for a
stated period of time.” These rules permit Bank audits of contractors and require contractors to
record all payments to agents both before and after the bidding because such payments are frequently
the route by which payoffs are made. Most cases so far have uncovered fraud, not corruption, but the
potential exists to investigate allegations and debar or otherwise discipline those who break the rules.
Investigation of such malfeasance remains difficult, however, if host state law enforcement officials
do not cooperate.23 The international antibribery conventions discussed in section III and laws in the
home states of multinational firms can help support these IFI efforts.
In addition, aid agencies typically impose audit requirements as a condition for aid. In projects
with weak financial controls, cost overruns can hide payoffs and lead the recipient country to ask for
and obtain more funds.24 The claim that better auditing works to reduce corruption seems borne out
by European Union aid programs in Africa and the work of Olken (2007, 2009) in Indonesia. The
European Union uses its own auditors, and observers in Africa believe that projects cofunded by the
European Union are less corrupt than others.25
Another option is to work with civil society groups to promote anticorruption projects – usually
through monitoring activities, information gathering, or pilot projects. Sometimes IFIs and NGOs can
work at the grassroots level with local governments. They may find local allies able to support
reform without generating a backlash from the central government. The goal is to finance development
projects that benefit the population without triggering rent seeking.
Alternatively, specific sectors can be the target of reform efforts without the IFI trying to
transform the entire pattern of state/society relationships. In particular, both the IMF and the World
Bank have targeted tax and customs systems. Some programs appear to have been successful although
others failed because of a lack of high-level support (Dia 1993; Das-Gupta and Mookherjee 1998:
302). The basic problem is the enclave nature of many past efforts. Tax collectors and customs agents
receive pay raises and improved working conditions and win incentive bonuses. This works for a
while but then begins to undermine morale elsewhere in government, causing resentment and risking a
backlash that can leave the government in worse shape than before. Either everybody else gets a pay
raise, or the enclave of virtue is offset by resentful bureaucrats in the rest of government. A potential
solution to this problem is to professionalize the office that gets the raise, so that these employees are
better qualified than their lower-paid peers. Sometimes the problem is not just reducing corruption in
existing institutions, but preventing it from arising in new ones. Consider the potential pathologies of
privatization that we discussed earlier. Payoffs and insider deals can tarnish the initial auction, and
corruption can undermine the performance of a new regulatory agency established to oversee
privatized firms. Oversight by international bodies or civil society can help ensure transparency.
Integrity Pacts,26 audit requirements, grassroots involvement, and sectoral reforms can help limit
corruption, but international actors cannot legitimately force domestic governments to become honest
and corruption-free overall. They need to obtain government cooperation, but sometimes this puts aid
agencies in a bind. In order to induce governmental cooperation they may end up supporting projects
that benefit the elite even though other priorities would better serve ordinary people.27 In such cases
it might be better to simply refuse to provide aid instead of becoming complicit in grand corruption.
Furthermore, the pressure to approve projects can undermine efforts to hold governments to account.
The Paris Declaration on Aid Effectiveness includes a pillar labeled “ownership” that emphasizes
the leading role recipient countries must play in identifying projects and overseeing implementation.
This principle includes strategies to improve institutions and tackle corruption.28 However, it may
also induce donors to defer to local demands even when they suspect corruption and self-dealing. The
World Bank has received criticism for funding corrupt governments29and ineffective or even harmful
projects.30 Because borrower governments are responsible for project implementation, the World
Bank may find it especially difficult to implement controls for malfeasance and waste.
If payoffs and favoritism are deeply embedded in local practices, IFI programs that mandate
bureaucratic and programmatic reforms may be hard-pressed to show results. Local officials must
buy into the reforms, or they will fail. The only way for IFIs to evaluate whether the reforms are
genuine is through supervision. Past projects have proven more cost-effective when they have been
more closely monitored by the funder (Kilby 2000). Donor monitoring ought to build on baseline data
on service delivery (or tax and customs receipts, environmental quality, etc.) so their staff can check
to see if the anticorruption program had any impact. This data need not always include actual
measures of payoff levels. Household and business surveys can get at individual experiences,
especially when corruption is endemic, but there may also be other objective measures such as gaps
between program goals and actual performance, levels of tax and tariff collections, or road quality.
Failures are just as important as successes and need to be part of an ongoing learning process.
At the World Bank, the Controller’s Office has explored ways to improve ex post monitoring so
that there is more review of goods and services actually provided. But concentrating on the Bank’s
own projects is not sufficient. The Operations Evaluation Department (OED) is the World Bank’s
own inside/outside oversight agency. An old OED study found that countries with weak governments
and high levels of corruption were less likely to have completed World Bank projects successfully
(Kilby 1995) and that seems likely to continue to be true. This result suggests that even if the Bank is
only concerned with the success of its own projects, it ought to help borrowers improve the quality of
government overall.
Outside donors and lenders must acknowledge the political and organizational dynamics that
make corruption control difficult. They must self-consciously review their own control institutions to
isolate areas of deficiency.31 If they do not carry out the oversight function themselves, outside
observers may do it for them and in a way that undermines the credibility of these organizations.
Criticism from both the left and the right of the political spectrum is a fact of life for these
organizations. It needs to be met by acknowledging that a problem exists and taking steps to reduce
the harm caused by corruption and self-dealing in aid and lending projects.
The very existence of aid funds sometimes fuels corruption in poor countries because there are
few other resources available (see Chapters 10 and 13). There is a risk, as Wren-Lewis (2013)
points out, that aid dependence makes government reform harder, not easier. Civil servants may be
enlisted to further the anticorruption agenda with aid funds that supplement their salaries, provide per
diems for travel and conference attendance, and supply incentive payments for effective performance.
Such programs risk a backlash if they are terminated after a few years. Local institutions cannot
develop sustainable anticorruption strategies if they are overly dependent on foreign financial and
technical assistance.
Aid and lending organizations should be wary of being used as a cover for the distribution of
patronage. In the Philippines under President Ferdinand Marcos, for example, technocrats in the
government worked with the IMF and World Bank to keep aid and lending flowing. A Filipino
economist claimed, however, that the technocrats provided the public rhetoric that kept loans coming
in but that the regime “then allowed the unconstrained introduction of exceptions that made complete
mockery of the spirit and letter of the plans” (quoted in Hutchcroft 1998: 114). Hutchcroft claims that
Marcos saw reform and plunder as complementary (ibid.: 141–2). He was attempting to establish
himself as one of Mancur Olson’s “stationary bandits” who could use reform to extract rents more
efficiently. As other evidence presented by Hutchcroft suggests, Marcos was apparently quite
unsuccessful in achieving thoroughgoing reform. Arbitrariness and cronyism remained.
Unfortunately, some countries may simply not be worth the time, funding, and trouble that it takes
to provide help beyond the provision of information. Kleptocratic states should not be helped to
become more efficient at controlling and exploiting their own population. The World Bank should not
help autocrats collect taxes more effectively, as it once tried to do in Zaire (Dia 1993). The United
States should not provide military training to armies that use their new competence and organizational
coherence to enrich their top brass, as happened in Haiti (Grafton and Rowlands 1996: 271–2).
Similarly, elite police forces trained by U.S. contractors may defect to organized crime, as occurred
in Mexico32 or to counterinsurgency groups who use the training and weapons to rule over the locals
they are supposed to protect, as in Afghanistan.33 Geopolitical concerns may push the IFIs to continue
to work in such countries, but there is an obligation for those at the staff level to argue that
development goals are poorly served by continued funding of projects riddled with corruption. In the
worst case, aid fuels corruption by setting off an illicit competition for funds.34 Funds should be
redirected to countries and projects that can credibly reduce poverty and aid growth and to projects
that explicitly address governance challenges where points of leverage exist. The needs of the poor
and disenfranchised in autocratic countries may be better served by NGOs who undertake goods and
service provision directly, rather than through the host government.
Greater success in improving the institutional environment for development would be likely if
both international organizations and borrower governments took a more straightforward approach to
controlling corruption and other forms of malfeasance. The United Nations Development Program
(UNDP) and the World Bank try to maneuver between the economic interests of poor and wealthy
states and to manage the tensions between charitable goals and the politics of aid and lending policy.
The issue is a complex one, but a place to start is to acknowledge the problem. The goal should not
be to insulate aid projects from a country’s corrupt climate or from the payoffs that have become
routine in some areas of international business. Instead, the international organizations need to work
with interested countries to develop an overall program. Conversely, they should be willing to cut off
aid to countries that demonstrate an inability to use it effectively.
III. International Institutions: Conventions, Soft Law,
Arbitration, and Tribunals
International efforts have multiplied in recent years, building on the experience of the U.S. Foreign
Corrupt Practices Act (FCPA) but also taking on a range of broader issues over and above grand
corruption by multinational firms – the focus of the FCPA. They are directed toward increasing the
performance of the international economy and the political legitimacy of governments. They may, of
course, also benefit the economies of developing countries, but that is not their explicit aim. In
extreme cases international anticorruption efforts could harm host countries by making investment
seem too risky, but the goal is obviously to influence the behavior of politically powerful local elites
so they do not highjack deals that could provide social benefits. The benefits from foreign investment
are very poorly reflected in the sheer volume of funds if much of it flows back out in the form of
kickbacks sent offshore.
We review the important international conventions and the complementary informal, nonbinding,
international “soft-law” arrangements that often have considerable impact on the behavior of state and
nonstate actors.35 We then discuss dispute-resolution systems where corruption allegations might play
a role, including the international arbitral systems and proposals for a specialized court, followed by
an evaluation of the debate over whether U.S. national interests have been harmed by such efforts. We
end this section with a summary of mechanisms to detect corruption in international organizations.
A. Conventions
The most notable multinational initiatives have been spearheaded by the Organization for Economic
Cooperation and Development (OECD), the United Nations, the Organization for American States
(OAS), and the Council of Europe; many regional bodies also have promulgated anticorruption
agreements. The most important is the OECD’s initiative to deter foreign bribery. The OECD Anti-
Bribery Convention entered into force in February 1999 and has been ratified by all 34 OECD
countries and seven nonmember countries.36 It extends the principles expressed in the FCPA to the
international business community.37
The FCPA was passed in 1977 in the aftermath of the Watergate scandals, which revealed
widespread bribery by U.S. firms operating abroad, most notably Lockheed (Vogl 2012: 165–8).38
Congress amended the FCPA in 1988 to exempt “facilitating payments” and again in 1998 to make it
compatible with the OECD Anti-Bribery Convention (Thomas 2010: 446–8).39 The statute makes it
an offense for U.S. firms to pay bribes to get business abroad, with both corporations and officers
subject to criminal liability.40 Other provisions, enforced by the Securities and Exchange
Commission (SEC) and dealing with books and records, apply only to firms listed on the U.S. stock
exchanges, but include all listed firms – domestic and foreign.41
Over time, enforcement of the FCPA generated support in the U.S. business community for an
international treaty to generalize the U.S. approach to countries that are the major sources of overseas
investment. Transparency International42 was an early supporter of an international treaty and pushed
for what eventually became the OECD Anti-Bribery Convention. Mark Pieth, a Swiss lawyer, led the
drafting process (OECD 2008), but the support of the U.S. government and business community was
crucial (Metcalfe 2000).
The convention parallels the FCPA, but it allows states to tailor compliance to their legal
systems.43 For example, corporate criminal liability is not available in every country so substitute
penalties must be found.44 The treaty has no official sanctioning mechanisms; instead, an OECD
Working Group on Bribery (WGB) in International Business meets periodically to carry out country-
level evaluations, and Transparency International publishes its own reviews.45
The weakness of this oversight mechanism was demonstrated in 2006 when the British Serious
Fraud Office dropped an investigation of corruption in a military procurement deal between UK firm
BAE Systems and the Saudi government, by claiming that the treaty contained an implied national
security exemption.46 However, the severe criticism leveled at the United Kingdom led to the passage
of the 2010 UK Anti-Bribery Act that strengthened the law governing both domestic and overseas
bribery.47
Periodic surveys by Transparency International show that enforcement is highly variable, with
the United States a clear outlier in terms of the number of cases brought in recent years (Bixby 2010:
90–1; Koehler 2010; Westbrook 2011: 495–6). Among signatories to the OECD Anti-Bribery
Convention, 128 of 207 cases have been concluded in the United States; followed by Germany, with
26 cases (OECD 2014: 31, figure 19). However, the U.S. law includes any firm listed on a U.S.
exchange or doing business in the United States so that many firms incorporated outside the United
States have been targeted by U.S. law enforcement. In spite of the U.S. government’s active
enforcement, few cases go to trial as defendants prefer to settle, often to preserve their ability to bid
on U.S. government contracts.48 Settlements are announced with considerable fanfare, but the actual
wrongdoing admitted by a firm and its officers may appear relatively trivial.49 Many offenses involve
only the civil violations of the books and records aspects of the law. The primary deterrent effect of
the law appears to be the stigma attached to being cited under the statute.
Empirical evidence suggests that the FCPA has had little effect on U.S. firms: their investment in
corrupt countries has not fallen (proportionally) more than that of other countries’ firms (Wei 2000;
Cuervo-Cazurra 2008). The OECD Anti-Bribery Convention, however, has reduced foreign direct
investment in corrupt countries by all signatories, including the United States (Cuervo-Cazurra 2008).
Batzilis (2015) found that firms from countries that have ratified the OECD convention do bribe less
abroad, but his results suggest that this is because they are less likely to be corrupt overall than firms
from countries that are not part of the convention. This could mean either that the convention has had
little marginal effect or, more positively, that it has changed corporate behavior overall so that even
bribes not covered by the treaty are reduced as part of corporate integrity efforts.
In 2000, shortly after the OECD Anti-Bribery Convention entered into force, the UN General
Assembly negotiated a convention against corruption. In 2003, the General Assembly adopted the UN
Convention against Corruption (UNCAC).50 Again, the United States was a key supporter and among
the first to sign and ratify it.51 The UN Convention entered into force in 2005,52 and there are
currently 178 parties to the UNCAC.53
The UN Convention is broader than the OECD Convention, extending beyond bribery of foreign
public officials to other facets of corruption, including trading in influence, money laundering, and
private-sector corruption,54 and it also covers countries not yet party to any other anticorruption
instrument (Low, Sprange, and Barutciski 2010: 171–2). However, similar to the OECD, the United
Nations has weak sanctioning mechanisms and instead focuses on encouraging states to exchange
information.
Complementing the UN Convention are several regional agreements.55 The OECD has regional
initiatives, established between 1998 and 2008, in the Asian Pacific, Eastern Europe and Central
Asia, Africa, Latin America, the Middle East and North Africa, and Central Europe and the
Mediterranean. Several of these involve the cooperation of a regional development bank.56
Under the auspices of the Organization for American States, the Inter-American Convention
against Corruption was signed in 1996 and has been ratified or acceded to by 33 countries.57 The
convention envisages a good deal of cross-border cooperation and requires countries to prohibit and
punish transnational bribery. However, it lacks enforcement provisions and will not be a strong tool
unless these are developed. For example, Article VIII, paragraph 4 specifies that offenses defined in
the convention should be considered the basis for extradition to other signatory states, even in the
absence of a bilateral extradition treaty,58 but Chile recently refused the extradition of a Honduran
wanted for corruption and money laundering in her home country.59
The Council of Europe, an organization that comprises most of the countries of Europe
(including the members of the former Communist bloc), has two anticorruption conventions dealing
with criminal and civil law, respectively (Council of Europe 1999a, 1999b).60 The criminal
convention has been ratified by 44 members of the Council of Europe and one nonmember
(Belarus).61 The criminal law convention requires countries to enact laws that permit “legal persons”
(corporations) to be held criminally liable for certain corrupt offenses [Council of Europe 1999a, art.
18 (1)]. Lack of supervision by higher-up employees can be a reason to hold a corporation liable
[Council of Europe 1999a, art. 18(2)].62 The Civil Law Convention, “the first attempt to define
common international rules in the field of civil law and corruption,”63 entered into force in 2003.64 It
presents a challenge to the international business community by including provisions for damage suits
by those harmed by corruption and by insisting that parties to the convention enact laws voiding
contracts “providing for corruption.” Whistle-blowers are to be protected, and corporate accounts
must be audited to give “a true and fair view of the company’s financial position” (Council of Europe
1999b, articles 3, 8, 9, and 10). The conventions are monitored by the Group of States against
Corruption (GRECO) based on “mutual evaluation and peer pressure.”65 GRECO teams prepare
periodic reports evaluating the state of the law and practice in signatory countries, and these are
published on the GRECO website.66 However, GRECO has no judicial or true enforcement power; it
can only evaluate and make recommendations. Disputes between signatory countries under either
convention can be adjudicated by another committee of the Council of Europe, by an arbitral tribunal,
or by the International Court of Justice [Council of Europe 1999a, article 40 (2); Council of Europe
1999b, article 21 (2)].
The African Union’s Convention on Preventing and Combatting Corruption and Related Offenses
criminalizes bribery, illicit enrichment, and money laundering.67 The Policy on Post-Conflict
Reconstruction and Development also calls for anticorruption legislation as an essential part of the
peace- and state-building process (African Union 2006: 21). The League of Arab States adopted the
Arab Anti-Corruption Convention in 2010, which was modeled after the UNCAC. States are required
to provide anticorruption training and witness protection, ensure judiciary independence, and
cooperate in international investigations and asset confiscation, but they are not required to extradite:
rather, they are invited to consider signing bilateral extradition treaties with other members.68
However, many of the articles are quite vague. The Arab Anti-Corruption and Integrity Network
(ACINET) is a public-private organization founded in 2008, with government representatives from
seventeen Arab states, as well as NGOs, academics, and private-sector representatives.69 It fulfills
an advisory role much like GRECO, but so far does not conduct country-by-country analyses. The
Association of Southeast Asian Nations (ASEAN) does not have an anticorruption convention, but
Transparency International has urged the formation of an ASEAN Integrity Community (Transparency
International 2015).
Finally, the development of an international procurement code would be a key advance but has
proved difficult. The World Trade Organization’s (WTO) Revised Agreement on Government
Procurement (GPA) entered into force on April 6, 2014,70 but only 43 countries (fifteen parties,
because the European Union is a single entity) out of 161, mostly industrialized states, have adopted
its provisions.71 This is a broad initiative, aimed at liberalizing procurement and includes explicit
goals of preventing corruption and conflicts of interest [GPA article IV.4 (b), (c)]. However, the fact
that the control of corruption is combined with other goals, including openness to foreign suppliers,
has limited the number of countries willing to accept its terms. The Revised GPA, article V, permits
developing countries to be exempt from some of the provisions of the agreement for a transition
period in the hope of convincing more WTO members to sign on.
B. Soft Law and Voluntary Agreements
In recent years recommendations from international bodies and voluntary efforts have sought to
increase transparency and limit corruption outside the framework of formal treaties. The OECD seeks
to fight corruption in ways that complement its efforts under the Convention. Especially important are
its efforts to require member states to outlaw the tax deductibility of bribes – a common practice
before the OECD Convention went into effect. Recognizing that the law on the books is insufficient, it
has issued documents designed to help tax examiners identify efforts to hide bribes in reports of legal
business expenses.72
Several efforts are underway to obtain the voluntary cooperation of business.73 The UN Global
Compact and ISO 26000 encourage firms to sign on to a set of ethical principles, including
anticorruption.74 The Global Compact contracted with Transparency International in 2009 to produce
a guidance document for firms (United Nations Global Compact and Transparency International 2011)
that lays out a six-step process for firms to combat corruption. As Søreide has pointed out, difficulties
arise because the incentives of top managers may not align with those lower down, employees are
reluctant to speak out (even when whistle-blower protection is in place), and legal systems differ in
the way they apply anticorruption laws to organizations and employees (Søreide 2011). Nevertheless,
the ongoing efforts are encouraging.
The UNDP Aid Accountability Initiative is working with the International Organization of
Supreme Audit Institutions and the International Federation of Accountants to develop projects to
strengthen accountability in developing countries (UNDP 1996: ii).
Global professional associations of comptrollers general, ombudsmen, electoral commissioners,
and other public officials meet to share ideas and to establish codes of ethics and good practice
(Slaughter 2004). The bodies also provide training for incumbents in emerging economies and
support embattled incumbents whose independence is threatened.
International civil society organizations, not connected with governments, have tried to help their
nongovernmental counterparts working in difficult environments. For example, international
associations of journalists provide training in investigative reporting and can also provide legal
advice and international publicity to newspapers facing government harassment. Advocacy groups
can support and train domestic civil society activists and help to protect those who face criticism and
even arrest in hostile environments.
Some efforts focus on specific industries so responses can be tailored to each industry’s
particular vulnerabilities. This effort is farthest advanced in the extractive industries, through Publish
What You Pay (PWYP) and the Extractive Industries Transparency Initiative (EITI).75 These
international initiatives seek the publication of payments connected to extractive companies’ business
activities. Such transparency is promoted so that (even without strong prosecutorial efforts)
information on payments, even legal ones, can help citizens and civil society groups to monitor the
behavior of governments and firms. These initiatives are clearly partial responses. They will have an
impact only if civil society groups make use of the information to pressure firms and governments,
and if these institutions respond. Aspects of PWYP and EITI were incorporated into Section 1504 of
the Dodd-Frank Act in the United States with the key support of Washington-based good government
and anticorruption groups.76 Section 1504 requires firms in extractive industries – oil, gas, and
mining – to file reports with the SEC documenting payments to governments where they operate.77
The SEC adopted a final rule implementing this section in August 2012, but it was struck down by a
federal court and is being revised. The SEC had required public disclosure of the reports, the only
interpretation that seems consistent with the statutory purpose. However, the federal court disagreed
that the statute was clear and asked for more reasoning from the agency. Following other recent
decisions on SEC matters, the courts may be seeking a definitive cost/benefit analysis, but this seems
a misreading of the provision that is clearly only one input into an overall anticorruption strategy.78
These requirements, if they ever go into effect, are hard law, not soft law, but because they only
require disclosure, not explicit anticorruption actions, they are weak anticorruption tools, close to the
other soft-law efforts outlined here.
Other industries where sectoral approaches are being organized are national defense, transport,
and pharmaceuticals, all with Transparency International support. Transparency International-UK is
sponsoring an important project to push both firms and countries to be more transparent about the size
and nature of defense contracts. The level of secrecy is quite impressive and seems far beyond what
is justified on national security grounds. The one-of-a-kind nature of many defense deals also makes
them easy sites for corrupt deals that increase costs and lead to purchases with little valid
justification (see Chapter 3). According to the OECD (2014: 24, figure 11), defense officials are the
third most common recipient of bribes (after state-owned enterprise officials and health officials) and
the bribes they receive are disproportionately high. Like the EITI, the Transparency International -UK
project is trying to provide the type of background information that can empower local activists and
international advocacy groups to challenge the status quo. This project has already yielded results.
Between the first survey, in 2012, and the second survey, published in 2015, 60% of the 127 firms
studied improved their codes of ethics and levels of transparency (measured as what they publish on
their websites); 33% improved “significantly,” moving up at least one category.79 A similar
Transparency International report (Transparency International 2014b) evaluates the anticorruption
policies, transparency, and country-by-country reporting of the world’s top 124 firms in any industry.
Compared with their 2012 report, there are also significant improvements, although most firms still
score poorly and regional disparities are glaring. Lack of country-by-country reporting of payments is
a common weakness that needs to be corrected.
The World Health Organization has also led efforts to combat corruption in medicine – from
counterfeit drugs to bribery in procurement and distribution that leads to overpricing and undersupply
– with the Good Governance in Medicine (GGM) program, initiated in 2004. The GGM promotes
transparency and the elimination of conflicts of interest with a dual approach of legislation
(“discipline approach”) with education (“values approach”). The GGM started in four countries, by
2010 had expanded to 26 (Baghdadi-Sabeti and Serhan 2010), and to 37 in 2015.80
These various efforts demonstrate how an issue can gain momentum in the international arena
and can produce changes in institutions and in attitudes. The anticorruption effort is an example of
how international norms can be created and internalized – although the process is still ongoing and is
full of risks. There are many parallels in the fields of human rights and environmental norms, where
governments, NGOs, and business firms interact. The recent history of the global anticorruption
movement echoes Koh’s (1998) discussion of the process by which international norms are created
and internalized in the human rights area. The anticorruption movement has “transnational norm
entrepreneurs” who attract “governmental norm sponsors” and develop “transnational issue
networks.”81
C. International Arbitration
The international arbitration system dominates international business disputes but, so far, has mostly
avoided taking on allegations of grand corruption. Corruption, although recognized as an important
issue, remains a vexing and difficult problem for arbitrators, given that they are charged with
resolving contract disputes, not dealing with domestic criminal law violations (Meyer 2013;
Pauwelyn 2013). Nevertheless, the institutions that organize arbitrations are stepping gingerly into
this arena as litigants seek to void contracts tainted by corruption. As Pieth (2011: 11) writes,
“Arbitration is no longer an exclusive area of party-interest, especially as far as large infrastructure
projects are involved. It is right to consider corruption an issue of (domestic and international) public
interest.”
There are two types of fora. One is private commercial arbitration; the second, the World Bank’s
International Center for the Settlement of Investment Disputes (ICSID),82 considers cases in which
investors sue nation-states,83 usually under Bilateral Investment Treaties (BITs), the North American
Free Trade Agreement (NAFTA), or the ICSID Convention, which entered into force in 2006.84 BITs
are, as their name implies, treaties between two states, and they frequently include clauses allowing
firms from one country that invest in the other to initiate an arbitration against the host state without
first gaining the approval of their home state. The ICSID was little used, with fewer than five cases
per year initiated before 1997; since then, its caseload has been increasing, from ten cases in 1997
and 1999 to 50 in 2012 (ICSID 2015: 7–8). Arbitration panels are not formally courts, and their use
is based on the prior consent of the parties, but they do occasionally deal with issues that are
indirectly related to corruption.
One study located 38 international arbitration cases that dealt with corruption,85 but the arbitral
system has not yet settled on an appropriate framework. In an ironic twist, the first set of disputes
arose between firms and their local intermediaries who allegedly had paid bribes. The firms were
seeking to avoid paying their agents on the ground that bribery was illegal, even if they knew that
payoffs were taking place (Meyer 2013). In such cases, arbitrators generally refuse jurisdiction on the
ground that they have no authority to resolve criminal allegations. In general, the arbitral status of
contracts allegedly obtained by corruption is unclear, especially because such disputes are plagued
by problems of proof. This is unsatisfactory if the complainant has been harmed by the corrupt nature
of the deal and if the domestic law enforcement system is dysfunctional and even corrupt.
Furthermore, in many cases, neither the host state nor the international investor has an interest in
raising corruption charges – even if they can be proved. An exception, which has arisen in a few
cases, occurs when a host government introduces evidence of corruption under the previous regime
(Pauwelyn 2013).86
Arbitrators do not, however, hear disputes arising at the contract awarding stage, and they may
not have jurisdiction in such matters. Arbitration is also an expensive and time-consuming process
that is not presently able to handle a large volume of cases. Serious reforms would be required before
it could regularly be invoked as part of a broader anticorruption effort. Private firms can initiate the
arbitration process, but only if they are parties to the contracts in question. Disappointed bidders, or
other outsiders to the contract, have no standing. Pauwelyn (2013) argues that BIT provisions, in
requiring “fair and equitable treatment,” could be extended to cover corruption. But so far, no cases
have made that connection.
D. International Tribunals
Corruption in international business needs to consider issues of deterrence that are not easily dealt
with by arbitration tribunals or by the weak treaty regimes we have just described. Thus, the idea of
an international tribunal as proposed by Carrington (2007, 2010) deserves further scrutiny. This could
be either a formal court or another type of arbitral tribunal that would deal explicitly with claims that
corruption should void a contract or, at least, lead to its renegotiation. Reform may require structural
changes. Carrington, for example, argues that the new international forum should hear cases initiated
by outsiders to the deal. In the alternative, he suggests an expanded mandate for arbitrators to accept
submissions from amici curiae that provide evidence of corruption (Carrington 2013). Cases brought
by disappointed bidders or defrauded lenders would require the country involved to make a
transparent accounting of its behavior. Plaintiffs would not necessarily need to document bribes paid.
The focus should instead be on the terms of the deal. If it seems to diverge significantly from what an
honest process would produce, the court could require that the project be rebid. One difficulty in
making the process operational, however, is that the rebid will not simply be a more transparent and
honest rerun of the old one. All the players have new information as a result of the first round that
will affect their behavior in the second round. Students of auction processes need to analyze the
strategic aspects of this proposal carefully to avoid creating an even more unfair system.
A more serious problem with an international tribunal is assuring obedience to its decisions.
One option is to use the leverage of the WTO. The advantage of WTO sanctions is that they are not
imposed by the WTO but by a country’s trading partners. However, the WTO governs relations among
nations, not individuals and businesses. Thus, transnational bribery could be controlled through the
WTO, not by the WTO (Nichols 1997a: 361–364). An international process of this kind would, of
course, discourage some investment and privatization projects from going ahead. First of all, that
might not be such a bad thing. If an inside deal appears inevitable, a country should delay
privatization because a public firm is much easier to monitor than a private one. Similarly, corrupt
leaders may design a public works project with bribes in mind, not economic development. Second,
the international community might subsidize the cost of any proceeding where the developing country
emerges victorious from a challenge. Of course, during the proceeding, the country would still have to
cover its legal expenses, and any doubt of victory would provide an incentive to settle. Third, like the
WTO procurement pact, participation could be voluntary with jurisdiction limited to those countries
that fulfill WTO conditions or that volunteer to establish an Integrity Pact system in return for World
Bank or UNDP technical advice and other support. Proposals for an international dispute-resolution
mechanism are an example of the more general principle that one way to fight corruption is to give
losers a means of lodging a complaint.
However, even an international tribunal could not influence state governance structures directly.
It would simply invalidate contracts on the basis of evidence that corruption tainted the original deal.
Carrington’s ultimate goal is to increase the cost of paying and receiving bribes. Even if a country’s
criminal justice system is weak or corrupted, an arbitral decision that invalidates a contract, or
awards damages to a successor government, ought to deter kickbacks up front. This deterrent will be
most effective in a multi-party democracy or in an autocracy whose leader is aging or losing popular
support.
E. Are Anticorruption Instruments Harmful to American Interests?
Some critics, including the U.S. Chamber of Commerce, claim that existing anticorruption instruments
harm the United States’ national interest. Many firms believe that they lose business to corrupt
competitors as a result of anticorruption laws, particularly with the rise of firms from China and other
emerging economies, which, so far, lack similar constraints.87 Though hard statistics are unavailable,
Rose-Ackerman and Hunt (2012) argue that these critics have vastly overstated the negative impacts
and neglected the potential benefits. We summarize their argument here, which focuses on the FCPA
but applies to any instrument where U.S. enforcement is relatively strong.88 Some empirical work
supports the claim that the FCPA puts U.S. firms at a competitive disadvantage (e.g. Hines 1995), and
needs a response.89 Rose-Ackerman and Hunt seek to shift the debate toward the comprehensive
benefits that result from a strong U.S. stance against foreign bribery. If a U.S. firm loses an individual
contract to a corrupt competitor, the cost is not the profits that it would have earned from the corrupt
deal because, first, the firm can usually shift its business elsewhere, and, second, even if the lost
contract involves resource extraction at a fixed location, the resource will generally enter into
international trade, where it can be purchased by American customers. Furthermore, even if some
business is lost, there are long-term benefits to the United States from a more honest international
business environment. A strong U.S. policy against corruption will encourage other countries to
follow suit, with positive effects on the efficiency of global trade and investment as well as
government reform efforts in other countries. Overall, although hard numbers are lacking, the benefits
to the United States and its standing in the world appear to outweigh the net costs associated with the
possibility of some lost contracts.
There are several reasons why critics have exaggerated the claimed harm to U.S. interests from
existing anticorruption law. For a start, some multinationals get around the law by providing
nominally legal benefits, such as contributions to a charity associated with a politician; the use of
local, well-connected suppliers; or the provision of local public goods.90 However, assuming that
workarounds are not always possible and that the law does limit payoffs, one can examine the law’s
potential consequences. There are two issues raised with respect both to the FCPA/OECD
Convention and to the Dodd-Frank/EITI initiatives.
First, even if other countries either do not enforce their own laws or are outside the international
anticorruption framework, the jurisdiction of the FCPA extends beyond U.S. companies and citizens.
Its antibribery provisions also cover foreign companies listed on U.S. exchanges as well as “foreign
persons and foreign non-issuer entities” in U.S. territory.91 The accounting provisions cover all
companies, U.S. or otherwise, listed on U.S. exchanges, as well as their consolidated subsidiaries
and affiliates.92 Though enforcement of the FCPA has increased in recent years, much of the increase
involves actions against foreign companies.93 To date, non-U.S. companies have paid nine out of ten
of the largest FCPA settlements, and the German company Siemens tops the list; it paid $800 million
in 2008.94 The enforcement agencies also bring actions against non-U.S. citizens. In 2012, twelve out
of eighteen actions were brought against non-U.S. individuals, and another three individuals held dual
U.S./foreign citizenship.95 Hence, U.S. anticorruption laws will not impose significantly higher costs
on U.S. companies compared with their competitors because many international companies and
individuals fall within the jurisdiction of the FCPA and/or section 1504 of the Dodd-Frank Act.
Additionally, the largest countries in terms of FDI are required to enforce anticorruption laws under
the OECD Convention and/or the UN Convention, and some of those countries have begun to bring
cases.
Second, even if some U.S. businesses lose contracts abroad because of U.S. anticorruption
initiatives, the losses to the U.S. economy are less than have been claimed. There are two distinct
cases: footloose firms and investments tied to the location of resources. In the former case, firms can
invest in various locations. Hence, if a firm loses a contract in one country, it can invest elsewhere.
The loss to a firm, therefore, is not the value of a lost contract but rather the marginal loss from
operating in a potentially less profitable and less corrupt location, taking into account the benefit of
not paying a bribe. Furthermore, the loss to the U.S. economy is considerably less than the loss to the
firm if the firm either is not 100% U.S.-owned or if the loss of an overseas contract leads the firm to
invest in the United States instead. In contrast, in the case of an extractive industry, firms must do
business in countries where resources are located, and many deposits are in corruption-prone
countries.96 Firms may have several options, but no potential investment site may seem particularly
“honest.” As resources are exhausted in relatively honest countries, firms will move elsewhere.
However, if a U.S. firm loses out on a deal because it cannot resort to bribery, the cost to the United
States is not the value of the lost deal so long as the resource enters into the international market
where it can be purchased by U.S. customers. The firm’s U.S. shareholders may suffer a marginal loss
of profit, but if prices are determined internationally the identity of the firm that obtains the contract
has little impact on U.S. citizens and firms that use the resource.97
Concerns about U.S. companies becoming less competitive vis-à-vis multinational firms based
in emerging economies are more compelling, but ultimately unconvincing. China, for example, a
major source of both outward and inward FDI, is not party to the OECD Convention and many
Chinese state-owned companies operating abroad are not subject to U.S. anticorruption laws because
they are nonissuers or are not listed on U.S. exchanges. However, as emerging economies like China
participate more actively in international markets, they will likely seek higher standards of
transparency to attract foreign capital. For example, a new Chinese law took effect in 2011 to prohibit
bribery of foreign officials, thereby helping to satisfy China’s obligations under the UNCAC, to which
it is a party.98
The United States is still the dominant actor in global international trade, and it can help to
establish an international marketplace with strong standards against corruption. Weakening U.S.
anticorruption laws by constraining the scope of the FCPA or section 1504 of the Dodd-Frank Act
may set the opposite trend in motion. China’s new and unprecedented anticorruption law covers
companies otherwise not subject to prevailing anticorruption instruments, but such laws are only
meaningful to the extent that prevailing norms in the international marketplace are credible. The
United States has a key role to play in this regard.
On the other side of the ledger, there are countervailing benefits to vigorous enforcement, of
which three are most important. First, opposing payoffs is profit maximizing for some firms, and they
ought to monitor the behavior of managers and subcontractors, even without external pressure.
However, this situation is unlikely to be widespread enough to eliminate the need for national and
international anticorruption initiatives.
Second, as we argued in Chapter 3, “grand” corruption is costly to host countries and this can
ultimately harm U.S. interests. Corruption distorts the business environment, slowing economic
growth and limiting opportunities for investment and trade that would arise from better economic
conditions (Aidt 2011: 37, 40). This harms U.S. firms that could have taken advantage of those
investment opportunities. Thus, U.S. businesses that benefit from strong private sectors in emerging
economies ought to support efforts to limit corruption.
Third, market actors benefit from the overall integrity of the international marketplace. Even if a
corrupt deal generates profits, pervasive corruption undermines the legitimacy of the international
marketplace and increases the risks of doing business. Global initiatives can keep firms from acting
unilaterally, and U.S.-based multinationals, leaders in international trade and investment, can help set
the standard for multinationals generally.
The benefits are not just gains in the efficiency and fairness of the international marketplace, but
also increased pressures on corrupt states and firms to move in a more honest direction. Although
anticorruption policies must extend beyond efforts to deter U.S. firms from paying bribes, reducing
bribery by U.S. firms is a necessary, if not sufficient, condition. As a global leader in international
business, the United States can set a strong example and encourage other countries to follow suit.
F. Who Guards the Guardians?
The international anticorruption initiatives promoted by supranational bodies and international NGOs
aim to fight corruption in governments and firms throughout the world, in part to level the playing
field and in part to improve economic outcomes. For international aid and lending organizations,
fighting corruption also results in higher productivity for their own projects. But what about
corruption within these organizations or the projects they support?99
There are two types of response: internal and external. Some organizations, such as the World
Bank and other IFIs, have internal review bodies or conduct internal audits. Such internal monitoring
is not only necessary and valuable, but also has several weaknesses. On some occasions it is better to
convoke an independent, external investigation committee. Civil society groups like Transparency
International and Global Witness produce periodic reports on supranational organizations. We
describe these responses briefly in this section.
Internal Mechanisms: In 1993 the World Bank established an independent Inspection Panel
(IP), with members chosen from outside the Bank and now appointed for nonrenewable five-year
terms; its independence has been evidenced by its actions (Rigo Sureda 2012: 315–16). The World
Bank set a precedent with the IP; most other IFIs have since established similar mechanisms, with the
notable exception of the IMF (Bradlow 2012: 42–3). Unlike the ICSID, which is open only to parties
to disputed contracts, the IP reviews complaints from groups of private persons in borrower
countries. Groups must allege that they are suffering or expect to suffer from the World Bank’s failure
to follow its own policies and procedures (Bradlow and Schlemmer-Schulte 1994; Bradlow 1996).
Thus it appears possible for the IP to hear complaints involving corruption in World Bank projects.
For example, the IP might consider allegations that the Bank did not follow its operational policies
and procedures if it overlooked evidence of corruption. In fact, corruption may be behind many of the
cases brought on other grounds. The status and details of all cases are available on the World Bank
portal.100 As of June 2014, 94 requests had been received; 79 had been registered (judged
admissible) by the IP; and of 37 cases in which the IP recommended an investigation, only 32
investigations were undertaken. In the following year, the caseload increased, with nine new cases
and 17 processed. The vast majority of the complaints involve environmental damage or involuntary
relocation of indigenous peoples; none of the complaints explicitly involved corruption, although
language referring to complicated or fragile political settings may be a clue that corruption lies
behind some of the complaints.101 Often the IP questions the processes used in project selection,
assessments, and bidding. Unfortunately, the IP is a weak instrument. It cannot proceed with an
investigation unless it obtains the approval of the Bank’s Board of Directors, and even if the IP finds
against the Bank, it has only advisory powers. Its recommendations are forwarded to the Bank’s
board, which makes the final decision (World Bank 1997a). The board’s decision is not published on
the IP’s website.
The flaws in the IP as an accountability mechanism were revealed in the case of Yacyreta Dam
on the Argentina/Paraguay border. A Bank vice president characterized an IP report from September
1997 as a vindication of the Bank’s actions, but when the report was leaked to the press, it was seen
to be very critical of Bank actions.102 Furthermore, the IP can recommend inspection only after
damage has been done; it cannot be used as a prevention mechanism. Consider, for example, Case 78,
the Kosovo Power Project, registered in 2012. The request – specifying concerns over environmental
damage, involuntary relocation, and lack of transparency, among other issues – was found ineligible
for inspection because the project had not yet begun.103 A new complaint regarding the Kosovo
Power Project, case 103, was registered in 2015, but as of this writing no supporting documents are
available.104 In addition, some Bank-backed projects are beyond the reach of the IP. In January 2015,
a group of civil society organizations in Haiti, with the support of the New York University School of
Law’s Global Justice Clinic and Accountability Counsel, filed a request to review a project in the
mining sector. Although the IP found that “the concerns raised in the Request are of great importance,
serious and legitimate and ... [the project] can have significant and considerable adverse
environmental and social consequences, ...” its hands were tied because this project was funded
“through a Bank-Executed Trust Fund (BETF) to which Bank operational policies and procedures ...
are not applicable.”105 Thus this system also must be reinforced and made more accountable before it
can become a serious part of the emerging regime, although even in its present form it can highlight
troublesome areas in Bank lending.
The IP’s experience with handling complaints from citizens’ groups and nonprofit organizations
is a useful first step. It was the first international forum in which individuals who do not have a
contractual relationship with an international organization can attempt to hold it accountable
(Bradlow and Schlemmer-Schulte 1994: 402; Bissell 1997). After analyzing the IP’s handling of
complaints about the Arun III dam project in Nepal, Daniel Bradlow (1996) concludes that the IP can
help protect the interests of people affected by World Bank projects, but he raises concerns about
ambiguities in the relationship between the IP, Bank Management, and the Board of Executive
Directors. A key requirement, and one that will be central to any new institution, is to assure that the
IP maintains its independence and that its processes are transparent to outside observers.
The Office of Business Ethics and Integrity investigates cases of World Bank employees’ alleged
corruption in its varied forms and recommends disciplinary measures to be taken, up to and including
termination of employment and referral to national authorities. The World Bank Administrative
Tribunal (WBAT) is charged with deciding cases in which World Bank employees allege violation of
their contracts, including decisions made by the Office of Business Ethics and Integrity. In principle,
the WBAT could hear cases involving corruption, either because the employee was dismissed for
engaging in corruption or because the employee was dismissed for attempting to reveal the corruption
of another. We found 21 cases related to corruption (of 503). These cases include complaints of unfair
treatment or dismissal, leaking personal information, FCPA violations, conflicts of interest,
kickbacks, whistle-blowing, and bid manipulation.106 Another seventeen deal with a common case
submitted by multiple employees of the Department of Institutional Integrity (INT), alleging conflicts
of interest and abuse of authority by the INT department’s supervisor.107 The information provided on
the website appears to be complete and transparent, revealing details of the inner workings of the
World Bank when individual employees engage in corrupt acts, but nothing of measures to detect or
prevent systemic corruption. Indeed, several of the cases allege retaliation for whistle-blowing. The
WBAT has the further weaknesses that it cannot consider complaints brought by third parties or cases
that aim to change Bank policies (Sheed 2012: 234–5). The International Labor Organization also has
an Administrative Tribunal (ILOAT); a United Nations Administrative Tribunal (UNAT) existed until
a reform in 2007 replaced it with the UN Dispute Tribunal and the UN Appeals Tribunal (Gomula
2012: 366).
External Mechanisms: All IFIs are bound by international judicial and customary law
regarding the sovereignty of states and human rights (Bradlow 2012: 46–8). In particular,
“individuals, at a minimum, are entitled to expect that the IFIs respect and protect their social,
economic, and cultural rights, such as rights to housing, health care, education, jobs, and social
security” (ibid.: 48). This is where the IFIs are often challenged: when a funded project causes
environmental damage or relocation to unsuitable housing, those affected may appeal to the
accountability mechanisms explained previously. But what if the IP finds that the Bank has complied
with its policies, as often occurs?
One possible, but rarely invoked, recourse is to the International Court of Justice (ICJ). The ICJ
has been used on a few occasions to appeal decisions by internal administrative mechanisms. In each
case, however, the ICJ found in favor of the administrative mechanisms. This contributed to the
legitimacy of such bodies. Currently, the ICJ may review the judgments of ILOAT, which has
jurisdiction over 60 international organizations. In 2009, the UNAT was replaced with the UN
Dispute Tribunal and the UN Appeals Tribunal; the latter has the final word. The ICJ has not had
jurisdiction over the United Nations since 1995 (Gomula 2012). Nevertheless, “[n]o international
judicial or quasi-judicial bodies have direct jurisdiction over the acts or omissions of international
organizations.... Moreover, only states can institute contentious proceedings before the International
Court of Justice” (Baimu and Panou 2012: 154). The International Law Commission is working to
define the responsibilities of international organizations vis-à-vis violations of human rights or other
issues covered by international law, whether committed by the organization or by a state with the
organization’s assistance (ibid.: 163–4). This is another area where Carrington’s proposals,
summarized in the preceding text, could be instructive. The use of local judicial systems is another
option. International organizations and their employees enjoy (limited) immunity: some national
courts observe immunity only within the organization’s announced objectives or for noncommercial
activities; in some cases, the organizations waive immunity (Berenson 2012). For example, “[t]he
World Bank’s immunity is not absolute; in certain cases, a suit may be filed against it in countries
where the Bank has representation, has appointed an agent for the purpose of accepting service or
notice of process, or has issued or guaranteed securities” (Rigo Sureda 2012: 304).
On at least three occasions, an external committee or panel has been appointed by an
organization to investigate corruption within the organization. In the first case, the secretary general of
the United Nations appointed an independent committee to investigate the Oil-for Food Programme
(see Box 14.1) in 2004, after persistent rumors of corruption and significant pressure from the Clinton
administration to do so (Vogl 2012: 93). The committee consisted of three globally recognized
authorities (Paul A. Volcker, Richard J. Goldstone, and Mark Pieth); it was granted funds and
independence to hire supporting staff, and endowed with the broad power to request and receive
information from UN employees and departments. The committee found evidence of $1.8 billion in
bribes and kickbacks to the Hussein regime, as well as $10 billion in illicit income earned through
smuggling oil to Jordan, Turkey, and Syria under the blind eye of the UN inspectors, whose mandate
covered only shipments made under the program. Thus, the committee signaled administrative
negligence and lacunae as serious shortcomings in need of reform. Direct evidence of corruption in
the United Nations was found in relation to UN official Benon Sevan, who administered the program,
andin the purchasing department (Volcker 2006). Sevan fled to Cyprus, his homeland, and has not,
apparently, been extradited to the United States for trial, despite an extradition request.108 Several
businesses and their employees have been convicted or settled, but relatively few UN officials faced
charges.109
Box 14.1. The UN Oil-for-Food Scandal
In August 1990, Iraq invaded Kuwait and shortly thereafter annexed Kuwait. In response, the
United Nations came to the defense of Kuwait in what has become known as the Gulf War.
Emerging victorious, the United Nations required Iraq to prove that it was not pursuing a
nuclear armament program: UN inspectors would visit suspected sites. Due to Iraqi resistance
to UN inspection of potential nuclear facilities, the United Nations imposed a trade embargo
on Iraq.
Over time, it became clear that the Iraqi populace was suffering the consequences of the
embargo in the form of malnutrition and poor health, while Saddam Hussein showed no
intention of cooperating fully with the UN inspectors. Such harm was in violation of the UN
mandate and international human rights, so the United Nations sought to remediate the damage,
undertaking the largest-scale humanitarian relief program to date: the Iraqi Oil-for-Food
Programme.
Under this program, which operated from 1996 to 2003, the Iraqi government would be
allowed to sell oil in order to obtain foreign exchange; this would be used to purchase food
and medicines. Sales and purchases under the program were overseen by UN inspectors and
the money was managed through an escrow account. By most accounts, the program was very
successful, improving the lives of millions of people across Iraq. But rumors began to
circulate of corruption in the sale of oil and the purchase of food and medical supplies. The
Clinton administration pressured the United Nations to investigate the rumors, and in 2004 the
secretary general of the United Nations, Kofi Annan, “reluctantly” (Vogl 2012: 93) appointed
a three-person commission to undertake the investigation, headed by Paul Volcker, former
chair of the U.S. Federal Reserve. This commission came to be known as the Volcker
Commission.
The Volcker Commission revealed direct evidence of $1.8 billion of bribes within the
program and negligence in ignoring smuggling that took place outside the program, but under
the noses of the UN inspectors, which generated $10 billion in rents. Subsequent studies
estimated that selling Iraq’s oil at below-market prices under the program – excluding
smuggling – generated an estimated $3.5 billion in rents, presumably divided between
Hussein and the traders (Hsieh and Moretti 2006; see also Jeong and Weiner 2011). Concerns
over conflicts of interest involving Kofi Annan’s son, who worked for a UN contractor, were
found to be unsubstantiated. However, as Volcker (2006: xxiv) observes,
Some 4,500 companies, registered in scores of countries, participated in the purchase of

Iraqi oil or sales of goods to Iraq ... during the period in which illicit payments were
required by the Iraqi government, almost all the companies appear to have, directly or
indirectly, made those payments to the Iraqi government through so-called “surcharges”
or “kickbacks.” Quite aside from the lapses in UN surveillance, the willingness of so
many companies to make such payments portrays a disturbing picture of the extent of
bribery and corruption in international trade.
Another example also involves the United Nations. In 2005, following “dissatisfaction” with the
way the UN Administrative Tribunal operated, an independent committee was established to make
recommendations. The committee’s report led to a thorough reform of the UNAT, with the creation of
the UN Dispute Tribunal and the UN Appeals Tribunal, as well as an “informal dispute resolution”
mechanism to avoid the costs of formal procedures (Struyvenberg 2012: 243–4).
In a third example, the World Bank’s INT was founded in 2001 to detect corruption and ethical
violations within the World Bank. In 2007, an independent committee (“the Volcker Panel”) reviewed
allegations that the head of INT was in a position of conflicts of interest, as well as abusing her
power. She resigned before the panel released its findings.
As imperfect as these internal and external measures are, they are the most advanced and most
transparent accountability measures that have been adopted by international organizations. The World
Bank and the United Nations have responded to criticism by improving procedures and publishing
results. Other international organizations are less transparent and less accountable. In these cases,
civil society can play a crucial role.
Civil Society: IFIs are increasingly subject to external scrutiny by the press and civil society groups.
Since their funding ultimately is derived from taxes paid by the member states’ citizens or obtained on
international capital markets (Baimu and Panou 2012: 151), it is fitting that the IFIs should respond to
the public. In fact, public oversight has been facilitated by improved transparency in most of the IFIs
over the past two decades. “All the IFIs have adopted information disclosure policies. These
policies, many of which have been revised over time, have steadily increased the amount of
information that the IFIs disclose [with the notable exception of proprietary information protested by
the state or firm]” (Bradlow 2012: 43). As demonstrated in the data analyzed in the preceding text,
much of this information is readily viewable on the World Bank’s website.
Civil society groups such as Transparency International and Global Witness keep tabs on the
anticorruption efforts of the UN, the OECD, and other multilateral groups. Global Witness
prepares reports and issues press releases criticizing the insufficiency of current efforts and
proposing more that needs to be done, rather than revealing corruption within these
organizations, themselves.110 Likewise, Transparency International evaluates the compliance of
member states with the UNCAC, the OECD Anti-Bribery Convention, and the OAS’s Inter-
American Convention against Corruption, but has little to say about corruption within these
organizations.111 TI is somewhat more critical of multilateral development banks (MDBs).112
Given their anticorruption enthusiasm, however, it is not difficult to imagine that these groups
and others would quickly expose any corruption discovered within the multilateral
organizations.
Conclusions: Policy Fads and Policy Reforms
The current interest in corruption repeats an old pattern. Reformist impulses have arisen frequently in
the last couple of centuries, and sometimes have led to real reform. The present wave of interest is
part of a more general trend. Development specialists recognize that the traditional focus on
macroeconomic policy and on large-scale infrastructure projects is not sufficient and may even
backfire. If a state’s political and bureaucratic institutions are weak and if the market operates very
imperfectly, development aid will fail to produce positive results.
International aid and lending organizations have taken the first steps toward reform. Corruption
is not a taboo subject any more. Reports no longer use euphemisms like “inappropriate capital/labor
ratios,” “excessive purchase of vehicles,” or simply “waste.” Some World Bank projects have been
withdrawn because of evidence of corruption, although generally without much publicity. The IMF
requires countries that want a bailout to agree to governance reforms that include policies to reduce
corruption. Yet doubts remain about the depth of these commitments. A serious attempt to deal with
the subject will require confrontation with many borrowers and with lending countries whose own
firms pay bribes in developing countries. Change cannot occur unless countries acknowledge the
problem and deal with it in a way that does not have the character of a witch hunt. Too often
anticorruption campaigns have floundered on the desire of those in power to undermine their
opponents.
Certain global strategies are possible today that would have been infeasible in the recent past.
Thus one could imagine a cooperative relationship between the IMF and the World Bank, on the one
hand, and multinational businesses, on the other, to aid reform. For example, the IMF requires reforms
in a country’s public-sector institutions and in the transparency of its procedures in order to limit
corruption and improve the effectiveness of IMF financial assistance.113 One method of checking the
effectiveness of a country’s policies would be to permit firms that are pressured for bribes to report
their experience to the IMF. The IMF might not investigate individual complaints, but a pattern of
reports could induce the IMF to reopen negotiations. Similarly, top government officials who feel
pressured to accept payoffs by businesses seeking favors could also report to the IMF. Such reports,
passed on to the World Bank and other IFIs, could be a preliminary step in implementing the policies,
outlined in this chapter, that can explicitly discipline firms by restricting access to projects supported
by World Bank loans.
Becoming a clearinghouse for allegations is a way of revealing to both sides that high-level
corruption is a game in which the developing country is the loser and in which neither private nor
public actors can absolve themselves of responsibility. If both a top official and a firm complain
about corrupt pressures exerted by the other, the stage may be set for meaningful reforms that reduce
the underlying incentives for such deals to be made in the first place. Perhaps the EITI could become
a source of such information. Without trying to affix blame, the IMF and World Bank could begin a
dialogue with a country’s leaders and major investors on ways to improve the situation for the benefit
of the country’s citizens. If everyone thinks that everyone else is corrupt, then all but the saints will be
tempted to engage in malfeasance. If expectations can be changed by clear statements on both sides,
followed by consistent actions and a credible commitment to report corrupt pressures, progress
seems possible. The climate of world opinion may be running strongly enough against corruption to
make it worthwhile for major corporations to take a stand against bribery rather than tolerating or
encouraging payoffs.
1 This chapter draws heavily on Rose-Ackerman (2013a, 2013b). These essays build on the
background papers and the discussion at a workshop held at the Rockefeller Foundation Center in
Bellagio, Italy, June 13–17, 2011, organized with the financial support of the Rockefeller
Foundation, the Open Society Institute, and the Yale Law School.
2 The breakup of the Soviet Union led to the democratization of Eastern Europe and the Russian
Federation with much input from outside experts. With input from international bodies, the Arab
Spring resulted in constitutional reform, even in some Middle Eastern countries that did not
undergo revolution. In both cases, however, the results have been disappointing with the passage of
time.
3 See, e.g., Ayee et al. (2011). The report is a work in progress, not a statement of World Bank
policy.
4 See Chapter 3 on the use of “carrots” and “sticks” in domestic reform.
5 Rodrik (2006) stresses the need to present options to developing countries based on individual
country experiences, not impose a single “consensus.”
6 Connect to the Governance and Anticorruption (GAC) portal through:

http://search.worldbank.org/all?qterm=GAC&title=&filetype= (accessed October 10, 2015).
7 An example is the Financial Action Task Force (FATF) discussed in Chapter 15 that scores
countries. See especially its report, FATF, Laundering the Proceeds of Corruption (2011),
available at http://www.fatf-
gafi.org/media/fatf/documents/reports/Laundering%20the%20Proceeds%20of%20Corruption.pdf
8 Wren-Lewis (2013). See Golden and Picci (2005) for an effort to compare the productivity of
public infrastructure spending across the Italian regions.
9 Transparency International-UK, 2015, Defence Companies Anti-Corruption Index,

http://companies.defenceindex.org/docs/2015%20Defence%20Companies%20Anti-
Corruption%20Index.pdf (accessed October 13, 2015) highlights the lack of transparency in
defense contractors’ anticorruption policies. Since the first study, issued in 2012 (and no longer
publicly available), there was significant improvement, but there is still considerable opacity.
10 Uganda purchased fourteen Su-30 Russian jet fighters for $750 million dollars, more than twice
their estimated value (Cockcroft 2012: 7). In South Africa the estimated cost of the Strategic
Defense Procurement Package rose from 21.3 billion rand in 1990 to 53 billion in 2003 amid
allegations of corruption particularly related to local offsets involving contracts with local
business (Griffiths 2008). In Taiwan a contract to purchase frigates for the navy was shifted from a
South Korean to a French supplier in 1991 with a huge increase in total value of the contract to $2
billion. Allegations of corruption soon surfaced. For an overview see “Taiwan’s Frigate
Corruption: Investigation: Can They Collect?,” Defense Industry Daily, April 17, 2014,
http://www.defenseindustrydaily.com/full-steam-ahead-for-taiwan-frigate-corruption-
investigation-01546/ (accessed July 10, 2015).
11 “Cross Debarment: Agreement for Mutual Enforcement of Debarment Decisions among

Multilateral Development Banks,” http://lnadbg4.adb.org/oai001p.nsf/ (accessed June 8, 2015).
12 “World Bank Listing of Ineligible Firms & Individuals,” The World Bank,
http://web.worldbank.org/external/default/main?
theSitePK=84266&contentMDK=64069844&menuPK=116730&pagePK=64148989&piPK=64148
984 (accessed June 8, 2015).
13 This section draws heavily on Wrong (2013).
14 Reporters without Borders, http://en.rsf.org/, publishes an index of media freedom and

advocates for journalists in peril or unjustly punished; Article 19,
https://www.article19.org/index.php, advocates for media freedom and keeps track of the status of
defamation laws globally (both accessed October 13, 2015).
15 Transparency International worker Robinah Kiyingi was killed in Uganda in 2005 while
preparing a report on the (mis)use of health assistance; her husband was framed for the murder and
eventually acquitted (Siraje Lubwama, “Kiyingi Claims Plot to Kill Him,” The Observer, May 1,
2015, http://www.observer.ug/news-headlines/37617-kiyingi-claims-plot-to-kill-him). Eleven of
the Integrity Awards awarded by Transparency International since 2000 have gone to people who
were killed while uncovering or fighting corruption; five of these eleven were journalists.
Transparency International, “Integrity Awards,”
http://www.transparency.org/getinvolved/integrityawards. For numerous additional examples of
the suppression of individuals and NGOs, see International Center for Not-for-Profit Law and
World Movement for Democracy Secretariat at the National Endowment for Democracy (2012)
(both websites accessed October 13, 2015).
16 Alan Rusbridger, “The Splintering of the Fourth Estate,” The Guardian, November 19, 2010.
Available at: http://www.guardian.co.uk/commentisfree/2010/nov/19/open-collaborative-future-
journalism (accessed October 13, 2015).
17 Twenty percent may be a conservative estimate in some countries – in Nepal in the 1970s, e.g.,
a project funded by the Soviet Union was halted when a leakage rate of 40% was discovered
(Cariño 1986: 183).
18 When widespread budgetary malfeasance was discovered in Malawi in 2013, several

international donors – who fund up to 40% of the national budget – suspended payments pending
investigation. Lameck Masina, “Malawi: Donors Withhold Aid over Cashgate Scandal,” Voice of
America, November 7, 2013, http://www.voanews.com/content/malawi-donors-withhold-aid-
over-cashgate-scandal/1786120.html (accessed October 10, 2015).
19 Recanatini (2011b) stresses this problem in her analysis of anticorruption agencies.
20 Kilby (2009) finds that macroeconomic conditions imposed on recipients of World Bank
programs are less stringently enforced for “friends” of the United States, the largest donor.
21 See World Bank (2011) (revised 2014), “Guidelines: Procurement of Goods, Works, and Non-
Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers,” 3–
7,
http://siteresources.worldbank.org/INTPROCUREMENT/Resources/Procurement_GLs_English_F
inal_Jan2011_revised_July1-2014.pdf (accessed October 13, 2015).
22 See “New World Bank Procurement Framework Approved,” July 21, 2015, with a link to the
framework document http://www.worldbank.org/en/news/press-release/2015/07/21/world-bank-
procurement-framework (accessed July 22, 2015). Integrity is included in III.D, paras. 48–53.
23 The Stolen Asset Recovery (StAR) initiative, a joint effort of the World Bank and the UN Office
of Drugs and Crime, is described at http://star.worldbank.org/star/. The website provides links to
background material and data (both accessed October 13, 2015).
24 Numerous examples can be drawn from the rebuilding experiences in Iraq and Afghanistan.
Consult the websites of the Special Inspectors General for Iraq and Afghanistan: www.SIGIR.mil;
www.SIGAR.mil (both accessed October 13, 2015).
25 Tina Søreide reports this observation from interviews with experienced auditors in Dar el
Salaam.
26 Integrity pacts are pledges by all the potential bidders on a government project to refrain from
corruption. See Chapter 4.
27 See the examples provided by Global Witness on its web site: http://www.globalwitness.org/
28 See the OECD website on the Paris Declaration and the Accra Agenda for Action at
http://www.oecd.org/dac/effectiveness/parisdeclarationandaccraagendaforaction.htm (accessed
October 13, 2015).
29 On Kazakhstan, see Ron Stodghill, “Oil, Cash and Corruption,” New York Times, November 5,
2006, http://www.nytimes.com/2006/11/05/business/yourmoney/05giffen.html (accessed October
13, 2015).
30 Sasha Chavkin, Ben Hallman, Michael Hudson, Cécile Schilis-Gallego and Shane Shifflet,
“How the World Bank Broke Its Promise to Protect the Poor,” Huffington Post, April 16, 2015,
http://projects.huffingtonpost.com/worldbank-evicted-abandoned (accessed October 13, 2015).
31 The World Bank, e.g., has long examined the behavior of its own employees. “World Bank in
Internal Corruption Probe,” Financial Times, July 17, 1998. “World Bank Hires Auditors to Probe
Its Own Spending; Possible Kickbacks, Embezzlement Cited,” Washington Post, July 16, 1998.
The Office of Business Ethics and Integrity now oversees all questions of ethics among the World
Bank’s employees.
32 Many of the original members of the Zetas were part of an elite antinarco force trained, in part,
by the United States. See, e.g., Noah Rayman, “Mexico’s Feared Narcos: A Brief History of the
Zetas Drug Cartel,” Time, July 16, 2013, http://world.time.com/2013/07/16/mexicos-feared-
narcos-a-brief-history-of-the-zetas-drug-cartel/ (accessed October 13, 2015).
33 Joseph Goldstein, “Afghan Militia Leaders, Empowered by U.S. to fight Taliban, Inspire Fear in
Villages,” New York Times, 17 March 2015,
http://www.nytimes.com/2015/03/18/world/asia/afghan-militia-leaders-empowered-by-us-to-
fight-taliban-inspire-fear-in-villages.html (accessed October 13, 2015).
34 In the discussion at the workshop that produced the book cited in note 1, Nathaniel Heller and
Liam Wren-Lewis stressed this point based on their experience.
35 International “soft law” is a general term used for a wide variety of informal, horizontal
arrangements negotiated between peers from multiple jurisdictions “to exchange information,
coordinate enforcement, and harmonize the regulatory rules applied at home” (Galbraith and Zaring
2013–14: 745). Galbraith and Zaring review the recent literature on the subject (ibid.: 744–55),
arguing that because the agreements are not legally binding, they can sometimes be more
substantively precise than a formal treaty (ibid.: 748).
36 Convention on Combating Bribery of Foreign Public Officials in International Business

Transactions, December 17, 1997, S. Treaty Doc. No. 105–43, 37 I.L.M. 4, available at
http://www.oecd.org/corruption/oecdantibriberyconvention.htm (accessed October 13, 2015)
(hereinafter OECD Anti-Bribery Convention).
37 Foreign Corrupt Practices Act of 1977, Pub. L. No. 95–213, 91 Stat. 1494 (codified as
amended in scattered sections of 15 U.S.C.), amended by, Foreign Corrupt Practices Act
Amendments of 1988, Pub. L. No. 100–418, tit. V, subtit. A, pt. 1, 102 Stat. 1415 and International
Anti-Bribery and Fair Competition Act of 1998, Pub. L. No. 105–366, 112 Stat. 3302. Most
countries are required not just to ratify the treaty, but also to pass conforming legislation
criminalizing overseas bribery. Even the United States made some modest amendments to its own
statute. The “International Anti-Bribery and Fair Competition Act of 1998” was enacted on
November 10, 1998. A U.S. federal appeals court upheld criminal liability under the U.S. Antitrust
Laws for acts committed abroad that had a substantial and intended effect within the United States
[United States v. Nippon Paper Industries Co., Ltd., 109 F. 3d 1(1997), cert. denied]. It did this
even though the Sherman Act makes no explicit mention of criminal liability for acts committed
abroad. In reaching their decision they noted that the firms’ actions were illegal under both
Japanese and American law (ibid. at 8). In passing, the opinion notes that extraterritoriality is
unproblematic under American law if explicitly included in the language of the statute (ibid. at 6);
this is true of the FCPA.
38 Linda Chatman Thomsen, Director, SEC Division of Enforcement, Remarks before the Minority
Corporate Counsel 2008 CLE Expo (March 27, 2008) (transcript available at
http://www.sec.gov/news/speech/2008/spch032708lct.htm).
39 Enforcement authority lies with both the Department of Justice (DOJ) and the SEC. The SEC
pursues civil actions for violations of the antibribery and accounting provisions whereas the DOJ
is primarily responsible for criminal enforcement of the FCPA, though it is also responsible for
civil enforcement of the antibribery provisions against domestic concerns. See A Resource Guide
to the U.S. Foreign Corrupt Practices Act 4–5 (November 2012), available at
http://www.justice.gov/criminal-fraud/fcpa-guidance (accessed October 13, 2015).
40 Foreign Corrupt Practices Act of 1977, 15 U.S.C. §§ 78dd-1 to -3 (2006).
41 15 U.S.C. § 78m(b)(2)(A)–(B).
42 Transparency International, “Our History,” http://www.transparency.org/whoweare/history

43 See, e.g., OECD Anti-Bribery Convention, 2, p. 4, 37 I.L.M. at 4–5 (“Each Party shall take such
measures as may be necessary, in accordance with its legal principles, to establish the liability of
legal persons for the bribery of a foreign public official.”).
44 Organisation for Economic Co-operation and Development, “OECD Demands the Slovak
Republic Establish Corporate Liability for Foreign Bribery,” January 18, 2010,
http://www.oecd.org/daf/anti-bribery/anti-
briberyconvention/oecddemandstheslovakrepublicestablishcorporateliabilityforforeignbribery.htm
45 For OECD reports, see OECD, Country Reports on the Implementation of the OECD Anti-
Bribery Convention,
http://www.oecd.org/document/24/0,3746,en_2649_34859_1933144_1_1_1_1,00.html (accessed
March 22, 2013). For Transparency International reports, see, e.g., Transparency International,
Exporting Corruption: Progress Report 2014: Assessing Enforcement of the OECD Convention
on Combating Foreign Bribery,
http://files.transparency.org/content/download/1573/11296/file/2014_ExportingCorruption_OECD
ProgressReport_EN.pdf (accessed July 23, 2015). For current activities of the OECD in
anticorruption consult http://www.oecd.org/corruption (accessed October 13, 2015).
46 Rose-Ackerman and Billa (2008) argued that this exemption could not be defended. Their
argument was used by two British NGOs that challenged the decisions, winning in the lower courts
only to lose in the House of Lords.
47 See Chapter 6.
48 Brzezinski and Brackett (2011):16n8. According to the OECD (2014: 19), 69% of cases were
settled and 31% ended in conviction. No data are provided for cases of acquittal.
49 UK firm BAE Systems agreed to pay a $400 million fine to settle one charge of “conspiring to
... make false statements.” Press Release, U.S. Department of Justice, “BAE Systems PLC Pleads
Guilty and Ordered to Pay $400 Million Criminal Fine” (March 1, 2010),
http://www.justice.gov/opa/pr/2010/March/10-crm-209.html (accessed October 13, 2015).
50 UN Convention against Corruption, https://www.unodc.org/unodc/en/treaties/CAC/ (accessed

July 20, 2015).
51 See, e.g., Murphy (2004: 184) (quoting UN GAOR, 58th Sess., 50th plen. mtg. at 19, UN Doc.
A/58/PV.50 (Oct. 31, 2003)).
52 Press Release, UN Office on Drugs & Crime, “Convention Against Corruption Ratified by 30th
State, Will Enter into Force 14 December 2005,” UN Press Release L/T/4389 (September 15,
2005), available at http://www.un.org/News/Press/docs/2005/lt4389.doc.htm (accessed October
13, 2015).
53 UN Office on Drugs & Crime, UNCAC Signature and Ratification Status as of 1 December
2015, http://www.unodc.org/unodc/en/treaties/CAC/signatories.html (accessed December 18,
2015).
54 Akin Gump Strauss Hauer & Feld, LLP, International Trade Alert: The United Nations
Convention against Corruption, 5–6 (January 14, 2004),
http://www.akingump.com/files/Publication/eb85b0df-4b9d-49f2-bb83-
0a19fa0e31a5/Presentation/PublicationAttachment/0ddf3ac5-050e-4e16-b3df-
0bf9e32f5ad3/628.pdf (accessed October 13, 2015).
55 For more detailed information on regional conventions, see Transparency International, “Our
Work on Conventions,” http://www.transparency.org/whatwedo/activity/our_work_on_conventions
56 See OECD, “Regional Anti-corruption Programmes,”

http://www.oecd.org/corruption/regionalanti-corruptionprogrammes.htm (accessed July 5, 2015).
57 Organization of American States, Department of International Law, “Signatories and

Ratifications,” https://www.oas.org/juridico/english/Sigs/b-58.html (accessed June 24, 2015).
58 Organization of American States, Department of International Law, “Inter-American Convention

against Corruption,” http://www.oas.org/juridico/english/treaties/b-58.html (accessed June 24,
2015). Only the United States and St. Kitts and Nevis have formally taken an exemption to the
extradition clause for countries with which they do not have bilateral treaties. Organization of
American States, Department of International Law, “Signatories and Ratifications,”
https://www.oas.org/juridico/english/Sigs/b-58.html (accessed June 24, 2015).
59 Nina Lakhani, “How Hit Men and High Living Lifted Lid on Looting of Honduran Healthcare
System,” The Guardian, June 10, 2015, http://www.theguardian.com/world/2015/jun/10/hit-men-
high-living-honduran-corruption-scandal-president?CMP=share_btn_tw (accessed October 13,
2015).
60 Nonmembers who participated in their design (the United States, the Holy See, Mexico, Japan,
Canada, and Belarus) can also accede to the terms of the conventions.
61 Council of Europe Treaty Office, “Criminal Law Convention on Corruption, CETS No.: 173,”
http://conventions.coe.int/Treaty/Commun/ChercheSig.asp?NT=173&CM=&DF=&CL=ENG
(accessed June 24, 2015). It has been signed but not ratified by Germany, Lichtenstein, San Merino,
Mexico, and the United States.
62 Although France is a party to this convention and others, a regional criminal court in Paris
acquitted Total S.A., and 18 employees on corruption charges related to the Iraqi oil-for-food
scandal, on the grounds that the payments were made to a sovereign government, not to corrupt
officials. Gibson, Dunn & Crutcher LLP, 2014, “2013 Year-End FCPA Update,” p. 27, available at
http://www.gibsondunn.com/publications/Documents/2013-Year-End-FCPA-Update.pdf (accessed
October 13, 2015).
63 Council of Europe, “Civil Law Convention on Corruption,”
http://conventions.coe.int/Treaty/en/Summaries/Html/174.htm (accessed June 24, 2015).
64 It has been ratified by 34 member states plus Belarus and signed but not ratified by seven
others. Council of Europe, Treaty Office, “Civil Law Convention on Corruption, CETS No.: 74,”
http://conventions.coe.int/Treaty/Commun/ChercheSig.asp?NT=174&CM=&DF=&CL=ENG
65 Council of Europe, Committee of Ministers, Resolution (99) 5, Establishing the Group of States
Against Corruption (GRECO), May 1, 1999.
66 Eighteen months after the evaluation report is published, each country submits evidence and a
compliance report is prepared; if necessary, a second compliance report is prepared for a given
country another eighteen months later. A small number of reports (typically those of more corrupt
countries) are marked “confidential” and therefore not published. Council of Europe, Group of
States against Corruption, “How Does GRECO Work?,”
http://www.coe.int/t/dghl/monitoring/greco/documents/index_en.asp (accessed July 5, 2015).
67 The convention was adopted in 2003, the same year as the UNCAC, and entered into force in
2006. Transparency International, “The African Union Convention on Preventing and Combating
Corruption,”
http://archive.transparency.org/global_priorities/international_conventions/conventions_instrument
s/au_convention (accessed June 24, 2015). See also Muna (2005).
68 League of Arab States, Arab Anti-Corruption Convention (2010), available in English at

https://star.worldbank.org/star/sites/star/files/Arab-Convention-Against-Corruption.pdf (accessed
October 13, 2015).
69 The Network works with the UNODC, the UNDP, the OECD, and the World Bank. The
ACINET meets periodically to discuss ongoing efforts and make recommendations for
anticorruption policy. Arab Anti-Corruption and Integrity Network,
http://www.arabacinet.org/index.php/en/home (accessed July 7, 2015).
70 The original code dates back to 1979, with amendments in 1987, 1994, and 2011. World Trade
Organization, “Agreement on Public Procurement,”
https://www.wto.org/english/tratop_e/gproc_e/gp_gpa_e.htm (accessed June 24, 2015).
71 All but Switzerland of the original fifteen had ratified the agreement by June 2015. World Trade
Organization, “Agreement on Public Procurement: Parties, Observers and Accessions,”
https://www.wto.org/english/tratop_e/gproc_e/memobs_e.htm (accessed June 24, 2015).
72 OECD (2013), a revision of earlier handbooks issued in 2001 and 2009. The original
Recommendation on the Tax Deductibility of Bribes to Foreign Public Officials in International
Business Transactions was adopted in 1996 and recommended making it a criminal offense to
deduct bribes from taxes. Recommendation on Tax Measures for Further Combating Bribery of
Foreign Public Officials in International Business Transactions was adopted in 2009. It
reiterated the 1996 recommendations and sought better cooperation between tax and law
enforcement agencies. Additional efforts were made in subsequent years. According to a 2012
report to the OECD, most member states now explicitly prohibit tax deductions for bribes, with
many of these statutes passed in the last decade. See Update on Tax Legislation on the Tax
Treatment of Bribes to Foreign Public Officials in Countries Parties to the OECD Antibribery
Convention, June 2011, http://www.oecd.org/tax/crime/41353070.pdf (accessed October 13,
2015).
73 We examine corruption in international business more closely in Chapter 15.
74 See their respective websites at http://www.unglobalcompact.org/;

http://www.iso.org/iso/iso26000 (accessed October 13, 2015).
75 For more information on PWYP, see http://www.publishwhatyoupay.org (accessed March 22,

2013) and on EITI, see https://eiti.org (accessed October 14, 2015).
76 Dodd-Frank Act § 1504, 124 Stat. at 2220. The Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank Act”) was passed on January 5, 2010, as a response to the 2008
financial crisis. It aims to regulate previously unregulated areas, especially “swaps” in certain
industries, and improve regulation in others. The full text is available at
http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
77 Specifically, companies listed on U.S. stock exchanges, i.e., “resource extraction issuers.” 77
FR 56365 (Sept. 12, 2012) (to be codified at 17 C.F.R. pts. 240, 249). In addition, section 1502 of
the Dodd-Frank Act requires companies to which conflict minerals are “necessary to the
functionality or production” of their products to disclose whether the minerals originated in the
Democratic Republic of the Congo or a bordering country. Dodd-Frank Act, Pub L. No. 111–203, §
1502(b), 124 Stat. 1376, 2214 (2010).
78 The legal developments under both sections 1502 and 1504 are summarized and updated in
Michael Seitzinger and Kathleen Ann Ruane, Conflict Minerals and Resource Extraction: Dodd-
Frank, SEC Regulations, and Legal Challenges, Congressional Research Service, Washington,
DC, Paper 7-5700, December 2, 2014, http://fas.org/sgp/crs/misc/R43639.pdf (accessed March
14, 2015).
79 Transparency International-UK (2015), Defence Companies Anti-Corruption Index,

Corruption%20Index.pdf (accessed October 13, 2015).
80 World Health Organization, “Good Governance for Medicines Participating Countries,”

http://www.who.int/medicines/areas/policy/goodgovernance/progress/en/ (accessed July 8, 2015).
81 In presenting this taxonomy, Koh has little to say about the role of global corporations.
However, in a speech while he was U.S. assistant secretary of state, he urged business to be part of
a voluntary partnership and draws an explicit analogy with the anticorruption movement (Koh
2000).
82 Available at https://icsid.worldbank.org/apps/ICSIDWEB/Pages/default.aspx (accessed

October 13, 2015).
83 The ICSID does provide administrative support for state-state arbitration cases (ICSID 2015:
9).
84 Shihata and Parra (1994); Reisman (1992). ICSID “Convention on the Settlement of Investment
Disputes between States and Nationals of Other States,”
https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/partA.htm (accessed October 13, 2015).
Several important countries – Mexico, Brazil, India, Poland, and South Africa, e.g. – had not
signed this convention by 2015 (ICSID 2015: 6).
85 Pauwelyn (2013) cites the study by Juanita Olaya, “Good Governance and International
Investment Law: The Challenge of Lack of Transparency and Corruption.” Paper presented at the
Second Biennial SIEL Conference, July 8–10, 2010.
86 An example from ICSID is World Duty Free Co. v. Republic of Kenya ICSID Case No.
ARB/00/07 (October 4, 2006) where both Kenya and World Duty Free acknowledged that the firm
had paid a bribe to former President Moi. They just differed on its implications for the resolution
of the dispute. See Chapter 7 for more discussion of this case. In another case the Democratic
Republic of Congo sought to avoid jurisdiction by claiming that no legal contract existed because
of bribe payment to the Mobutu regime (African Holding Company v. Democratic Republic of the
Congo, para. 48 of the award, http://www.italaw.com/sites/default/files/case-
documents/ita0016.pdf, accessed October 21, 2015). The tribunal dodged the corruption question
and found that it did not have jurisdiction on ratione temporis grounds.
87 See, e.g., Henry (Litong) Chen and Xiaosong Zhou, “Possible Impacts of the Dodd-Frank Act on
U.S. Companies Doing Business in Asia,” Bloomberg Law Reports Asia Pacific, June 6, 2011, pp.
18–19, available at http://www.mwechinalaw.com/uploads/doc/chenzhou-doddfrank.pdf (accessed
October 13, 2015).
88 The U.S. Chamber of Commerce (the Chamber) titled its suggested amendments to the FCPA
Restoring Balance, implying that the statute is too stringent. Andrew Weissmann and Alixandra
Smith, U.S. Chamber Institute for Legal Reform, “Restoring Balance: Proposed Amendments to the
Foreign Corrupt Practices Act 6–7,” October 2010, available at
http://www.instituteforlegalreform.com/sites/default/files/restoringbalance_fcpa.pdf. Its proposals
would significantly weaken the law. For a response to the Chamber’s proposals see David
Kennedy and Dan Danielsen, “ Busting Bribery: Sustaining the Global Momentum of the Foreign
Corrupt Practices Act,” Open Society Foundations (September 2011), available at
http://www.soros.org/initiatives/washington/articles_publications/publications/busting-bribery-
20110916 (both accessed October 13, 2015).
89 “Convention on Combating Bribery of Foreign Public Officials in International Business

Transactions,” December 17, 1997, S. Treaty Doc. No. 105–43, 37 I.L.M. 4, available at
http://www.oecd.org/corruption/oecdantibriberyconvention.htm (accessed October 13, 2015).
90 A survey of 350 international companies found that almost “two-thirds of respondents believed
that companies in their own country either ‘regularly’ or ‘occasionally’ seek to gain a business
advantage through making donations to charities favored by decision-makers.” Control Risks
Group Ltd. & Simmons & Simmons LLP (2006), “International Business Attitudes to Corruption –
Survey 2006,” pp. 4, 13, available at http://www.control-
risks.com/OurThinking/CRsDocumentDownload/International%20business%20attitudes%20to%2
0corruption%20survey_2006.pdf (accessed October 13, 2015).
91 DOJ and SEC, A Resource Guide to the U.S. Foreign Corrupt Practices Act (November 2012),
http://www.justice.gov/sites/default/files/criminal-fraud/legacy/2015/01/16/guide.pdf at page 11
92 Ibid.: 42–3. Similarly, section 1504 of the Dodd-Frank Act imposes new financial disclosure
requirements on all resource extraction companies listed on a U.S. stock exchange. It requires these
issuers to disclose project-level as well as country-level payments, legal or otherwise. Dodd-
Frank Act § 1504, 124 Stat. at 2221. In addition, that act includes a generous provision rewarding
whistle-blowers; Dodd-Frank Act, Pub. L. No. 111–203, § 922(a), 124 Stat. 1376, 1841 (2010).
93 Daniel Margolis and James Wheaton (2009), “Non-U.S. Companies May Also Be Subject to the
FCPA,” 1 Financial Fraud Law Report 168, 170, available at
www.pillsburylaw.com/siteFiles/Publications/961FAE6040BDB25EB4E6C63B250A3AAE.pdf
94 Erin Fuchs, “The Largest-Ever Corporate Payouts to the US over Foreign Bribery Charges,”
Business Insider, August 14, 2012, http://www.businessinsider.com/the-largest-fcpa-settlements-
2012-8 (accessed October 13, 2015).
95 Shearman & Sterling LLP, “FCPA Digest: Recent Trends and Patterns in the Enforcement of the
Foreign Corrupt Practices Act,” January 2012, available at http://www.shearman.com/shearman--
sterlings-recent-trends-and-patterns-in-the-enforcement-of-the-foreign-corrupt-practices-act-fcpa--
fcpa-digest-01-03-2012/ (accessed October 13, 2015).
96 Of 175 countries, resource-rich Nigeria scores 27 and ranks 136 (tied with Russia) on the 2014
CPI; Angola and Venezuela score 19 and rank 161 (tied); and Iraq scores 16 and ranks 170.
Transparency International, “Corruption Perceptions Index,”
http://www.transparency.org/cpi2014/results. Transparency International also ranks oil and gas
and mining as the fourth and fifth most corrupt industries, respectively. Transparency International,
“Bribe Payers Index 2011,” http://www.transparency.org/bpi2011/results (accessed October 13,
2015).
97 There could be an effect on world prices, however, if corruption affects the level and type of
production, not just the right to extract the resource. Suppose, e.g., that corrupt payoffs permit firms
to harvest protected trees in such large numbers worldwide that the world price is depressed or to
extract a mineral resource using extremely poorly paid workers with little health and safety
protection. In such cases, firms that refuse to engage in such practices would not be the high bidder,
even if no one pays a bribe, so long as some firms use exploitative labor practices. The
fundamental problem in such cases goes beyond the existence of payoffs to include weak
protections against environmental harms and workers’ rights.
98 George J. Terwilliger III et al., “China’s New Anti-Corruption Law Goes into Effect May 1,
2011,” White & Case LLP, April 19, 2011, http://www.whitecase.com/alerts-04202011/ (accessed
October 13, 2015).
99 Palifka thanks Eno Inyangete for raising this issue in class, June 2015.
100 World Bank, Inspection Panel, “Panel Cases,”

http://ewebapps.worldbank.org/apps/ip/Pages/AllPanelCases.aspx (accessed June 26, 2015).
101 World Bank, Inspection Panel, Annual Report, July 1, 2014 – June 30, 2015, p. 6,
http://ewebapps.worldbank.org/apps/ip/Pages/Annual-Report.aspx (accessed October 18, 2015).
102 “Yacyreta Report Implies WB Panel Downgrade,” Financial Times Business Reports, January
1, 1998; “Row Brews Over Bank Role in Dam Project,” Financial Times, May 4, 1998; “World
Bank Issues Apology,” Financial Times, May 12, 1998.
103 The World Bank, The Inspection Panel, “Kosovo: Kosovo Power Project (Proposed),”
http://ewebapps.worldbank.org/apps/ip/Pages/ViewCase.aspx?CaseId=87 and “Complaint
Addressed to the World Bank Inspection Panel Regarding the Kosovo Power Project,”
http://ewebapps.worldbank.org/apps/ip/PanelCases/78-
Request%20for%20Inspection%20(English).pdf (accessed October 13, 2015).
104 See http://ewebapps.worldbank.org/apps/ip/Pages/ViewCase.aspx?CaseId=108 (accessed

October 13, 2015).
105 The World Bank, The Inspection Panel, “Haiti: Haiti Mining Dialogue Technical Assistance,”
http://ewebapps.worldbank.org/apps/ip/Pages/AllPanelCases.aspx (accessed June 27, 2015).
106 World Bank Administrative Tribunal, “Judgments & Orders: Search Results” (search using the
terms “corruption OR bribery OR graft,” June 27, 2015),
http://lnweb90.worldbank.org/crn/wbt/wbtwebsite.nsf/00f5031dafee0204852578f100053348?
CreateDocument (accessed October 13, 2015).
107 One of these is World Bank Administrative Tribunal (2009), “No. 420: AW, Applicant v.
International Bank for Reconstruction and Development, Respondent,”
http://lnweb90.worldbank.org/crn/wbt/wbtwebsite.nsf/(attachmentweb)/C6BA54D9E411A68E85
2576C4007DE257/$FILE/AWDecisionNo.420.pdf (accessed October 13, 2015).
108 Warren Hoge, “U.S. Legislators Want Cyprus to Extradite Indicted U.N. Official,” New York
Times, February 14, 2007, http://www.nytimes.com/2007/02/14/world/14briefs-unoilforfood.html
109 “Rolling Up the Culprits,” The Economist, March 13, 2008,

http://www.economist.com/node/10853611 (accessed October 13, 2015).
110 See, e.g., Global Witness, “World Bank Facilitates Transport of Illegally Cut Logs in
Cambodia,” February 10, 2005, https://www.globalwitness.org/search/?
search_query=%22World+Bank%22+corruption&tab=pages; Global Witness, “UN Anti-
Corruption Meeting Develops Worrisome Trend,” November 4, 2009,
https://www.globalwitness.org/archive/un-anti-corruption-meeting-develops-worrisome-trend/;
Global Witness, “UN Anti-Corruption Convention Rendered Toothless,” November 13, 2009,
https://www.globalwitness.org/archive/un-anti-corruption-convention-rendered-toothless/; Global
Witness, “Lessons UNlearned,” January 27, 2010,
https://www.globalwitness.org/documents/17845/lessons_unlearned.pdf (all accessed October 13,
2015).
111 Transparency International, “Our Work on Conventions,”

http://www.transparency.org/whatwedo/activity/our_work_on_conventions (accessed October 13,
2015).
112 See, e.g., Transparency International, “Are We There Yet? The World Bank’s Anti-Corruption
Record,” June 28, 2012,
http://www.transparency.org/news/feature/are_we_there_yet_the_world_banks_anti_corruption_re
cord; Transparency International, “Making Development Accountable: World Bank/IMF Spring
Meetings 2011,” April 13, 2011,
http://www.transparency.org/news/feature/making_development_accountable_world_bank_imf_sp
ring_meetings_2011; U4 Expert Answer, “Multilateral Development Banks’ Integrity Management
Systems,”
http://www.transparency.org/files/content/corruptionqas/264_Multilateral_development_banks_int
egrity_management.pdf (all accessed October 13, 2015).
113 International Monetary Fund, “The Role of the IMF in Governance Issues – Guidance Note,”
issued as part of News Brief 95/15, Washington, DC: IMF, August 4, 1997.
15
International Cooperation: States, Firms,
Banks, and Organized Crime
◈
International corruption is facilitated by the practices of multinational firms. However, even if such
firms all pledged to refuse to make payoffs, the big business of international organized crime would
remain a corrupting influence. Furthermore, money laundering not only facilitates such crime, but also
smooths the way for corrupt officials to transfer their funds abroad. Policies that make it difficult for
illicit funds to cross national borders and to enter the legitimate financial system are thus a key
subsidiary aspect of global efforts against corruption. Explicit international efforts to constrain
corruption are not sufficient. Hence, in this chapter we consider efforts to change the behavior of
business firms by invoking principles of business ethics and ask how the global fight against
organized crime and money laundering can indirectly limit the benefits of international corruption.
Both of these initiatives have broader goals than the control of corruption per se, but they are tightly
linked to the incentives for and the gains from grand corruption. Even when the United States or the
European Union cannot press charges for bribery, they may prosecute foreign firms or individuals for
money-laundering offenses. Many organized crime groups are international in nature, and their
corrupting activities are far-reaching. To successfully disband such groups and prosecute individual
members requires international cooperation.
We begin with the obligations of multinational businesses, especially large firms whose size and
market power exceed that of many nation-states. Then we discuss the importance of international
cooperation, outside of existing anticorruption treaties, in dealing with organized crime and money
laundering.
I. Corruption in International Business: The
Obligations of Multinational Firms
Corruption involves a buyer and a seller. It cannot properly be described as “imported” by evil
multinational firms into innocent developing countries. Nevertheless, multinational firms are central
actors in many large-scale corrupt deals. Anticorruption reformers have tried to enlist these firms in
anticorruption efforts and to convince them to alter their own behavior. These efforts can complement
other efforts to fuel growth, reduce poverty, and enhance government legitimacy, and most saliently,
they can improve the overall international business climate.
We begin by discussing the corporation as an actor with moral responsibilities and argue that
multinational firms should consider their obligations as international actors that exceed in size and
influence some of the nations with which they deal. Over and above its sheer size, a firm’s leverage
in relation to a nation-state depends upon the nature of its dealings with government and upon the size
of its deals relative to the size of the government. If the deal represents a large share of a country’s
national income or state budget, firms cannot responsibly adopt the position that their own business
interests are all that is at stake. They may claim that they ought to be under no obligation to take a
broader perspective, but they cannot claim that their actions are irrelevant to conditions in the
developing or transitional country. Because firms are legal creations and operate subject to legal
constraints, firms’ obligations to the legal order are stronger than those of natural persons (ordinary
citizens). However, a firm’s political and economic obligations are not always consistent. We explain
these tensions and discuss ways to minimize them.
Managers and directors that accept an obligation to refrain from “grand” corruption must still
decide what kinds of actions their firms should take. Thus, we next consider the limits of efforts to
assure that individual managers have high standards of personal morality. This approach is too
narrow – a focus on personal morality neglects the often valuable disjunction between personal
morality and business judgment. Because the obligation to refrain from corruption derives from the
organizational and legal position of firms, appeals to personal morality are inadequate and often
inappropriate.
Finally, we argue that, in general, anticorruption efforts must depend upon the ethical obligations
of firms and their coordinated behavior to turn a “prisoners’ dilemma” into a “coordination game” in
which most firms benefit from lower levels of grand corruption.
A. The Corporation as a Moral Person
The modern corporation is a creation of law, and it operates in multiple political jurisdictions only
with the permission of governments. Its creation can only be justified insofar as, on balance, it
furthers desirable social goals, both economic and political. The basic “legal personality” of the
business firm gives it an obligation at least equal to that of natural persons, both to the state that
created it and to those jurisdictions that permit it to operate within its borders. In contemplating a
corrupt action, the firm ought not just assess its own profit position but ask if its actions are, on
balance, good for society (Thompson 1987: 15). Under this view a payoff would be unethical even if
management believes that the firm is the least-cost provider that would win in an honest competition.
The firm is part of a political-economic system whose overall efficiency and legitimacy can be
undermined by payoffs.
Donaldson’s (1989: 44–64) notion of a hypothetical “social contract” between business and
society provides a useful way of framing the issue. He asks whether idealized citizens, in setting up a
society under similarly idealized conditions, would agree to the creation of private productive
organizations (e.g., corporations, partnerships). He hypothesizes that citizens would accept such
organizations if the benefits in increased productivity outweighed the costs. Under this view, it is
plausible to ask firms to accept moral obligations as a condition of their right to exist. “Productive
organizations and society should act as if they had struck a deal ... that would be acceptable to free,
informed parties acting from positions of equal moral authority (one person, one vote)” (ibid.: 61).
As Thompson writes: “The legal rights of a corporation (as distinct from the rights of its members)
should rest mainly on social utility” (1987: 78; see also Dahl 1982: 197–202).
Donaldson applies his analysis to multinational businesses by claiming that certain moral
conditions are culturally neutral.1 From his list, we focus on two obligations that are related to our
concern with corruption: obligations to enhance the efficiency of the market system and obligations to
refrain from undermining legitimate government institutions.2
Furthering Market Efficiency: Some behavior may not be individually rational or profitable
for the firm but may nevertheless further the overall efficiency of the market economy, both
domestically and globally. In the purely competitive model no such moral dilemmas exist because the
rules of the game are fixed and the assumptions needed for a competitive market are met. The
competitive market system operates to produce efficient results even though all the individual actors
are only concerned with their own narrow self-interest. For-profit firms, constrained by the
marketplace, cannot survive unless they are single-mindedly devoted to profit maximization.
In the real world, of course, this is not true. As Bowie writes, “[T]he market is not a morally
neutral, well-oiled machine; rather it is embedded in morality and depends upon the acceptance of
morality for its success” (1988: 530). Laws and regulations exist to constrain the worst sorts of
behavior such as fraud against customers or intimidation of one’s competitors through threats of
violence. The legal system in most countries seeks to limit monopoly power, requires certain types of
information disclosure, and controls externalities such as environmental pollution. If these laws
created just the right financial incentives for firm compliance, that could be the end of the matter.
Firms would organize their operations to avoid running afoul of these legal constraints.
Obviously, this assumption is also false. Laws express aspirations but are not perfectly
enforced, and they seldom provide an incentive for optimal deterrence. This leaves room for firms
and their managers to consider their ethical obligations. These considerations will be especially
salient in the international arena where there are few realistic legal constraints.
Even if an individual corrupt deal is efficient, actions that contribute to the acceptability of
corruption in the marketplace undermine efficiency. The firm is a beneficiary of the market system and
the normative justification of markets rests on their efficiency. Thus the firm has an obligation to act in
ways that improve the efficient functioning of the market. Otherwise the entire market system leaves
itself open to charges of immorality and illegitimacy. People may differ over the strength of this
obligation, but it is hard to argue that grand corruption is not on the prohibited side of it. Widespread
unscrupulous behavior can erode public confidence in the market and seriously affect the ability of
honest entrepreneurs to carry out their activities. Under this view, the firm has a duty not only to
refuse corrupt demands but also to expose them.3
Maintaining Political Legitimacy: Firms are dependent for their success not only on the
existence of a functioning market system but also on a state that protects private property, facilitates
market activity, and maintains order and stability. As we have argued, there is a close connection
between the effectiveness of the state, on the one hand, and economic growth and development, on the
other. In particular, foreign direct investment (FDI) and the success of industrial development policies
are linked to the quality of governance and the relative lack of corruption. Thus, just as firms have an
obligation to act consistently with the preservation of markets, they also have an obligation to act
consistently with the preservation of a “market-friendly” state. Some speak of “corporate citizenship”
to focus on the firm as a legal person that has been created or permitted to operate by the state. The
firm’s very dependence on the state for its existence gives it an obligation to consider the
consequences of its actions for the state and sometimes to act affirmatively to preserve political
values (Donaldson 1989). “Corporate citizenship” falls within the broader category of “corporate
social responsibility.”
Democracy and the “market-friendly” state are not always the same thing. Case studies of
foreign direct investment indicate that businesses are not always supporters of democracy even if they
are headquartered in countries where democracy is well entrenched (Armijo 1999). Nevertheless,
there are some easy cases. Given the firm’s dependence on the state for its existence and its ability to
operate, it has an obligation not to undermine the constitution of democratic states viewed as
legitimate by their citizens. If firms invest in countries trying to establish democratic systems, they
should ask if their actions are supporting the development of a viable and legitimate state.4New
corrupt opportunities are one of the growing pains of economic and political transformation and can
undermine otherwise promising reforms by reducing their legitimacy and fairness. As Bowie
concludes, firms should support democracy because: “[o]therwise, multinationals would be in the
position of benefitting from doing business with the society while at the same time engaging in
activity that undermines the society” (Bowie 1988: 527).
The difficult cases occur when a state’s long-term stability is built on an autocratic system that is
favorable to business investment and where democracy, if established, could pass through a long
unsettled period, as has occurred in the countries of Eastern Europe after 1989 and in several
countries of the Middle East and Africa. If one accepts the argument that firms have an obligation not
to undermine a state based on popular sovereignty, then the firm’s obligation during a transition is
clear. It should not engage in corruption to obtain contracts, concessions, or privatized firms.
B. Role and Responsibility
The previous section argued that multinational businesses ought to refrain from corruption, but this
claim leaves open the question of what steps they should take. To a large extent, corporate
anticorruption measures parallel to those of governments. Firms should establish and disseminate a
strong code of corporate ethics, hire honest personnel who identify with that code, remove incentives
that induce employees to engage in corrupt behavior, and take steps to detect malfeasance with
internal audits and whistle-blower protection. One simple response is a personnel policy that favors
applicants with strong norms of personal morality. But personal morals are sometimes insufficient
when challenged by the logic of the marketplace or a corrupt internal culture. Actors often face direct
conflicts between profit and principle. Furthermore, some personal traits that are admired in private
life work against the achievement of organizational goals, including the control of corruption.
Consider, first, the easy case, in which employees’ high ethical standards are good for the bottom
line. Corrupt managers further their own financial self-interest at the expense of the firm. Then, a
strategy of hiring the moral is profit maximizing. Norms of loyalty, corporate codes of conduct, and
monitoring and incentive systems can also work to align the behavior of employees with those of
shareholders (KPMG 2010). Managers and other employees generally will perform better if they
have a residual commitment both to moral actions and to firm profitability. For example, purchasing
agents may be offered bribes to favor particular suppliers, or to write contracts biased in favor of
suppliers.5 Salespersons may be offered kickbacks in return for a price discount. In such cases top
management benefits from hiring purchasing agents and salespersons with a strong moral commitment
to honest dealings.
Two difficult cases, however, demonstrate that a personnel policy of hiring those with strong
personal morals is insufficient. In both, agents’ personal moral codes conflict with the firm’s pursuit
of profit. In one case, this conflict represents a normatively valid distinction between personal and
institutional ethics. An employee who elevates personal norms of behavior above the firm’s goals
will be judged corrupt or unethical. In the other, personal morality and business ethics coincide to the
detriment of the firm’s profits.
Much corruption arises from a failure to separate ties of family and friendship from one’s
behavior as a public official or private firm manager (Thompson 1995: 12). Modern management
theory argues that the role played as employees should not be equivalent to their roles as family
members and friends (Smiley 1992: 188–9). Thus a parent has an obligation to help his or her child
develop into an adult but would violate his or her obligation as a manager if he or she favored his
son’s company in making purchases for his or her employer.
Furthermore, an honest employee may become corrupt under duress. KPMG is an international
consulting firm that specializes in, among other things, corporate forensic investigation. Based on 348
cases in 69 countries, KPMG (2011) observed that in many cases, the offending employee had been a
star for several years, until a distressful family situation led him (more often men) to cross the line in
favor of higher income.
Managers need to beware of dysfunctional organizational cultures under which employees
conspire to keep evidence of wrongdoing from their superiors. Rewarding whistle-blowers may fail
if empathy between workers is stronger than loyalty to the firm (Greenberger, Miceli, and Cohen
1987). In one survey, managers from Germany, France, Israel, and the United States did not condemn
co-workers who failed to turn in those who violated the rules (Jackson and Artola 1997). To
overcome this reluctance, top management may try to convince employees that peer reporting is part
of their role. For example, in one study, students of business were more likely to report the cheating
of other students after they were told that such behavior was their responsibility as members of an
educational institution (Trevino and Victor 1992).
In the second case, behavior that increases firm profits and violates personal morality is also
unethical in the business context. Managers once again face a conflict between greed and moral
behavior, but with purely profit-seeking bosses now on the side of immorality. For example, if
corrupt payoffs help a firm to obtain business, managers and owners may hope to facilitate their
subordinates’ bribery while remaining ignorant of the details.6
Hence, hiring “good” people is not always sufficient. If the owners and top managers believe
that their organization ought not to engage in unethical or illegal actions that enhance their firms’
profitability, they must make their position clear rather than rely on their employees’ moral scruples.
Some lower-level managers, faced with a conflict between profitability and morality, will opt for
profitability unless given strong signals to the contrary by owners and top managers. Others will
follow personal affective ties at the expense of profitability and business ethics. Top management
must lead by example (Newstrom and Ruch 1975; Brenner and Molander 1977; Badaracco and Webb
1995) and set clear and well-enforced guidelines and codes of conduct (Cooper and Frank 1992;
Vincke, Heimann, and Katz 1999: 14–26).
C. Can Anticorruption Policies Do without Corporate Ethics?
We have argued that firms have an obligation to refrain from making illegal payoffs. The source of
this obligation is the status of firms as legal persons operating at the suffrage of the state. But let us
leave aside such obligations for a moment and ask when firms, especially large global corporations,
might find it in their interest to limit corruption both inside their own organizations and
internationally. There are two situations in which this condition might hold.
First, a firm may gain leverage with its buyers or suppliers by taking a strong stand against
corruption. For example, a firm’s product may be obviously superior to those of its competitors so
that it has bargaining power with a state purchasing agency. Those monitoring the contracting process,
be they politicians or watchdog groups, would complain if a low-quality supplier were chosen. Then
giving in to corrupt demands to win a contract would simply cut into the firm’s profits. Similarly, a
firm with the best restructuring offer for a privatized firm will want to announce its honesty for the
same reason. Consumer goods companies with strong international brand recognition may be such
powerful symbols of economic and social development that they can successfully resist corrupt
demands associated with overseas investments. Firms with an observable advantage over their
competitors will not only seek to limit corruption within their own firm but may also support reforms
in host countries that increase transparency and accountability. Such efforts will impress consumers
who value honesty.
Second, managers and boards of directors of large corporations may support international
anticorruption efforts when the global situation can be described as a “coordination game.” Here
individual bribe payments are profit maximizing in the existing business context, but if corruption
could be eliminated, all firms would benefit, and none would have an incentive to defect unilaterally.
In contrast, the strategic situation among competitors may resemble a “prisoners’ dilemma” instead of
a coordination game. If a prisoners’ dilemma operates, voluntary agreements to refrain from
corruption will be unstable because each firm has an incentive to defect. Some claim, however, that a
prisoners’ dilemma can be converted into a coordination game through dialogue, public relations, and
outside pressure. The difference between these “games” is important. In both situations, firms are
better off if they all cooperate than if they do not. However, in a pure coordination game the
cooperative solution is stable. Once everyone abjures bribery, there is no incentive for anyone to
defect. The fundamental problem is then inducing firms to move to such a strategy because being the
only honest firm in a sea of corruption is costly.7 Unfortunately for those who believe that corruption
can be fought on the basis of business self-interest alone, moral commitments are required in this
second class of cases. It is not sufficient to observe that a low-corruption world would lead to
increased total profits. Seldom can a prisoners’ dilemma be converted to a coordination game without
some degree of moral commitment. There are two moral issues here – willingness to cooperate and
attitudes toward corruption.
The situation will only be a coordination game if managers and boards value not just integrity,
but also cooperation. Managers and boards must be willing to sacrifice short-term profits for long-
term benefits once a low-corruption situation is established. They may do this because of a norm of
cooperation under which firms refuse to pay bribes so long as most others are also cooperating in this
effort. Those who accept this norm will sometimes act in ways that are contrary to their individual
firm’s interest (e.g., refusing to pay a bribe to get a contract) because this will enhance the overall
benefits to the group of firms that are part of the market.8 In addition, incentives to work for a
reduction of corruption will be weak if managers and boards suffer no consequences from inaction.
Similarly, it will be difficult to maintain a general anticorruption norm if reverting to payoffs has no
negative effects on managers and boards. Outside pressure can help tip firms toward an active
anticorruption stance, but if the motivations of key individuals inside the firm are purely instrumental,
their commitments are likely to be fragile and contingent.
If the strategic situation can lead to a coordination game, one needs to know whether firms exist
with the capacity and the incentive to shift the equilibrium from a high-corruption to a low-corruption
outcome. Some firms do indeed appear to have the capacity. In 2014 the sales figures for the twenty
largest multinational corporations ranged from $155.9 billion to $485.7 billion; together they produce
more than the Japanese economy. The smallest of these companies had sales that exceeded the 2013
GDP of 135 of the 192 countries providing data to the World Bank (see Table 15.1).9 Such firms have
leverage in many of the countries where they invest and trade that is likely to give them clout that
local firms may lack.
Table 15.1. The twenty largest corporations in the world by sales
Company Country Sales (Billions of U.S. Approximately equal to the 2013

dollars) GDP of
Walmart Stores United 485.7 Venezuela

States
Sinopec China 427.6 Austria

Royal Dutch Netherlands 420.4 United Arab Emirates
Shell
Exxon Mobil United 376.2 Colombia

States
BP United 352.8 South Africa

Kingdom
PetroChina China 333.4 Denmark
Volkswagen Germany 268.5 Finland

Group
Toyota Motor Japan 252.2 Greece
Glencore Switzerland 220.9 Portugal

International
Total France 211.4 Algeria
Apple United 199.4 Peru

States
Samsung South Korea 195.9 Romania

Electronics
Berkshire United 194.7 Romania

Hathaway States
Chevron United 191.8 Romania

States
McKesson United 174 Kuwait

States
Daimler Germany 172.3 Vietnam
ICBC China 166.8 Bangladesh
EXOR Italy 158.3 Bangladesh
Gazprom Russia 158 Bangladesh

General Motors United 155.9 Bangladesh
States
Sources: Forbes, “The World’s Biggest Public Companies,”

http://www.forbes.com/global2000/list/ and World Bank, “Table 4.2 Structure of Output,” World
Development Indicators 2015, http://wdi.worldbank.org/table/4.2# (accessed June 21, 2015).
There may be an interaction between the anticorruption policies of host countries, global
advocacy groups’ attempts to embarrass business, and firm actions. If a country initiates an
anticorruption policy, this can present an opportunity for firms to announce their support, pledge not
to pay bribes, and do so in a way that encourages others to follow suit. If a firm is sensitive about its
international image because of worries about regulatory initiatives and the loss of consumer
goodwill, it may be willing to support an anticorruption agenda. Such actions will, however, be more
likely if the firm’s management and board are morally opposed to corruption or accept the obligations
that accompany the corporate form.
Several international initiatives aim to fill this gap. First, the Integrity Pacts described in
Chapter 4 can serve as a type of “club” in which the host country publishes a list of those who have
pledged not to pay bribes. This exerts pressure on the remaining firms in a given industry to follow
suit. Second, industry-wide assessments of anticorruption and protransparency measures, such as
Transparency International’s Defence Companies Anti-Corruption Index10 and the Extractive
Industries Transparency Initiative,11 provide incentives for firms to improve their practices to avoid
public embarrassment. Third, the current movement in favor of corporate social responsibility has led
many firms to publish annual reports documenting their socially responsible activities, which may
include ethics training and working with governments to reduce corruption.12
In short, there are two broad reasons why profit-maximizing firms may seek to root out
corruption inside their organization and work for a less corrupt global business environment. In the
first case, the costs of corruption are mostly absorbed by the firm in lost profits, and the firm has
leverage over individual deals. The second requires a collective change in behavior by most firms in
the market. Here, a narrow interest in firm profitability is unlikely to be sufficient to motivate action.
Managers and boards need to accept ethical obligations that go beyond both private morality and their
responsibility to stockholders. Acceptance of these obligations may indeed be good public relations,
but the fundamental arguments for abiding by these principles are neither profit maximization nor
individual scruples, but depend on an understanding of the role of the corporation in the modern
world.
The advantage of the current interest in corruption is that companies suffer international
embarrassment if a payoff is revealed, and this possibility can induce them not only to resist corrupt
demands, but also to report them. Companies that claim to abhor corruption while accepting it as a
necessary evil are not acting consistently. Revealing corrupt demands can have an impact if the
pressure of international public opinion affects both corrupt public officials and bribe-paying
business firms. Nevertheless, in practice, relying on corporate responsibility and moral suasion will
likely be insufficient: of international corruption cases that were concluded between 1999 and 2013,
only 31% were self-reported (OECD 2014: 15, table 3).13
As the issue of corruption in global business has become more salient, the business community
has supplemented the legal and soft law approaches with its own efforts. The World Economic Forum
has a Partnering against Corruption Initiative of business leaders; one of its aims is to “support
corporate citizenship” and the global anticorruption agenda.14 The International Chamber of
Commerce (ICC) entered the debate in the 1990s by promoting corporate self-regulation to fight
corruption (Vincke, Heimann, and Katz 1999: 4). It continues to stress this approach with specific
guidelines, recommendations, and efforts to inform business about the OECD Convention (Vincke and
Kassum 2013). The ICC is committed to “developing a broad international consensus on the need to
fight extortion and bribery” as a way of overcoming the reluctance of individual companies to act
(Vincke, Heimann, and Katz 1999: 10).15 It urges its members to adopt rules of conduct designed to
limit international bribery for any purpose, not just to obtain or retain business.16
The legal profession has also taken up the issue. The American Bar Association has an
International Anti-Corruption Committee which seeks to “deter corruption and promote transparency”
through dialogue and debate.17 The International Bar Association follows a strategy similar to that of
the ICC. In 1996 it adopted a resolution condemning international bribery, and its Anti-Corruption
Committee has a program of education, consciousness raising, and guidelines working in
collaboration with the OECD and the UN Office on Drugs and Crime. It holds an annual conference
on the topic.18
Business anticorruption efforts depend on a cooperative attitude in the business community; even
the OECD Convention depends importantly upon the willingness of firm managers and boards to
police their own employees, agents, and subcontractors. The initiatives listed here are positive
developments that can help turn the anticorruption effort in the private sector into a coordination
game, at least among the organizations’ members. The moral argument has, we think, helped tip the
scales in favor of an anticorruption effort. Corporate executives and government officials feel that
they are doing the right thing as well as promoting the concerns of multinational businesses.
However, the impact of these initiatives remains, in practice, largely unproven. Because the
British, by law, and Americans, in practice, take account of corporate anticorruption efforts, the
business community has an incentive to settle on a set of best management practices. However,
although many of these recommended practices seem plausible, little empirical work has been done to
substantiate their value or their relative importance. The promotion of good corporate values and
practices is a worthwhile global effort, but it cannot substitute for law enforcement and for changes in
public-sector institutions to limit the underlying incentives for payoffs.
Most of our book has concentrated on policies that change the economic incentives for
corruption, and Chapter 14 spelled out the international involvements of aid and lending organizations
and the growing body of international laws and norms that seek to control corruption. However, we
have so far only touched on a major international facilitator of corruption – the laundering of funds
across international borders. We mentioned the issue in discussing organized crime, but it needs a
fuller treatment here in light of the need for cross-border cooperation. It is one of the major areas
where international initiatives can help both to limit corruption and to contain the spread of organized
crime.
II. Controlling Money Laundering and International
Criminal Enterprise
The control of money laundering and the fight against organized crime both require international
cooperation along several dimensions. Successful policies can indirectly affect corruption levels and
help improve the legitimacy of the state and the functioning of the international market. (Of course,
such policies could also have beneficial effects on growth and development.) First, to build a case,
investigators need information. Many countries now share investigative capacity and results under the
auspices of Mutual Legal Assistance treaties. In 2006, for example, under a bilateral treaty,
Switzerland shared financial information with the corresponding authorities in the United States,
enabling the prosecution of a U.S. citizen who had acted as an intermediary in corrupt oil deals in
Kazakhstan.19
Second, in order to prosecute a foreign individual or a national who is in a foreign country, a
government must request that he or she be extradited by the foreign government. Many countries now
have signed bilateral extradition agreements. Several of the international agreements dealing with
corruption laid out in Chapter 14 require such cooperation. In civil suits, the process may be more
complicated. For example, civil lawsuits against website-based companies (apparently affiliated
with the Pakistani Axact group) ended with $700,000 damages awarded in 2007 and $22.7 million in
2012, but none of these damages has been paid, and the supposed defendants gave their depositions
by video with poor lighting so that it was difficult to identify them; at least one provided a false
address.20
Another area for fruitful cooperation is information sharing. Cross-debarment could work for
countries, as it does for IFIs: when a firm is debarred from working with a particular government, it
would be debarred from working with any government. An international portal of debarred firms
would be of enormous value. Coordinated investigation of cases that cross borders, and reports that
make other countries’ authorities aware of firms and individuals who are under investigation for
corruption, is essential. The list of politically exposed persons (PEPs), which governments must
provide to banks, should also be provided to foreign governments at a central location, such as the
United Nations.
The recent FIFA case provides a good example of these types of international and cross-agency
cooperation. The FBI and the IRS realized that they were on the trail of the same people thanks to a
British media sting operation that put FIFA corruption in an international spotlight. The IRS lent its
money-laundering expertise, while the FBI drew on its experience pursuing organized crime. Police
and investigative forces in 33 countries cooperated over several years to build the case, tracing
payments from one bank account to another. The accused were arrested in Switzerland (at the FIFA’s
annual meeting), with extradition to the United States according to the terms of a bilateral treaty.21
This case is an excellent example of cooperation across agencies and national boundaries to
investigate a corruption case in the private sector.
However, a case of embezzlement in Honduras reveals some of the weaknesses. The head of the
state health system allegedly embezzled millions of dollars, putting the nation’s health and government
in jeopardy, as protesters took to the streets. Interpol issued arrest warrants for him (and others
involved), on money-laundering charges. He was arrested in Nicaragua, but his girlfriend, arrested in
Chile, was not charged or extradited because Chile and Honduras do not have an extradition
agreement (although they are both signatories to the Inter-American Convention against Corruption,
which contains a mutual extradition clause). His brother is a fugitive; his brother’s girlfriend was
arrested while seeking asylum in the United States. Several potential witnesses have been threatened
or killed in Honduras.22
International cooperation and the laws that support it allow the United States and the European
countries to fill an important lacuna when other governments are unable or unwilling to pursue the
corrupt. Where corrupt politicians enjoy prosecutorial immunity, they can be brought to justice abroad
through money-laundering charges. If civil servants take or extort bribes from multinational firms, the
firm can be prosecuted by the SEC or equivalent body; if the civil servants launder their bribes using
dollar-based instruments, the money laundering laws in the United States also apply to them. Where
local law enforcement is subject to plata o plomo (bribe or bullet) demands, and going free is as easy
as bribing a police officer, judge, or prison guard, extradition to the United States is a more credible
threat. Such agreements also help to counterbalance corrupt options, giving local law enforcement the
ability to say, “My hands are tied” when offered bribes.
While this obviously has positive, global counter corruption effects, it may also have negative
effects on the legitimacy of weaker domestic governments. Local sentiment that the government is
impassive (at best) regarding corruption may be exacerbated when foreign prosecutors shine a light
on domestic corruption cases. The result may be cynicism, grassroots pressure for reform, political
instability, or even revolution. If freedom of the media is suppressed, social media may seek to
overcome this barrier and attempts to shut down social media may backfire.23
As we argued in Chapter 9, organized crime can be deeply intertwined with corruption. Hence,
one route to control corruption can be efforts to limit the reach of international organized crime. In
that regard, a key factor that facilitates both organized crime and corruption is the ability to shift
illicit funds across borders and into the global capital market – money laundering. It can be used to
transfer both corrupt payoffs and the profits of organized crime. The easier it is to launder funds, the
lower the risks of illegal activities, including payoffs by organized criminals to public officials.
Money laundering is big business, representing approximately 2% of world GDP; estimates range
from 0.4% (OAS 2013a: 56, 2013b: 6 – for drug-related money laundering only) to 2.7% (UNODC
2011).24 There are many methods in use, but one common technique is the transfer of funds to
countries that permit banks to conceal the identity of depositors and account holders. These funds are
then transferred to international banks with access to markets worldwide (Paulose 1997: 259–61).
In this section we review and critique international efforts to control money laundering. We
recognize, of course, that there is more to the control of both organized crime and corruption than
simply making it harder for funds to cross borders, but we argue that increasing these costs for both
types of criminals ought to be a focus of international attention. We begin by summarizing the existing
international instruments and then consider their strengths and weaknesses. “Following the money”
often leads to corruption, organized crime, or both (Paulose 1997: 257). Hence, isolated initiatives
will often have limited success. Yet, anti-money laundering (AML) institutions are not always
empowered to investigate or prosecute corruption and organized crime. Investigative and
prosecutorial cooperation among these three areas, both inside individual countries and across
borders, is essential for effective law enforcement.
Table 15.2 summarizes the current international situation: it includes instruments that target
corruption, organized crime, or money laundering, or some combination of them. For example, the UN
Convention against Corruption includes anti-money-laundering provisions. The first AML laws and
international agreements arose out of attempts to control organized crime, especially with respect to
the drug trade. The goal was to attack organized crime’s sustainability, while providing law
enforcement agencies with more resources and incentives to uncover criminal enterprises.25
Eventually, corruption was added as a predicate offense for the application of money laundering laws
and international agreements.
Table 15.2. Selected international initiatives: Anti-corruption, anti-organized crime and anti-money
laundering
Year Name AC AOC AML
1988 UN Convention against Illicit Traffic in Narcotic Drugs and ● ●

Psychotropic Substances (Vienna Convention)
1989 Financial Action Task Force (FATF) ○ ● ●
1990 Council of Europe, Convention on Laundering, Search, Seizure and ● ●

Confiscation of Proceeds of Crime (updated 2005)
1991 European Union, Council Directive 91/308, 1991 O.J. (L 166) 77 ●
1996 OAS Inter-American Convention against Corruption ● ○
1997 OECD Anti-Bribery Convention ●
1997 European Union, Council Framework Directive “20 Guiding ● ● ●

Principles” Council Framework Decision 2003/568/JHA (guides
member states’ policies)
1999 Council of Europe Criminal Law Convention on Corruption ●
1999 Council of Europe Civil Law Convention on Corruption ●
2000 UN Convention against Transnational Organized Crime (Palermo ● ●

Convention)
2003 UN Convention against Corruption (UNCAC) ● ●
2003 African Union’s Convention on Preventing and Combatting ● ●

Corruption and Related Offenses
2003 European Union, Council Framework Decision 2003/568/JHA on ●

combating corruption in the private sector (criminalizes corruption,
holds legal persons responsible)
2008 Mérida Initiative – US, Mexico, Central America ○ ● ○
2010 Arab Anti-Corruption Convention ● ●
2012 World Trade Organization’s Revised Agreement on Government ●

Procurement
Notes: AC = Anticorruption goal; AOC = anti-organized crime; AML = anti-money laundering.
“Year” indicates the year the measure was established and opened for signing (if applicable): in many
cases, they entered into force several years later. Filled circles indicate a primary objective; empty
circles indicate a secondary objective.
Source: Authors, based on primary documents.
The United States was the first country to criminalize money laundering (in 1986) and to begin
pushing for an international anti-money-laundering response (Chaikin and Sharman 2009: 15). The
United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
(known as the Vienna Convention) was the first international effort to combat money laundering. This
convention, signed in 1988, addresses the issue of illicit drugs, including transfers of proceeds.
Although it does not mention organized crime per se, it was clearly designed to combat the
domination of this trade by various mafias. As of this writing, there are 189 parties to this
convention.26
The United Nations Convention against Transnational Organized Crime (UNTOC, also referred
to as the Palermo Convention) was signed in 2000 and entered into force in 2003 (147 countries
signed the UNTOC before it became effective; there are now 185 parties to the convention). Under
this convention, signatory states commit to criminalize Organized Crime Groups (OCGs), money
laundering, and corruption; to extradite criminals in these categories to other states for prosecution if
so requested; to cooperate with other states vis-à-vis investigation, prosecution, and law enforcement
training; and to strengthen domestic law enforcement bodies. Signatories to the convention may also
adopt any of three complementary protocols specific to human trafficking, migrant smuggling, and
arms manufacturing and trafficking, respectively.27 Thus, the United Nations explicitly links OCGs to
these three activities.28
Since much of the money laundered uses U.S. dollars, it must pass through U.S. banks, where the
SEC has jurisdiction. As a consequence, the United States has led the charge, prosecuting even
foreign banks on charges of money laundering. Sometimes foreign courts help with recovery of assets
held abroad.29 Although domestic actions can be useful in particular cases, especially when aided by
information from banking havens, they hardly represent a general solution.30 Recognizing that a
coordinated international effort was required, the United States pushed for international cooperation.
The result was the Financial Action Task Force (FATF), founded in 1989, and the “40
Recommendations” published by the FATF in 1990 and updated in 1996. These recommendations
were concerned primarily with the links between money laundering and drug trafficking. Following
the terrorist attacks in New York City and Washington, D.C., on September 11, 2001, the FATF added
Eight (later nine) Special Recommendations on Terrorist Financing, and many commentators now
bundle money laundering and terrorist financing, and refer to the recommendations as the 40+9
Recommendations. These were revised in 2003 to address the issue of PEPs31 and again in 2012.
They now cover a wide range of predicate crimes and call on a variety of private-sector actors to
report potential money-laundering attempts.32 The FATF now stresses its interest in controlling
corruption while acknowledging that this was not in its original mandate.33
The UN Convention against Corruption (UNCAC),34 discussed in Chapter 14, formalized the
FATF 40+9 Recommendations by requiring signatory countries to criminalize a wide variety of
corrupt acts and the laundering of corrupt funds. It also established the principle of asset repatriation.
This strengthened international will to fight both corruption and money laundering, but some countries
have done very little to implement the money laundering (or indeed any other) provisions.
The FATF’s 40+9 Recommendations and UN Convention provisions provide guidance for
financial authorities around the world. Members of the FATF also participate in a periodic peer-
review process that pressures each to abide by the recommendations. As a result of these instruments,
many jurisdictions have passed AML legislation. Modern AML norms require banks to “know your
client,” identifying PEPs (as well as lawyers, notaries, real estate agents, casino owners, and dealers
of precious metals and jewels) (Levi, Dakolias, and Greenberg 2007: 399), and to inform the
authorities of any suspicious (not necessarily forbidden) activity in PEP accounts. Governments are
required to provide the international financial system with an updated list of PEPs to facilitate this
process. Under these norms, the banks must freeze the illicit accounts and, after a legal procedure,
repatriate the funds to the country of origin. This process, however, is not simple, and often takes
many years, especially if the account holder appeals the transfer. In all of these laws the most
problematic element is the requirement that the financial institution had or should have had knowledge
of the illicit origin of the funds. This knowledge requirement can permit a bank to defend itself.
Clearly, it is in the interest of the depositor to conceal the origin of the funds and of the financial
institution to ask as few questions as possible. Thus the legal meaning of “should have had” is a key
factor determining a bank’s level of liability.
Regional initiatives are also important. Both the Council of Europe (CoE) and the European
Union have been active. In 1990 the CoE promulgated a Convention on Laundering, Search, Seizure,
and Confiscation of Proceeds of Crime; it was updated in 2005 to include the financing of terrorism.
It includes measures on freezing and confiscating assets, international cooperation (and a relatively
long section on the right to refuse to cooperate), the creation of a financial intelligence unit (FIU),
corporate liability for money laundering, and the repatriation of assets for victim compensation. It
further establishes a Conference of the Parties to oversee the convention and settle disputes.35 A
directive from the Council of the European Union in 1991 obligates member states to require
financial institutions to maintain systems to prevent money laundering. This was derived from other
international initiatives, including the FATF’s 40 Recommendations and the United Nation’s Vienna
Convention, focusing initially on organized crime. Because freedom of capital movement is one of the
basic freedoms of the European Union, standardizing financial controls is an important step toward
combatting money laundering within the European Union.36 A 2001 amendment extended the directive
to include corruption and other predicate crimes.37 Later, under “Council Framework Decision
2003/568/JHA on combating corruption in the private sector,” the European Union moved to require
member states to hold private-sector actors (“lawyers, accountants, doctors and real-estate
surveyors”) accountable for their business with organized crime (Center for the Study of Democracy
2010: 17).
In the Americas, the Mérida Initiative promotes international cooperation among the United
States, Mexico, and the countries of Central America. The United States provides funds (beginning in
2008) and training to the other countries, and all work together to strengthen law enforcement, the
judiciary, human rights, borders, and civil society. The Mérida Initiative contains both anticorruption
and anti-money-laundering measures as important policies to achieve the primary objective of
combatting organized crime (Ribando and Finklea 2014). If enforced, these provisions could help
combat money laundering and limit corruption.
In light of all these efforts to limit money laundering, there is little solid evidence of the success
or failure of these initiatives, in part due to the difficulty of measuring the amount of money laundered
at any given time. In one cross-country study, Buscaglia and van Dijk (2003) found that organized
crime (measured by an index that they created) was significantly higher in countries with low AML
regimes versus strong AML regulation. However, they have not measured the marginal effects of
recent efforts, and much has been done since that study was published.
Although it is difficult to demonstrate that AML policies have prevented the transfer of illicit
funds, there have been notable – although insufficient – successes in repatriating corrupt funds ex
post. Even the Swiss have recently frozen questionable assets of deposed rulers and have transferred
them to incumbents who claim that the funds belong to the state. General Sani Abacha reportedly stole
approximately $4 billion from Nigeria; Switzerland froze some $660 million in Swiss bank accounts,
and the Federal Supreme Court ruled in 2005 that $505.5 million of that total should be repatriated to
Nigeria – the first such case of an African country receiving repatriated funds. Similarly, Switzerland
and the United States repatriated $100.7 million to Peru in relation to the corruption of Vladimir
Montesinos (former top advisor to President Fujimori), who was imprisoned for taking defense
contract kickbacks (Levi, Dakolias, and Greenberg 2007: 400, 403).
There is some reluctance to repatriate funds to countries with persistently high levels of
corruption, however, for fear that the funds would simply be embezzled by the new leaders. In other
cases, appeals delay repatriation for long periods or indefinitely. For example, Sani Abacha of
Nigeria died in 1998, but as recently as 2013 the U.S. Department of Justice, charging that the funds
had been laundered “through the purchase of bonds backed by the United States using U.S. financial
institutions,” filed “a lawsuit seeking the recovery of money that had been identified in overseas bank
accounts” allegedly embezzled under his authority. In compliance with bilateral agreements, Jersey
and France froze approximately $458 million of his embezzled funds in accounts in their banks (in
Deutsche Bank and HSBC, among others) as recently as 2014, and repatriation was appealed by
associated corporations.38 The World Bank’s Stolen Asset Recovery (StAR) Initiative aims to assist
countries seeking to recover illicitly appropriated assets, but the task is difficult.39
There are other limitations to AML, as well. For starters, the onus of detection is on financial
institutions and others in the private sector, and AML legislation is not necessarily backed up with
enforcement, leaving the firms to turn a blind eye in the interest of profit (Levi, Dakolias, and
Greenberg 2007). Indeed, FIUs are rarely responsible for bringing money laundering cases to light.
Banks may even find paying the noncompliance fines to be an optimal response, rather than playing an
active AML role, so that the level of scrutiny applied is inversely related to the profitability of the
client, rather than increasing with the size of deposits. Even when banks apply due diligence, they
will not necessarily discover the launderers. For example, the UN Oil-for-Food investigation
“concluded that the banks had used acceptable levels of due diligence in vetting the oil contracts they
financed and did not have access to information that would have shown that some of these contracts
involved bribes” (Levi, Dakolias, and Greenberg 2007: 411). Furthermore, as Gordon (2011: 10, 14)
observes:
... the wording of the Recommendations themselves include a number of terms that are not easily
defined in practice and therefore add significantly to the problem.... FATF preventive measures
do not specify key aspects of FIs’ [financial institutions’] responsibilities in identifying and
reporting suspicious transactions, including how many resources they should resort to identifying
the bona fides of payment origins or of owner[s] and controllers of accounts, how much scrutiny
should be applied to transactions, and how many false positives and false negatives are
reasonable.... And, while over-reporting creates serious problems for the CI [Criminal
Investigation] system, it seems to be the norm.
The existence of enabling jurisdictions makes AML efforts more difficult. It is not enough to
keep most developed countries pure. At issue are both the ease with which corrupt officials in one
country can hide their gains in another, and the possibility that money-laundering activities can
undermine the credibility of a country’s financial structure (Scott 1995). To further complicate
matters, the traditional model of money laundering, outlined in Chapter 9, does not apply to all
money-laundering schemes, rendering the “red flags” next to useless in those cases. Platt (2015: 79–
83) describes a scheme in which clients who want to launder large quantities of cash are matched
with others who would like to withdraw funds from their overseas stashes without drawing attention
to themselves. The broker shifts the cash from the one to the other, all the while keeping the older
funds in the same bank account and merely making a bookkeeping transaction to show that the funds
have changed hands. The bank has no way to detect the laundering that took place under these
circumstances.
Even as the various governments and organizations seek to limit money laundering, new methods
emerge at a faster pace. Recently developed electronic payment systems and virtual currencies like
bitcoins provide another way for funds to move across borders without the involvement of
conventional financial institutions that must comply with national and international rules.40 Bitcoins
and other virtual currencies offer anonymity, which is invaluable when illicit transactions are
involved. The FATF has only just begun to address the risks involved, issuing a report and guidelines
in 2014, five years after bitcoins were launched (in 2009) as the world’s first convertible virtual
currency. Several cases have been prosecuted successfully in the United States, including Liberty
Reserve, a virtual money transfer “bank” that operated out of Costa Rica; Silk Road, an online black
market that used encrypting and virtual currencies to ensure anonymity; and Western Express, an
identity theft clearinghouse operated out of Manhattan.41
Despite the increased national and international interest in control, the problem is becoming
more serious. Money laundering has become the specialty of small “financial paradises” and of some
emerging market economies. A serious international campaign against the worst abusers is of
increasing importance, but unfortunately, sophisticated money launderers manage to hide funds in
major financial centers, disguising the funds’ origin though a chain of shell companies. Sometimes
they are able to do this because of weak transparency requirements in a number of U.S. states.
A country’s links to the broader world can either limit or expand the scope for organized crime.
On the one hand, an open trading and investment regime will make it easy for both contraband and the
profits of crime to flow across borders. The existence of banking havens where black money can
come to rest makes domestic criminal activity less risky, because money can be hidden abroad easily.
On the other hand, open borders facilitate investment by outsiders in a country. If these outsiders are
not part of the domestic criminal bodies and are not associated with such groups elsewhere, they may
challenge entrenched groups. Of course, if such investments are costly and dangerous, few may make
the effort, but a country’s openness to foreign investment at least makes them possible.
One role for international organizations and for law enforcement agencies in developed
countries is the compilation of information on questionable transactions, combined with the
prosecution of individuals and organizations based in developed countries that do business in
developing countries. For example, it is possible to compare average product prices in U.S.
international trade with the average prices for the same products recorded for U.S. trade with
particular countries. The data provide a way to look for over- and underinvoicing and have been used
by U.S. authorities to direct investigative efforts (Pak and Zdanowicz 1994; Paul et al. 1994).
Obviously, price divergences cannot prove anything on their own, but they can provide a starting
point for more intensive investigation. These data could point to violations of U.S. tax and customs
laws, as well as laws of foreign countries. They can indicate where money laundering may be
occurring through mispriced traded goods.42 This data-gathering effort should be extended to include
trade records from other developed countries and could provide a way for developed countries to
help poorer countries control illegal transfers of funds and tax and customs fraud. To a certain extent,
existing databases can be exploited to identify some types of import-export fraud. Trade statistics
available in the United Nation’s Comtrade (UNCTAD) database, for example, can be used to detect
smuggling, when there are mismatches between bilateral exports of a specific good from the sending
country and imports of the same good in the receiving country. Fisman and Wei (2004) use this
technique to detect import tax evasion in China; Fisman and Wei (2009) use it to detect art and artifact
smuggling.
International efforts to control illegal businesses are a second important option that complements
the anticorruption instruments in Table 15.2. If corruption is combined with organized crime, the
problem for international aid organizations is especially difficult. If the entire state is permeated with
crime, there is probably not much that outside organizations can do except wait in the wings and hope
for the best. In less extreme cases, the experience of developed countries in fighting organized crime
may be useful. In developing countries, unused to confronting organized crime, a combination of
training and law reform is a useful first step. But such reforms are unlikely to be sufficient unless the
economy is strong and competitive. The state may need to make more direct efforts to reduce the
excess profits available to criminal entrepreneurs in legitimate business. One way to do that is to
promote the entry of well-capitalized legitimate businesses that, with some state help on the law
enforcement side, can compete with mob-dominated firms. For example, the courts mandated the entry
of large multinational waste management firms into the trash hauling industry in New York City. This
strategy reduced the influence of organized crime and lowered garbage removal costs for the
commercial businesses not serviced by the Sanitation Department. State prosecutors estimated that
garbage removal fees of $1.5 billion in 1995 were inflated by as much as $400 million. After the
policy was implemented, the cost of garbage removal fell by 30% to 40% for most businesses.43
Obviously, this is not a useable strategy if organized crime is engaged in illegal businesses such as
the drug trade and trafficking in people or weapons. However, the corruption generated by the illegal
drug trade is one argument in favor of legalization so as to produce a more competitive and less
corrupt market (Global Commission on Drug Policy 2011).
Conclusions
Domestic and international efforts to combat corruption directly are necessary, but are insufficient in
an increasingly globalized world. We have discussed two aspects of a broader framework: the
obligations of multinational firms and the control of money laundering and organized crime.
In the first place, many large multinational corporations have greater financial clout and global
reach than some sovereign states. Such firms need to take seriously their role as global “citizens”
operating beyond the reach of many national laws. Their boards and managers need to recognize their
obligations as key actors beyond the nation-state and seek to restrain the corrupt acts of their
employees and to work toward a stronger business role in resisting corrupt demands.
Second, because corruption is often intertwined with international organized crime and is
facilitated by money laundering, cooperation among countries and agencies is essential. Otherwise,
the proceeds of corruption and organized crime will simply be hidden abroad or in cyberspace.
Current cross-border efforts have yielded some positive results, but more is needed. Too many
countries still have lax financial regulations or enforcement, and there is not enough cross-country
investigative sharing and extradition.
Sometimes, it is easier to prosecute money-laundering offenses than corruption; such offenses
may be the initial path to prosecuting organized crime and may lead to corrupt public officials who
are also sending their illegal funds into the global capital market. At the domestic level, coordinated
efforts among anticorruption bodies, organized crime investigators, and anti-money laundering
experts will yield better results than each operating in isolation. Because anticorruption agencies are
often underfunded and understaffed, drawing on other agencies for support is one way to maximize
their effectiveness. At the international level, several initiatives already recognize these interactions
and include two or three of these concerns.
But money-laundering controls are only negative sanctions. They are unlikely to increase
investment in capital-poor countries and may even limit legitimate capital inflows by increasing
transactions costs. They are not likely to have much of an impact unless combined with more direct
efforts to improve government performance and accountability.
In short, the specific anticorruption policies discussed in previous chapters are likely to be
necessary but not sufficient in many highly corrupt sectors, industries, and countries. Anticorruption
policies do need to remove the background incentives for payoffs that arise from poorly designed and
monitored public programs. They need to limit the opportunities for bureaucrats, judges, and elected
officials to seek personal financial gain to exploit the system to obtain campaign funds. However,
large, specialized infrastructure or defense contracts cannot be converted into pure competitive
bidding processes, and organized crime activities cannot simply be legalized as an anticorruption
strategy. Even though we sympathize with the anticorruption and good government arguments for
legalizing and regulating drugs, we recognize that such a sharp change in global policy is unlikely,
and other organized crime activities, such as trafficking in people and arms, are clearly harmful to
society and should not be legalized. Thus, even if all the reforms we proposed in other chapters were
implemented, anticorruption proponents would still need to confront the global nature of both big
business and organized crime, with their corresponding roles in corruption. Multinational businesses
need to examine their own operations to limit opportunities for corruption and to be sure that their
organization and its subcontractors and consultants internalize corporate anticorruption commitments.
Efforts to control money laundering need to recognize that the illicit transfer of funds into the global
financial system is the province not only of mafias and tax evaders, but also of corrupted officials
seeking to hide and profit from their payoffs and kickbacks at the expense of their home countries.
1 Donaldson posits three conditions: (1) A productive organization should enhance the long-term
welfare of employees and consumers in any society in which the organization operates; (2) a
productive organization should minimize the drawbacks associated with moving beyond the state of
nature to a state containing productive organizations; and (3) a productive organization should
refrain from violating minimum standards of justice and of human rights in any society in which it
operates (Donaldson 1989: 54).
2 According to the ICC in introducing their rules of conduct for corporations: “The highest priority
should be directed to ending large-scale extortion and bribery involving politicians and senior
officials. These represent the greatest threat to democratic institutions and cause the gravest
economic distortions” (Vincke, Heimann, and Katz 1999: 103–4).
3 Some proposed corporate codes of conduct for transnationals include provisions designed to
maintain the integrity of the market by restricting political payments and bribes. Such restrictions
are part of the code developed by the OECD and the draft United Nations Code of Conduct on
Transnational Corporations. For an overview see Frederick (1991).
4 Thompson writes that “political ethics provides support for democratic politics in many ways”
(1987: 3). We would say the same for corporate ethics. The restrictions on bribes and political
payments in proposed codes of conduct for transnationals are sometimes justified as attempts to
avoid behavior that interferes with national sovereignty and the internal politics of host countries
(Frederick 1991).
5 According to KPMG (2011), procurement and operations/sales account for 33% of corporate
fraud and corruption cases in 69 countries studied. Greed was the first motivating factor, followed
by internal pressure to meet quantitative targets such as sales or profits.
6 See Braithwaite (1985: 49): “The mentality of ‘Do what you have to do but don’t tell me how
you do it’ is widespread in business.” The solution, according to Braithwaite, is to set goals that
can be achieved without illegal behavior. Experimental work suggests that many individuals
express strong norms of moral behavior but do not apply them as the employees of for-profit firms.
The pursuit of firm profitability takes precedence over their moral scruples. Thus, Baumhart
(1961) examined managers’ views of ethics by asking them what they would do in response to
fictitious cases in which ethical issues were involved. He found that, when faced with an ethical
dilemma, executives tended to opt for the profitable course of action if doing so would further
company interests. In contrast, managers did not choose the unethical course of action if doing so
hurt company interests. In another experiment, more than 70% of participants were willing to pay a
bribe to get a sale for their firms. Those willing to make payoffs were not significantly less
committed to honesty and fairness in their personal lives than other participants. Other studies have
produced similar results (Brenner and Molander 1977; Vitell and Festervand 1987).
7 Readers interested in the technical details of such games are referred to MacRae (1982). A
parallel game is developed by Chang and Lai (2002). In their game, workers find it more (less)
costly to be corrupt, the more of their peers that are honest (corrupt). In another game that models
organizational corruption, Jávor and Jancsics (2013: 27) support our assertions when they
conclude:
We believe that the existence of three important conditions is necessary to launch successful
anti-corruption programs in an organization. First, there must be some organizational actors
who are interested in reducing corruption.... Second, such actors should have enough power to
initiate an anti-corruption strategy.... Finally, such reformers should be willing to come into
fierce conflicts with their colleagues who are the main beneficiaries of organizational
corruption. Briefly, the organization’s power systems should be radically restructured by elite
members who are supportive toward corruption reduction.
8 Regan labels this a norm of “co-operative utilitarianism (CU).” Under his theory “each agent
ought to co-operate, with whoever else is co-operating, in the production of the best consequences
possible given the behavior of non-co-operators” (Regan 1980:11). CU “emphasizes that those
agents who are prepared to behave morally are engaged in a common undertaking which requires a
shared recognition of the need for co-ordination and a shared willingness to go beyond ideal rules
and counterfactual assumptions” (ibid.: 145). Regan’s normative theory is closely related to
Sugden’s (1984) positive claim that a principle of reciprocity operates in the field of charitable
giving. People believe that free riding is wrong, but will only donate if others in their reference
group also donate.
9 Calculated from data in World Bank, World Development Indicators, table 4.2,
http://wdi.worldbank.org/table/4.2#; and Forbes, “The World’s Biggest Public Companies,”
http://www.forbes.com/global2000/list/ (accessed June 21, 2015).
10 Transparency International-UK, 2015, Defence Companies Anti-Corruption Index,

Corruption%20Index.pdf (accessed October 14, 2015).
11 See their website at https://eiti.org/ (accessed October 14, 2015).
12 This can backfire, however, if firms only make donations to anticorruption organizations in
order to create the illusion of acting ethically.
13 An additional 2% were revealed by whistle-blowers (OECD 2014: 15, table 3), some of whom
could be competing firms.
14 World Economic Forum, Partnering against Corruption Initiative,

http://www.weforum.org/community/partnering-against-corruption-initiative-0 (accessed July 22,
2015).
15 The last chapter of this volume includes a section entitled, “Why Bribery Is No Longer
Tolerable.” The authors claim that a “significant change” in attitudes occurred in the late 1990s and
concludes that “bribery violates acceptable standards for international competition. Companies
that continue to bribe will do serious damage to their ability to continue as reputable participants in
the global economy” (Vincke, Heimann, and Katz 1999: 91–2, emphasis in original).
16 The ICC also has documents dealing with anticorruption contract clauses:
http://store.iccwbo.org/t/ICC%20Anti-corruption%20Clause, guidelines on whistle-blowing and
on agents and intermediaries, and a report on resisting extortion. The latter, titled RESIST, was
prepared with the United Nations Global Compact, the World Economic Forum, and Transparency
International and is available in six languages at http://www.iccwbo.org/products-and-
services/fighting-commercial-crime/resist/ (accessed October 14, 2015).
17 International Anti-Corruption Committee, http://apps.americanbar.org/dch/committee.cfm?

com=IC700600. There is also a Global Anti-Corruption Committee under the Criminal Justice
Section but it seeks only to “monitor, evaluate and report” on recent international developments,
not promote an anti-corruption agenda. http://apps.americanbar.org/dch/committee.cfm?
com=CR121212 (both accessed July 22, 2015).
18 International Bar Association,

http://www.ibanet.org/LPD/Criminal_Law_Section/AntiCorruption_Committee/Default.aspx
(accessed July 22, 2015). See also IBA: Anti-Corruption Strategy for the Legal Profession,
http://anticorruptionstrategy.org/AC_strategy_legal_profession_about.aspx (accessed July 22,
2015).
19 Ron Stodghill, “Oil, Cash and Corruption,” New York Times, November 5, 2006,
http://www.nytimes.com/2006/11/05/business/yourmoney/05giffen.html (accessed October 14,
2015).
20 Declan Walsh, “Fake Diplomas, Real Cash: Pakistani Company Axact Reaps Millions,” New
York Times, May 17, 2015, http://www.nytimes.com/2015/05/18/world/asia/fake-diplomas-real-
cash-pakistani-company-axact-reaps-millions-columbiana-barkley.html (accessed October 14,
2015).
21 Matt Apuzzo, “A U.S. Tax Investigation Snowballed to Stun the Soccer World,” New York
Times, May 29, 2015, http://www.nytimes.com/2015/05/30/sports/soccer/more-indictments-
expected-in-fifa-case-irs-official-says.html (accessed October 11, 2015); Matt Apuzzo, Stephanie
Clifford and William K. Rashbaum. “FIFA Inquiry Yields Indictments; U.S. Officials Vow to
Pursue More,” New York Times 27 May 2015,
blatter-isnt-among-them.html (accessed May 27, 2015).
22 Nina Lakhani, “How Hitmen and High Living Lifted Lid on Looting of Honduran Healthcare
System,” The Guardian, June 10, 2015, http://www.theguardian.com/world/2015/jun/10/hit-men-
high-living-honduran-corruption-scandal-president?CMP=share_btn_tw (accessed October 14,
2015).
23 Terrence McCoy, “Turkey Bans Twitter – and Twitter Explodes,” The Washington Post, March
21, 2014, http://www.washingtonpost.com/news/morning-mix/wp/2014/03/21/turkey-bans-twitter-
and-twitter-explodes/?tid=pm_pop (accessed October 14, 2015).
24 More specific estimates are in Chapter 9.
25 Mast, Benson, and Rasmussen (2000) find that allowing police forces to keep confiscated drug-
related assets increases drug-related arrests, whether measured as a proportion of total arrests
(20% increase) or as per 100,000 population (18% increase).
26 Several Central European countries seceded from this convention in the early 1990s. See
“United Nations Treaty Collection,” https://treaties.un.org/Pages/ViewDetails.aspx?
src=TREATY&mtdsg_no=VI-19&chapter=6&lang=en#4 (accessed October 14, 2015).
27 These are the Protocol to Prevent, Suppress and Punish Trafficking in Persons, Especially
Women and Children; the Protocol against the Smuggling of Migrants by Land, Sea, and Air; and
the Protocol against the Illicit Manufacturing of and Trafficking in Firearms, Their Parts and
Components and Ammunition.
28 For more information, see UN Office on Drugs and Crime, “United Nations Convention against
Transnational Organized Crime,” http://www.unodc.org/unodc/treaties/CTOC/ (accessed October
14, 2015).
29 For recent U.S. cases brought under the Alien Tort Statute (ATS) outside the corruption area see
Doe v. Exxon Mobil, D.C. Cir., No. 09-7125, 7/8/11, and Flomo v. Natural Rubber Co., 7th Cir.,
No. 10–3675, 7/11/11. In the former case the D.C. Circuit held that the ATS applied to corporate
conduct and allowed a case against Exxon Mobil brought by Indonesian villagers, claiming human
rights violations, to go forward. The seventh circuit opinion also held that the ATS applies to
corporations, but it held that plaintiffs, 23 Liberian children, had not shown that Firestone violated
customary international law. These two opinions contradict a recent second circuit opinion, Kiobel
v. Royal Dutch Petroleum Co., 621 F. 3d 111 (2d Cir. 2010), which held that the ATS did not apply
to corporations. The Supreme Court has not yet ruled definitively on this issue. Other foreign
litigants have used the Racketeer Influenced and Corrupt Organizations (RICO) Act to seek
damages, under the jurisdiction of the U.S. courts, from companies that are alleged to have engaged
in corrupt or fraudulent behavior. For a recent example see Ukrvaktsina v. Olden Group, Case No.
10-CV-06297-AA (Proposed) Default Judgment, June 9, 2011.
30 For an example of the reluctance of U.S. courts to get involved in judging the validity of
allegedly corrupt and fraudulent bankruptcies abroad, see Films by Jove, Inc. v. Berov, 250 f.
Supp. 2d 156 (U.S. Eastern District of New York, April 16, 2003). The background of the case is
discussed in Volkov (2004). On tax havens see Shaxson (2010) and Platt (2015).
31 PEPs include heads of state, legislators, and high-ranking public servants, such as heads of
departments, as well as the immediate family members of such figures.
32 See FATF, International Standards on Combating Money Laundering and the Financing of
Terrorism & Proliferation: The FATF Recommendations, http://www.fatf-
gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf (accessed
October 14, 2015).
33 FATF, Home: Corruption, http://www.fatf-gafi.org/topics/corruption/ (accessed May 2, 2015).
34 The UNCAC is available at http://www.unodc.org/unodc/en/treaties/CAC/ (accessed October

14, 2015).
35 Scott (1995). Council of Europe, “Council of Europe Convention on Laundering, Search,

Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism,”
http://conventions.coe.int/Treaty/EN/Treaties/Html/198.htm (accessed June 26, 2015). This
convention complements the criminal and civil law conventions of the CoE and the work of the
Group of States against Corruption (GRECO), discussed in Chapter 14. Its website is:
http://www.coe.int/t/dghl/monitoring/greco/default_en.asp (accessed July 15, 2015).
36 Council Directive 91/308, 1991 O.J. (L 166) 77, http://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=URISERV:l24016 (accessed October 14, 2015).
37 EUR-LEX, “Directive 2001/97/EC of the European Parliament and of the Council of 4

December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial
system for the purpose of money laundering – Commission Declaration,” http://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=celex:32001L0097 (accessed October 14, 2015).
38 “US Freezes $458m Hidden by Nigerian Ex-leader,” Al Jazeera, 6 March 2014,

http://www.aljazeera.com/news/africa/2014/03/us-freezes-458m-hidden-nigerian-ex-leader-
20143664513203928.html (accessed October 14, 2015).
39 The web site is http://www1.worldbank.org/publicsector/star_site/. See Dubois and Nowlan

(2013).
40 Nathaniel Popper, “Can Bitcoin Conquer Argentina?” The New York Times, April 29, 2015,
http://www.nytimes.com/2015/05/03/magazine/how-bitcoin-is-disrupting-argentinas-economy.html
41 FATF, “Virtual Currencies: Key Definitions and Potential AML/CFT Risks,” June 2014,
http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-
potential-aml-cft-risks.pdf and FATF, “Virtual Currencies: Guidance for a Risk-based Approach,”
June 2015, http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-
Currencies.pdf (both accessed October 14, 2015).
42 In Venezuela, under a fixed foreign exchange regime with a severely overinflated official value
for the local currency, importers have used inflated prices and faked invoices to obtain dollars,
which are either sold on the black market or ferreted away abroad. William Neuman and Patricia
Torres, “Venezuela’s Economy Suffers as Import Schemes Siphon Billions,” New York Times, May
5, 2015, http://www.nytimes.com/2015/05/06/world/americas/venezuelas-economy-suffers-as-
import-schemes-siphon-billions.html (accessed October 14, 2015).
43 “Judge Backs Competition in Trash-Hauling Industry,” New York Times, February 28, 1994,
http://www.nytimes.com/1994/02/28/nyregion/judge-backs-competition-in-trash-hauling-
industry.html; “The Garbage Wars: Cracking the Cartel,” New York Times, July 30, 1995,
http://www.nytimes.com/1995/07/30/business/the-garbage-wars-cracking-the-cartel.html;
“Monitors Appointed for Trash Haulers,” New York Times, December 23, 1995,
http://www.nytimes.com/1995/12/23/nyregion/monitors-appointed-for-trash-haulers.html; “Prices
Plummet and Service Rises with Crackdown on Trash Cartel,” New York Times, May 11, 1998 (all
accessed October 14, 2015).
Conclusions
16
Conclusions
◈
Widespread corruption may have roots in culture and history, but it is, nevertheless, an economic and
political problem. Corruption causes inefficiency and inequity. It is a symptom that the political
system is operating with little concern for the broader public interest. It indicates that the structure of
government does not channel private interests effectively. The economic goals of growth, poverty
alleviation, and efficient, fair markets are undermined by corruption. Corruption erodes political
legitimacy and the protection of rights. Twenty years into the global fight against corruption, there has
been progress in both policy and research, but much remains to be done. Attempts to measure
corruption – imperfect as they are – have exposed especially corrupt governments and industries,
spurring reform toward transparency and more ethical dealings in the public and private sectors, but
most governments still receive failing grades on the control of corruption. Our goal is to further
understand the circumstances that contribute to corruption and the policies that can help to combat
corruption, but there is no one-size-fits-all anticorruption program.
I. The Causes of Corruption
The causes of corruption fall into three broad categories: institutions, incentives, and personal ethics.
These interact to determine the levels and types of corruption in any given case. Corrupt practices
such as bribery, nepotism, and influence peddling are informal institutions that frequently undermine
formal institutions and are often pervasive and entrenched. Formal institutions, such as the political
structure and the body of law and its enforcement, help shape culture and attitudes toward corruption.
A strong kleptocratic state may suffer financial hemorrhaging at the top, but very little day-to-day
petty corruption. Where the state pretends to be strong by implementing numerous strict regulations,
but the rule of law is weak, petty corruption will be rampant.
Situation-specific incentives influence choices when an individual balances costs and benefits to
decide whether to offer, accept, or demand a corrupt exchange. A strong organizational stance against
corruption, coupled with monitoring and proportional penalties, creates very different incentives from
an environment in which corruption is tolerated or even encouraged. Low pay may need to be
supplemented in some circumstances, but even some well-paid public servants and CEOs engage in
corruption if the risks of detection and punishment are low. Individuals and firms may engage in
corruption if it seems beneficial: to lower taxes, avoid a penalty, gain access to a scarce good or
service, or win a contract. Public servants may even create scarcity or onerous qualifications in order
to extract more bribes.
Finally, personal ethics play a role. Some people have such strong moral convictions that they
will resist any corrupt proposal. At the other extreme, some are so cynical that they have no scruples
about using corruption to get things done. Most have a sense of morality, but one that can be overcome
for the right price. Perceptions of corruption can help shape personal ethics: the more an individual
perceives corruption to be the norm, the more that person is likely to engage in corruption. If
government is generally perceived to be illegitimate, then cheating the government through tax
evasion or taking benefits to which one is not entitled does not seem immoral.
II. The Consequences of Corruption
Self-interest and the public interest frequently conflict. Well-functioning governments try to align
them, but there will always be tensions between broad public goals and narrow calculations of self-
interest. Taxes and regulatory restrictions are burdensome, and distributional programs require
criteria other than willingness to pay. Then corruption perverts underlying public goals. However,
sometimes corrupt public officials claim that bribes have not influenced their behavior, but were
merely gifts of appreciation. Even those who pay to receive something they ought to obtain for free
may believe that bribery is better than the alternative presented by the corrupt official, who will be
biased against them if no money or favors have changed hands.
Although individual payoffs may seem to further efficiency and even fairness in specific
situations, systemic corruption is evidence that the underlying public programs need reform. Too
much discretion allows civil servants to invent requirements with the sole purpose of generating
bribes, resulting in inefficiency, low growth, and poorly distributed income and wealth. Frustrated
when trying to follow the rules, formerly honest citizens may begin to pay bribes, in a vicious spiral
of increasing corruption. Bureaucrats and firms may collude to create rents, which can be divided
between them. Domestic and foreign investment suffer, and competition is stifled. Only those willing
to engage in bribery participate in such distorted markets.
Facilitation payments are sometimes viewed as a positive form of corruption because they
increase civil servants’ productivity, much like a tip. The cases in which corruption actually enhances
the efficiency of agents and improves the allocation of public services are limited to programs where
willingness to pay is an acceptable allocation method. In any case, bribes are a second-best response
compared with programmatic reform. The theoretical and empirical evidence does not support
tolerance of corruption. The possibility that payoffs may sometimes motivate officials to work more
efficiently suggests that in particular cases illegal bribes could be converted into legal incentive pay
schemes. If some types of payments are viewed as acceptable tips to public officials, they should be
legalized and made subject to reporting requirements. One test of the “cultural” justification for
payments is the acceptability of proposals to make such payments legal and public.
Grand corruption in procurement and concessions is extremely costly to society. Oversized or
inappropriate projects are chosen, not for their social or economic benefit, but for the kickbacks they
generate or the votes they buy. A country may then have too many roads and high-rises, but not enough
potable water, teachers, or essential medicines. Concessions are granted and purchases made on
favorable terms that are suboptimal from an environmental or fiscal perspective. The results are, for
example, excessive deforestation, minerals sold at below-market prices, and overpriced and
misdirected government infrastructure projects and purchases for the ruler’s glorification.
Widespread corruption undermines the legitimacy of the government. In democracies, corrupt
incumbents are likely to lose to an opposing party that favors reform unless corruption has so
undermined the system that no politicians are trusted to be honest. In autocracies, the eventual result
of kleptocracy may be violent overthrow. In a state whose policies favor an entrenched elite, the
private elite corrupts the political elite, and low-level corruption may be the only option for the
excluded. As long as ordinary people tolerate the status quo, corruption and inefficiency will persist.
In such circumstances, tolerance of corruption may decline as a result of political maturity, as citizens
become aware of its negative consequences. Especially if the media is not censored, the exposure of
corruption scandals is a positive development, providing checks on the government. Citizen concerns
over bribes paid in return for favors indicate that people recognize norms of fair dealing and
competent administration and are beginning to demand that governments serve general public
purposes.
III. Anticorruption Reforms
Because combatting corruption is a means to an end – improving both economic conditions and
political legitimacy – anticorruption reform should be embedded in overall efforts to improve the
delivery of public goods and services. Treating the symptom, but not the underlying problems, will
not cure the malady. It is not enough to make a few high-profile arrests: true reform involves changing
the way government interacts with society. The experience of other countries should be documented –
both successful experiments and those that backfired when the nominal corruption fighters became
corrupt, instead. Especially important, as a background to other reforms, are improvements in the
checks and balances present in a political system.
The initial step for reform should be assessment: survey the public to find out how corruption
affects their daily lives. This provides a way to set priorities that reflect popular grievances.
However, assessment should not stop at such surveys. High-level corruption in procurement,
concessions, and privatizations can be even more damaging, but may not be perceived by the general
public. These might be assessed using targeted surveys of participating firms and the establishment of
reporting mechanisms that guarantee anonymity and whistle-blower protection. Deals supported by
organized crime are especially harmful, but even otherwise legitimate business deals can be deeply
dysfunctional if payoffs determine the results. Audits or what the World Bank calls Public
Expenditure Tracking Surveys, carried out by independent public or private organizations, can
measure the impact of corruption and embezzlement on public finances.
Once these efforts have identified vulnerable sectors, reformers should promote several changes
at once. We stress the importance of reforms that limit the incentives for payoffs as well as reforms
that target law enforcement and that increase transparency and oversight.
First, reforms should modify incentives: reduce the benefits and increase the costs of engaging in
corruption, over and above the enforcement of antibribery laws. To tackle grand corruption, decision-
makers need to be held accountable for their decisions. Increased transparency and whistle-blower
protection are key elements here, but, unlike routine purchases, removing discretion can be
counterproductive in large-scale procurement. A simple rule requiring acceptance of the lowest-
priced proposal often results in poor quality. Thus, discretion is necessary, but the decision-makers
should have enough technical knowledge to exercise such discretion wisely. From the perspective of
civil servants, increased monitoring by supervisors or peers and penalties for corruption that are
proportionate to the act detected should be coupled with increased compensation and reduced
workloads if the acceptance of payoffs has become a substitute for the careful evaluation of
alternatives. If civil service wages are allowed to deteriorate relative to the private sector and if pay
differentials within the civil service are too small to give officials an incentive to seek promotions,
then efforts to control official corruption are unlikely to succeed. At the same time, public servants
should declare their assets and income and be held accountable for extraordinary wealth.
In order to reduce the demand for “bent rules,” the incentives for firms and individuals need to
change. Reforms should reduce onerous monetary and temporal burdens imposed by unnecessary
regulations and high nominal tax rates. Necessary programs serving valid public purposes should be
redesigned. Many countries have excessive business regulation that merely generates bribes. Care
should be taken, however, when reducing red tape, so that programs that serve important public
purposes (when administered honestly) are not eliminated, and that such simplification actually
reduces corruption, rather than displacing it to another department. Removing discretion, through e-
governance, both reduces opportunities for civil servants to demand bribes and allows the
government to operate with fewer employees.
Privatization may be an effective strategy in some cases but may bring its own problems.
Privatized monopolies will still be inefficient if they maintain their monopoly power and especially if
they retain close links to politicians. Even nonmonopolies may shift from demanding bribes of the
public, to paying bribes to legislators and regulators, with no benefits to the public relative to pre-
privatization. Prices may even rise, and quality may suffer after privatization because the government
is no longer held accountable.
Even if some programs can be redesigned and some responsibilities shifted to private firms, the
state must play a central role in regulating the market, providing public goods, protecting the
vulnerable, and promoting equity. Hence, thoroughgoing civil service reform is often essential.
Professionalization of the civil service should be designed to change the way public servants see
themselves and how they interact with the public. In the extreme, firing entire departments and
replacing them with new hires may be more effective than purging a few “bad apples.”
Second, reformers should review the criminal law of corruption to be sure that its coverage and
penalties are sufficient, and laws that are not directly related to corruption should include
anticorruption elements, as a deterrent. An honest law enforcement system is essential, including
police, prisons, prosecutors, and judges. If the judiciary is corrupt, the law will be applied
arbitrarily; thus, removing judicial impunity is an important step. Police departments and the prison
system should be professionalized, with strong codes of ethics, personnel training, and pay
comparable to the private sector, in order to ensure that the law will be applied impartially. All
branches of law enforcement should also be trained in anti-money laundering and organized crime, to
avoid sharp jurisdictional boundaries in cases that involve corruption. Likewise, if an anticorruption
agency is established, it should have sufficient funding and power to act, and the support of other
agencies. If international financial institutions provide assistance, they should make a long-term
commitment rather than exit once the training is done. Restructuring government and changing
people’s expectations take time.
Third, civil society should be part of the anticorruption discourse. If the populace does not
understand the damage caused by corruption, there will be little interest in combating it. To reduce the
financial burden on government, civil society groups can help educate against corruption, provide
credibly safe environments for whistle-blowers, and advocate for change. Increasing transparency
helps citizens identify corruption and improve government efficiency and legitimacy. Even if
government resists transparency, it may come of its own accord: increasingly, social media can
overcome a lack of media freedom in some polities, as witnessed recently in the Arab Spring, Turkey,
and China.
Democratic governments are subject to more outside checks on corruption than autocratic
polities. However, the need to finance elections, even using legally raised funds, can undermine
popular control. Corrupt campaign finance means that elected officials represent the interests of the
highest bidder, rather than those of their constituents. In addition to the key role of elections, other
institutions help citizens monitor the state, and deserve support even in nondemocratic regimes. These
include freedom of information acts, ombudsmen, and independent oversight bodies such as audit
agencies, electoral commissions, anticorruption commissions, and judicial review of government
action. Laws governing conflicts of interests and ethical standards for civil servants, politicians, and
business people can also help. The protection of whistle-blowers can complement these efforts by
encouraging those inside government to come forward without being afraid of losing their jobs and by
rewarding those in the private sector who report malfeasance. Corporations should be required to
reveal all campaign donations and lobbying expenses, and the voting record of each elected official
should be published. Only then can elected officials and political parties be held accountable at
elections.
It is often difficult for reform-minded groups to determine whether an incumbent or incoming
government is willing to change the status quo. Even if government leadership is committed to reform,
there may be resistance within the bureaucracy. Outside pressure can help, but abiding change is
unlikely unless those who oppose reform can be either compensated or marginalized. In the best
scenario, reform benefits a specific interest group, such as importers or program beneficiaries, who
will defend the reform and advocate for more. In the worst case, reform backfires, and corruption
spreads. An announced reform plan or change of leadership will not, in and of itself, change attitudes
and behavior; if the underlying incentives remain the same, corruption will persist. Those who claim
that “the fish rots from head down” take too simplistic a view of reform if they concentrate only on
personalities at the top. Rather, even honest leaders might tolerate low-level corruption and some
corrupt rulers have supported lower-level reform to increase the rents available at the top and to
quiet demands for overall reform (Rose-Ackerman 2015).
In postconflict countries, many urgent changes must be addressed at once in order to establish the
legitimacy of the victorious government and prevent further conflict. Anticorruption should be built
into whatever restructuring occurs, not treated as a stand-alone policy. On the one hand, the new
government structure should be inclusive, but, on the other hand, it should not rigidly divide up the
spoils of office or the result can be an ongoing struggle for the private benefits of office. In many
cases, large international aid flows – also present after national disasters – are tempting to those who
administer and distribute them, and need to be monitored closely. Foreign and domestic contractors
should sign Integrity Pacts to avoid perpetuating previous levels of corruption. States that are deeply
infiltrated by organized crime are in a similarly difficult situation because the basic problem is not
corruption per se but the overall weakness of the state vis-à-vis mafia-dominated businesses.
The international community can be a source of pressure for change. Several international
anticorruption initiatives include peer review by other signatory countries specifically with this in
mind. Simply signing an initiative, however, does not necessarily signal a willingness to change,
especially if the signature is required in order to qualify for aid. There are ample examples of
countries that have signed multiple anticorruption agreements, and even established anticorruption
agencies, without effecting fundamental reform; corruption continues unabated. More direct pressure
can come from international cooperation among governments, agencies, or firms. If one government is
unwilling to prosecute the corrupt, a foreign government may do so if an extradition treaty is in place.
Furthermore, the OECD Convention provides that the home states of multinational firms can prosecute
these firms for foreign bribery. Proposals for an international court to handle large-scale corruption
cases are worthy of consideration along with reforms in the international arbitration system to make
these proceedings more transparent and allow the consideration of kickbacks and bribes in
determining the enforceability of contracts.
Clearly, it makes no sense for international bodies to pressure for reform unless key actors
inside corrupt states have an interest in reform. Many of the reforms we have proposed assume that
some of those in power genuinely want to limit corruption and do not just see reform as a way to
suppress their opponents and consolidate their power – the “bad principal” problem. A kleptocrat
might support some low-level reforms to increase his or her own rent stream and support an
anticorruption crackdown that differentially targets political rivals. Serious reform can be carried out
within any existing structure of government, but governments that make it difficult for independent
voices to be raised in criticism will have an especially difficult time establishing a credible
commitment to honest and transparent government. Such governments may be able to move quickly in
the short run, but they may reverse course in the future. Anticorruption campaigns can be used to
undermine political opponents and discipline troublesome groups. Reformers should resist those who
would use anticorruption crusades to limit political opposition. Nominal reform efforts that become a
vendetta against political opponents will lose credibility. In a highly politicized atmosphere
individualized prosecutions will not produce real reform. Only structural changes in the underlying
corrupt incentives built into the operation of government can accomplish lasting change.
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Index
Page numbers in italic refer to footnotes. Page numbers in bold refer to Boxes.
Abacha, Sani, 442, 514

accounting fraud, 8, 9, 225, 328, 370, 436, 478
Acemoglu, Daron, 10
ACINET. See Arab Anti-Corruption and Integrity Network
Ades, Alberto, 30
Afghanistan, 17, 22, 68, 337, 457
money laundering, 313
organized crime, 305
outsourcing, 199
police defection, 461
procurement corruption, 325, 397
women in politics, 245
Africa, 33, 204, 466. See also individual countries
aid programs, 457
attitudes to corruption, 236
civil service reduction, 171
conflict of interest, 175
electoral systems, 349
excessive licensing, 128
grassroots anti-corruption, 410
inflation, 432
judicial independence, 385
kleptocracy, 279
pay levels, 169
procurement corruption, 101
selective reform, 444
social norms, 264–265, 270–271
tax and tariff corruption, 76
telecoms corruption, 152
trust levels, 249
African Development Bank Group, 452
African Union, 320, 339
Convention on Preventing and Combatting Corruption and Related Offenses, 468
Policy on Post-Conflict Reconstruction and Development, 468
agency heads, 11, 188
agents, 56, 63, 76, 145, 156, 197–198, 229, 457, 474. See also middlemen
aid, 4, 5, 6, 38, 268, 286, 287, 321, 327, 328, 329, 330, 333, 337, 338, 339, 340, 378, 406, 426, 441,
442, 446, 449, 454, 455, 457, 458, 460, 461, 470, 481, 489, 504, 517, 529
Aidt, Toke, 33
American Bar Association
International Anti-Corruption Committee, 504
Andvig, Jens Christopher, 107
Angola, 321
fossil fuels corruption, 325, 326–327
post-conflict society, 317–321, 324–327, 329–330, 335, 336
UNITA, 330
Annan, Kofi, 116, 486
anti-corruption agencies (ACAs), 189, 395, 450, 528
conditions for success, 394
distraction from structural reform, 394
tool for repression, 393
anti-corruption measures.See also civil service reform; e-government; international action;
procurement reform
amnesties, 392
avenues for individual complaints, 408–409
cash replacing in-kind benefits, 138
eliminating corrupt programs, 34, 127–128, 130–131, 132, 160, 203, 214, 228
eliminating corruption-prone regulations, 127–128, 203, 527
government spending levels, 34–35, 130–132
grassroots participation, 409–411
incentive-based market systems, 136–138, 139
legalization, 129–130, 228, 269, 525
ombudsmen, 408–409, 470, 528
political opposition, 129
pretext for repression, 393, 416, 427–428, 489, 530
Public Expenditure Tracking Surveys, 39, 397, 526
reducing regulatory discretion, 133, 136–138, 139, 158, 192, 210, 527
regional integration, 132
stock market discipline, 133
subsidy elimination, 129
systemic approach, 130, 132, 135, 203
tax and tariff simplification, 134–135, 203
user fees replacing bribes, 136, 138
vouchers, 138
Arab Anti-Corruption and Integrity Network (ACINET), 468, 484
Arab Spring, 10, 91, 316, 317, 447
social media, 528
Argentina
auditing, 396
civil service reform, 166–167
crisis-driven reform, 432
excessive executive power, 377
health system corruption, 97, 398
incentive bribes, 67
judicial corruption, 388
political control of media, 403
privatization, 117, 118
subsidy corruption, 129
tax and tariff reform, 432
Yacyreta Dam, 482
Arthur, Chester, 423, 430
artifact smuggling, 80, 517
Asia, 30, 31, 55, 105, 114, 119, 121, 244, 250, 284, 295, 359, 377, 393, 410, 421, 427, 466. See also
individual countries
Asian currency crisis, 55
Asian Development Bank, 452
AT&T, 123
Australia, 22, 44
Chinese immigrants, 234
criminal law, 208, 213
gender differences, 243
Hawke reforms, 416
BAE Systems, 464

Bahamas
Bangladesh, 22, 29, 43
anti-corruption as tool of repression, 428
construction industry corruption, 69
cultural differences, 250
Bardhan, Pranab, 51
Basu, Kaushik, 140, 217, 218
Becker, Gary, 206, 263
Belarus, 467
Council of Europe conventions, 467
foreign investment, 303
Belgium
corporate criminal liability, 215
trading in influence, 197
Ben-Ali, Zine El-Abidine, 279, 280, 417
Benin
bent rules, market for, 70–71, 161–164, 527
Berlusconi, Silvio, 95, 359
Bertrand, Marianne, 363
Bilateral Investment Treaties (BITs), 473
bilateral monopolies, 288
black lists, 5, 105
Blackwater, 200
Blagojevich, Rod, 276
Blazer, Chuck, 218
Boehner, John, 253
Bolivia
civil service pay levels, 168
e-government, 141
Bosnia & Herzegovina, 22
Botswana
education system corruption, 59
Brazil, 22, 252
auditing, 396
autocratic reform, 427
business pressure for reform, 424
corruption networks, 255
Extractive Industries Transparency Initiative, 326
forestry corruption, 114
International Center for the Settlement of Investment Disputes, 473
lack of reform, 420
land reform corruption, 196
mayoral corruption, 417
New Public Management (NPM) reform, 173, 174
Participatory Budgeting, 410
political corruption, 276
privatization, 157, 419, 117, 118
prosecutors, 389–390
bribery
definition, 8
Britain
Audit Commission, 379, 396
cash-for-questions scandal, 358
civil service ethics codes, 176–177
civil service incentive bonuses, 182
civil service reform, 198
corporate anti-corruption efforts, 504
corporate criminal liability, 215–216
corporate gender quotas, 246
durability of reform, 422
electoral corruption, 364
fixed supply corruption, 58
foreign students, 234
fossil fuels corruption, 111
intelligence services, 399
judicial conflict of interest, 387
legislative conflict-of-interest laws, 358
libel laws, 404
MPs’ expenses scandal, 398
MPs’ salaries, 357
nineteenth-century reform, 417, 423–425, 428–429
post-conflict society, 317
prison corruption, 82
Public Accounts Committees (PACs), 398
rulemaking procedures, 377
Serious Fraud Office, 464
telecoms regulation, 159
Thatcher reforms, 416
British Virgin Islands
Bulgaria
informal networks, 258
judicial networks, 385
bureaucrats.See civil service reform
Burundi, 321
police corruption, 331
post-conflict society, 317–321, 329, 330–334, 336, 338
Buscaglia Jr, Edgardo, 69, 391, 513
Cambodia
forestry corruption, 114, 137
Cameroon
e-government, 143
Campos, Jose Edgardo, 37
Canada
criminal law, 208
electoral corruption, 352–353
Freedom of Information Act (FOIA), 400
Senate expenses scandal, 206, 398
Capone, Al, 307
Carrington, Paul, 475, 476, 485
Cayman Islands
Ceauşescu, Nicolae, 339
Center for Responsibility and Ethics in Washington, 351
Center for the Study of Democracy, 304
Chávez, Hugo, 56, 428
Cheney, Dick, 360
Chevron Texaco, 327
Chile, 466, 506
anti-corruption reform, 420–421
auditing, 396
criminal law, 208
earthquake building standards, 72
e-government, 142
lack of reform, 420
New Public Management (NPM) reform, 173
China, 18, 22, 43, 44, 46, 476
anti-corruption laws, 479–480
bank hiring practices, 11
clenbuterol, 261
falsification of documents, 260
guanxi, 265–266
health system corruption, 73–74, 381
infant formula scandal, 73, 261
investment abroad, 446
judiciary, 385
market orientation, 117
media scrutiny of corruption, 431
one-time “golden handshakes”, 438
poverty reduction, 3
privatization, 259, 118, 120
social media, 528
state-subsidized prices, 54
tax and tariff corruption, 76, 133, 517
vicious and virtuous cycles, 261–262
Citigroup, 123
civil service reform, 201, 283, 289, 293, 418, 455. See also anti-corruption measures; hierarchical
corruption; procurement reform
competitive bureaucrats, 192–197
conflict of interest, 166–167, 174–178
criminal prosecution vs. structural reform, 168, 416, 429–430, 431, 526
decentralization, 136, 173, 187, 188, 192, 201
downsizing, 34, 198, 201, 202
ethics codes, 175–178
fiscal accountability, 167, 193
flexible vs. rule-based approach, 179–180
fragmented systems, 191
incentive bonuses, 180–183, 439, 525
job-seeking, 177
legal structure, 167, 202
meritocracy, 165, 166, 172–174, 278, 421
middlemen, 198
monitoring corruption, 179, 210
morale, 171
New Public Management (NPM), 173–174
not-for-profit contractors, 200–201
one-stop shop approach, 191–192, 200
one-time “golden handshakes”, 438–439
outsourcing, 198–201
pay levels, 166–167, 168–170, 171–172, 202, 204, 438, 524, 527
political neutrality, 165, 177, 198
privatization, 189, 434, 438, 440, 527
professionalism, 165, 166, 167, 172–174, 528
recruitment, 170, 171–172, 204
rewarding performance, 178–184, 203
rotation of staff, 256, 186, 198
sanctions against corruption, 179, 203
separation of roles, 166–167
sequential systems, 189–191
technical knowledge, 166, 527
Weberian bureaucracy, 174, 192, 165, 173, 174
clientelism, 187, 251, 265, 410
Clinton, Bill, 178
Cold War, 5, 319, 446
Collier, Paul, 3
Collor, Fernando, 118, 252, 399
Colombia, 379, 424
Alternative Dispute Resolution, 390–391
anti-corruption reform, 419, 420
auditing, 396
drug trade, 297, 304
e-government, 142
environmental degradation, 297
health system corruption, 72, 136, 142
homicide rate, 299
violence as catalyst for reform, 419
commodity taxes, 54–55
Communism, 55, 319
competition, 61, 71, 93, 100, 105, 108, 118, 119, 121, 126, 148, 153, 154, 155, 165, 192, 195, 196,
215, 222, 262, 297, 298, 302, 305, 306, 335, 336, 371, 378, 380, 381, 425, 430, 461, 493,
525
competitive corruption, 288–290
concession corruption, 109–116
conditions for reform
benevolent autocracy, 427
coalition-building, 415–416, 419, 421, 422
compensating reform’s losers, 438–439, 529
crisis as catalyst, 429, 432–433
electoral systems, 419–420, 421, 422
executive power, 421
federal structure, 425
first-mover disadvantage, 418
foreign aid as obstacle, 441–442, 460–461
inefficiency as driver, 418, 423, 424–425, 428–438
inertia of past practice, 415
institutionalizing reform, 416, 417, 421, 429, 438–441
patronage burden, 423–424, 425, 429, 435, 436–437
pressures on autocrats, 416–417, 425–428
resource wealth as obstacle, 441–443
revenue collection as motivation, 426
scandal as catalyst, 416, 425, 429–432
size of government, 428–438
strong leadership, 415
voter self-interest, 419, 420
conflict of interest, 9, 118, 166, 167, 178, 242, 358–360, 361, 387, 422
Congo
conflict minerals, 471
mining corruption, 116
construction industry corruption, 69–72
earthquake building standards, 34, 69, 71–72
consulting fee, 12, 103, 280
Control of Corruption Indicator (CCI). See under World Bank
corruption
creation of uncertainty, 58, 84–86, 103, 104, 112–113
economic consequences, 58, 83–92, 93, 99, 100, 101–105, 110, 111–113, 121, 123–124, 480, 523,
524–525
explicit vs. implicit, 11
grand, 11, 22, 27, 43, 93–125, 153, 214, 259, 262, 267–269, 300, 305, 312, 381, 420, 458, 462,
473, 491, 493, 495, 525, 527
grand vs. petty, 11, 19, 22, 26, 43, 47, 53, 267, 282–283, 292, 523–524
illegal vs. “legal”, 343
incentives, 11–14, 38, 126–127
petty, 11, 22, 185, 187, 200, 299, 523
public vs. private sector, 7
systematic vs. venal, 36
undermining of political legitimacy, 86, 90–91, 92, 165, 303–304, 335, 339, 462, 495–496, 523,
525–526
undermining of public goals, 58–61, 91, 99, 101–105, 165, 195, 523, 524, 525
undermining of reform, 86, 90–91
Corruption Perceptions Index (CPI).See under Transparency International
Costa Rica
Côte d’Ivoire, 271
transportation corruption, 130
utilities privatization, 157
Council of Europe, 462
anti-corruption conventions, 467–468
credit access, 54–55
criminal law.See also soft law; whistleblowing
active vs. passive bribery, 207–209
anti-trust laws, 222
bribery vs. extortion, 208, 226
bribes as deterrents, 227
bribes for illegal benefits, 219
bribes for scarce legal benefits, 219
corporate criminal liability, 214–216
cost-benefit of deterrence, 205–206
criminal vs. civil penalties, 223
entrapment, 221
extortion, 217–218
fiduciary duty, 223
fines vs. prison, 226
high corruption trap, 213–214
law enforcement corruption, 225–228
legalizing criminal activities, 129–130, 228, 269
maximal fines, 226
private non-profit associations, 224–225
privatizing law enforcement, 227–228
probability of detection vs. severity of punishment, 206
severity of punishment, 209–214
social harm and enforcement priorities, 209
sting operations, 221–222
Croatia
crony, 55
cronyism, 8, 11, 21, 60, 96, 104, 149, 252, 277, 280, 282, 360, 460
cross-country data, 14–27, 451–453. See also Transparency International, Corruption Perceptions
Index (CPI); World Bank, Control of Corruption Indicator (CCI)
cost benchmarks for public spending, 451–452
elite surveys, 39, 42–43
limitations, 451
listing debarred firms, 452–453
money laundering detection, 516–517
popular surveys, 44–46
culture and corruption.See under defining corruption
Cuomo, Andrew, 189, 353
customs service, 12, 19, 56–57, 62, 63, 65, 67, 75–76, 78, 79, 80, 94, 106, 114, 130, 131, 132, 133,
134–135, 143, 144, 175, 183, 184, 185, 196, 203, 241, 258, 280, 296, 299, 304, 305, 313,
332, 336, 394, 424, 426, 430, 433, 434, 457, 458, 459, 517
Cyprus, 22, 487
Czech Republic
judiciary, 385
Davoodi, Hamid, 32, 101, 283

debarment and cross-debarment, 151, 156, 215, 452–453, 457, 506
decentralization, 374, 378–382
competing jurisdictions, 379–380
financial, 381–382
hierarchical oversight, 379, 396
local government corruption, 380
defense spending corruption, 95–96, 98, 452, 471–472, 514
defining corruption, 7–11
cultural differences, 6, 22, 37, 47, 205, 233, 235, 236, 242, 243, 264–271. See also ethnography;
gender; religion
multinational “cultural sensitivity”, 267–269
types of reciprocity, 255, 121, 205, 236–242
della Porta, Donatella, 202
democracy, 7, 32, 34, 35, 37, 87, 102, 165, 233, 237, 244, 259, 264, 266, 271, 275–277, 287, 288,
291, 293, 296, 319, 320, 326, 328, 330, 331, 334, 337, 339, 341–373, 388, 396, 402, 407,
410, 411, 416, 476, 494, 495–496, 525, 528–529. See also decentralization; electoral
corruption
blocking legislation, 345–346, 361
buying legislation, 346
election as deterrent to corruption,341, 342, 372, 374, 397, 417
election funding, 242, 342, 346, 350, 351–356, 362, 422
legislative conflict of interest, 360, 361, 422
lobbying, 12, 360–364, 372, 422
parliamentary vs. presidential systems, 347–349
party discipline, 344–345, 350–351
plurality vs. proportional representation, 346–347, 348–350, 421–422
public goods vs. private benefits, 349–351
revolving door jobs for politicians, 341, 355, 422
separation of legislature and executive, 374, 375
Denmark, 16, 17, 22, 43, 44
lobbying, 361
Deutsche Bank
development, 3–7, 21, 29, 31, 33, 38, 101, 105, 111, 113, 233, 247, 251, 268, 270, 271, 280, 283,
286, 291, 306, 324, 329, 380, 397, 406, 410, 425, 426, 428, 441, 442, 447, 450, 452, 454,
455, 457, 461, 466, 468, 476, 488, 489, 495, 499, 505. See also United Nations,
Development Goals
di Tella, Rafael, 30, 398, 403
distribution of income, 3, 4, 7, 19, 33, 36, 125, 165, 168, 201, 319, 325, 384
doctors, 14, 73, 74, 122–123, 241, 513. See also health system corruption
Dodd-Frank Act, 477, 478
drug trade.See under organized crime
Dubai
Duvalier family, 279, 282
East India Company, 433

Easterly, William, 10, 442
Eastern Europe, 447, 466. See also individual countries
conditions for reform, 421
credit access, 55
privatization, 159
transition to democracy, 496
utilities corruption, 119
violent resolution of disputes, 390
economic growth
measure of well-being, 6
relation to corruption, 31–33, 35–36
Economic Union of West African States, 339
Ecuador
auditing, 396
judiciary, 388, 388
privatization, 118
education. See also teachers
education system corruption, 59–60, 64, 241, 328, 380, 382
investment in, 30, 32, 33
e-government, 35, 139–146, 203, 221, 257, 339, 376, 400, 408
cameras, 143
database efficiencies, 143
information sharing, 142
information transparency, 141
monitoring government, 141–142, 143–144, 193
on-line submission, 141
privacy and security concerns, 145–146
reducing regulatory discretion, 128, 144, 527
vulnerabilities, 145
Egypt, 90, 102, 141
Arab Spring, 316, 317
fall of Mubarak, 417
kleptocracy, 279, 280
permit corruption, 128
El Salvador
libel laws, 404
electoral corruption, 8, 9
buying votes, 12, 267, 342, 364–366, 367, 372, 419
campaign funding, 341, 342, 343, 350, 356–357, 366, 372–373, 528
fraud, 367
Elf, 111
embezzlement, 9, 11, 12, 19, 71, 122, 222, 280, 300, 309, 331, 379, 382, 442, 506, 514, 526
Enron, 120, 123, 352
entrusted power, 9
environmental degradation, 33, 34, 72, 105, 110, 112, 113–115, 297–298, 409, 482, 484, 494, 525
environmental regulation, 136, 137, 143, 377
Equatorial Guinea, 17
equity, 5, 527
Estonia
ethical universalism, 6
ethics, 27, 121, 175–178, 247, 253, 266, 351, 363, 422, 429, 459, 470, 472, 483, 495, 496, 497, 498,
502, 523, 524, 528
Ethiopia
ethnography, 262, 264–266, 270
Europe. See also individual countries and European Union
banking corruption, 124
commodity taxes, 54
criminal law, 219
health system corruption, 74
judicial independence, 385
organized crime, 304, 295, 297
European Bank for Reconstruction and Development, 452
European Police Office (Interpol), 295, 506
European Union
anti-corruption agencies, 391
auditing of aid programs, 457
competitive anti-corruption, 379
Emissions Trading System, 137
freedom of information, 400
legislative conflict of interest, 358
money laundering, 491, 512–513
organized crime, 295, 304
regional integration, 132
subsidies, 123
whistleblowing statutes, 409
exchange of favors, 8, 262, 264
exchange rates, 55–56, 124
Exim Bank of China, 325
extortion
definition, 8
Extractive Industries Transparency Initiative (EITI), 326, 470–471, 472, 477, 490, 502
Exxon Mobil, 510
Facebook, 310
FIFA, 96, 218, 221, 224–225, 506
Fiji
credit access, 55
Financial Action Task Force (FATF). See under money laundering
Finland, 17, 22, 43, 44
Firestone, 510
firm efficiency vs. market efficiency, 494–495
Fisman, Raymond, 77, 80, 84, 104, 120, 133, 243, 360, 362, 517
fixed supply corruption, 57–61, 94, 109, 524
Foreign Corrupt Practices Act (FCPA). See under United States of America
foreign direct investment (FDI), 12, 30–31, 42–43, 101, 284, 303, 446, 462, 465, 478, 479, 495
forestry corruption, 110, 111–115, 137
Reducing Emissions from Deforestation and Forest Degradation (REDD), 115
fossil fuels corruption, 110–111, 194, 324–325, 326–327
France
civil service ethics codes, 176
environmental regulation, 377
independence of legislature, 357
peer reporting of corruption, 497
political neutrality in civil service, 177
Fujimori, Alberto, 404, 427, 514
Gambetta, Diego, 255, 285, 302

Gambia
gambling, 129, 195, 196, 313, 380
Garfield, James, 429
GATT, 426
Geddes, Barbara, 417–421, 422, 423, 444
gender, 234, 235, 243–246, 248
Georgia
criminal law, 214
judiciary, 385
organized crime, 297, 303
privatization, 160
Germany, 130, 261
corporate criminal liability, 215, 216
criminal law, 213
election funding, 353, 369–371
Frankfort Airport scandal, 94
judicial review, 407
prosecutions under OECD Anti-Bribery Convention, 464
Ghana, 22
civil service pay levels, 169, 202
Public Expenditure Tracking Surveys, 398
social norms, 265, 269
tax and tariff reform, 183–184
gift-giving. See defining corruption, types of reciprocity
Glaeser, Edward L., 37, 117, 424, 430
Global Commission on Drug Policy, 228
Global Competitiveness Report, 68, 300
Global Corruption Barometer (GCB). See under Transparency International
Global Financial Integrity, 306, 443
Global Integrity, 340, 451
Global Witness, 38, 114, 137, 269, 340, 481, 488
globalization, 5, 295, 518
Goldman Sachs, 124
Goldstone, Richard J., 485
Google, 310
Gorbachev, Mikhail, 258
Gramm, Phil, 352
Gramm, Wendy, 352
greasing the wheels hypothesis, 32
Greece
debt crisis, 433
Group of States against Corruption (GRECO), 512, 217, 467, 484
Guatemala, 321
judicial corruption, 322–323
outsourcing, 200
police corruption, 322, 323, 336
post-conflict society, 317–324, 325, 326, 327, 335, 336
Guinea, 43
mining corruption, 115–116
Gulf War, 486
Guyana
concession corruption, 110
Hadi, Abdu Rabbu Mansour, 91

Haiti, 43
kleptocracy, 279, 280, 281, 282, 283
military training, 460
mining corruption, 483
Halliburton, 360
Hawke, Robert, 416
head of state, 511, 11, 12, 14, 80, 103, 109, 279, 312, 348, 425
health system corruption, 72, 73–74, 97, 122–123, 133, 241, 328, 380, 381, 472, 506–507
Heritage Foundation
Index of Economic Freedom, 263
Hewlett Packard, 98
hierarchical corruption, 185–189, 257
bottom-up, 185–186, 187–188
internal vs. external, 187
top-down, 185–186
hiring corruption,8, 11, 14, 58, 170, 179, 247, 289, 424, 437
Hobbes, Thomas, 263
Holy See
Honda, 122, 222
Honduras
health system corruption, 506–507
Hong Kong
housing supply corruption, 59
Independent Commission against Corruption (ICAC), 392–393, 394
hospitals, 14, 69, 72, 73, 97, 100, 122, 136, 142, 180, 381, 398, 435, 452
HSBC
money laundering, 311, 514
Human Rights Watch, 325
Hungary
criminal law, 218
Hunt, Jennifer, 46, 477
Huntington, Samuel, 263
Hussein, Saddam, 486, 485
Iberia, 118
illegal activity, 79–83
informal vs. criminal, 79
vulnerability to extortion, 80, 81
impartiality, 6, 10, 38, 146, 153, 165, 176, 235, 250, 252, 253, 255, 256, 257, 266, 396, 416, 430,
528
import and export licenses, 56–57, 58, 62, 136
imports, 56, 62, 69, 78, 80, 119, 135, 517
incentive bribes, 66–69, 84
red tape burden, 68–69
inclusive institutions, 10
India, 18, 43, 44, 46, 136, 138, 186, 277
appeal processes, 408
class differences, 257
Commonwealth Games scandal, 96
criminal law, 207
defense spending corruption, 98
health system corruption, 74, 122
irrigation supply corruption, 60, 233
outsourcing, 200
permit corruption, 128
police corruption, 63, 64
tax and tariff corruption, 135, 186, 196
telecoms corruption, 83, 84
Indonesia, 20, 22, 62, 65, 85, 104, 190, 195, 300, 361
auditing, 397, 457
civil service recruitment, 170
colonial history, 268
e-government, 141
Exxon Mobil, 510
forestry corruption, 111, 114
lobbying, 360
oil wealth as obstacle to reform, 441
regulatory corruption, 72
religion, 247
weak state authority, 288
industrial policy, 29–31
inequality and corruption, 33
influence peddling, 9, 123, 523
initial public offerings (IPOs), 123, 160
Institute for Economics and Peace, 383
Integrity Pacts, 156, 458, 476, 502, 529
Inter-American Development Bank, 452
international action, 529–530. See also cross-country data
arbitration, 473–475
conditional aid and lending, 461
conventions, 462–469
extradition agreements, 505
monitoring international organizations, 481–488
Mutual Legal Assistance treaties, 505
soft laws, 462, 469–473
tribunals, 475–476
International Bar Association, 504
International Center for the Settlement of Investment Disputes (ICSID). See under World Bank
International Chamber of Commerce (ICC), 494, 503, 504
International Competitive Bidding, 151, 154
International Country Risk Guide (ICRG). See under PRS Group
International Court of Justice (ICJ), 468, 484–485
International Crime Victims Survey, 45, 46, 48
International Federation of Accountants, 470
International Labor Organization Administrative Tribunal (ILOAT), 484, 485
International Law Commission (ILC), 485
International Monetary Fund (IMF), 5, 57, 132, 202, 325, 330, 457, 460, 481, 489–490
International Organization of Supreme Audit Institutions, 470
Iran
Iraq, 43, 68, 200, 457
lobbying, 360
oil-for-food scandal, 467, 487
outsourcing, 199
irrigation supply corruption, 60–61, 136
Israel
Italy
auditing, 397
broadcasting monopoly, 95
Clean Hands investigation, 95, 102, 356–357
election funding, 366
electoral corruption, 351, 356–357, 366, 368
organized crime, 255–256, 296, 299, 303
political control of media, 402
privatization, 120
procurement corruption, 95, 102, 105, 109
regional corruption index, 451, 100
Ivory Coast
privatization, 118
J.P. Morgan, 11
Jackson, Andrew, 423
Jamaica, 159
Japan, 22, 44, 501
credit access, 55
electoral corruption, 351, 353, 366, 368
gift-giving, 255
judicial review, 407
procurement corruption, 154–155
procurement reform, 155
Jersey
Johnson & Johnson, 74
Johnston, Michael, 290–292, 293
Jordan
oil-for-food scandal, 485
judiciary, 382
accountability, 384–387
Alternative Dispute Resolution, 390–391
civil law systems, 386, 389
clarity of laws, 388–389
common law systems, 387
competence, 384, 385, 386, 388
corruption, 8, 80, 81, 225–228, 313, 314, 322–323, 328, 331, 384, 386, 387–388, 528
independence, 374, 383–389
prosecutors, 389–390
Katrina (Hurricane), 200

Kaufmann, Daniel, 30, 34
Kazakhstan
fossil fuels corruption, 110, 505
military service, 63
Kelman, Steven, 148–150, 151, 153, 154, 155
Kelvin, Lord, 14
Kenya, 44, 65
abuse of anti-corruption agencies, 394
harambee, 267
kickbacks, 10, 11, 12, 14, 20, 74, 84, 93, 94, 95, 96, 97, 101, 102, 103, 105, 107, 110, 121, 122, 124,
142, 157, 167, 234, 260, 286, 294, 313, 339, 342, 343, 353, 357, 361, 380, 381, 422, 426,
462, 476, 484, 485, 487, 497, 514, 519, 525, 530
Kilby, Christopher, 4
Kilpatrick, Kwame, 276
Kirchner, Cristina, 403
Kirchner, Néstor, 403
Kiyingi, Robinah, 453
kleptocracy, 9, 12, 263, 264, 277, 278–287, 288, 381, 426, 427, 443, 460, 523, 525, 530
bilateral monopolies, 285–287
control of bureaucracy, 284
monopolist character, 278
privatization and nationalization, 281–282
regime change, 281, 283
regulation, 281
size of government, 279
taxes and tariffs, 280–281
weak vs. strong, 278–279, 282, 286
Klitgaard, Robert, 81, 127
Kohl, Helmut, 370
Korea, 22
civil service corruption, 185
Confucianism, 247, 266
construction industry corruption, 69, 69
credit access, 55
e-government, 140
marine regulation corruption, 74–75
procurement corruption, 107, 154, 155
qualification-for-benefits corruption, 63
social norms, 266
Kosovo
Power Project, 482
KPMG, 52, 72, 123, 325, 497
Kraft Food, 222
Kunicová, Jana, 346, 347, 348, 420, 421
Kuwait, 486
La Porta, Rafael, 383, 384

Lambert-Mogiliansky, Ariane, 107, 190
Lambsdorff, Johann Graf, 198
land reform, 61, 196, 255, 407, 440–441
Latin America, 33, 421, 466. See also individual countries
Alternative Dispute Resolution, 390
auditing, 396
civil service reform, 173, 179
democracy and reform, 417
grassroots participation, 410
homicide rate, 298
inflation, 432
judiciary, 385, 388–389
land reform, 440–441
libel laws, 404
police reform, 245
selective reform, 444
voting systems, 417–421
Latin American Public Opinion Project (LAPOP), 46
Latvia
League of Arab States
Arab Anti-Corruption Convention, 468
Lebanon, 43
credit access, 55
Lee Kuan Yew, 427
Leff, Nathaniel, 263
legitimacy of government. See corruption, undermining of political legitimacy
Lehman Brothers, 312
lending, 5, 6, 38, 55, 101, 327, 411, 442, 446, 449, 455, 460, 461, 481, 483, 489, 504
Lessig, Lawrence, 343, 352, 354, 357
Liberia, 22, 44, 91
Firestone, 510
libel laws, 404
libertarianism, 90, 262–264, 266, 268, 269–270, 271
Libya, 17, 43
Lithuania
Lockheed, 463
low-income countries, 4, 262
Lui, Francis, 83, 136, 213
Luxembourg, 22
Macolin Convention, 96
mafia. See organized crime
Malawi, 455
Malaysia
telecoms corruption, 112
utilities corruption, 112
Malta
Manion, Melanie, 219, 392
Manzetti, Luigi, 117, 119
Marcos, Ferdinand, 426, 460
Mauritania, 43
Mauro, Paolo, 28, 29
media
international assistance, 453–454
international journalist associations, 470
libel laws, 403–404, 453
political control of, 402–405
role in exposing corruption, 396, 402, 404–405, 429–432, 526
social media, 454, 528
Menes, Rebecca, 425, 436, 437
Mexico, 18, 22, 43, 44, 46, 88, 130, 379
anti-corruption reform, 421
archaeological destruction, 116
auditing, 396
business registration, 79
clenbuterol, 261
education system corruption, 60, 60–61
e-government, 141
election funding, 356, 369
Federal Institute for Access to Information, 401
fossil fuels corruption, 111, 194
homicide rate, 299
import and export licenses, 78, 57
interpersonal trust, 249
judiciary, 388
libel laws, 404
military service, 64
money laundering, 310–311, 513
organized crime, 295–296, 299–301, 302, 305, 323, 353, 461
police corruption, 65, 172–173, 245, 461
political control of media, 403, 403
privatization, 117
public accountability, 382
tax and tariff reform, 134–135, 426, 432
women in politics, 245
Middle East, 10, 313, 359, 427, 466, 496
middlemen, 197–198, 229
Millennium Development Goals. See under United Nations
ministers, 11, 83, 96, 102, 105, 110, 118, 283, 391, 399
Mobutu Sese Seko, 170, 279–280, 417, 441
Moi, Daniel Arap, 267
Moldova, 22
money laundering, 38, 83, 223, 295, 306–315, 448, 451, 466, 468, 491, 505, 506, 507, 518–519,
528. See also gambling; organized crime
banks, 310–311, 312–313, 314, 508, 510, 512, 514–515
Bitcoin, 515–516
cash contraband, 311
cross-country data, 516–517
economic effects, 306–307
effectiveness of international response, 513, 514–516
Financial Action Task Force (FATF), 451, 511–512, 513, 515
hawala, 313
identity theft, 295, 311, 516
international response, 505–518
Mérida Initiative, 513
Politically Exposed Persons (PEPs), 310, 312, 313, 506, 511, 512
repatriation of funds, 513–514
United Nations Vienna Convention, 508
Mongolia, 22
Montesinos, Vladimir, 404–405, 514
Morris, Stephen, 249, 291, 46
Morsi, Mohamed, 90
Mozambique, 321
education system corruption, 59, 328
post-conflict society, 317–321, 327–330, 335–336, 338
RENAMO, 327–328, 335
tax and tariff corruption, 76, 79
Mubarak, Hosni, 10, 90, 102, 279, 280, 417
multinational firms, 491–504, 518, 519
ethics vs. profit maximization, 496–498
obligations toward political legitimacy, 495–496
Prisoner’s Dilemma game vs. cooperation game, 499–502, 504
responsibilities as moral persons, 493–496
social contract, 494
Mungiu-Pippidi, Alina, 10
Museveni, Yoweri, 427
Myanmar
Nahimana, Terrance, 332

Nazarbayev, Nursultan, 110
Nazis, 10
neoclassical economics, 253–254
Nepal, 455
Arun III dam project, 483
nepotism, 8, 9, 14, 60, 93, 252, 523. See also trust, interpersonal
Netherlands
New Zealand, 15, 17, 43, 130
Chinese infant formula scandal, 73
government reform, 419
telecoms regulation, 159
Niger
transportation corruption, 130
Nigeria, 22, 102
credit access, 55
import and export licenses, 56–57
oil wealth as obstacle to reform, 441, 442–443
open government, 395
pharmaceutical regulation, 158
procurement corruption, 98, 101–102, 105, 252
social norms, 265, 269
Nkurunziza, Pierre, 336, 331
noble cause corruption, 10
nongovernmental organizations (NGOs), 5, 9, 22, 114, 137, 201, 269, 307, 332, 394, 395, 403, 406,
407, 453, 454, 456, 457, 461, 463, 464, 468, 473, 481
Nordic countries, 15, 34
Nordic Investment Bank, 452
North American Free Trade Agreement (NAFTA), 57, 78, 132, 135, 296, 473
North Korea, 17, 43
Norway, 88, 17, 43
Obama, Barack, 178, 422

Obamacare, 200
Obiang Mangue, Teodoro Nguema, 312
OECD, 87, 311, 462, 466, 468, 469, 488, 495, 504
Anti-Bribery Convention, 94, 219, 462–465, 469, 477, 478, 479, 481, 488, 503, 504, 530
foreign bribery study, 88
Working Group on Bribery in International Business, 484
oil-for-food scandal. See under United Nations
Olken, Benjamin, 20, 48, 188, 190, 191, 251, 300, 397, 457
Olson, Mancur, 188, 278, 460
Olympics Committee, 96, 97, 224
open access orders, 10
open government, 395, 455, 528
auditing, 396–399, 455, 457, 526, 528
Freedom of Information Acts (FOIAs), 399–401, 402, 528
open meetings, 401–402
public accountability, 375–378
Organization for American States
Inter-American Convention against Corruption, 466, 488, 506
organized crime, 79, 80, 113, 151, 167, 209, 225, 228, 271, 285, 287, 293, 294–306, 307, 311, 313,
314–315, 321, 353, 387, 390, 448, 460, 491, 507–508, 517–518, 519, 526, 528. See also
gambling; money laundering; prostitution
causes, 295–296
cooptive philanthropy, 297
definition, 295
drug trade, 29, 34, 56, 79, 82, 129, 180, 195, 196, 219, 227, 228, 259, 285, 294, 295, 296,
297–298, 300, 302, 304, 306, 307, 311, 312, 314, 315, 323, 324, 335, 379, 508, 510,
511, 518, 519
extortion, 301, 302
government contracts, 302–303
human trafficking, 34, 294, 297, 314, 510
infiltration of legitimate business, 302
pirated goods, 302
post-conflict society, 317–324, 327, 335, 336
privatization, 303
protection rackets, 255–256
violence, 306, 285, 297, 298–299, 302, 303, 304, 305
Ostrom, Elinor, 248
Ottoman Empire
tax farming, 181
Pakistan, 22, 136

Axact group, 505
credit access, 55
e-government, 143
environmental regulation corruption, 72
irrigation supply corruption, 61
judiciary, 385
lobbying, 360
Panalpina, 111
Panama
libel laws, 404
Papua New Guinea
Paraguay, 22
civil service recruitment, 170
exchange rates, 55
kleptocracy, 279
Yacyreta Dam, 482
Paris Declaration on Aid Effectiveness, 458
Pearson’s Law, 14
Pemex, 67, 98, 194, 260
Pérez, Carlos Andrés, 399, 428
Pérez, Otto, 323
Persson, Torsten, 348, 247, 348
Peru, 22, 34, 44, 46, 514
defense spending corruption, 98, 514
dispute resolution corruption, 390
drug trade, 297
gender differences, 245–246
judiciary, 388
libel laws, 404
police corruption, 245–246
privatization, 117
Philippines
customs reform, 184
foreign aid as obstacle to reform, 442
foreign aid corruption, 460
import and export licenses, 56
tax and tariff reform, 134, 426
Pieth, Mark, 224, 463, 473, 485
Piga, Gustavo, 146–147
Pinochet, Augusto, 312, 420
Poland
police corruption, 14, 23, 27, 46, 63, 65–66, 81–82, 84, 129, 130, 167, 170, 182, 185, 186, 195,
225–228, 240, 245–246, 260, 263, 300, 302, 305, 313, 314, 322, 323, 328, 336, 392, 393,
460
political action committees (PACs), 355, 371
Portillo, Alfonso, 322
post-conflict society, 316–340, 529. See also under organized crime
decentralization, 378
elite continuity, 322, 324, 326, 327, 335, 336, 338
ethnicity-based power sharing, 330–334, 336, 337
international aid, 316, 320–321, 327–330, 337–338
law enforcement, 316, 322–323, 324
military control, 322, 338, 339
political legitimacy, 316, 318–319, 321
poverty, 316, 322, 324, 331, 332–333, 334, 336
resource wealth, 319, 321, 324–327, 330, 335
weak institutions, 316, 320, 322, 323, 324, 329, 334, 335, 336, 337, 339
poverty, 3–4, 6, 33, 61, 143, 160, 186, 316, 319, 321, 322, 324, 331, 332–333, 334, 336, 454, 461,
492, 523
price. See defining corruption, types of reciprocity
Pride International, 111
principal–agent model, 9
prison corruption, 82–83
Prisoner’s Dilemma game, 84, 85, 499, 500
private sector corruption, 121–124, 222–225, 275
anti-corruption pacts, 407
collusion, 123
interbank interest rate manipulation, 55, 124
monopoly, 121, 223, 277, 494, 527
monopsony, 121
quality fraud, 123
stock price manipulation, 123
sub-prime mortgage derivatives, 123–124
privatization, 303
deregulation, 120
inside information, 117
monopoly, 118–119, 158
potential to reduce corruption, 117, 157–160, 189
regulatory corruption, 119–120, 158, 458
value uncertainty, 117–118
procurement corruption, 93–109, 112, 154–155, 252. See also procurement reform
bidding collusion, 106, 107–108, 154–155
bidding specifications, 106
cement demand, 101–102
cost overruns, 97–98
disbarment, 211
excessive budgeting, 97–98, 99–100
inside information, 105
investor strategies, 103
low bidding, 109
offsets, 108
overestimation of demand, 105
sealed bidding, 106
time path of benefits and costs, 102, 103–104
procurement reform, 146–157, 418, 455, 468–469
criminal prosecution vs. regulation, 149–150
flexible vs. rules-based approaches, 146–147, 148, 149
International Competitive Bidding, 147
off-the-shelf purchase, 147, 150, 153–154
output-oriented vs. goal-oriented specifications, 153
past performance evaluation, 149, 151–152
performance-based contracts, 149
prebid communication, 149, 151, 152–153
public monitoring, 146, 152–153
sealed bidding, 147
sole-source contracts, 148
types of purchase, 147
prostitution, 73, 130, 295, 298, 315
PRS Group
International Country Risk Guide, 42–43, 47
International Country Risk Guide (ICRG), 41
Prussia, 427
Public Accounts Committees (PACs), 397, 398
public interest lawsuits, 406–407
public service fraud, 8, 9, 16, 24, 26, 34, 44, 63, 66
Publish What You Pay (PWYP), 470–471
Putnam, Robert, 256
Qaddafi, Muammar, 103, 110

Qatar, 43
Quah, Jon S.T., 393
qualification-for-benefits corruption, 63–66
quid pro quo. See defining corruption, types of reciprocity
Rachid, Rachid Mohamed, 102

Racketeer Influenced and Corrupt Organizations Act (RICO). See under United States of America
Ramos, Fidel, 442
Recanatini, Francesca, 34, 456
regulatory corruption, 69–75. See also anti-corruption measures, eliminating corruption-prone
regulations and reducing regulatory discretion; civil service refom, flexible vs. rule-based
approach; environmental regulation; procurement reform, prosecution vs. regulation
Reinikka, Ritva, 382, 401
religion, 35, 234, 235, 247–248
rent-seeking, 31, 62, 64, 72, 104, 157, 228, 279, 288, 332, 335, 343, 347, 377, 440, 441, 442, 457
Reporters without Borders, 453
Reuter, Peter, 302, 306
Riggs Bank, 312
Rodrik, Dani, 6, 449
Romania, 22, 339
Rose-Ackerman, Susan, xxiii, 27, 29, 61, 109, 165, 185, 205, 248, 262, 275, 278, 279, 316, 317,
321, 324, 338, 346, 347, 348, 374, 375, 377, 382, 420, 421, 431, 446, 464, 476, 477
Rothstein, Bo, 10, 256
Russia, 18, 22, 43, 46. See also Soviet Union
credit access, 55
democratization, 447
forestry corruption, 110, 114, 116
judiciary, 80, 385
Olympics bid, 97, 223
organized crime, 255, 301, 305
private sector corruption, 224
real estate corruption, 62
understanding of markets, 259
Rwanda, 319, 334, 337
Saleh, Ali Abdullah, 91

Salinas, Carlos, 418, 426
Sanader, Ivo, 276
schools, 4, 14, 59, 60, 63, 64, 69, 71, 72, 123, 193, 238, 241, 260, 297, 380, 382, 393, 398, 434,
452. See also education
self-dealing, 10, 20, 21, 53, 119, 124, 165, 166, 167, 199, 205, 270, 276, 319, 334, 359, 374, 383,
384, 417, 428, 458, 460
self-interest, 6–7, 10, 175, 187, 234, 236, 248, 249, 250, 253, 263, 269, 419, 420, 494, 496, 500,
524
Serbia, 22
Serono, 122–123
Serpico, Frank, 52
Sevan, Benon, 485
Shell, 111
Shleifer, Andrei, 76, 263, 283
Sicily
organized crime, 255–256
Siemens, 478
Sierra Leone, 44
e-government, 143
Silk Road, 516
Singapore, 16, 43
Corrupt Practices Investigations Bureau (CPIB), 393
libel laws, 404
monitoring of civil service, 393
Slovakia
privatization, 118
social norms, 233, 234–235, 236, 524
social science policy evaluation, 448–450
socialism, 119, 303, 328, 359
Solomon Islands, 22
Somalia, 68, 10, 17, 43
Sonangol, 325, 326
Søreide, Tina, xxiii, 37, 88, 457, 470
South Africa, 337
customs corruption, 65
exchange rates, 56
South Sudan, 17
Soviet Union, 447
media scrutiny of corruption, 431
privatization, 159
Spain
sports bodies corruption, 96, 218, 221, 223, 225
Sri Lanka
judiciary, 385
Stalin, Joseph, 258
stock, 8, 14, 73, 104, 108, 120, 123, 133, 216, 282, 360, 361, 439, 463, 471, 478, 502
Stroessner, Alfredo, 279
Sudan,17, 18, 22, 43, 44, 47–48, 69
Suharto, 20, 85, 104, 114, 170, 195, 282, 284, 288, 360, 426
Super-PACs, 355
Surinam
Sustainable Development Goals. See United Nations, Millennium Development Goals
Svensson, Jakob, 62, 67, 71, 84, 398
Sweden, 17, 43
Switzerland, 17, 22
FIFA scandal, 506
money laundering, 309, 513–514
tax leniency, 224
WTO Revised Agreement on Government Procurement, 469
Syria
Tabellini, 348
Tabellini, Guido, 30, 247, 348
Taiwan
criminal law, 207
Tanzania
Tanzi, Vito, 101, 283
tax and tariff corruption, 75–76, 133, 134–135, 185, 186, 196, 459, 517
tax evasion, 75, 76, 91, 114, 125, 132, 134, 186, 218, 296, 298, 380, 403, 517, 524
tax farming, 83, 181
teacher, 59
teachers, 8, 14, 59, 64, 143, 172, 177, 241, 382, 398, 525. See also education
terrorism, 306
Thailand
police corruption, 63, 186
privatization, 118
Thatcher, Margaret, 416
Thoreau, Henry David, 87
tips. See defining corruption, types of reciprocity
Tirole, Jean, 238, 257, 392
Total S.A., 467
Transparencia Mexicana
Encuesta Nacional de Corrupción y Buen Gobierno, 23
Transparency International, 9, 38, 97, 156, 267, 269, 340, 385, 405–406, 451, 453, 456, 463, 464,
470, 471–472, 481, 488, 503
ASEAN Integrity Community, 468
Bribe Payers Index (BPI), 88
Corruption Perceptions Index (CPI),5, 15–20, 21, 23–24, 26, 27, 29, 39, 72, 88, 111, 322, 336,
393, 479
Defence Companies Anti-Corruption Index, 502
Global Corruption Barometer (GCB), 22–24, 27, 44–45, 47, 66, 81, 88, 127, 225, 246, 328
Treisman, Daniel, 247
Trinidad and Tobago
trust, 234, 235–236
generalized, 249–250, 252, 253, 256
institutional, 253–256
interpersonal, 250–253, 254, 255–256, 353
vicious and virtuous cycles, 256–262
Tunisia
Arab Spring, 317
fall of Ben-Ali, 417
tax farming, 181
Turkey, 88
Fire Department corruption, 63
judiciary, 385
social media, 528
Uganda, 44
import and export licenses, 62
incentive payments, 67
Ukraine, 22
civil service pay levels, 168, 170
fall of Yanukovych, 417
incentive bribes, 66–67
regional corruption, 234
weak state authority, 287–288
Union of South American Nations, 339
United Arab Emirates, 43
United Kingdom. See Britain
United Nations, 87, 95, 115, 234, 320, 330, 462, 487, 488, 506
Administrative Tribunal (UNAT), 484, 485, 487
Appeals Tribunal, 484, 485, 487
Code of Conduct on Transnational Corporations, 495
Comtrade, 517
Convention against Corruption (UNCAC), 465–466, 468, 478, 480, 488, 508, 511, 512
Development Program (UNDP), 461, 468, 470, 476
Dispute Tribunal, 484, 485, 487
Global Compact, 470, 503
Human Development Index (HDI), 29, 31
Millennium Development Goals, 3, 5
Model Code, 147
Mozambique, 327–328
Office on Drugs and Crime, 297, 468, 504
oil-for-food scandal, 485–487, 514–515
Palermo Convention (UNTOC), 510
Reducing Emissions from Deforestation and Forest Degradation (REDD), 115
Vienna Convention, 508, 513
United States of America, 342, 18, 33, 37, 43, 44, 46, 136, 319, 324
Administrative Procedures Act (APA), 375–376
Agency for International Development (USAID), 130
Anti-Patronage and Progressive periods, 415
automobile industry corruption, 122, 222
banking corruption, 128
blocking legislation, 361
Central Intelligence Agency (CIA), 399, 506
Chamber of Commerce, 476
civil service ethics codes, 175–176, 177–178
civil service incentive bonuses, 182–183
civil service job-seeking, 177
competing jurisdictions, 380
competitive anti-corruption, 379
corporate anti-corruption efforts, 504
corporate gender quotas, 246
corruption scandals, 429
Crédit Mobilier scandal, 425
criminal law, 208, 209, 211–212, 218, 219, 220
crisis-driven reform, 429, 432
defense spending corruption, 95–96
Dodd-Frank Act, 471, 480
durability of reform, 422
e-government,143, 376, 400
election funding, 351, 352, 353–356, 362, 368–369, 370, 371–372
executive corruption, 378
Federal Bureau of Investigation (FBI), 95, 218, 221, 379, 506
federal oversight, 379
Food and Drug Administration (FDA), 74, 123
Foreign Corrupt Practices Act (FCPA), 5, 87, 221, 222, 461, 462–465, 476–481, 484
fossil fuels corruption, 110–111
Freedom of Information Act (FOIA), 400, 400
Freemasons, 431
General Accounting Office, 394
Government Accountability Office (GAO), 396, 398
Government in the Sunshine Act, 401–402
health system corruption, 74, 122–123
institutionalizing reform, 439–440
judiciary, 384, 387
libel laws, 403–404
lobbying, 360, 361, 363–364
media scrutiny of corruption, 430–431
money laundering, 310–311, 491, 507, 508, 513, 514, 516–517
nineteenth-century reform, 417, 423–425, 433–434, 435–436
Office of Federal Procurement Policy, 148
one-sided fee shifting, 407
organized crime, 296, 299–300, 302, 517–518
outsourcing, 201, 199–200
Pendleton Act, 423, 434
police corruption, 84, 143, 186
political corruption, 276, 351
political machine cities, 436–438, 440
political neutrality in civil service, 177
political system, 345–346
postal service reform, 435–436
prison corruption, 82–83
procurement corruption,97, 101, 106, 108, 109, 148, 325
procurement reform, 148–151, 152, 153
Prohibition, 129
prosecutors, 387, 389
public interest lawsuits, 406
qualification-for-benefits corruption, 63
Racketeer Influenced and Corrupt Organizations Act (RICO), 511
regional corruption, 234
Securities and Exchange Commission (SEC), 74, 121, 463, 471, 507, 510
separation of legislature and executive, 377
social norms, 270
tax and tariff corruption, 75, 133
Teapot Dome scandal, 430
training foreign militaries, 460
training foreign police, 460
trust in government, 343
whistleblowing, 409
Uruguay
anti-corruption reform, 419, 420
resistance to reform, 415
utilities corruption, 75, 109, 112, 120, 141, 155, 157, 199, 245, 437
utility maximization, 7
Vanuatu, 22
ombudsman, 409
Vanucci, Alberto, 202
Varese, Federico, 307, 295
Vargas, Getúlio, 427
variable quantity and quality corruption, 61–62
Venezuela, 43
anti-corruption reform, 419
exchange rates, 56
oil wealth as obstacle to reform, 441
presidential corruption, 399
privatization, 118
windfall oil profits, 424
vicious circle, 10, 33, 36, 46, 69, 76, 96, 131, 236, 252, 257, 258, 259, 260, 262, 294, 296, 299,
300, 305, 314, 324, 335, 336, 525
vicious spiral. See vicious circle
Vietnam
Voigt, Stefan, 387
Volcker, Paul, 487, 485
Wachovia, 311
Wade, Robert, 233
Walmart, 116
Washington Consensus, 6, 6
water, 34, 525. See also environmental degradation; irrigation supply corruption; utilities corruption
Watergate, 356
weak state authority, 10, 287–288
Weber, Max, 247
Wei, Shang-Jin, 31
Western Express, 516
whistleblowing, 96, 127, 208, 218, 219–221, 339, 407, 409, 451, 453, 467, 470, 478, 484, 496, 497,
503, 526, 527, 528, 529
World Bank, 4, 115, 129, 138, 156, 169, 202, 203, 322, 330, 380, 406, 426, 446, 447, 450, 452, 457,
458, 459, 460, 461, 468, 476, 481, 485, 487, 488, 489–490
Administrative Tribunal (WBAT), 483–484
Afghan Reconstruction Trust Fund, 337
conditionality of programs, 456–457
Control of Corruption Indicator (CCI), 15, 16–20, 26, 39, 80, 111, 317, 393
Department of Institutional Integrity (INT), 484, 487
Enterprise Survey, 48
good governance priorities, 5
Inspection Panel (IP), 481–483, 484
International Center for the Settlement of Investment Disputes (ICSID), 473–474, 481
International Competitive Bidding, 147
Office of Business Ethics and Integrity, 483
Operations Evaluation Department, 459
poverty reduction, 4, 4
Procurement Guidelines, 152, 156
Public Expenditure Tracking Surveys, 398, 526
Stolen Asset Recovery Initiative (StAR), 514
World Economic Forum, 503
Global Executive Survey, 43
Partnering against Corruption Initiative, 503
World Health Organization (WHO)
Good Governance in Medicine (GGM), 472
World Justice Project
Rule of Law Index, 81
World Trade Organization (WTO), 147, 475, 476
Revised Agreement on Government Procurement (GPA), 468–469
World Values Survey, 45, 46, 48, 171, 249, 364
WorldCom, 123
Wortman, Charles, 157
Xi Jinping, 175
Yanukovych, Viktor, 417

Yao, Shuntian, 11
Yemen, 43, 44, 91
Arab Spring, 316
Zaire
fall of Mobutu, 417
kleptocracy, 279–280
mineral wealth as obstacle to reform, 441
privatization, 118
tax collection, 460
Zambia
Zedillo, Ernesto, 418
Zimbabwe, 22, 43

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CO RRUPTIO N AND G O VERNMENT

Bonnie J. Palifka is an Assistant Professor at the Tecnológico de Monterrey (ITESM), Campus

Cambridge University Press is part of the University of Cambridge.

Information on this title: www.cambridge.org/9781107441095

© Susan Rose-Ackerman and Bonnie J. Palifka 2016

First published 2016

Printed in the United States of America by Sheridan Books, Inc.

Library of Congress Cataloging in Publication Data

Identifiers: LCCN 2015038967| ISBN 9781107081208 (hardback) | ISBN 9781107441095 (paperback)

Classification: LCC JF1081.R675 2016 | DDC 364.1/323–dc23

LC record available at http://lccn.loc.gov/2015038967

ISBN 978-1-107-08120-8 Hardback

ISBN 978-1-107-44109-5 Paperback

Part I Corruption as an Economic Problem

3 Corruption in Procurement and Privatization

4 Reducing Incentives and Increasing Costs

5 Civil Service Reform and Bureaucratic Reorganization

6 Using the Criminal Law to Deter Bribery and Extortion

Part II Corruption as a Cultural Problem

9 Organized Crime, Corruption, and Money Laundering

10 Corruption in Postconflict State Building

11 Democracy: Corruption, Connections, and Money in Politics

12 Accountability beyond the Ballot Box

Part IV Reform Agendas: Domestic Political Will and

14 The Role of the International Community

15 International Cooperation: States, Firms, Banks, and Organized Crime

1.3 Sector-specific results from the 2013 Global Corruption Barometer

1.4 Global Corruption Barometer: Incidence of bribery in subsectors

1.5 Public opinion (GCB) vs. expert opinion (CPI)

1.6 Incidence (GCB) vs. expert opinion (CPI)

1.8 Causes and consequences of corruption

1.9 Corruption and development

1A.1 Global Corruption Barometer 2013: Incidence of bribery, by country

2.2 The Bribe Payers Index

3.1 Selected cost overruns

3.2 Procurement process

4A.1 Supply-side reforms

4A.2 Demand-side reforms

8.1 Types of corrupt governments

9.1 Corruption and organized crime

9.2 Money laundering flows

9.3 Corruption, organized crime, and money laundering

10.2 Corruption Perceptions Index in four countries vs. world average

1A.2 Comparing results across corruption indices: Percentile ranks

7.1 Payments by clients or customers

10.1 Nature of postconflict regimes

15.1 The twenty largest corporations in the world by sales

15.2 Selected international initiatives: Anti-corruption, anti-organized crime and anti–money

Box 1.1. Types of Corruption

cronyism Preferring members of one’s group – racial/ethnic, religious, political, or

accounting Intentional deception regarding sales or profits (usually in order to boost

electoral Manipulation of election results, through vote buying or threats to the

influence Using one’s power of decision in government to extract bribes or favors

Figure 1.5. Public opinion (GCB) vs. expert opinion (CPI).

3. Perceptions change more slowly than incidence. If an anticorruption campaign is undertaken,

1 World Bank, “Poverty Overview (Results),”

4 United Nations, “Sustainable Development Goals,”

13 The Washington Consensus, articulated by Williamson (1990), includes standard