CORRUPTION AND GOVERNMENT

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.
 CORRUPTION AND
GOVERNMENT
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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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

 fraud (usually in order to boost stock prices).

electoral Manipulation of election results, through vote

fraud buying or threats to the electorate, or by
falsification or destruction of votes.

public service Any activity that undermines the legal

fraud requirements of public service 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

peddling extract bribes or favors from interested parties.

conflicts of Having a personal stake in the effects of the

interest policies one decides.

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_TIPlainL
anguageGuide_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/14cha
se-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_CPITechnic
alMethodologyNote_EMBARGO_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_Statisti
cal_Assessment_CPI2012_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 September 27, 2015).

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_globalcorruptionba
rometer_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
September 27, 2015).

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_C
orruptionandHumanTrafficking_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

Data source Type Countries* CPI CCI

African Development Expert opinion 40/54 • •

Bank Governance Africa
Ratings 2013

Afrobarometer Public survey 22 Africa •

Asian Development Expert opinion 28 Asia •

Bank Country Policy
and Institutional
Assessments

Bertelsmann Aggregate index 41 OECD •

Foundation based on expert and EU
Sustainable opinion and
Governance quantitative dataa
Indicators 2014

Bertelsmann Expert opinion 129 • •

Foundation
Transformation Index
2014

Business Enterprise Executive survey 30 •

Environment Survey

Cingranelli Richards Expert opinion 194 •

Human Rights
Database and
Political Terror Scale
Data source Type Countries* CPI CCI

Economist Expert opinion 120 •

Intelligence Unit
Country Risk Ratings
2014

Economist Expert opinion 183 •

Intelligence Unit
Riskwire and
Democracy Index

European Bank for Expert opinion 33 •

Reconstruction and
Development
Transition Report

Freedom House Expert opinion 198 •

Freedom House Expert opinion 29/69 • •

Nations in
Transit/Countries at
the Crossroads 2014

Gallup World Pollb Public survey 161 •

Global Insight Expert opinion 203 • •

Business Conditions
and Risk Indicators

Global Integrity Expert opinion 62 •

Index
Data source Type Countries* CPI CCI

Heritage Foundation Expert opinion 183 •

Index of Economic
Freedom

IFAD Rural Sector Expert opinion 98 •

Performance
Assessments

iJET Country Expert opinion 197 •

Security Risk Ratings

Institute for Aggregate index 60/59 • •

Management and based on official
Development World statistics (2/3) and
Competitiveness executive opinion
Yearbook survey (1/3)c

Institutional Profiles Expert opinion 143 •

Database

International Budget Expert opinion 100 •

Project Open Budget
Index

International Expert opinion 71 •

Research and
Exchanges Board
Media Sustainability
Index

IREEP African Expert opinion 54 Africa •

Electoral Index
Data source Type Countries* CPI CCI

Latinobarometro Public survey 18 Latin •

America

Political and Executive survey 15 Asia + • •

Economic Risk USA/17
Consultancy Asian
Intelligence 2014

Political Risk Expert opinion 140 • •

Services (PRS)
International Country
Risk Guide

Reporters without Expert opinion 177 •

Borders Press
Freedom Index

Transparency Public survey 115 •

International GCB
Survey

U.S. State Expert opinion 185 •

Department
Trafficking in People
Report

Vanderbilt University Public survey 26 Latin •

Americas Barometer America
(LAPOP)
Data source Type Countries* CPI CCI

World Bank – Expert opinion 81/136 • •

Country Policy and
Institutional
Assessment 2013

World Economic Executive survey 143/144 • •

Forum Executive
Opinion Survey

World Justice Project Aggregate index 99 • •

Rule of Law Index based on public
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.

bThis source has been included in the CPI for some years but was not
part of the 2013 CPI.

cSee IMD World Competitiveness Center, “IMD World

Competitiveness Yearbook,” http://www.imd.org/wcc/wcy-world-
competitiveness-yearbook/ (accessed September 29, 2015).
dThese 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_C
PISources_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: GCB:
CPI CCI GES Corruption Paid Were
is a a asked
problem bribe to
pay a
bribe

USA 9.7 15.2 18.6 25.0 29.9 22.1 13.1

 Country TI’s
WB’s
ICRG WEF’s GCB:
GCB: GCB:
CPI CCI GES Corruption Paid Were
is a a asked
problem bribe to
pay a
bribe

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/9368
890/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/inte
ractiva/NLOC20140817-
001.jpg&text=inscripci%f3n&tit=Denuncian+abusos+en+cuotas+escolar
es#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 September 24, 2014).

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 September 27, 2014).

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/ (accessed October 7, 2015).

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_triu
mph_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
(accessed July 17, 2014).

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_gen
ehmigt_korruptionsbericht.parsys.83108.downloadList.89797.Download
File.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_konvention_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_trium
ph_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%20
website%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/Econom
y/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 (accessed October 5, 2014).

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.CORRUPTIONEXAMPL
ES.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
September 29, 2014).
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/de
fault.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/PROCUR
EMENT/0,,contentMDK:20060842~menuPK:93304~pagePK:84269~piP
K: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/F14297
31028/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 (accessed March 30, 2015).

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).

42 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); 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,
http://www.nytimes.com/2015/05/28/sports/soccer/fifa-officials-arrested-
on-corruption-charges-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).

45 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); 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_Pr
esent_and_Future_of_Swiss_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_gen
ehmigt_korruptionsbericht.parsys.83108.downloadList.89797.Download
File.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,” http://www3.weforum.org/docs/GCR2014-
15/GCI_Dataset_2006-07-2014-15.xlsx (accessed 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).

13 World Economic Forum, “The Global Competitiveness Index

Historical Dataset,” http://www3.weforum.org/docs/GCR2014-
15/GCI_Dataset_2006-07-2014-15.xlsx (accessed 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 (accessed October 11, 2015).

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.

36 World Economic Forum, “The Global Competitiveness Index

Historical Dataset,” http://www3.weforum.org/docs/GCR2014-
15/GCI_Dataset_2006-07-2014-15.xlsx (accessed 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 (accessed October 11, 2015).

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 (accessed
October 11, 2015).

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_i
mpunity (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_bul
garian_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 (accessed October 11, 2015).

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, http://www3.weforum.org/docs/GCR2014-
15/GCI_Dataset_2006-07-2014-15.xlsx (accessed 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_principl
es_for_whistleblower_legislation (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 (accessed July 22,
2015).
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=e
mcmt&serialid=0KeRr%2F61xVEXpQnMG3lDQEELb3eyzkbk6JSBKZ
APzn0%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 (accessed October 13, 2015).

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%20Companie
s%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=64148984 (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/Proc
urement_GLs_English_Final_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/ (accessed October 13, 2015).

28 See the OECD website on the Paris Declaration and the Accra Agenda
for Action at
http://www.oecd.org/dac/effectiveness/parisdeclarationandaccraagendafo
raction.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 (accessed March 22,
2013).

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/oecddemandstheslovakrepublicestablishcorporateliabil
ityforforeignbribery.htm (accessed October 13, 2015).

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_Exp
ortingCorruption_OECDProgressReport_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_conventio
ns (accessed October 13, 2015).

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 (accessed October 13, 2015).
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_convention
s/conventions_instruments/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. (accessed October 13, 2015).

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,
http://companies.defenceindex.org/docs/2015%20Defence%20Companie
s%20Anti-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/restoringbalanc
e_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/publica
tions/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%20busine
ss%20attitudes%20to%20corruption%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 (accessed October 13,
2015).
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/961FAE6040BDB25EB4E
6C63B250A3AAE.pdf (accessed October 13, 2015).

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/00f5031dafee0204
852578f100053348?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)/C
6BA54D9E411A68E852576C4007DE257/$FILE/AWDecisionNo.420.p
df (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
(accessed October 13, 2015).

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_conventio
ns (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_record; Transparency International, “Making
Development Accountable: World Bank/IMF Spring Meetings 2011,”
April 13, 2011,
http://www.transparency.org/news/feature/making_development_account
able_world_bank_imf_spring_meetings_2011; U4 Expert Answer,
“Multilateral Development Banks’ Integrity Management Systems,”
http://www.transparency.org/files/content/corruptionqas/264_Multilateral
_development_banks_integrity_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 Approximately equal
of U.S. dollars) to the 2013 GDP of

Walmart United 485.7 Venezuela

Stores States

Sinopec China 427.6 Austria

Royal Dutch Netherlands 420.4 United Arab Emirates

Shell

Exxon United 376.2 Colombia

Mobil States

BP United 352.8 South Africa

Kingdom

PetroChina China 333.4 Denmark

Volkswagen Germany 268.5 Finland

Group

Toyota Japan 252.2 Greece

Motor

Glencore Switzerland 220.9 Portugal

International

Total France 211.4 Algeria

Apple United 199.4 Peru

States

Samsung South 195.9 Romania

Electronics Korea
 Company Country Sales (Billions Approximately equal
of U.S. dollars) to the 2013 GDP of

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 United 155.9 Bangladesh

Motors 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)
Year Name AC AOC AML

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
 Year Name AC AOC AML

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,
http://companies.defenceindex.org/docs/2015%20Defence%20Companie
s%20Anti-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_Com
mittee/Default.aspx (accessed July 22, 2015). See also IBA: Anti-
Corruption Strategy for the Legal Profession,
http://anticorruptionstrategy.org/AC_strategy_legal_profession_about.asp
x (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,
http://www.nytimes.com/2015/05/28/sports/soccer/fifa-officials-arrested-
on-corruption-charges-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_Recommen
dations.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 (accessed October 14, 2015).

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

Jens Christopher, 107

321
fuels corruption, 325, 326–327
onflict society, 317–321, 324–327, 329–330, 335, 336
A, 330
Kofi, 116, 486
uption agencies (ACAs), 189, 395, 450, 528
ions for success, 394
tion from structural reform, 394
r repression, 393
uption measures.See also civil service reform; e-government; international
action; procurement reform
ties, 392
es for individual complaints, 408–409
eplacing in-kind benefits, 138
ating corrupt programs, 34, 127–128, 130–131, 132, 160, 203, 214, 228
ating corruption-prone regulations, 127–128, 203, 527
nment spending levels, 34–35, 130–132
oots participation, 409–411
ive-based market systems, 136–138, 139
ation, 129–130, 228, 269, 525
dsmen, 408–409, 470, 528
al opposition, 129
t for repression, 393, 416, 427–428, 489, 530
Expenditure Tracking Surveys, 39, 397, 526
ng regulatory discretion, 133, 136–138, 139, 158, 192, 210, 527
al integration, 132
market discipline, 133
y elimination, 129
mic approach, 130, 132, 135, 203
d tariff simplification, 134–135, 203
es replacing bribes, 136, 138
ers, 138
ti-Corruption and Integrity Network (ACINET), 468, 484
ing, 10, 91, 316, 317, 447
media, 528
a auditing, 396
ervice reform, 166–167
driven reform, 432
ive executive power, 377
system corruption, 97, 398
ive bribes, 67
al corruption, 388
y laundering, 311
al control of media, 403
zation, 117, 118
y corruption, 129
d tariff reform, 432
eta Dam, 482
Chester, 423, 430
muggling, 80, 517
31, 55, 105, 114, 119, 121, 244, 250, 284, 295, 359, 377, 393, 410, 421, 427,
466. See also individual countries
rrency crisis, 55
evelopment Bank, 452
23
, 22, 44
se immigrants, 234
al law, 208, 213
driven reform, 432
r differences, 243
e reforms, 416

BAE Systems, 464

Bahamas money laundering, 308

esh, 22, 29, 43

orruption as tool of repression, 428
uction industry corruption, 69
al differences, 250
Pranab, 51
ushik, 140, 217, 218
Gary, 206, 263
467
il of Europe conventions, 467
n investment, 303
corporate criminal liability, 215
g in influence, 197
Zine El-Abidine, 279, 280, 417
nder differences, 245
s, market for, 70–71, 161–164, 527
ni, Silvio, 95, 359
, Marianne, 363
Investment Treaties (BITs), 473
monopolies, 288
s, 5, 105
ter, 200
ich, Rod, 276
Chuck, 218
John, 253
 ivil service pay levels, 168
driven reform, 432
ernment, 141
d tariff corruption, 79
d tariff reform, 184
& Herzegovina, 22
a criminal law, 208, 213
ion system corruption, 59
2, 252
ng, 396
atic reform, 427
ss pressure for reform, 424
ervice pay levels, 168
tion networks, 255
tive Industries Transparency Initiative, 326
y corruption, 114
ational Center for the Settlement of Investment Disputes, 473
f reform, 420
eform corruption, 196
al corruption, 417
ublic Management (NPM) reform, 173, 174
patory Budgeting, 410
al corruption, 276
zation, 157, 419, 117, 118
ement corruption, 93
utors, 389–390
efinition, 8
Audit Commission, 379, 396
or-questions scandal, 358
ervice ethics codes, 176–177
ervice incentive bonuses, 182
ervice reform, 198
ate anti-corruption efforts, 504
ate criminal liability, 215–216
ate gender quotas, 246
al law, 208, 212
driven reform, 432
lity of reform, 422
ral corruption, 364
upply corruption, 58
n students, 234
fuels corruption, 111
gence services, 399
al conflict of interest, 387
tive conflict-of-interest laws, 358
aws, 404
expenses scandal, 398
salaries, 357
enth-century reform, 417, 423–425, 428–429
onflict society, 317
corruption, 82
Accounts Committees (PACs), 398
aking procedures, 377
s Fraud Office, 464
ms regulation, 159
her reforms, 416
g in influence, 197
Virgin Islands money laundering, 308
electoral corruption, 366
mal networks, 258
al networks, 385
ats.See civil service reform
321
al corruption, 331
corruption, 331
onflict society, 317–321, 329, 330–334, 336, 338
a Jr, Edgardo, 69, 391, 513

Cambodia forestry corruption, 114, 137

n education system corruption, 64

ernment, 143
d tariff corruption, 143
Jose Edgardo, 37
riminal law, 208
ral corruption, 352–353
y corruption, 114
om of Information Act (FOIA), 400
expenses scandal, 206, 398
Al, 307
on, Paul, 475, 476, 485
Islands money laundering, 308
cu, Nicolae, 339
or Responsibility and Ethics in Washington, 351
or the Study of Democracy, 304
Hugo, 56, 428
Dick, 360
Texaco, 327
6, 506
orruption reform, 420–421
ng, 396
al law, 208
uake building standards, 72
ernment, 142
f reform, 420
ublic Management (NPM) reform, 173
8, 22, 43, 44, 46, 476
orruption laws, 479–480
atic reform, 427
hiring practices, 11
terol, 261
ct of interest, 175
uake building standards, 71
cation of documents, 260
om of Information Act (FOIA), 399
i, 265–266
system corruption, 73–74, 381
formula scandal, 73, 261
ment abroad, 446
ary, 385
t orientation, 117
scrutiny of corruption, 431
me “golden handshakes”, 438
y reduction, 3
zation, 259, 118, 120
ement corruption, 325
media, 528
ubsidized prices, 54
d tariff corruption, 76, 133, 517
s and virtuous cycles, 261–262
p, 123
vice reform, 201, 283, 289, 293, 418, 455. See also anti-corruption measures;
hierarchical corruption; procurement reform
titive bureaucrats, 192–197
ct of interest, 166–167, 174–178
al prosecution vs. structural reform, 168, 416, 429–430, 431, 526
ralization, 136, 173, 187, 188, 192, 201
izing, 34, 198, 201, 202
codes, 175–178
accountability, 167, 193
e vs. rule-based approach, 179–180
ented systems, 191
ive bonuses, 180–183, 439, 525
eking, 177
tructure, 167, 202
cracy, 165, 166, 172–174, 278, 421
emen, 198
oring corruption, 179, 210
e, 171
ublic Management (NPM), 173–174
r-profit contractors, 200–201
op shop approach, 191–192, 200
me “golden handshakes”, 438–439
rcing, 198–201
vels, 166–167, 168–170, 171–172, 202, 204, 438, 524, 527
al neutrality, 165, 177, 198
zation, 189, 434, 438, 440, 527
sionalism, 165, 166, 167, 172–174, 528
ment, 170, 171–172, 204
ding performance, 178–184, 203
n of staff, 256, 186, 198
ons against corruption, 179, 203
tion of roles, 166–167
ntial systems, 189–191
cal knowledge, 166, 527
ian bureaucracy, 174, 192, 165, 173, 174
m, 187, 251, 265, 410
Bill, 178
r, 5, 319, 446
Paul, 3
ernando, 118, 252, 399
a, 379, 424
ative Dispute Resolution, 390–391
orruption reform, 419, 420
ng, 396
ervice pay levels, 168
driven reform, 432
rade, 297, 304
ernment, 142
 nmental degradation, 297
system corruption, 72, 136, 142
ide rate, 299
y laundering, 311
zed crime, 297
ce as catalyst for reform, 419
ity taxes, 54–55
nism, 55, 319
ion, 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
ive corruption, 288–290
on corruption, 109–116
ns for reform benevolent autocracy, 427
on-building, 415–416, 419, 421, 422
nsating reform’s losers, 438–439, 529
as catalyst, 429, 432–433
ral systems, 419–420, 421, 422
ive power, 421
l structure, 425
mover disadvantage, 418
n aid as obstacle, 441–442, 460–461
iency as driver, 418, 423, 424–425, 428–438
of past practice, 415
tionalizing reform, 416, 417, 421, 429, 438–441
age burden, 423–424, 425, 429, 435, 436–437
res on autocrats, 416–417, 425–428
ce wealth as obstacle, 441–443
ue collection as motivation, 426
al as catalyst, 416, 425, 429–432
government, 428–438
leadership, 415
elf-interest, 419, 420
of interest, 9, 118, 166, 167, 178, 242, 358–360, 361, 387, 422
onflict minerals, 471
g corruption, 116
ion industry corruption, 69–72
uake building standards, 34, 69, 71–72
g fee, 12, 103, 280
of Corruption Indicator (CCI). See under World Bank
n creation of uncertainty, 58, 84–86, 103, 104, 112–113
mic consequences, 58, 83–92, 93, 99, 100, 101–105, 110, 111–113, 121, 123–
124, 480, 523, 524–525
it vs. implicit, 11
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
vs. petty, 11, 19, 22, 26, 43, 47, 53, 267, 282–283, 292, 523–524
vs. “legal”, 343
ives, 11–14, 38, 126–127
11, 22, 185, 187, 200, 299, 523
vs. private sector, 7
matic vs. venal, 36
mining of political legitimacy, 86, 90–91, 92, 165, 303–304, 335, 339, 462,
495–496, 523, 525–526
mining of public goals, 58–61, 91, 99, 101–105, 165, 195, 523, 524, 525
mining of reform, 86, 90–91
on Perceptions Index (CPI).See under Transparency International
ca civil service pay levels, 168
y laundering, 516
voire, 271
r differences, 245
ortation corruption, 130
s privatization, 157
of Europe, 462
orruption conventions, 467–468
y laundering, 512
cess, 54–55
law.See also soft law; whistleblowing active vs. passive bribery, 207–209
ust laws, 222
y vs. extortion, 208, 226
as deterrents, 227
for illegal benefits, 219
for scarce legal benefits, 219
ate criminal liability, 214–216
enefit of deterrence, 205–206
al vs. civil penalties, 223
ment, 221
on, 217–218
ary duty, 223
vs. prison, 226
orruption trap, 213–214
forcement corruption, 225–228
ing criminal activities, 129–130, 228, 269
mal fines, 226
e non-profit associations, 224–225
zing law enforcement, 227–228
bility of detection vs. severity of punishment, 206
y of punishment, 209–214
harm and enforcement priorities, 209
perations, 221–222
olitical corruption, 276
5
m, 8, 11, 21, 60, 96, 104, 149, 252, 277, 280, 282, 360, 460
untry data, 14–27, 451–453. See also Transparency International, Corruption
Perceptions Index (CPI); World Bank, Control of Corruption Indicator
(CCI)
enchmarks for public spending, 451–452
urveys, 39, 42–43
ions, 451
debarred firms, 452–453
y laundering detection, 516–517
ar surveys, 44–46
nd corruption.See under defining corruption
Andrew, 189, 353
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
22, 487
epublic foreign investment, 303
ary, 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
trading in influence, 197
Deutsche Bank money laundering, 514

ment, 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
Rafael, 30, 398, 403
on of income, 3, 4, 7, 19, 33, 36, 125, 165, 168, 201, 319, 325, 384
14, 73, 74, 122–123, 241, 513. See also health system corruption
ank Act, 477, 478
e.See under organized crime
oney laundering, 308
family, 279, 282

East India Company, 433

Easterly, William, 10, 442
Eastern Europe, 447, 466. See also individual countries
civil service pay levels, 168
conditions for reform, 421
credit access, 55
excessive licensing, 128
foreign investment, 303
informal networks, 258
privatization, 159
 tax and tariff corruption, 76
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

c Union of West African States, 339

auditing, 396
ervice pay levels, 168
ary, 388, 388
zation, 118
n. See also teachers
ion system corruption, 59–60, 64, 241, 328, 380, 382
ment in, 30, 32, 33
ment, 35, 139–146, 203, 221, 257, 339, 376, 400, 408
as, 143
se efficiencies, 143
mation sharing, 142
mation transparency, 141
oring government, 141–142, 143–144, 193
e submission, 141
y and security concerns, 145–146
ng regulatory discretion, 128, 144, 527
abilities, 145
0, 102, 141
Spring, 316, 317
Mubarak, 417
fuels corruption, 110
 cracy, 279, 280
corruption, 128
d tariff corruption, 75
dor civil service pay levels, 168
aws, 404
corruption, 8, 9
g votes, 12, 267, 342, 364–366, 367, 372, 419
ign funding, 341, 342, 343, 350, 356–357, 366, 372–373, 528
367

ement, 9, 11, 12, 19, 71, 122, 222, 280, 300, 309, 331, 379, 382, 442, 506,
514, 526
20, 123, 352
power, 9
mental degradation, 33, 34, 72, 105, 110, 112, 113–115, 297–298, 409, 482,
484, 494, 525
mental regulation, 136, 137, 143, 377
al Guinea, 17
y laundering, 312
, 527
oreign investment, 303
d tariff reform, 134
niversalism, 6
7, 121, 175–178, 247, 253, 266, 351, 363, 422, 429, 459, 470, 472, 483, 495,
496, 497, 498, 502, 523, 524, 528
criminal law, 208, 213
phy, 262, 264–266, 270
See also individual countries and European Union banking corruption, 124
 odity taxes, 54
al law, 219
system corruption, 74
al independence, 385
zed crime, 304, 295, 297
n Bank for Reconstruction and Development, 452
n Police Office (Interpol), 295, 506
n Union anti-corruption agencies, 391
ng of aid programs, 457
ervice pay levels, 168
titive anti-corruption, 379
ions Trading System, 137
m of information, 400
tive conflict of interest, 358
y laundering, 491, 512–513
zed crime, 295, 304
ement corruption, 148
al integration, 132
ies, 123
eblowing statutes, 409
e of favors, 8, 262, 264
e rates, 55–56, 124
nk of China, 325
definition, 8
e Industries Transparency Initiative (EITI), 326, 470–471, 472, 477, 490,
502
Mobil, 510
 Facebook, 310
FIFA, 96, 218, 221, 224–225, 506
Fiji credit access, 55

l Action Task Force (FATF). See under money laundering

17, 22, 43, 44
al law, 208, 213
e, 510
ciency vs. market efficiency, 494–495
Raymond, 77, 80, 84, 104, 120, 133, 243, 360, 362, 517
ply corruption, 57–61, 94, 109, 524
Corrupt Practices Act (FCPA). See under United States of America
irect investment (FDI), 12, 30–31, 42–43, 101, 284, 303, 446, 462, 465, 478,
479, 495
corruption, 110, 111–115, 137
ing Emissions from Deforestation and Forest Degradation (REDD), 115
ls corruption, 110–111, 194, 324–325, 326–327
ivil service ethics codes, 176
ate criminal liability, 214
il of Europe conventions, 467
al law, 208, 213
ral corruption, 351
nmental regulation, 377
fuels corruption, 111
ndence of legislature, 357
al corruption, 386
y laundering, 514
eporting of corruption, 497
al corruption, 276
al neutrality in civil service, 177
aking procedures, 377
g in influence, 197
, Alberto, 404, 427, 514

Gambetta, Diego, 255, 285, 302

Gambia tax and tariff corruption, 76

g, 129, 195, 196, 313, 380

James, 429
26
Barbara, 417–421, 422, 423, 444
34, 235, 243–246, 248
criminal law, 214
ary, 385
zed crime, 297, 303
corruption, 172
zation, 160
y, 130, 261
ervice pay levels, 169
ate criminal liability, 215, 216
al law, 213
n funding, 353, 369–371
ort Airport scandal, 94
al review, 407
government corruption, 380
eporting of corruption, 497
al corruption, 276
 utions under OECD Anti-Bribery Convention, 464
aking procedures, 376
2
ervice pay levels, 169, 202
ion system corruption, 59
Expenditure Tracking Surveys, 398
norms, 265, 269
d tariff corruption, 76
d tariff reform, 183–184
ng. See defining corruption, types of reciprocity
Edward L., 37, 117, 424, 430
ommission on Drug Policy, 228
Competitiveness Report, 68, 300
orruption Barometer (GCB). See under Transparency International
inancial Integrity, 306, 443
ntegrity, 340, 451
Witness, 38, 114, 137, 269, 340, 481, 488
tion, 5, 295, 518
n Sachs, 124
e, Richard J., 485
310
ev, Mikhail, 258
Phil, 352
Wendy, 352
the wheels hypothesis, 32
ebt crisis, 433
States against Corruption (GRECO), 512, 217, 467, 484
la, 321
 tive Industries Transparency Initiative, 326
al corruption, 322–323
rcing, 200
corruption, 322, 323, 336
onflict society, 317–324, 325, 326, 327, 335, 336
43
g corruption, 115–116
r, 486
concession corruption, 110
y corruption, 112

Hadi, Abdu Rabbu Mansour, 91

Haiti, 43
earthquake building standards, 71
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

Packard, 98
cal corruption, 185–189, 257
m-up, 185–186, 187–188
al vs. external, 187
wn, 185–186
rruption,8, 11, 14, 58, 170, 179, 247, 289, 424, 437
Thomas, 263
Council of Europe conventions, 467
22, 222
s health system corruption, 506–507
y laundering, 506
ng housing supply corruption, 59
endent Commission against Corruption (ICAC), 392–393, 394
corruption, 392
, 14, 69, 72, 73, 97, 100, 122, 136, 142, 180, 381, 398, 435, 452
supply corruption, 59

y laundering, 311, 514

Rights Watch, 325
corruption networks, 252
al law, 218
n investment, 303
om of Information Act (FOIA), 400
ement corruption, 106, 107
nnifer, 46, 477
on, Samuel, 263
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
civil service pay levels, 170
class differences, 257
Commonwealth Games scandal, 96
criminal law, 207
crisis-driven reform, 432
defense spending corruption, 98
falsification of documents, 260
fossil fuels corruption, 111
Freedom of Information Act (FOIA), 401
gender differences, 243
health system corruption, 74, 122
housing supply corruption, 59
incentive bribes, 66
International Center for the Settlement of Investment Disputes, 473
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
education system corruption, 380
e-government, 141
Exxon Mobil, 510
forestry corruption, 111, 114
gender differences, 243
health system corruption, 380
kleptocracy, 282, 284
lobbying, 360
oil wealth as obstacle to reform, 441
procurement corruption, 98
regulatory corruption, 72
religion, 247
tax and tariff reform, 426
violent resolution of disputes, 390
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 state-subsidized prices, 54

68, 200, 457

ng, 360
-food scandal, 467, 487
rcing, 199
ement corruption, 397
ubsidized prices, 54
n supply corruption, 60–61, 136
sil fuels corruption, 110
eporting of corruption, 497
onflict society, 317
-corruption as tool of repression, 428
ng, 397
casting monopoly, 95
Hands investigation, 95, 102, 356–357
ate criminal liability, 215
n funding, 366
ral corruption, 351, 356–357, 366, 368
ive bribes, 84
tive conflict of interest, 359
government corruption, 380
zed crime, 255–256, 296, 299, 303
al control of media, 402
al corruption, 276
zation, 120
ement corruption, 95, 102, 105, 109
al corruption index, 451, 100
ast privatization, 118

J.P. Morgan, 11
Jackson, Andrew, 423
Jamaica, 159
Freedom of Information Act (FOIA), 400
Japan, 22, 44, 501
credit access, 55
electoral corruption, 351, 353, 366, 368
 gift-giving, 255
judicial review, 407
political corruption, 276
procurement corruption, 154–155
procurement reform, 155
Jersey money laundering, 309, 514

& Johnson, 74
, Michael, 290–292, 293
il-for-food scandal, 485
, 382
ntability, 384–387
ative Dispute Resolution, 390–391
aw systems, 386, 389
of laws, 388–389
on law systems, 387
tence, 384, 385, 386, 388
ct of interest, 387
tion, 8, 80, 81, 225–228, 313, 314, 322–323, 328, 331, 384, 386, 387–388,
528
ndence, 374, 383–389
utors, 389–390

Katrina (Hurricane), 200

Kaufmann, Daniel, 30, 34
Kazakhstan fossil fuels corruption, 110, 505
military service, 63

Steven, 148–150, 151, 153, 154, 155

Lord, 14
4, 65
of anti-corruption agencies, 394
ion system corruption, 59
nmental degradation, 138
bee, 267
system corruption, 99
tory corruption, 72
s, 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
hristopher, 4
k, Kwame, 276
, Cristina, 403
, Néstor, 403
Robinah, 453
acy, 9, 12, 263, 264, 277, 278–287, 288, 381, 426, 427, 443, 460, 523, 525,
530
al monopolies, 285–287
l of bureaucracy, 284
polist character, 278
zation and nationalization, 281–282
e change, 281, 283
tion, 281
government, 279
and tariffs, 280–281
vs. strong, 278–279, 282, 286
d, Robert, 81, 127
lmut, 370
2
ervice corruption, 185
ervice incentive bonuses, 182
cianism, 247, 266
uction industry corruption, 69, 69
access, 55
ernment, 140
ral corruption, 351, 366
e regulation corruption, 74–75
al corruption, 276
ement corruption, 107, 154, 155
cation-for-benefits corruption, 63
norms, 266
d tariff corruption, 185
post-conflict society, 317
Project, 482
52, 72, 123, 325, 497
od, 222
á, Jana, 346, 347, 348, 420, 421
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 pay levels, 168
civil service reform, 173, 179
democracy and reform, 417
excessive executive power, 377
excessive licensing, 128
grassroots participation, 410
homicide rate, 298
inflation, 432
judiciary, 385, 388–389
land reform, 440–441
libel laws, 404
money laundering, 308
police reform, 245
privatization, 117, 119
selective reform, 444
voting systems, 417–421
Latin American Public Opinion Project (LAPOP), 46
Latvia tax and tariff reform, 134

f Arab States Arab Anti-Corruption Convention, 468

, 43
access, 55
n Yew, 427
haniel, 263
cy of government. See corruption, undermining of political legitimacy
Brothers, 312
5, 6, 38, 55, 101, 327, 411, 442, 446, 449, 455, 460, 461, 481, 483, 489, 504
awrence, 343, 352, 354, 357
22, 44, 91
tion networks, 252
ion system corruption, 60
one, 510
y corruption, 112
aws, 404
nism, 90, 262–264, 266, 268, 269–270, 271
7, 43
fuels corruption, 110
ement corruption, 103
a tax and tariff reform, 134
d, 463
me countries, 4, 262
ncis, 83, 136, 213
ourg, 22
 Macolin Convention, 96
mafia. See organized crime
Malawi, 455
housing supply corruption, 59
police corruption, 66
procurement corruption, 99
Malaysia forestry corruption, 112
telecoms corruption, 112
utilities corruption, 112

dicial corruption, 386

Melanie, 219, 392
, Luigi, 117, 119
Ferdinand, 426, 460
ia, 43
Paolo, 28, 29
ternational assistance, 453–454
ational journalist associations, 470
aws, 403–404, 453
al control of, 402–405
exposing corruption, 396, 402, 404–405, 429–432, 526
media, 454, 528
Rebecca, 425, 436, 437
18, 22, 43, 44, 46, 88, 130, 379
orruption as tool of repression, 427
orruption reform, 421
ological destruction, 116
ng, 396
ss registration, 79
terol, 261
il of Europe conventions, 467
ion system corruption, 60, 60–61
ernment, 141
n funding, 356, 369
ral corruption, 353, 418
nmental regulation, 137
tive Industries Transparency Initiative, 326
cation of documents, 260
al Institute for Access to Information, 401
y corruption, 410
fuels corruption, 111, 194
om of Information Act (FOIA), 400
r differences, 245
ide rate, 299
and export licenses, 78, 57
ive bribes, 67
ational Center for the Settlement of Investment Disputes, 473
ersonal trust, 249
ary, 388
aws, 404
y service, 64
y laundering, 310–311, 513
ublic Management (NPM) reform, 174
zed crime, 295–296, 299–301, 302, 305, 323, 353, 461
corruption, 65, 172–173, 245, 461
al control of media, 403, 403
 al corruption, 276
zation, 117
ement corruption, 98, 105
accountability, 382
tory corruption, 72
d tariff reform, 134–135, 426, 432
n in politics, 245
East, 10, 313, 359, 427, 466, 496
en, 197–198, 229
um Development Goals. See under United Nations
, 11, 83, 96, 102, 105, 110, 118, 283, 391, 399
Sese Seko, 170, 279–280, 417, 441
niel Arap, 267
, 22
aundering, 38, 83, 223, 295, 306–315, 448, 451, 466, 468, 491, 505, 506, 507,
518–519, 528. See also gambling; organized crime
310–311, 312–313, 314, 508, 510, 512, 514–515
n, 515–516
ontraband, 311
country data, 516–517
mic effects, 306–307
veness of international response, 513, 514–516
cial Action Task Force (FATF), 451, 511–512, 513, 515
a, 313
y theft, 295, 311, 516
ational response, 505–518
a Initiative, 513
ally Exposed Persons (PEPs), 310, 312, 313, 506, 511, 512
 ation of funds, 513–514
d Nations Vienna Convention, 508
a, 22
nos, Vladimir, 404–405, 514
Stephen, 249, 291, 46
Mohamed, 90
ique, 321
ion system corruption, 59, 328
system corruption, 328
al corruption, 328
corruption, 328
onflict society, 317–321, 327–330, 335–336, 338
AMO, 327–328, 335
d tariff corruption, 76, 79
, Hosni, 10, 90, 102, 279, 280, 417
onal firms, 491–504, 518, 519
vs. profit maximization, 496–498
tions toward political legitimacy, 495–496
er’s Dilemma game vs. cooperation game, 499–502, 504
sibilities as moral persons, 493–496
contract, 494
Pippidi, Alina, 10
i, Yoweri, 427
r police corruption, 240

Nahimana, Terrance, 332

Nazarbayev, Nursultan, 110
Nazis, 10
neoclassical economics, 253–254
 Nepal, 455
Arun III dam project, 483
civil service corruption, 186
falsification of documents, 260
police corruption, 185
tax and tariff corruption, 196
nepotism, 8, 9, 14, 60, 93, 252, 523. See also trust, interpersonal
Netherlands electoral corruption, 364

land, 15, 17, 43, 130

se infant formula scandal, 73
ervice incentive bonuses, 182
driven reform, 432
uake building standards, 72
nment reform, 419
ublic Management (NPM) reform, 174
ms regulation, 159
ucation system corruption, 59
cation of documents, 260
ortation corruption, 130
22, 102
access, 55
tive Industries Transparency Initiative, 326
and export licenses, 56–57
y laundering, 514
alth as obstacle to reform, 441, 442–443
government, 395
aceutical regulation, 158
corruption, 65
ement corruption, 98, 101–102, 105, 252
norms, 265, 269
ubsidized prices, 54
iza, Pierre, 336, 331
use corruption, 10
rnmental 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
ountries, 15, 34
nvestment Bank, 452
merican Free Trade Agreement (NAFTA), 57, 78, 132, 135, 296, 473
orea, 17, 43
88, 17, 43
fuels corruption, 111

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

d 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
, 295–296
ve philanthropy, 297
ion, 295
rade, 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
on, 301, 302
nment contracts, 302–303
n trafficking, 34, 294, 297, 314, 510
ation of legitimate business, 302
d goods, 302
onflict society, 317–324, 327, 335, 336
zation, 303
tion rackets, 255–256
ce, 306, 285, 297, 298–299, 302, 303, 304, 305
Elinor, 248
Empire tax farming, 181

Pakistan, 22, 136

anti-corruption as tool of repression, 428
 Axact group, 505
credit access, 55
e-government, 143
environmental regulation corruption, 72
irrigation supply corruption, 61
judiciary, 385
lobbying, 360
tax and tariff corruption, 75
Panalpina, 111
Panama civil service pay levels, 168
libel laws, 404

ew Guinea concession corruption, 110

y, 22
ervice recruitment, 170
nge rates, 55
cracy, 279
ement corruption, 98
eta Dam, 482
claration on Aid Effectiveness, 458
s Law, 14
67, 98, 194, 260
arlos Andrés, 399, 428
tto, 323
Torsten, 348, 247, 348
34, 44, 46, 514
ological destruction, 116
atic reform, 427
ervice pay levels, 168
ervice reform, 173
driven reform, 432
e spending corruption, 98, 514
e resolution corruption, 390
rade, 297
nmental degradation, 297
r differences, 245–246
ary, 388
aws, 404
corruption, 245–246
zation, 117
Expenditure Tracking Surveys, 398
es customs reform, 184
ion system corruption, 380
ral corruption, 364
ive executive power, 377
n aid as obstacle to reform, 442
n aid corruption, 460
and export licenses, 56
d tariff reform, 134, 426
ark, 224, 463, 473, 485
stavo, 146–147
, Augusto, 312, 420
oreign investment, 303
ational Center for the Settlement of Investment Disputes, 473
al corruption, 388
tive conflict of interest, 359
rruption, 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
action committees (PACs), 355, 371
Alfonso, 322
flict society, 316–340, 529. See also under organized crime
ralization, 378
ontinuity, 322, 324, 326, 327, 335, 336, 338
ity-based power sharing, 330–334, 336, 337
ational aid, 316, 320–321, 327–330, 337–338
forcement, 316, 322–323, 324
y control, 322, 338, 339
al legitimacy, 316, 318–319, 321
y, 316, 322, 324, 331, 332–333, 334, 336
ce wealth, 319, 321, 324–327, 330, 335
nstitutions, 316, 320, 322, 323, 324, 329, 334, 335, 336, 337, 339
3–4, 6, 33, 61, 143, 160, 186, 316, 319, 321, 322, 324, 331, 332–333, 334,
336, 454, 461, 492, 523
e defining corruption, types of reciprocity
ernational, 111
–agent model, 9
rruption, 82–83
s Dilemma game, 84, 85, 499, 500
ector corruption, 121–124, 222–225, 275
orruption pacts, 407
on, 123
ank interest rate manipulation, 55, 124
poly, 121, 223, 277, 494, 527
psony, 121
y fraud, 123
price manipulation, 123
ime mortgage derivatives, 123–124
tion, 303
ct of interest, 118
ulation, 120
information, 117
poly, 118–119, 158
ial to reduce corruption, 117, 157–160, 189
tory corruption, 119–120, 158, 458
uncertainty, 117–118
ment corruption, 93–109, 112, 154–155, 252. See also procurement reform
g collusion, 106, 107–108, 154–155
g specifications, 106
t demand, 101–102
verruns, 97–98
ment, 211
ive budgeting, 97–98, 99–100
information, 105
or strategies, 103
dding, 109
, 108
timation of demand, 105
bidding, 106
ath of benefits and costs, 102, 103–104
ment reform, 146–157, 418, 455, 468–469
ervice reform, 153
al prosecution vs. regulation, 149–150
e vs. rules-based approaches, 146–147, 148, 149
ational Competitive Bidding, 147
e-shelf purchase, 147, 150, 153–154
-oriented vs. goal-oriented specifications, 153
erformance evaluation, 149, 151–152
mance-based contracts, 149
communication, 149, 151, 152–153
monitoring, 146, 152–153
bidding, 147
ource contracts, 148
of purchase, 147
on, 73, 130, 295, 298, 315
up International Country Risk Guide, 42–43, 47
ational Country Risk Guide (ICRG), 41
427
ccounts Committees (PACs), 397, 398
terest lawsuits, 406–407
rvice fraud, 8, 9, 16, 24, 26, 34, 44, 63, 66
What You Pay (PWYP), 470–471
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
anti-corruption agencies, 391
criminal law, 208, 217
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
construction industry corruption, 71
credit access, 55
democratization, 447
 foreign investment, 303
forestry corruption, 110, 114, 116
health system corruption, 241
incentive bribes, 67
judiciary, 80, 385
legislative conflict of interest, 359
Olympics bid, 97, 223
organized crime, 255, 301, 305
private sector corruption, 224
procurement corruption, 97, 223
real estate corruption, 62
tax and tariff reform, 134
understanding of markets, 259
violent resolution of disputes, 390
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

478
one, 44
ion system corruption, 143
ernment, 143
d, 516
e, 16, 43
atic reform, 427
ervice pay levels, 393
pt Practices Investigations Bureau (CPIB), 393
r differences, 243
g supply corruption, 59
aws, 404
oring of civil service, 393
corruption, 393
ement corruption, 105
privatization, 118
rms, 233, 234–235, 236, 524
ience policy evaluation, 448–450
m, 119, 303, 328, 359
Islands, 22
ssion corruption, 110
68, 10, 17, 43
l, 325, 326
Tina, xxiii, 37, 88, 457, 470
rica, 337
ms corruption, 65
e spending corruption, 452
nge rates, 56
ational Center for the Settlement of Investment Disputes, 473
dan, 17
nion, 447
ervice pay levels, 168
n investment, 303
mal networks, 258
scrutiny of corruption, 431
zation, 159
d tariff corruption, 76
ctoral corruption, 353, 366
ement corruption, 101, 105
dies corruption, 96, 218, 221, 223, 225
a judiciary, 385
oseph, 258
sidized prices, 54
14, 73, 104, 108, 120, 123, 133, 216, 282, 360, 361, 439, 463, 471, 478, 502
er, Alfredo, 279
7, 18, 22, 43, 44, 47–48, 69
20, 85, 104, 114, 170, 195, 282, 284, 288, 360, 426
ACs, 355
concession corruption, 110
ble Development Goals. See United Nations, Millennium Development Goals
n, Jakob, 62, 67, 71, 84, 398
17, 43
driven reform, 429
tive conflict of interest, 358
and, 17, 22
scandal, 506
y laundering, 309, 513–514
l Legal Assistance treaties, 505
niency, 224
g in influence, 197
Revised Agreement on Government Procurement, 469
-for-food scandal, 485

Tabellini, 348
Tabellini, Guido, 30, 247, 348
Taiwan criminal law, 207
defense spending corruption, 452
rulemaking procedures, 376

civil service pay levels, 172

Expenditure Tracking Surveys, 398
d tariff corruption, 198
to, 101, 283
ariff corruption, 75–76, 133, 134–135, 185, 186, 196, 459, 517
on, 75, 76, 91, 114, 125, 132, 134, 186, 218, 296, 298, 380, 403, 517, 524
ng, 83, 181
59
8, 14, 59, 64, 143, 172, 177, 241, 382, 398, 525. See also education
, 306
anti-corruption as tool of repression, 428
ral corruption, 366
ive executive power, 378
 zed crime, 305
corruption, 63, 186
zation, 118
, Margaret, 416
Henry David, 87
defining corruption, types of reciprocity
ean, 238, 257, 392
A., 467
encia Mexicana Encuesta Nacional de Corrupción y Buen Gobierno, 23
ency International, 9, 38, 97, 156, 267, 269, 340, 385, 405–406, 451, 453,
456, 463, 464, 470, 471–472, 481, 488, 503
N Integrity Community, 468
Payers Index (BPI), 88
ption Perceptions Index (CPI),5, 15–20, 21, 23–24, 26, 27, 29, 39, 72, 88,
111, 322, 336, 393, 479
ce Companies Anti-Corruption Index, 502
l Corruption Barometer (GCB), 22–24, 27, 44–45, 47, 66, 81, 88, 127, 225,
246, 328
n, Daniel, 247
and Tobago civil service pay levels, 169
4, 235–236
lized, 249–250, 252, 253, 256
tional, 253–256
ersonal, 250–253, 254, 255–256, 353
s and virtuous cycles, 256–262
Arab Spring, 317
Ben-Ali, 417
cracy, 279, 280
ming, 181
88
uake building standards, 69
epartment corruption, 63
ary, 385
-food scandal, 485
media, 528

Uganda, 44
autocratic reform, 427
defense spending corruption, 452
education system corruption, 382
health system corruption, 453
import and export licenses, 62
incentive payments, 67
Public Expenditure Tracking Surveys, 398
Ukraine, 22
civil service pay levels, 168, 170
fall of Yanukovych, 417
foreign investment, 303
incentive bribes, 66–67
legislative conflict of interest, 359
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-corruption agencies, 393
Anti-Patronage and Progressive periods, 415
archaeological destruction, 116
automobile industry corruption, 122, 222
banking corruption, 128
blocking legislation, 361
Central Intelligence Agency (CIA), 399, 506
Chamber of Commerce, 476
civil service corruption, 179
civil service ethics codes, 175–176, 177–178
civil service incentive bonuses, 182–183
civil service job-seeking, 177
civil service pay levels, 168
civil service reform, 198
competing jurisdictions, 380
competitive anti-corruption, 379
conflict of interest, 175
construction industry corruption, 71
corporate anti-corruption efforts, 504
corporate criminal liability, 215
corporate gender quotas, 246
corruption scandals, 429
Council of Europe conventions, 467
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
electoral corruption, 364, 367
environmental degradation, 409
environmental regulation, 137
executive corruption, 378
Extractive Industries Transparency Initiative, 326
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
gender differences, 244
General Accounting Office, 394
Government Accountability Office (GAO), 396, 398
Government in the Sunshine Act, 401–402
health system corruption, 74, 122–123
housing supply corruption, 59
institutionalizing reform, 439–440
judiciary, 384, 387
legislative conflict of interest, 358
libel laws, 403–404
lobbying, 360, 361, 363–364
local government corruption, 380
media scrutiny of corruption, 430–431
money laundering, 310–311, 491, 507, 508, 513, 514, 516–517
Mutual Legal Assistance treaties, 505
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
peer reporting of corruption, 497
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
privatization, 117, 157
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
New Public Management (NPM) reform, 173
resistance to reform, 415

orruption, 75, 109, 112, 120, 141, 155, 157, 199, 245, 437
aximization, 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 as tool of repression, 428
anti-corruption reform, 419
civil service pay levels, 168
exchange rates, 56
fossil fuels corruption, 111
incentive bribes, 67
judicial corruption, 388
money laundering, 517, 311
oil wealth as obstacle to reform, 441
police corruption, 66
political corruption, 276
presidential corruption, 399
privatization, 118
state-subsidized prices, 54
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 education system corruption, 60

efan, 387
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

stice Project Rule of Law Index, 81

ade Organization (WTO), 147, 475, 476
ed Agreement on Government Procurement (GPA), 468–469
alues Survey, 45, 46, 48, 171, 249, 364
m, 123
n, Charles, 157

Xi Jinping, 175

Yanukovych, Viktor, 417

 Yao, Shuntian, 11
Yemen, 43, 44, 91
Arab Spring, 316
civil service pay levels, 168

Zaire civil service pay levels, 170

fall of Mobutu, 417
kleptocracy, 279–280
mineral wealth as obstacle to reform, 441
privatization, 118
tax and tariff corruption, 77
tax and tariff reform, 426
tax collection, 460

civil service pay levels, 168

Expenditure Tracking Surveys, 398
Ernesto, 418
we, 22, 43
ement corruption, 105