The Pervasive Nature of Corruption

In common usage, corruption is often used to refer to all types of immoral or harmful behaviour by public officials. But in the social sciences and policy discussions, corruption refers specifically to the illegal use of power by politicians or bureaucrats for their own benefit. The important point is that this definition does not presume that corruption is damaging, though it may be.

How damaging it is has to be established by theory and evidence, and here there is considerable debate. Corruption involves two related activities. First, public power has to be acquired or purchased. Resources are therefore spent in bribes or in efforts to directly capture political power. These activities can waste resources which could have been more productively invested.

Public power

Secondly, public power is then used to create benefits for public officials, or those who have bribed them, or create obstacles for others. The benefits are beneficial for those who get them, but can be damaging for society.

For instance, public power can be used to create monopolies to import goods, or to grant contracts at inflated prices. In extreme cases of predation, public officials and their friends can simply loot resources. Public officials can also create obstacles that citizens have to pay to avoid, like red tape and unnecessary restrictions.

The economic effect of the second set of activities can therefore also be negative and the total effect of corruption is then clearly negative. International agencies like the World Bank and the IMF assume that corruption does have negative effects and also that it can be removed by reforms. Therefore, they use their influence to persuade developing countries to spend time, effort and money to reduce corruption.

In this, they are often supported by civil society organisations and NGOs who are also against corruption for obvious reasons. The policies they recommend include greater transparency and accountability, stricter prosecutions and punishments, and liberalisation to reduce the amount of discretion that public officials have to create privileges or allocate resources. But much investment in these policies has generally not achieved significant reductions in corruption.

Political corruption

No one can be in favour of corruption. The question really is that, if corruption is so bad, why is it so pervasive? Why does every developing country suffer so greatly from corruption? And why have all the resources spent on fighting corruption achieved so little in terms of sustained and lasting reductions in corruption, and what should we be doing about it? To answer these questions we need to look at what the simple analysis of corruption is missing out.

First, it misses the fact that much of the corruption in developing countries is political corruption driven by the fact that political power is often based on the ability of politicians to deliver resources or privileges to their clients that they cannot offer through the budget. Here the significant difference with advanced countries is that in the latter, the budget is big enough to allow competing parties to offer credible spending plans to voters that can potentially win one of them a majority.

In developing countries this is very difficult because the small budget cannot offer much to voters. Rather, power is constructed through political networks where powerful faction leaders are rewarded with privileges to maintain political stability, mobilize voters and enable the state to function.

Social cost

This is also corruption because resources are being spent, sometimes illegally, to construct these networks and the privileges created for the political organisers are often illegal as well. But the problem is that in the absence of a fiscal base to allow social democratic politics, it is difficult to imagine how else politics can be organised. In these contexts, the only feasible solution is to make politics more stable and developmental so that the budget can grow over time. But attempts to immediately root out all corruption typically fail.

A second problem with the simplistic analysis is that what public officials ‘deliver’ varies greatly. It is not always a monopoly or an obstacle. Sometimes citizens have to pay to get resources to which they are legally entitled and which are socially desirable, such as food grains for poor people.

Here corruption has a social cost, but it may be less than the cost of not having the programme at all. Another example is when states make resources available for investment in new or risky areas. If the state has the capacity to ensure that these resources are not entirely wasted, economic development can take place even in the presence of corruption. The corruption associated with support for industrial policy is often observed in East Asian countries. In these cases the bribe is a bit like an illegal tax, which has a cost, but the net effect of intervention can be growth-enhancing for the economy.

Buying influence

These sorts of reasons explain why corruption can be associated with collapsing economies but also with some of the most dynamic economies in the developing world. Clearly developing countries have different mixes of corruption. In poorly performing economies predatory types of corruption dominate as well as corruption that creates obstacles for investors.

In high-growth developing countries corruption is more like profit-sharing between business and public officials in a context where public officials facilitate and enable businesses to grow. If we cannot get rid of all corruption immediately, we should certainly try to attack predatory behaviour and looting and try to create incentives for public officials to behave in developmental ways.

This is a very different strategy from the moralistic approach of much of global anti-corruption policies today. And it has to be remembered that in advanced countries the rich do buy influence, but because of higher levels of institutionalisation, they usually buy influence legally, through lobbying, contributions to political parties, contributions to think-tanks and universities, and by employing ex-politicians on their boards. This is another reason why corruption gradually disappears as a country becomes richer. But if we are concerned about justice and democracy, we should be just as concerned with the legal forms of influence-buying in advanced countries.

Source: http://english.aljazeera.net/focus/2009/06/200962632221819406.html

Tags: Corruption, Lobbying, Political Corruption, East Asia, bribery, developing countries, IMF, World Bank, Al Jazeera, Public Power, Political influence, NGO, NGO’s, Global Best Practice,

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America Snubbed as China, India, and Russia Summit

Challenging America will be the focus of meetings in Yekaterinburg, Russia, on Monday and Tuesday for Chinese President Hu Jintao, Russian President Dmitry Medvedev and other leaders of the six-nation Shanghai Co-operation Organisation.

The alliance comprises Russia, China, Kazakhstan, Tajiki stan, Kyrgyzstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia.

The attendees have assured American diplomats that dismantling the US financial and military hegemony is not their aim. They simply want to discuss mutual aid – but in a way that has no role for the US or for the dollar as a vehicle for trade among these countries. The meeting is an opportunity for China, Russia and India to “build an increasingly multipolar world order”, as Mr Medvedev put it in a St Petersburg speech this month.

What he meant was this: we have reached our limit in subsidising the US military encirclement of Eurasia while also allowing the US to appropriate our exports, companies and real estate in exchange for paper money of questionable worth. “The artificially maintained unipolar system”, Mr Medvedev said, was based on “one big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks”.

Keen observers of America, if not effective managers of their own economies, these countries argue that the root of the global financial crisis is that the US makes too little and spends too much. Especially upsetting is US military expenditure – such as military aid to Georgia or the presence in the oil-rich Middle East and central Asia – using money that foreign central banks recycle.

Overconsumption by US citizens, US buy-outs of foreign companies and dollars the Pentagon spends abroad all end up in foreign central banks. These governments face a hard choice: either recycle the dollars back to America by buying US Treasury bonds or let the “free market” force up their currencies relative to the dollar – thereby pricing their exports out of world markets, creating domestic unemployment and business failures. US-style free markets hook them into a system that forces them to accept unlimited dollars. Now they want out.

This means creating an alternative. Rather than making merely “cosmetic changes as some countries and perhaps the international financial organisations themselves might want”, Mr Medvedev concluded his St Petersburg speech: “What we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries, will not dominate.”

For starters, the six countries intend to trade in their own currencies so as to get the benefit of mutual credit, rather than give it to the US. In recent months China has struck bilateral deals with Brazil and Malaysia to trade in renminbi rather than the dollar, sterling or euros.

Many foreigners see the US as a lawless nation. How else to characterise a country that holds out a set of laws for others – on war, debt repayment and the treatment of prisoners – but ignores them itself? The US is the world’s largest debtor, yet has avoided the pain of “structural adjustments” imposed on other debtor nations. US interest rate and tax reductions in the face of exploding trade and budget deficits are seen as the height of hypocrisy in view of the austerity programmes that Washington has forced on other countries via the International Monetary Fund and other vehicles.

It is no mystery to other countries how the US remains above the law. Foreigners see a financial system backed by American military bases encircling the globe. The IMF, World Bank, World Trade Organisation and other Washington surrogates are seen as vestiges of a lost American empire no longer able to rule by economic strength, left only with military domination. They see this hegemony cannot continue without adequate revenues and are attempting to hasten the bankruptcy of the US financial-military world order. If China, Russia and their allies have their way, the US will no longer live off the savings of others, nor have the money for unlimited military spending.

US officials wanted to attend Yekaterinburg as observers. They were told no. It is a word that Americans will hear much more in the future.

The writer is professor of economics at the University of Missouri

Source: http://www.ft.com/cms/s/0/e9104e82-58f7-11de-80b3-00144feabdc0.html

Tags: Unipolar, Multipolar, decline of the American empire, Russia China India summit, Shanghai Co-operation organization, Global Development News, USD, IMF, World Bank, WTO, reserve currency, economic hegemony, Medvedev, Jintao, Manmohan Singh, renminbi, Brazil, Malaysia,

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G20 Communiqué – Emergence by Emergency

So where do we stand, now that the momentous G20 event has concluded?

Well, one thing is for sure. Some pundits will be “up in arms” over the lack of tangible progress resulting from the summit.

However, this pundit is particularly impressed with the visible contours of the new global financial system.

In this author’s opinion, the most important takeaway from the G20 summit is that we, as citizens of the world, now have evolving multi-lateral coordination occurring on a global level.

See here: http://www.number10.gov.uk/Page18914

 

“We face the greatest challenge to the world economy in modern times; a crisis which has deepened since we last met, which affects the lives of women, men, and children in every country, and which all countries must join together to resolve. A global crisis requires a global solution.”

 

On a practical level, the implicit consensus understated here, is not to be overlooked. We now officially live in an age where a global consensus has developed in the sphere of the global political economy.

On a practical level, to get 20 human beings to agree on any one-thing is, in my view, a major accomplishment. As an experiment in analogy, take your 20 best friends and try to get them all to agree on a restaurant, and a time to meet…

After you’ve completed this simple experiment, then take 46 sovereign nations (the G19 + EU), and get them all to agree on immediate coordinated financial and regulatory action.

Impressive indeed!

 

“We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families, not just in developed countries but in emerging markets and the poorest countries of the world too; and must reflect the interests, not just of today’s population, but of future generations too.”

 

“We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.”

 

Clearly, the march toward an increasingly integrated world lurches onward.

 

“In order for our financial institutions to help manage the crisis and prevent future crises we must strengthen their longer term relevance, effectiveness and legitimacy.”

 

“So alongside the significant increase in resources agreed today we are determined to reform and modernise the international financial institutions to ensure they can assist members and shareholders effectively in the new challenges they face.”

 

“We will reform their mandates, scope and governance to reflect changes in the world economy and the new challenges of globalisation, and that emerging and developing economies, including the poorest, must have greater voice and representation.”

 

And now the real take home:

 

“we commit to implementing the World Bank reforms agreed in October 2008. We look forward to further recommendations, at the next meetings, on voice and representation reforms on an accelerated timescale, to be agreed by the 2010 Spring Meetings;”

 

“we agree that the heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based selection process; and”

 

“building on the current reviews of the IMF and World Bank we asked the Chairman, working with the G20 Finance Ministers, to consult widely in an inclusive process and report back to the next meeting with proposals for further reforms to improve the responsiveness and adaptability of the IFIs (International Financial Institutions).”

 

When we take into consideration that the G20 represents approximately 85% of global GDP, and provided that these reforms do not get bogged-down in partisan complexities, then we can look forward to a financial future that is, for better or worse, on the vanguard of a new era of co-operation and integration, the likes of which the world has never experienced before.   

http://www.g20.utoronto.ca/2009/2009-london-communique090402.html