The Costs of Corruption
April 8, 2004—More than $1 trillion dollars (US$1,000 billion) is paid in bribes each year, according to ongoing research at the World Bank Institute (WBI).
Daniel Kaufmann, the Institute's director for Governance, says this US$1 trillion figure is an estimate of actual bribes paid worldwide in both rich and developing countries.
"It is important to emphasize that this is not simply a developing country problem," Kaufmann says. "Fighting corruption is a global challenge."
The $1 trillion figure, calculated using 2001-02 economic data compares with an estimated size of the world economy at that time of just over US$30 trillion, Kaufmann says, and does not include embezzlement of public funds or theft of public assets.
It is extremely difficult to assess the extent of worldwide embezzlement of publi
c funds, "but we do know it is a very serious issue in many settings." For example Transparency International estimates that former Indonesian leader Suharto embezzled anywhere between $15-35 billion from his country, while Ferdinand Marcos in the Philippines, Mobutu in Zaire and Abacha in Nigeria may have embezzled up to $5 billion each.
Kaufmann notes that a calculation of the total amounts of corrupt transactions is only part of the overall costs of corruption, which constitutes a major obstacle to reducing poverty, inequality and infant mortality in emerging economies.
WBI research shows that countries that tackle corruption and improve their rule of law can increase their national incomes by as much as four times in the long term, and child mortality can fall as much as 75 percent. "We have found what we label as the '400 percent governance dividend'," Kaufmann says.
A country with an income per capita of US$2000 that addresses corruption, improves its governance and the rule of la
w could expect to see its income rise to US$8000 in the long run.
Tackling Corruption Can Boost Development
Not surprisingly, tackling corruption and governance can provide a major boost to a developing country, according to Kaufmann.
Countries like Botswana, Chile, Costa Rica, and Slovenia, which have curtailed corruption to levels comparable with those of many wealthy industrialized countries, challenge the popular notion that a country needs to become rich in order to address corruption. Research utilizing a comprehensive governance database of 200 countries shows, in fact, that higher national incomes per capita result from improving governance, rule of law, and corruption control.
There are many successes at the project level that also illustrate what is feasible, such as the citizen's report card in Bangalore, India, which has resulted in an increase in citizen satisfaction with local agencies and a decline in corruption, or expenditure trackin
g surveys in Uganda, which led to a reduction in budgetary leakages away from local schools.
Is the Battle Against Corruption Being Won?
Progress has been made in fighting corruption in some areas, but much still needs to be done, says Kaufmann. The main challenge lies ahead, and will require enormous political resolve, by national governments, the private sector (including multinationals), and international bodies.
Some country leaders and governments are serious about addressing corruption. On the international scene, one positive is the adoption of the United Nations Convention Against Corruption, signed in December 2003 in Merida, Mexico. Other international organizations, such as the Organization of Economic Co-operation and Development and the Organization of American States, have also implemented anti-corruption conventions.
Kaufmann says the World Bank, which until the mid-1990s had been constrained from assisting countries fight corruption, sig
nificantly stepped up its efforts under current President James Wolfensohn, following the landmark "cancer of corruption " speech on this challenge at the 1996 IMF/World Bank Annual Meetings.
Through projects in about 100 countries, the Bank is assisting in this area. Equally important is the Bank's own 'zero tolerance' policy on corruption internally and the aggressive approach to minimize corruption on Bank-funded projects. The Bank publicly names companies found to have been engaged in corrupt practices in its projects. So far more than 100 firms have been debarred.
Research confirms some countries have achieved success while others have not.
"There are success stories in some countries, cities and institutions. But the sobering reality is that for each success case, there has been inaction or deterioration in others. The variation in performance across countries, cities and institutions in controlling corruption is enormous. The key is to learn from the mistakes and successes of ea
rly experience in this area," Kaufmann says.
The Way Forward
Given the "sobering reality" of the extent of international corruption, some rethinking of how to address it might be necessary, according to Kaufmann. Key issues include:
- Viewing corruption within the context of governance and institutional change. Promoting the rule of law, protection of property rights, freedom of the press, political competition, and transparency in general, and in politics in particular (such as in campaign finance) is vital. Mechanisms to allow citizens to have an effective voice are also central.
- The power of data and transparency. Reformist countries utilize data to measure and monitor progress on governance and assist in decision-making on governance and corruption. Pro-transparency measures such as Freedom of Information Acts, public asset disclosure by high offici
als, and transparent access to the voting records of parliamentarians should be further encouraged. As important is the continuing scaling up in worldwide indicators as well as country-specific diagnostic efforts.
- There is no evidence that ideology, culture, globalization or privatization are culprits behind corruption. Corruption has thrived and been quashed by governments of all political leanings. Globalization can help control corruption by increasing transparency and competition.
- Revisiting the wisdom of anti-corruption agencies and traditional legal initiatives. The overall record of anti-corruption agencies (which are often created for political expediency and at the expense of difficult systemic reforms) is mixed at best. So is the focus on redrafting laws. This suggests that a shift away from these agency-creation and/or traditional legal initiatives may be warrant
ed. Instead, what is needed is moving towards much more focus on incentives, prevention, and systemic institutional and regulatory reforms, focusing on existing public, private and civil society institutions.
- Citizen involvement in fighting corruption. Anti-corruption efforts cannot succeed only by actions of a few government agencies. Civil society, the media, Parliament, the judiciary and the private sector must be involved in a participatory way, with full voice and empowerment. Innovative ways of involving the citizenry at the local level, working with their municipalities to improve governance and control corruption, can be very effective - such as in a large project reaching many Indonesian villages, or in the participatory budgeting process in Porto Alegre, Brazil.
- Open and transparent private sector competition, to avoid capture of state institutions by monopolistic private vested
- Domestic politics contributes enormously to the success or failure of any effort to reduce corruption. Vested interests need to be explicitly recognized and understood, acknowledging that at times the domestic private elite exerts undue influence against public governance reforms. For reforms to proceed, there has to be leadership from within the domestic political scene, which is prepared to overcome pressures blocking reforms from members of the public and private sectors. A redoubling of international efforts is crucial, but these will not succeed without leadership and resolve from within the country.
- The role of an international compact. International organizations need to distill the lessons of experience and suggest frank and concrete steps to improve results. Multinational corporations can significantly affect governance and corruption wit
hin an emerging economy - for better or worse. Thus, a set of incentives and transparency measures (such as 'publish what you pay' to governments; debarring of rogue firms engaged in bribery, etc.) is required to ensure a positive influence. Further disclosure in international banking and tackling money laundering are also important. A higher priority effort by the G-8 against corruption is also warranted. Finally, in this context, further prominence of governance and anticorruption incentives and criteria for eligibility to join global or regional economic and trade agreements can also be a powerful incentive. This is illustrated for instance by the cases of Chile (accessing early to NAFTA, and then EU and other such agreements), and the EU accession countries from the transition region. Eventual membership in these 'select' international economic and political clubs provided an impetus to improve governance.