Bribery and corruption - impact on business environment

Speech delivered by the Chairman of the Commission to Investigate Allegations of Bribery or Corruption, Justice Ameer Ismail at the Key Persons' Forum organised by the Federation of Chamber of Commerce and Industries Sri Lanka and Small and Medium Entrepreneur Developer, a project funded by Friedrich Nauman Stiftung (Fnst).

Bribing your way through customs; paying off agents introducing you to deals; acting in collusion with your competitors to fix prices; copying designs; infringing intellectual property rights; providing expensive gifts to government officials in return for favours; using child labour in your enterprise; allowing environment waste to pollute the whole community; unfairly exploiting your labour force; making false entries in your books and records to generate money to finance a bribe.

None of you would want your company to be doing any of these things. Yet, companies big and small right across Asia do these things every day. Some companies manage to survive and get away with it. Others get caught up in public scandals that cost them a fortune destroying their brands, defending themselves and ultimately losing out on business.

A rooted culture

It is not easy to change a culture, when competition, corporate profits and the need to produce results drive behaviour. Compliance with the law is easier said than done. Maintaining a clean image from the board room to the working of the factory is hard. Compliance with policies, procedures and customer expectations around ethics is even harder. 'Corporate ethics' is about doing the 'right thing'.

Any form of behaviour which departs from ethics, morality, tradition and civic virtue could be labelled as corruption. It has the effect of slowly but steadily destroying the fabric of society. Corruption is an act done with an intent to gain some advantage, inconsistent with one's official duty and acting to the detriment of the 'rights' of others.

It includes bribery but it is more extensive. It encompasses more. Corruption is not a synonym for any sort of crime nor is it the same as waste, fraud extortion or inefficiency although these are sometimes companions of it.

Corruption is the misuse of power, office or authority for private profit. The office can be a public office or it can be any position of authority even in the private sector. It can occur both in the public and the private domain, and often in collusion with individuals from both sectors.

Enforcement is therefore necessary on all sides to ensure that not only individuals but also high powered politicians and corporations will be subjected to the same standards. Law enforcement and corruption investigation would then be a uniform process.

'A cancer'

Bribery is an evil practice that threatens the foundation of any civilised society. The Privy Council in a recent case, speaking of corruption in the same breath as drug-trafficking characterised both as 'cancerous activities'.

The analogy is popular. World leaders have called it a cancer. The Prime Minister of Albania said, "corruption is a cancer every moment. It works to weaken efforts against it, so that it can take over."

A Minister from Eritrea remarked, "corruption is a dangerous cancer that will destroy a healthy culture, pollute the moral and accepted values of society, undermine the rule of law, decimate the social and economic rights of the majority and retard the production capacity of the people and government. It is the greatest threat to national security as well as to reconstruction efforts."

Sour impact

Corruption is a global phenomenon but it has a greater impact on developing nations, rather than on more affluent countries. There are certain characteristics of corruption which make its effects extremely destructive in the third world where corruption occurs up-stream, whereas in the developed world it is more a down-stream phenomenon, though a need based or 'petty corruption' could also occur down-stream.

Most of the money gained through corrupt means in the third world is immediately smuggled out to safe havens abroad. While there is some capital flight in the developed countries as well, a greater proportion of the 'corruption money' is ploughed back into domestic production and investment which, from a country perspective, is a less destructive process.

Third world corruption is not effectively confronted. It is sometimes overlooked and not punished. It leads often to promotion of individuals rather than to prison in this part of the world.

The big fish, unless they belong to the opposition, rarely fry. In contrast, through a process of accountability even top leaders in industrialised countries are investigated and prosecuted. Corruption in the third world results in further impoverishment and the diminishing of dwindling resources. The per capita income of a large proportion of the population is far below the poverty line.

Poverty

The reality is that while some make a fortune through corruption in the third world, the majority of the population cannot meet even their basic needs while national budgets have yawning gaps. Corruption in such a setting, if unabated, will lead to massive human deprivation. Combating corruption in this region is not just about punishing corrupt politicians and bureaucrats but about saving life and preserving the right to life.

A recent issue of the Hindu newspaper reported that the World Bank has unearthed serious cases of fraud and corruption in five projects in India receiving bank aid in relation to malaria control, health-system development in Orissa, food and drug capacity building, national HIV/AIDS control and tuberculosis control.

The fraud and corruption came to light during a detailed implementation review by the World Bank with the support of the Government of India. The probe had shown 'systemic flaws', 'weaknesses in project design, supervision and evaluation'.

Blow to human rights

The Government has promised to take 'exemplary' action against those found guilty of these 'unacceptable indicators' of fraud and corruption. If we pause to reflect for a moment on the five health projects identified in this international investigation, we can understand why corruption is an assault on basic human rights, in this case, on the right to health.

Corruption robs civic life of public virtue. The effect of corruption in developing countries is most destructive and savage. It would be difficult to exaggerate the revulsion of ordinary citizens to the institutionalised venality of public life.

Petty corruption is especially endemic at the lower, clerical levels of administration - precisely the point at which the ordinary citizen comes into daily contact with officialdom. People are forced to pay bribes for securing virtually any service connected with the government, even that to which they are entitled by right and law.

People naturally tend to judge the entire structure of government on the basis of their own direct experiences with the agents of government. The bottom ranking countries in the corruption perception index of Transparency International is notorious for influence peddling politicians, money seeking bureaucrats and bribe dispersing entrepreneurs.

The prime issue in most Asian countries fuelling public anger is public sector corruption involving politicians, public servants and law enforcement officers. The biggest cost to the country is political.

In the Philippines, a wave of public anger against corruption swept the then President Joseph Estrada from office eight years ago and replaced him with his deputy, Gloria Macapagal Arroya. In Japan, successive stories of corruption have gradually undermined trust in the bureaucracy and the ruling Liberal Democratic Party.

In China, Indonesia, South Korea and Thailand in recent years, senior officials have been forced to resign or face criminal charges for abusing public office for private gain. Prime Minister Thaksin Shinwatra was overthrown in a military coup, not the least, because of widely believed allegations of abuse of power for personal political and financial gain.

In Pakistan, the equally widely held perceptions of corruption by the civilian governments of Benazir Bhutto and Nawaz Sharif helped to establish the initial acceptability and legitimacy of army chief Pervez Musharraf's military regime.

In turn, the failure to stem the rot of public venality and the military itself being infected by it steadily undermined the public legitimacy of the Musharraf rule.

Foreign examples

Because corruption reaches to the very top in so many societies, a bottom-up strategy for weeding it is unlikely to work. Instead, a top-down approach is needed. In Malaysia, when Abdullah Badawi became Prime Minister, he gained public support for trying to tackle corruption. In India, Manmohan Singh began his prime ministership with the huge advantage of widespread public perception that he is clean and incorruptible. His public perception of probity remains intact.

Reasons

Let me now make three points about corruption before we consider what we can do to combat it. First, corruption occurs more readily in certain institutional, political and cultural settings.

The levels of corruption will tend to be higher in countries and institutions where democracy and good governance are not widely valued or practised, where there is no press freedom, where the government's role in the economy is large and monopolistic, where there is prolonged wars and terrorist activity, where public servants are poorly paid and poorly qualified, where the private sector involvement in the economy is thin and where the rules of economic dealings are unclear.

Corruption is a governance issue - the failure of institutions, the moral decline of public life, lack of capacity to manage social, economic and political affairs by the rules of the game. The levels of corruption will be higher under such conditions.

The second point is that corruption is a crime of calculation, not one of passion. Corruption is an economic crime. Morality matters, of course, but given the level of public morality, the amount of corruption depends on economic calculations made by the parties involved in the corrupt activity.

Motivation

They are motivated by the benefits of the activity. They consider the probability of being caught, and if caught the expected penalty. Will it be immediate or in a few years when the incident is long forgotten? The corrupt individual will proceed if the benefit he could expect to reap from his corrupt activity minus the other factors like the moral cost and the probability of being caught would be greater and be of value to him according to his calculation.

Third, these calculations of benefits and costs have a systemic pattern. There is a formula for corrupt systems: C = M + D - A. Corruption equals monopoly plus discretion minus accountability. If a system gives an official monopoly power over goods or services, the discretion to decide how much and the manner of its distribution, while the system is itself not subject to accountability, then the system, will be manipulated to serve corrupt ends.

Difficult task

Let us now agree, for a moment that it is difficult in the short run to change the basic institutional, political and cultural settings. Let us also agree that we do not have a ready way to change people's morality, again at least, in the short run. Can we nevertheless prevent corruption?

The answer is yes, in the sense that we can reduce corruption but never eliminate it. Courageous leaders around the world have made impressive progress against corruption. The case of each country is different but the themes which emerge from their strategies might be helpful for leaders to follow.

They effect a change in the existing corrupt institutional culture. When corruption is systemic, the institutional culture grows sick. The norm is corruption; expectations are that corruption will continue. Cynicism and despair would be widespread.

There is a feeling of helplessness; change would seem impossible. However, there are leaders who have improved the institutional culture. What did the leaders do? They sent a strong signal of change. In corrupt societies, words counts for little. The culture of corruption contains the idea that big fish will swim free, the powerful would enjoy impunity. Successful leaders change this idea through impressive action, not just words.

One step is to fry some big fish.

Deeds not words

A second principle is to make an impact by 'picking low-hanging fruit'. Successful reformers create short-term successes that are highly visible and change expectations. They work through existing institutions. They strengthen their anti-corruption mechanism. They openly demonstrate a political will and a commitment to eradicate the menace, not merely by words but by concerted action.

They mobilise and co-ordinate a variety of resources inside and outside the government. The fight against corruption requires allies. The business community and civil society can provide information about where corruption does occur and how corrupt systems work.

(To be continued)