Financial Transparency Coalition

A Wall Street Journal article and a BBC program have recently discussed the potential merits of corruption^[1]. This seemingly provocative topic is indeed thought-provoking, but not exactly along the lines that the publishers or contributors intended.

Is there such a thing as good corruption?

If we try to sum up the arguments that were developed, they are several. Corruption may be a way to circumvent bureaucratic inefficiencies, and to set a business or export goods more quickly, if not to simply survive like in the former USSR. The networks between government and business, with their unavoidable conflicts of interest and corruption risks, also produce business success. There are several cases of notoriously corrupt economies which are or were also fast-growing economies, when corruption is somehow centralized and predictable, like in Suharto’s Indonesia where the Suharto family’s financial demands were simply factored in by businesses as transaction costs, while Suharto made sure the economy was growing so that his own wealth was also growing. Lastly, those systems of centralized and predictable corruption, when destroyed by a change in power or political upheaval, may be replaced by decentralized corruption, the costs of which are significantly higher.

It is worth addressing these arguments one by one. Circumventing bureaucracy is clearly a powerful motive for corruption, but it is obvious that any individual paying a bribe does so in order to gain profit from that payment. It is therefore not enough to say that corruption brings benefits to the bribe-payer; we have to ponder the respective merits, for the general population, of a system plagued by corruption, and of a system with reduced or minimal corruption. The expression of “bureaucratic inefficiencies”, although or because it is often used, is also very vague and can be applied to extremely different situations. The judgment on the efficiency of a particular office or clerk also depends on the subjective situation of the observer. A dynamic business person may find a civil servant inefficient because his application for a license is subject to extensive analysis, whereas a parliamentarian will find the same civil servant efficient on the same subject because of the time devoted to considerations of law compliance and public good. Awarding quick exploitation licenses may be detrimental to the public budget, the environment, the labor or even human rights, and circumventing bureaucrats who serve the public efficiency and not the private one should not be considered as contributing to a country-wide optimum.

It is true, though, that some bureaucracies are no longer, or have never been, serving the public good, and the well-known example of the former USSR is being used, with its long history of wide corruption as a means of economic survival for a large number of citizens. It is however difficult to understand why the USSR example makes the case for good corruption. Many inhabitants had to enter into corrupt transactions for various amounts, but the small benefits they derived from them, like the benefits to the rogue business person, are by no means a proof of the system’s global virtue. To the contrary, the soviet system proved to be a system which poorly served the public good, and in which fairness was greatly impaired by the corrupt nature of the bureaucracy, increasing the often brutal power of the already powerful whereas weakening the weak.

State inefficiency, not to mention failure, is always a cause of massive corruption, but making it an argument for the social value of corruption would be praising the Ancien Regime’s civil servants, from the Spanish officials in the Americas to the French magistrates, who bought their offices, were barely paid, and made their profit out of the populations they were responsible for. Corruption in the bureaucracy is one very important element of a vicious circle going from weak governance to low tax efficiency, insufficient wages for civil servants, and corruption which continuously weakens governments.

The second argument is the one of business success partly lying upon networks and conflicts of interest. It is true that well-connected businesses have an advantage over their competitors, and that the exploitation of this advantage through bribes or kick-backs may bring them substantial profits. It is also true that legal and reputational risks are today increasing for those tempted by such behavior, and more importantly, the failure by corrupt civil servants to adequately perform their duties creates a potential damage to economic fairness and public good. Corrupt deals may contribute to global growth, but more economic growth, and better oriented to the public good, would have been created by adequately priced public tenders or higher use of local resources, not to mention compliance with environmental, health and safety regulations.

The third, and a bit surprising, argument lies upon what apparently forms for some observers the “Suharto model”. This model consists in a “centralized”, “predictable”, “measured”, “stable”, “forward-looking” corruption system in which a dictator allegedly stimulates long-term economic growth in order to maximize his personal profit through well quantified and predictable bribe payments. Those payments are factored in like taxes by the corporations, which in turn enjoy a business-friendly environment. There are several flaws in that way of reasoning. First of all, as even the advocates of good corruption recognize, there is a major difference between bribes and taxes, which is that bribes go to an individual whereas taxes go to the public budget. This difference may be insignificant for the bribe-payer who wouldn’t worry about legal consequences, and would agree to pay high bribes and low taxes in a business-friendly environment. The difference is huge, though, for the general population which would have benefitted from the taxes being used in the budget, and does not benefit from the bribes being paid. Only a marginal amount of the Suhartos’ wealth was spent in charitable activities or local development, and even the amounts reinvested in local economic activities did not represent, by far, the entirety of the wealth which was saved or reinvested elsewhere, mostly through secret accounts in developed countries.

Under the same Suharto argument, we read that it was in the dictator’s interest to favor infrastructures that enabled growth, since he was taking profit of it. A government caring for the public good would arguably also have favored growth, but that growth would have been different. All kinds of growth are not of equal interest to a dictator who wants to maximize his US Dollar revenue. The investments that are favored allow the production of exportable goods, so that the investors can easily pay a bribe in dollars while expecting a pay-back in the same currency. Foreign investment is probably needed in every economy. Highly extraverted economies, which rely too much on the demand and currencies of developed countries, are fragile economies, as very well illustrated by the 1997 Asian crisis, the biggest victim of it was Indonesia.

The 1997 crisis and the subsequent fall of Suharto bring us to the last argument. We have to be happy with the Suharto model, because if we get rid of Suharto and his likes, we will be confronted with a wider and less controlled corruption, which will discourage business. To borrow Raymond Fisman’s expressions, “roving bandits” are worse than “stationary bandits”. It is not our purpose here to discuss the respective merits of brutal dictatorship and state failure. What is being implied by the warning against what could happen after the fall of a strong dictator reveals an underlying belief. According to that belief, some, many or most countries would be unable to achieve effective checks and balances in their political regimes, and for those countries the power of an iron fist would be close to an optimal state. This belief often lies behind the rejection of transparency and accountability as western and non universal principles. The idea is not new, and comes from the West, having been the main intellectual justification of the European support to African authoritarian regimes in the 1960’s and beyond, or the US support to similar regimes in the Latin American “backyard” for most of the 20^th century. Sub-contracting law and order to a powerful man may be the most efficient way of doing corrupt business, but in the title of the WSJ article, “Corruption You Can Count On”, the You certainly does not refer to the local population, but rather to some, not all, foreign investors.

If there is one point on which we can probably agree with Raymond Fisman, it is the link between authoritarian regimes and corruption. Corruption may be observed everywhere, also in traditional democracies, but political violence is consubstantial to massive corruption. This violence can be exercised by a man and his clan for their own benefits, or by competing parties so that the country is on the verge of civil war. Transparency International knows by experience, through its presence in 100 countries from the US to fast-growing Asia through old European states and young African nations, that systemic corruption, in any form, causes violent fight for private appropriation of public wealth. There is no good corruption.