Corruption – how it perpetuates itself

We can all think of instances when applying for a permit or a passport at a government office and the process is so long and complicated that a little ‘greasing the wheels’ won’t hurt. Besides, if everyone else does it, surely being principled isn’t the way to go, right?

The main argument for bribery, embezzlement and extortion specifically (and all types of corruption) is that in environments where it happens, if you don’t do it, you fall behind other companies, public office holders and private citizens. This state of hyper-competitiveness, where you have to pay (with money, services or promises to return the ‘favour’) for what should be performed without the payment creates a dangerous environment. 

Across the political spectrum there’s agreement that corruption is bad. So how does it continue existing and even in relatively stable countries, how does it rear its head in the first place?

Corruptie.org defines it as:

Corruption is an improbity or decay in the decision-making process in which a decision-maker consents to deviate or demands deviation from the criterion which should rule his or her decision-making, in exchange for a reward or for the promise or expectation of a reward, while these motives influencing his or her decision-making cannot be part of the justification of the decision.

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A simpler definition is ‘the abuse of entrusted power’. We can pretty much agree on what entrusted power is. Private or public, you have authority derived from a position. CEO, head of HR, President, Prime Minister, clerk at the car registration office, insurance representative.

The good – is there any good to it? 

If you have the money, it makes things easier. It speeds up bureaucratic processes, removes barriers to trade and gets you ahead of the competition. But what’s to say it won’t happen to you. After all, you could do it. Why won’t your competitors or everyone else as an individual? If it continues, market economics dictates a new equilibrium is established where everyone has to pay a bribe or tender a service in return – the briber’s dilemma. The only real winners in corruption are the ones receiving the bribe or doing the extorting. Long term, it distorts more than it lightens the load.

What causes corruption?

While there is no one trigger for corruption to point fingers at, there are a couple of reliable indicators. Over time the following broad causes have been identified:

The resource curse: having a lot of natural wealth (oil, minerals, timber, rare earth, diamonds, gas etc.) predicts corruption (and higher concentration of power in a small elite). The logic is that you only need to control a couple of roads, the extraction sites, the capital and the airport or port as a ruler. The vast majority of extractive industries can be performed either by foreign companies hired for a fee or unskilled labour. That means no need for wasting money on pointless things like education, internet connection or water pipes. Just pay your guards, police and army and keep the population down. This gets a lot harder to do if you need people to manufacture goods out of those raw materials or provide services. There’s no mine or well for banking, cleaning or IT management. 

Social structure and customs: Having a gift-giving culture, strong family ties and large families, the primacy of identity relationships (ethnicity, religion, clan, caste) over horizontal and rights-based relationships, weak separation of public and private sectors (appropriation of property, ties between officials and businesses) and many others can predict corruption. Another cause is ‘big man syndrome’. This is a mixture of the cult of personality and patron-client relationships replicated down a chain of influence, replicating a feudal system of loyalties and favouritism and can be very dangerous. You can easily think of examples of boastful leaders, with underlings that jockey for favour and a seat at the right hand of the ‘big man’.

Quick question – when is corruption … corruption?

 You think… ‘Easy. When you abuse power for private gain.’ A breakdown of the types of corruption usually includes bribery, extortion, embezzlement, nepotism, graft and abuse of discretionary power. With some of those, like bribery, there’s money changing hands. That’s the giveaway. But if, like me, you bribed your parents when you were little to leave you alone by doing what they asked (that’ll teach them!), you might have been involved in the other kind of bribery. It becomes corruption, rather than proper use of influence and power depending on the end-goal of the use of influence. If it enriches the private interests of the public official or private company, then it’s corruption. Simple right? (It’s not, because if we could tell good intentions from bad, human history would be sooo much simpler)

The simplest way to break it down is to look at the relationship. The Principal Agent problem.  

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The principal is the person or institution whose interests are being represented by the agent. Think of the local community and a police officer. There will always be slightly diverging interests. But that above-mentioned problem arises when the interests of the agent favour one course of action that damages the principal’s interests, which they supposedly represent. Let’s take this problem up to 11 – what if the local community isn’t all that principled. The lack of principled principals – not a critique of school headmasters, nor an analysis of Lack’s Principle about bird sizes, no no. This can cause the agent (i.e. the police officer) to follow the principal’s interests closely, but lead to damaging results to public trust, health or the rule of law.

Going back to the first point, that corruption is perpetuated by a competition amongst individual and private sector agents to avoid being left out. There is an argument that competition in itself can bring about corruption. Funnily enough, both too much competition as well as too little can lead to corruption. Too much and you get collusion  between companies to survive a crowded environment. Too little and you get extortive corruption to maximise profits when there’s no resistance. 

The perpetuating cycles.

Chicken or the egg? Corruption or competition at every level breaking down cooperation. I find this game teaching game theory a good simulation of how asymmetric information and preferences can lead to a breakdown in trust. Once trust breaks down, the principal-agent problem kicks into high gear.

Looking at definitions, corruption’s difficult to nail down or stamp out without civic involvement but it’s often the lack of trust in public institutions that leads to corruption and a slow erosion of principled principals. There’s a dangerous myth that economic growth removes corruption. That’s not true. See Russia during the oil price boom before 2014. Economic growth hides it. Everyone’s income rises a little so the corrupt businesses and politicians with much faster rising wealth don’t look so out of place. Don’t get me wrong. Regular run-of-the-mill income and wealth inequality aren’t always tied to corruption. But corruption can be one of the cogs in the system. 

In fact corruption accounts for 53% of the reduction in economic growth. Therefore in a corrupt system or country, even when times are good, economic growth is slower. But corruption, especially of the rent-seeking variety, has strong roots in bad economic growth. If you’re a public servant or even a high-ranking official, the hopelessness of economic stagnation can drive you to try and get yourself sorted out at the expense of others. This ‘I got mine’-ism, if not caught early, triggers a race to the bottom, where even more principled civil servants try to cash in on what influence they have. This is one of the ways economic growth then lags and reinforces the loop.

What about the US? They allow lobbying. That’s corruption, right?

The main difference between the US and the EU for example, when it comes to lobbying is that in the EU, the policy-makers that get lobbied aren’t elected. This means they don’t need to raise campaign funds, which removes one element of a principal-agent problem. But it is still legal to lobby, albeit in a different form.

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US campaign finance regulations and lobbying have always struck me as the most divisive example of where different countries and political parties disagree about corruption. You’ll find few supporters of bribery, for example. But lobbying is different and it’s partly down to whether companies are treated as people. 

While the United States allows private citizens organisations and private companies to lobby Congress members and try to convince them to pass specific legislation (which would be fine if they were well informed). The arguments for this go as far as calling it essential in a participatory democracy. This is true and citizens, trade unions, scientists with actionable proposals (here, here and here) and groups with common interests from lobbying Congress about their worries, aims and proposals. However, the issue stems from the imbalance between private citizens and companies, not just when it comes to money (hint – $1,050,000 in 2019). The sugar lobby is a famous example of how much more companies can do to convince legislators. Part of that boils down to the willingness to promote bad science (see oil companies and climate change denialism).

The problem may still persist even if the US does outlaw lobbying or reform campaign finance regulations. In fact, attempts to reform that system with a (bipartisan) bill in 2002 (syke, that bill didn’t pass, this one did) were struck down by a Supreme Court decision. In many ways lobbying and campaign advertising supported by businesses are seen as a part of free speech. The ACLU compiled a fact sheet regarding HR380 (Shay-Meehan, the bill that did pass).

Mostly this issue boils down to whether companies and individuals are considered to have the same rights in a court of law. Briefly put, is corporate personhood a thing and should it be? (I’m working on a piece about this). This is not in itself corruption, but plays on similar tunes and is always worth watching.

The improvements. 

Let’s look at a couple of countries and see if anti-corruption measures really make that much of a difference. I’ll pick some of the more corrupt countries and some of the least corrupt ones and see the differences in their anti-corruption measures.

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I’m using Transparency International’s Corruption Perception Index 2019 (released in Jan 2020) for this analysis. 

South Korea has risen in the rankings because of strong enforcement of campaign finance regulations. While there’s a lot of money in politics in Korea, as one would imagine with industry giants like Samsung, Daewoo and Hyundai, there have been multiple arrests of high-ranking officials for violating campaign finance laws.

Cote D’Ivoire has also risen since 2010, thanks to transparent elections and inclusive elections processes (things like restricting access to voting booths, purging the electoral register and complex registering requirements would have been exclusive). However, campaign finance regulations are still only loosely enforced.

Indonesia’s ranking also improved and the KPK (the anti-corruption body) is seen as a symbol of modernity and progress. However, there is still considerable civil society repression and the KPK’s autonomy is being reduced by the government. This is despite the government’s desire to boost foreign investment and economic growth, which are tied to reducing corruption in Indonesia.

For Armenia, its improvement  since 2018 came following the revolution that year and the formation of a new parliament. The country has demonstrated promising developments in advancing anti-corruption policy reforms. However, unaccountable public sector activities are still ongoing and conflicts of interest in business and politics remain a big concern.

One of the best performers, according to the CPI 2019, is Estonia. It has historically been a high performer, with strong rule of law and oversight institutions. However, even among the top performers there are still issues: the money laundering scandal involving the Estonian branch of Danske Bank shows that even with strong oversight, corruption is still present. 

One important take-away, and feel free to look more into the linked CPI 2019, is that there are solutions to corruption and it is not a done deal or an unchangeable fact. 

Solutions: 

A model of corruption by Rober Kliitgard in 1998 has been counter-argued by the anticorruptionblog here. I agree with the comments as well, that in the 1990s there was a real lack of research and options for public policy. The solutions to dealing with it are much more well-researched now. Here are some of them, with my opinion of them in bold.

  1. Democratic engagement – proper education of as many citizens as possible in basic finance and legal matters, which allows public administration evaluation by citizens. A good proposal for public finance fraud and embezzlement, at the local level where public finances are relatively simple with well-established discounting models, this is one of the best tools. Not very useful in developed countries and where complicated nested subsidiaries of public companies drag the process out. In my experience, the best planned acts of corruption delay and discourage the investigation until public opinion tires of it, discrediting the very anti-corruption efforts. See Indonesia’s KPK.
  2. Reducing unilateral discretionary powers. Most countries only allow discretionary powers to the judiciary, where courts make decisions that can’t be overturned except by other courts. Weakening judiciary independence usually brings it under the control of the ruling party or ruler. My two kopeks on this is that all-powerful presidents with broad executive and veto powers are a bad thing, even if originally well-intentioned. What’s to stop them from one day deciding against public opinion that a class of voters shouldn’t have full rights, for example? While not flawless, the well-established triad of executive, legislative and judiciary keeping each other in check works well. No one accumulates too much power. Yes, it slows down the process, but you avoid far worse fates. Also notice this tends to happen in times of crisis where fast reaction times are put above the preservation of democratic ideals. The downside is too little discretionary power and public officials are more likely to bend rules because a system is too cumbersome. See Italy’s many business permits.
  3. Access to information – Transparent and easily accessible government rulings, decisions and meeting minutes. Government contracts and other information about policy and governance are uploaded and archived, digitally if internet access is widespread enough and in some physical form as a low-tech back-up. Pretty simple, really. Publish government and publicly traded companies’ relevant information and you have fewer instances of obvious fraud. Shame is a powerful disincentive. Especially valuable for public contract awards. Doesn’t get over the language barrier – legalese is still the go-to tool, whether legal or illegal, for making things difficult to read, but 1. helps a bit with that.
  4. Close international loopholes – financial disclosures reduce money laundering and cross-border operations. Similar to 3., helps remove the main way for corrupt business people and politicians to cash in on their illicit deals.
  5. Cooling-off periods – A period when civil servants and politicians can’t join lobbying organisations or private sector companies. You don’t want a conflict of interest to occur. Simply add a ‘non-compete’ period of a couple of months to a year, where they can’t join companies in the same industry.
  6. Meritocratic selection – in the case of hiring, promotion and job assignment, there can be strong in-group attachment to clan, ethnicity or other identity markers. More meritocratic selection based on examinations, experience and policy proposals can reduce favouritism and nepotism, one type of corruption. These can be fudged, as there’s always some ‘team spirit’ or unquantifiable metric for hiring and decision-making, but some enforcement can always help.

One key thing to note is that democracy in itself does not reduce corruption (page 80, last paragraph). In fact, in democratic transitions, factors enabling corruption can manifest. Governments trying to buy legitimacy, compromising with strong private actors for the provision of public goods and asset allocation can lead to arrangements that promote rent-seeking, public contract corruption and bribery. It is the introduction of institutions that remove the factors at the root of the problem that removes corruption.

Conclusion and the sum-up.

A supposedly ancient Russian proverb doubling as a Milton Friedman quote goes: “Nothing is as permanent as a temporary solution.” 

Friedman also added “…as a temporary government program.”. But the fact remains, policy decisions made now will take years to untangle and in many countries where corruption is ever-present, decisions made years ago because of unprincipled principals, self-interested agents, members of a group helping their own, rent-seeking business people with influence in fledgling governments or all-powerful dictators leave marks that take decades to undo.

But removing those marks has been done before. Corruption has been reduced, returned and vanquished again and in places like Uruguay, Estonia and Greece it has fallen since 2012.

It’s no surprise that corruption is such a many-headed beast. This Scylla of modern day policy and nation-building is the bane of legislators and foreign policy wonks. It’s also hard to find a simple cause and effect relationship. This is why I referred to so many of the ‘causes’ of corruption as predictors. Corruption is the wild root that rots the house. It comes with many symptoms, none of which are the cause of it. To understand it you cannot simply pluck the end of the root in sight, but trace it down to the source, the factors that laid the ground for corruption to happen. With loops feeding back into it and time on its side, no wonder anti-corruption efforts often fail.

But it’s also a worthwhile fight. Trust in one’s community and country’s institutions and the stability that gives has a host of benefits, from longer life expectancy (the stress of political instability is not known to help heart conditions) to better savings rates and financial stability. 

So my simple sum-up of this chonk of a topic is this: corruption bad, transparency good. Transparency hard, accountability hard, but corruption long term worse. Do everything to stop corruption. Grog out.

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