Globalisation, Corruption and Poverty Reduction

by E Jane Ellis[1]

1. Introduction

The poverty experienced by many nations has been an international concern at least since the United Nations was established. A number of factors contribute to such poverty, including war, exploitation and illiteracy. Corruption, particularly endemic corruption, is also a significant contributing factor to the continuation of poverty and the underdevelopment of a nation's society, government and economy.

This article discusses corruption in the context of private business, among others, paying bribes to foreign public officials toward securing an illegal advantage. It defines corruption, identifies the wrongs of corruption and its impact, discusses whether globalisation has resulted in a worsening of corruption and then summarises what is being done to address corrupt practices.

Clearly, development aid has had, and continues to have, a significant role in corrupt activities. Unfortunately, there is insufficient space to address corruption and development aid adequately. Although it is clearly a related topic, it should be addressed as a separate issue and given individual attention. It is encouraging to note however, that of late several multi-lateral and bi-lateral aid agencies are admitting and looking into this internal problem.[2]

2. Corruption

2.1 What is Corruption?

Transparency International defines corruption as the abuse of power for private advantage.[3] In effect, corruption is a legal wrong arising from a particular conduct or activity and suggests moral bankruptcy of an individual, a bureaucracy or a business.

Scholars have identified a number of different kinds of corruption. For example, it is argued that one can distinguish between political and bureaucratic corruption and parochial (to achieve status) and market corruption (for money) and that recognising the motivators behind these different kinds of corruption can be useful in determining ways to combat the problem.[4]

A distinction is also made between grand corruption and what is known as facilitation payments, grease payments or petty corruption.[5] Grand corruption involves the making of large payments to people in positions of power in order to secure a right or obtain an advantage that could not be secured or obtained legitimately.

Petty corruption involves the payment to minor officials of small amounts of money toward securing a right that is legitimately due. For example, paying extra to have a telephone installed or to have it installed more quickly.

Petty corruption, while not condoned, is considered to be of less concern than grand corruption. This is because the motivators behind, and the consequences of, petty corruption differ significantly from those of grand corruption. That is, facilitation payments are not considered to distort international trade or the economy nor are they considered to undermine the economic development of a country.[6]

While it is understood that in many countries facilitation payments can impose a direct burden, particularly on the poor, and sometimes are the most 'visible' face of corruption, the international effort toward combating corruption, and the focus of this paper, is on grand corruption.

2.2 What is wrong with corruption?

Bribery, the most prevalent form of corruption, is prohibited in almost all countries world-wide[7] even in those countries where corruption is endemic, such as Indonesia and Nigeria.[8]

It has been argued that corruption, in its most negative portrayal, is a western construct and that what constitutes corruption and bribery in a developed country, is no more than a traditional and cultural practice in another, non-western and developing, country. The corollary to this view is that where there existed traditional practices such as gift giving to chiefs and important people, this was done openly and with the expectation that the gifts would be passed on or shared (some see this as an early taxation system). The modern day practice of secret and personal gifts is a perversion of such traditions, and in many cases is a modern construct quite unrelated to traditional practice.[9]

Even those countries that argue against the imposition of western values have explicitly recognised through legislation that bribery and corruption are not cultural practices but illegal and outlawed activities.

Further, concerns about the level and pervasiveness of corruption raised by the population in countries such as Nigeria and the old Zaire indicate that such corruption is not generally accepted as a traditional right. This is further evidenced by the fact that such conduct is inevitably shrouded in secrecy.

It also has been argued that corruption, in fact, could have a neutral impact on an economy and therefore should not be illegal.[10] Indeed some have gone so far as to argue that bribery can be an indication of the high level of competitiveness between businesses and prohibiting businesses from bribing could result in them operating more as a cartel.[11]

The reality, however, is that inefficient companies are both more likely to bribe, and to bribe more, than an efficient company because it has more to gain from doing so. Further, the overwhelming evidence is that the damage caused by bribery and corruption to a business, society, government and economic development far outweighs any perceived benefits.

Corruption is a symptom that something has gone wrong in the management of the state. Institutions designed to govern the interrelationships between the citizen and the state are used instead for personal enrichment and the provision of benefits to the corrupt. The price mechanism, so often a source of economic efficiency and a contributor to growth, can, in the form of bribery, undermine the legitimacy and effectiveness of government.[12]

Corruption is an economic, legal, environmental and social issue. It corrodes the social structure and trust in government, damages the economy and ultimately undermines the legitimacy of the state.[13] In addition, the "benefits" of bribery, particularly grand corruption, inevitably are enjoyed by a very few members of any given society and tend to go disproportionately to the rich to the detriment of the poor.[14] Indeed, it has been observed that, "the most serious corruption is an elite activity".[15] Recent studies suggest that serious corruption also tends to benefit men to the disadvantage of women. This is because corrupt activity means less money is available for health and social security and that women suffer disproportionately as a consequence.[16]

The significant damage corruption causes to the economic development of a country also is felt most strongly by the poor, and therefore contributes to poverty. That in itself usually threatens the social and political fabric of a nation. A good example of the corrosive impact of corruption on a society and nation can be found in what was Mobutu's Zaire.

Corruption and bribery encourages competition in bribery, rather than in quality and price of goods and services. It inhibits the development of a healthy marketplace. Above all, it distorts economic and social development and nowhere with greater damage than in developing countries ...
... Most important, the heaviest cost is typically not in the bribes themselves but rather in the underlying economic distortions they trigger and the undermining of institutions of administration and governance.[17]

2.3 Corruption and the impact on economies

There is no clear estimate of the global cost of corruption. However, according to the Association of Certified Fraud Examiners, all organisations world-wide lose around 6% of annual revenue to fraud and corruption. In the United States, the cost is estimated to be around $400 billion per year.[18] While it is unclear what percentage of this is attributable to corrupt activity, it suggests that corruption does result in significant sums of public moneys being illegally diverted to private use. These significant sums that are being enjoyed by a few private individuals would go some way to redressing the debt being experienced by the more heavily indebted poor countries.[19]

Corrupt behaviour by public officials who are important decision makers can result in the wrong projects being developed usually at the expense of smaller, more labour intensive and ultimately more socially and economically beneficial projects.

This is because it is easier to maximise profits through major short term capital intensive projects as opposed to slower labour intensive projects that use local resources, and would be of more benefit to the poor, such as constructing schools, clinics, wells and simple sanitation. Developing countries have an abundance of examples of projects that were driven by the wrong motivators, especially during the 1970s and 1980s. This has resulted in many countries having steel mills, sugar refineries or other processing plants that cannot be used; inefficient and unnecessary dams; expensive national stadiums and structures; poorly constructed and un-maintained roads and railways. At the same time, the poorest members of these countries remain without basic services, such as schools, water, health centres and sanitation.

3. Does increasing globalisation mean increasing corruption?

There is no empirical evidence to suggest that increasing globalisation has led to increasing corruption.[20] Certainly, since the early 1990s there has been more evidence of corruption than previously. But this also could reflect the cessation of the Cold War which, it could be argued, ensured the corrupt activities of politically strategic politicians remained conveniently overlooked.

It is clear, however, that unless concerted action is taken, the level of corruption will only increase. What is required to curb corruption is both the reform of the public sector in those nations where corruption is most endemic (as well as others)[21] and a change in attitude by the private sector.[22] Increased numbers of wealthy companies trading around the world cannot help reduce corruption unless they commit themselves to not give bribes. And there is evidence to suggest that countries with strong anti-corruption programs are seen to prosper. For example, a 1997 study concluded that if the corruption occurred in Singapore to the same extent as Mexico - it would be equivalent to increasing the tax rate on the foreign investor by more than 20%. Accordingly, it concludes that increased corruption has the same deterrent effect on investment as increased taxes.[23]

While multinationals have gained in number and economic strength over the past few decades they have not, and cannot under the existing structure of international law, usurp the role of the state.

4. Can corruption be curbed?

Given the:

transnational nature of bribery and corruption,
the detrimental impact on development,
the endemic nature of corruption in many states such that it has become difficult if not possible for businesses to operate transparently, and
the resulting distortions to the global economy

it is recognised that the issue can only be successfully addressed if there is international co-operation.[24] This is particularly so as those local systems introduced to address corruption are often themselves corrupted or at least perceived to be by a distrustful population.[25]

United States enacted the Foreign Corrupt Practices Act ("FCPA") in 1977. The FCPA prohibits American companies and American citizens from bribing foreign public officials, foreign political parties or candidates for foreign political office. Criminal penalties are imposed in the event of a breach. The prohibition does not extend to the making of facilitation payments, or petty corruption.

Despite the leadership provided by the United States, however, it was not until the 1990s that other countries began to follow suit. The World Bank, among others, after many years of refusing to acknowledge or address corruption (as it was an 'internal political issue'), now targets corrupt practices as a major cause of under-development and provides assistance to countries seeking to address the factors underlying corruption. This includes introducing measures to combat fraud and corruption and black-listing companies from participating in World Bank projects where they have been found to have breached World Bank procurement guidelines.[26]

Transparency International was another private sector initiative toward curbing corruption. Transparency International, which was formed in 1993, is a coalition against corruption and has national chapters in 80 states around the world, most of them in developing countries.[27]

Transparency International is a non-political and non-profit organisation that does not take sides, or impose judgement on either bribe payers or bribe seekers. It does not investigate individual cases nor does it seek to expose individuals who engage in corrupt activity. Instead, Transparency International devotes itself to combating grand corruption through creating awareness, improving systems and encouraging other organisations and individuals to join the coalition.[28]

Transparency International uses a number of strategies to achieve those ends and has introduced two surveys as part of those strategies: the Corruption Perception Index ("CPI") and the Bribe Payers Index ("BPI"). The CPI, which has been published annually since 1995, has been instrumental in increasing public awareness of the problems of corruption. The CPI ranks countries in terms of the degree to which corruption is perceived to exist among public officials and politicians. The BPI, which was launched in 1999, in contrast lists those countries in order of the propensity of their businesses and business people to pay bribes.

The problem of corruption thus is becoming increasingly exposed and increasing numbers of agencies and businesses are both prepared to speak out against it and to take steps toward addressing it. Transparency International, through its national chapters, works with all governments, institutions and private sector companies and organisations, be they for profit or non-profit, to assist them in this process.

5. OECD Convention

The most significant initiative was the adoption by OECD member countries and 5 non-member countries in December 1997 of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions ("OECD Convention").

The OECD Convention obliges parties to the Convention to implement legislation that prohibits the bribery of foreign officials and requires parties to impose "effective, proportionate and dissuasive criminal penalties" on any person, including corporations, who breaches this prohibition. Each party is obliged to take necessary measures to prohibit the use of accounting or book keeping methods to hide bribery payments and to ensure that bribery of a foreign public official is an extraditable offence.

Thus the OECD Convention commits all signatory countries to introduce legislation making it a criminal offence for a national of that country to bribe a foreign public official. Given the signatory countries account for around 70% of world trade and around 90% of foreign direct investment, it is likely the enactment of such legislation, if rigorously enforced, could have a significant impact on addressing corruption and corrupt activity.[29]

Australia implemented its obligations under the OECD Convention through the Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999 ("Act").. The Act was passed with bipartisan support and proclaimed on 17 December 1999. The Commonwealth Government also agreed to remove payments of bribes as tax deductions around the same time as passing the Act.[30]

The Act applies to bodies corporate as well as individuals. However, the Commonwealth Criminal Code 1995[31] also deems a body corporate to be responsible for any offence committed by its employee, agent and officer acting within the actual or apparent scope of his or her employment, or actual or apparent authority.

What will be crucial to corporations in such circumstances will be whether the relevant corporation had in place an adequate "corporate culture" at the time the offence was committed.[32] In the event an employee, agent or officer of a corporation is found to have bribed a foreign public official and that corporation's corporate culture is found to be inadequate, then that corporation will be criminally liable for the conduct of that employee, agent or officer.

A breach of the Act incurs a penalty of 10 years imprisonment or substantial fines - for both the individual and the corporation. There remain some significant problems with the Act, including:

how to gather sufficient evidence to secure a conviction and enforce the legislation; and
concerns that companies may seek to use facilitation payments, which are not prohibited under the Act, as a means to avoid the prohibition.

Will the OECD Convention be effective?

Concerns have been expressed at the strict nature of the prohibition and the fact that OECD companies may now suffer a disadvantage when competing for contracts overseas.

As noted above, the signatory countries account for around 70% of world trade and around 90% of foreign direct investment which means that a significant number of companies are subject to the same laws. The fact that all signatory countries to the OECD Convention are obliged to implement, or have implemented, comparable legislation also should go some way to "leveling the international business playing field" thus addressing some of these concerns. Indeed there may be occasions when an individual could be subject to legislation of two separate countries, for example when a corporation is linked with one country but that individual as employee is linked to another.

The OECD convention, if properly monitored and enforced, will encourage business to operate in a way that limits their involvement in corrupt activity thus reducing their role in perpetuating the poverty cycle of many peoples and nations. Many well known multinationals, such as BHP, Rio Tinto and De Beers, already prohibit their employees, contractors and agents from paying bribes. Such companies are in a position to take such unilateral action against corruption because they wield considerable economic power. Also such companies are subject to close scrutiny by the media and non-government organisations. After a series of public relations disasters, they have become sensitive to engaging in any conduct that may result in further bad public relations.

Where many problems are likely to arise is in the activity of the smaller, less well known multinational companies.[33] Problems could arise because:

many smaller multinational companies do not have the economic power to withstand corrupt demands made by foreign public officials; and/or
some smaller multinational companies aim to maximise returns and rapidly and therefore are prepared to pay bribes to achieve their objective.[34]

6. Conclusion

Poverty is worsening in many nations and populations, many of which are located in Africa. Poverty is an issue that has been of international concern at least since the establishment of the United Nations. The corrupt activities of many public officials and private business people contribute significantly to the perpetuation of poverty and the continuation of the underdevelopment of nations.

It is only through international co-operation and a change in attitude by multinational companies, many of which are wealthier than the nations in which they operate, that such corrupt activities can be curbed. The agreement between OECD and other nations of the OECD Convention and the implementation of the obligations under the OECD Convention is a significant step toward achieving this aim.

Footnotes:

1 Is a member of Transparency International Australia (NSW) and a Senior Associate at the law firm Blake Dawson Waldron, Sydney office. I would like to give special thanks to Isabel Blackett, Chief Executive Officer of Transparency International-Australia for her valuable input to, and constructive comments on, various drafts of this paper. Of course, responsibility for all errors remains with me.

2 Department for International Development (UK) are currently holding an inquiry on the matter and the World Bank has gone a long way into examining its own systems and the behaviour of its sub-contractors.

3 See also Dey, Harendra Kanti 'The Genesis and Spread of Economic Corruption' (1989) 17 World Development 503 at 504.

4 Nichols, Philip M 'Outlawing Transnational Bribery Through the World Trade Organisation' (1997) 28 Law and Policy in International Business 305 at 311.

5 Ibid at 316.

6 Joint Standing Committee on Treaties: OECD Convention on combating bribery, 16 April 1998. There are many who disagree with this distinction and in fact some argue that petty corruption can be just as economically and socially debilitating as grand corruption. Space precludes this debate being explored any further at this time.

7 See Nichols op cit n. 4; Rose-Ackerman, Susan Corruption and Government: Causes, Consequences, and Reform (1999) Cambridge University Press; and Transparency International-Australia ("TI-A"), (1998) Submission by TI-Australia to the Joint Standing Committee on Treaties: Inquiry into the OECD Convention on Combating Bribery, p. 3.

8 Nichols op cit n. 4 at 319-320. See also Bayart, Jean-Francois, Stephen Ellis and Beatrice Hibou The Criminalization of the State in Africa, 1999 The International African Institute in association with James Currey and Indiana University Press, and Mbaku, John Mukum 'Bureaucratic Corruption in Africa: The Futility of Cleanups' (1996) 16(1) Cato Journal 1 (also located at www.cato.org/pubs/journal)

9 See, for example, Agbese, Pita Ogaba, 'Foreward: Africa and the Dilemmas of Corruption' in Corruption and the Crisis of Institutional Reforms in Africa, John Mukum Mbaku (ed) (1998) The Edwin Mellen Press at 9 (also located at http://weber.edu/jmbaku/corruption)

10 Lien, Da-Hsiang Donald "Corruption and Allocation Efficiency" (1990) 33 Journal of Development Economics 153 at 154.

11 Rose-Ackerman, op cit n. 7 at 182. See also Leys, Colin "What is the Problem about Corruption?" (1965) 3 The Journal of Modern African Studies 215 at 223. But it also has been argued that evidence of corrupt payments by businesses can also be evidence of other illegal practices, such as international cartels, in breach of anti-trust legislation world-wide: see Spratley, Gary "International Cartels: The Intersection between FCPA Violations and Antitrust Violations" presented to the American Conference Institute 7th National Conference on Foreign Corrupt Practices Act (1999) Washington at 2

12 Rose-Ackerman op cit n.7 at 9.

13 Ibid, Nichols op cit n. 4 at 342 and Klich, Agnieszka "Bribery in Economics in Transition: The Foreign Corrupt Practices Act" (1996) 32 Stanford Journal of International Law 121 at 130.

14 Lambsdorff, Dr Johann Graf "Corruption in Empirical Research - A Review" (1999) Internet Centre for Corruption Research at 5 ( http://www.gwdg.de/~uwvw/Research_area/lambsdorff_eresearch.html).

15 Githongo, John, Executive Director, Transparency International-Kenya 'Corruption as a Problem in the Developing World: Effects on the Economy and Morale" presented to the Seminar on Corruption and Development Co-operation held by the Government of Finland, May 2000.

16 Transparency International, "Press Release: Gender and Corruption: are women less corrupt?". As the title indicates the press release also highlights other studies that suggest that corruption is less severe where women are in positions of power both in government and in business. See www.transparency.de

17 Pope, Jeremy 'Building National Integrity Systems: The Holistic Approach to Containing Corruption" paper presented at the conference on National and International Approaches to Improving Integrity and Transparency in Government organised by the OECD, OSCE and the EDI of the World Bank (no date provided).

18 Helping Countries Combat Corruption: Progress at the World Bank since 1997, The World Bank, June 2000 at 1

19 See, for example, the press release issued by the World Bank Group and the IMF 'Debt Relief for the Poorest Countries: Milestone Achieved' where it was announced that debt relief will lift around $34 billion in debt service obligations from 22 eligible nations. www.worldbank.org

20 See the paper by Kaufmann, Daniel 'Economic Corruption: Some Facts' presented at the 8th International Anti-Corruption Conference held in Lima in 1997 where he gives a compelling analysis of this issue: www.transparency.org/iacc/8th_iacc/papers/kaufmann.html

21 This is not to suggest that there is no corruption in wealthy and/or developed nations. Clearly corruption to various degrees occurs in all countries however the damage caused by corruption is most prevalent in developing nations.

22 This change in attitude is occurring and coincides with a broader movement by companies, multinational in particular, having to become more accountable to shareholders and communities - that is, practising 'good corporate governance'. See, for example, Peter Dicken Global Shift: Transforming the World Economy 3rd edition (1998) Paul Chapman Publishing Ltd; John Elkington cannibals with forks: the triple bottom line of 21st century business (1998) New Society Publishers; and 'Business Ethics: Doing well by doing good' The Economist 22 April 2000 at 71.

23 Wei, Professor Shang-Jin (1997) 'How Taxing is Corruption on International Investors?' presented at the 8th International Anti-Corruption Conference held in Lima in 1997: www.transparency.org/iacc/8th_iacc/papers/jinwei.html

24 Kim, Joongi and Jong Bum Kim " Cultural Differences in the Crusade Against International Bribery: Rice-cake expenses in Korea and the Foreign Corrupt Practices Act" (1997) 6 Pacific Rim Law & Policy Journal 549 at 560.

25 Nichols op cit n. 4 at 353. See also Agbese, op cit n. 9 at 7.

26 See www.worldbank.org/html/opr/procure/debarr.html. Additional action is being taken by the United Nations, the International Monetary Fund, the World Trade Organisation, the Council of Europe and the European Union: Preamble to the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions: http://www.oecd.org/daf/nocorruption/20novle.htm.

27 For a full list of national chapters see www.transparency.org Transparency International's head office is in Berlin.

28 See www.transparency.org for details.

29 It should be noted, however, that there remain some significant trading countries that have yet to sign the OECD Convention, such as China.

30 See www.transparency.org.au for details.

31 The Act incorporates the prohibition into the Commonwealth Criminal Code 1995.

32 The Code defines corporate culture as "...an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities takes place." Section 12.3(6)

33 Mehra, Malini 'New Frontiers of Corporate Responsibility and Accountability: Response and Remaining Challenges' a paper presented at the UNDP Second Global Forum on Human Development, Rio de Janeiro on 9-10 October 2000.

34 This raises an interesting question as to what liability a nation, that has implemented its obligations under the OECD Convention, might have under international law if it does not adequately enforce those obligations.

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