CORRUPTION AND GOVERNANCE Daniel Kaufmann Nonresident Senior Fellow

CORRUPTION AND GOVERNANCE Daniel Kaufmann Nonresident Senior Fellow Brookings Institution

The progress of international anti-corruption efforts • More explicit international recognition now exists of the negative effects of corruption – Corruption is an obstacle to development • When corruption is curbed and governance improves, development dividend is significant • Private sector has a major role – and a major responsibility – in fighting corruption 300 percent development dividend: a country that improves governance by one standard deviation can expect to more or less triple its annual per capita income in the long run.

The need for collective action against corruption • Collective action is indispensable in combating corruption • Collective action should include the private sector – Making business ethics a higher priority is crucial in anti-corruption efforts • Significant progress has been made in the past decade, but more is still needed

Limits to progress • Though there is progress in anti-corruption efforts around the world, it has been checkered and not universal • Many domestic firms and multinationals still widely engage in bribery – Procurement is particularly corruption-prone • Corrupt practices in emerging economies remain widespread despite some improvements

Single bottom line • Multiple bottom lines approach expanded business considerations beyond the profit motive to include other goals – Social and environmental sustainability, corporate social responsibility, etc. • BUT the essence of business operations still comes down to the single bottom line – Basic principle: companies must be first accountable to their shareholders – The principle of accountability to shareholders drives incentives and behavior of companies

Incentives and costs matter • It is important to find the incentives that drive companies and individuals to engage in corrupt practices • It is also important to evaluate the costs and benefits of anti-corruption regulation and enforcement – Excess regulations can create negative reactions from the private sector and produce more incentives for bribery

The need for greater transparency • The alternative to excessive regulation is greater transparency • More attention should be paid to proper disclosure in governments, corporations, and multilateral organizations • Transparency at the corporate level, such as the monitoring of stock market and banking system, is needed

Transparency deters corruption • The World Bank publishes the names of corporations and individuals involved in inappropriate or corrupt practices in World Bank-funded projects • International organizations such as Transparency International can be a depository of information on corruption – Greater transparency increases reputational cost and decreases incentives for corruption We need transparency reforms with spine, not rhetoric.

The importance of media freedom • Free media and investigative journalism can greatly increase reputational risks for corporations and public officials • Research also shows a strong correlation between mentions in the press about corporate abuses and better corporate governance

Evaluating anti-corruption efforts • There has been little progress globally on broader governance reforms – Media freedom is lacking in many countries – Disclosure of assets by politicians is not widespread – Political campaign finance remains an issue If there is very little progress on broader governance reforms, the impact of many of the smaller initiatives, such as anti-corruption manuals, publications, and voluntary codes of conduct, may be rather limited.

Broader governance framework • Voluntary anti-corruption codes can only work with better overall governance – Single bottom line and incentives matter – Voluntary measures may produce little results if the incentives are not there • Incentives for corruption can be reduced by third-party monitoring with serious sanctions for non-compliance and high reputational costs

Overcoming resistance to anti-corruption reforms • Many serious anti-corruption reforms are resisted by different groups – There are often many vested interests stacked against the implementation of anti-corruption reforms • The key is to figure out whether each initiative is truly making a difference – If not, how can it make a difference in the next stage?

Going beyond superficial reforms • State capture remains a formidable challenge – The capture of the state institutions, laws, regulations, and policies of the government by private elites – Prevalent in many countries around the world • Wherever state capture exists, micro anti-corruption initiatives make little difference – The key is to address the systemic problem – Outside donor organizations cannot solve this problem, but can position their programs better to make a difference

State capture and vested interests • State capture undermines competitiveness of medium- and small-scale enterprises, as well as public sector governance – Exists in industrialized and emerging economies • Although most firms have an interest in a wellgoverned business environment, some firms with vested interests in status quo will remain uninterested in anti-corruption reforms – Even if firms recognize the benefits of anti-corruption, the challenge of collective action against corruption remains

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