Privatesector P U B L I C P O L I C Y F O R T H E The World Bank April 1996 Note No. 75 Redesigning the State to Fight Corruption Transparency, competition, and privatization Susan A companion Note argued that, with norms of the risk of losing what is now a very desirable Rose-Ackerman honesty constant, corruption depends on three job. Thus, the incidence of bribery falls as fewer factors: the overall level of public benefits avail- officials are willing to accept payoffs, but the able, the riskiness of corrupt deals, and the size of the bribes paid increases. relative bargaining power of briber and bribee. Anticorruption strategies must operate in par- Civil service reform must therefore include fea- allel, by reducing the benefits under the con- tures tied to the marginal benefits of accepting trol of officials, increasing the costs of bribery, payoffs. There are two parts to such a strategy. and limiting the bargaining power of officials. The first is to set civil service wages above the This Note proposes reforms to achieve these going private sector wage, or to grant public objectives, beginning with measures to increase employees generous benefits, such as pensions, the riskiness of corruption. that they will receive only if they retire in good order. But, again, such reforms may not be suf- Risks and costs of bribery ficient, since they are not tied to the benefits of individual corrupt deals. Once an official steps Government policy can reduce corruption by over the line and begins to take bribes, these increasing the benefits of being honest, increas- policies will encourage him to take ever-higher ing the probability of detection and punish- and more frequent payoffs. If he faces a high ment, and increasing the penalties levied on probability of losing his job anyway, why not those caught. Such measures will usually re- take as much as possible? Thus, a second step quire substantive law reform to tighten inter- is also necessary. Penalties should be tied to nal controls, strengthen external monitoring, the marginal benefits of the payoffs received. and introduce more transparency. The probability of detection and punishment and the level of punishment, given conviction, Civil service reform should increase with the level of peculation. Reforming the civil service is an obvious first Furthermore, to be effective, antibribery laws step. Often the pay structure needs adjustment. must apply both to those who pay and to those If officials are paid much less than those with who receive bribes. Convicted public officials similar training elsewhere in the economy, should pay a penalty equal to a multiple of bribes people willing to accept bribes will be dispro- received, and penalties for convicted bribers portionately attracted to the public sector. Offi- should be tied to their gains (their excess prof- cials with discretionary control of large benefits its, for example), not to the amount paid. One may need to be paid much more than the going effective deterrent is debarment procedures that rate for people with similar skills, to increase prohibit corrupt firms from contracting with the their willingness to resist the high bribes they government for a period of years. may be offered. But adequate civil service pay is only a necessary condition, not a sufficient Law enforcement and administrative penalties one. Paradoxically, an official whose pay is focus on locating corruption after it has oc- boosted may demand higher bribes—to offset curred. They can deter civil servants from ac- Private Sector Development Department ▪ Vice Presidency for Finance and Private Sector Development Redesigning the State to Fight Corruption cepting or extorting payments if they create Increased transparency the perception that corruption carries high risks. The goal is to use a combination of carrots Those concerned with fighting corruption should (desirable pay and benefits) and sticks (legal support a free press, few constraints on the cre- and administrative penalties) to deter payoffs. ation and operation of watchdog and good-gov- ernment groups, and freedom of information External bodies and whistleblower statutes laws. They should oppose restrictive libel laws, especially those that give special protection to Outside institutions can complement internal public officials. Elected politicians ought not be controls. An independent and honest judiciary, immune from charges of corruption. from lower-level clerks to judges, is essential for effective legal sanctions. As alternatives or Within the public sector certain structures and supplements, other independent review and in- systems can make government actions more vestigative systems have been proposed, such transparent. Corruption is deterred because it as an anticorruption commission, an ombuds- is more difficult to hide. For example, strong man, or other independent administrative tri- financial management systems are essential that bunals. Such external review bodies (Hong audit government accounts and make finan- Kong’s Independent Commission against Cor- cial information about the government public. ruption, for example1) can be valuable, but they Open and fair procurement regulations are also carry the risk of arbitrariness if they report only necessary. Similarly, corruption among politi- to the country’s ruler. cians can be deterred through campaign finance reform and conflict of interest rules. But re- Uncovering evidence of corruption is notori- strictions on legal donations must not be so ously difficult because both sides to the trans- restrictive that they push candidates off the action have an interest in keeping it secret. In books. Legal controls must be combined with fact, reporting the peculations of others can be effective methods of financing campaigns from dangerous. If corruption is systemic, a “whistle- public money or private contributions. blower” risks being disciplined by corrupt su- periors and attacked by coworkers, and may Integrated approach even end up being accused of corruption him- self. Governments should consider promulgat- It is hard to evaluate the relative merits of these ing whistleblower statutes that protect and options in the abstract, because their costs and reward those in the public and private sector benefits depend on the context. But most can- who report malfeasance. The United States, for not stand alone. For example, increases in civil example, has a statute that rewards those who service pay and benefits are pointless if cred- report irregularities in government contracts. ible monitoring systems are not in place to de- tect wrongdoing. Policies to increase the risks When corruption is systemic, solutions that ap- and costs of corruption are usually part of re- pear reasonable in other contexts can have per- form strategies designed to reduce the potential verse effects. For example, some recommend benefits. For example, when Mexico reformed rotating officials so that they are unable to de- its customs service, it not only simplified the velop the close, trusting relations in which pay- underlying regulations, but also improved civil offs may be more likely. But if the entire service pay and improved auditing and control. government agency is corrupt, superiors can use their ability to reassign staff to punish those Reducing discretionary benefits who refuse to play along. A study of corrup- tion in an irrigation system in India found that The most promising anticorruption reforms are such practices were common.2 They have also those that reduce the discretionary benefits un- been observed in corrupt police forces in the der the control of public officials. This must United States. be done without simply shifting the benefits to private sector elites, where they will show up protection by introducing market-based schemes as monopoly profits. and charging user fees for scarce government services. In addition to improving efficiency, these Less intervention reforms reduce corrupt incentives. The sale of water and grazing rights, pollution rights, and The first and most obvious way to reduce payoff import and export licenses can limit corruption opportunities is simply to eliminate those pro- by replacing bribes with legal payments. grams riddled with corruption—though this is not an option for programs with strong public policy Administrative reforms can also be important rationales. If the state has no authority to restrict in lowering corrupt incentives. One such re- exports or license businesses, there is no oppor- form is the introduction of competition within tunity for bribes. If a subsidy program is elimi- government to reduce the bargaining power nated, the associated bribes will also disappear. of officials. When bribes are paid for benefits If price controls are lifted, market prices will ex- such as licenses and permits, overlapping, com- press scarcity values, not bribes. If a parastatal petitive bureaucratic jurisdictions can reduce that is the locus of corrupt payoffs is moved into corruption. Since clients can apply to any of a the private sector, those payoffs will end. number of officials and go to a second one if the first turns them down, no one official has Of course, many regulatory and spending pro- much monopoly power, and, therefore, no one grams have strong justifications and ought to can extract a very large payoff. For qualified be reformed, not eliminated. clients, bribes will be no larger than the cost of reapplication. Unqualified clients will still Competition and market forces pay bribes, but even they will not pay much so long as they too can try another official. In general, any reform that increases the com- This model can be extended to law enforce- petitiveness of the economy helps reduce cor- ment, giving police officers who control illegal rupt incentives. Policies that lower the controls businesses overlapping enforcement areas. on foreign trade, remove entry barriers for pri- Gamblers and drug dealers will not pay much vate industry, and privatize state firms in a way to an individual policeman if a second one may that assures competition, all contribute to the come along later and also demand a payoff. fight against corruption. But deregulation and The system may work better if the law enforce- privatization must be carried out with care. ment officers belong to different police forces— Deregulating in one area may increase corrup- local, state, or federal, for example—making tion elsewhere. For example, a successful ef- collusion among officers less likely. fort to reduce corruption in the transport of agricultural products in one African country Clear rules, simple processes increased corruption and legal tariffs in neigh- boring countries on the same transport route.3 When corruption is difficult to observe, admin- The privatization process can itself be cor- istrative reforms can be designed to make its rupted, as can new regulatory institutions. effects more easily observed. For example, the Rather than bribing the parastatal to obtain state might use private market prices as bench- contracts and favorable treatment, bidders bribe marks to judge public contracts. Clear rules of officials in the privatization authority. This is proper behavior could be established so viola- not to say that privatization and deregulation tions can be spotted even if the bribery itself is are not, on balance, desirable in most cases, not. Procurement decisions could favor stan- but only to caution reformers to be aware of dard off-the-shelf items to provide a bench- the incentives for malfeasance along the way. mark and to lower the cost of submitting a bid. Economists have long recommended reforming Corruption in the collection of taxes cannot, regulatory laws in such areas as environmental of course, be solved by failing to collect rev- Redesigning the State to Fight Corruption enue. In such cases, one solution is to clarify cials have an incentive to demand larger bribes and streamline the necessary laws. The reform and seek new ways to extract payments. There- of the Mexican customs service, for example, fore, even when illegal payoffs appear to facili- reduced the steps in the customs process from tate commerce, governments and private citizens twelve to four, and streamlined the remaining should not respond with tolerance. Instead, they service to reduce delays. Rules should be trans- must move vigorously to stem a “culture” of il- parent and publicly justified. A government legality. Illegal markets are always inefficient could move toward simple nondiscretionary relative to a well-functioning legal market. Those tax, spending, and regulatory laws as a way of with scruples will not participate, price infor- limiting corrupt opportunities. But the value mation will be poor because of the illegality of of such reforms depends on the costs of limit- the trades, and time and energy must be ex- ing the flexibility of public officials. Some risk pended to keep the deal secret and to enforce of corruption often needs to be tolerated in its terms. In some cases, paying bribes may be exchange for the benefits of a case-by-case more efficient than complying with existing approach in administering programs. But even rules, but corruption is always a second-best in these cases, transparency and publicity can response to government failures. reduce corrupt incentives. Corruption can never be entirely eliminated. Many corrupt situations have both winners and Under many realistic conditions, it is simply losers. The state could introduce ways for the too expensive to reduce corruption to zero. potential losers to protest or to organize ahead And a single-minded focus on preventing cor- of time, or make it hard for corrupt officials to ruption can impinge on personal freedoms and organize themselves or bribe payers. Sometimes human rights. Such a focus could produce a bribe payers view themselves as losers who government that is rigid and unresponsive. The The Note series is an open forum intended to would be better off in an honest world and are aim, therefore, should be not complete recti- encourage dissemina- potential allies in an anticorruption effort. But tude, but a fundamental increase in the hon- tion of and debate on when bribery makes both the payer and the esty—and thus the efficiency, fairness, and ideas, innovations, and best practices for recipient better off than they would be in a political legitimacy—of government. expanding the private no-bribery world, control incentives must rest sector. The views with outsiders (for example, disappointed bid- 1 published are those of Robert Klitgaard, Controlling Corruption, Berkeley: University of the authors and should ders, taxpayers, consumers). The existence of California Press, 1988, chapter 4; Jon Quah, “Controlling Corrup- not be attributed to the losers with a large stake in the outcome, such tion in City-States: A Comparative Study of Hong Kong and World Bank or any of its Singapore,” prepared for a conference on “The East Asian Miracle: as disappointed bidders, can facilitate efforts Economic Growth and Public Policy,” Stanford University, Palo Alto, affiliated organizations. Nor do any of the con- to limit corruption. CA, 1993. 2 clusions represent Robert Wade, “The System of Administrative and Political Corrup- official policy of the tion: Canal Irrigation in South India,” Journal of Development Stud- Conclusions ies 18: 287–327 (1982). World Bank or of its 3 Executive Directors Glenn Rogers and Sidi Mohammed Iddal, “Reduction of Illegal Pay- or the countries they Some argue that bribes help firms and individu- ments in West Africa: Niger’s Experience,” draft discussion paper represent. presented at a workshop on “Good Governance and the Regional als circumvent government requirements—re- Economy in Francophone Africa,” sponsored by USAID and IRIS, Comments are welcome. ducing delays and avoiding burdensome Dakar, March 1996. Please call the FPD regulations and taxes. Payoffs seem to be noth- Note line to leave a ing more than the grease needed to move the Susan Rose-Ackerman is Henry R. Luce Profes- message (202-458-1111) or contact Suzanne gears of complex machinery. But corruption sor of Law and Political Science at Yale Univer- Smith, editor, Room cannot be limited to situations where the rules sity and a Visiting Research Fellow at the World G8105, The World Bank, are inefficient. Incentives to make and ask for Bank in the Private Sector Development Depart- 1818 H Street, NW, Washington, D.C. 20433, payoffs exist whenever a government official ment (email: sroseackerman@worldbank.org). or Internet address has economic power over a private firm or in- She is the author of Corruption: A Study in ssmith7@worldbank.org. dividual. It does not matter whether the power Political Economy and is currently working on 9 Printed on recycled is justified or unjustified. Once a pattern of suc- a book on corruption in developing and transi- paper. cessful payoffs is institutionalized, corrupt offi- tion economies.