Johann Graf LAMBSDORFF
Lehrstuhl für Volkswirtschaftstheorie, Universität Passau
|Prof. Dr. Johann Graf Lambsdorff|
Those who are willing to carry out corrupt acts lose the capacity to commit to honesty. This is the core of the message I want to deliver today. Corrupt actors can neither commit to honestly serve the public nor credibly promise reciprocity to their corrupt counterparts. This thought is at the center of understanding the disastrous economic and social consequences of corruption. At the same time, this concept deserves to be placed at the center of reform. Bribe takers and bribe givers have a schizophrenic relationship to honesty. They betray their superiors and the public but attempt to signal honesty to each other and often fail in doing so. A strategy for reform must exploit this failure. The Achilles heel of corrupt transactions is that a briber often does not know what he will get in return. This is a crucial weakness of those who are willing to engage in corrupt transactions. Anticorruption can therefore take the tactic of a judo-fighter someone who exploits his opponents weaknesses.
The power of economic thinking started with the concept of the invisible hand. Competition substituted for benevolence by guiding self-seeking actors to serve the public. With respect to fighting corruption we do not have such a powerful mechanism. If something comes close to it, it is the corrupt actor s capacity to betray each other. This betrayal is a good thing. I call this the principle of the invisible foot. The willingness to take bribes works against the corrupt actors. Anticipating this, even self-seeking individuals may have reason to commit to honesty rather than seeking opportunities for bribes.
There should be no doubt that bribe taking is often a utility maximizing strategy of a self-seeking bureaucrat. Is it thus natural to bribe? Is it the inevitable behavior that emanates where individuals are left uncontrolled? Some economists wonder why levels of corruption are not even higher in a world where we are scarce of altruism. With self-seeking being the presumed nature of human beings, opportunities for self-enrichment should always be sought and seized; distrusting public decision makers should be the natural consequence; trusting them appears to be a naïve attitude. Given that we sometimes have reason to wonder about astonishingly high levels of integrity, social scientists must confess that they are lacking a theoretical explanation. Also in recent experiments, researchers found that integrity was higher (and corruption lower) than predicted from a rational, self-centered viewpoint.
There are good reasons to assume that corruption is not part of human nature. Quite the opposite, I claim a natural strife for integrity. This strife is not in contrast to self-seeking, it is its rational consequence. The downside of ones willingness to take bribes is that one disqualifies for professions where a commitment would be vital.
Bribes impede actors from performing official duties. For example, it may well be worthwhile to construct good-quality roads. But governments may choose to cancel the project if bad quality is expected to result from unavoidable collusive behavior. Or imagine that a fair and efficient tax system should be established, but tax collectors cannot be kept from taking bribes in exchange for turning a blind eye to underreporting; the project may fall into disfavor and be terminated by the principal. A related situation arises for auditors. If they cannot guarantee to abstain from faking reports, their contributions lose value for governments and investors. The construction companies, the tax collectors and the auditors will not be hired if they fail to commit to honesty. Those who cannot ascertain that they will not give in to temptation are ultimately jobless. By recognizing this, we notice that even those who might engage in corruption sometimes want to partner in anticorruption campaigns.
A similar thought arises for heads of government. They might transfer public funds into their private pockets. But they are not trusted by investors if they disrespect law. The advantage from bribery turns against its actors. This is at the core of understanding the social costs of grand corruption, the type of corruption that takes place higher up in hierarchy. And at the same time this viewpoint provides direction to reform.
One explanation for seemingly low levels of corruption relates to the (mostly informal) institutions needed for arranging and securing a corrupt deal. Partners in a corrupt exchange face a challenging task in negotiating the terms of their agreement and in making sure that each side adheres to its promises. At the same time they are constantly tempted to betray each other. Such betrayal can be a good thing from the point of view of the society at large, because it assures that corruption is a troublesome business, and convinces potential participants to refrain from becoming involved in corrupt deals. When public officials are paid with counterfeit money, as it recently happened in India, or with fake antiques, as it took place in China, the resulting insecurity for public servants may effectively deter them from asking for bribes in the future. Similarly, when public servants, who take bribes, decline to deliver on their promises, businesspeople may become less likely to continue with their illegal strategy.
A functioning type of corruption is sometimes regarded as the lesser of two evils. Although costly to businesspeople, it allows at least for some predictability and confidence. This sometimes misleads observers to conclude that the adverse effects of corruption might be avoided by divesting it of its unpredictability. But, these arguments are misguided because a lack of confidence in those supposed to deliver corrupt services also acts as a deterrent to corruption itself. To root out corruption, it may be necessary to risk destroying some of the confidence that goes along with it: the trust that corrupt favors will be reciprocated.
For example, the downsizing of the customs services in Tanzania was a failure, because those officials who were fired at a later stage became middlemen, and created trusted corrupt relationships. After a first crackdown on corruption, the corruption networks were revitalized and strengthened, and corruption returned to its original level. Apparently, strategies in fighting corruption can fail if they do not adequately take notice of the network ties, and the mechanisms that facilitate corruption.
Anticorruption is society s perpetual endeavor to discipline its public servants and politicians. It cannot be imagined that this goal will ever be reached solely by intellectual effort. Courage and commitment among civic-minded people will remain a prerequisite for low levels of corruption. But societies ventures require some thorough guidance. Our knowledge on anticorruption is increasing at a remarkable speed. Reform ideas are tested throughout the world and experiences are rapidly exchanged so as to determine best practice. Let me provide you with an overview.
A first approach intended to inspire anticorruption related to repression: draconic penalties and higher probabilities of detecting malfeasance. While this approach has its merits, it is doubtful whether it can be the guiding principle for the future. Data on prosecutions (per head of population) related to bribery reveal that they are common in some developed countries but rare elsewhere. Whether conviction rates in less developed countries would ever reach levels where they can represent an effective deterrence can be put in question. Furthermore, if the effects follow an economic law of decreasing marginal gains and increasing marginal costs, the likely outcome would be that criminals are less deterred by higher penalties while the pursuit of absolute integrity becomes more and more expensive, bringing about unpleasant side effects. Law enforcement is costly and requires an honest judiciary. Administrative procedures are complex due to enhanced monitoring, and may adversely affect the intrinsic motivation of the bureaucracy. Even worse, sanctioning even minor malfeasance can backfire. If those guilty of negligible malfeasance have to fear severe prosecution, they may become entrapped in a corrupt career. Repression would become ineffective if it does not provide an emergency exit for the petty sinners. These drawbacks may increasingly materialize in the future, and other guiding principles have to be sought that inspire anticorruption efforts.
Some prosecutors are fighting a devoted battle for integrity. They consider their strong stand to serve as an effective deterrent against corruption. But their treatment of insiders and whistleblowers is sometimes unsatisfactory. It is essential to provide pardon to minor misbehavior so as to catch the big fish. But it is just a policy of zero tolerance that can be in contradiction to such a policy. Also political commitments to absolute integrity can backfire badly. Take the following case. The Aerospace Engineering Design Corporation (AEDC), registered in Panama, is alleged to have ar¬ranged the sale of aircraft equipment worth 20 billion British pounds from Rolls Royce to the Saudi Arabian Air Force. Commissions of up to 15 percent had been agreed upon. In exchange, the Pana¬manian firm maintained close relationships with prominent Saudi Arabian nationals. Al¬legedly Rolls Royce did not pay as negotiated. AEDC brought the case to the high court in Great Britain. Following a High Court writ, Rolls Royce feared for its reputation, as did the British gov¬ernment, which had always denied any bribery payments in con¬nection with the deal. This induced Rolls-Royce to settle the case out of court, causing AEDC to withdraw the case. The British government, it seems, was unable to deliver on its promise of a perfectly honest deal. In order to avoid further investigation, they felt forced to opt for the worst option: the actual payment of the bribe.
Another approach to anticorruption focuses on prevention. This approach may likely be subject to similar limitations. These confines particularly relate to incentives and ethical training. Such training will certainly be an important issue for the years to come. It can help in communicating more clearly the conflicts of interest unique to specific sectors and countries. Furthermore, ethical training can help in developing an atmosphere of transparency and stewardship among a firm s and bureaucracy s employees. At the same time, it is costly and time consuming, and it may sometimes serve to camouflage an organization s true interests. Private firms, for instance, might be in a prisoner s dilemma, paying lip service to anticorruption, but at the same time profiting from a corrupt contract. Ethical training would be given to those supposed to stay clean, while the dirty work would be outsourced. In the end ethical training may simply provide firms with official excuses when their employees are caught, resulting for instance in exemption from corporate liability. Ethical training of bureaucrats is likely to face similar limitations.
Using incentives instead of ethical training for inducing honesty in the bureaucracy and in politics is arduous to implement. Firstly, there is no measurable economic surplus that might serve as a yardstick for remuneration. Bureaucratic departments and political initiatives cannot be transformed into profit centers. Secondly, incentive schemes imply a variation of public servants income, lowering the security equivalent of their pay and crowding out the risk-averse (and potentially less corrupt) from obtaining a public position. The consequence is that incentive schemes in the bureaucracy and in politics fall short of economists prescriptions. Incentive theory, at best, helps us detect the variety of inconsistencies and disincentives that exist in the public sector. But incentives per se will hardly ever be sufficient to outbid the briber, as is sometimes suggested by academics. Realistically, incentive schemes can provide a helpful contribution that complements other factors such as public servants intrinsic motivation, cultivation of professional ethics and anticorruption norms in society.
Fostering transparency still seems to be an overarching principle with latent benefits. Its potential in reducing corruption is immense. The administrative costs of increasing transparency are limited, albeit often mentioned as an excuse for inactivity. Freedom of information in administration can effectively limit the arbitrariness required for corrupt transactions. A culture of corporate transparency inhibits the condoning of bribery. But this concept might, at least, be fine-tuned to some extent in the future. One concern is that transparency may support the monitoring of corrupt reciprocity. Bribers may prefer a transparent environment if this allows them to avoid opportunism among public servants. Likewise, non-transparent bureaucracies may at times prevent corruption, because bribers would have a hard time, first, finding the right person to compromise and, second, observing whether the bribee reciprocates honestly. In a similar spirit it is standard practice that public procurement requires some limits on transparency: Bidders are not supposed to know the incoming bids of their competitors. Some secrecy must prevail until all bids are jointly opened. The reason is that bid-rigging would be facilitated if transparency is introduced at the wrong stage. The principle of transparency, therefore, will undergo a more fine-tuned interpretation. Instead of advocating unlimited disclosure of all information, comprehensive information management systems that provide key data to stakeholders will have to be put in place. Their design will remain an important issue for the years to come.
When I visited China at the invitation of the China Supervision Institute in 2004 I was impressed by the so-called tangible construction market . All public contracts related to construction in Beijing were organized by this organization. Tenders are announced and bids collected via internet. The names of the firms are recorded separately, not in the incoming documents. A computer then randomly selects experts from its database, requests them to meet at the office without revealing, for which project their expertise is sought. Experts pass a security check and meet in a video-supervised room where their mobile phones are not operating. There, the experts determine the best bid, which need not necessarily be the cheapest one. From my impression, the system is capable of seriously reducing corruption, if not making it impossible, related to bidding and selection. At the same time, it becomes apparent that a mixture of transparency and obfuscation is fruitfully employed to minimize corruption.
Currently, anticorruption activities mostly embrace the testing of some best practice without knowing to what extent such approaches can claim global validity. Integrity systems are often suggested that embrace aspects of accountability, monitoring and reporting. But we know little whether criminals may seek loopholes within the newly established system and undermine the efforts. New initiatives, for example, aim at increasing revenue transparency for the extractive industries and the respective host governments where the extraction takes place. But crucial questions for the future will be whether bribery may continue in different form. Companies with a criminal intent may engage local agents, subsidiaries or design joint ventures so as to pass on advantages to local politicians. Any integrity system is quickly overburdened if these more sophisticated criminal methods are employed. Instead of avoiding corruption, the new systems may just force the criminals to reorganize their activities.
The current guiding principles for anticorruption such as repression, prevention or transparency may run out of steam when trying to cope with these future challenges. A more promising approach to fighting corruption requires a micro analysis of the criminal s activities. Instead of imagining systems of perfect integrity, diagnosis must focus on where corruption is most prevalent and how corrupt transactions are arranged. The particular institutional design that is employed for carrying out corrupt transactions must be at the core of analysis.
Given the limitations of some principles for anticorruption, our work expounds that an understanding of the criminal s calculus can provide us with a vivid starting point for future reform approaches. The principle of the invisible foot, as we call it, utilizes some thought of the New Institutional Economics. It states that corrupt actors can neither commit to honestly serve the public nor credibly promise reciprocity to their corrupt counterparts. This implies that their willingness to take bribes leaves them in uncertainty. Strengthening this principle ascertains that even self-seeking public servants refrain from corruption.
Corrupt actors must be deterred from their criminal actions. But deterrence is more than just the threat of suffering from legal sanctions. It embraces also the risk of being cheated by one s counterpart. It includes the threat of being denounced. Deterrence imposed with utmost rigor can backfire where it forces corrupt partners into a cartel of silence. Penalizing public servants already for the taking of bribes and gifts may increase rather than decrease corruption. Such penalties place officials at the mercy of businesspeople after a minor malfeasance and open the door to the worse types of misbehavior.
At a court in Bochum, Germany, an employee of the road construction authority confessed to accepting bribes for contracts relating to marking roads. Beginning in 1987, and lacking busi¬ness experience, he passed on names of competing firms in a public tender. After this incident, he received an envelope filled with DM 2000 from the private firm who obtained the favor. Suddenly I knew that I had begun to be at his mercy, was the expli¬cation given in court and the justification for why he afterwards became en¬trapped in this corrupt relationship.
Apparently, although the public servant had done little to favor the briber, he was en¬trapped in a corrupt relationship afterwards.
The general approach for reform would be to render those willing to take bribes untrustworthy for public positions, to encourage betrayal among corrupt parties and to destabilize corrupt agreements. A plethora of practical methods for anticorruption emanate from the principle of the invisible foot. To name but a few, reform should focus on fostering whistleblowing, providing immunity and monetary incentives to informants, disallowing courts to enforce corrupt contracts and finding clear ways of regulating conflicts of interest. The following workshops will provide some inspiration in this regard. One focus that deserves recognition is the design of the legal system. Penalties may mark the starting point of a corrupt career. An asymmetric design of penalties may avoid this problem and inhibit corrupt reciprocity.
Corruption is an art, requiring a plethora of business and psychological skills. We observe that corruption has an impact on international trade. Some exporters are advantaged in entering corrupt markets. Others may refrain from corruption owing to moral concerns, or are simply untalented. One application of this finding relates to corrupt intermediaries. These offer expertise on corrupt transactions to the untalented. Their role is key to reform and currently too little investigated. Certification should be offered to those intermediaries who are willing to commit to anticorruption. Such certification would allow separating the wheat from the chaff.
Anticorruption activists often start their campaigns by trying to form broader coalitions and seeking collaborators. But where are these found? Is it only the civil society activist, the moralists, idealists or the priests who can contribute to anticorruption? As emphasized in our work, the willingness to engage in corrupt transactions can turn against the actors themselves. As a consequence, nobody can upfront be excluded when forming coalitions against corruption. Public servants, even when tempted to take bribes, can have an interest in integrity. An engagement against corruption can provide them with avenues for committing to honesty; their service may increase in value and provide them with promising perspectives for their career. Businesspeople may like to join an anticorruption initiative. Not only may this help them in overcoming a prisoner s dilemma. It may also be an individually profit-maximizing strategy because a visible commitment to anticorruption may drive down the solicitation of bribes and businesspeople s subordinates would no longer be induced to betray their own firm. Lobbyists may dislike corruption because it limits their capacity to find popular support for the interests of their clients and constrains them in broadening the base of supporters. Also intermediaries may like to seek binding rules that disallow their engagement in bribery, so as to ascertain honest firms that these are not liable for any criminal activities. Career-oriented rulers may have an interest to engage in anticorruption and they would be willing to curb their own corrupt opportunities so as to ascertain investors that their investments will be honored. Even Mafia bosses attempt to legalize their business in a strategy to avoid the hazards for their offspring. In sum, anticorruption crusaders can find support among many in society. The strife for integrity is a natural part of human behavior.
Combating corruption is like judo. Instead of bluntly resisting the criminal forces, one must redirect the enemy s energy to his own decay. Instead of proclaiming a policy of zero tolerance one must recognize that the imperfections of human behavior will endure. Instead of demanding a world of absolute integrity, fighting corruption foremost is the art of exploiting these imperfections for our battle.
The power of economic thinking started with the notion of the invisible hand: Competition can substitute for benevolence by guiding self-seeking actors to serve the public. Individual morality lost relevance as a guiding principle for directing behavior in private markets. May this also be true of politics and administration? Can anticorruption flourish without good intentions? Will anticorruption come to a standstill if it focuses on moral sanctions? With respect to fighting corruption we may not have a mechanism as powerful as the invisible hand. If something comes close to it, it is the failure to make credible promises once actors are willing to take bribes. The risk of betrayal may operate like an invisible foot, making life hard for those who fail to commit to honesty. This principle can motivate even the self-seeking actors to abstain from corruption and reconcile civil liberties with good governance.