Corruption

Costs of a Crackdown

By | Updated May 12, 2016 2:38 AM UTC

Corruption is a moral outrage. It’s also an economic affront, eating up an estimated 5 percent of global gross domestic product and thwarting efforts to lift billions of people out of poverty. But there’s more than one way to look at corruption, which helps explain why it’s so difficult to stamp out. There are costs as well as benefits to cracking down: Cleanups can temporarily hold back economic growth and stifle investment. Economists study how bribery, embezzlement and extortion get around inefficient rules and help allocate scarce resources, such as building permits, school places or apartments. China, India and Nigeria have notorious corruption problems — which haven’t stopped their economies from powering ahead.

The Situation

More than 100,000 officials have been snared by an anti-graft campaign in China, from military top brass to middle managers at state-owned companies. President Xi Jinping warned in 2012 that failure to clean up the problem could trigger social unrest and imperil the Communist Party. Scrutiny has crimped spending in high-end restaurants, sales of luxury goods and gambling in the casinos of Macau. It also triggered the first default of a Chinese real estate developer on its overseas bonds. Goldman Sachs predicts that the next phase will target $600 billion of off-the-books income of the country’s 69 million public-sector employees. The drive has rattled China’s securities markets and hampered some types of investment as officials try to steer clear of trouble, braking a slowing economy. A corruption scandal is also rocking business in Brazil, where a probe revealed more than a decade of bribes and kickbacks at state-controlled oil company Petrobras. In the U.S., Senator Robert Menendez was indicted in April 2015 on charges that he accepted almost $1 million in gifts and campaign donations to enrich a friend. He has denied wrongdoing. In April, the Panama Papers, a trove of leaked confidential documents from a Panamanian law firm, exposed politicians and other public figures who were using shell companies and offshore bank accounts. The prime minister of Iceland resigned following allegations that he hid wealth and dodged taxes. He denied wrongdoing. In Malaysia, tens of thousands of people turned out for an anti-corruption protest in August 2015.

 

The Background

The greasing of palms has shaped history and contributed to the downfall of Rome. China’s anti-corruption campaigns stretch back to the rule of the Kangxi Emperor, who reigned from 1662 to 1722 during the Qing Dynasty. Graft helped overcome the rigidities of planned economies such as the former Soviet Union’s, enabling benefits to flow to the highest bidder. Some countries have cleaned up corruption, though it’s rare. Hong Kong and Singapore set up powerful watchdogs in the 1970s that are held up as models of how a crackdown can be a springboard for development. Transparency International, a global advocacy group, began publishing its widely followed survey of the most corrupt countries in 1995, spurring debate about how culture influences bad behavior and whether government accountability helped make Scandinavian countries the cleanest. Payment of bribes was tax deductible for companies in many places until the late 1990s. More than 100 countries have since ratified the United Nations Convention Against Corruption. The U.S. has stepped up enforcement of the 1977 Foreign Corrupt Practices Act, which bans payments to foreign officials to win or retain business. There’s also more scrutiny of how corruption is fed by disaster-relief efforts and by U.S. military involvement in countries like Afghanistan.

The Argument

Cynics who wink at corruption see it as an unavoidable cost of doing business, particularly in less-developed countries or states undergoing transition. But there’s a growing awareness of the crippling effects of corruption and its role in fueling inequality. Studies have shown that better delivery of public services can help remove incentives for cheating. Some aid agencies tie assistance to efforts to fight the abuse of power and to the promotion of a set of broader goals known as good governance. There’s plenty of debate in rich countries, too. While most nations regulate campaign contributions and conflicts of interest, there’s a question about whether shifting cash from envelopes to influence-seeking lobbyists has solved the problem or made it worse.

The Reference Shelf

First published May 22, 2015

To contact the writer of this QuickTake:
Enda Curran in Hong Kong at ecurran8@bloomberg.net

To contact the editor responsible for this QuickTake:
Leah Harrison at lharrison@bloomberg.net