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There's No Rule Book for Eradicating Corruption

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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U.K. Prime Minister David Cameron's anti-corruption summit coincided with the release of an International Monetary Fund staff paper that explains why corruption is bad for economies and suggests ways to eradicate it. But neither these recommendations nor those expressed at the forum will do much to fix the developing world's problems. That would require much more than better anti-graft laws and dogged enforcement.

At the forum, much was made of international efforts to recover stolen wealth, and of transparency in general. Cameron hopes to erase London's reputation as a haven for corrupt fortunes. He wants all foreign companies that own real estate in the U.K.  to declare their assets in a public register. I doubt that'll be very useful: In most cases, such declarations won't contain anything but a list of London properties, and the names of beneficiary owners either won't mean anything to anyone or will belong to people with legitimate businesses. 

Asset recovery is tricky: For starters, the owners must be sentenced by a court of law. In corrupt countries, however, courts are among the most rotten institutions. The European Union has been forced to remove associates of former Ukrainian President Viktor Yanukovych from its sanctions lists after the Ukrainian justice system failed to nab them.

The IMF's "mitigating strategies" for corruption also center on transparency, enhancing the rule of law, building institutions and trying patiently to change social norms in corrupt societies. These are all well-known recommendations that some of the most corrupt regimes in the world have mockingly applied. Russia has a transparent, electronic government procurement system that would be the envy of many a country if the "right" companies weren't winning all the tenders, anyway. Ukraine has not one but three bodies charged with fighting graft -- the National Anti-Corruption bureau, the National Agency for Corruption Prevention and the Specialized Anti-Corruption Prosecutor's Office, but it's still so corrupt that the IMF is withholding the latest tranche of its bailout package.  

Kakha Bendukidze, whose reforms took the nation of Georgia from the 124th place in Transparency International's corruption perceptions index in 2003 to 50th place today, recalled in an interview with Ukrainian journalist Vladimir Fedorin that he once attended a RAND Corporation-organized U.S.-Russian business forum, attended by Donald Rumsfeld and Paul O'Neil, both of whom had leading roles in George W. Bush's administration.

"Once a Russian participant was complaining about corruption. So Rumsfeld said to that: 'I think there's a simple way to combat corruption -- you need to pass a law to ban corruption.' All the Russian participants were rolling around laughing, and the Americans were nodding their heads earnestly: 'Yes, yes.'"

It may not have happened quite like that, but Bendukidze, known for his sharp wit, seized on an important issue: Western experts stress the institutional, legal and enforcement side, as if unaware that laws can be ignored, institutions subverted and enforcers can become the problem rather than the solution.

Bendukidze's own solution was not of the kind recommended at international conferences or in IMF papers. "Liberalization and deregulation helped destroy corruption, and the destruction of corruption, in turn, helped liberalization and deregulation," was how he described the process.

Bendukidze, who paid out millions of dollars in bribes while building a huge fortune in Russia, knew all the common schemes and many of the players when President Mikheil Saakashvili of Georgia appointed him minister for economic reform in 2004. Saakashvili had the biggest grafters jailed without much due process and forced others to hand most of their fortunes to the state. The process wasn't grounded in legality by Western standards but, coupled with Bendukidze's reductionist approach to government, it worked remarkably well. 

Bendukidze's theory was that to remove corruption, a government had to get rid of departments that it knew it could do without and reduce contact between citizens and government to a minimum. Thus, he closed down Georgia's antitrust committee, which, he said, was doing little except taking bribes, and disbanded the notoriously venal traffic police. No one missed either, and monopolization or traffic chaos did not ensue. Georgian culture changed quickly, and the country didn't slip in the Transparency rankings even after Bendukidze and Saakashvili were driven out of office. Georgia is now the cleanest country in the former Soviet bloc, but no other nation -- including post-revolutionary Ukraine -- has had the courage to adopt this draconian approach. 

The economist Hernando De Soto regarded excessive bureaucracy as the root cause of corruption in the developing world. In post-Soviet states, some of the world's most corrupt, the bureaucracy is mostly inherited from a time when cheating the state was a national pastime. It has been strengthened and streamlined to keep out the unconnected. So in these countries, corruption is both a traditional part of the social fabric and a mainstay of the regime. The only way to beat it is to take the reins out of the bureaucrats' hands, depriving them of any opportunity to collect a rent.

The IMF paper contains exactly three paragraphs about eliminating excessive regulation, but one of these stresses the importance of technology (electronic procurement again), and another warns that deregulation can "pose its own risks, particularly where the institutional framework is underdeveloped." These risks, according to the paper, are associated with the monopolies created by the fast post-Soviet privatization. The oligarchs who put together these conglomerates are pretty good at government capture. Bendukidze's approach to them was "play by the new rules or rot in jail," but that can't be part of any "institutional framework."

Eradicating corruption in countries where it is the way of life can't be achieved by following a rule book. Bendukidze's method probably isn't the only possible one, but no useful recipe can be based solely on recommendations from law-abiding, orderly Western societies: Post-Communist states, and probably many in Africa and Asia, have deep traditions of subverting and mocking the systems and institutions of power.

According to the IMF, corruption costs the world $1.5 trillion to $2 trillion a year, or 2 percent of global economic output, mainly by undermining incentives for taxpayers to share their incomes with governments, increasing costs and undermining the quality of public spending, and stifling private investment and productivity. The losses mostly occur in the countries that can least afford them. The West cannot do much to help, either in terms of enforcement or by offering advice. It's up to each corrupt nation to rip up its bureaucracy and chase away its architects.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net