Wednesday, December 17, 2008


$1 trillion in bribes paid each year

SINGAPORE - To understand the challenge faced by emerging Southeast Asian economies struggling to shake off a corrosive culture of corruption, you can start by counting the parking tickets issued to foreign diplomats in Manhattan.
The league table of the worst parking offenders in New York embassies tells the same story as other methods economists have used to gauge countries’ propensity for corruption — many Asian nations fare very poorly in upholding the rule of law.
And the fact national corruption patterns persist even among diplomats in a foreign city suggests that a solution requires more than just better law enforcement — it needs fundamental institutional reform and a wholesale change in attitudes.
"You cannot fight corruption just by fighting corruption," said Daniel Kaufmann, who spearheaded the World Bank’s efforts to improve the study of governance and the rule of law, and who estimates that $1 trillion of bribes are paid every year.
Evidence showed there was little to be gained from "yet another anti-corruption campaign, the creation of more commissions and ethics agencies, and the incessant drafting of new laws, decrees, and codes of conduct," he said, adding that "fundamental and systemic governance reforms" were needed instead.
Economists who specialize in governance say combating corruption is not just a moral imperative — it is essential for promoting long-term economic growth and investment.
That means economies like Singapore and Hong Kong, which have successfully sought to crack down on corruption, have received real economic benefits in return. And southeast Asia’s laggards have driven investors away because of their poor reputation.
"International capital flows are strongly affected by corruption," said Johann Graf Lambsdorff, professor at the University of Passau and creator of Transparency International’s Corruption Perceptions Index (CPI). "Capital flows into countries that have a reputation of limiting corruption."
There is no objective way of measuring corruption. Most methods of ranking countries rely on tracking perceptions, and two of the most widely followed — Kaufmann’s World Governance Indicators for the World Bank, and Transparency International’s CPI — aggregate several surveys to produce a composite rating.
They paint a remarkably consistent picture of southeast Asia.
Singapore is the clear leader in the region according to all surveys. At the opposite end of the scale, Myanmar is among the world’s most corrupt countries — of 180 nations ranked by Transparency International, only Somalia rates worse.
Of the emerging economies that most interest investors, Malaysia has a clear advantage — the World Bank indicators gave it a 2007 score of 62.3, above Thailand on 44.0, Vietnam on 28.0, Indonesia on 27.1 and the Philippines on 22.2. Transparency International’s CPI ranks the countries in the same order.
Economists say a host of data supports the theory there is a "development dividend" for countries that tackle corruption.
"We estimate that a country that improves its governance from a relatively low level to an average level could almost triple the income per capita of its population in the long term, and similarly reduce infant mortality and illiteracy," Kaufmann said.
Lambsdorff said there was convincing evidence that not only foreign direct investment but also portfolio investment was affected by corruption, with studies showing that stock markets outperformed in countries that successfully reduced corruption.
"International investors are more confident of a country, or consider the country to be less risky so don’t seek such a risk premium to invest in a country," he said.
Economists agree that tightening the law is not enough to defeat corruption. Often what is required is a full overhaul of governance and institutions, and a transformation of attitudes.
The New York parking ticket study supports this thesis. In a 2006 paper, Raymond Fisman and Edward Miguel of the US National Bureau of Economic Research collected data on $18 million in unpaid parking fines issued to diplomats between 1997 and 2002.
"The act of parking illegally fits well with the standard definition of corruption, the abuse of entrusted power for private gain," they wrote. Kuwait was the worst offender with 246.2 violations per diplomat. Indonesia had southeast Asia’s biggest tally with 36.1, followed by Thailand with 24.5.
And overall, the parking ticket ranking showed remarkable correlation with more conventional measures of corruption.
"Norms related to corruption are apparently deeply ingrained, and factors other than legal enforcement are important determinants of corruption behavior," Fisman and Migel said.
This raises the question of whether gains in tackling corruption take years or even generations to achieve.
Kaufmann said short-term gains were not impossible: "While it is true that institutions often change only gradually, in some countries there has been a sharp improvement in the short term."
Indonesia ranked among the world’s most corrupt nations five years ago but now outperforms the Philippines in most rankings — a major step forward given the importance of country comparisons in influencing investment decisions.
But perhaps the key finding of economists’ work in measuring corruption is the bleak discovery that there has been no clear trend toward gradually defeating it, either in Asia or globally.
"In spite of improvements in some countries, there have been at least as many countries where deterioration has taken place," Kaufmann said in a World Bank report. "The quality of governance around the world has been stagnant." – Reuters

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