August 29, 2004

‘Corruption is a dynamic, not a static, process. Its levels were not the same 20 years ago or will not be the same 20 years from now,’ argues Laurence Cockcroft, of Transparency International

THE Corruption Perception Index (CPI), compiled by the Transparency International (TI), has received significant attention since it was first introduced in the 1990s. The 2003 CPI brackets Pakistan in the same group as Argentina, Philippines and Tanzania with a low score of 2.5. The lowest score, denoting high levels of corruption, is zero and the highest is 10. The Scandinavian countries like Finland, Denmark, Sweden and Norway have some of the highest rankings, as do Singapore and New Zealand. The Third World countries are grouped close to the bottom and the middle-income countries like some East European countries, Middle Eastern states and some East Asian countries are, unsurprisingly, mostly grouped in the middle.

The Transparency International (TI) has been criticized for its methodology that involves surveys of a few business people with ‘international’ engagements and predictability of the trends that it highlights in corruption being higher in the Third World. Perhaps the most critical question that the work of the Transparency International, probably inadvertently, raises is not about the ranking of individual countries, but about the different kinds of corruption — from the petty corruption in Bangladesh to electoral corruption in the US. What also emerges is the question of a link between corruption and poverty and about the need to understand whether corruption is a cause or symptom of underdevelopment.

In a recent interview with Laurence Cockcroft, founder member of the boards of the TI and TI-UK, currently chairman of TI-UK and a member of the board of the TI, Dawn Magazine tried to grapple with some of these issues. Following are the excerpts.

Q. Is there a link between corruption and underdevelopment?

A. The key role of corruption in undermining development in low income countries is its ability to siphon funds away from public services, which are so essential if UN Millennium Development Goals are to be met. If a big road project is fuelled by corruption it not only takes funds away from education, health and water supplies, but also sets up a stream of debt service, which weighs heavily on the public purse for years to come. Further, corruption tends to skew the choice of projects away from labour intensive to capital intensive projects, thereby minimizing employment creation. A further dimension to this is that it is very likely that a good part of the proceeds of corruption will be invested outside the country in question and so will not increase the rate of domestic investment. The ways in which the proceeds of Benazir Bhutto’s funds were held in the UK and elsewhere is a classic illustration of this.

Q. Some scholars argue that excessive focus on corruption in developing countries tends to move the attention away from more fundamental impediments to economic development. What is the TI’s position on that?

A. I can understand the view; but it is very difficult to sustain this argument because of two reasons. The first reason is that corruption in big projects results in skewed costs to the government. This throws off the whole budget making exercise and has serious implications for the allocation of resources to public services through the budgetary system. Ultimately, corruption is not compatible with efficient growth.

Second, petty corruption, that is, corruption for the person on the street is a burden with a real financial cost. In addition, it leads to a breakdown in trust in the system.

Q. Historically, corruption was endemic in the US and other industrialized countries of the world during the early stages of their development. What can developing countries hope to learn from the experience of the now industrialized countries in tackling corruption?

A. Personally, I do not belong to the school of thought that says corruption is the most important impediment to development. I would argue that it is an impediment, but it is probably not the most important one, with exceptions. The importance may also vary with the context. However, I would say that in some countries like Nigeria it has been the most important single impediment.

In relation to the experience of the OECD countries it is important to realize that corruption is a dynamic process, and not static. Its levels were not the same 20 years ago or will not be the same 20 years from now.

We really do not know enough about what effects corruption. We do know that in the US and the UK there was significant domestic pressure for reform during the late 19th and early 20th centuries. The driving force for this reform was as much religious and moral as secular and political.

I doubt myself whether or not you can have comparable reforms in other societies by imposing it from the outside. It may not be possible to have significant reforms unless there is a drive from within. So do we really understand what triggers that need for reform within a society? I think not.

Corruption is more damaging when resources are sent outside the country. If the resources generated through corruption are invested back in the country, as they were during UK’s industrialization process, it may not have as negative an impact. We can also look at the Asian tigers as another example of this. They achieved high rates of growth despite fairly corrupt, by some standards, practices. It may make a difference whether or not corruption is centrally controlled with a fixed amount of ‘take’ as it was in their case or more widespread.

Q. Critics within Pakistan often point out that indices of corruption are used to pressurize the government in bilateral and multilateral trade agreements to offer highly favourable terms to foreign investors to the detriment of local investors. Could this be an unforeseen effect of the work the TI is doing?

A. I am surprised to hear this. Of course, I was aware that the Pakistani and other governments of developing countries could be pressurized in some cases, but we are not aware of TI indices being used for this specific purpose in relation to investment incentives.

Corruption in general is one of the issues that foreign investors would look at and perhaps use in negotiations, but it is one of the many issues which may deter investment.

We can look at the cases where the CPI has led to reforms and improvements. For instance, in Cameroon low CPI ranking has been used to support change. When Cameroon was rated at the bottom of the CPI, the government was forced to take steps to improve its anti-corruption agenda.

Similarly, when Malaysia was first included in the CPI, the government protested at the ranking, but later broadly accepted the methodology. Later, the low ranking was also used to instigate anti-corruption reforms.

The CPI has been criticized on a number of grounds and we have tried to balance our approach by also constructing an index of OECD countries that pay bribes.

Q. TI’s critics contend that the rankings are established on weak methodologies and uneven information. Any comments?

A. The TI produces both the Corruption Perception Index and the Bribe Payers’ Index. The former, which has attracted the most attention, is a ‘poll of polls’. It simply represents an averaging of perceptions expressed about relative levels of corruption by mainly business related individuals who have an international perspective. There have to be at least three reports of this kind for a country to be included. The results are expressed as a three-year moving average and so a general upward or downward trend in the score, rather than in a country’s relative position, is a fairly reliable indicator of how it is doing.

To create a balanced perspective the TI produces the Bribe Payers’ Index to show how 19 major exporting countries are perceived as more or less likely to offer a bribe to secure a contract. This poll is conducted by Gallup in 13 middle income countries and has received remarkably little criticism for its methodology.

Q. Are there significant differences in corruption issues between the First and the Third world?

A. In the industrial world the negative impact of corruption lies primarily in its impact on political stability and public confidence in the political system.

The major corruption scandals in Italy over the last 10 years have eroded confidence in the democratic system, which ironically goes some way to explaining Berlusconi’s grip on political power — he was seen, at least a couple of years ago, as a source of stability after the many upsets triggered by the actions of the investigative magistrates in the mid 1990s. Likewise, the sad story of the irregular payments made to the CDU under Helmut Kohl have intensified a lack of confidence in politicians amongst many people in Germany. Corruption of this kind, centred around payments to political parties, does not undermine economic growth but does create serious questions for the stability and self confidence of society.

Q. In your own work you have also focused on corruption in the arms trade. This is of immense importance to countries like Pakistan that spend a major part of their budget on arms. What have been your key successes in this arena?

A. Our key successes have yet to come, but we have started the process. We, that is the TIUK on behalf of the TI, have produced a few key reports in the last five years in which we have looked at the companies, backed by their own governments that drive the arms trade and how they try to increase market share in individual countries. By association we have looked at the impact on countries that may have the potential to be engaged or are already engaged in conflict.

We work in dialogue with private companies. In the last five years we have organized three meetings, the most recent one in June this year, in which we discussed the potential for an ‘Integrity Pact’ in the arms trade sector. The pact would mean that each party will agree to not take or give bribes. This would be done in the light of a fairly complex set of written undertakings.

We are also trying to make sure that arms export licenses from the UK and other members of the EU are more closely tied to corruption eradication. The licensing arrangement would require that a senior official of the company, at managing director or chairman level, would need to sign the saying that no corruption was involved.

We are exploring the building and enforcement of a code for the industry which would be linked to a strong compliance system. A code is of little use if it is not practised, so we are looking at ways in which it can be built into the system — a genuinely complex task for large multinational companies, used to working through agents with a long lead.

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