Transcript 2. Definitions and Opportunities - uni

Anticorruption and the Design of Institutions 2008/09
Lecture 1
Definitions and
Opportunities
Prof. Dr. Johann Graf Lambsdorff
Literature
ADI 2008/09
 Lambsdorff, J. Graf (2007), The Institutional Economics of Corruption and
Reform: 1-26.
 Andvig, J.C. and O.-H. Fjeldstadt (2000), ”Research on Corruption. A Policy
Oriented Survey“, Chr. Michelsen Institute and Norwegian Institute for
International Affairs. 5-20, 66-73
www.ICGG.org/downloads/contribution07_andvig.pdf
 Shleifer, A. and R.W. Vishny (1993), ”Corruption.” Quarterly Journal of
Economics, CVIII, 599–617.
 Gupta, A. (1995), “Blurred boundaries: the discourse of corruption, the
culture of politics, and the imagined state”, American Ethnologist, Vol. 22 (2),
375-402.
Heidenheimer, A., M. Johnston and V. LeVine (1989), Political Corruption - A
Handbook, (New Brunswick: Transaction Publishers). 3-14.
 Tanzi, V. (1995), ”Corruption: Arm's-length Relationships and Markets.” The
Economics of Organized Crime, ed. by G. Fiorentini and S. Peltzman,
(Cambridge: Cambridge University Press), 161-80.
Forms of Corruption
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 We define corruption as the misuse of public power for private
benefit.
 “misuse” describes

behavior that deviates from the formal duties of a public
role,

behavior that deviates from informal rules (public
expectations, codes of conduct, conflicts of interest)

behavior that harms public interest.
Forms of Corruption
Public interest
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expectations concerning
public duties
formal
obligations
Definition of
Corruption
 Formal obligations normally derive via public expectations, which in
turn are determined by public interest.
 If this process is impeded, definitions of corruption have to refer to the
prior category
Forms of Corruption
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Bribery
 Obtaining of money or favors by public decision makers (politicians or
bureaucrats) in return for preferential treatment or government services.
 Bribery is an exchange of favors between a briber and a bribee.
 It involves two individuals, commonly a state agent and a civilian,
where the state agent misuses his or her power.
 In addition, it requires a third party that is harmed.
 Bribery is commonly described in the form of a principal-agent-client
relationship; the public interest is embodied by the principal.
Forms of Corruption
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Figure 1: Basic Principal-Agent-Client Model
P
Sticks to
negotiated
contract
Makes
rules,
pays
salary
/defects
Pays a bribe
Provides service/license,
awards contracts
A
C
Pays taxes/tariffs
Forms of Corruption
ADI 2008/09
Embezzlement
 Theft of resources; disloyal employees steal from their employers.
 Embezzlement differs from bribery because there is no client involved.
 Embezzlement is commonly included in a broader definition of
corruption.
 The exist an overlap with bribery: Public servants cannot directly and
with reason transfer funds to their personal account. They obfuscate
embezzlement by requesting fake receipts from private firms and
transferring the funds to them. This introduces a (fake) client to the
transaction and blurs the difference between bribery and
embezzlement.
Forms of Corruption
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 In criminal investigations bribery and embezzlement might be difficult
to distinguish.
 For example, French firm Elf Aquitaine is alleged to having paid bribes
to the Christian Democratic Party in Germany in exchange for being
preferred in the privatization of the Leuna refinery and the Minol petrol
stations.
 But embezzlement within the firm has been suspected as an alternative
explanation for the missing funds.
 Dieter Holzer acted as an intermediary, receiving a “commission” of 45
million German Marks for only ten weeks of Lobbying. Depending on
who finally received the money, either bribery or embezzlement took
place.
Forms of Corruption
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Forms of Corruption
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Fraud
 Economic crime that involves some kind of trickery, swindle, deceit,
manipulation or distortion of information, facts and expertise.
 Bribery often involves fraud.
 Bribery without fraud: If public servants take speed money but do not
obfuscate their malpractice and do not otherwise act against the rules.
 Fraud without bribery: Fraud also takes place when state officials
engage in organized crime, such as smuggling, counterfeit or when
contracts are given to firms where public servants have a stake.
Forms of Corruption
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 Fraud is typically monitored by internal and external auditing.
 This suggests another link between bribery and fraud:
supervisors/auditors take bribes in exchange for turning a blind eye to
malpractice.
 Such behavior suggests another player in a principal-agent model: the
supervisor.
Forms of Corruption
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Figure 2: Principal-Agent-Supervisor Model
P
Pays salary
Reports honestly/defrauds
Pays
salary
Sticks to nego- Monitors
tiated conagent
tract/defrauds
Pays
bribe
A
S
Forms of Corruption
ADI 2008/09
Extortion
 Resources extracted by the use of coercion, violence or the threats to
use force.
 Extortion may be organized by criminal organizations. This may
involve “protection- or security-money”.
 Public servants and politicians can extort favors by harassment and
threats to disfavor private actors (clients).
 The crucial difference to bribery is that no benefit is given to the client.
 The extortionist only promises exemption from further harassment.
 In court, extortion and bribery might be difficult to distinguish. Bribers
may declare having been extorted.
Forms of Corruption
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Forms of Corruption
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 Shleifer and Vishny (1993) establish the difference between
“corruption with theft” and “corruption without theft”.
 An example relates to customs officials requesting payments from
those who seek to clear their goods
 In the former case no official tariffs are paid in exchange for a bribe.
The officials take bribes and defraud the government.
 In the latter case in addition to the official tariffs further payments are
requested by threat of harassment (delaying the clearing of goods).
There is no apparent case of fraud involved. We label this extortion.
Forms of Corruption
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 Advocates of free markets tend to be particularly concerned about
extortion.
 They suggest that reform should focus on strengthening private
actors.
 For example, in order to avoid harassment by customs officials one
may suggest that failure to process goods within 3 days leads to
punishment of customs officials (and an eased burden on private
actors).
 The problem is that while extortion is contained, bribery and fraud
(that is, insufficient payment of official duties) may increase.
 Customs officials may exchange one source of income by another.
Forms of Corruption
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
Anti-corruption must embrace all forms of
corruption.

Corruption cannot commonly be fought by
strengthening one side in a principal-agentclient relationship as opposed to another.
Forms of Corruption
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Petty versus grand
Street level experience of
frequent routine payments for
small favors by low placed
public servants, like in hospital,
schools, local licensing
authorities, police, customs and
tax authorities.
High placed individuals exploit
their position to extract large
bribes, design contract scams or
embezzle large sums of money
from the public treasury into
private (often overseas) bank
accounts.
Forms of Corruption
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Political versus administrative/bureaucratic
 Who was bribed? An (elected) politician or an (appointed)
administrator?
 Separation between politics and administration is often incomplete,
particularly in poor countries. The distinction between these two types
of corruption can become difficult.
 Cooperation between politicians (who provide connections) and
administrators (who provide technical expertise) can further blur this
distinction.
Forms of Corruption
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Absence of Corruption
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 While we may agree on a definition of corruption, how would you
describe a world that is free of corruption?
 Answers seem to depend on what particular model of “good
governance” one adheres to.
 One suggestion is the arms-length principle: ”personal or other
relationships should play no role in economic decisions that involve
more than one party. Equality of treatment for all economic agents is
essential ...”, [Tanzi 1995: 161].
 Absence of arms-length principle: Pertinent factors in public decision
making are overshadowed by personal relationships.
Absence of Corruption
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“Sharmaji was a patwari, an official who keeps the land record of approximately
five to six villages […]. Sharmaji lived in a small, inconspicuous house deep in the
old part of town […]. The lower part of the house consisted of two rooms and a
small enclosed courtyard. One of those rooms had a large door that opened onto
the street. This room functioned as Sharmaji’s ‘office’. That is where he was
usually to be found, surrounded by clients, sycophants, and colleagues […]. Two
of the sidewalls of the office were lined with benches; facing the entrance toward
the inner part of the room was a raised platform, barely big enough for three
people. It was here that Sharmaji sat and held court, and it was here that he kept
the land registers for the villages that he administered. All those who had
business to conduct came to his ‘office’. At any given time there were usually two
or three different groups, interested in different transactions, assembled in the
tiny room. Sharmaji conversed with all of them at the same time, often switching
from one addressee to another in the middle of a single sentence. Everyone
present joined in the discussion of matters pertaining to others. Sharmaji often
punctuated his statements by turning to the others and rhetorically asking, “Have
I said anything wrong?” or, “Is what I said true or not?” Most of the transactions
conducted in this ‘office’ were relatively straightforward […] [but] these things
‘cost money’” (Gupta 1995:379).
Absence of Corruption
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 The arms-length principle would require a clear separation of public
and private.
 But as the preceding case from India illustrates, this distinction may
be severely violated without suggesting the persistence of
corruption.
 The idea of the arms-length principle may not obtain global support.
It disregards aspects of local participation, accountability and
transparency. These are aspects that deserve equal recognition.
Absence of Corruption
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 Application: Does decentralization lower corruption?
 The answer depends particularly on the definition of corruption
chosen.
 Yes: It involves locals in public decision-making, increases
participation, subjects public officials to scrutiny of their immediate
environment.
 No: It violates the arms-length principle. Rational decision-making
is impeded by personalism which is stronger at the local level.
Absence of Corruption
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Application: Does “modernization” lower corruption?
 Corruption sometimes arises when traditional societies attempt a
transformation into modern nation states, due to the arising conflicts
between two existing systems.
 Yes: The building of modern nation states frees individuals (and
officials) from their traditional ties which otherwise overshadow
pertinent arguments in public decision-making.
 No: Traditional ties also provide mechanisms to monitor officials
and safeguard against self-enrichment by a ruling class.
Absence of Corruption
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
Decentralization and modernization are too
crude to be guiding concepts for reform.

Increased decentralization might be helpful
in some instances but damaging in others.
Absence of Corruption
ADI 2008/09
The World Bank’s Country Policy and Institutional Assessment (CPIA):
Appendix
ADI 2008/09
Discussions
1) What are the various approaches to define the term “misuse” in a
definition of corruption?
2) Use a Principal-Agent model to describe the actors that are involved
in a corrupt transaction!
3) Why may courts fail to distinguish between bribery and
embezzlement?
4) In how far may bribery go along with fraud or extortion. Define these
terms prior to giving an answer!
5) What is “corruption with theft”?
6) What is the arms-length principle? Is it exhausting for defining
corruption?