* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
Daniel Kaufmann is a senior researcher on global economy and development at the Brookings Institution in the United States. Until November 2008, he led the work on governance and anti-corruption at the World Bank Institute.
TrustLaw has summarised some of Kaufmann’s recent blogs from The Kaufmann Governance Post, highlighting mentions of corruption.
Does grease money speed up the wheels of commerce?
This blog was originally posted on May 2.
Does bribery reduce bureaucratic red tape to an enterprise? Daniel Kaufmann and Shang-Jin Wei investigated this question in a research paper over a decade ago. The answer was ‘no’. They found that on average firms that bribe waste more, not less, management time dealing with bureaucrats than firms that say no to bribery, and that firms that bribe also face a higher, not lower, cost of capital. But many firms operating in corrupt environments can still find that individually it may ‘pay’ for them to bribe, often when that is the way that others do business in the same industry and country.
At the end of the day, it comes down to a cost-benefit calculation by each firm. Research suggests this varies greatly across countries and types of firms.
Better enforcement of foreign anti-bribery laws and conventions is important in order to raise the costs for all firms simultaneously and eliminate competitive pressures to pay bribes. Voluntary industry agreements on some general anti-bribery principles, or manuals on internal codes of ethical conduct, are not enough.
Corruption and fiscal deficits in rich countries
This blog was originally posted on April 20.
There are a number of rich countries where corruption is widespread. Corruption affects a country’s public finances in a number of ways:
1. Corruption lowers tax revenues.
2. Corruption increases public expenditure.
3. Where corruption exists and transparency is lacking, decisions regarding the composition of public debt may be more risky, and debt servicing may become more expensive for the national treasury.
4. The more a country distorts, hides and delays disclosure of the true status of its financial and national statistics, the more likely this will introduce destabilising uncertainty into financial markets.
5. Large unofficial economies shrink the tax base and may force higher official tax rates, which in turn may feed into the vicious cycle of expanding shadow economies and high statutory taxes (which often go uncollected). Also, a large underground economy hampers growth, foreign domestic investment, exports and overall productivity, all of which further reduce overall tax revenues.
6. Corruption affects productivity, competitiveness (including in exports) and growth.
Daniel Kaufmann’s other findings are:
1. Industrialised countries vary in their ability to control corruption.
2. There is a strong relationship between corruption and fiscal deficits in industrialised countries.
3. “Legal corruption”, or state capture (which varies substantially among industrialised countries), is also associated with higher fiscal deficits.
4. There is no evidence that being a member of the eurozone results in convergence towards higher levels of governance and corruption control.
The findings’ implications are:
1. An increased focus on the challenges of corruption in industrialised countries is long overdue. Corruption is far from an exclusive problem afflicting some poor countries.
2. More analysis is needed on how governance failures and corruption affect macroeconomic and financial outcomes.
3. Global governance bodies, such as the EU, the G-20 and the IMF may need to pay more attention to enhancing incentives that encourage their member states to improve both their governance and fiscal standing. Required improvements include the production and disclosure of transparent, timely and unaltered data on public finances, economic activities and prices, as well as further dissemination and use of governance indicators. The cost of preventive inaction on governance issues is enormous and far beyond the confines of the misgoverned country, as illustrated in recent financial crises.
Wall Street financial reform: Less than meets the eye on financial institutions, more than meets the eye on oil companies
This blog was originally posted on July 16.
The Dodd-Frank Financial Regulatory Reform Bill includes a little-noticed side initiative which is of high relevance for global development and anti-corruption efforts. There is a resource transparency provision in the bill that mandates oil, gas and mining companies registered with the Securities and Exchange Commission to publicly disclose the tax and revenue payments made to any government and requires that they disclose how they ensure that these payments do not fund armed groups in some countries.
There are two more priorities. First, transparency provisions ought to also require full disclosure of the contracts signed between industry and governments.
Second, in the near future these reforms in the extractive industries ought to be rolled out to security exchanges in financial centres in London, Frankfurt and elsewhere.
Millennium Development Goals (MDGs) will not be met unless governance improves
This blog was originally posted on May 14.
Past research suggests that when governance improves, infant mortality declines and incomes rise. Poor quality of governance in many countries can be a major constraint to progress on the MDGs. Emphasis on key components of governance, including corruption, inequality, media freedoms and gender rights, is required to help address major hurdles to progress.
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