Corruption and institutional design

Robert Klitgaard is an insightful expert on the institutional causes of corruption in various social arrangements. His 1988 book, Controlling Corruption, laid out several case studies in detail, demonstrating specific features of institutional design that either encouraged or discouraged corrupt behavior by social and political actors.

More recently Klitgaard prepared a major report for the OECD on the topic of corruption and development assistance (2015; link). This working paper is worth reading in detail for anyone interested in understanding the dysfunctional origins of corruption as an institutional fact. Here is an early statement of the kinds of institutional facts that lead to higher levels of corruption:

Corruption is a crime of calculation. Information and incentives alter patterns of corruption. Processes with strong monopoly power, wide discretion for officials and weak accountability are prone to corruption. (7)

Corruption can go beyond bribery to include nepotism, neglect of duty and favouritism. Corrupt acts can involve third parties outside the organisation (in transactions with clients and citizens, such as extortion and bribery) or be internal to an organisation (theft, embezzlement, some types of fraud). Corruption can occur in government, business, civil society organisations and international agencies. Each of these varieties has the dimension of scale, from episodic to systemic. (18)

Here is an early definition of corruption that Klitgaard offers:

Corruption is a term of many meanings, but at the broadest level, corruption is the misuse of office for unofficial ends. Office is a position of duty, or should be; the office-holder is supposed to put the interests of the institution and the people first. In its most pernicious forms, systemic corruption creates the shells of modern institutions, full of official ranks and rules but “institutions” in inverted commas only. V.S. Naipaul, the Trinidad-born Nobel Prize winner, once noted that underdevelopment is characterised by a duplicitous emphasis on honorific titles and simultaneously the abuse of those titles: judges who love to be called “your honour” even as they accept bribes, civil servants who are uncivil and serve themselves. (18)

The bulk of Klitgaard’s report is devoted to outlining mechanisms through which governments, international agencies, and donor agencies can attempt to initiate effective reform processes leading to lower levels of corruption. There are two theoretical foundations underlying the recommendations, one having to do with the internal factors that enhance or reduce corruption and the other having to do with a theory of effective institutional change. The internal theory is couched as a piece of algebra: corruption is the result of monopoly power plus official discretion minus accountability (37). So effective interventions should be designed around reducing monopoly power and official discretion while increasing accountability.

The premise about reform process that Klitgaard favors involves what he refers to as “convening” — assembling working groups of influential and knowledgeable stakeholders in a given country and setting them the task of addressing corruption in the country. Examples and case studies include the Philippines, Columbia, Georgia, and Indonesia. Here is a high-level description of what he has in mind:

The recommended process – referred to in this paper as convening – invites development assistance providers to share international data, case studies and theory, and invites national leaders from recipient countries to provide local knowledge and creative problem-solving skills. (5)

Klitgaard spends a fair amount of time on the problem of measuring corruption at the national level. He refers to several international indices that are relevant: Transparency International’s Corruption Perceptions Index, the World Economic Forum’s Global Competitiveness Index, the Global Integrity index, and the International Finance Corporation’s ranking of nations in terms of “ease of doing business” (11).

What this report does not attempt to do is to address specific institutional arrangements in order to discover the propensities for corrupt behavior that they create. This is the strength of Klitgaard’s earlier book, where he looks at alternative forms of social or political arrangements for policing or collecting taxes. In this report there is none of that micro detail. What specific institutional arrangements can be designed that have the effect of reducing official monopoly power and discretion, or the effect of increasing official accountability? Implicitly Klitgaard suggests that these are questions best posed to the experts who participate in the national convening on corruption, because they have the best local knowledge of government and business practices. But here are a few mechanisms that Klitgaard specifically highlights: punish major offenders, pick visible, low-hanging fruit, bring in new leaders and reformers, coordinate government institutions, involve officials, and mobilize citizens and the business community (chapter 5).

A more micro perspective on international corruption is provided by a recent study by David Hess, “Combating Corruption in International Business: The Big Questions” (link). Hess focuses on the Foreign Corrupt Practices Act in the United States, and he asks the question, why do large corporations pay bribes when this is clearly illegal under the FCPA? Moreover, given that FCPA has the power to assess very large fines against corporations that violate its strictures, how can violation be a rational strategy? Hess considers the case of Siemens, which was fined over $1.5 billion in 2008 for repeated acts of bribery in the pursuit of contracts (3). He considers two theories of corporate bribing: a cost-benefit analysis showing that the practice of bribing leads to higher returns, and the “rogue employee” view, according to which the corporation is unable to control the actions of its occasionally unscrupulous employees. On the latter view, bribery is essentially a principal-agent problem.

Hess takes the position that bribery often has to do with organizational culture and individual behavior, and that effective steps to reduce the incidence of bribery must proceed on the basis of an adequate analysis of both culture and behavior. And he links this issue to fundamental problems in the area of corporate social responsibility.

Corporations must combat corruption. By allowing their employees to pay bribes they are contributing to a system that prevents the realization of basic human rights in many countries. Ensuring that employees do not pay bribes is not accomplished by simply adopting a compliance and ethics program, however. This essay provided a brief overview of why otherwise good employees pay bribes in the wrong organizational environment, and what corporations must focus on to prevent those situations from arising. In short, preventing bribe payments must be treated as an ethical issue, not just a legal compliance issue, and the corporation must actively manage its corporate culture to ensure it supports the ethical behavior of employees.

As this passage emphasizes, Hess believes that controlling corrupt practices requires changing incentives within the corporation while equally changing the ethical culture of the corporation; he believes that the ethical culture of a company can have effects on the degree to which employees engage in bribery and other corrupt practices.

The study of corruption is an ideal case for the general topic of institutional dysfunction. And, as many countries have demonstrated, it is remarkably difficult to alter the pattern of corrupt behavior in a large, complex society.

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