Corruption: Myths & Realities in a Developing Country Context

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Ngozi Okonjo-Iweala delivers the Second Annual Richard H. Sabot Lecture, June 20, 2007.

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<ul><li><p>Corruption: Myths &amp; Realities </p><p>in a Developing Country Context</p><p>Ngozi Okonjo-Iweala</p><p>The Second Annual</p><p>Richard H. Sabot Lecture</p><p>June 2007</p><p>The center for Global Development</p></li><li><p>e Richard H. Sabot Lecture Seriese Richard H. Sabot Lecture is held annually to honorthe life and work of Richard Dick Sabot, a respectedprofessor, celebrated development economist, successfulInternet entrepreneur, and close friend of the Center forGlobal Development (CGD) who died suddenly in July2005. As a founding member of CGDs Board ofDirectors, Dicks enthusiasm and intellect encouraged ourbeginnings. His work as a scholar and as a development</p><p>practitioner helped to shape the Centers vision of independent research andnew ideas in the service of better development policies and practices.</p><p>Dick held a Ph.D. in economics from Oxford University; he was Professor ofEconomics at Williams College, and he taught at Yale University, OxfordUniversity, and Columbia University. He made numerous scholarlycontributions in the elds of economics and international development, and heworked for ten years at the World Bank.</p><p>e Sabot Lecture series hosts each year a scholar-practitioner who has madesignicant contributions to international development, combining, as didDick, academic work with leadership in the policy community. In 2006, theSabot Lecture was delivered by Lawrence Summers, Charles W. EliotUniversity Professor of Economics at Harvard University. We are grateful tothe Sabot family and to CGD board member Bruns Grayson for support tolaunch the Richard H. Sabot Lecture Series.</p></li><li><p>Ngozi Okonjo-IwealaNgozi Okonjo-Iweala is Managing Director of the WorldBank, overseeing the banks Africa region and South Asia,Europe and Central Asia region. From 2003 to 2006, sheserved rst as Finance Minister and subsequently asMinister of Foreign Aairs of the Federal Republic ofNigeria. As Finance Minister, Okonjo-Iweala led thePresidential Economic Team, responsible forimplementing a comprehensive home-grown economic</p><p>reform program that fought corruption, stabilized the macro-economy, andtripled the growth rate to an average of 6 percent per year over three years. Shewas the lead negotiator in the cancellation of US$18 billion, or 60 percent, ofNigerias external debt with the Paris Club. Okonjo-Iweala oversaw Nigeriasrst ever sovereign credit rating from Fitch and Standard and Poorsa ratingthat grouped Nigeria with other emerging market countries such as Vietnam,Venezuela, and the Philippines.</p><p>Prior to her role as Finance Minister and Minister of Foreign Aairs, she served21 years as a development economist at the World Bank, working in the EastAsia, Middle East and Africa regions. She held the post of Vice President andCorporate Secretary. She also served as Director of Institutional Change andStrategy (19951997). In this post, she assisted with the implementation of theBanks reform agenda. From 1989 to 1991 she was Special Assistant to theSenior Vice President, Operations, an assignment that enabled her to helpformulate World Bank policy for many countries, from China to Burkina Faso.</p><p>Okonjo-Iweala is the recipient of numerous honors and awards, including fourhonorary doctorate degrees, Euromoney Finance Minister of the Year 2005, andForbes 100 Most Powerful Women in the World 2006.</p><p>Okonjo-Iweala attended Harvard and received a Ph.D. in regional economicsand development from the Massachusetts Institute of Technology.</p></li><li><p>Ngozi Okonjo-Iweala | 1</p><p>Corruption: Myths &amp; Realities in a Developing Country Context</p><p>I am pleased to have this opportunity to deliver the second Richard H. SabotLecture at the Center for Global Development. Given his interest in examiningdiverse issues such as the role of government policy and markets in contributing tothe East Asia miracle, Dick Sabot demonstrated that he was very concerned aboutunderstanding the conditions needed for growth and development in low-incomecountries. Indeed it was very tting that last year Professor Larry Summersdelivered the rst Sabot lecture, Harnessing the Development Potential ofEmerging Market Reserves. e rst lecture focused on an important andpressing public policy issue of the day. Today, I have been asked, or press ganged,by Nancy Birdsall to focus on another critical and pressing public policy issue fordeveloping countries, which I believe Dick Sabot would have approved of:CorruptionMyths and Realities in a Developing-Country Context.</p><p>In this lecture, I would like to take a more in-depth look at corruption, and the way itundermines development in poor countries. In the course of the lecture, I will touchon this idea of myth and reality: What are the easy assumptions on corruption? Andwhat are the realities? Are we focusing adequately on important aspects of corruption?What solutions can one proer to guide developing countries with very weakinstitutions such as we nd on the African continent? And what can be done andwhat has been done as good practice to tackle corruption in developing countries?</p><p>The Effect of Corruption on Governance and GrowthIt is probably best to begin with denitionsand to lay out what is meant bythe interrelated terms, corruption and good governance. According to a recentreport prepared for the United Nations Development Programme (UNDP) byProfessor Rose-Ackerman, </p><p>Corruption is a symptom of something gone wrong in the management ofthe state. When institutions designed to govern the relationships betweencitizens and the state are used instead for the personal enrichment of public</p><p>1 UNDP, Corruption and Good Governance, Discussion Paper 3, Management Developmentand Governance Division (New York, 1997).</p></li><li><p>2 | Second Annual Richard H. Sabot Lecture</p><p>[and I would add private] ocials, then you have corruption and theprovision of benets to the corrupt. (UNDP, 1997; pp vii)1</p><p>e World Bank notes simply that corruption is the outcome of poor governance. </p><p>Viewed in its broadest sense, corruption is simply the misuse of public oce orpublic assets for private gains. It is also the misuse of these assets in a way thatcreates an unlevel playing eld and which makes people feel that injustice has beendone. Perhaps this is why average citizens in any countryin fact we allfeel sobadly about corruption. Corruption may be manifested in various forms such astheft, fraud, bribery, extortion, request for kickbacks, nepotism, patronage, and soon. A distinction is often made between grand and petty corruption. In the case ofgrand corruption, big businesses are seen greasing the palms of senior state ocialsto receive favors. And in petty corruption, junior civil servants may be enticed toreceive side payments or bribes to facilitate administrative arrangements for theirclients. e existence of corruption clearly indicates that something is gone awry.And it is indeed symptomatic of weak governance and more importantly weakinstitutions. Of course, the desired outcome is that of good governanceasituation in which public institutions are strong and public resources and publicgoods and services are managed eciently to address the needs of society.</p><p>In the past, some skeptics often provided a rational defense for corruptionbased on economic eciency arguments. It was argued that bribes helped inlowering the cost of doing business, in clearing the market, in providingincentive bonuses, and in distributing monopoly rents from a single agent toother ocials who collude in sharing a bribe. ese are all interestingeconomic arguments which merit some discussion.</p><p>For example, it has been argued that in an environment where there arerestrictive or bureaucratic government proceduressuch as bottlenecks inpaying taxes, burdensome customs procedures, or diculties in obtaininglicensesbribes could actually provide an ecient way of reducingburdensome transaction costs. Similarly, in cases where a government needs to</p><p>1 UNDP, Corruption and Good Governance, Discussion Paper 3, Management Developmentand Governance Division (New York, 1997).</p></li><li><p>Ngozi Okonjo-Iweala | 3</p><p>allocate a scarce resource to various private agents, a bribe payment may helpthe market to clear more eciently by allocating the resource to the highestbidder. Bribes could also be explained as a rational incentive bonus to publicsector workers whose wages may be articially depressed. And nally, somescholars have also argued that bribe payments ensure distribution of monopolyrents among other private agents participating, for example, in a largeprocurement contract or perhaps in the sale of some government asset.2</p><p>Some literature even showed evidence of growth and economic development incountries with high degrees of corruption (such as Indonesia under Suharto,Bangladesh, and China) as evidence that corruption had a limited orambiguous impact on growth. </p><p>e problem with many of these arguments above is that they point to themicroeconomic eciency of an isolated corrupt event without examining its long-run systemic impacts. In the long run, widespread corruption often creates muchlarger negative externalities which could hinder the long-term dynamic eciency ofan economy. We understand this in Nigeria and many other countries in Africawhere we have long struggled with systemic corruption that has diverted resources,corrupted values, and led to rent-seeking activities in place of productive ones.</p><p>Corruption Undermines Growth and Poverty ReductionLet me share with you four corruption tales to illustrate or illuminate how corruptiontotally undermines growth and poverty reduction. e rst concerns the wholesaletheft of public monies and it is the rst Abacha tale. In August 2004, Swiss authoritiesaccepted the argument of Nigerias lawyers that there existed an Abacha criminalorganization whose purpose was to engage in the looting and laundering of Nigerianpublic funds. With this acceptance of a long-fought, ve-year battle to prove thecriminal origin of corruptly acquired Abacha monies, the Swiss government agreed torepatriate about US$505 million of frozen Abacha funds back to Nigeria in 2005 and2006. Over the ve-year period, from November 1993 to June 1998 of Abachamisrule, an estimated $3 to $5 billion of Nigerias public assets were looted and sentabroad by Abacha, his family, and their associates.3</p><p>2 See Chapter 1 of Corruption and Good Governance. 3 See Swiss public records (Swiss Federal Court, Decision of 7 February 2005, Public Law Court 1,</p><p>Presiding Judge Feraud).</p></li><li><p>4 | Second Annual Richard H. Sabot Lecture</p><p>1 payment Euros 25 mil</p><p>7 payments totaling $175 mil</p><p>US $40 mil</p><p>US $20 mil</p><p>US $10 mil</p><p>US $20 mil</p><p>US $50 mil</p><p>Euros 5 mil</p><p>Euros 1 mil</p><p>Euros 12 mil</p><p>CBN</p><p>London BankAccount of Company A</p><p>Cayman IslandsBank Abacha</p><p>Account</p><p>Bahamas BankAbacha Account</p><p>Kenya Bank</p><p>Geneva BankAbacha Account</p><p>Lebanese BankAccount AbachaShell Company</p><p>Geneva BankAccount of Company A</p><p>Lebanese BankAccount of Company A</p><p>Paris BankAccount ofCompany ANigerian Bank</p><p>Account ofCompany A</p><p>Central Bank Nigeria (CBN Payments to Multinational Company ALaundered to Abacha Accounts 1998</p><p>Chart 1</p></li><li><p>Ngozi Okonjo-Iweala | 5</p><p>ese sums represent a substantial amount of Nigerias public assets by dierentmeasures. For example, the estimated sums represent 2.6 to 4.3 percent of 2006GDP and 20.6 to 34.4 percent of the 2006 federal budget. Another way of viewingthis is that at the upper end of the range, the amount stolen is larger than the 2006education and health federal budgets combined. Using unit cost estimates providedby the World Bank, these amounts could provide antiretroviral therapy for 23million HIV/AIDS infected persons over a ten-year period, or supply insecticide-treated bed nets for over 200 million pregnant women and children. </p><p>Of the amount stolen, over US$2.2 billion was largely documented by the CentralBank of Nigeria as stolen from it in truckloads of cash in foreign currencies, intravelers checks, and other means. Most of these monies were laundered abroadthrough a complex network of companies, banks, and shell concerns before ndingtheir way into foreign accounts operated by the Abacha family and their cronies. Atthe peak of their activities, over 70 companies and more than 32 banks, includingsome of the worlds best known banks, had money laundered through them. e second tale is a subset of the rst but involves the ination of a public healthcontract. It is another Abacha tale, the main protagonist of which is Mrs. MariamAbacha. e contract was for Pasteur Merieux vaccines awarded by the NigerianFamily Support Programa social program designed to benet poorer families,especially poor women and children in the countrywhich was headed by Mrs.Mariam Abacha. e contract, for a value of US$111 million, was awarded toMorgan Procurement Ltd., a company belonging to the Abacha family. e truevalue of the vaccines was $22.5 million, thereby resulting in an $88.5 millionprot for the family which was transferred to their various accounts. issubversion of the countrys vaccines procurement introduced corruption into acrucial health program. It became almost systemic and undermined the nationsimmunization and vaccination programs which harmed Nigerian children. </p><p>e third tale is a tale of corruption in education on a small yet worrying scale. It isthe tale of Rose, a twenty-one-year-old university student, who nally made it out ofher village and family as the rst child to get a university education. Rose, from apoor rural family, could not purchase the series of class notes sold by her lecturer to</p></li><li><p>6 | Second Annual Richard H. Sabot Lecture</p><p>students as part of the reading material for the class. e lecturer, who used thesemonies to supplement his income, noticed Rose was not purchasing the notes andpenalized her through low grades for her work. When she explained she couldnt payshe was asked to make up with other favors which she refused. e failing grade shewas given in the course was instrumental in her withdrawal from the universitywhich put an end to her higher education. An individual and entire family lost theirhope and pathway to escape poverty. When I followed up on this story, I found thatit was by no means an isolated case. It was part of a systemic rot that had befallenwhat had once been a very good tertiary education system in Nigeria.</p><p>And nally, my fourth tale is based on reports by the Financial Times in 2004involving a foreign consortium and a lucrative oil and gas project in Nigeria.Sometime in 1994, the TSKJ consortiumcomprised of Frances Technip, ItalysSnamprogetti, Japans JGC, and the Halliburton subsidiary Kellogg, Brown andRoothad made a bid to provide services to a US$12 billion LNG project inNigeria partly owned by the Nigerian government and the Royal Dutch ShellGroup. is initial bid was not accepted. Subsequently, the TSKJ group obtainedthe services of Tristar Investments, a separate company which was to provideconsultancy services, to enable the company to win its contract in the LNGproject. Finally, in December 1995, TSKJ was awarded a US$2 billion contract inthe Nigerian LNG project. Years later, evidence was produced that t...</p></li></ul>