EXCERPTS

Susan Rose-Ackerman, "Corruption: Causes, Consequences and Cures. "1 Paper presented at the Institute for Contemporary Studies and National Strategy Information Center [NSIC] Conference, "Challenge of Corruption," Mexico, March 1997: 1-17.

Dr. Rose-Ackerman is Henry R. Luce Professor of l_xtw and Political Science at Yale University.

[...] Paying to Avoid Costs [...] Taxes are always burdensome. Thus businesses and individuals may collude with tax collectors to lower the sums collected. The savings are divided between the taxpayer and the official. In some parts of eastern Europe and the former Soviet Union, where nominal tax rates are very high, business people report high pay- offs. 13 In Italy, many allegations of corruption involved payoffs to tax inspectors. 14 In the Philippines tax avoidance is common with the poor contributing twice as much as the rich in taxes according to a press report. Jobs with the Bureau of Internal Revenue and the customs are popular with recent university graduates ap- parently because of the opportunities for payoffs. 15 Concerted reform efforts can yield substantial rewards. For example, in Ghana a reform program in the eighties gave the newly established National Revenue Service 3.5% of tax revenue and 2.5% of customs revenue as a bonus. Tax collections almost doubled as a share of GDP between 1984 and 1988) 6

Customs officials are particularly likely to engage in corruption since they con- trol something that firms' value--access to the outside world. Surveys of business people in both developing and transitional economies suggest that corruption in customs is widespread. 17 In Africa several studies suggest that the loss due to tariff exemptions is about 50%. ~ Of course, some exemptions are legally justifiable, but it appears that corruption plays a role as well. Customs reform in Indonesia and Mexico resulted, in part, from widespread evidence of corruption. ~9 Here is an area where the prescriptions of the market-oriented economist and the anticorruption reformer go together. Free trade policies both improve efficiency under most con- ditions and reduce the economic rents available to corrupt officials. Toleration of corruption leads to widespread inequities and inefficiencies. Studies show that as tariff rates rise, tariffs collected fall as a share of nominal tariffs and the variance of rates actually paid increases (Pritchett and Sethi 1994). These results are consistent with the view that corrupt incentives rise with tax and tariff rates.

Illegal businesses are especially vulnerable to extortionary demands. Law en- forcement authorities from the police, to prosecutors and judges can demand pay- ments to overlook criminal law violations or limit penalties. If the evidence of criminal behavior is clear, such businesses will be unable credibly to threaten to report corrupt demands. But, of course, illegal business people are hardly innocent victims. They may actively seek to corrupt the police. They seek, not only immu-

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nity form prosecution for themselves, but also assurance of monopoly power in the illegal market. Thus in both the United States and in Latin America, gamblers and drug dealers have paid officials to raid their competitors or to restrict entry. 2~ At the local level in Thailand some public authorities shelter criminal enterprises both from competition and from the law. 2' Alternatively, instead of inducing state offi- cials to harass their competitors, illegal businessmen may engage in outright in- timidation of potential rivals, often paying off the police not to intervene in their private attempts to dominate the market. 22

Since time is money, firms and individuals everywhere will pay to avoid delay. For example, if the government or a parastatal does not pay its bills on time, con- tractors or customers may pay to get speedy payment. In many countries informal payoffs are required to obtain such routine services as a telephone, a passport, or a driver's license. An Indian newspaper, for example, recently published a list of the "fee" for a range of routine public services. 23 A recent study of the business climate in the Ukraine provides a similar list. 24

Some states do have many inefficient regulations and levy burdensome taxes on business. Given the existing inefficient legal framework, payoffs to avoid regula- tions and taxes may increase efficiency. This defense of payoffs is commonly es- poused by foreign investors in the developing world and appears in discussions of investment in eastern Europe and the former Soviet Union as well. It is a pragmatic justification that grows out of frustration with the existing legal order. The case is important because it attempts to justify corruption carried out to obtain benefits to which one is not legally entitled. However, toleration of corruption that is efficient for individual firms produces systemic results that can be very harmful. [...]

Notes 1. This paper is a revised version of "The Political Economy of Corruption--Causes and Consequences,"

and "Redesigning the State to Fight Corruption--Transparency, Competition, and Privatization," in Private Sector, Quarterly Number 6, March 1996, pp. 45-48 (a publication of the World Bank Group, Vice Presidency for Finance and Private Sector Development).

13. De Melo, Ofer and Sandier, supra; Novitzkaya, Irina, Victor Novitzky, and Andrew Stone, Private En- terprise in Ukraine: Getting Down to Business, World Bank Private Sector Development division, un- processed (1995) and Webster and Charap, supra.

14. See• f•r examp•e• ``Fashi•n Designer Says •ta•ian Taxmen Victimized Her••• Agence France Presse• January 22, 1996, and "Armani Negotiates a Fine As Designers Go on Trial," International Herald Tribune, May l l , 1996, concerning cases against a number of people in the fashion industry who are accusing of paying bribes to obtain favorable tax audits. The designers claimed to be victims of extortion.

15. Far Eastern Economic Review, April 20, 1995. 16. Mamadou Dia, Africa's Management in the 1990s and Beyond: Reconciling Indigenous and Trans-

planted Institutions, Washington, DC: The World Bank, 1996. 17. Susan Rose-Ackerman and Andrew Stone, "The Costs of Corruption for Private Business: Evidence

from World Bank Surveys," Washington, DC: World Bank, unprocessed draft, October 1996, provide evidence on Ukraine and Pakistan. For a table of average reported payments in the Ukraine see Daniel Kaufmann and Aleksander Kaliberda, "Integrating the Unofficial Economy into the Dynamics of Post- Socialist Economies: A Framework of Analysis and Evidence" in Economic Transition in Russia and the New States of Eurasia, Bartlomej Kaminski, ed., Armonk NY: M.E. Sharpe, 1996, pp. 81-120.

18. Patrick Low, Preshipment Inspection Services, World Bank Discussion Paper 278, Washington, DC 1995; Janet MacGaffey, The Real Economy of Zaire: The Contribution of Smuggling and Other Unof- ficial Activities to National Wealth, Philadelphia: University of Pennsylvania Press, 1991; Pritchett,

110 TRENDS IN ORGANIZED CRIME ] FALL 1997

Lant, and Geeta Sethi, "Tariff Revenue, and Tariff Reform: Some New Facts," World Bank Economic Review, 4:1-16 (1994); and David Stasavage, "Corruption and the Mozambican Economy," second draft, OECD Development Centre, Paris, August 1996.

19. GATT, Trade Policy Review: Indonesia, Geneva, 1991, 1995; "Airport Customs Harnesses 3 Billion Mexican Pesos Per Year," El Economista, February 13, 1992.

20. Allan Kornblum, The Moral Hazards, Lexington MA: D.C. Heath, 1976; "Bribes and Publicity Mark Fall of Mexican Drug Lord," New York Times, May 12, 1996; "Mexican Connection Grows As Cocaine Supplier to U.S." New York Times, July 30, 1996; "Popular Revulsion Is New Factor in Chronic Colom- bian Drug Scandal," Washington Post, January 28, 1996.

21. Phongpaicht and Piriyarangsan, supra, pp. 51-97. 22. Handelman, Stephen, Comrade Criminal, New Haven, CT: Yale University Press, 1995. 23. "Bribe Index," Sunday Times oflndia, December 17, 1995. 24. Kaufmann and Kaliberda, supra.

�9 1997 By National Strategy Information Center. Reprinted with permission.

Luigi Manzetti, "Controlling Corruption in a Global Economy" Paper presented at the Institute for Contemporary Studies and NSIC Conference, "Challenge of Corruption," Mexico, March 1997: 1-40.

Dr. Manzetti is associate professor of polit ical science at Southern Methodist

University.

[...] VIII. Economic Crisis, Market Reforms and Corruption [...] In recent times, corruption in some Latin American democracies has taken a new twist for the worse. In a study of corruption in Brazil, Geddes and Ribeiro Nero posited that, "traditional forms of corruption have been more extensive since 1985 than they were during the previous democratic period. In addition, a new pattern of corrupt practices involving the private accumulation of wealth by the president and his cronies developed under Collor. ' '~ Indeed, new types of corrup- tion have emerged in the last few years. The incentive structure behind corruption has changed because the political economy of many countries has changed as well. In the political realm, corruption takes the form of the rise of a new type of politi- cian and in the economic realm it takes the form of a new opportunity structure created by a far reaching process of economic reform. Thus, situations of political transitions, punctuated by severe economic crises, are conducive to the rise to power of new political elites represented by business politicians. In turn, business politi- cians, while portraying themselves as a new brand of reform-minded leaders and national saviors untamed by the ineptness of their predecessors, aim ultimately at acquiring such a broad mandate once in office that can enable them to pursue their ruthless goals. In other words, the main hypothesis here is that if a country is al- ready affected by high levels of corruption enters into a deep socioeconomic crisis, the likelihood that the executive office is entrusted upon what we defined earlier as a business politician is high. Once in office, with the excuse of tackling the crisis, the business politician adopts emergency powers that allow him to pursue reform policies conducive to corrupt practices to an unprecedented scale. The decision to

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