How institutions work in a high corruption equilibrium.

The legal assumptions. The Montesinos case. National and international institutions vs.

power networks Experiences from the World Bank. New Ideas to go from high to low

corruption equilibrium.

Legal framework

All citizens have equal rights. Citizens vote to choose their government. REPRESENTATION.The government

represents the interest of all and has monopoly power to make public decisions.

SOVEREIGNTY.Each national government maintains formal relations with foreign governments and multilateral organizations.

‘Traffic Light’ World Maps Control of Corruption – 2000/01

Source for data: http://www.worldbank.org/wbi/governance/govdata2001.htm ; Map downloaded from : http://info.worldbank.org/governance/kkz/gov2001map.asp Colors are assigned according to the following criteria: Red, 25% or less rank worse; Orange, between 25% and 50%; Yellow, between 50% and 75%; Light Green between 75% and 90% ; Dark Green above 90%

Criminal prosecution and political networks

1985/7. Criminal prosecutor of the military juntas ( three former presidents) , 22 generals, admirals and other officers.

1988/91. 2 military rebellion cases. 1988/92. More than 100 big corruption cases,

involving private bankers and businesspersons, public officials and cabinet members. Big mistake.

What was the difference? Power networks.

The former minister of labor case

•The former minister of labor was appointed President of a state-owned company.

•We collect evidences of fraud against him for one year.

•Finally, the judge indicted him, resulting in a political scandal.

•President Menem fired him. “A man under criminal suspicions can not be a public official”

•A woman who had two indictments was appointed as a new President of the company.

the individual behavior approach. (judges and prosecutors, journalists, people)

•Binnary ethic

Demons Saints

•Small number of criminals

90% Saints

10%Demons

Beyond binnary profiles

Demons good but sinful Saint

Ethical profile

25% Demons

50%

Honest but sinful

25% Saints25% demons 50% sinful 25%saints

25%

Institutions

from individual to organizational behavior.

Authorities abide by the law and are commited to enforce it

STATE

PUBLIC EMPLOYEES

OFFICIALS

CABINET

Ethical Profile of Authorities

Difficult situation

STATE

CABINET

OFFICIALS

PUBLIC EMPLOYEES

Solutions

Institutional changes are not sufficient.

ENVIRONMENT

COMPANY Z

COMPANY Y

COMPANY X

MANAGERS

SUPERVISORS

EMPLOYEES

CABINET

OFFICIALS

PUBLICEMPLOYEES

MANAGERS

SUPERVISORS

EMPLOYEES

MANAGERS

SUPERVISORS

EMPLOYEES

government

The Montesinos case.

The clientelistic network

•Evidences from 110 vladivideos transcript in “El Comercio”

•The political and resource interchange of 230 people.

•Each number is a person

•Each blue line represent a political favor

•Each purple line represent a money interchange

1

State (Bureaucracy)

Vladimiro Montesinos

Media

Private Sector Municipal

Government

Military

Political Parties

Civil Society International

Legislative Branch

Judiciary

Alberto Fujimori

Political Support NetworkMoreno Ocampo

Media

Private Sector

Vladimiro Montesinos

Municipal Government

Military

State (Bureaucracy)

Political Parties

Civil Society International

Legislative Branch

Judiciary

Alberto Fujimori

1

Resource Dependency NetworkMoreno Ocampo

Lessons from Montesinos case

The judicial approach. Does the elimination of the central node ensure the disarticulation of the network or can the network be regenerated?

The institutional approach. Can we change institutions by constructing buildings, improving technology, training people or changing procedures?

The international approach. Can we use the relation with formal institutions to control informal networks in power?

A 170-person refuse collection company working for the city of Salta, the 700,000 inhabitant state capital of the Salta Province in northern Argentina.

In part because of Salta´s economic difficulties, payments for the refuse collection contracts in question had been delayed. These delays in the

payment of over 2.0 million dollars which the municipality of Salta owed to company began to pose problems. Total annual sales amounted to roughly

2.2 million dollars and the outstanding debt to the company began to threaten its viability. payroll had been delayed for over two months.

 the treasurer informed the company’s CEO that by order of the Mayor, 33% of the contract ($660,000) would have to be paid in bribes in order for any

payment to be made. 

the manager takes into considerations: the major is from the same party of the governor and a close friend of the state prosecutor. The governor is the owner of the state newspaper. He also appointed and control all the criminal

judges.

THE SALTA CASE

PAY OR NOT

FFINANTIAL BENEFITS 1.37 million Dollars     MORAL BENEFITS Payment of salaries Profit for stockholders Inclusion in public

contracting networks (future contracts)

Financial viability of firm, including the provision of employment for workers

FINANTIAL BENEFITS No short-term financial

benefits for the company.

MORAL BENEFITS Personal moral satisfaction

Mayor

Treasurer

Prosecutor

Mayor

Treasurer

Newspaper

Governor

Supreme Court Chief Justice

Judge

Prosecutor

Mayor

Treasurer

Newspaper

Governor

Supreme Court Chief Justice

Judge

Prosecutor

Mayor

Treasurer

Newspaper

Governor

RESULTS The company refused to pay kickbacks and successfully

denounced the mayor.

The mayor was fired, jailed and replaced by a new mayor.

9 months later the company lost its contract.

5 years later the company had still not received the payment.

The Solution: destroy one node is not sufficient, you have to create

a preventive network

The Solution: destroy one node is not sufficient, you have to create

a preventive network

WB Data

WBI data about State CaptureCountry

Parliamentarylegislation(% of firms)

Presidentialdecrees(% of firms)

CentralBank(%offirms)

CriminalCourts(% offirms)

CommercialCourts(% offirms)

Partyfinance(% offirms)

Captureindex(% offirms)

CaptureClassification

Albania 12 7 8 22 20 25 16 MediumArmenia 10 7 14 5 6 1 7 MediumAzerbaijan 41 48 39 44 40 35 41 HighBelarus 9 5 25 0 5 4 8 MediumBulgaria 28 26 28 28 19 42 28 HighCroatia 18 24 30 29 29 30 27 HighCzech Rep 18 11 12 9 9 6 11 MediumEstonia 14 7 8 8 8 17 10 MediumGeorgia 29 24 32 18 20 21 24 HighHungary 12 7 8 5 5 4 7 MediumKazakhstan 13 10 19 14 14 6 12 MediumKyrgyzstan 18 16 59 26 30 27 29 HighLatvia 40 49 8 21 26 35 30 HighLithuania 15 7 9 11 14 13 11 MediumMoldova 43 30 40 33 34 42 37 HighPoland 13 10 6 12 18 10 12 MediumRomania 22 20 26 14 17 27 21 HighRussia 35 32 47 24 27 24 32 HighSlovakia 20 12 37 29 25 20 24 HighSlovenia 8 5 4 6 6 11 7 MediumUkraine 44 37 37 21 26 29 32 HighUzbekistan 5 4 8 5 9 4 6 Medium

Overall 24 21 25 18 18 20 20

Source: Hellman, Jones, and Kaufmann, ‘Seize the State, Seize the Day’. State Capture Index = [1+….+6] / 6

An Index of State Capture

0

5

10

15

20

25

30

35

40

45

Sta

te C

aptu

re I

ndex

Azerb

aijan

Bulgar

ia

Croat

ia

Czech

Rep

Estonia

Georgia

Hungar

y

Latvia

Lithuan

ia

Poland

Roman

ia

Russia

Slovak

ia

Slovenia

Ukrain

e

% Firms Affected by State Capture

Peru: “State Capture” by elite, shaping laws/regulations(as reported by firms, GAC diagnostic, 2001)

40 60 80 100

Central Bank decisions

Regulatory Agencies

High Officials (influencing presidentialdecrees/decisions)

Judiciary (influencing major courtdecisions)

Parliamentarians (to influence laws)

% firms reporting that bribes by others to institution have negatively affected their operations

Capture by Vested Interests of:

Fig.13: Peru: Sources of Undue Private Influence on the State

10

40

70

100

DrugConglomerates

EconomicGroups

FDI/TransnationalCorporations

OrganizedCrime

ProfessnlAssociations

Labor Unions

% r

ep

ort

ing

ag

en

t is

hig

hly

in

flu

en

tia

l

Firms Public officialsBased on governance diagnostic surveys of public officials and enterprises

Responses by:

WB data shows democratic representation is seriously distorted.Who represents the poor ?

This is not an occasional problem but a stable situation.

Formal institutions are crossed and controlled by a network of people who interchange favours and take the government for themselves.

In order to assure the possibility of controlling or distorting any public policy these networks maintain the public management at a very low level.

CHALLENGING ASSUMPTIONS

State Institutions represent citizens’ interest. Representation is not working.

The World Bank can develop economic programs and build institutions in developing countries without being involved in political issues. Commercial Sovereignty is gone.

0

5

10

15

20

25

30

35

40

% o

f fi

rms

Note: For transition economies, average of 20 countries. Source: Hellman, Jones and Kaufmann, 2000 (www.worldbank.org/wbi/governance)

Companies responsibilityState capture

•WORLD BANK INCENTIVES20 billions dollar in loans.How much poverty alleviation?

Is the private sector the key actor for the social change?

THE TESTMADE TO 300 DIRECTORS OF U.S. AMERICAN COMPANIES IN

LATIN AMERICA

1. Who of you pays bribes to obtain business and to solve problems in the public sector?

2. Who believes that their competitors pay bribes to win business and to solve problems with the public sector?

3. Who has a strategy that would impede or make it difficult for other companies to obtain business because they paid bribes?

IN DEVELOPING COUNTRIES THE GOVERNMENT IS UNABLE TO ESTABLISH AN EFFICIENT PUBLIC MARKET. THE PRIVATE SECTOR IS UNABLE TO THINK ABOUT IT.

Beyond individual behavior and state institutions. Focus

in the outcome of the interaction.

IMPROVING THE QUALITY OF SERVICE DELIVERY

Creating Goods Social Networks

• Connecting green nodes • Changing the incentives of

yellow nodes• Controlling red nodes • Monitoring the interchange

between nodes

ENVIRONMENT

COMPANY Z

COMPANY Y

COMPANY X

MANAGERS

SUPERVISORS

EMPLOYEES

cabintet

OFFICIALS

PUBLICEMPLOYEES

MANAGERS

SUPERVISORS

EMPLOYEES

MANAGERS

SUPERVISORS

EMPLOYEES

government

Governance

The process and institutions by which authority in a country is exercised.