Global Policy Forum

Corruption: A necessary evil?


By Pierre Abramovici

Johannesburg Mail
December 01, 2000

Everyone has a word for it: hongbao in China, baksheesh in Arab countries, matabiche in central Africa, propina in Latin America, pots de vin in France, or just plain bribery. But what does it involve? Daniel Bertosa, the Public Prosecutor of Geneva, offers a definition: technically it consists of promising or offering an advantage to a public agent, civil servant, minister or manager of a public company, so that they betray their responsibility to the public authority they represent. The active corrupter is the person promising or paying the favour, and the public agent betraying his or her trust is corrupted. There's a link between the promise of an advantage and the betrayal of trust.

No one knows the full cost to the international economy of corruption. The World Bank estimates that it amounts to $80-billion a year, disregarding the embezzled development funds and small-scale corruption found particularly in developing countries, where it is an additional form of taxation levied by civil servants, politicians, police and customs officers. Samuel Pepys (1633-1703), the English diarist and secretary of the Admiralty, thought there was nothing wrong with bribery, providing it was done discreetly. This view has hardly changed.

Corruption is an economic factor in international trade, and it has got worse since decolonisation in the 1960s. Western business people tend to consider corruption in the Third World an inevitable feature of local culture. In simple terms the corrupted are public bodies in emerging countries, and the corrupters are companies based in rich countries. According to a specialist in African affairs, there is a quiet corruption that takes the form of deceit: corruption occurs when people are not prepared to compete on equal terms and are determined to hold on to protected markets, at the risk of being thrown out later because they can no longer pay the exorbitant commissions demanded by customers.

With the huge rise in oil prices in the mid-1970s France was plagued by a chronic balance-of-payments deficit. In 1977, to compensate for the poor competitive position of its companies on the export market, the French government authorised bribery in the form of commissions provided they were paid to foreign civil servants. Other European governments followed suit. It became legal to corrupt heads of state, ministers, even the most humble figures in the hierarchy in order to beat competitors. And by a convenient fiscal fiddle bribes became tax-deductible.

The United States took a different line. The Federal Corrupt Practices Act, adopted in 1977 in the wake of the Lockheed scandal, made the corruption of foreign officials a criminal offence. But in practice US companies carried on as before via subsidiaries in tax havens. The US government supported exports from places such as the Virgin Islands, an arrangement that costs $2,5-billion every year in unpaid tax. These assisted subsidiaries, known as Foreign Sales Corporations, form the basis of an undercover system for paying commissions abroad. For several decades international trade fitted into a framework of East-West conflict. Each side tried to keep hold of its customers and stop them from joining the opposition. That changed with the fall of the Berlin Wall, when former communist countries and their client states opened their borders. International trade, particularly in arms and construction, became a free- for-all, driven by exclusively economic interests.

In Eastern Europe huge commissions changed hands to secure big building projects and industrial contracts. All the sectors still under public control (arms, oil, power, transportation, civil engineering, water works, even medical equipment) were subject to a levy. Eventually the situation got so out of hand that the industry found corruption was no longer worthwhile.

Corruption in international trade, however, remained taboo until the mid- 1990s. The International Monetary Fund (IMF) and the World Bank made only cautious reference to the C word, complaining how deep-rooted it was in certain countries. Yet nothing changed: the "owners" of the bank and the IMF were states, as much as their customers were. Finally, at the bank's annual meeting in Washington in October 1996, James Wolfensohn, the bank's president, raised the issue. The cancer of corruption, he said, "diverts resources from the poor to the rich, increases the cost of running business, distorts public expenditures, and deters foreign investors". In July 1997 the IMF also changed course. On top of the usual requirements for balanced public spending, it warned Argentina that additional financial aid would be dependent on progress in education, public health, tax, but above all, in the fight against corruption.

The IMF statement coincided with the start of a series of discussions at the Organisation for Economic Cooperation and Development (OECD), instigated by the US, which were designed to prepare a draft agreement to end the corruption of foreign nationals. On December 10 1997, at an OECD ministerial meeting, 21 countries signed the agreement. However, its ratification proved difficult. Despite the exorbitant commissions being paid " as much as 40% in some arms deals " European industry was hostile to the agreement, seeing it as a trick by Washington to undermine European exports.

A couple of years earlier, an NGO called Transparency International (TI) had published its first survey ranking countries on the scale of corruption. It was, its authors admitted, not scientific. But it was clearly impossible to determine an actual level of corruption. In October last year TI organised a conference in Durban which established its international credibility. The 1200 delegates accused the World Bank of funding the corrupted parties by misguided distribution of development funds, and they expressed interest in the OECD agreement.

Shortly afterwards TI published a classification of bribe-payers in which France and several other European countries ranked poorly, in contrast to the US. The media demanded changes and noted several OECD countries, including France, had still not ratified the agreement on corruption. They pointed to the coincidence between the publication of the survey and the upcoming World Trade Organisation (WTO) conference in Seattle last December. TI chair Peter Eigen made no secret of his desire to put corruption on the agenda of the WTO, which he thought could act as international watchdog. With the transatlantic dispute at its height, the US spelled out the consequence of "unfair" European trade, omitting any reference to its own system of subsidies. Conveniently, the foreign subsidiaries of companies based in OECD countries were not affected by the agreement.

Last June, two-and-a-half years after signing the agreement, France ratified it. But in the meantime the European Union had taken the matter to the WTO, which condemned illegal US export aids via subsidiaries in tax havens. On September 5 this year, in view of US reluctance to comply with the ruling, the EU warned that it would retaliate with new sanctions on American goods. Is it realistic to suppose that international political will can end up corruption? In some countries, such as Saudi Arabia, bribery is a form of tribal gift. In Russia poverty has resulted in a spectacular increase in small- and large-scale corruption. It hardly seems plausible that international trade will boycott entire countries.

Jean Cartier-Bresson, a lecturer in economics at Reims University, explains: "Everyone knows that corruption is widespread in China. But it's still the world's prime target for direct foreign investment. And corruption doesn't stop people from developing countries from doing business there either. "On the other hand, corruption in Russia raises a different sort of problem, that of an unsettled political environment. Traders can cope with controlled corruption in a stable context, where they always deal with the same people. The problem is when their opposite number, and the sums involved, and even the basic rules of the game, keep changing."

Some people are already looking for new ways round the controls. A sales representative in a large French firm said: "One of the fiddles now involves opening subsidiaries in countries that don't belong to the OECD, so that work that used to be done from France is now carried on out there." This trend was confirmed last February when a French judge dismissed a case against the CEO of Dumez Nigeria. He was suspected of diverting $60-million via shell companies, with a part of the money being paid to public figures in Nigeria. The case was dropped because in legal terms the Nigerian subsidiary was a separate entity from the parent company in France. The public prosecutor and the judge thought it probable that Dumez Nigeria belonged to the "consolidation basis" of Dumez France, but it had not been possible to prove its "dependence".

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