Post No.: 0619
Acts of corruption include bribes, kickbacks (collusion), extortion (coercion), embezzlement (theft), money laundering, blackmail and undue influence (exploitation). It also includes nepotism, cronyism or otherwise favourably helping one’s relatives or mates in professional contexts. If it’s about ‘who you know or what you can pay rather than what you know’ then this means that people can schmooze or buy their way in rather than need to actually be the best candidate for a job. Once in, they might give themselves pay rises, bonuses, demand bribes from others, etc. too.
Corrupt dealings are often funnelled through family members or close friends too so that the trails of fraud aren’t concentrated on just one person. And so it’s again about who people know rather than what they know.
The raising of political campaign funds is an area where bribery frequently occurs – lobbyists, donors and ‘bundlers’ donate money to political candidates in return for ‘favours’.
Funding political parties, lobbying specific politicians, providing ‘cash for questions’ that’ll be asked in parliament, and other quid pro quo deals where a politician does something like push for industry deregulation, award government subsidies or public contracts to a (usually already wealthy) individual, business or group in return for money or a lucrative job afterwards, are situations when palm-greasing can occur in politics. This means that a corrupt politician, while serving his/her own interests, serves a corporation or industry’s interests rather than the wider interests of his/her constituency or country. Note that both the offeror and receiver, or solicitor and giver, of a bribe are guilty of bribery.
‘Regulatory capture’ occurs when a political entity starts to serve the narrow interests of a commercial or ideological group rather than the general interests of the public, which leads to a net loss for society. This can, for example, arise when a regulatory body is in fact headed by former industry employees who still have old friends in the industry or simply still have their cultural way of thinking (this especially happens in highly specialised technical industries), or when a firm in the industry secretly promises to give a regulator a position on the board of directors of their firm, along with a nice compensation package, once they cease their role as a public servant. A ‘revolving door’ here is when the same people seem to switch from playing a regulatory or legislative role to members of the industry affected by the former, and vice-versa. This reduces the regulator’s independence from the industry they’re supposed to be regulating, thus leads to an unhealthy relationship between the government and private sector.
In some cases there can be a problem of where to draw the line between ‘fair influence’ and ‘undue influence’. In principle, what’s wrong with ‘I give you something and you give me something in return’? Well, the general definition of corruption is the abuse or misuse of power or trust for personal benefit rather than the reasons for which that power or trust was given. Woof!
Corruption occurs in the private sector and with non-governmental organisations (NGOs) too. Most people are only mainly concerned about the public sector because we all directly hold ‘shareholder’ interests in the public sector and public funds – but corruption occurs in the private sector too.
Private sector corruption includes kickbacks in business-to-business transactions, favourable board member and executive pay decisions, nepotism and cronyism during employment, gift-giving and undeclared benefit-in-kind perks provided to entice a potential client or employee, embezzlement, industrial espionage, creative accounting and other forms of fraud, and of course private sector interactions with the public sector (common ones include bribing public officials to gain public contracts, or firms coercing governments by threatening to take their jobs elsewhere unless they receive a favourable tax deal).
Corruption sadly often pays, at least for the individuals involved and in the short-term. Some people don’t wish to go on the record to get powerful individuals convicted of crime even though they know what’s going on, because they want to keep their jobs and don’t want to be labelled as whistleblowers ‘who ruined everybody else’s fun’. (Whistleblowers were covered in Post No.: 0429.) Corrupt organisations can thus become corrupt to the core because honest people will end up leaving or not joining such organisations because they don’t fit into that organisation’s culture, and because they might be labelled as potential snitches. Ironically, the honest employees can become viewed with suspicion and threatened by the dishonest employees if they don’t join in with the misconduct.
Something is always in the public interest if it involves public tax money, thus hiring public servants, civil servants, and even maintaining a monarchy, for instance, are all under fair scrutiny under a free press. Nepotism or cronyism in politics presents a conflict of interest between a politician doing what’s best for his/her country and what’s best for his/her own family and/or friends, hence such relationships aren’t merely a private matter and must be publicly declared.
It’s hard to measure the full costs of corruption because of the indirect effects (e.g. a business losing work due to corruption doesn’t just affect that firm but its employees, and therefore their families and communities, etc.). The costs aren’t just monetary but social, such as a greater general distrust of politicians or large corporations. This leads to a reduced sense of cooperation or community spirit, decreased innovation and increased transactional costs, and the normalising of unethical behaviours. It could also fund terrorism and the illegal drugs trade (from bribes for letting arms or other illegal goods go through customs), lead to lower health, educational and economic development and environmental protection (because public funds aren’t being spent on these areas or they’re disregarded areas e.g. a company might dump industrial waste into a river after bribing an official, either to turn a blind eye or as part of influencing wider environmental policies at the top).
So it’s far more than just about economic rents going to one place or actor. Corruption distorts markets because contracts aren’t granted based on the price-to-fit of products but on the quality of the bribe to the decision maker. So if a buyer is basing his/her decision on the quality of the bribe rather than on the quality and/or price of what’s being procured, this distorts the market. (In fact, a producer is better off not spending money on R&D but on maximising the bribe to buyers and inspectors!) The result is lower quality (dangerous) or pointless infrastructure, buildings and other projects. This (and siphoned funds) explains some of the unexpected collapses of bridges and inadequate quality of social housing around the world.
Corruption (historically involving numerous western private corporations) is one major reason why an African country can be rich in natural minerals, like copper or diamonds, yet a huge proportion of the population live in poverty. It can also lead to much-needed public projects being neglected altogether (e.g. social or affordable housing). It diverts resources from where they’d be more useful (e.g. furry schools and hospitals). The poorest and most vulnerable (as usual) are the ones who get hit first and the hardest because they have the least power. So it creates incentives that distort and misallocate resources.
It leads to taxes not being paid too (when auditors or inspectors are bribed for a lower tax bill) – hence the public loses out this way too. Tax havens and places with strong banking secrecy allow the proceeds of bribes to be hidden too. Even if not hidden, the ‘Big Accounting’ firms frequently fail to do their job of auditing to catch and stop corruption – perhaps because they corruptly accept millions themselves to turn a blind eye? Either that or they’re just incompetent and not worth the money?!
It can create monopolies because the rich firms get richer (for they can offer the juiciest bribes to be, perhaps, the exclusive supplier). Market prices and the flow of goods are distorted if certain goods contain a ‘hidden tariff’ (i.e. a bribe is necessary to clear them through customs), which means those goods will be supplied less and be more expensive in that country.
Black markets, loan-sharking and other underground economies or parallel institutions can end up forming because people don’t trust official institutions – but these don’t do better for the people because they’re not independently regulated and are costly to society (e.g. loan-sharks often use extortionate methods themselves).
Sources of corruption data may be corrupt themselves(!) Nonetheless, a conservative estimate for the cost of corruption is a few trillion US dollars globally every year. Another estimate is that as much as 20-25% of the value of public contracts is lost to corruption on average globally. But do note that the variance between the best and worst countries is large – some countries are inordinately corrupt while some are quite clean (see the Corruption Perceptions Index). The Scandinavian countries are perceived to be amongst the least corrupt, for instance. There’s also variance within different local governments of countries. In some countries, political rivals are routinely eliminated under the guise of ‘tackling corruption’ when they’re only being eliminated because they’re rivals!
It’s critical to be mindful that not all bureaucracy is bad – some regulations are vital to society and business (e.g. for upholding ethical standards, improving safety, protecting the vulnerable, enforcing consumer rights). Centralisation is sometimes more efficient too (e.g. for not wastefully duplicating processes by many different groups and for increasing economies of scale). There are plenty of honest bureaucrats and decision makers so it’s wrong to tar them all with the same fuzzy brush – we don’t want to punish and disincentivise the good by calling them bad. (The less we know, the more we stereotype entire groups as homogenous e.g. ‘all’ politicians as corrupt). Yet with great power does come great temptations.
Corruption has been getting generally worse since WWII, and three theories for this are weak institutions (the sudden formation of many new countries and therefore inexperienced governments and institutions after WWII and the Cold War), new trade relationships (relatedly, global trade, with rich foreign corporations tempting officials and business leaders in these new countries with huge sums (bribes) that they struggle to refuse), and authoritarian regimes (again relatedly, officials and business leaders ‘doing what they need to do to get things done’ – and even when authoritarian regimes become less authoritarian, old normative habits of providing bribes ‘to get things done’ can persist).
If bribes are fine because they ‘grease the wheels’ to make things happen then it encourages governments to put up greater barriers and bureaucracy because with greater barriers come the need for greater bribes to make things happen! And firms that pay bribes to overcome obstacles become labelled as firms that are willing to pay bribes, and so get extorted for further bribes otherwise their reputation for their past transgressions will be publicly revealed – thus creating a ratchet effect (i.e. once you start on this road, it’s hard to go back). These firms that pay bribes will end up spending more time and money interacting with governments than firms that don’t too, which imposes costs upon them. A firm that has a reputation for giving bribes also loses international investment because why invest in them when you worry that some of that investment won’t be used for what you hope?
Woof. So it’s wise to avoid corrupt behaviour! The risks aren’t just fines and penalties if caught but legal costs, remedial action costs, calls for increased industry regulation and oversight, damaged reputations, employee morale and custom, and jail sentences, bans or other sanctions for corrupt actors (hopefully for the real criminals usually at the top of the organisations rather than those who’ve become scapegoats). Contracts that form via corrupt methods will be considered void. The costs to a politician or government behaving corruptly include impeachment, criminal charges, bans, international economic sanctions and domestic public uprisings. So there are criminal, civil and international sanctions.