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Corruption: Major Cause and Result of Poverty

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by Anup Shah

Corruption is a major cause and result of poverty around the world, at all levels of society, from governments, civil society, judiciary functions, military and other services and so on. The impact of corruption in poor countries on the poorer members of those societies is even more tragic.

The issue of corruption is very much inter-related with other issues. At a global level, as globalization continues at rapid pace, with promises of prosperity, the “international” (Washington Consensus-influenced) economic system that has shaped this globalization in the past decades, requires further scrutiny for it has also created conditions whereby corruption can flourish and exacerbate the conditions of people around the world who already have little voice in international meetings and summits about their own destiny.

A hard thing to measure or compare though, is the impact of corruption on poverty issues, versus those inequalities that are structured into law, such as unequal trade agreements, structural adjustment policies, so-called “free” trade agreements and so on. It is easier to see corruption. It is harder to see these other more formal, even legal forms of “corruption.” It is easy to assume that these are not even issues because they are part of the laws and institutions that govern national and international societies and many of us will be accustomed to it—that is how it works, so to speak. Those deeper aspects are discussed in other parts of this web site’s section on trade-related issues.

That is not to belittle the impact of corruption, for its impacts are enormous too.

Rich Countries involved in corruption abroad

When asking why poor countries are poor, it is quite common to hear, especially in wealthier countries that are perceived to have minimal corruption (at least domestically) that other countries are poor because of corruption. Yet, corruption is not something limited to third world despots. Rich countries too have been involved in corrupt practices around the world.

As Professor Robert Neild from Trinity College, Cambridge University writes in Public Corruption; The Dark Side of Social Evolution (London: Anthem Press, 2002), “Rich countries and their agencies … commonly have been and are accomplices in corruption abroad, encouraging it by their actions rather than impeding it….” (p.209). Specific problems he highlights include:

  • The impact of Cold War corruption (supporting dictatorships, destabilizing democracies, funding opposition, etc);
  • Firms from rich countries bribing rulers and officials from developing countries to gain export contracts, particularly in the arms trade and in construction (even justifying it by suggesting bribery is “customary” in those countries, so they need to do it to, in order to compete);
  • The “corruption-inducing effects of the purchase, by the rich countries and their international corporations, of concessions in Third World countries to exploit natural deposits of oil, copper, gold, diamonds and the like.” Payments made to rulers often violate local (and Western) rules, keeping corrupt rulers in power, who also embezzle a lot of money away.
  • The drug trade. Neild suggests that international law and national laws in rich countries that prohibit drugs may serve to “produce a scarcity value irresistable to producers, smugglers and dealers.” Governments and civil society in the third world are often “undermined, sometimes destroyed” by the violence and corruption that goes with the drug trade. “This is probably the most important way in which the policies of rich countries foster corruption and violence. Yet the effect on the Third World seems scarcely to enter discussion of alternative drug policies in the rich countries.” Legalizing drugs, a system of taxation and regulation, comparable to that applied to tobacco and alcohol might do more to reduce corruption in the world than any other measure rich countries could take, he suggests.

Rich countries have been used to it, too:

Bribery may be pervasive, but it is difficult to detect. Many Western companies do not dirty their own hands, but instead pay local agents, who get a 10 per cent or so “success fee” if a contract goes through and who have access to the necessary “slush funds” to ensure that it does. Bribery is also increasingly subtle.… Until recently, bribery was seen as a normal business practice. Many countries including France, Germany and the UK treated bribes as legitimate business expenses which could be claimed for tax deduction purposes.

Dr Susan Hawley, Exporting Corruption; Privatisation, Multinationals and Bribery, The Corner House, June 2000

A Cold War Legacy: The Curse of Natural Resources; Inviting corruption

Professor Neild is worth quoting at extensive length on the impacts the Cold War had in terms of encouraging or exacerbating corruption in the developing countries:

Many Western covert and overt military operation were motivated, in part at least, by the view, which may have been fearfully exaggerated, that the West’s supplies of raw materials and oil were threatened by communist intrusion into Third World countries. A feeling of vulnerability was understandble. The Soviet Union … was largely self-sufficient …; the West, in need of increasing supplies for its growing industrial production, depended heavily on imports from Third World countries…. Western governments used diplomacy plus overt and covert military operations to counter the Communists. Meanwhile western firms paid rulers to obtain concessions to extract oil and minerals.

The business of obtaining oil and mineral concessions has aways been conducive to the use of bribes, ommissions, gifts, and favors, and remains so since there are huge “rents” (i.e. windfall profits) to beshared by the parties to a deal…. Third World governments rarely use auctions [for concession, which, when done honestly, removes the opportunity for buyers to bribe sellers]. They commonly sell concessions by negotiation. For which there are some good reasons. It is often necessary for the foreign company that buys a concessionto build infrastructure, such as ports, pipelines, roads and dormitory towns for their staff; to make this worthwhile, a whole oil field or major mineral deposit has to be given to one foreign company, rather than split between many competitors; and that one company, which will become the source of a significnant, perhaps dominant, part of the nation’s revenue, will acquire substantial economic power vis--vis the government. Hence strategic and diplomatic consideration enter the calculation: the government will want to give the concession to a company backed by a government which it believes will be helpful to it in its international relations—and in supplying it with arms and mercenaries. But …. there is [also] the prospect of bribes. Those who run a government that has a concession to sell will know that negotiation creates a strong incentive to the potential buyers to offer them bribes: they will know this from the point of view of the buyers, a sum that will only add a small percentage to, say, a billion dollar deal, will be worth paying in order to win the concession. Once negotiation is adopted as the means of allocating concessions, the dominant incentive is for bidders to engage competitively in teh bribery of local rulers and fixers.

Robert Neild, Public Corruption; The Dark Side of Social Evolution, (London: Anthem Press, 2002), pp. 136-137 [Emphasis added]

But Neild feels that this same attitude has affected rich countries’ domestic political behavior, too. Of particular concern to Neild in this is

the apparent tendency for bribery, which is intense in the business of seeking resource concession and selling arms, to become a secret habit of western firms and politicians that infects their domestic political behavior. Of this there has been considerable evidence in scandals that have occurred recently in Britain, France and Germany…. Le Monde published an outspoken editorial commenting on the [French company, Elf Aquitaine, corruption] affair:

For too long French policy in Africa has been neither moral nor effective.

… It would be wrong to deny that corruptionis indispensible in the obtaining of drilling concession, though that does not mean that one should not try to stop it. M. Tarallo [a senior Elf Manager] is unfortunately right when he says that all petrol companies use it… But the sins of others do not absolve Elf. Added to which … Elf has used its money to keep in power dictators whose principle aim has been not the development of their country but their personal enrichment. In exchange, Paris could count on their support in its diplomatic battles and could offer captive markets to French firms…

This “neo-colonialism” was put in place during the presidency of General de Gaulle and has been maintained by subsequent governments regardlessof party…

Looked at today the picture is not glorious. A fomer colonial power has taught corruption to its African clients—who were willing pupils—and there is nothing to persuade us that they have not rewarded their friends in Paris…

… In one case at least, lack of natural resources has apparently been an incentive to anticorruption policies: the tough ruler of Singapore, Lee Kuan Yew, is reported to have said that he came down hard on the corrupt because his tiny country with no natural resources has to rely on its good name to remain a center of banking and technology.

Robert Neild, Public Corruption; The Dark Side of Social Evolution, (London: Anthem Press, 2002), p. 138 [Emphasis added]

Globalization, Multinational Corporations, and Corruption

Corruption scandals that sometimes make headline news in Western media can often be worse in developing countries. This is especially the case (as the previous link argues) when it is multinationl companies going into poorer countries to do business. The international business environment, encouraged by a form of globalization that is heavily influenced by the wealthier and more powerful countries in the world makes it easier for multinationals to make profit and even for a few countries to benefit. However, some policies behind globalization appear to encourage and exacerbate corruption as accountability of governments and companies have been reduced along the way. For example,

For multinationals, bribery enables companies to gain contracts (particularly for public works and military equipment) or concessions which they would not otherwise have won, or to do so on more favourable terms. Every year, Western businesses pay huge amounts of money in bribes to win friends, influence and contracts. These bribes are conservatively estimated to run to US$80 billion a year—roughly the amount that the UN believes is needed to eradicate global poverty.

Dr Susan Hawley, Exporting Corruption; Privatisation, Multinationals and Bribery, The Corner House, June 2000

Dr Hawley also lists a number of impacts that multinationals’ corrupt practices have on the “South” (another term for Third World, or developing countries), including:

  • They undermine development and exacerbate inequality and poverty.
  • They disadvantage smaller domestic firms.
  • They transfer money that could be put towards poverty eradication into the hands of the rich.
  • They distort decision-making in favour of projects that benefit the few rather than the many.
  • They also
    • Increase debt;
    • Benefit the company, not the country;
    • Bypass local democratic processes;
    • Damage the environment;
    • Circumvent legislation; and
    • Promote weapons sales.

(See the previous report for detailed explanation on all these aspects.)

IMF and World Bank Policies that Encourage Corruption

At a deeper level are the policies that form the backbone to globalization. These policies are often prescribed by international institutions such as the World Bank and IMF. For years, they have received sharp criticism for exacerbating poverty through policies such as Structural Adjustment, rapid deregulation and opening barriers to trade before poorer countries are economic ready to do so. This has also created situations ripe for corruption to flourish:

As Western governments and the World Bank and IMF shout ever more loudly about corruption, their own policies are making it worse in both North and South. Particularly at fault are deregulation, privatisation, and structural adjustment policies requiring civil service reform and economic liberalisation. In 1997, the World Bank asserted that:

any reform that increases the competitiveness of the economy will reduce incentives for corrupt behaviour. Thus policies that lower controls on foreign trade, remove entry barriers to private industry, and privatize state firms in a way that ensure competition will all support the fight.

The Bank has so far shown no signs of taking back this view. It continues to claim that corruption can be battled through deregulation of the economy; public sector reform in areas such as customs, tax administration and civil service; strengthening of anti-corruption and audit bodies; and decentralisation.

Yet the empirical evidence, much of it from the World Bank itself, suggests that, far from reducing corruption, such policies, and the manner in which they have been implemented, have in some circumstances increased it.

Dr Susan Hawley, Exporting Corruption; Privatisation, Multinationals and Bribery, The Corner House, June 2000

Jubilee Research (formerly the prominent Jubilee 2000 debt relief campaign organization) has similar criticisms, and is also worth quoting at length:

Rich country politicians and bank officials argue that because dictators like Marcos, Suharto, and Mobutu were kept in power with western arms and were given loans to squander on ill-judged and repressive schemes, that the people of those countries—who often fought valiantly against those dictators—cannot be trusted not to waste the money released by debt cancellation. This may seem confusing to people not familiar with the logic of the IMF and World Bank. In summary:

  • Creditors colluded with, and gave loans to dictators they knew were corrupt and who would squander the money.
  • Creditors gave military and political aid to those dictators—knowing arms might be used to suppress popular opposition
  • Therefore, successor democratic governments and their supporters, who may have been victims of corruption and oppression, cannot be trusted.

To many people in the South, this seems irrational and illogical—the logic of blaming the victim. It is the logic of power rather than of integrity, and is used to benefit the rich rather than the poor in developing countries.

A similar logic argues that if the World Bank and government export credit agencies promoted inappropriate and unprofitable projects, then southern governments proved their inability to control money because they accepted the ill-advised projects in the first place. Thus, if money is released by debt cancellation, it must be controlled by agencies which promoted those failed projects.

This is the logic that says if people were stupid enough to believe cigarette advertising, then they are too stupid to take care of themselves and the “reformed” cigarette companies should be put in charge of their health care.

The same institutions who made the corrupt loans to Zaire and lent for projects in Africa that failed repeatedly are still in charge, but their role has been enhanced because of their success in pushing loans. Can we trust these institutions to suddenly only lend wisely; to not give loans when the money might be wasted?

Preventing new wasted loans and new debt crises, and ensuring that there is not another debt crisis, means that the people who pushed the loans and caused this crisis cannot be left in charge.

The creditors or loan pushers cannot be left in charge, no matter how heartfelt their protestations that they have changed. Pushers and addicts need to work together, to bring to an end the entire reckless and corrupt lending and borrowing habit.

Joseph Hanlon and Ann Pettifor, Kicking the Habit; Finding a lasting solution to addictive lending and borrowing—and its corrupting side-effects, Jubilee Research, March 2000

And in terms of how lack of transparency by the international institutions contributes to so much corruption structured into the system, Hanlon and Pettifor continue in the same report as cited above:

Structural adjustment programmes cover most of a country’s economic governance.

… The most striking aspect of IMF/World Bank conditionality [for aid, debt relief, etc] is that the civil servants of these institutions, the staff members, have virtual dictatorial powers to impose their whims on recipient countries. This comes about because poor countries must have IMF and World Bank programmes, but staff can decline to submit programmes to the boards of those institutions until the poor country accepts conditions demanded by IMF civil servants.

There is much talk of transparency and participation, but the crunch comes in final negotiations between ministers and World Bank and IMF civil servants The country manager can say to the Prime Minister, “unless you accept condition X, I will not submit this programme to the board”. No agreed programme means a sudden halt to essential aid and no debt relief, so few ministers are prepared to hold out. Instead Prime Ministers and presidents bow to the diktat of foreign civil servants. Joseph Stiglitz also notes that “reforms often bring advantages to some groups while disadvantaging others,” and one of the problems with policies agreed in secret is that a governing elite may accept an imposed policy which does not harm the elite but harms others. An example is the elimination of food subsidies.

Joseph Hanlon and Ann Pettifor, Kicking the Habit; Finding a lasting solution to addictive lending and borrowing—and its corrupting side-effects, Jubilee Research, March 2000

As further detailed by Hanlon and Pettifor, Christian Aid partners (a coalition of development organizations), argued that top-down “conditionality has undermined democracy by making elected governments accountable to Washington-based institutions instead of to their own people.” The potential for unaccountability and corruption therefore increases as well.

Tackling corruption

What can be done to tackle this problem?

The above-cited report by Hanlon and Pettifor also highlights a broader way to try and tackle corruption by attempting to provide a more just, democratic and transparent process in terms of relations between donor nations and their creditors:

Campaigners from around the world, but particularly the South, have called for a more just, independent, accountable and transparent process for managing relations between sovereign debtors and their public and private creditors.

An independent process would have five goals:

  • to restore some justice to a system in which international creditors play the role of plaintiff, judge and jury, in their own court of international finance.
  • to introduce discipline into sovereign lending and borrowing arrangements—and thereby prevent future crises.
  • to counter corruption in borrowing and lending, by introducing accountability through a free press and greater transparency to civil society in both the creditor and debtor nations.
  • to strengthen local democratic institutions, by empowering them to challenge and influence elites.
  • to encourage greater understanding and economic literacy among citizens, and thereby empower them to question, challenge and hold their elites to account.

Joseph Hanlon and Ann Pettifor, Kicking the Habit; Finding a lasting solution to addictive lending and borrowing—and its corrupting side-effects, Jubilee Research, March 2000

During the 2002 World Summit on Sustainable Development, the BBC broadcast a mini debate on globalization, poverty, and related issues, and had a panel of around 30 experts, from both the developing and rich countries. One person on that panel was Vandana Shiva, a vocal critic of the current form of globalization and its impact on the environment and people in the third world. She was asked why people should listen to concerns from the third world when they cannot sort out the rampant corruption first. Her answer was simple: rich countries need to stop dictating policies that encourage corruption in the first place.

Like Shiva, Professor Neild feels that the solution is philosophically simple. However, as Neild acknowledges, in reality it is far harder to do, due to the power interests involved:

It is hard to see how the international economic agencies and their member governments can introduce incentives that would cause corrupt rulers to [attack corruption]… Not only are the rich countries and their agencies in this respect impotent, they commonly have been and are accomplices in corruption abroad, encouraging it by their action rather than impeding it.

… It is hard to see any solution other than transparency and criticism. It would take an unprecedented degree of united dedication to the checking of corruption for the international community to agree that the oil and mining companies of the world should boycott corrupt regimes, somehow defined, let alone manage to enforce an agreement.

Robert Neild, Public Corruption; The Dark Side of Social Evolution, (London: Anthem Press, 2002), pp. 208-210, [Emphasis added]

More Information

This is a large topic in itself. Over time, more will be added, but for now you can start at the following:

http://www.globalissues.org/TradeRelated/Poverty/Corruption.asp