EKIP– Expert Club for Economics and Politics A Different Opinion
This text is a translation of the article “ The problem of corruption” published on Mises.org more than 16 years ago. This translation is provoked by the unwillingness to accept the thesis that the quality of the state is solely a consequence of what the people in the country in question are like. For me, this would mean that I myself am a person who in my daily life accepts “bribes”, whether in monetary or other terms, which allow me to live better or easier and expand my own utility at the expense of others. I do not live this way, I am directly guilty if I do not get something done or escape responsibility – both when paying my bills and taxes, and when receiving remuneration for the value I bring to the people I work for or who receive goods and services from me.
Corruption fuels poverty. That is the conclusion of the latest World Development Report (2002), in which the World Bank presents "evidence that high levels of corruption are associated with lower levels of GDP per capita." According to the report, bribes increase the cost of doing business and, as a result, more corrupt countries attract less foreign direct investment, which reduces real growth and per capita income.
Note that this obscures the significant difference between Business-to-Business and Business-to-Government corruption. The former is in most cases better ignored because it is a self-correcting or beneficial phenomenon. The latter, however, deserves widespread public attention.
In their mildest and most basic form, B2B bribes can facilitate communication (i.e., reduce the costs of acquiring information) and help strengthen relationships between principals (in, for example, a supply chain). “Facilitation payments” (this includes anything from generous commissions to golf and spa club cards to free dinners and lunches and entertainment) can replace costly, wasteful contracts with implicit contracts that ensure the quality, quantity, and on-time delivery of business requirements. The distinct positive aspect of these B2B bribes is that they get the wheels of trade and exchange turning through lower transaction costs.
Bad examples of B2B bribery include personal gain by an employee without benefit to the business he or she works for. This more insidious form of bribery is like a worm that eats away at the company's profits. For example, as in Enron, when employees made significant additional payments (damaging to the business) to partners at Arthur Andersen to promote/cover up fraud and financing accounting activities, then the owners themselves are the victims.
If discovered early, internal corruption involves costs that owners would be happy to part with, as well as the employees involved. If discovered too late (or corruption has become endemic to the business), bankruptcy is guaranteed. Because of the automatic regulation of B2B bribes, and the fact that some of them make sense, governments should limit their third-party intervention to promoting transparency. Here, the shorter the arm of the law, the better, as markets will take care of the rest.
In sharp contrast, bad cases of B2G bribery involve private gains (usually for corporations and government officials) at the expense of competing companies or ordinary citizens. The main difference between B2B and B2G bribery is the government, because it has the power to change the rules of the game. More important than its role in providing monopoly services and doling out government contracts is the fact that public officials control every institution that guides market activity.
Not surprisingly, a popular form of B2G corruption involves “giving away rights” to influence the design or terms of the rules, regulations, taxes, allocations, and contracts that the government makes with the real sector, as well as all other activities. Unfortunately, as Mises also mentions (in the third part of “Human Action”), in cases of B2G corruption, one person or group of people generally benefits at the expense of others who are not involved. Unlike B2B bribery, which actually strengthens the business relationship between the two parties, B2G bribery is a zero-sum game at best.
When a company or industry tries to gain an advantage over other players through B2G corruption, it forces other industries and consumer groups to defend themselves. Even in cases where businesses try to bribe officials to avoid truly bad and pointless regulations, this provokes counter-lobbying by other companies who want to keep those bad and pointless regulations. Sometimes these bad regulations are simply a covert attempt to erect barriers to protect locally established companies from competition. As Gordon Tullock and others have demonstrated, the amount of resources expended on offensive and defensive B2G corruption can be much greater than the private gain derived from it.
Instead of simply dividing the pie—a dead-end game (I win, you lose)—in this case, corruption reduces the pie to be divided—a negative-sum game where everyone loses. Of course, in its mildest form, this business-to-government activity is known as legal lobbying. But, in its most criminal manifestations, this activity can take such covert forms as “compensatory contracts”—sponsoring meaningless social projects that benefit government officials or their friends and relatives in exchange for contracts and rules initiated by the government to their advantage; “revolving doors”—promises of lucrative positions in the company; and payments to offshore bank accounts.
Smaller government equals less corruption. Companies will always try to acquire government services. Mises reminds us that “corruption is a regular feature of intervention” (Human Action, Part 3). Therefore, the fewer rules, the fewer regulations, contracts, etc., the less opportunity public officials have to write, modify, or enforce rules that are corruptly motivated. The clearer and more transparent their actions are, and the more they have to lose, the better. Encouraging governments to employ fewer administrative officials with less power and more compensation is a step in the right direction. But focusing on the key contagion is also important.
Promoting transparency is bad for both contagions (business-to-business and business-to-government), and is the key to minimizing corruption. But while the short arm of the law is sufficient to deal with b-to-b corruption, with government corruption it is necessary for every citizen of the country to signal and protest against it, as well as to demand transparency from those in power.
Overly complex regulations are extremely problematic. For example, the World Bank reports that starting a business in Mozambique requires 19 steps, 5 months, and the payment of fees equivalent to the country’s annual income, while in Australia it takes 2 steps, 2 days, and 2% of income (per year, according to the World Development Report 2002). Instead of protecting the rights of consumers and businesses, unchecked governments create regulations that distort market activity and act as a breeding ground for corruption.
You can read the latest information on the topic here - Doing Business 2018. The graph taken from the report shows that the time and costs of starting a business are lower in economies with more transparency:
The strategy pursued in the 1998 OECD Anti-Corruption Agreement, which threatens to punish multinational corporations that pay bribes in cases of gross corruption, is not a solution. It simply encourages more creative techniques by companies to influence government decisions. Reducing the power of the administration and addressing its incentives to seek bribes is a more effective solution. The world’s free press, NGOs such as Transparency International, and international institutions such as the OECD, IMF, and World Bank can play supportive roles. But there is currently a risk that international institutions such as the IMF and World Bank are unwittingly facilitating corruption through well-intentioned efforts to deal with unstable governments.
Tackling the scourge of business-to-government corruption in the poorest countries is urgently needed. Since reducing corruption is associated with poverty reduction, helping the poorest countries streamline their governments and make their leaders more transparent and accountable in their work is a way to ensure a better life for future generations there.
This concludes the original article. Once again, advocates of the market economy prove that when there is responsibility and a clear finding of cause and effect, the market mechanism works better. However, this does not mean that the market is perfect.
Opponents of the market system and advocates of the need for more rules always point out the lack of perfection in the market, forgetting to mention the distortion that occurs when it is restricted. We should not forget that an argument against something must be made not only because it does not work perfectly, but also because there is an alternative that would work better than it. The goal is not to be perfect, but to build and live in a system with the fairest rules possible for everyone.
