Public Sector Governance & CorruptionA Quick Introduction

Contains materials from Public Sector Governance and Anti-corruption Core Course,

Public Sector Group, the World Bank

Why governance and corruption?

• Ch 11 deals with the poor, the sick, the disenfranchised. – These people are a significant majority in developing economies.– The contrast between rich and poor is significant and troubling.

• Ch 12 suggests that foreign direct investments can limit conflict. – FDI depends on economic and political stability.

• Governments or states have a role in how economies are managed, determines political climate.

• Governance deals with how states acquire and exercise its authority.

• Corruption is the absence of good governance

Relevance

• Political risk is heightened by– Disenchantment with government

• Too many frustrated and disempowered• Too sick = poverty

– “Terrorist” activities can arise from• Disenchantment• Religious, tribal/ethnic, and clan rivalries

– Individual ambition– Conflict with neighboring countries– Weak and/or corrupt central government

Relevance (continued)

• Political risk can lead to– Violence e.g. civil unrest, coup d’etat, rebellion– “Non-regular” change in control of central government– Change in “rules of the game”

• The price is usually control of central government– Concentration of power– Impose goals, e.g. ideological, religious, etc.– Rent seeking– “For good of the country”

Relevance (continued)

• Recall discussion on Tienamen square situation• Conflict or threats build up, but how to gauge?• If a country is considered particularly risky, there

will be contingency plans in place.• Things to look out for?

– Security of personnel– Security of the facility or investment– Report to head office and obtain guidance– Manage head office – find out

• Before hand, build your network, e.g. government officials, local business entities, etc.

Relevance (continued)

• Impact on foreign companies: during crisis– Physical harm to managers and employees– Loss of control of physical and technological assets;

management flexibility• Possible impact if crisis results in “non-regular”

or unplanned change in government– Increased cost of doing business– Loss of investments

• Opportunities – if worse does not occur– If one stays and everyone leaves– If one takes a chance, competitors do not

Corruption . . .• Reduces the amount of resources intended for

specific sectors of society.– Estimate of losses due to corruption in Iraq $5b

• Reduces the amount of resources collected for government to do its work.– Estimate of portion of national revenues not collected

due to corruption in tax collection: 20% of national budget

• Distorts markets: eliminates a level playing field.• Weakens credibility and legitimacy of

government, in some cases faith in the ballot

Definitions & discussion

• State = government, which includes national and local units

• Provides goods and services not otherwise provided by private sector

• Acquisition of authority– Election

• Exercise of authority

Concepts/DefinitionsThe manner in which the StateStateacquires and exercises itsauthority to provide public goods and services

Using publicpublic office for privateprivate gain

GovernanceGovernance

CorruptionCorruption

InstitutionsInstitutions

The “rules of the game”“rules of the game” that govern the behavior of people within a given environment

Concepts/Definitions

CorruptionCorruption

Administrative CorruptionAdministrative Corruption::Private payments and other benefits to public officials in connection with the implementation of government policy and regulations

State CaptureState Capture::Influence of powerful private interests in the formation of laws, regulations, through illegal provision of private gains for public officials

The Governance Triad

Politicians/Policymakers

Citizens Bureaucrats

Delega

tion

and

Voice

Delega

tion

and

Voice

Polit

ical A

ccou

ntab

ility

Polit

ical A

ccou

ntab

ility

Delegation of

Delegation of

Implementation

Implementation

Internal Accountability

Internal Accountability

Public Goods and ServicesPublic Goods and Services

Client Power/Social AccountabilityClient Power/Social Accountability

The Governance Triad

Politicians/Policymakers

Citizens Bureaucrats

Delega

tion

and

Voice

Delega

tion

and

Voice

Polit

ical A

ccou

ntab

ility

Polit

ical A

ccou

ntab

ility

Public Goods and ServicesPublic Goods and Services

Client Power/Social AccountabilityClient Power/Social Accountability

Delegation of

Delegation of

Implementation

Implementation

Internal Accountability

Internal AccountabilityCompactCompact

Comment on relationships

• Because of the complexity of relationships between entities, what is delegated and who are accountable have to be decided on a case by case basis

• Relationship is implicit – citizens vote, politicians act on their behalf – and explicit, e.g. bureaucrats can have job descriptions. However link to citizenry is usually weak.

Some basic principles of good governance

• In providing goods and services, states do have to deal with various sectors.– Who should be involved in decision making?

• Are goods and services being delivered?• Are public officials accountable? Is there

transparency?• Fairness – equal opportunity, laws enforced

impartially• Direction – strategic vision on good governance

and human development

The Governance Triad

Politicians/Policymakers

Citizens Bureaucrats

Delega

tion

and

Voice

Delega

tion

and

Voice

Polit

ical A

ccou

ntab

ility

Polit

ical A

ccou

ntab

ility

Delegation of

Delegation of

Implementation

Implementation

Internal Accountability

Internal Accountability

Public Goods and ServicesPublic Goods and Services

Client Power/Social AccountabilityClient Power/Social Accountability

CompactCompact

AdministrativeCorruption

The Governance Triad

Politicians/Policymakers

Citizens Bureaucrats

Delega

tion

and

Voice

Delega

tion

and

Voice

Polit

ical A

ccou

ntab

ility

Polit

ical A

ccou

ntab

ility

Delegation of

Delegation of

Implementation

Implementation

Internal Accountability

Internal Accountability

Public Goods and ServicesPublic Goods and Services

Client Power/Social AccountabilityClient Power/Social Accountability

State Capture

Example of administrative corruption

• I will use my classification scheme• Petty – bribery to facilitate a process or avoid

minor penalties, e.g. traffic violations– Extortion through use of authority to extract bribe

• Major – briberies and use of influence to win major contracts or control of assets– Manage a port or power plant

• State capture – in addition to major contracts, write laws that favor specific interests

Example of administrative corruption

• Related to the enforcement of laws– Bribes to avoid traffic citation, facilitate paper

work required, extortion to avoid trumped up charges, etc..

– Citizens may actually pay the same or less to obtain the service or avoid penalties. Either way, government suffers financially and in terms of credibility.

• Other examples?

Examples of state capture

• In case of Saudi Arabia, based on reading, is there state capture? Why?

• Bribing legislators, by whatever means, to enact laws favorable to one’s industry or company. – Difference between lobbying and cash in an envelope

• Or bribing printer of laws and implementing regulation.

• Other examples – readings?

Additional examples?• Award and management of contracts

– Transparency in bidding and award process– Hurdles during evaluation of performance under the

contract, collection, change orders,etc.• Article on Saudi Arabia• Venezuela – evidence that President is using

nationalized companies to “take care” of his loyal supporters

• Nigeria – misuse of oil revenues, flawed elections to retain power

• Others?

Where corruption thrives• Monopoly

– one can only go to one office for a transaction• Human discretion

– Rules are subject to interpretation or lack of transparency• Low risk of capture, e.g. no history of anyone being jailed• Penalties for capture much less than sums of money to

be gained• Large sums of money . . . and small salaries• Stated another way, corruption will thrive when:

– Rules are unclear and subject to interpretation– Weak rule of law– Low paid civil servants– Social acceptance that corruption is inevitable

Approaches to stopping corruption

• Anti-corruption campaigns– Leadership appoints an anti-corruption czar– Publicity to announce end to corruption– A few heads roll

• Czar must be independent, hit the big fish, sustained, e.g. Hongkong program bagged the police chief

• “Al Capone” strategy• Systems and procedures must be changed to eliminate

some of the conditions that allow corruption– Regulatory change sometimes necessary– Internal changes to systems and procedures

Governance

• Myths about governance and corruption in http://www.imf.org/pubs/ft/fandd/2005/09/basics.htm– Governance and corruption are one and the same.– Governance and corruption can not be measured– The importance of governance and corruption is over-

rated.– Governance is a luxury only rich countries can afford.– It takes generations for governance to improve.

Governance

• Myths about governance and corruption (continued)– Donors can “ringfence”projects in highly

corrupt countries and sectors.– Fight corruption by fighting corruption.– The culprit is the public sector in developing

countries.– There is little countries can do to improve

governance.– There is not much the IFIs can do.

In-class writing

• List issues or topics we have covered so far that you find:– Personally interesting– Believe a global manager must be

knowledgeable of• Note whether the topic meets both criteria

Some suggested topics

• Use governance and corruption framework in understanding political situation in a particular country? For example, are China and India really “model” states?

• Causes and organization behind terrorist activities in a given country

• Islam and its relationship with specific countries (where one may have a major operation.)

Some suggested topics• Challenge to global companies of “flat world”: e-waste,

mass produce but cater to individual markets, competition from non-traditional locations, etc.

• Investigate movement of an industry in the last couple of decades to understand how and why these became global; provide perspective on “triple convergence”

• What were the roles of indigenous entrepreneurs in establishing manufacturing facilities in places like southern China, northern Mexico (maquiladoras), or software companies in India? Roles of global firms?

• Various means used by different countries to encourage foreign direct investments