How Bribery and Other Types of Corruption Threaten the Global
Marketplace
In Turkey , the apartment buildings
that collapse during earthquakes are known as "bribe buildings." In Africa , bridges dot the landscape with no roads to
connect them.
There's no doubt that corruption,
endemic in emerging economies around the world, throws economic development
into chaos. It affects decisions made by bureaucrats, degrades the quality of
those in power, and discourages foreign investment. It's also an increasingly
hot business topic, with a growing number of influential business and political
leaders from around the globe regularly pinpointing corruption as one of the
greatest threats to global economic development.
"Corruption and bribery have
moved to the forefront in discussions about business," says Wharton legal
studies professor Philip M. Nichols. "The list of countries that have
been politically or economically crippled by corruption continues to grow, and
businesses with long-term interests abroad will ultimately be harmed by any
plans that include bribery."
Nichols, the author of more than
10 studies and theoretical writings on the implications and mechanics of
corruption, has spent the past decade studying corruption in such nations as France , Belize ,
Russia , Kazakhstan , and Bulgaria . Most recently, he
examined perceptions of corruption in Mongolia , where he lived for a year
while studying and teaching on a Fulbright Scholarship. In September, Nichols
offered anti-corruption strategies to entrepreneurs at a national conference in
St. Petersburg , Russia . Last month he led a
weeklong seminar on corruption in Tashkent ,
Uzbekistan run
by the Resource Network for Economic and Business Education. "A decade
ago, corruption was not a proper subject for polite scholars or
policymakers," Nichols and his co-authors wrote in a recent research
paper. "Today, the creation of and comment on anti-corruption regimes is a
growth industry."
Bribery, of course, is the most
widespread form of corruption, and corporate strategies for dealing with bribe
requests vary. According to Nichols, some companies opt to pay, sometimes
damaging their public images and making it more difficult to refuse future
requests. Others have the sheer bulk and revenues to successfully and
consistently say "no." Oil giant Texaco, for example, has such a
formidable reputation for refusing to pay bribes that its jeeps are often waved
through even remote African border crossings without paying a penny.
A key, Nichols suggests, is
wiring this no-bribe ideal into a corporation's culture, starting with a
corporate code for managers and employees, affiliates and potential business
partners. But coming to grips with what appears to be an international groundswell
of corruption is far from a simple matter. Nichols believes that unraveling and
explaining the mechanics of corruption is critical to helping the growing body
of government and corporate organizations trying to fight it.
His research on Mongolia , for instance, compared views of
corruption in Mongolia and Bulgaria , two
countries at the opposite ends of the former Soviet empire. The study revealed
that university students in both countries had nearly identical ideas and
perceptions about corruption, something Nichols found surprising. "This
does not support the idea that corruption is a completely relative cultural
construct," he says. For those in the field trying to study and control
corruption, it's interesting to see that there might be "a shared
understanding" of it.
On a practical level, what does
the upswing in international corruption mean to a company? "The fact that
a great number of government officials in a great number of countries,
including some potentially large markets, seem to demand bribes is critical to
any business that has a cross-border presence," says Nichols. "Then
there's the reality that more than 20 nations, including the wealthiest and
most-active trading nations, have made bribe paying illegal, and the fact that
despite this there are still competitors who will pay bribes.
"These facts combined make
for some extremely difficult terrain. Officials expect you to pay bribes, some
of your competitors will pay them, but you might go to jail if you do."
The ‘Corruption
Perception Index'
Much of the comparative evidence
about bribery is anecdotal, though Nichols alone can cite numerous instances.
In Kazakhstan ,
several foreign businesses have told Nichols that the typical bribe amount that
must be given to win approval of a large construction project is between 15%
and 20% of the contract price – which often means that the bribe alone will
amount to hundreds of millions of dollars. In Russia , meanwhile, a retail chain
manager told Nichols that a bribe of US $4,000 would lower the tariff on a
truckload of printer cartridges from U.S. $20,000 to U.S. $4,000.
International businessmen and
women say the number of countries in which they expect big bribe demands has
risen staggeringly. A recent study by Berlin-based Transparency International
pegged 70 of 102 countries surveyed as likely places for executives to be hit
up for bribes. TI's "Corruption Perception Index" incorporates data
from surveys, polls and other ratings on the number of bribe requests perceived
by business people who regularly conduct business in a given country. A score
of 10 means people perceive that bribe requests are never made in a particular
nation, while a zero indicates the perception that bribes are always requested.
In the 2002 index, Finland scored a 9.7, the United Kingdom came in at 8.7 and the U.S. earned a
7.7. With 70 of 102 countries scoring 5.0 or lower, however, the index shows
that business people believe bribe requests are likely to be made in more than
two-thirds of the nations examined. These countries include some of the world's
biggest: China , which scored
3.5; India , 2.7; Indonesia , 1.9; and Pakistan , 2.6. Bangladesh had
the lowest score of 1.2.
Two treaties governing the
northern and western hemispheres will soon weave a comprehensive system of laws
prohibiting the payment of bribes to foreign government officials. Countries
like Austria , Belgium , Canada ,
Germany , Japan , Korea
and the UK
are bound by the Organization for Economic Co-operation and Development
convention to criminalize transnational bribery. Three years ago the U.S. alone
criminalized paying bribes abroad. Today at least 20 countries have such laws
and 14 more will soon enact them. The Organization of American States'
Inter-American Convention against Corruption, signed by most countries in the Americas in
1996, also requires members to criminalize transnational bribery.
Nichols speculates that once the
public outcry against paying bribes becomes as loud as it is for environmental
issues, the risk for corporations willing to pay bribes will rise
significantly. Already the penalties can be severe. In the U.S. they include incarceration, fines and
disqualification from doing business with the U.S. government. A French proposal
would impose a 15-year prison sentence on certain types of transnational
bribery. Even in Norway ,
which has the least punitive of the new laws, bribery of foreign government
officials is punishable by a year in jail.
The risk of prosecution is quite
real, Nichols says. Both direct government investigations and reports by
competitors can bring a corporation under the spotlight. The U.S. , he adds, is believed to already be using
intelligence agency reports from Latin America and the Middle
East to track bribery. Further, competitors who wish to uphold
high ethical standards have every motive to report another company for failing
to do so.
Strategies for Saying
No
Corporations, Nichols believes,
must create a corporate culture that doggedly refuses bribe requests and
establish clear corporate codes that employees unwaveringly adhere to. They
must also assure managers that the company will back them when they refuse to
pay."A company would be foolish not to develop two general strategies, one
for dealing with bribe demands and another for dealing with competitors who
offer bribes," he says. "The potential, in terms of criminal
liability, skewed relationships, lost contracts, disqualification from
government contracts, loss of reputation and so on is simply too great to
ignore.
"Perhaps the most useful
action a business can take is to really understand corruption, and to create
and articulate a general response to corruption before it encounters difficult
situations," Nichols says. "It's also useful for businesses to work
together to create assurances that each will adhere to some agreed level of
behavior."
Other risks and costs abound for
companies that succumb to the bribery game, Nichols says. Because bribery is
illegal, it is conducted behind closed doors, with those involved expending
time and resources to keep their secret. "For obvious reasons, we have not
really been able to study the quality of corrupt relationships," he says.
"But those who have endured them often describe them as unhealthy,
unstable and unenforceable." He adds that firms' reputations suffer when
word ultimately leaks, as happened with those who conducted business with the
family of former Indonesian President Suharto. Prior to and just following
Suharto's 1998 resignation, the former leader, his children and associates were
widely accused of taking advantage of benefits such as monopolies and tariff
breaks to amass enormous personal wealth.
Companies also face the very real
possibility of being pushed to pay more and more bribes as their reputation as
a bribe-payer spreads. "One European businessman told me that after his
company made its first few payments, bribery became a part of the normal course
of business because bureaucrats worldwide expected similar treatment,"
Nichols says. "This is far from uncommon."
Lastly, there are international
trade implications surrounding bribery. Bribery degrades markets. Economist
Paolo Mauro, in the article "Corruption and Growth," finds a direct
link between high levels of corruption and low levels of foreign direct
investment. Though Mauro's work does not explain this finding, Nichols offers
three likely reasons. "First, corruption actually increases the amount of
time a company must spend with a bureaucracy; second, corruption makes it more
difficult to obtain information, which increases transaction costs, and third,
corrupt relationships are less predictable and less enforceable. There's
probably a fourth reason too, which is that most business people are good
people and have a distaste for endemically corrupt environments," he says.
"Corruption also drastically
affects economic development by causing a misallocation of resources. Yes, Africa is littered with bridges instead of hospitals. But
more damaging is the fact that in endemically corrupt systems, regular people
are not getting served by the government; they don't trust the government so
they don't interact with the government," Nichols says. "But people
have to get things done. So they create their own systems to do things, such as
resolve disputes or enforce contacts or even police neighborhoods."
These systems, however, "are
not free," Nichols adds. "They cost money. So money goes to
supporting the government system and money goes to supporting the shadow
system; twice as much money goes to bureaucracies as it should. That means
money is not going to increasing food production, or to health, or to enlarging
the economy. And that stinks."
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