How Bribery and Other Types of Corruption Threaten the Global MarketplacePublished: October 23, 2002 in Knowledge@Wharton
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."