Magnitude and Definition of Corruption
Corporate scandals involving corruption continue to dominate media headlines and have generated well-deserved concerns throughout both the business world and the society as a whole. Often, tendencies for quick gain at the expense of competitors and unsuspecting customers create ripple effects that permeate corporate culture and leads consumers and investors to feel increasingly vulnerable (Agbenya & Daniel-Gittens, 2005). Whereas corruption has become a term with many potentially different meanings and encompasses a variety of criminal and civil violations, it is clear that the issue must be dealt with effectively on a global scale.
Corruption can include, but is certainly not limited to, acts such as bribery, extortion, influence peddling, nepotism, fraud, the use of “speed money” (money paid to government officials to speed up their consideration of a business matter falling within their jurisdiction), and embezzlement (Klitgaard, 1988). Contrary to popular belief, corruption is hardly a problem exclusive to poor or developing countries as virtually every country around the world has reported all forms of corruption, though varying in extent and pattern (Transparency International, 2014b). Because of its vast nature and universality, battling corruption can appear to be a daunting and overwhelming task. In fact, combating corruption has grown into such an arduous and complex issue that many national political leaders who may encourage such efforts in theory are tentative to undertake them in practice (Klitgaard, 1988). In many cases, this hesitancy is also accompanied by a lack of resources and the knowledge of how to properly utilize them if acquired (Dahlström, Lindvallc, & Rothstein, 2013). In poor countries, the legal and financial institutions in question are corrupt themselves as often corruption is embedded in the national culture and reinforced by the lack of political pluralism and fragmentation of democratic institutions.
What can account for the positive relationship between corruption and regulation of markets? One plausible mechanism has to do with bureaucratic powers. Government regulations that raise barriers to entry are often enacted because they give public officials the power to demand and collect bribes … Thus, deregulation may reduce corruption not so much by increasing competition, but by reducing the extent to which public officials have the power to extract bribes. At least in theory, increased competition at the level of the official receiving the bribes may also reduce corruption … When officials dispense a government-produced good, such as a passport, the existence of a competing official to reapply to in case of being asked for a bribe will bid down the equilibrium amount of corruption … However, there is as yet no convincing empirical evidence that competition among officials actually reduces corruption. Moreover, the mechanism will only work if the multiple officials can individually produce the good. If multiple officials must sign off on the good, each with the power to stop a project, extremely high bribe levels may result. (Svensson, 2005, p. 34)
Despite increased attention, corruption, generally defined as the abuse of trust for private gain, is not unique to modern systems of government. Corruption, like most concepts in the social sciences, does not have a single agreeable definition (Anazodo, Okoye, & Ezenwile, 2012). For the most part corruption can be thought of in terms of a formula that combines a market power with authoritarian or influential discretion and the clear absence of accountability. It is associated with efforts to secure wealth or power through illegal means, private gain at public expense, or misuse of public power for private benefits (Lipset & Lenz, 2000). In a modern society, few individuals are granted more power by the public than its bureaucrats and elected politicians. This being the case, being granted such power is a fundamental disposition for corrupt actions to occur, making it no great revelation that many of today’s public officials are continually linked to high profile corruption scandals. This is not to say that all bureaucrats are corrupt, simply that they may be presented with more potential paths to corrupt behaviors than a typical individual.
The most recent scandal in New York State involves the corruption charges that were brought against the now former Speaker of the New York State Assembly, Sheldon Silver. For decades, Silver has been regarded as one of the most powerful politicians in New York, and he used this position to obtain millions of dollars in bribes and kickbacks. Silver carefully crafted a scheme involving fictional participation in a law practice which allowed him to pocket nearly $4,000,000 in corrupt payoffs. In his most lucrative scheme, he allegedly secretly channelled $500,000 in state funded taxpayer grants to Dr. Robert N. Taub, who in return would refer potential asbestos victims to a law firm were Silver was technically employed, but served no actual job function. This scheme netted Silver nearly $3,000,000 in kick pays for referrals to the law firm, according to federal prosecutors (http://www.nytimes.com/2015/01/23/nyregion/speaker-of-new-york-assembly-sheldon-silver-is-arrested-in-corruption-case.html?_r=0).
If Cooperstown can have its Hall of Fame, then Albany should have its Hall of Shame, or at least that’s what Albany resident and College of Saint Rose professor Bruce Roter thinks (McGrath, 2013). It sounds like a joke, but in July 2013, Roter launched a campaign to open The Museum of Political Corruption, “a museum that stands by its convictions” (http://www.albanymuseumofpoliticalcorruption.org/). Albany’s name has been dragged through the mud because of the corrupt acts of countless state politicians, many of whom don’t even live in Albany. So it seemed fitting for Albany to harness its bad reputation to create a museum of corruption that would generate jobs and tourist dollars to help the city. Roter created a website, www.albanymuseumofpoliticalcorruption.org, and a Facebook page (which has 857 likes as of February 1, 2015) to build support. Visitors would be asked to pay a bribe instead of an admission fee. The cafeteria would serve pork. The gift shop, meanwhile, could have figurines that feature people in suits and say, “I bought this legislator in Albany, New York!” “If Albany is going to be associated with corruption, we might as well cash in on it,” Roter said. “Why not embrace it?” While an unconventional proposal, this museum would be a way to ensure the corrupt are permanently remembered and to fight back against the waves of political corruption that seem to occur. After all, it seems like every time you scan a headline, there’s another ethical blunder in the spotlight – Malcolm Smith, Micah Kellner, Anthony Weiner, Eliot Spitzer, Pedro Espada Jr., Joe Bruno – and the list goes on. It’s evident that our area has ethical issues, but how bad is it really? What’s the magnitude of corruption here in New York State, or in any area for that matter? If Roter got his way, how BIG would this Museum of Corruption need to be? (Churchill, 2013)
Quantifying the magnitude of corruption, or the misuse of public office for private gain, has evolved over time. Early studies used surveys to measure the perception of bribes on the parts of villagers or experts, sometimes measuring perceptions against other indicators (Olken, 2012). Whereas individuals collecting bribes may be reluctant to provide information, bribe-payers are often willing to disclose information about bribes they paid, making surveys of bribe-payers a useful method of obtaining corruption estimates. This is a common method of surveying, specifically because it can be replicated across countries (Olken & Pande, 2012a). For example, Svensson (2003) presented survey data from firms in Uganda, one of the fastest growing economies in sub-Saharan Africa in the last fifteen years. He interviewed managers and found over 80 percent of Ugandan firms reported needing to pay bribes, which accounted for 8 percent of their total costs. Svensson also found that avoiding bribes came at a cost, and companies that did not pay bribes needed to limit their involvement in the public sector. Corruption runs so rampant that it seems to have become a Darwinian business tool; it is perceived as competitively advantageous. In fact, research by Harvard Business School’s Paul M. Healy and George Serafeim found that firms that launch anti-corruption efforts grew their business more slowly than firms that did not, especially in regions where bribery is the expected norm (Nobel, 2013).
Subjective surveys and interviews can certainly be useful to get a preliminary sense of the magnitude of corruption, but are less reliable as accurate measuring tools. These methods are also inapplicable in countries with strict regulations. For example, US companies are subject to the Foreign Corrupt Practices Act (FCPA), which depicts bribery as an illegal act. The FCPA, enacted in 1977 in the wake of the Watergate scandal, prohibits US companies from paying bribes domestically or when trying to win contracts abroad (United States Department of Justice, n.d.). American law and culture is more restrictive than other countries, where bribery is endemic and part of culture.
In countries where there is a social or legal stigma attached to bribery, however, survey respondents are reticent to tell the truth about corruption activities. Since there is a need to rely on the honesty of the people being interviewed, there is sampling error in these estimates of corruption. This is what has happened in Italy, where many people were surprised to learn that corruption, which was thought to be suppressed, is actually still rampant. In December 2014, Massimo Carminati, a reputed mobster, and thirty-six others were arrested and accused of vote rigging, usury, extortion embezzlement, and bullying their way into dozens of lucrative public tenders in the Italian capital. These underworld bosses were found to have relationships with public figures, and most money for roads and public projects was siphoned off as kickbacks for politicians and revenue for organized crime. Even for a country where corruption is admittedly a part of daily life, the revelations have stunned citizens and have uncovered a new corruption ring in the heart of the capital of Italy, involving politicians across the spectrum (Povoledo, 2014).
Other countries are even more outright with their reliance on bribes and corruption. In Russia, one of the most important things in business is that you know how to bribe, according to Tim Worstall, an American businessman who worked in Russia. Bribes are considered a normal business expense and are even tax deductible. As long as cash disbursements were “reasonable” it could just be documented as cash spent (Worstall, 2013).
Subtraction, or diversion of funds, is a much more direct and objective approach to measure the magnitude of corruption. This technique is also much more common. One measure is taken before corruption occurs and another after – the difference is an estimate of the rent collected by the government official. This subtraction technique was described by Reinikka and Svensson (2004), who looked at the diversion of funds to estimate the magnitude of corruption in the public education program in Uganda. Reinikka and Svensson compared the amount of a special education block grant sent down from the central government with the amount of funds actually received by schools, and arrived at the conclusion that the schools only received 13 percent of the grant. The bulk was siphoned by government officials and politicians. That’s a leakage rate of about 87 percent! Another example is from a study done by Olken (2007), which looked at the cost of building a road in Indonesia versus the actual cost of building the same road, where 24 percent of the cost of the road unaccounted for.
What if the funds are not siphoned, but instead built into the pricing structure to conceal corruption? In these situations, price comparisons have been useful to calculate how much a project would cost without corruption, and then compare this number to the real-world cost. Prices can be overinflated if firms are not subject to controls for corruption. For example, Di Tella and Schargrodsky (2003) compared prices paid by public hospitals in the city of Buenos Aires before attention was paid to corruption and then afterwards. After a crackdown on corruption in 1996–1997, prices paid decreased by 15 percent, indicating that was the amount allocated to corruption. Hsieh and Moretti (2006) also found that underpricing was a way to get illegal kickbacks from buyers in the oil business in Iraq; however, one should be cautious to assume all price differences during a specified time period are solely due to corruption. It could instead be from more aggressive bargaining, for example.
Another method is direct observation, which, while effective in obtaining a measurement of the magnitude of corruption, is also the most challenging. One example was provided in McMillan and Zoido (2004), where a secret-police chief in Peru bribed an array of individuals and documented the entire financial operation with great precision. Another method of direct observation is described by Olken and Baron (2009), where enumerators acted as driver assistants and documented bribes over a course of nine months in Indonesia. The bribes they tallied accounted for 13 percent of the marginal cost of the trip. Overall, direct observations seem to provide the most accurate data. Still, these observations are contextualized and extremely difficult to obtain, making an aggregate evaluation virtually impossible.
As we collect more microdata through self-reporting, diversion of funds, and also price comparisons, we should have a better idea of aggregate corruption, though evidence in this respect is more limited. While literature does suggest that corruption is rampant, there is heterogeneity in corruption levels that is due, in part, to how much monitoring is going on. If people in the community have greater control over the utilization of resources by having more influence, such as through voting, then there is less corruption in these communities. Svensson’s (2003) study of Uganda firms found the incidence of corruption is highly correlated with the level of autonomy given to public officials to make deals, since the officials can then extort bribe payments from firms. The more power and independence public officials have, the more fertile the ground for the development of corruption.
In China, for example, government officials have been allowed latitude to make deals with little to no supervision, which is why they find themselves trying to clean up their act now. China’s current president, Xi Jinping, is known for his campaign against corruption, which runs from small towns to mega cities. Xi is two years into his ten year term and has taken steps to consolidate power by cracking down on corruption. More than 80,000 Communist Party members have been investigated as of fall 2014, and over 13,000 have been found guilty. Xi’s purge is focused on people of all ranks. Top generals have confessed to taking bribes and have been kicked out of the Communist Party. Thousands have lost jobs, and the most powerful men in the country are being targeted and investigated. Even though this is a huge initiative on the part of China and supporting nations, this is still just a tiny fraction of the widespread corruption in China. However, some people think that this crackdown won’t even make a dent (CBS News, 2014).
It is difficult to sort out the forces that compel and restrain officials from dipping into the world of corruption, but what we do know is that even with monitoring and punishments, corruption is still occurring. A July 2013 report from Transparency International finds that more than one in four people paid a bribe in the past year, based on a survey of 114,000 respondents in 107 countries. The World Bank estimates that the equivalent of $1 trillion is offered in bribes every year (Nobel, 2013); however, this calculation is far from an accurate measure of the magnitude of global corruption. The literature has revealed that there are varying degrees of corruption, and while we have four relatively rel...
