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FIGURE 5: Vicious and Virtuous Cycles

1 Henry R. Luce Professor of Jurisprudence (Law and Political Science), Yale University.

2 Doctoral student in Political Science, Yale University. The authors are grateful for the comments of Tina Søreide and the anonymous reviewers.

3 In an evaluation of a rice distribution program in Indonesia, Olken (2006) finds that around 18 percent of the rice was lost from the program due to corruption. Under reasonable assumptions, the welfare losses from the missing rice outweigh the redistributive gains.

4 The survey actually asked respondents separate questions about their experiences in the legal and judicial sectors, but it is unclear what this distinction means. Here, these categories are merged for purposes of conceptual clarity.

5 Before engaging in cross-national comparisons using the GCB, it is important to note the limitations of the data. First, the questions only capture low-level petty corruption experiences, not grand corruption by high-level officials. Second, differences in reported bribery rates might be driven in part by cultural differences in respondents’ willingness to report illicit behavior. Corruption is more openly discussed in some societies than others. There may also be cultural differences in what constitutes a corrupt transaction. A bribe in one country may be considered a gift in another. Third, government institutions may vary significantly across countries, and “registry and permit services” could represent something quite different in Turkey and Ireland, or in Venezuela and Malaysia. Any cross-national comparison assumes that sector definitions hold relatively constant worldwide.

6 Transparency International (TI), an international organization that advocates for the control of corruption worldwide has published cross-country data on corruption since 1995. TI collects data from a number of different surveys that mostly report business and expert perceptions of corruption in various countries. Some of the underlying data sources also include questions concerning the overall business environment—asking about red tape, the quality of the courts, etc. Respondents rank the countries on a scale from excellent to poor. The annual TI indices are a compilation of corruption scores. The CPI is an ordinal ranking and does not provide measures of the volume of bribes, the incidence of corruption, or its impact. The World Bank (WB) has made use of most of the underlying indices that make up the TI index and has produced its own “graft” index using a different aggregation method and including more countries. It is highly correlated with the TI index. Most studies use one or the other of these indices. Although some countries change position from index to index and have different rankings in the TI and WB data, there is an overall stability to the rankings, even given TIs recently changed methodology covering the 2011 index. These indices are a rough measure of the difficulties of doing business across countries, but they should not be used to make precise bilateral comparisons between closely ranked countries. See http://www.transparency.org/policy_research/surveys_indices/cpi/2010 .

7 There is a fundamental difficulty in using an index of corruption to measure the impact of corruption on growth or GDP. The index is a measure with no obvious physical counterpart and with a minimum and a maximum (or in the World Bank index, a zero mean) determined by the researcher. Thus, it is not clear exactly how to interpret the numbers reported in the text.

8 There is also some skepticism over whether the corruption and GDP growth correlation is driven by faulty measurement, specifically the use of perceptions-based corruption measures. Treisman (2007) and Aidt (2009) find no strong relationship between corruption experiences and growth.

9 In a somewhat competitive procurement market, bribes could both reduce firm excess profits and inflate costs. If suppliers collude with each other and corrupt officials to keep prices high, most of the costs of corruption will be shifted to the government budget. See Rose-Ackerman (1978) and Lambert-Mogiliansky (2011).

10 One study of Central and Eastern Europe shows that people disapprove of corruption even if they report engaging in it themselves (Miller, Grødeland and Koshechkina, 2001, 2002). Although experience with corruption varied markedly across the countries, the public’s underlying values and norms did not differ greatly. A majority in each country expressed strong moral disapproval of payoffs, but, at the same time, a plurality of citizens in every country except the Czech Republic said they would pay a bribe if asked.

11 See, for example, some of the cases examined in Barma et al. (2011) which discusses the special problems that can arise in natural resource rich states controlled by a small elite. On the case of Angola see the reports of the Christian Michelson Institute, Norway at http://www.cmi.no/angola.

12 Of course, Suharto did actually resign from office in May 1998, but as Fisman points out, this is a difficult event to study within his framework because so many other things were happening at the same time: the “event window” was several months long, the successor was a Suharto ally, and trading volumes were exceptionally low by the end of 1997. Perhaps for these reasons, the relationship did not hold in the beginning of 1998 except for steep declines in the shares of firms controlled by Suharto’s children. (Fisman 2001: 1100, note 9).

13 See also studies of the former Communist states in Europe and Central Asia. Although administrative corruption is a problem throughout the regions, state capture is a particularly serious problem in the countries of the former Soviet Union. In such situations the firms that do the capturing perform well, but overall economic growth suffers (Hellman, Jones, and Kaufmann 2003). Fries, Lysenko, and Polanec (2003: 31-32) document the differences between “captor” firms with insider status and “non-captor” firms. The former have higher growth rates of fixed capital, revenue, and productivity.

14 Fjeldstad (2003) reviews the literature on decentralization and corruption and cites studies that contradict the results for federalism found in the sources listed in the text. In any case, it is important to distinguish between federalism and explicit policies designed to empower those at the grassroots.

15 Recent survey evidence from Nepal suggests that anti-corruption attitudes grow stronger with education (Truex, 2011).

16 Numerous examples can be drawn from the rebuilding experiences in Iraq and Afghanistan. Consult the websites of the Special Inspectors General for Iraq and Afghanistan,: www.SIGIR.mil; www.SIGAR.mil.

17 The World Bank has also launched a broader Governance and Anti-Corruption (GAC) initiative to promote the demand for good governance, and can point to some positive cases. However, more research is needed both to conceptualize the way accountability institutions operate and to understand how these institutions behave in different national settings. The GAC web portal is at: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALDEVELOPMENT/0,,contentMDK:21211265~pagePK:210058~piPK:210062~theSitePK:244363,00.html

18 For a more extensive discussion of the role of travel perks as a salary supplement and potential source of corruption see Søreide, Tostensen & Skage (2012).

19 This section on the media draws heavily on Wrong (2011)

20 An example here is Reporters without Borders, http://en.rsf.org/.

21 Unfortunately, however, smuggling appears to be on the rise (Zuleta, Leyton and Ivanovic 2007; Escobar 2004).

22 Including Social Security contributions, the tax share increased from 11.6% in 1990 to 14.0% in 2000. However, the share fell between 1995 and 2000 from a high of 15.4% (Gómez Sabaini 2006).

23 Stein et al (2005, 186, 192) also found that countries, such as Colombia, are forced to pass reform after reform because each gets watered down in the approval process.

24 See: http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/PROCUREMENT/0,,contentMDK:20060844~menuPK:93305~pagePK:84269~piPK:84286~theSitePK:84266,00.html

25 See Ware et al. (2011, 98-99), which provides links to the underlying studies.

26 Kossick (2004).

27 Hoffmann (2007, 10) quoting a study by the International Telecommunications Union (2000, 3).

28 See also Shleifer and Vishny (1993) who make a similar point using a different theoretical approach.

29 Note that this “privatization” refers to services and is distinct from the privatization of state assets.

30 Interestingly, neither reform resulted in higher levels of reported satisfaction.

31 The growth rate of other tax revenues does not change appreciably, lending greater validity to the results.

32 See Extractive Indus. Transparency Initiative, http://eiti.org (last visited Sept. 26, 2011).

33 For details consult their website at: http://eiti.org/

34 Dodd-Frank Act § 1504, 124 Stat. at 2220.

35 Dodd-Frank Act § 1504, 124 Stat. at 2220 (defining a “resource extraction issuer” as an issuer that “(i) is required to file an annual report with the SEC, and (ii) engages in the commercial development of oil, natural gas, or minerals” (internal quotation marks omitted)).

36 Dodd-Frank Act § 1504, 124 Stat. at 2221.

37 EITI, for example, requires “regular publication of all material oil, gas and mining payments by companies to governments,” i.e., country-level disclosures. The EITI Principles and Criteria, Extractive Indus. Transparency Initiative, http://eiti.org/eiti/principles (last visited Sept. 30, 2011).

38 Their infomative website is: http://www.ti-defence.org . See especially, Transparency International, Defence and Security Program, October 2011, September 2011, and April 2010 and Pyman et al. (2009).

39 See Dubois & Nowlan (2010). More information is available at the website of the World Bank's investigative unit: www.worldbank.org/integrity..

40 On tax havens see Shaxson (2010).

41 According to Pauwelyn, the term “corruption” does not appear in the WTO rulebook. He argues that the WTO tribunals could consider corruption to the extent that it affects trade, but its reach would be limited by the face that only nation states can bring claims and that it only judges government conduct, not the conduct of private parties. The penalties only involve reciprocal trade restrictions.

42 An example from ICSID is World Duty Free Co. v. Republic of Kenya ICSID Case No. ARB/00/07 (October 4, 2006).

43 In the US see, Boyd et al. v. AWB Ltd. Et al, 544 F. Supp. 2d 236 (S.D. N.Y. 2008). In the EU see ADT Projekt Gesellschaft der Arbietisgemeinschaft Deutscher Tierzuchter mbH v Commission of the European Communities, Case t-145/98 European Court reports page ll-00387. In South Africa: Transnet litd v. Sechaba Photoscan (Pty) Ld 2005 (1) SA 299 (SCA)). Abiola Makinwa supplyied these citations.

44 Governments have also sometimes turned to ordinary courts for redress. Thus, in 1999 the Nigerian Government sought to recover the assets of a former president by asking the High Court in London to freeze his assets as a prelude to their repatriation. See also an effort in US court by a state-owned Costa Rican company to block Alcatel-Lucent’s FCPA settlement. It sought restitution from the firm under a federal victim’s rights law.

45 The last few years have seen a growth of corruption metrics, ranging from household bribery experience surveys to detailed tracking of public expenditures at all stages in the government hierarchy. Such metrics both allow researchers to understand the determinants of corruption and permit reformers to identify particularly problematic sectors or regions. The simple act of publishing corruption measures gives citizens and observers the opportunity to name and shame governments that foster the abuse of public power for private gain. This approach can also be employed effectively for sub-national units, as evidenced by Vietnam’s Public Administration Performance Index (PAPI), which richly quantifies government performance at the provincial level. Transparency International Mexico’s National Index of Corruption and Good Governance.

46 Rodrik stresses the need to present options to developing countries based on individual country experiences, not impose a single “consensus.”

47 See the similar conclusions of Olken & Pande (2011) after a review of the empirical research.

48 In addition to the material summarized here, see the on-going research summarized in Olken & Pande (2011).

49 Examining the relationship between corruption incidence and perception-based data, Treisman (2007) finds that the perceptions-based indices are not as well correlated with incidence as would be expected, and many of the factors that predict high levels of perceived corruption do not explain levels of actual corruption. Other scholars have levied additional critiques. Kenny (2006) argues the CPI is a lagging, not leading, indicator of corruption scandals. Olken (2009) finds that although Indonesian villagers’ perceptions of corruption correlated reasonably well with incidence, using the perceptions data would give misleading results for the explanatory power of variables like ethnic heterogeneity and social capital. Among other critiques, Seligson (2006) notes that the CPI may be influenced by stereotypes and factors unrelated to corruption, like economic performance.

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