Will we ever see the back of business bungs?

East-West trade has triggered an economic debate about cracking down on corruption
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The Independent Online
Open a newspaper any day and there is a good chance there will be a report about corruption in it. Today's quota comes from Irish politics, but it could be from anywhere in the world, for whether corruption is actually rising, concern about it certainly is.

Actually, Ireland does pretty well on the world league of corruption. It is equal 11th with the UK, behind such paragons as New Zealand, Denmark and Singapore, but ahead of Germany, the US, France and Japan, and far ahead of Italy. (At the bottom of this table, produced by an organisation called Transparency International, come Pakistan, China and Indonesia.)

Concern is rising for several reasons. The integration into the world economy of the Soviet Union and China has made the West more aware of the different ethical values of these two societies. The fact that more North American and Western European companies are seeking to do business in "new" markets has raised the practical question as to whether they should apply home country or local country ethical standards. And maybe Western companies have become more squeamish, or maybe just more hypocritical, than they used to be about the acceptable levels of "commission" that they should pay to secure orders.

Quite suddenly, there has been a string of conferences, academic papers and speeches about the costs of corruption. The International Monetary Fund is worrying about money laundering; the European Union (itself not entirely corruption-free) is trying to curb trans-national bribery; and last month James Wolfensohn, the president of the World Bank, attacked the corruption of the organisation's home city, Washington DC. Just before his speech, Mayor Barry, who would have been on the platform, slipped out of the room.

These attacks have a common theme - corruption makes countries and cities poorer than they would otherwise be. But how much poorer? Can you actually measure the effect? There are perfectly good moral reasons for seeking to curb corruption, which in general rewards the few at the expense of the many. But cool economics seems more likely to provoke change than hot rhetoric.

There is a lot of academic work in analysing the sources of corruption and measuring its effects on economic performance, work which has been summarised in an IMF paper by Paolo Mauro, and will be in a book called Corruption and the World Economy, published by the Washington-based Institute for International Economics.

Quite a lot of corruption, it seems, is caused by government policy. When governments impose regulations and give too much discretion to officials as to how these should be applied, they create opportunities for bribery. Trade restrictions, subsidies and price controls all increase the scope for bribes to be demanded and paid. Even government industrial policy encourages bribery - there is a link, apparently, between subsidies to manufacturing and the level of corruption. And the lower the level of civil service pay, the greater the chance that civil servants will seek to extract bribes.

The effect of corruption can be very big. A couple of studies suggest that if a country improves its corruption performance by 2-2.5 points on the scale of one (worst) to ten (best), it can increase investment by 4 per cent of GDP and boost growth by half a percentage point each year. That is the gap in the level of corruption, as perceived by business people, between France and Denmark, or Italy and Spain. But how on earth do you move a country along the scale - how do you cut corruption?

This is beyond the scope of the IMF study, but there seem to be two broad approaches. One is to call for tighter regulation, greater co-operation between governments, pressure for higher ethical standards by companies and so on. This is the mainstream view, espoused by the political establishment, and there is obviously much merit in it. There is also, alas, a high level of hypocrisy.

For example, I happen to know that one giant US company which is particularly active in pressing for higher ethical standards used its financial power with New York banks to wreck the refinancing of a much weaker foreign corporation. Only when the weaker company threatened to shop it to the appropriate US Federal authorities did the giant lay off. Beware multinationals that boast about ethical standards.

There is an alternative approach, which is to start not by putting pressure on the payers of bribes, but on the recipients - often government officials or politicians. If one cuts capital spending by governments, there are fewer of the large "white elephant" projects which seem to generate opportunities for bribery. Simplifying planning controls also helps. The amount governments spend on education seems to be associated with corruption. Though the causal link is not clear, it would seem common sense that the better-educated people are, the less thrilled they are when they are asked to pay bribes. The spread of education and in particular the creation of an articulate middle-class helps shift the balance of power away from the few who can benefit from corruption towards the many who are hurt by it. That process seems, for example, to be happening in Mexico.

The most hopeful view about global corruption comes from what many would argue is at present the most corrupt region - the former Soviet Union. Anatoly Chubais, President Yeltsin's economic guru, believes that as wealth spreads in Russia, market forces will inevitably shift the balance of power against the Mafia. The market becomes self-policing - good money will, so to speak, force out bad. I hope he is right. I checked to see where Russia was on the corruption league. They do not even rank on it.