House of Commons - International Development

Select Committee on International Development Fourth Report

SECTION 3: THE IMPACT OF CORRUPTION ON DEVELOPMENT

24. Transparency International noted that in the past it had been argued that corruption was compatible with development since the reinvestment of capital (even if it was corruptly acquired) would increase GDP, which ultimately helped reduce poverty through trickle down.[64] East Asia was sometimes given as an example of a region where growth and high levels of corruption were compatible, largely due to the local reinvestment of corruptly acquired funds.[65] But as the Asian economic crisis showed this was not really sustainable growth. Transparency International said "Regardless of the fact that some forms of corruption may be compatible with growth for limited periods, the question of the incompatibility of corruption with the provision of adequate services to the poor is hardly contestable".[66] There are no circumstances under which corruption can be condoned and we believe that it is impossible for any government committed to poverty reduction to tolerate any form of corruption.

25. In this Section of the Report we examine the impact of corruption on the poor primarily through the impact it has on service delivery before going on to consider the impact corruption has on foreign direct investment and growth.

Impact on the Poor and Service Delivery

26. In her evidence to the Committee, Clare Short said "Corruption is a crime against the poor above all"[67] and said it was petty corruption which affected the poor hardest.[68] In a discussion paper on corruption and good governance, UNDP stated "A state with endemic corruption can be especially brutal to the very poor, who have no resource to compete with those willing to pay bribes".[69] Corruption continues to impact on the poorest people by:

diverting resources away from social sectors and the poor;
denying access to services, security and justice;
increasing costs;
hampering economic progress and growth.

27. The Corner House said "Corruption makes the poor poorer - not only do they end up paying more for services but they also lose out when money that could have been spent on projects that would directly benefit their communities is diverted to big expensive projects with lucrative commissions".[70] CIET told us that corruption in public services denied services to those who could not afford to pay bribes, often the very people most in need of the service.[71] Mark Malloch Brown felt corruption directly affected the poor both in terms of lost economic growth in the national economy, but also through exclusion from basic services because they were unable to pay the small bribes required for access.[72] Transparency International said that where corruption was endemic "many, if not most, of the poor are excluded from the basic services of health, education and energy which may be regarded as the key building blocks of human development".[73] Transparency International (Bangladesh) had undertaken a study that showed the poor had to make corrupt payments to get security, justice, healthcare, education, basic utilities and business opportunities.[74] Anne Cockcroft, CIET, said "If you ask ordinary people, the bottom of the pile, poor people, living in villages, they do not think it is all right to be corrupt, it affects them very disastrously in their everyday lives, they are very unhappy about it but they do not feel there is very much they can do about it".[75] She stressed the poor often felt they had no choice but to pay bribes especially in the case of access to health services.[76]

28. DFID conducted participatory poverty assessments in 23 developing countries. These consistently showed that corruption reduced the access of the poor to basic services. They provided evidence that unofficial payments were often needed for health, education and other services and that some people went without services as a result. They also demonstrated diversion of resources as essential medicines and supplies went missing. In many countries where the justice system was affected by bribery, the poor were unable to obtain the protection of the law and in some cases were threatened by those who should protect them.[77]

29. Anne Cockroft, CIET, said that their studies often reported that people perceived corruption as being worst in the police and the judiciary. She said this was perhaps because there were more opportunities in these areas, rather than because they attracted more corrupt people. She noted people's perception of high levels of corruption in the police and judiciary did not mean that other services were free of corruption. She said health and education services were often affected and that health was a particular problem as people could not necessarily choose not to use the service.[78] Transparency International also noted customs and excise was also often an area prone to corruption in many countries.[79]

30. However, poor access to services is just one of a number ways corruption affects service delivery. The quality of services often suffers and studies have shown that people who pay bribes often do not get a better service. CIET found that people's reported experience was that those who paid bribes tended to make more visits and see more staff, so that actually it took longer to obtain the required service. They also found that seeing more staff simply increased the number of opportunities corrupt staff had to collect bribes.[80] There is a disincentive to reform because corrupt staff have a vested interest in maintaining systems that give them discretionary powers. This strengthens the argument that tackling low wages can only sensibly be done in the context of improved management of systems.

31. There can sometimes be a fine line between mismanagement and corruption, and mismanagement of service delivery is sometimes mistakenly attributed to corruption. Anne Cockcroft, CIET, said, "Lack of medicines in Bangladesh may be due to inadequate and poorly targeted supplies as well as leakage from the system, but citizens attribute it to corruption".[81] It is important that a careful analysis is made of failing services to determine whether it is corruption or mismanagement that is the root cause of the problems.

32. There are clearly resource implications for services as a result of corruption. Anne Cockcroft noted that "some people say that up to 70 per cent of resources can be wasted through petty corruption".[82] She explained that there were costs to those who should be able to access a free service and costs to those denied the service. On the misallocation and misappropriation of goods, she said that if drugs intended for a health service 'leak' out of the system, there was a cost because the drugs purchased did not reach the intended recipients. On absenteeism, she noted there was a cost involved in paying someone to do something that was not being done.

33. It might be argued that if free services are replaced by a service for which there is an open, transparent and agreed fee then corruption could be removed or limited. However, it might also be argued much petty corruption is already open and that introducing a fee system would only formalise the mechanism for collecting small bribes and introduce another official with whom service users would have to interact. Perhaps it is not so much whether the service is free or fee-based that is the issue, but whether people understand how the system works, what rights they have, what they can expect, when they have to pay, when they do not, what any fees are for and that bribery is not required to get either a service or a better service. Clare Short said "In Uganda, and in some places in India, Andhra Pradesh, they have a notice on the school saying the budget comes from this state, and this is how much the money is; so all the people in the local village know exactly what money is coming and to make sure it is being properly spent".[83] Anne Cockcroft, CIET, explained that one of the reasons people were vulnerable to corruption was that they did not know how the system worked.[84] DFID should ensure that the intended beneficiaries, of any of the service delivery projects and programmes it is supporting, have a clear understanding of their rights, how the service is funded and what it should deliver. DFID should make this a part of the formal arrangements with those providing services on its behalf including NGOs and partner governments. External monitoring of services, including parliamentary scrutiny, should check that the intended beneficiaries have a clear understanding of the project and their entitlement to the service.

Impact on the Prospects for Growth and Foreign Direct Investment

34. Richard Manning, DFID, told the Committee, "there is increasing evidence that corrupt societies over the long haul do less well than less corrupt societies. This has implications for a sustainable level of growth without which, of course, there will be no escaping from poverty".[85] Transparency International said that corruption had been a major constraint on Foreign Direct Investment (FDI) and that many countries were paying a high price for corruption, given that formal aid flows accounted for only about 15 per cent of all flows to developing countries.[86] John Bray, Control Risks Group, agreed that corruption made a difference to investment flows and explained that work being done in Harvard and the World Bank showed the impact of corruption was analogous to tax so just as investment fell when corporation taxes rose, investment fell as corruption increased.[87] Transnational corruption is often associated with large scale investment, particularly in the power generation, telecommunications and defence sectors.[88] While it is clear that corruption is a disincentive and deterrent to further investment, corruption is also frequently generated by the corporate sector.[89] DFID acknowledged that there was a growing understanding that corruption had an adverse impact on investment and growth.[90]

Source: World Investment Report, 1999, 'Foreign Direct Investment and the challenge to Development'

35. The Worldaware survey of UK based companies ranked corruption as a greater barrier to foreign direct investment than political instability or lack of infrastructure.[91] In 1999, UNCTAD[92] conducted a survey of 44 African investment promotion agencies for the 1999 World Investment Report. The results of the survey make striking reading, suggesting that a business-friendly environment does not automatically make a country more attractive for foreign direct investment. Figure 1 shows the factors rated as most likely to have a negative impact on investment decisions by transnational corporations. It is clear that the level of extortion and bribery far outweighs all other responses. The 'administrative cost of doing business' and 'customs efficiency' - both factors which, in themselves, are affected by corruption were also important factors.[93] However, corruption was not always seen as the most significant barrier to foreign direct investment and General Mohammed, National Security Advisor to President Obasanjo, attributed a lack of FDI, in the case of Nigeria, to political instability rather than corruption.[94]

36. John Bray, Control Risks Group, said that a risk analysis of a country for investment purposes would consider levels of corruption and the strength of institutions.[95] Transparency International noted that investors built an aversion to corruption into their analysis of investment opportunities.[96] This is especially true where there may be a choice of national location. Anglo American said in their memorandum that "Stability, the operation of the rule of law and levels of corruption are all major factors in the political analysis which we undertake".[97] John Bray, Control Risks Group, explained that Chile had a better reputation than most as a destination for foreign direct investment due to the relative transparency and strength of its institutions. He also said that, in Africa, Uganda was still regarded as a safer investment destination than many of its competitors due to the efforts it had made to tackle corruption. Anglo American gave South Africa, Botswana, Tunisia and Namibia as examples of countries which had relatively strong economies and a higher level of economic development. They said it was easier to prevent corruption in these countries because they had stronger institutions and better levels of public sector pay. The prevalence of corruption was one of a number of factors that led them not to pursue investments in a number of countries.[98] Similarly, Mike Welton, Balfour Beatty, acknowledged that his company had withdrawn from a number of countries because it was not possible to operate within the company's ethical framework in those countries.[99] David Philips, Crown Agents, said that the presence or absence of the private sector was an indicator of the severity of corruption in a country.[100] However, this cannot apply universally since an extractive company is constrained to working where a particular natural resources is to be found. This explains to some extent the case of Nigeria which has both high levels of corruption and an active oil industry.

37. There is a link between money laundering[101] and foreign direct investment as some of the investment going into a country is likely to be laundered funds being returned as legitimate wealth. A share of the foreign direct investment entering Russia is actually money controlled by Russian criminals that has been laundered to disguise its origin.[102] The development of an effective local banking system that is properly regulated will be essential in the battle against such money laundering. Donors should be conscious that as improvements in money laundering controls are made in developed countries the attention of the launderers could switch to less well known, less well regulated but emerging financial centres in developing countries.

38. Tackling corruption is not only important as a measure to attract foreign investment but also to prevent the flight of domestic capital. Mark Malloch Brown explained that while FDI in developing countries is five times the level of official development assistance, domestic capital formation was ten times the level of FDI. He stressed the importance of forming and retaining domestic capital. He said foreign investment had historically followed the formation or return of domestic capital. The level of domestic and foreign investment will be dependent on a number of factors including the development of a trustworthy and active banking system.[103] This underlines the importance of improving the strength and regulation of local banking systems.

39. Corruption is a major disincentive to foreign direct investment and thus limits a country's prospects for growth, without which there is little hope of tackling poverty. As part of its effort to eliminate corruption, DFID should provide support and technical assistance to the financial sectors in developing countries, particularly banking.

64 Evidence, p.57 Back

65 Corruption and Good Governance, Discussion Paper 3, UNDP, July 1997, p.39 Back

66 Evidence, p.58 Back

67 Q.757 Back

68 Q.770 Back

69 Corruption and Good Governance, Discussion Paper 3, UNDP July 1997, Executive Summary p.viii Back

70 Evidence, p.300 Back

71 Evidence, p.202 Back

72 Q.289 Back

73 Evidence, p.58 Back

74 Evidence, p.58 Back

75 Q.474 Back