in the media

Corruption Eruption

published by
 on June 1, 1995

Source: Carnegie

Brown Journal of World Affairs, Summer 1995

Why, in the 1990s, has corruption suddenly become such a political lightning rod? From India to Italy, from Japan to Brazil-why have societies which have traditionally tolerated corruption at the highest levels in government and the private sector suddenly lost their patience, their citizens willing to take to the streets to topple high officials accused of wrongdoing?

In the last few years, at least six heads of state, more than fifty cabinet ministers, scores of congressmen, and hundreds of businessmen throughout the world have lost their jobs, their liberty, and even their lives on account of allegations of corruption. (1) Indeed, suicides among powerful government officials and businessmen accused of corruption have become quite common. This veritable eruption of corruption scandals has affected every region of the world, regardless of cultural background or gross national product.

Even nations that pride themselves on their established democratic systems and rule of law have not been immune. In France, one ex-minister and a prominent senator have been jailed, a former treasury minister committed suicide after having been accused of improprieties, another minister was forced from office, and at least five additional ministers are under investigation on account of allegations of corruption. In Spain, popular support for the government of Felipe Gonzalez has been substantially eroded by repeated accusations of corruption. In 1994, two British ministers resigned over a corruption scandal. (2) In the same year, Willy Claes, NATO's secretary general, became entangled in a scandal related to kickbacks that took place when he was the economic minister of Belgium. In Switzerland, a cabinet member was forced to resign after her husband was accused of using her position to advance his business interests. (3) In the United States, in 1994 alone, both a cabinet member and the powerful chairman of the House Ways and Means Committee were accused of unethical behavior-and subsequently lost their jobs-while a senior White House aide, who was also a close associate of President Clinton, committed suicide. In addition, a senior official at the Justice Department resigned, and pleaded guilty to wrongdoings in his previous activities as a lawyer in the private sector. In the 1994 presidential summit in Naples, the financial affairs of President Clinton and former prime ministers Hosokawa and Berlusconi received as much media attention as the deliberations of the heads of state. Even quiet Norway was dragged into the fray, as the director of the Oslo Stock Ex change was dismissed from his position and, some days later, found dead.

Countries with a long tacit acknowledgment of corruption have also been affected by the wave-what was once the norm has now become a cause for scandals. In Brazil and Venezuela, democratically elected presidents were impeached following accusations of corruption. In India, former prime minister V.P.Singh quit the ruling party and resigned from office, claiming that widespread corruption made governing impossible. Three ministers in the cabinet of P.V. Narashima Rao-Singh's successor-were accused of being involved in corruption scandals, and subsequently resigned after the ruling party suffered important losses in state elections; in those elections, in a break from the past, corruption became a central concern of the voters. (4) Japanese Prime Minister Morihiro Hosokawa resigned in April 1994, following charges that he had mismanaged funds and decimated his political support base. (5) In a four year period in Argentina, twenty ministers and senior presidential aides were forced to resign.(6) In Italy, where corrupt activities have long been the hallmark of the elite, twenty prominent politicians and businessmen have committed suicide over allegations of corruption. Prime Minister Berlusconi was toppled by a no-confidence vote after having been targeted by the famous Milan magistrates who, however, found themselves investigated shortly thereafter by the Ministry of Justice for their own alleged improprieties. (7)

To some, this barrage of scandals is an unmistakable sign that corruption has reached unprecedented levels. It seems that the erosion of moral values and the excessive, almost anarchic, freedoms that accompany the present spread of democracy and capitalism are reinforcing each other, creating the conditions for corruption to soar. Yet, is not the daily disclosure of corruption a sign that democracy and markets are working? Indeed, more democratic regimes and freer markets are making government decisions more transparent, increasing the accountability of public officials, and reducing the impunity that has often accompanied the corruption of those in high places. It is a paradox that corruption is perceived to be erupting just as new global, political, and economic circumstances are creating unprecedented conditions for the decline of corruption. Any discussion of corruption is constrained by the impossibility of arriving at reliable data with which to measure corruptions occurrence. Because corruption is, by design, covert, there is no real way of quantifying it; thus, there is no real way of knowing whether it is increasing or decreasing. However, there is no question that within the past five or ten years, the public's perception of corruption has greatly increased be cause of the great increase in publicity. This eruption of awareness stems from the increasing openness that accompanies democratic transition, and from changes in the nature of corruption, which, in many cases, make violations more visible. While constant media coverage on pervasive corruption may convey a sense of gloom over the current state of ethical behavior in the world, a deeper analysis of underlying trends shows that, instead, this is a time to be optimistic about the possibility of reducing corruption.

In addition to strong moral values, the best antidotes against corruption are an independent parliament and judiciary, a vigorous political opposition to the party in power, and a free and independent media. Moreover, the elimination of economic policies relying too heavily on the discretion of government officials to allocate resources and guide economic activities helps minimize the opportunities for corruption.

In recent years, the world has made unprecedented progress on these two fronts. According to Freedom House, an organization that tracks different measures of civil and political liberties, 114 countries had a political system classified as a democracy in 1994. This is the largest number in history-more than double the total of the early 1970s. The World Bank has the same opinion about the spread of free markets. The economic reforms that have swept the world during the last decade have created the freest economic landscape in recent memory Democratization, decentralization, marketization, financial integration, and the globalization of business, the media, and even politics have surged with unprecedented force. Admittedly, some of these trends also create new forms of corruption and facilitate some of the old corrupt practices. However, in the long run the new global conditions will hinder, more than help, corruption.

Corruption has always existed, and will probably never be completely eradicated. But, if current global trends continue, it is possible to envision a world in which the scope for corruption is shrunk to its historical minimum. It will not be easy, and it will not occur spontaneously. Leaders in government, business, and the media will have to seize this emerging historical opportunity, and act together.

The effectiveness of such actions requires clear ideas about the nature of corruption and the way in which current international trends in politics, economics, and business are offering grounds for optimism in the fight against corruption.

Corruption's Multiple Meanings: A Conceptual Framework

Corruption, like cancer, has many manifestations. In the same way that different types of cancer require different treatments, fighting corruption requires different initiatives, tools, and institutions. For example, the money-laundering associated with the drug trade is a different phenomenon than the corruption that often distorts a government's procurement of large public works. Using the same approach and institutions to deal with both cases is surely less effective than targeting each with strategies that incorporate its relevant characteristics.

Nonetheless, corruption's multiple manifestations do share many commonalities. In principle, a conflict of interest underlies all acts of corruption. This conflict can often be open and brutal, such as when a government official extorts a payment in exchange for allowing imports to go through customs. Usually, however, the process is more subtle-perhaps a vendor's gift to the wife of a corporation's procurement manager, exchanged for his tolerance of higher prices. In fact, corruption can only exist when someone-the agent-is given authority to allocate the resources of others-the principals. All salaried managers in a private corporation act as the agents of the shareholders, who are the principals; all government officials are agents for their citizens. From this perspective, the potential for corruption exists every time a principal-agent relationship is present.

Every time an agent buys or sells on behalf of the principals, he can, in exchange for personal gain, conduct the transaction at prices above fair market value when buying, or under market value when selling. Moreover, in the case of governments, in addition to the buying and selling of properties on behalf of the community, officials can also sell their decisions for personal gain. From zoning rights that benefit a specific land developer, to health regulations that benefit specific pharmaceutical companies, government intervention offers a wide array of possibilities for the personal sale of public decisions. These decisions can be sold wholesale, as when government policies are distorted to benefit a specific interest group which has bribed policymakers. However, they can also be sold retail, as is the case when public employees personally collect a payment for the granting of a permit or a license. From this perspective, corruption in the public sector can only exist when the government buys goods and services, privatizes public assets, and regulates the activities of individuals and corporations.

The variety of corruption can lead to a complex system of classification, but for our purposes, we will focus on three specific categories, which together capture most of the instances of corruption more frequently denounced by the media and prosecuted by the courts: 1) competitive corporate corruption, 2) corruption instigated by organized crime, and 3) political corruption.
Competitive corporate corruption includes all the illegal activities that companies undertake to remain competitive. This is a form of institutional corporate corruption distinct from the individual corruption that occurs in corporations when employees benefit personally from their actions against the interest of the corporation. Competitive corporate corruption instead seeks to further the interests of the corporation. In some countries, it is impossible to win a bid for large public works projects without paying off government officials. In other countries, extensive government regulations make corporate survival overly dependent on the goodwill of public bureaucrats. Corporations challenged by competitors that are actively greasing the hands of eager government officials often find that they cannot compete unless they also relax their ethical standards. In some industries, these practices are widely accepted as part of the cost of doing business; some companies regretfully follow the practice, others do so enthusiastically, while still others rigorously and vehemently reject participating in corrupt practices, allowing competitors to take away their business. Often this ethical fortitude is supported by technological, financial, or other competitive advantages which make it affordable. Unfortunately, not all companies have the resources or the alternatives needed to withstand the consequences of losing business to rivals willing to break legal or ethical standards.

The point, however, is that the core business of companies involved in competitive corporate corruption is legal; they do not depend on systematically breaking the law to be profitable. Companies involved in organized crime, on the other hand, are purposefully created to break the law. While a legitimate private corporation may engage reluctantly in corrupt practices, occasionally, as a consequence of the competitive behavior of its rivals, or of the extortion of government officials, organized crime exists to break the law deliberately and constantly. As the profits of organized crime-especially the profits of narcotics trafficking-have soared, the natural path for these companies has been to diversify by investing in legitimate businesses whose survival and prosperity does not require illegal activities. Yet, because immoral and unethical acts are the basic business of these groups, they do not hesitate to-and actively seek to-corrupt government officials. Thus, the same group that keeps a Mexican drug enforcement official on its payroll will bribe a New York City official in order to keep its garbage-collecting cover operation in business. As organized crime groups increasingly operate across borders, they are becoming a critical element in international affairs.

Both categories are closely intertwined with political corruption, whose manifestations range from government officials stealing outright from the national treasury, to the illegal financing of political parties. The recent upheavals involving corruption in Italy and France, for example, can be traced to this category. In many countries, political parties customarily rely on the illegal payments of both private and state-owned corporations, which finance their activities and the posh lifestyles of the political elite. There is, of course, much overlap between the aforementioned three categories, as one form of corruption frequently spawns another.

There is little doubt that, in the last decade or so, some forms of corruption have greatly increased in scope and importance, and that such increases are related to changes in technology, as well as to changes in international politics and economics. Money laundering has been facilitated by the unprecedented level of international financial integration. The demand for illegal political financing has been boosted, as the spread of democracy has made elections more frequent, and the intense use of expensive media strategies has in creased the cost of political campaigns. However, democracy and a free media are also increasing government accountability and lowering the impunity of corrupt politicians and businessmen. In addition, market reforms are decreasing the instances in which the profits of private firms depend on the signature of a government bureaucrat.

Beyond the Velvet Revolution

It is no coincidence that corruption has acquired its current political prominence just as democratic ideals are making their greatest progress. The type of political system is a determining factor in the behavior of civil servants and the transparency of business activities, especially those of large corporations.

In one of the best analyses of corruption, Robert Klitgaard argued that the level of corruption depends on three variables: the monopoly (M) on the supply of a given good or service, the discretion (D) enjoyed by the suppliers, and their accountability (A) to others that have the authority to reduce M or D, that is, the agents' monopolistic control of the supply or their discretion in ad ministering their monopoly power. Klitgaard then suggested that the level of corruption (C) could be expressed as:


The more concentrated the supply of a good or service, the higher the discretionary power of those that control the supply; the lower their accountability to other authorities, the higher the corruption level will be. (8)

This equation would then predict that corruption is more probable in government agencies that have a monopoly on the supply of a specific good, service, or decision, than in a private corporation that sells goods and services in a highly contested market. Corruption will also be directly proportional to the degree of discretion accorded to those in charge of making the decision. A government agency that has to use some market-based benchmark to make its economic decisions has a narrower scope for corruption than one that relies only on the judgment of its officials. While competitive bidding among different suppliers does not necessarily eliminate the possibility for the distortionary effect of corruption on price and quality, it certainly limits its scope. In contrast, in a contract unilaterally awarded to a specific vendor in accord only with the judgment of the agents in charge, the room for corruption is obviously much larger.

In all cases, however, accountability has a significant inhibitory effect on corruption. From internal auditing processes to large scale congressional investigations, from organizational reporting procedures to media scrutiny, a wide array of mechanisms can be used to boost accountability and limit corruption.

Democracy and Corruption

A corollary of Klitgaard's equation is that the deepening of democratization should have corruption-curbing effects. Why, then, is there the perception that corruption is mounting, if democratic regimes are displacing authoritarian governments which are presumably more corrupt? Democracy provides opportunities for corruption which are necessarily more visible than those present under authoritarian rule. In a dictatorship, corruption can be more institutionalized, controlled, and predictable. A well-organized dictatorship allows for "one-stop shopping," where the right amount of money, given to the appropriate official, will take care of all of one's bribe-paying needs. The various bribe-takers, each of which has a monopoly on the service offered, work together to insure that the system continues to function, and the money continues to flow. This collusion can help insure that bribes stay both "reasonable" and out of the public view. (9) Democracy, on the other hand, is all about competition. If a government employee maintains his monopoly on a government service (such as, for instance, the one rubber stamp required to process a certain form), but is no longer in cooperation with his fellow bribe-takers, the bribe amount demanded can skyrocket, the employee caring little if he stifles demand for the various services, as long as he can continue to increase the amount of the graft. This sort of competition is inhibited in societies that are small, homogeneous, or controlled by a police state. However, when a society becomes more open, without eliminating the monopoly, the bribery problem becomes acute.

Elections, another crucial element of democracy, can affect corruption by increasing the need of politicians for two scarce resources: money and public affection. According to Transparency International-an international pressure group formed to fight corruption-the increased need for contributions has caused political parties to seek the support of business interests, increasing the potential for corrupt relations between the two. (10) This problem has recently become overt in France, where the national employers' federation, the Patronat, has urged a suspension of all corporate campaign contributions. (11) The problem has been blamed on French laws concerning campaign funding; these laws have undergone various changes in the past several years. As the old laws made legal fundraising difficult, a culture of corrupt campaigning developed; the laws remain ambiguous, furthering the problem. In Italy, the same problem was at the core of the scandals that have led to a fundamental restructuring of the country's political structure.

The increased competition for public affection engendered by elections encourages the revelation of corrupt acts. In a non-competitive system, the wolves travel in a pack, colluding and protecting each other. Only the insiders have the necessary evidence to convict the perpetrator. When a system is democratized, the wolves turn upon each other, offering up their knowledge in hopes of dashing their opponents and gaining a reputation as a reformer. The danger here is evident: the anti-corruption crusade can easily be turned into a populist tool. While the accusations may be true, it does not necessarily follow that the accuser stands on higher moral ground. Brazilian President Fernando Collor de Mello won his presidency on an anti-corruption crusade, billing him self as a cacador de marajás ("hunter of overpaid bureaucrats"), only to be impeached two years later under accusations of corruption. (12) Ironically, many of the congressmen who actively sought President Collor's removal were later themselves accused of having embezzled huge amounts of funds through their influence in the Congressional Budget Appropriations Committee. For the non-insider, it is frequently difficult to know whom to believe. As power shifts from discredited politicians and bureaucrats accused of corruption, to journalists specializing in exposing graft in government, the latter soon become tempted to use their new-found power for their own personal gain. In Venezuela, the journalists who gained significant public acclaim through their aggressive denunciations of government officials were later found to have been paid by businessmen seeking to exert as corrupt an influence as that of the public bureaucrats exposed by the journalists themselves.

Democratization is frequently accompanied by the deliberate weakening of central state authority. In societies in transition from dictatorship, this is due to the bitter memory of abuses committed by states with absolute central authority. In other cases, decentralization is fed by the growing perception of corruption at the national level. The US, with its Congressional check-kiting and Savings and Loan scandals, is a good example. However, if corruption is already present, decentralization can frequently exacerbate an existing problem, giving local bureaucrats free reign to create new regulations that charge transaction fees. Moreover, as power devolves to regional authorities, operating nearer to the people, abuses of power also devolve downwards, becoming more evident to the people.

In addition, the dismantling of national institutions can lead to a regulatory and security vacuum which allows corruption to flourish. This is not to say that these old institutions should remain untouched-public agencies in developing nations are frequently bloated with non-productive personnel, and hobbled by unclear mandates. The devolution of power away from the center makes their effective reformation even more problematic.

As the ideological battlefield of the Cold War is vacated and the tenets of democracy take hold, government effectiveness is questioned both by citizens at home and by governments abroad. Corruption is becoming much more of a factor in political life in general, and in voter preferences in specific. The success of the democratization movement can be affected by the perceived level of government corruption. Just as citizens worldwide are discovering their ability to participate in and affect politics, they are also discovering how collusive and dirty politics can be. This tension threatens to drive a wedge between citizens and their governments. A poll of Brazilians conducted in 1993 showed a weakening commitment to democracy as the best system of government for Brazil, with "corruption/weak government" most often cited as a problem of democratic government. (13) Democracy requires some minimal amount of trust accorded to the government. While a lack of trust is evident even in nations with established democracies, for nations without a history of positive state-civil interaction, it is a critical hurdle which must be overcome.

The New Economic Order

In the last decade, not only has the political environment changed, but economic policy frameworks have been drastically altered, as government intervention and centralized planning have been increasingly displaced by market-oriented policies. These reforms are as good for the anti-corruption campaign as they are for macroeconomic stability. The less that economic decisions are made inside the state apparatus, the narrower the scope for corruption. State-owned industries, which have long enjoyed an unwarranted popularity in developing nations, generally provide fertile ground for bribe extortion or the utilization of company resources for the private use of their managers. It is now a well-established fact that while state-owned enterprises may, in principal, be owned by society at large, in practice, their "ownership" resides with the coterie of politicians, top managers, and union leaders that control the company's decisions. In state-owned enterprises, the benefits of ownership often accrue to an even smaller elite than that found in many privately owned companies.

Privatization eliminates the years of hidden, day-to-day corruption prevalent in state-owned companies. However, because privatization of a national firm is such a high-profile and high-profit event, it easily leads to corruption of a different sort. In one notable instance, when the Spanish airline Iberia acquired the Argentine national airline, Aerolineas Argentinas, it listed $80 million in expenses as "costs associated with the sale." (14) The Argentine privatization system came under so much criticism that it had to be entirely revised with help from the World Bank in 1991. Suspicion has now fallen upon the Eastern European privatization process. In Russia, where the process of privatizatsia ("privatization") has been nicknamed prikhvatizatsia ("grabitization"), (15) one study estimates that 61 percent of Russia's new rich are former Soviet managers who took advantage of privatization to make the industries their own. (16)

The process through which a state-owned firm is sold can, of course, be plagued by corruption. However, once the corporation is in private hands, the scope for corruption narrows. While there is no reason to assume that corruption will not also be found in a private corporation-especially those in which principals have inadequate control or information about their agents-it is safe to expect that market discipline will limit its extent, both in magnitude and in time.

In publicly listed companies, for example, investors demand greater transparency in corporate finances, with regular reports on expenditures. The common man provides an incentive for publicly-owned companies to keep their hands clean; when executives of French corporations Sant-Gobain and Alcatel were placed under investigation last fall, company stock fell immediately in reaction to their foreseeable instability. (17)

While economic reforms decrease the opportunity for corruption, they also decrease public tolerance for corruption. As developing nations put a long-overdue end to decades of economic populism, and industrialized nations feel the pinch of economic slowdown, fiscal belts everywhere are being tightened. These changes do not go unnoticed by the population at large, which casts an ever-more-watchful eye on public accounts, as their own pet benefits and entitlements are slashed. The end result is closer monitoring of government officials, and greater public indignation over corruption. As one commentator, writing about the Japanese Recruit scandal of 1989, remarked, "public opinion only becomes critical when politicians are seen to be too greedy and start welshing on their obligation to deliver the appropriate share from Tokyo's bottom less pork barrel." (18) The reform process breaks the existing social contract wherein everyone got their cut: labor through higher wages and protected jobs, consumers through lower prices, and politicians through whatever they could skim off the public coffers.

The Globalization of Business and Corruption

Increased international trade and transnational business operations, stimulated by economic liberalization and marketization, have introduced new elements into what were once closed economies, causing old practices to be questioned. As competition among developing nations for international investment in creases, companies have more options. In this context, corruption, or the lack thereof, has become one of the relevant factors in deciding where to invest. Macy's recently announced its withdrawal from the clothing industry in Myanmar, stating that it was "impossible to make money there," because corruption "makes normal operations impossible." (19) US businesses are forbidden by the 1977 Foreign Corrupt Practices Act from paying bribes in order to gain contracts. (20) As a result, US companies often feel they are at a disadvantage in a world where many of their international rivals do pay bribes and, in some cases, even declare payoffs a tax deduction. However, the ability to bribe is, at best, a costly advantage--last year, the French armament industry spent approximately 60 billion Belgian francs bribing foreign officials for contracts. (21) Businesses operating in China spend between 3 percent and 5 percent of their operating costs on "gifts" to officials; all this is frequently spent without any guarantee that results will be forthcoming. Moreover, a company which pays the big money quickly acquires a reputation as an easy mark, and, in this day of global gossip, this Unwanted reputation frequently precedes its entry into new markets.

Corruption can be just as frustrating for the government concerned as it is for the corporation. For developing nations, the inefficiency and waste associated with corruption is often crippling. In Kenya last year, three banks failed as a result of corrupt practices involving campaign funds. In Ecuador, the cost to the state annually is estimated at $775 million, 9.5 percent of the GDP. It is estimated that bribes and blackmail add a 50 percent surtax onto Russian consumer goods. Even China, with its reputation as an economic powerhouse, has lost an estimated $50 billion due to the deliberate undervaluing of state assets by public employees. Moreover, countries desirous of foreign aid have a vested interest in proving themselves not to be corrupt "rat holes" which swallow up foreign aid, as Senator Helms has accused them of being.

The difficulties experienced by developing nations trying to reform them selves are often compounded by the outdated perceptions of foreign businessmen. Many companies operating in poor countries assume that corruption is pervasive, and that payoffs are an inevitable fact of doing business there. In a survey of American business leaders, more than half of the respondents affirmed that they would, under certain circumstances, bribe a foreign official in order to gain a desired contract-an act which is illegal under US law. (22) Their justifications were based on the ideas that business abroad could not be con ducted without such bribes, that cultural differences made American business ethics inapplicable, and that such payments might not be illegal under foreign law. This attitude is itself a self-fulfilling prophesy, creating a vicious cycle of corruption in which foreigners continue to bribe because they think they have to, and officials continue to extort because they know they can. The incongruence of the resources involved-where the annual revenue of a large multinational can easily outweigh the GDP of a small developing nation-makes fighting corruption a daunting task for a government greatly in need of the jobs and goods provided by foreign firms.

However, small countries are beginning to make known their frustration with corrupt practices, acting independently to eliminate opportunities for the unethical. Last year, the Malaysian government declared several British firms found guilty of bribing officials ineligible to bid for government contracts. (23) Ecuador requires any company, foreign or domestic, which bids on government contracts to sign an agreement that it will not bribe officials, and to disclose all payments made to "consultants" or middlemen of any kind. By instituting open-bidding systems and mandating transparency in payments, a re forming government can make life much harder for the parasites in its own bureaucracy. A clear and transparent legal code is also necessary, as it prohibits bureaucrats from inventing their own regulations, thereby creating additional opportunities for graft, and allows the public to know when transgressions have been committed. Governments can remove some of the incentive to demand bribes by making sure that salaries are commensurate with responsibilities.

However, given the lack of international agreements concerning corruption, it is frequently difficult to enforce regulatory violations across borders. Governments are, in general, loathe to prosecute bribery when it is performed in another country, or by a foreign national. Legal jurisdiction in these cases- which are now among the most significant of bribery cases-is unclear, as laws differ among countries. International cooperation is needed to develop common standards of behavior and establish acceptable means of penalizing of fenders. Unilateral action, such as the United States Foreign Corrupt Practices Act, can only go so far. The US example has failed to catch on; so far, only Sweden has instituted a similarly restrictive law. (24) As is the case with trade liberalization, nations are understandably reluctant to act independently, since no one wants to feel that their companies are alone in operating at a disadvantage. Such a problem can best be solved by bilateral or multilateral agreements. In recognition of this fact, the OECD met in June 1994 to ratify the Recommendation on Bribery in International Business Transactions, the first multinational agreement to attack bribery in international trade. (25) A follow-up symposium was held in March 1995. Among the OECD's recommendations for its twenty-five member countries are: 1) to cease considering bribes as legitimate, deductible business expenses; 2) to extend national criminal law to acts committed by citizens in foreign countries where such acts are also illegal; 2) to treat payments made to foreign officials in the same way that payments to national officials are treated, at the request of the country involved; and 3) to extradite offenders to be prosecuted in the country involved. (26) The recommendations will be reviewed within three years and mandatory sanctions for noncompliance are being considered. The trend is catching on in the Western hemisphere as well; corruption was a major agenda item at the Summit of the Americas held last December in Miami.

The push is not limited to political leaders. Business leaders are also working on the problem. The World Economic Forum made corruption a ma jor agenda item at its annual meeting last January, bringing together CEOs, politicians, social scientists, and law enforcement officials to discuss the topic. Out of the talks was born the Davos Group-named for the city in Switzerland where the meeting was held-which is working on an agenda to catalyze the adoption of international standards for business ethics and regulation.

The globalization of legitimate business practices, which has made it easier to transfer money between nations, has inadvertently aided the growth of international criminal groups. Organized crime has become truly global, and it has become apparent that it cannot be attacked from one country alone, as evidenced by the recent opening of a FBI branch office in Moscow. As authoritarian states disappear and market economies flourish, crime groups are making strongholds out of weak states, such as Russia, which still lack the frame work and institutions for a market economy to function. The 26.5 percent surge in investment by the Cosa Nostra in the Italian manufacturing sector is attributed to their ties with the Russian mafia; the Italians export goods to the Russians, who enforce their distribution monopoly with an iron fist. (27) The vast sums of money controlled by these groups far outweigh the annual GDP of most countries, thus making it nearly impossible for nations acting individually to make much of an impact. Changes in the international finance system have made it increasingly more difficult to trace the source of this money. Every day, trillions of dollars are transferred electronically. (28) British intelligence estimates that around $500 billion may have been laundered through international finance channels last year. (29) A Financial Action Task Force, established in 1987 by the Group of Seven most industrialized nations and the European Community, issued forty recommendations, including making money-laundering a criminal offense, requiring banks to disclose more information, and extending some current regulations to cover firms other than banks; however, few member countries actually passed these directives into law. (30) Even this, though, would be less than adequate. If regulations are not truly international, dirty money will simply shift to safer havens, as it previously did when Switzerland tightened its regulations and money flowed into Luxembourg and the Netherlands Antilles.

A Shrinking World

Just as money flows across borders, political trends now spread from one nation to another. It is commonly suggested that the French magistrates have been inspired in their vigorous investigations by Italian magistrates. An American commentator, discussing the success of the magistrates in Southern Europe, concludes his commentary by noting "America does not have national magistrates, and our corruption takes a different form. But the mood is right for people with serious law enforcement backgrounds to have a serious national impact." (31) Allusions to the Italian magistrates frequently appear in Latin American newspapers as well. The hope exists that this marks the beginning of a trend towards imitation and transnational encouragement.

This global exchange is made possible by the increasingly international character of the mass media. Within the last few years, news has spread more quickly and farther than ever before. This is, in part, due to political changes, where increasingly open societies have led to a more numerous and independent press corps, and in part to technical advancements connected with the advent of satellite broadcasts and of CNN. The character of political journalism has also changed over the last two decades. Adam Gopnik has written that the journalistic profession has changed from an "access" culture into an "aggression" culture. Formerly, "in exchange for access, the reporter would show discretion." (32) If a reporter broke this gentlemen's code and published the seamier side of political life, he could suffer professional death. In the United States, this system ended with the Nixon era. In many other countries, how ever, the access system, which in a police state carried a penalty much greater than professional ostracism, has only recently ended. The burgeoning press of a newly opened society creates a stiff competition among journalists, accentuated worldwide by the growing importance of television news. Aggressive, investigative reporting, especially when it involves a scandal, sells papers and keeps independent newspapers solvent. Corruption has thus become the bread and butter of some journalists; Gopnick writes, "the reporter used to gain status by dining with his subjects, now he gains status by dining on them." It should also be remembered that journalistic power, like any other power, can be bought and sold. However, the new culture of aggression means that no one, be they politician, journalist or businessman, can be assured secrecy of action.

A Time for Action

Changes in the political, economic and social standards of the world have opened a window of opportunity in the fight against corruption. However, while this time of upheaval provides unprecedented opportunities for corruption-fighting initiatives, it also provides an opening for the dishonest.

Money is pouring in and out of countries at a rate never before seen, while the globalization of business and communications systems has created a complex web of global interactions, making it increasingly difficult to discover, or even define, the criminal. Corruption has always existed, yet the problem is often dismissed as either an idiosyncratic inconvenience or an unavoidable cultural imperative. However, the stakes involved are growing, as is the scope of those affected. Now is not only an opportune moment to act, but, in fact, a critical moment. Vito Tanzi has posited that corruption stems from the failure to recognize the need for "arms-length" distance in government decision-making. This tendency is strongest in societies where communities are small and interactive, relationships are highly personal, and where the need to accumulate "social capital" is great. (33) The process of globalization destroys old-world patrimonialism, undermining the importance of social capital.

Globalization, along with the economic pressure caused by years of governmental waste and the political pressure exerted by an increasingly informed populace, has made the old system of doing business simply untenable in today's world, leading to an eruption in the seams of political life. The smoke-filled rooms and family politics of yesteryear are largely going the way of the dinosaur. The current challenge is to ensure that this old-style corruption is not replaced with a new-style corruption of international intimidation. Instead of denouncing corruption or moralizing about its ills, the time has come to address the issue head-on, creating incentives for businesses and government officials to stay clean, and the regulatory and penal frame works to punish them when they do not.

It is important to strengthen the forces and trends that have lowered the tolerance for corruption, and to continue to heighten the consciousness of how these things pollute and endanger everyone's environment. Businesses, de spite having a vested interest in cleaner politics, cannot act on their own. Politicians must cooperate internationally to generate frameworks that create behavioral inducements and disincentives. That will not happen until the politicians get strong signals from the political marketplace of voters. The solution is thus very dependent on the media and on public opinion. Corruption flourishes under public apathy. Happily, democracy and the free market are just the thing to reduce apathy by giving citizens a stake in how things are run. Perhaps the steady stream of discouraging stories is a consequence of a global renewal of political ethics. With the necessary pressure and encouragement, the recent eruption in the global perception of corruption could turn out to be the catharsis world politics needed.


1 This includes Brazilian President Collor de Mello (impeached in 1992), Venezuelan president Perez (impeached in 1993), Japanese premiers Takeshita (1989) and Hosokawa (1994), Irish Prime Minister Haughey (1992), Pakistani Prime Minister Bhutto (dismissed in 1990, but later re-elected), and Italian Prime Minister Berlusconi (1995).

2 "Hands Up all those hit by sleaze," Economist, 29 October 1994. Financial Times, 30 December 1994.

3 "Belgian Minister quits amid fraud claims," Financial Times, 9 December 1994.

4 "Ex-Premier Quits Post in India Over Corruption," New York Times, 30 December 1994: A11. "Three Indian Ministers Quit," Financial Times, 23 December 1994.

5 Bill Powell, "Tokyo Shock: Sayonara, 'Mr. Clean'," Newsweek 18 April 1994.

6 Luigi Manzetti, "Economic Reform and Corruption in Latin America," North-South Issues 3, no. 1.

7 "The Stain Spread in Italy," New York Times, 9 December 1994.

8 Robert E. Klitgaard, Controlling Corruption (Berkeley: University of California Press, 1987).

9 For a discussion on the idea of cooperative monopolies in bribe-taking as opposed to competitive monopolies, see Andrei Shleifer and Robert W. Vishny "Corruption," Quarterly Journal of Economics 108, no. 3 (August 1993).

10 Peter Marsh, "More Potential for Corruption," Financial Times.

11 John Ridding, "Halt to political funding urged," Financial Times.

12 Luigi Manzetti, "Economic Reform and Corruption in Latin America," North-South Issues 3, no. 1 (1994).

13 "Second Thoughts on Democracy in Brazil?" USIA Opinion Research memorandum, 22 February 1994.

14 Luigi Manzetti, "Economic Reform and Corruption in Latin America," North-South Issues 3, no. 1 (1994).

15 Peter Galuszka, "Red-Handed Russia." Business Week, 11 January 1993.

16 Dorinda Elliot, "Lifestyles of Russia's Filthy New Rich," Newsweek, 19 December 1994, 42.

17 Sharon Waxman, "Corruption Crackdown Shakes Europe's CEOs," Washington Post, 11 October 1994.

18 Terry McCarthy, "The Sleaze Factor: It's not graft, just duty and obligation; Bribes in Japan form part of a system of gifts and incentives," Independent, 27 October 1994.

19 G. Pascal Zachary "US Companies Back Out of Burma, Citing Human-Rights Concerns, Graft," Wall Street Journal, 13 April 1995: Al0.

20 The original impetus for this law was the scandal involving the Lockheed corporation's payment of some $25 million to Japanese officials in connection with aircraft sales. As a result of this scandal, Japanese Prime Minister Kankuie Tanaka was forced to resign, and US businesses lost considerable prestige overseas. The United States subsequently initiated an investigation by the Justice Department, the Securities Exchange Commission, and the Internal Revenue Service into overseas bribery payments. In the course of the investigation, 450 companies admitted to having made over $300 million worth of suspect payments. Public indignation led to the passage of the Foreign Corrupt Practices Act which forbids payments only to officials with discretionary powers, while allowing "facilitating payments," or "transaction" bribes, made to low-level officials in order to expedite paperwork or basic services. Opponents of the Act have claimed that the distinction is ambiguous, leading to unfair prosecution of American firms.

21 "French Armament Industry Spent 60 Billion Franks on Bribes," De Standaard, 17 March 1995.

22 Justin C. Longnecker, Joseph A. McKinney, and Carlos W. Moore, "The Ethical Issue of International Bribery: A Study of Attitudes Among US Business Professionals," Journal of Business Ethics 7 (1988).

23 Barbara Ettore, "Why overseas bribery won't last," Management Review 83 (June 1994).

24 Glenn A. Pitman and James P. Sanford, "The Foreign Corrupt Practices Act revisited." International Journal of Purchasing and Materials 30 (Summer 1994).

25 Rosie Waterhouse, "War declared on corruption," Independent, 5 June 1994.

26 Catherine Yannaca-Small, "Battling international bribery," OECD Observer, February-March 1995.

27 "The Legitimate Assets Owned by the Crime Company," Italian Federation of Public Enterprises. Cited in FBIS-WEU-94-211-S, 1 November 1994: 2.

28 "Crime Becoming Major Powerbroker," Bangkok Post, 14 January 1995: 5.

29 "Money Launderers on the Line," Economist Newspaper Ltd., 1994.

30 US Department of State Dispatch, 2 March 1992 3, no. 9: 163.

31 Jim Hoagland, "Revolt of the Magistrates," Washington Post, 11 October 1994.

32 Adam Gopnik, "A Critic at Large: Read All About It," New Yorker, 12 December 1994.

33 Vito Tanzi, Corruption, Governmental Activities and Markets, International Monetary Fund, Fiscal Affairs Department, August 1994.

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.