How can business help fight corruption?

The control of corruption is commonly treated as the responsibility of government. The presumption is that people, firms and corporations will be what they are. So if corruption flourishes in a country, it reflects a failure of government. In informal discussions in the bazaar and angry public forums, the demands are invariably for greater honesty among government servants, tougher laws, and better enforcement. The public outrage against corruption is understandable for corruption is among the biggest obstacles to economic development. At the same time, the solutions offered in popular discourses are often naïve.

We argue here that there is scope for private firms and corporations to develop self-enforcing norms for controlling corruption, in somewhat the same way that people in private housing communities often develop mechanisms for keeping their public spaces clean.

There is a fundamental flaw in the popular expectation that government will have an interest in controlling corruption. Most agents who comprise government – politicians, bureaucrats, law enforcement officers – benefit from corruption. Therefore, laws are watered-down and leave loopholes; enforcement of anti-corruption measures by one branch is resisted and obstructed by other branches or departments with parallel or independent powers.

The business community as a whole has stronger incentives to counter corruption. There are situations where business and government can conspire to benefit at the expense of the broader citizenry. But in most contexts involving award of scarce resources such as land, spectrum channels, licenses and contracts, the politicians’ and bureaucrats’ gain is the business community’s aggregate loss. The winning firm profits, but the efforts and expenses of all the losers more than offset this gain. Worse, to the extent that corruption acts like a tax and therefore deters future investment, it hurts profits and growth for all business.

Thus business as a whole can benefit from the reduction of corruption. Moreover, the cleaning up of corruption can have long-run effects such as those of fostering growth and speeding up development and, as such, it can confer huge benefits to the citizenry.

The trouble is that each firm has an incentive to cheat on any agreement not to bribe. Of course when all firms do this, they collectively lose. This is a prisoner’s dilemma game among them, and needs their own collective action: an effective system of norms and sanctions to deter cheating.

Successful community institutions for collective action have existed for at least a millennium. Stanford economic historian Avner Greif analyzed a community of Jewish traders in north Africa in the 11th century that sustained honest contracting in long-distance trade among its members through a system of norms and punishments. Any one member could profit by cheating another in a deal, but the community as a whole benefited from the norm enforcement as the guarantee of honest dealing enabled them to sustain a much greater volume of trade.

University of California economist James Rauch, Chicago Law School professor Lisa Bernstein, and others have studied more recent ethnic networks of traders. India can learn from these examples to set down some features that an anti-corruption business institution should have.

Most importantly, the community needs an efficient method to detect and punish cheating. We believe India is fortunate in the first aspect. National and local business associations form good networks, with good communication both formal and informal (gossip), ensuring that insiders quickly come to know any incidents of bribery. India also has high-quality investigative journalists who can provide an additional channel for detection. The facts may be difficult to prove in a court of law, but this is where an internal tribunal has an advantage: it can use broader standards of evidence, and has insider expertise to evaluate the evidence. As for punishment, the community can deploy even more effective sanctions than the fines a court of law would impose: it can ostracize offenders, basically driving them out of business. Of course such a potent weapon must be used with care; the process needs to guard against false accusations and must ensure that it does not become an insiders’ cartel that keeps out new or disruptive entry.

Next, the institution needs large and prominent “launch members”. This might often be difficult because existing business leaders may have come to that position by benefiting from the existing corrupt system. But again we believe India is fortunate. In the last two decades many prominent firms and businesspeople have emerged using good governance and operating in the world economy. If they step up to start an institution, inviting others to join in a no-bribery pledge, they can succeed because others will find it a matter of shame to stay out. The government can provide some minimal help by requiring as a condition for a firm to be on its list of approved vendors or bidders that it be a signed-up member of the no-bribery group.

One of us (Dixit) has constructed a game-theoretic model, and examined evidence from other business community governance institutions, to list several other desiderata for an anti-corruption institution. We believe they provide the basis for serious public discussion of the idea, and even some experimental implementation in the near future. We hope this essay will help start the process.

We do not offer this as a magic solution that will eliminate all corruption. It is far from being a panacea, but there are no panaceas in life. We believe that this proposal can reduce corruption substantially. It would be a mistake to dismiss it summarily or argue that we should wait for a more perfect solution. Waiting for 100% success merely ensures 0% success.

This post first appeared on The World Bank Let’s Talk Development Blog. Publication does not imply endorsement of views by the World Economic Forum. 

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Author: Kaushik Basu is Senior Vice President for Development Economics and World Bank Chief Economist.Avinash Dixit is John J. F. Sherrerd ’52 University Professor of Economics Emeritus at Princeton University.

Image: Pedestrians walk inside a train station in Tokyo. REUTERS/Yuriko Nakao (JAPAN