RESTRAINING ARBITRARY STATEACTION AND CORRUPTION

ANEFFECTIVE STATE CAN CONTRIBUTE POWERFULLY

to sustainable development and the reduction ofpoverty. But there is no guarantee that state interventionwill benefit society. The state's monopoly on coercion,which gives it the power to intervene effectively in eco-nomic activity, also gives it the power to intervene arbi-trarily. This power, coupled with access to informationnot available to the general public, creates opportunitiesfor public officials to promote their own interests, or thoseof friends or allies, at the expense of the general interest.The possibilities for rent seeking and corruption are con-siderable. Countries must therefore work to establish andnurture mechanisms that give state agencies the flexibilityand the incentive to act for the common good, while atthe same time restraining arbitrary and corrupt behaviorin dealings with businesses and citizens.

Chapter 5 focused on building the capability of thepublic sector. Many of the reforms discussed there willcontribute to reducing arbitrariness and corruption. Par-ticularly useful toward that end are instilling a rule-basedculture in public institutions, and curbing patronage inthe civil service. This chapter broadens that discussion tolook at mechanisms to restrain arbitrary state action andcorruption more generally.

The chapter examines first the formal checks and bal-ances that need to be built into the structure of govern-ment, including judicial independence and the separationof powers. These promote credibility and accountability.But formal instruments of restraint are seldom enough,particularly in countries where corruption has becomewell entrenched. Therefore this chapter also analyzes theoptions for these states and others seeking to make a dentin corruption, by examining its root causes. One impor-tant lesson is that anticorruption efforts must proceedalong many fronts, to reduce the opportunities for, and

the payoffs from, corruption while raising the price andthe probability of being caught.

Formal checks and balances

In framing a government to be administered by menover men, the great difficuliy lies in this: you must firstenable the government to control the governed; and inthe next place oblige it to control itself

James Madison, FederalistNo. 51(1788)

Restraining the potential use and abuse of state power isa challenge for any country. Harder still is doing it with-out depriving state agencies of the flexibility they need todo their job. The misuse of state power creates seriousproblems of credibility, whose effects linger long afterthe event. The expropriation of property and the harass-ment of entrepreneurial Asian minorities in Ugandaunder Idi Amin left a legacy of distrust, which initiallyposed enormous problems when the current administra-tion tried to attract private investment. But arbitrary andcapricious state action undermines more than credibility.It undermines the rule of law itself, by weakening theforce of whatever rules the state has set in place. And itfosters conditions that encourage state officials to placethemselves above the law and tempt the rest of society todo the same. Development, in these circumstances, hits abrick wall.

Instruments of restraintSustainable development generally calls for formalmechanisms of restraint that hold the state and its officialsaccountable for their actions. To be enduring and credible,these mechanisms must be anchored in core state institu-tions; if these are too weak, external mechanisms such asinternational adjudication may substitute temporarily. The

100 WORLD DEVELOPMENT REPORT 1q97

two principal formal mechanisms of restraint are a strong,

independent judiciary and the separation of powers.JUDICIAL INDEPENDENCE AND EFFECTIVENESS. To

prosper, economies need institutional arrangements toresolve disputes among firms, citizens, and governments;to clarify ambiguities in laws and regulations; and toenforce compliance. Societies have devised a broad arrayof formal and informal mechanisms to do this, but nonemore important than the formal judiciary. It alone hasaccess to the coercive authority of the state to enforcejudgments. And it alone has the formal authority to ruleon the legality of actions by the legislative and the execu-tive branches. This special relation to the rest of the stateputs the judiciary in a unique position to support sustain-able development, by holding the other two branchesaccountable for their decisions and underpinning thecredibility of the overall business and political environ-ment. Yet judiciaries can play this role only when threecore conditions are met: independence, the power toenforce rulings, and efficient organization.

Independence from the rest of government is the mostimportant of these. Whatever the precise character ofjudicial relations with the legislature and the executive, allindustrial countriesand many developing countriesrely on the judiciary to hold the executive accountableunder the law and to interpret and enforce the terms ofthe constitution.

Judicial independence has been repeatedly compro-mised in some countries, and in no country has the judi-ciary been immune from political efforts to override itsdecisions. Legislatures and executives have used a varietyof gambits to rein in their judiciaries:

Judges of the superior court in Malta were suspendedone hour before a case challenging executive actionswas to be heard.A succession of Pakistani governments in the pastappointed temporary judges, whose lack of tenuremade them more vulnerable to political influence.Although Ukraine's constitution declares that the courtsare independent of the executive, judges remain largelydependent on local authorities for their housing. Judgeswho have ruled against city officials appear to be partic-ularly susceptible to long delays in getting housing.

The effectiveness of the judiciary also depends on itsdecisions being enforced. In practice that means thatother branches of the government must consent to pro-vide the resources needed for enforcement, including per-sonnel authorized by law to serve court documents, toseize and dispose of property, and to turn the proceedsover to the winning parry. In many countries this enforce-ment capability is constrained. In Poland, for instance,

bailiffs are not under the control of judges but are em-ployed by the Ministry of Justice. Thus, although judgesare competent and reasonably efficient, enforcement isslow and often ineffective because the number of bailiffshas not kept pace with the rising caseload.

Developing relationships among the judiciary, legisla-ture, and executive that ensure judicial independence andreliable enforcement is a gradual process. Studies showthat private sector confidence in the rule of law increaseswith each year a stable regime remains in place. Morebroadly, as Box 6.1 illustrates for Peru, the success ofthird-party mechanisms for enforcement depends in largepart on citizens viewing those mechanisms as legitimate.In countries where judicial institutions are weak, it may beat least as important to demonstrate to citizens and firmsthe potential benefits of a well-functioning judiciary, andto win support for good laws and impartial enforcement,as it is to proceed with wholly technocratic programs ofjudicial reform.

The third component of judicial effectiveness is organi-zational efficiency, which is needed to avoid long delays inclearing cases. The average case takes 1,500 days to clear inBrazil and Ecuador, but only 100 days in France. Long de-lays raise the transactions costs for dispute resolution andmay block access for some potential users; however, theinternal efficiency of the judiciary is less critical than itsindependence and its enforcement authority. As discussedin Chapter 3, even when saddled with cumbersome andcostly procedures, judicial systems can strengthen credibil-ity in countries as long as their decisions are perceived tobe fair. Any state beginning from a weak institutional baseshould consider building this aspect of judicial perfor-mance its first priority.

SEPARATION OF POWERS. Judiciaries may be capable ofenforcing rules, but if the public has little faith in thoserules remaining stable, the state's credibility can still becompromised. The classic constitutional mechanism forrestraining constant legislative changes is the horizontaland vertical separation of powers.

Power can be divided horizontally among the judi-ciary, the legislature, and the executive, and vertically be-tween central and local authorities. The patterns of acountry's political party organizationwhich can rangefrom a small number of highly disciplined parties to alarge number of parties whose members only loosely abideby a party line, and that can govern only by forming multi-party coalitionsalso influence the extent to which polit-ical power is concentrated or diffused.

The broader the separation of powers, the greater willbe the number of veto points to be navigated to changeany rule-based commitments. Thus the separation ofpowers increases confidence in the stability of rules. Mul-tiple veto points can be a double-edged sword, however:

Box 6.1 How popular participation improved property rights and dispute resolution in Peru

Until 1989 most Peruvians living in marginal urbansettlements and rural areas did not enjoy the securityprovided by formal ownership of their real property(70 percent of the population in urban areas and 80percent in rural areas). The traditional system of prop-erty registration was run by the Ministry of Justice, andconflicts were resolved by the judiciary. The systemwas perceived by poor urban and rural property own-ers as a system for the rich, who could better afford thehigh transactions costs.

In the early 1980s the Institute of Liberty andDemocracy (ILD), an NGO, began a campaign toimprove the property rights of poor Peruvians. TheILD began by holding extensive public hearings togather complaints, identify reasons why citizens didnot formally register their property, and publicize thepotential benefits and costs of registration and secureproperty. The group coupled this participatory processwith a study of the laws and regulations governingproperty registration and enforcement. Based on theresulting diagnosis, the ILD then developed concreteproposals for reform. These were publicly debated andLine-tuned starting in 1986. Although the professional

monopolies that held a stake in the old system, such as

lawyers' associations and notaries, strongly opposed the

proposed reforms, community-level support carried theday.

In 1989 a new property registration system wasenacted into law. The new system dramatically reducedtransactions costs and uncertainty by reducing thepower of the professional monopolies. Instead the sys-tem uses community norms, such as neighbors vouch-ing for a party's ownership claim, to establish propertyrights and resolve conflicts. Subject to administrativerequirements specified by the law, any lawyer may serveas a third-party verifier, sign the property titles, andresolve conflicts in the field. Contested or complicatedcases are resolved by the new system's chief registrar,who is appointed by the Ministry of Housing, not thejudiciary. Only after these mechanisms have failed canthe conflict be taken to a judge.

By 1994 the new system had registered nearly120,000 entities, and between 1994 and 1996 it regis-tered an additional 170,000. Spurred by its demand-driven design, the system continues to evolve, and ini-tiatives are under way to expand it nationwide.

they make it just as hard to change harmful rules as tochange the beneficial ones.

Many developing countries, including some with for-mal separation of powers, have few effective checks andbalances on the actions of political leaders. In some coun-tries legislative oversight is weak because of poor capacityand inadequate information. In others the executive dom-inates a compliant legislature. But like the development ofa well-functioning judicial system, the formal elaborationof constitutional checks and balances, or their more effec-tive institutionalization, is a gradual process.

EXTERNAL MECHANISMS. To some extent, extraterritor-

ial and international restraints can substitute for limita-tions on the ability of national institutions to enforce rulesor to signal credibly that the rules will remain reasonablystable over time. One option is to use extraterritorial adju-dication to underpin the domestic judicial system. Confi-dence in the Jamaican judicial system is buttressed by thefact that the United Kingdom's Privy Council serves as itsappellate court of last resort. Because of the weaknesses ofthe Philippine judicial system, many firms, domestic aswell as foreign, prefer to adjudicate their contracts offshore.

As Chapter 3 noted, international agreements are a sec-ond mechanism for strengthening commitments not

RESTRAININC ARBITRARY STATE ACTION AND CORRUPTION 101

anchored by any domestic institution. On the trade front,both the European Union and the North American FreeTrade Agreement have been able to play this role, andmany countries will find it an important reason to join theWorld Trade Organization. Clearly, sovereign countriescan still reverse course on, for example, trade policy bywithdrawing from such agreements. But they then have tocalculate not just the benefits and costs of the policy rever-sal, but also the broader costs of reneging on an interna-tional commitment for which their partners will holdthem accountable. The threat of international censuremakes countries less likely to reverse course.

Agreements with multilateral organizations, such as theIMF or the World Bank, often include some degree of pol-icy conditionality: in order to borrow funds, for example,countries undertake certain reforms. This can have a simi-lar benefit for some countries. These conditionalities can beviewed as a sign of national commitment to the policies thatare included as conditions. Countries with weak domesticcommitment mechanisms can strengthen their credibilityby binding themselves to pay a penalty should they violatethe agreement. One of the intentions behind World Bankguarantees is to accelerate the flow of private finance todeveloping countries by underpinning such commitments.

102 WORLD DEVELOPMENT REPORT 1997

Building in flexibility

Instruments of restraint are a vital foundation for sustain-able development. But excessive restraint can lead toparalysis. Instruments for restraining government need tobe complemented by institutional arrangements thatbuild in flexibility for the executive branch in formulatingand implementing policies and adapting to new informa-tion and changing circumstances.

As discussed in Chapter 5, countries have tried a vari-ety of institutional arrangements that combine flexibilitywith restraint. Some arrangementssuch as deliberationcouncils in East Asia and the Administrative ProceduresAct in the United Statesdelegate substantial autonomyto executive agencies to define the substance and under-take the implementation of policy. But they also requirethese agencies to follow procedures that open their deci-sions to input and oversight by other arms of the state andby civil society and businesses. Other arrangements relyon mechanisms within the executive branch to promoteflexibility within restraints, such as the devolution ofmanagerial authority to executive agencies within set bud-gets and performance targets.

But even if bureaucracies are embedded in processesthat provide ample opportunity for outside input andoversight, the risk remains that officials will pursue per-sonal rather than organizational goals. Self-seeking behav-ior can degenerate into corruption when private interestswield their influence in illegal and secret ways, circum-venting the legal and bureaucratic rules designed to keepthem out. Whether public institutions succumb to theseand other sources of corruption will depend on thestrength of their institutional defenses. How these arebuilt and maintained is the subject of the next section.

Controlling corruption

A Congressional appropriation costs money. . . . Amajority of the House Committee, say $10,000apiece$40, 000; a majority of the Senate Commit-tee, the same eachsay $40,000; a little extra to oneor two chairmen of one or two such committees, say$10,000 each. Then seven male lobbyists at $3,000each; one female lobbyist, $10,000; a high moral Con-gressman or Senator here and therethe high moralones cost more.

A U.S. railroad company owner in Mark Twainand Charles Warner, The Gilded Age:

A Tale of Today (1877)

Mark Twain's damning tale was a thinly veiled caricatureof corruption in the U.S. Congress in the 1 870s. Twain'snovel followed closely on the heels of the infamous Cre'ditMobilier scandal, in which two prominent businessmenbrazenly bought their way into the Congress. In India in

1996 a blockbuster movie, Hindustani, expressed an ex-treme form of popular outrage over corruption. Themovie depicts horrific tales of callous politicians andbureaucrats willing to let hospital patients die and poorpensioners starve unless they receive their cut.

Fiction thrives on exaggeration. But it is also a mirrorthat society holds up to itself to reflect entrenched prob-lems. These talesa century and a hemisphere apartremind us that corruption is nothing new, nor is it con-fined to any particular corner of the world. It is a problemthat has deeply affected the lives and stirred the resent-ment of citizens and businesspeople the world over.

Today, citizens everywhere demand greater probity ofgovernment officials, and the new transparency in domes-tic and global markets brings corruption more quickly tothe public eye. In the past few years allegations of corrup-tion have contributed to the fall of governments through-out the world. Two former presidents of the Republic ofKorea have been prosecuted and indicted. A president ofBrazil was impeached on charges of corruption. In Octo-ber 1996 more than 250,000 people protested the Belgiangovernment's handling of a pedophile ring and allegedcorruption in judicial appointments and enforcement.And a fierce debate has erupted over the financing ofpolitical campaigns and its influence on public policy inthe aftermath of the 1996 U.S. presidential election.

Corruption has been defined in many ways. ThisReport defines it as the abuse of public power for privategain. Although corruption tends to get the most atten-tion, it is a symptom of a more general problem of per-verse underlying incentives in public service. Corruptionflourishes where distortions in the policy and regulatoryregime provide scope for it and where institutions ofrestraint are weak. The problem of corruption lies at theintersection of the public and the private sectors. It is atwo-way street. Private interests, domestic and external,wield their influence through illegal means to take advan-tage of opportunities for corruption and rent seeking, andpublic institutions succumb to these and other sources ofcorruption in the absence of credible restraints.

Corruption violates the public trust and corrodes socialcapital. A small side payment for a government servicemay seem a minor offense, but it is not the only costcor-ruption can have far-reaching externalities. Unchecked,the creeping accumulation of seemingly minor infractionscan slowly erode political legitimacy to the point whereeven noncorrupt officials and members of the public seelittle point in playing by the rules.

Studies have shown a clear negative correlation betweenthe level of corruption (as perceived by businesspeople)and both investment and economic growth. This is con-firmed for investment levels by the results of the privatesector survey conducted for this Report (Figure 6.1). As we

saw in Chapter 3, the survey identified corruption as oneof the major obstacles to doing business in many countries.Yet it is not just a cost of doing business. Other surveys andanecdotal evidence suggest that the greatest victims ofpetty corruption are usually the poor.

Despite such evidence, many parts of the developingworld retain a certain ambivalence toward corruption. Acommonly heard view is that corruption merely greasesthe wheels of commerce, and that without it there wouldbe no transactions and no growth. Apparent support forthis argument comes from the fact that some countriesthat rank high in surveys of the level of corruption havealso excelled in economic growth. The predictability ofcorruptionboth that of the amount one has to pay andthat of receiving the outcome one has paid forprovidessome insights into this apparent paradox. For a given levelof corruption, countries with more predictable corruptionhave higher investment rates (Figure 6.1). But even inthese countries corruption has an adverse impact on eco-nomic performance. Figure 6.1 also shows that, no matterhow high the degree of predictability of corruption in acountry, its rate of investment would be significantlyhigher were there less corruption.

Countries that have so far achieved high rates of eco-nomic growth despite serious corruption may find them-selves paying a higher price in the future. Tolerating cor-ruption that siphons off payments of, say, 10 percent onaverage may generate pressures to increase the take to 15or 20 percent. Corruption feeds on itself, creating awidening spiral of illegal payoffs until ultimately develop-ment is undermined and years of progress are reversed.And the very growth that permitted corruption in the pastcan produce a shift from productive activities to an unpro-ductive struggle for the spoils. Over time corruptionbecomes entrenched, so that when governments finally domove to contain it, they meet powerful resistance.

Causes of corruptionIncentives for corrupt behavior arise whenever public offi-cials have wide discretion and little accountability. Politi-cians, bureaucrats, and judges control access to valuablebenefits and can impose costs on private citizens and busi-nesses. Public officials may be tempted to use their posi-tions for private gain by accepting bribes; for their part,private individuals may be willing to make illegal pay-ments to get what they want from government. Thus, anecessary condition for corruption is that public officialshave rewards and penalties at their disposal.

Some corruption stems from opportunities generatedby the policy environment, at the bottom or the top ofthe hierarchy. Payoffs are frequent to lower-level officialscharged with collecting tariffs, providing police protec-tion, issuing permits, and the like. When corruption is

RESTRAININ3 ARBITRARY STATE ACTION AND CORRUPTION 103

Figure 6.1 High and unpredictable corruptionhurts investment

Gross investmentGDP ratio(percent)

30

25

20

15

10

Low

Level ofcorruption

High

High

LowPredictabilityof payments

and outcomes

Note: Each value is an average for a group of countries. Resultsare based on a regression using data from thirty-nine industrialand developing countries, controlling for income, education, andpolicy distortion. See the Technical Note for details. Source:World Bank staff calculations based on data from the privatesector survey Conducted for this Report.

endemic, these officials may create additional red tape anddelays to induce even higher payments. Of course, corrup-tion also occurs at the highest levels of government, in theawarding of major contracts, privatization, the allocationof import quotas, and the regulation of natural monopo-lies. This helps explain why corruption is more prevalentin countries with highly distorted policies, as measured byvariables such as the black market exchange rate premium(top left panel in Figure 6.2). Any policy that creates anartificial gap between demand and supply creates a prof-itable opportunity for opportunistic middlemen.

The probability of being caught and punished (for theperson paying the bribe and for the official receiving it)also affects the level of corruption. Economic analysis ofthe law suggests that individuals weigh the expected ben-efits of breaking the law against the expected costs (theprobability of being caught and punished multiplied bythe level of punishment). Corruption may be high in acountry where the government system does little to deterbribes. Lawbreakers may believe that there is little chanceof being caught or, if caught, of having to pay the penalty,since they believe that the system of justice itself can be

104 WORLD DEVELOPMENT REPORT 1997

Figure 6.2 Some factors associated with corruption

Index of corruption

6

5

4

3

2

1

0

Index of corruption

6

5

4

3

2

1

0

Index of corruption

6

Index of corruption

6

5

4

3

2

1

0

Note: Data for the top left panel are from thirty-nine industrial and developing countries during 1984-93 (for the policy distortion index) and1996 (for the corruption index). The top right panel is based on a regression using data from fifty-nine industrial and developing countries during1996. Data for the bottom left panel are from twenty industrial and developing countries in the late 1980s to early 1990s. The bottom rightpanel is based on a regression using data from thirty-five developing countries during 1970-90, controlling for income. See the Technical Noteto Figure 3. Source: World Bank staff calculations (top two panels); Van Rijckeghem and Weder, background paper (bottom left panel); Evansand Rauch 1996 (bottom right panel).

corrupted. Corruption can even persist in countries withsubstantial press freedom and public resentment againstit, if there is little hope of independent judicial resolutionof important cases. This Report's private sector surveyfound a negative correlation between reported levels ofcorruption and judicial predictability (top right panel inFigure 6.2).

Finally, corruption may thrive if the consequences ofbeing caught and disciplined are low relative to the bene-fits. Officials frequently control the allocation of benefitsand costs whose value far exceeds their own salaries, Cor-ruption becomes especially likely if the wages of publicservice do not reflect the comparable private wage. 'Wherecivil service wages are very low, officials may try to eke outa middle-class standard of living by supplementing theirpay with illegal payoffs. The risk of being fired from alow-paying civil service job because of corruption is not

a serious threat if more remunerative positions are avail-able legally in the private sector. Hence corruption isoften positively associated with the difference betweenpublic and private salaries, or what may be termed the"rate of temptation" (bottom left panel in Figure 6.2). Butsimply raising civil service salaries may not reduce corruptbehavior. Pay reform must be combined with crediblemonitoring and law enforcement. Merit-based recruit-ment and promotion mechanisms that restrain politicalpatronage and create a more impartial public service arealso associated with lower corruption (bottom right panelin Figure 6.2),

Reducing corruptionSeveral countries have managed to reduce endemic cor-ruption over time. The struggle of the Progressive move-ment against the power of U.S. urban political machines

0 1 2 3 4 5 6 7 8 2 3 4 5 6

Policy distortion index Predictability of judiciary index

0.5 1.0 1.5 2.0 25 0.5 1.0 1.5 20Ratio of civil service wages Merit-based recruitment index

to manufacturing wages

of the nineteenth century is a case in point (Box 6.2).Containing corruption requires an understanding of thebenefits and costs under public officials' control. Manyofficials remain honest despite considerable temptation,and many ordinary people and businesses refuse to paybribes despite the promise of short-term gain. But otherssuccumb. It is unwise to deal with the possibility of cor-ruption by assuming that government officials are ofhigher moral standing than the rest of the population.

The actual extent of bribery and other corruptiondepends not just on the potential gains and risks, but alsoon the relative bargaining power of the buyer and theseller of public favors. Reformers must also consider thefact that anticorruption efforts have marginal costs as wellas marginal benefits; the efficient level of bribery will sel-dom be zero.

Corruption cannot be effectively attacked in isolationfrom other problems. It is a symptom of problems at theintersection of the public and the private sectors andneeds to be combated through a multipronged strategy.Recent reforms in Uganda illustrate such an approach(Box 6.3). One part of the strategy focuses on a major

RESTRAINING ARBITRARY STATE ACTION AND CORRUPTION 105

theme of Chapter 5: creating a rule-based bureaucracywith a pay structure that rewards civil servants for honestefforts, a merit-based recruitment and promotion systemto shield the civil service from political patronage, andcredible financial controls to prevent the arbitrary use ofpublic resources. Here we focus on the remaining twoparts of the strategy. The first is to reduce the opportuni-ties for officials to act corruptly, by cutting back on theirdiscretionary authority. The second aims at enhancingaccountability by strengthening mechanisms of monitor-ing and punishmentusing not only criminal law butalso oversight by formal institutions and ordinary citizens.

REDUCING OPPORTUNITIES FOR CORRUPT PPACTICE.

In general, any reform that increases the competitivenessof the economy will reduce incentives for corrupt behav-ior. Thus policies that lower controls on foreign trade,remove entry barriers to private industry, and privatizestate firms in a way that ensures competition will allsupport the fight. If the state has no authority to restrictexports or to license businesses, there will be no opportu-nities to pay bribes in those areas. If a subsidy program iseliminated, any bribes that accompanied it will disappear

Box 6.2 Urban political machines in the United States and their reform

In the late nineteenth and early twentieth centuriesmany U.S. cities were dominated by political machines,defined by one scholar "as a political party in which aboss oversees a hierarchy of parry regulars who provideprivate favors to citizens in exchange for votes andwho expect government jobs in return." Machine-controlled cities also typically made corrupt, collusivedeals with private businesses seeking contracts, fran-chises, or protected markets. The politicians drivingthese machines operatedand flourishedin nomi-nally democratic environments.

Machines were costly to the communities they dom-inated. Spending per capita for general administrationand for police and fire servicesboth areas with lots ofpatronage jobswas 34 percent and 17 percent higher,respectively, in machine-controlled than in nonmachinecities. To take one extreme case, in Boston the numberof city clerks increased by 75 percent between 1895 and1907, while the population increased by less than aquarter; meanwhile growth in productivity fell by half.

The Progressive movement in the United States hadas one of its main goals the reform of machine-domi-nated cities. Reform frequently meant property taxreform. Seth Low, New York's reform mayor in theearly 1900s, was distressed by the favoritism shown to

wealthy property owners and introduced a plan toassess property at market value. The plan increased theassessed value of real estate, lowered the tax rate, andincreased revenues. The city's budget was cut by $1.5million as patronage appointees were removed fromoffice. Reform mayors in many other U.S. cities fol-lowed similar policies.

Reform also involved municipal franchises. InPhiladelphia, for example, the machine-controlled citycouncil regularly awarded a gas franchise in return forcontributions to the Republican Party. In 1905 reformmayor John Weaver vetoed the franchise bill, ap-pointed a supporter to a key position on the city coun-cil to ensure that the veto would be upheld, and hadmachine adherents arrested on charges of corruption.

Cities dominated by machines paid a high cost inthe form of inflated budgets and inequitable tax andspending systems. Although many people benefitedfrom the jobs and patronage dispensed by themachines, the losers were more numerous still. It wasthey who eventually organized to elect reform candi-dates in many cities. The wave of reform mayorseffected real change, which persisted even when themachines were returned to power, mainly because thereforms were popular and hard to reverse.

106 WORLD DEVELOPMENT REPORT 1997

Box 6.3 Fighting corruption in Uganda

Uganda, long plagued by systemic corruption, haslaunched a multipronged battle against it. The effortenjoys support from the country's leaders, who seemcommitted to the goal of sound governance.

in the immediate postcolonial period Uganda was akleptocratic state. By 1967 the regime ruled withoutholding elections. These beginnings set the stage forIdi Amin's rise to power in 1971. Under Amin, gov-ernment became little more than a system of organizedcrime used to extract rents from the public. Theirdepredations took many forms, including support foreconomically irrational projects, exorbitant militaryexpenditures, kickbacks on state contracts, extortionateimport controls, and expropriation of the properties ofAsians. Upon emerging from civil war in 1986, thenew Ugandan government under President YoweriMuseveni inherited a weak, underpaid, and overstaffed

civil service (including thousands of "ghost workers")and a thin and porous tax base.

Cleaning up the civil service will take years, butUganda is making some progress. The effort includespolicy reform and deregulation to remove opportunitiesfor rent seeking; civil service reform to streamline thepublic work force, improve remuneration, provide train-ing, and instill a code of ethics; revival of the PublicAccounts Committee of Parliament; a strengthenedauditor general's office; and a public relations campaignagainst and prosecution of corruption, under the author-ity of an inspector general with powers to investigate andprosecute. Much remains to be done before corruptioncan be said to be under control. The inspector general,however, has announced prosecutions against commonexamples of rent seeking (such as customs and procure-ment fraud), which should have a deterrent effect.

as well. If price controls are lifted, market prices willreflect scarcity values, not the payment of bribes.

Needless to say, reducing official discretion does notmean eliminating regulatory and spending programs withstrong justifications. Such programs must be reformed,not eliminated. Abolishing taxes is not a sensible way toroot out corruption among tax collectors; a corrupt policeforce cannot simply be closed down. Several measureshave proved effective in reducing official discretion in on-going programs:

Clar and streamline laws in ways that reduce officialdiscretion. Mexico's customs reforms cut the number ofsteps in the process from twelve to four; the remainingsteps were streamlined to reduce delays.Contract for services with a private company, possibly a

foreign firm with no close ties to the country. WhenIndonesia contracted with a Swiss firm for customspreinspection and valuation and for help in collectingimport duties, corruption declined. Contracting outmonitoring functions is pointless, however, unless thegovernment makes use of the reports it receivesandthat does not always happen.Make rules more transparent. Simpler, nondiscretionarytax, spending, and regulatory laws can limit opportuni-ties for corruption. Sometimes a certain risk of corrup-tion is tolerated because the benefits of a discretionaryapproach to program administration exceed the costs ofcorruption. But even then transparency and publicity

can help blunt the incentive to be corrupt. Police offi-cers, for example, must have discretionary authority tomake law enforcement decisions on the spot, but pub-lic complaints will often restrain any abuses.Introduce market-based schemes that limit the discretion ofregulators. This approach also has the virtue of pro-ducing an economically efficient allocation of re-sources. The sale of water and grazing rights, pollutionrights, and import and export licenses can improvethe efficiency of government operations while limitingcorruption.Adopt administrative reforms that introduce competitivepressures into government. Open, competitive biddingfor public procurement contracts can reduce opportu-nities for corrupt deals. Creating overlapping, compet-itive bureaucratic jurisdictions can greatly diminish thebargaining power of individual officials. If clients canturn to a second official when the first demands a bribe,no single official has the power to extract a large payoffso long as applicants are eligible for the service. Andif it is the applicants who are seeking something ille-gal, overlapping enforcement areas can help to checkpayoffs as well. For instance, when the state wants tocontrol illegal businesses, police officers can be givenoverlapping enforcement areas to reduce opportunitiesfor corruption.

STRENGTHENING MECHANISMS FOR MONITORING AND

PUNISHMENT. Independent watchdog institutions that are

part of the government structure can also curb corruption.Countries have experimented with various approaches:

Some countries have independent anticorruption com-missions or inspectors genera! that can investigate alle-gations and bring cases to trial. The most famous is theIndependent Commission against Corruption in HongKong (China), which reports exclusively to the highestauthority and has extensive powers (Box 6.4). Singa-pore and Botswana have similar institutions.Ombudsmen hear citizen complaints and can helpincrease the accountability of government agencies.Under the Ombudsman Act of 1991, South Africa hasestablished a public protector to investigate allegedimproprieties (malfeasance, corruption, human rightsabuses) by public officials and to prepare reports, whichare usually made public. The office cannot initiate legalactions but will refer cases to offices that can.Some public agencies, such as the School ConstructionAuthority in New York City, have established internal

RSTRAINJINJ6 ARBITRARY ST,A,TE ACTIDNI .AMD CDRRUPTIDNI 107

units to root out corrupt contractors and propose waysto reorganize the agency to reduce corruption.Whistleblower statutes protect and reward publicemployees who report the malfeasance of co-workers orgovernment contractors, The United States, for exam-ple, has a statute that calls for rewarding workers whoreport irregularities in government contracts. Such anincentive for reporting is often necessary, since peoplewho report co-workers' misdeeds are frequently ostra-cized. Such measures are hollow, however, unless pros-ecutors follow up, courts are incorruptible and effi-ciently run, and penalties are severe enough to deterpotential offenders.

Watchdog organizations should focus not only onthose who receive bribes, but also on those who pay them.It takes two to tango, and penalties should be equallysevere on both sidesusually a multiple of the bribesreceived or pald. Penalties for bribe payers should alsoinclude the prospect of being barred from contracting

ox 6.4 Hong Kong's independent commission against corruptionE

Corruption was endemic in Hong Kong (China) dur-ing the 1960s. Its entrenched character is suggested byexpressions popular at the time: people had the choiceof "getting on the bus" (actively participating in cor-ruption) or "running alongside the bus" (being abystander who did not interfere with the system)."Standing in front of the bus" (reporting or resistingcorruption) was not a viable option.

Spurred to action by a scandal involving a high-anking police officer, the then-governor general estab-

lished the Independent Commission Against Corrup-tion (ICAC) in 1974. The commission reports only tothe governor and is independent of the police force.ICAC officials are paid more than other governmentworkers and cannot be transferred to other depart-ments. No one may leave the ICAC to work for seniorofficers who have been the subject of an investigation.The ICAC has the power to investigate and prosecutecorruption cases as well as to sponsor public educationcampaigns. The government's commitment to reformwas further indicated by the appointment of a personof unquestioned integrity as the first head of the com-mission and by a policy of investigating and prosecut-ing "big tigers" from the outset,

Early efforts to clean up corrupt syndicates withinhe police force, however, met with protests. The ICAC

at first backed down and granted an amnesty foroffenses committed before January 1, 1977. This set-back was harmful to the commission's prestige, but itwas able to recover with a vigorous public educationcampaign. Public surveys carried out between 1977 and1994 indicate that public perceptions of corruptionhave fallen significantly. Indirect evidence suggests thatactive corruption has declined as well.

Still, the ICAC is not without its problems. Themain one is that it reports only to the governor. Ananticorruption commission reporting to an autocraticruler could be used as an instrument of repressionagainst political opponents, and the ICAC has notbeen immune to such charges. The ICAC's broadpowers could be abused in systems less committed tothe rule of law. A series of oversight committees andan independent judiciary act as a check on the ICAC,but even so the occasional scandal surfaces. As a fur-ther control on its power, such an agency might re-port not to the chief executive but to the legisla-ture, as do Uganda's Inspector General and the U.S.General Accounting Office. A tough, independentanticorruption agency is a potent tool and representsa credible long-term commitment, but there shouldalso be checks on its ability to be misused for politi-cal ends.

108 WORLD DEVELOPMENT REPORT 1997

with the government for a period of years. Industrialcountries with strong monitoring capacity can enforcesuch measures on their multinational companies conduct-ing business overseas. But except for the United States,which adopted the Foreign Corrupt Practices Act in1977, countries have been reluctant to act unilaterally forfear of subjecting their businesses to more stringent stan-dards than their foreign competitors.

In this context, international organizations provide aforum for agreeing on common standards and coordinat-ing action. Regional organizations such as the Organizationof American States have sponsored international conven-tions making bribery, including international bribery, acrime. A recent initiative by the OECD encourages endingthe tax deductibility of bribes and criminalizing the bribingof foreign officials. It makes recommendations to its mem-ber countries on how to deal with bribery in internationalbusiness transactions. International organizations are alsoworking to coordinate the Light against money launderingand, in particular, to expand the list of offenses, includingcorruption. The forty recommendations of the FinancialAction Task Force on Money Laundering include nondrugcriminal activities. This opens the way for countries tomake illegal the use, deposit, or transfer of money acquiredthrough corruption.

Citizens' groups can also be an important check on thearbitrary abuse of government powerif people can orga-nize, and if they can find out what is happening. Govern-ments should publish budgets, revenue collection data,statutes and rules, and the proceedings of legislative bod-ies. Financial data should be audited by an independentauthority like the U.S. General Accounting Office. Unau-dited secret funds or extrabudgetary funds available tochief executives are an invitation to corruption.

Freedom-of-information acts in the United States anda number of European countries are an important tool forpublic oversight. A recent directive of the EuropeanUnion requires member states to pass freedom-of-infor-mation laws covering environmental information. Suchlaws enable citizens to obtain government informationwithout having to show how their lives are affected by it.The availability of information helps citizens disciplinepublic officials at the ballot box and through otheravenues of protest, such as legal challenges and direct peti-tions to decisionmakers.

Information is of little value, however, without mech-anisms for using the knowledge gained to influence gov-ernment behavior:

In democracies, citizens can vote officials out of office ifthey believe them to be corrupt. This gives politicians anincentive to stay honest and work for the interests of

their constituents. (However, if corrupt payoffs are usedto buy benefits for individual voters, knowledge of cor-ruption may do little to stop it.)If courts are independent and citizens can sue to forcethe government to comply with the law, this opensanother route to control government malfeasance.Public exposure of corruption through the media isanother option. Even undemocratic rulers are likely to besensitive to public opinion, if only because they wish toavoid being overthrown. A free press can be a vital checkon abuses of power, especially in countries that lack othermeans of constraining politicians and bureaucrats.

Yet even if both the necessary information and themeans of punishing corrupt practices are available, indi-vidual citizens are unlikely to act alone. Laws that make iteasy to establish associations and nonprofits can helpresolve this collective action problem. Such groups mightnot only seek information from government, but also sup-ply information to government about citizens' opinions ofthe quality of public services. As discussed in Chapter 7,the nonprofit Public Affairs Centre in Bangalore is en-gaged in a promising experiment to publicize the per-formance of Indian public agencies. An internationalnonprofit organization, Transparency International, is

working to mobilize citizens around the world to fightcorruption and to publicize countries' track records. Yetprecisely because open information can be so potent inpromoting government reform, many countries limit suchgroups or make it costly for them to organize.

Strategic options: Balancing flexibility with restraints

Pressures for reform are on the rise everywhere. Private en-trepreneurs and firms want the credibility of state actionsanchored by a well-functioning system of property rights.Citizens are demanding more responsive and effectivedelivery of public services and greater probity in the use ofpublic resources. At the same time, globalization is in-creasing demands for a more agile state, one that canrespond quickly to changing circumstances. These pres-sures have magnified the state's dilemma: how to checkarbitrary decisionmaking without building rigidities thatinhibit innovation and change. The fundamental chal-lenge is to devise institutional arrangements that sustain aworkable balance between flexibility and restraint. Coun-tries with strong institutions or track records of followingthrough on commitments may have room to respond flex-ibly (even at the cost of some corruption), but countrieswith dysfunctional and arbitrary governments may not.

States in many developing countries have demon-strated a clear imbalance between flexibility and restraint.They have generally not been credible, accountable,

sponsive, or agile. In several countries the capricious exer-cise of state power coupled with rampant and unpre-dictable corruption has undermined development. Stateswith too much flexibility and not enough restraint willfind that their actions are not viewed as credible, andinvestment and growth will suffer. These countries needto strengthen the formal instruments of restraintjudi-cial independence, effective separation of powerstoenhance the credibility and accountability of the state.International commitment mechanisms can serve as ashort-term substitute while these institutions are built up.

Yet these actions will not be enough to stop the rot incountries where endemic and entrenched corruption hasundermined key functions of the state. Strengtheningformal instruments of restraint is only one element of amultipronged strategy to control corruption. Reforming

RESTRAINING ARBITRARY STATE ACTION AND CORRUPTION 109

the civil service (for instance, by raising pay and restrain-ing political patronage in recruitment and promotion),reducing opportunities for officials to act corruptly (forinstance, by increasing competition and reducing officials'discretionary authority), and enhancing accountability areother essential steps. Strengthening mechanisms for mon-itoring and punishmentof the people who pay bribesas well as those who accept themwill require vigorousenforcement of criminal law. But it will also require over-sight by formal institutions such as statutory boards andby ordinary citizens (through voice and participation).These efforts can help not only in controlling corruptionbut also in improving many other functions of the state,such as policymaking and service delivery. The use ofvoice and participation to reinvigorate public institutionsis the subject of Chapter 7.