Chapter 30

Globalization and Corruption

CAROLYN WARNER

Globalization has helped to expose the extent to which corruption is embedded in international economic exchanges. This has led some to think that globalization inevitably reduces corruption by first revealing it and then subjecting firms and states to bribery-discouraging pressures from the free market. However, for as much as globalization helps to reduce corruption, its effects on corruption are not inherently in the presumed positive direction. Globalization creates incentives and new means for corruption, the standard definition of which is the misuse of public office for private gain (Philp 1997; Gerring and Thacker 2005; Scott 1972).

The standard expectation is that more international trade decreases corruption because states, now competing globally, have to present clean business environments to attract business. In addition, firms in any particular country, now subject to competitive pressure from foreign firms, cannot sustain the costs which corruption adds to their operating expenses. Thus, the free trade which is part and parcel of globalization is supposed to dampen corruption. It raises competitive pressures on firms, which lowers their ability to tolerate the costs of corruption that they may have been paying. If free trade also includes an agreement to open up states’ public procurement practices to bids from foreign firms, then politicians and bureaucrats should also find it harder to continue corrupt practices. In this virtuous path, even under domestic policing and judicial systems which haven’t changed, everyone should have less incentive to engage in corruption: there is less profit in it (Ades and Di Tella 1999: 988; Krueger 1974).

Furthermore, globalization has seen the proliferation of non-governmental organizations (NGOs), several of which have been prominent in crusading against corruption by exposing it and by pressuring firms and states to take corrective measures. NGOs such as Transparency International and even some international organizations, such as the World Bank, have pointed out that corruption is not just bad for democratic values, it is also bad for economic development and business. They have lobbied governments and firms to adopt anti-corruption measures, and have had some success in getting corruption onto the international agenda.

Globalization also exposes more states to anti-corruption norms, because an inherent feature of globalization is increased state membership in international organizations and networks. The assumption is that these international networks, being dominated by the wealthy Western states, which have anti-corruption norms of their own, contain and transmit anti-corruption norms (Sandholtz and Gray 2003). Indeed, corruption should be receding in international economic transactions because the dominant power in the international system, the United States, has been striving to internationalize its own anti-bribery law, the Foreign Corrupt Practices Act (FCPA). Originating in reaction to discoveries, via the uncovering of Watergate slush funds, of widespread bribery by US firms in their foreign dealings, it has been amended and tightened. Given that no elected official in the United States wants to be seen as condoning corruption, the FCPA has proven impossible to repeal. Because of that, US firms as well as agencies of the US government were compelled to turn their energies towards having other states adopt a similar law. The US view was that everyone ought to be equally constrained from using bribery in foreign business transactions, so that US firms, vulnerable to prosecution at home for using bribery abroad, were not at a disadvantage. Success of a sort came in 1997, with the adoption of the OECD Anti-bribery Convention, and ratification of it by all 35 signatories by 2004. There have been reviews of all countries’ implementation and enforcement and follow-up reviews have taken place or been scheduled. Results are transparent, in that they are posted on the OECD’s website (www.oecd.org). In addition, the United States has relatively stringent requirements for firms to be listed on US stock exchanges. Over the years, those exchanges have become a locus of international trade, as numerous foreign firms list on them. Thus, globalization is exposing firms around the world to the laws of the United States. This should have a damping effect on the extent of bribery and corruption in international economic transactions.

Just as globalization got a large boost with the collapse of the Soviet Union and increased economic openness of China, so too did anti-corruption efforts: they were no longer impeded by the privileging of anti-Communist policies, and, since 2001, have been aided by anti-terrorist banking laws exposing other transactions to inspection (Naylor 2002; Palan 2003).

However, the standard view that globalization decreases corruption has been confounded by the perverse effect of increased competition in the international export markets increasing the utility of bribery as a business tool and increasing the utility of corruption as a means for politicians to extract resources from foreign firms; and by the fact that international trade and political activity takes place increasingly under rules governed by international organizations which lack real enforcement powers. It is because of that that OECD states can (and do) use or tolerate corruption when it facilitates geo-political or economic interests, such as national security or weapons sales. Furthermore, the reputed engine of globalization, the World Trade Organization (WTO), has no rules concerning corruption in international trade and government contracting. OECD states have even institutionalized the underwriting of corrupt transactions. It is inaccurate to speak of international anti-corruption norms – they are circumscribed by the concrete economic and geo-political interests of the very states which are said to promulgate them, and are not shared by many of the world’s rising economic and political powers.

Specifically, corruption continues despite globalization because competition has become fierce, especially in energy, infrastructure and weapons; by there being increased economic competition in already corrupt countries (e.g. the opening of the East bloc and Russia); by loopholes in the OECD anti-bribery convention (including tax deductions for ‘grease’ payments and excluding payments to political parties); by legal jurisdictions largely still being national and by international organizations and conventions having limited or no enforcement powers (enforcement is left to states which may have little interest in enforcement or no capacity to do so); by arms and economic embargoes which create incentives for black markets and corruption; sometimes merely by the political sensitivity of the transaction and individuals involved; by the emergence of a corrupt country, China, as a world economic power; and by the resistance of most states to anti-corruption efforts (Manion 2004; Sun 2004; Abbott 2001; Transparency International 2004).

It is clear that part of globalization has been the apparent increase in international organizations taking on governing and trade tasks which used to be the purview of sovereign states. The UN’s ‘oil for food’ programme for Iraq is one example; the WTO’s regulation of trade between most countries of the world is another. The UN also has been the locus of arms embargo enforcement. Yet these organizations often become part of the problem, as the UN oil for food programme has shown, as the scandal of UN head Kofi Anan’s son obtaining UN contracts, the EU Commission being plagued by mismanagement and nepotism, and the Coalition Provisional Authority turning a blind eye on corruption in contracting in Iraq. In addition, international organizations sometimes become the repositories for leaders with dubious domestic records. The European Union’s Commission, the Organization of American States (OAS), the World Economic Forum, the North Atlantic Treaty Organization, all have had leaders and officials whose corrupt or dubious activities in their country of origin surfaced during their tenure in the international organization.

This chapter first discusses the expectations and indications that globalization has introduced dynamics which help to reduce corruption, then analyses the contrary. It moves to an analysis of whether a tipping game might be in the offing, with dynamics shifting from those in which corruption is the norm to those in which it is not, and concludes with some reflections on the tensions between globalization, and the economic and political interests of industry and politicians.

GLOBALIZATION AGAINST CORRUPTION

Globalization seems to have brought with it some efforts to globalize anti-corruption policies and practices. Symptomatic of this is Transparency International (TI), founded in 1993 by a German businessman, Peter Eigen, who decided to rally against corrupt practices in international business. His first tactic, and the one for which TI is most widely known, was to make public the varying degrees of corruptness of almost all countries in the world. While the TI Corruption Perception Index makes no claim to being a scientific measure of corruption, it does make transparent what had previously been a taboo subject: corruption, and it does challenge the international stature of some countries which find themselves further down the rankings than their moral posturing and level of economic development would lead one to expect. Perhaps more importantly, TI has been a persistent lobbyist to international organizations when trade and other agreements are being established. As Abbott and Snidal (2002) note, TI’s efforts were critical to the adoption of the OECD Anti-bribery Convention, and they continue to be important in pressuring states to implement and enforce the convention. TI has likewise been an important player in OAS, World Bank, International Monetary Fund (IMF) and WTO meetings on anti-bribery and corruption policies. It is not the only international NGO which has emerged: others, such as Global Witness and the Center for Public Integrity, have been active.

The United States has been a major player in efforts to internationalize the US FCPA, and its efforts to do so seem to coincide with a rapidly globalizing international economy. The fall of the Soviet Union brought new business opportunities in corrupt countries, and US firms wanted everyone else to be shackled with the same competitive restraint they were: anti-bribery laws. The US government coordinated efforts which led to the 1997 OECD Anti-bribery Convention. The United States has also attempted to reduce corruption through the creation and practices of the Millennium Challenge Corporation, a para-public foreign aid agency which is only to give aid to those countries which demonstrate good governance, as defined by the United States: those countries which are seen to be ‘governing justly, investing in their citizens, and encouraging economic freedom’ qualify for aid. As part of that assessment, countries are evaluated on their control of corruption (Millennium Challenge Corporation 2005).

Another important international institution has been the World Bank, an international organization which is seen to be an integral part of globalization. The Bank had, for decades, tolerated corruption in developing countries because it assumed that corruption, by enabling firms to get around red tape, facilitated economic development. The Bank also justified its stance by noting it was respecting local traditions. Coincident with the fall of the Berlin Wall in 1989 came ‘a turning point’ at the Bank: its African ‘development experts called for a rethinking of policy’ (Abbott and Snidal 2002: 10). Yet it took several other key events in order to have this epitome of globalization reconsider its stance on corruption. First, it took the founding and then persistent lobbying of TI to goad the Bank into adopting anti-corruption policies. TI founder Peter Eigen used to work for the World Bank but, dissatisfied with the Bank’s tolerance of corruption, left it and then established TI. Second, it took a change in leadership. With his arrival in 1996, James Wolfensohn used his presidency of the Bank to start to change the Bank’s stance. It remains to be seen whether Paul Wolfowitz (President, June 2005–) will give the Bank’s anti-corruption measures the same attention.

Those who think globalization promotes anti-corruption measures can point to the fact that by the late 1990s, many major international organizations had anti-bribery and/or anti-corruption policies of some sort: the UN, the development banks, the IMF, the OAS, the Council of Europe, the European Union, as well as the OECD. Anti-corruption measures are being written into the North–South American free trade agreement. They can also point to successful prosecutions of corruption which in previous decades would never have seen the light of day, such as the Montesinos case in Peru (exposing a thick network of corrupt transactions and reaching all the way to then President Alberto Fujimori) and the Elf Aquitaine case in France (the then state-owned oil company was at the centre of major international bribery cases ranging from Germany to Taiwan and parts of Africa and including some of the highest ranking officials and politicians in France). They can point to banking and accounting laws, such as the 2002 Sarbannes–Oxley Act of the United States, which make it easier for magistrates to find and sequester laundered money (Naylor 2002) or discover fraudulent transactions. Private enterprise has also initiated anti-corruption efforts, most notably the Extractive Industries Transparency Initiative (see below).

Regional or international economic integration has been a significant element in globalization. It has been said to reduce corruption, by improving norms of business and government practice and, through economic competition, making corruption’s drag on the economy more noticeable. These macro level trends may exist in theory, but at the micro level, they often fail to obtain. International economic integration tends to remove barriers to trade and increase economic competition but fails to install effective regulatory and enforcement agencies. Some have pointed to the EU’s Convention against Corruption as evidence that the EU promotes norms of clean government (Sandholtz and Gray 2003, 772; Gerring and Thacker 2005). But the Convention does not have the force of law, and it merely masks a more significant but informal convention, the one which agrees to tolerate corruption because to expose it would be to undermine further the tenuous popularity of EU institutions. If anything, the EU (to say nothing of the UN) should lead us to question whether international organizations promote norms of clean government.

The EU can serve as a microcosm of globalization: there is a fairly free flow of capital, labour and goods, with supranational oversight institutions, and a number of states which not only seem to have norms against corruption, but also score very high in international anti-corruption indices. Risks to corrupt activities would seem to be high. But, as the European Union’s experience shows, these risks may exist in theory, but not, at least for many years, in practice. The risks, so far, have been minimal: additional oversight is trivial, penalties negligible, and competitors seldom wind up having an incentive to protest malfeasance. Opportunities have the same source: an inadequate international legal system, enforcement largely left to the very governments which may be directly involved in corruption and low risk of discovery and penalty, partly because the states seldom if ever intervene in each other’s affairs. In addition, firms, including newcomers to a market, sometimes find it cheaper to pay a bribe as part of a collusive arrangement than to confront the costs of a competitive market. Indeed, contractors looking for more business may be willing to pay ‘commissions’, bribes or kickbacks in order to establish themselves in a new market. Also, due to their characteristics, some sectors do not have a plethora of available competitors, so those firms which enter the market can easily be incorporated into the corrupt distribution network.

Even if globalization is encouraging and facilitating some reduction in corruption, it is also doing the opposite, and it is worth understanding how that happens.

WHY GLOBALIZATION ENCOURAGES CORRUPTION

Competition and corruption

Globalization has brought more firms and governments from more parts of the world into more frequent contact for economic exchange. Corruption has followed. Firms do what is expedient for business, and if bribery lands contracts, gains market access and moves goods, whereas honesty doesn’t, the incentives to use bribery are strong. Western politicians and firms claim that bribery is a ‘must’ in many parts of the world; non-Western politicians and firms claim that their Western counterparts are only too ready to bribe. Either way, given the spread of capitalism and the growth of so-called emerging markets, there are more and not less instances in which ‘[p]owerful actors are motivated to penetrate government wherever possible, if not to gain privileged access to government contracts, then – and more commonly in the developed democracies – to affect the rules of competition in ways favorable to them’ (Warren 2004: 340).

Fierce competition by firms and their home states for export markets has given rise to markets which economists might say are characterized by ‘market failure’, particularly in the realm of infrastructure projects, arms and oil. I suggest that corruption is not in opposition to the export market, it is a feature, a tool, of it. The more profitable the market, the more demand there will be to participate in it, to gain a large share of it. As demand goes up (when, for instance, there are more competitors in the international construction industry and when traditional markets saturate), the price of getting into the market goes up. This includes legally permitted ‘offsets’, and also illegal bribes. In some sectors, such as the manufacture of commercial planes, arms, oil and utility infrastructure, the stakes (profits, rents) are very high; and firms and states have the perception that winning any particular contract is critical for gaining substantial market share and for maintaining and increasing domestic employment and economic growth. Because of that, as economic competition increases, firms are willing to pay bribes up to the point where the cost (including nearly negligible risks of prosecution) matches the profits. Their domestic governments are willing to overlook or indirectly subsidize the bribes (through export credits) in order to help their firms land contracts.

Competition carries with it countervailing pressures. More competition means that expenses, including taxes, matter more. This means, in turn, that firms have an increased incentive to bribe their way out of taxes; more competition also means that cartels have a higher value to all the firms which are included in them, even if, under the new trade regime, cartels run a greater risk of discovery and disruption (because more firms can try to enter the market; cf. European Commission 1997: 38–41).

Free trade and ensuing competition may not reach into all areas vulnerable to corruption. Even under competitive rules, states retain discretion over actions with large financial repercussions for firms, among them, tax decisions, zoning regulations, authorizations of the sale or purchase of arms etc. More free trade may spur demand for the development of agricultural land, which may require a change in zoning laws. Politicians on the relevant councils and committees may extract fees for their ‘services’.

Petty corruption, such as bribing customs officials, also thrives with globalization. Clearly, as competition gets keener, access to markets becomes more significant, so customs officials can charge more for access to that market. Recognizing and, in a way, legitimizing this practice, the OECD Anti-bribery Convention, as well as most national anti-corruption legislation, exempts from prosecution ‘facilitation payments’ to speed market access.

The apparent opposite of competition, economic and weapons embargoes, also facilitate the creation of new circuits of corruption.

Embargoes

Arms and other embargoes to lucrative (often oil) markets do nothing but force the (already prone-to-corruption) transactions market underground, making corruption inevitable. The corruption of the UN-run Oil for Food programme, for Iraq, is a stellar case in point. In addition, virtually all major arms exporting countries violated the UN arms embargo against Iraq; Iran benefited from an extraordinarily complicated evasion of weapons sale bans (courtesy not just of the United States and the United Kingdom, but France, Germany, Saudi Arabia and Israel). Bribes are paid not just to facilitate the sale between states but also to buy or reward the complicity of home country politicians. Firms take advantage of regional economic integration to use subsidiaries to move weapons which, when they leave one country, are usually declared to be going to a false destination (Marion 1990: 117–18).

Using corruption to promote national champions and institutionalizing the means to do so

Despite the fact that the largest firms based in any OECD country are usually multinationals and have their tax liabilities spread across numerous jurisdictions, domestic governments still regard them as their national champions. There has been a trend for states, in the name of the free market, prosperity and national defence, to promote their industries’ exports. This has two effects related to corruption: first, supply starts to push demand. Markets are created artificially, and states are tempted to bribe or condone bribes for the sake of their firms’ international market share. The corrupt practices of Elf, the French oil firm, the alleged corruption in, and the UK government’s quashing, of all efforts to investigate and make public findings about, major UK arms sales to Saudi Arabia, the huge infrastructure projects in less developing countries promoted by Western states and their construction industries, all illustrate this phenomenon of supply pushing demand, and an accompanying willingness to overlook corruption for the sake of market share. Second, the states establish institutions which facilitate networks between potential buyers and sellers, in order to support their export industries (Warner 2007).

Export credit guarantees to home firms and development aid to foreign governments are typical means by which the OECD countries have supported corruption in international economic transactions. While EU states have regulated themselves to limit state subsidies to their own industries, they have left the international market virtually regulation free.¹ Another government strategy for increasing domestic economic and political revenue, which is not technically corrupt but which can foster corruption, is increasing the level of aid given to a country in order that it can purchase weapons or infrastructure projects from the donor country. The United Kingdom provides an example of how it works. In 1988–9, the United Kingdom’s aid to Nigeria was £6.3 million. In 1989–90, UK aid increased tenfold, to £67.7 million. Also in 1990, the United Kingdom negotiated the sale of eighty ‘made in the UK’ Vickers tanks to Nigeria for at least £50 million. ‘A Whitehall spokeswoman said £59.4 million of this aid was to finance essential imports. She insisted there was no link between the aid increase and the arms deal’ (Elliott et al. 1994). Rather than force Nigeria’s corrupt president, the now late Sani Abacha, to pay for the tanks, or for the ‘essential foreign aid’ which the oil-rich country should not have needed, with funds he had sequestered in Swiss banks, by way of UK banks, the UK government coddled the Nigerian ruler, used public money to facilitate sales for the UK’s privatized defence industry and foisted the costs onto UK taxpayers. In essence, the scheme is not unlike that of politicians inflating a contract by an amount more than sufficient for the contractor(s) to pay the required kickback and make a hefty profit at the same time. Significantly, research by the NGO World Development Movement found that between the 1980s and 1990s, foreign aid to ‘eight of the largest buyers of British arms, including Oman and Indonesia, has risen while aid overall has fallen by 20 per cent. Last year alone, as aid to Africa was cut, ECGD [Export Credits Guarantee Department] increased by five times its financial backing for arms sales to “risky markets”.’ In 1984, India used its UK foreign aid to purchase 21 UK military helicopters. In 1993, two months after Foreign secretary Douglas Hurd promised Indonesia £500 million in aid, Indonesia agreed to a £65 million ‘soft loan’ for a power station (Bellamy 1994; Davis 2002: 125). This process appears to have accelerated as weapons sales became ever more competitive, and from the perspective of politicians, had the benefit of ostensibly providing business for their infrastructure contractors too. The system sets up an absurd cycle: for rulers of developing countries, the more subsidies there are for contractors, the more they will have bidders for their contracts, the more the bidders will be compelled, due to intense competition, to offer bribes. In addition, the cost effectiveness of such programmes is dubious at best, and the ease with which buyers can obtain weapons enables them to engage in behaviour which the export-credits are there to off-set: the risk for the sellers of civil wars, currency crises etc. (Cooper 1997: 143; World Development Movement 1995: 22). In 2005, the United States gave Pakistan $3 billion in military and economic aid to enable it to buy up to 24 F-16 jets, so Lockheed-Martin would have additional orders for a plant in Texas which Lockheed-Martin was threatening to close down (Financial Times 2005). For Lockheed-Martin, this has the added benefit of impelling Pakistan’s rival India to place a large order for F-16s.

Bad press and some effort to implement the OECD Anti-bribery Convention have prompted a number of states to make slight changes to their export credit guarantee practices. As an example, the UK’s ECGA now requires firms receiving funds to sign a document saying that they did not knowingly use bribes to obtain the contract to be subsidized by the ECGA. However, OECD states have done nothing to change their efforts to promote weapons sales, save disengage from some of the direct marketing, nor have they made changes in how they help their oil industries land contracts, or promote sales of other exports.

The banks of the OECD countries have long profited from their role as repositories for illicitly gained funds; globalization has only meant that they can now do so via offshore transactions (Naylor 2002; Palan 2004).

Incentives to government officials reward the status quo. First, it takes an enormous amount of time and money to investigate and prosecute corruption. Second, doing so renders public actions and expenditures that those involved might have preferred had been kept confidential. Firms and governments prefer that things such as amounts of bribes, names of intermediaries, remain secret. Third, prosecution of major multinationals is akin to biting the hand that feeds the politicians. Fourth, the OECD Convention’s mandate to prosecute despite possible economic repercussions loses out to the economic argument that if ‘their’ companies aren’t bribing, then rival states’ companies will anyway, and will therefore win the contracts. The ‘what’s good for the multinational is good for the domestic economy’ argument is irresistible to politicians, particularly when the corruption occurs offshore, out of sight of constituents and practically off limits to domestic investigative agencies. The same logic holds for the bureaucrats who supposedly regulate the industries in question. Fifth, even though globalization deterritorializes capital and sometimes culture, elections are still nation-state based. That goes for the European Parliament as well. Elections to it are still held by and within each member state; politicians do not run in transnational political parties, and the elections have become referenda on domestic politics, with jobs and the economy being key issues. Hence, the promoting of national industries is critical to the electoral success of politicians.

Exacerbating those pressures is the fact that globalization has not done away with one of the key factors fuelling corruption: the demand by politicians and parties for campaign and party financing. Many of the corruption cases in Western Europe have involved efforts by politicians and their parties to obtain more financing. When they are blocked from getting the funds legally, say, through caps on donations and limited state funding, they get it through requiring kickbacks on government contracts or retro-commissions from bribes paid for overseas contracts. While the percentages may or may not be large, ranging from 2 to 50 per cent, the more globalized economy has merely provided another realm from which funds can be purloined. Combine that with more sophisticated offshore financial sectors, and restricted jurisdictions of national judiciaries, and the result is anything but less corruption.

Corruption needs secrecy, and in many major international economic sectors, such as infrastructure projects, oil and arms trade, it has it, courtesy of ‘national interest’ and ‘defence secrecy’. With the exception of Sweden (after a 1986 arms export corruption scandal), OECD countries seldom fully disclose the terms of weapons sales. Information is provided ‘on an unofficial and selective basis’, oversight by elected parliaments is rare and media coverage is regarded as a nuisance, at best (Gibbs 1995; Davis 2002). Despite claims of being democratic, OECD governments keep to themselves information such as ‘to which countries and in what quantities goods such as artillery shells, land mines and cluster bombs have been licensed for export’ (British House of Commons 1996: pr. K8.13). Oil companies have protested efforts to have them ‘publish what they pay’ in bribes (always called commissions, see below) or reveal their financial circuits. A TotalFinaElf spokesman said that ‘Whether it’s the oil industry or any other industry, obviously you wouldn’t want your competitors to know what you pay. It’s not that we’re against it, or that there’s something to hide; it’s just the standard’ (International Consortium of Investigative Journalists 2002: 10). Infrastructure projects are seldom decided by transparent processes; with neither the governments nor the firms involved having an incentive to share their pricing and payment information with the public or each other. The legitimate procedures in place to maintain corporate secrecy provide a cover for corruption.

Even in a country with a stronger tradition than most of public oversight by way of parliamentary committees, the unwillingness to investigate possible corruption in overseas exports is strong. The economic and political costs are deemed too great. The United Kingdom has refused to make results public of one investigation into a shady arms deal with Saudi Arabia, on the grounds that the publication would have annoyed the Saudis, and terminated another on the grounds that it jeopardized jobs and national security. This is the same state that, in other contexts, lectures or ‘advises’ new democracies on the importance of transparency, openness and other anti-corruption policies in government and in economic transactions. As an OECD review noted (2005), the United Kingdom, for all its extensive overseas trade activities, had not yet investigated or prosecuted anyone for bribery of foreign officials.

Globalization and the market for bribes

In some ways, globalization has merely spread the knowledge that bribes are necessary to facilitate transactions. Often, these are euphemistically known as ‘commissions’. As one managing director of a UK weapons manufacturer said, ‘Commissions make the world go round. There’s nothing illegal about them. I don’t know of a [Saudi] Royal who’ll get out of bed for less than 5%’ (John Hoakes, of Thorn EMI, quoted in the Guardian, 14 November 1994). Some argue that commissions should not be called bribes, they are instead like brokerage or realtor fees – a payment to someone who makes a deal happen, who finds terms on which buyer and seller can agree. Yet commissions support corruption. When the commission is 25 per cent of the contract, and when it is not transparent where all the money from that commission goes, is it really just a commission? Commissions are used to purchase the award of contracts, even and often especially in competitive markets (where there is competition between suppliers). A French official in the finance ministry said that ‘They go up in certain Asian countries for some types of transactions, because there is very strong competition’ (Plouvier 1992). An industrialist noted that sometimes the commissions, which are often turned to private ends by the recipient, reach 45 per cent of the contract in highly competitive markets because it is necessary ‘to coax’ the client (Isnard 1998).

Globalization has not done away with the middlemen necessary to conduct corrupt international economic transactions. They advertise themselves as being connected to the right people in the right places and they stress that without their intervention, Western firms will get nowhere. They rely on the personalistic nature of much of politics and business, and given lack of familiarity and contacts in the countries in which they wish to land contracts, firms and states believe them. When an intermediary is paid a commission, he/she routinely gives part of it to key officials and leaders in the country awarding the contract. Often, part of the commission makes its way back to the home country by way of the foreign bank accounts of key politicians and industry leaders. For example, one of the French state’s oil company intermediaries, André Guelfi, estimated that of the $100 million Elf paid him in commissions for the various contracts he brokered, he spent $70 million paying third parties, including political leaders (Van Ruymbeke 2002: 372–87). Intermediaries also ‘isolate businessmen [and states] from unpleasant truths’ (Rose-Ackerman 1978: 193). Using an intermediary keeps the corruption at arms length. As a French exporter said, ‘One is not too curious neither about the real power that is behind [the deals], nor about the real recipient of the funds’ (Plouvier 1992). Commissions may reach extraordinary heights in order to buy the compliance of the intermediary. When the intermediaries become the targets of judicial investigations, they often find comfortable exile in an OECD country.

IS THE TIDE TURNING?

Corruption in international economic exchange thrives on a collective action problem: firms and governments might prefer not to pay bribes, so as to reap higher profits, but can’t trust others not to bribe. The OECD Convention is a case in point: 35 countries had signed and ratified it by 2004, a number too large for easy monitoring. Furthermore, within each state there are thousands of exporting firms, too many for effective monitoring by the group of each group member’s adherence to the agreement. As Transparency International (2002: 7) notes, ‘there are more than 60,000 multinational corporations operating around the world with more than 600,000 foreign affiliates’. The Convention’s failure is evident in statistics on bribe paying. Italy has ratified the Convention, but on a scale of 10–0, in which 10 is least likely to bribe, Italy’s firms are ranked 4.1; France’s 5.5; firms from the United States, notwithstanding its Foreign Corrupt Practices Act, 5.3; and Germany’s firms, 6.3 (Transparency International 2002). Construction and public works contracts are the sectors in which bribery was most likely to take place, followed closely by the arms and oil and gas sectors (these same sectors were judged, in that same order, to be those where the biggest bribes were made). Even though most of the EU countries have ratified the OECD Convention and agreed to an EU statement (with no force of law) about being opposed to corruption, international organizations are inherently bad at policing their members; enforcement is largely left to the individual, highly self-interested states’ authorities, who often find bribery for export market access an acceptable evil. And in this exemplar of international coordination to reduce bribery and corruption, even with external ‘peer’ review, some signatory states are uncooperative. The United Kingdom and Japan have recently been singled out as having poor enforcement records. Of the 35 signatories, only four have investigated or prosecuted more than one case.

It is tempting to think that corruption in the international political economy is at a tipping point: despite the many factors encouraging corruption, 30 OECD states and five others have signed on to the OECD anti-bribery convention, OECD firms are becoming aware of possible penalties, a few OECD states’ judiciaries are investigating and prosecuting egregious cases of bribery, some major firms, spearheaded by BP, have signed on to the Extractive Industries Transparency Initiative, the World Bank and the IMF have made corruption reduction a recognized policy area, and NGOs such as Transparency International and Global Witness have made corruption an international issue. Could it be that the tide is turning, and corruption will recede?

For that to occur, not only do states and firms have to recognize that bribery and corruption is not in their interest, but a major coordination problem has to be solved. International trade is interdependent on norms, not merely on economic and political conditions. The necessary coordination relies on a particular kind of interdependence: that of the expectations of each about the expectations and thus behaviour of the others involved in a transaction. In a tipping game, no one is willing to be first to abandon these practices: it would be irrational for any one firm to move unilaterally away from the status quo (Mackie 1996; Laitin 1994: 626). For firms and the Western states which back them up, the key assumptions that sustain the corrupt exchanges are: (1) firms believe they have to bribe in order to land contracts; (2) they want the contracts and know that other firms do also; (3) they think that if they do not bribe, they will lose to their competitors; (4) they believe there is a low risk of discovery and penalty and a high benefit of bribery and profit. For government officials who ask for bribes, the key assumptions which sustain the corrupt exchanges are: (1) if they ask for a bribe, firms will pay; (2) no risk or enforcement costs and penalties; (3) if they don’t, others will, thus putting them at a competitive disadvantage; (4) if one firm refuses to pay, another can easily be found that will. Some significant number of states including the significant world powers, and some significant number of firms, including the significant multinationals, would need to expect that others expect that the norm is uncorrupt interaction. They each and all would need to believe that the likelihood of others cheating (resorting to bribery and corruption) is extremely low, and very costly. There needs to be a convention shift. I suggest that this is not likely to obtain. The corruption abolition campaign has been limited in scope, ignoring as it does the WTO and the less developed countries, several key major powers have no scruples about using corruption to land contracts (e.g. India, China; Transparency International 2004), loopholes to the US FCPA and the implementing legislation of the OECD convention are plentiful, and enforcement has been erratic. Furthermore, to the extent that Western firms sign on to anti-bribery practices, that raises the profitability of bribery for those that do not, giving the latter a competitive edge, and thus impels the Western firms to find some way around the OECD Anti-bribery Convention. In contrast to other tipping games, it is not the case that the greater the proportion of firms and states which eschew bribery and corruption, the less are those activities advantageous in securing foreign contracts. While this may be contrary to economic wisdom, which holds that corruption is like an extra tax (in the long run everyone pays), it is in keeping with micro-economic and political logic. In the short run, powerful interests benefit, in part because they can shift the burden of the corruption tax onto others.

The much-touted US FCPA and the OECD Anti-bribery Convention have only as much bite as states wish to give them. Just as the United Kingdom has yet to prosecute anyone under its OECD legislation, the United States has only, since 1977, prosecuted 100 cases and many of those involve the same firms. That would indicate that penalties are quite low relative to the benefits of corruption, and that firms estimate they have a very good chance of being undetected. In addition, states themselves openly allow circumventions of the law: US firms can apply to the Justice Department and the Securities and Exchange Commission for permission to make dubious payments to foreign officials in order to land contracts. One such example is that of Goldman Sachs in 2004 getting permission to pay a $67 million ‘donation’ to Chinese officials in order to land a joint-venture banking operation there. The ‘donation’ was to help cover investor losses of firm which had gone bankrupt after embezzling most of its investors’ money. The donation, as it were, most likely went into a legal (for China) account before being dispersed to final recipients. In essence, Goldman Sachs could say they were not bribing foreign officials. However, the bankrupt firm, Hainan Securities, was completely unrelated to the securities firm Goldman Sachs was trying to set up, and yet had been linked to an official, Fang Feng Lei, to whom Goldman Sachs additionally made a $100 million loan and who was to be chairman of the new joint venture investment banking firm, Goldman Sachs Gaohua Securities (Barboza 2005). The US FCPA and the OECD Anti-bribery Convention may merely cause the corruption to go down one level, to where it is camouflaged by a variety of first order legal, albeit odd, transactions. States themselves establish complicated rules which legalize offshore banking and other financial transactions (Palan 2003).

Furthermore, the United States is undermining its efforts to compel other countries to abide by the OECD rules when it refuses to investigate corruption within the contracting practices of the Coalition Provisional Authority (CPA) in Iraq, when it ignores bribery and corruption allegations against Halliburton and its subsidiaries, when it condones or sponsors illegal drugs and weapons sales, and when it tries to block new governments in developing countries from re-visiting major contracts which may have been won by US firms through corruption. The United States has cleverly claimed that the CPA was not an arm of the US government because it was a multinational governing coalition (Hirsch 2005), so it has blocked the prosecution of firms which may have defrauded the US government of hundreds of millions of dollars. The senior army procurement officer who questioned the dubious practices of Halliburton and the contract award process has faced retribution, while the Republican Congressional majority has stymied efforts to investigate. By 2005, Halliburton had been awarded over $10 billion in US government contracts for reconstruction in Iraq, with at least 10 per cent of that being of questionable use or entirely unaccounted for (Bodzin, 2005; Griffiths, 2005; Waxman and Dorgan 2005).

In 1998, when Pakistan, under the new and short-lived government of Nawaz Sharif, challenged the Western-dominated electricity consortium Hubco for having allegedly bribed Pakistan’s previous prime minister, Benazir Bhutto, and for recovering those costs by overcharging on electricity rates, the World Bank, ten US Senators and the UK government, to name a few, intervened to block Pakistan’s efforts. Under the previous agreement, Hubco built, owned and operated a 1,200 MW power plant on the Hab river. Pakistan’s new audit agency, the Accountability Bureau, alleged that that Hubco’s project costs were inflated by over $400 million; there were other plausible allegations of kickbacks to Bhutto and her cohorts. (The Accountability Bureau had been established by Sharif to investigate corruption under Bhutto.) Spurred on by a US energy firm with interests in the project, and motivated by a similar situation in India involving now bankrupt Enron, the US Senators wrote to the World Bank, which had provided a controversial and scarcely used underwriting provision to cover approximately one-third of the $1.5 billion project (for reasons of ‘political risk’). In their letter, the Senators complained that Pakistan’s actions were part of ‘an alarming trend in several developing countries where federal and state governments use unproven allegations of corruption, collusion and even nepotism to rewrite existing commercial contracts’. The World Bank concurred (Fidler 2000; Hawley 2003). Once Sharif was deposed by military dictator and US ally Pervez Musharraf, Pakistan settled its dispute over the electricity rates and withdrew its case against the Hubco consortium and officials. The post-Suharto government of Indonesia faced a similar situation when it tried to renegotiate contracts that had all the hallmarks of Suharto’s corruption.

These examples show that the United States is undercutting the momentum towards an equilibrium shift to a much less corrupt international business environment. Corruption continues because firms and politicians correctly perceive that the level of coordination and cooperation needed to end bribery will not materialize. As a former Costa Rican prosecutor said of several major corruption cases that occurred in Costa Rica in the early 2000s, ‘Corruption continues to be to world business what doping is to high-level athletics and sports. Many enterprises are aware of the risks of corruption, and have probably the will to renounce to it, but only if all other competitors also give up kickbacks to get contracts’ (Godoy 2004).

Yet what are the possibilities for such a shift taking place in particular economic sectors? Take, for example, what might be a tipping game in the energy and mining sectors. The corrupt way of doing business is being challenged by several NGOs and a core of extractive industry firms, such as BP. Through the Extractive Industries Transparency Initiative, allegedly launched by the Blair government but apparently more the work of BP, some of the extractive industry firms have succeeded in getting several countries to agree to publish what they receive for mining and oil concessions, and several firms to agree to publish what they pay for those. Participation is far from universal or inclusive, and has no enforcement or penalty mechanisms. It is unlikely to alter the current ‘rules’ in the extractive industries game, which stipulate that the firm which does not bribe does not do business. Combined with secrecy incentives in the West, firms doing business in less developed countries may have little incentive to ‘publish what you pay’ for access to a market, for landing a contract: when BP did so, it was almost thrown out of the Congo; its competitors, unwilling to do so, were not. The Congo has not signed on to the EITI; at the time of writing, only five have (Azerbaijan, Ghana, Kyrgyz Republic, Nigeria, and Trinidad and Tobago), and only two other countries (Peru, and São Tomé and Príncipe), as well as the Congo, have engaged in tentative negotiations. Conspicuously absent from the companies which have signed onto the agreement are ENEL/ENI, the Italian energy conglomerate, China’s national oil company (China National Petroleum or Sinopec) and Japan’s (Japan National Oil Corporation).

Despite this somewhat discouraging start (though some would say that it started at all is encouraging), a tipping game may be possible, with a shift from opaque to transparent practices within particular countries. Why? Because in any one country, the signatory government and a prominent set of companies have declared a change in practices. This is one of the key components of creating the coordination of expectations necessary to tip the balance. The signatory countries have agreed to independent audits adhering to internationally recognized standards, in order to reconcile payments and revenues. Granted, this is an unstable condition, and any number of factors could defeat the coordination of expectations. There are no enforcement mechanisms, and a secret bribe from one of the non-signatory companies could sway the leadership, or one of the signatory companies may decide the EITI is not credible, and so will return to secrecy. Furthermore, if politicians and officials in other countries are ‘benefiting’ from corruption, why should the elites of any one country forgo it?

It may be that anti-corruption efforts will have to proceed sector by sector. There is less chance it will happen in the large infrastructure sector, since that would be covered by WTO rules, and the WTO has, for various reasons, studiously avoided anti-bribery and corruption campaigns and rules (Abbott 2001).

CONCLUSION

As globalization has shown, corruption is not something that is automatically swept away by it. Reducing corruption requires a concerted effort by activists, judiciaries, industries and politicians. Yet the efforts of the former two are often stymied by the interests of the latter two. Industries will refuse to use bribery only when the risks of being caught, and the penalties applied, are quite high relative to the potential profit of bribery. In light of the enormous number of transnational transactions which occur on a daily basis, versus the number of investigations and prosecutions of bribery, the risks are still quite low. Penalties applied are, in most cases, trivial, and are likely to remain so. Politicians will only crack down on bribery when doing so does not affect their ability to raise campaign funds, does not hamper their national champions in the global market and has some value at the polls. Globalization has not enabled politicians to raise more campaign and party financing legally, it has only increased the extent to which politicians must cater to their nationals (multinationals) in order to retain some jobs and tax revenue in their districts, and has not altered the fact that corruption is seldom the key concern of voters when they go to the polls. And for those countries which are not electoral democracies, globalization has yet to penalize the kleptocratic behaviour of their leaders. Finally, it has not altered a fundamental aspect of economic and political activity: firms competing for business and politicians competing for power can, through corruption, give each other what they want. The firms get exclusive contracts and market access, the politicians get resources which facilitate their bid for power.

Note

1 There has been pressure in recent years to reach agreements limiting export subsidies, but, as usual in international accords, the rules and enforcement provisions are weak. Aid which is given with strings attached (for example, funds for a project are donated with the restriction that the receiving country award contracts for the project exclusively to firms from the donor country) has been exempt from the rules (Moravcsik 1989: 181).

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Further reading

Della Porta, D. and Rose-Ackerman, S. (eds) 2002. Corrupt Exchanges: Empirical Themes in the Politics and Political Economy of Corruption. Baden-Baden: Nomos Verlagsgesellschaft.

Elliott, K.A. (ed.) 1997. Corruption and the Global Economy. Washington, DC: Institute for International Economics.

Warner, C.M. 2007. The Best System Money Can Buy: Corruption in the European Union. Ithaca, NY: Cornell University Press.