Accountability and Transparency: Economic and Political Costs of Corruption

Speech by Chris Huhne MEP delivered to the EU-Japan journalists conference at the New Otani, Fukuoka, Japan on Wed 7th Apr 2004

Corruption is endemic. It never goes away in any society. My first personal experience of it was seeing Indian farmers trying to get their cane cages of poultry onto a train bound for the weekly market at the local market town. There were too many, but only one price. How was the guard to decide? He took baksheesh to let some on and not others. In this case, the result may even have been economically beneficial as the farmers with the best expectation of getting the highest prices probably paid the highest baksheesh. But that case slips easily into the abuse of political power to extract bribes at any time, whether the guards van is full or not. And that is where serious economic and political costs begin to be paid. Bribery is no longer an allocation mechanism, but a means whereby significant waste and underused resources are imposed on society.

Nor is this by any means a public sector phenomenon uniquely. My second experience of corruption was at the privately owned Independent newspaper, which I joined in 1990 after it had been going for a few years. We took delivery of some very fine looking bright red office chairs, organised by the lady in charge of running the office. At the same time, she took delivery of a large and shiny new BMW. Some months later, the backs of these chairs proceeded to fall off at an alarming rate, and office gossip was full of the long interview between the lady and then then editor Andreas Whittam Smith, and she left the company along with her BMW. Nothing proven. Nothing publicised: after all, we had shareholders too.

Indeed, private sector corruption - and the abuse of shareholders' money by private managers - can be every bit as important as the abuse of public money. This can particularly be the case at the top of the business cycle when the profits are coming in so thick and fast that no-one is much minded to ask whether some shavings are dropping off on the way. Look in the US at Tyco, Global Crossing, Waste management, Enron. Look at Parmalat in Europe. Look now at Conrad Black's control of Hollinger: where the issue is payment of money owned by the publicly quoted company to private persons and the companies that they control, whether through direct cheques, the false sale of services, or the under-valuation of sold assets.

The exercise of power over large contracts is bound to lead to the opportunity for corruption, which is why in every country construction contracts, with their seductive mixture of politics and private money, are a magnet for problems. Here in Japan, there were the big examples of Lockheed and Recruit. In Korea, there have been cases of corrupt payments to waive safety regulations on buildings, a particularly odious example. There were also such allegations following the earthquake hitting Kobe.

A focus on corruption is not a first world conspiracy. In Nigeria, there was a culture of gift giving before the excesses of the Abacha regime, but traditional gift giving became an embarrassment if the gifts were too large. And they were always in public. There were no numbered Swiss bank accounts in traditional African society. But there are also clear differences in corruption between countries. Inevitably, our knowledge of this is second hand and impressionistic. There can be no firm figures on bribes offered or taken. But the league table of Transparency International is a start. It is based on the perceptions of business people, academics and risk analysts. It has some surprises, but not that many. Top is Finland, followed by other Nordic countries and northern European countries. Indeed, in Europe, there is clearly an olive tree line. The northern European countries are relatively 'clean'. Then south of the olive tree line there appears to be more social tolerance of corruption. France and Spain fall just below Japan at 23rd place. And Italy comes in at 35th out of 133 countries assessed last year, regarded by the business community as more corrupt than Oman, Qatar, Uruguay, Bahrain and Botswana. In Asia, Singapore is a star performer at fifth in the global league table, followed by Hong Kong at 14th place. Korea is a singular laggard at fiftieth, tied with the worst performing of the existing EU member states, Greece.

How much does corruption matter? First, it matters economically. World Bank research suggests high corruption is like a marginal tax rate reducing incentives to take risks and produce: you will not get the rewards of your work. This may effect growth by between 0.5 and 1 per cent a year. Secondly, it will hit foreign direct investment. If there is no confidence in the rule of law, and in the predictability of costs, these uncertainties will communicate themselves in a greater reluctance to invest. Then corruption also matters politically, although this is harder to measure. Public willingness to pay taxes, for example, may be corroded if there is a belief that politicians are on the take. There have even been examples of spectacular public backlashes against what were perceived to be excesses, such as here in Japan where there was a customer boycott of the Sogo department store when the Government proposed to bail it out on what were assumed to be improper motives. There have also been explosions of public disquiet at money politics in Thailand. Corruption clearly has political and economic ill effects.

The great turning points in the battle against corruption tend to be driven by a some public outrage led by press discovery and criticism. In my own country, both the civil service and the military were notoriously corrupt until well into the nineteenth century. Commissions in the army were bought and sold. Only the scandals surrounding the conduct of the Crimean war from 1854 to 1856 created enough public furore to ensure a real reform of the system, and the public momentum for that change came about in large part due to campaigning articles written by W.H. Russell in the Times. The civil service was also notoriously corrupt, with many officials seeing particular public offices as a licence to line their own pockets rather than promote the public good. In the civil service, the Northcote-Trevelyan commission of 1854 proposed reforms that began to be implemented the following year with the first regular system of competitive entry into the civil service organised by a civil service commission.. Perhaps just as importantly, the civil service was paid well with regular salaries, whereas in previous periods public servants had often lived by levying fees for their services and keeping the money.

This, by the way, was also an important turning point for one of the best examples of turnaround in Asia, which was Hong Kong. The Independent Commission against Corruption was set up in 1973 because of outrage concerning publicity over pay-offs to police, and has had a particularly successful record of changing both reality and perception. The ICAC, more controversially, benefited from special powers to make bank enquiries and compel information to be given under oath. It was crucial that it was seen as independent of the agencies that it was investigating: a previous Anti Corruption Office within the police force in Hong Kong fell foul of corruption itself. Not only did the ICAC address public sector corruption, but it has also extended its reach into the private sector, notably with early attacks on building licenses for sub-standard construction. Best practice guidelines spell out how to limit the possibilities for corruption through proper tendering, transparency at every stage, and committees rather than individuals responsible for key decisions. Along with paying reasonable salaries, such measures raise the costs of potential corruption and help to starve it out. The ICAC's watchwords are prevention, eradication and education.

So the first and key lesson is to stop believing that the best course is to hide the problem - 'don't wash your dirty linen in public' as the English phrase goes. Transparency is the enemy of corruption because it mobilises public support against it, and makes clear where the public interest lies. It does, though, lead in the short term to bad publicity: as with the 'mani pulite' and 'tangentopoli' campaign run against the Mafia in Italy by amongst others my European Parliament colleague Antonio di Pietro, the revelations feed anxiety. Instead, they should be taken as the first signs that the system is beginning to heal itself.

In a seriously corrupt society, the second issue is whether there is the political will from the top to implement a campaign against corruption, and to provide investigators with the means on a sustained basis to do so. The third is that those investigators are clearly independent and incorruptible themselves, a situation that can only be assured if there are reasonable checks and balances such as judicial and parliamentary review. Perhaps crucially too, a culture of personal and political responsibility has to be encouraged. That is crucial, because the most corrosive feeling for any reform of a problem is that it cannot be dealt with. It is inevitable. Unknowable. A fact of life.

Ultimately, the press and public opinion have to hold politicians accountable for failings in their areas of responsibility. There was a very good example of this recently in the European Union. We have been fighting a battle for some years to curb corruption and other mispayments in parts of the EU budget, which has not been signed off now as a true and accurate statement of the facts for eight years by the EU Court of Auditors. Yet problems recently came to light in another area of the budget - the statistical service, Eurostat - in which payments were made irregularly through unauthorised bank accounts to companies providing services. There is as yet no evidence of personal gain. But the immediate reaction of the Commissioner responsible, Pedro Solbes, was to say that he did not know what was going on and so could not be held responsible. To me and to my group, that seemed precisely wrong. He should accept responsibility because it was in his area of action, and at the very least represents a failing of oversight. What signal is sent out to the next commissioner in charge of eurostat if he or she knows that failings will have no personal cost?

A failure to act is every bit as damaging as a deliberate hurt. And a failure to act against corruption ultimately corrodes the whole basis of trust in society - the essential social contract of Rousseau. We put up with those who have power so long as they deliver better than the others. When they stop delivering, we can and should stop putting up with them. Different societies have different views of what is politically acceptable behaviour. But at the limit, at some point, every society turns round and says 'that was too much'. Corruption - the creaming off of economic rents - becomes in itself a destructive force within society as it erodes the confidence and faith that people have that they are not so much well governed, as at least governed in reasonably good faith. Mistakes may be made. In fact, mistakes will be made. But they should be honest mistakes made by people trying to do an honest job.

Chris Huhne MEP is the economic spokesman of the European Liberal Democrats in the European Parliament. Before his election in 1999, he was the head of country risk (sovereign ratings) at Fitch ratings and assessed good governance across the globe.