The collapse of central planning in the late 1980s and the need for the international community to assist these countries in making a successful transition to democratic forms of governance and economies based on market principles made it glaringly clear that it would take far more to do so than “getting inflation right” or reducing the budget deficit. Literally overnight, the economics profession was forced to confront a much broader set of issues beyond conventional macroeconomic policy. Related to the demise of central planning, the end of the Cold War had clear cut implications for the willingness of the international community to turn a blind eye to glaring instances of corruption in places where ideological loyalties had led to episodes of collective blindness. By the late 1980s, for instance, Mobutu was cut off by the donor community, no longer willing to quietly reward him for his persistent loyalty to the West during the Cold War.
A second factor was growing frustration with the plight of people in Africa and other parts of the developing world. Gains in the global fight against poverty had begun to bear some fruit but these were largely concentrated in China, with Africa actually seeing further increases in the number of poor. I was an economist in the IMF during the late 1980s and early 1990s and distinctly remember efforts by the IMF staff—particularly in Africa—to look beyond macroeconomic stabilization to issues of structural and institutional reforms and corruption could no longer be ignored.
A third factor had to do with developments in the academic community. In particular, research on the importance of property rights, education and training, and institutions, including some empirical work which began to suggest that differences in institutions appeared to explain an important share of the growth differential between countries, and therefore have an influence upon countries’ growth performance. (For a nice survey see, for instance, Acemoglu et. al., “Institutions as the Fundamental Cause of Long-Run Growth”, in Handbook of Economic Growth, Elsevier, 2004). For a growing number of economists corruption began to be seen as an economic issue and this led to a better understanding of the economic effects of corruption, a topic to which we will turn in a future blog.
Also playing an important role was the intensification, beginning in the 1980s, of the pace of globalization. Globalization and its supporting technologies have clearly led to a remarkable increase in transparency and to people’s demand for openness and greater scrutiny. The multilateral organizations were not immune to these influences. How could one ignore or fail to see the stashing away of billions of dollars of ill-gotten wealth in secret bank accounts by the world’s worst autocrats, many of them long-standing clients of these organizations?
In parallel to these developments and further raising international public awareness of corruption, the 1990s witnessed a large number of scandals involving major political figures in some form of bribery or corruption. In India and Pakistan the prime ministers were defeated largely because they were dogged by corruption charges. In South Korea two presidents were jailed following disclosures of bribery, while in Brazil and Venezuela bribery charges resulted in the presidents being impeached and removed from office. In Italy, Italian magistrates sent to jail a not insignificant number of the political class, who had ruled the country in the post-war period, and exposed the vast web of bribery that had bound together political parties and members of the business community. There was less progress in Africa but, without question, corruption became harder to hide and the new technologies of communication proved a useful ally of increasing openness and transparency.
A related development pertains to changes in the global economy, which significantly boosted the perceived importance of productivity as a primary engine of prosperity. Globalization highlighted the importance of efficiency. Countries could not hope to maintain their presence in the global economy and compete in an increasingly complex marketplace, unless they used scarce resources effectively. And the prevalence of corruption definitely detracted from this. Furthermore, business leaders began to speak more forcefully about the need for a level-playing field and the costs associated with doing business in corruption-ridden environments.
In the 1990s the United States government made efforts to keep the issue of corruption alive in its discussion with OECD partners, further raising international awareness. The Foreign Corrupt Practices Act of 1977 had forbidden American businessmen and corporations from bribing foreign government officials, imposing stiff penalties, including prison terms, on those engaged in the paying of illegal bribes. Because other OECD countries were not subject to such restrictions—in fact, the payment of bribes continued to be tax deductible in most other OECD countries, as a cost of doing business abroad—American companies began to complain that they were losing business to OECD competitors. Academics sifting through the data showed that following passage of the Act, U.S. business activities abroad declined substantially, as the Act had actually helped to undermine the competitive position of American firms. These developments gave considerable impetus to U.S. government efforts to persuade other OECD members to ban bribery practices and in 1997 the OECD adopted the Anti-Bribery Convention, an important legal achievement.
Also contributing to this shift in attitude was the work of Transparency International (TI) and the publication, beginning in 1993, of its now well-known Corruption Perceptions Index (CPI). That corruption existed everywhere was a well-known fact. What TI showed was that some countries had been more successful than others in curtailing it. The work of TI helped greatly to focus public attention on the issue of corruption and contributed to legitimizing public discourse on issues of corruption and thus eased the transition by the multilateral organizations into doing the same.
Transparency International was soon assisted in its efforts by the international organizations themselves. At the IMF/World Bank meeting in 1996 the Bank president, James Wolfensohn, gave a speech in which he did not mince words, saying that there was a collective responsibility to deal with “the cancer of corruption.” More important, Mr. Wolfensohn gave strong backing to Bank staff efforts to develop a broad range of governance indicators, including those specifically capturing the extent of corruption. This was an extremely important development because it made it possible for the Bank, through the use of quantified indicators and data, to focus attention on issues of governance and corruption while at the same time not appearing to interfere in the political affairs of its members.
While the above goes some way to explain what contributed to shift the thinking about the importance of corruption, in our next blogs we will examine three additional issues: what are the sources of corruption, what is the economic impact of corruption and what can be done about it?