Corruption: Myths & Realities in a Developing Country Context Ngozi Okonjo-Iweala The Second Annual Richard H. Sabot Lecture June 2007 The center for Global Development e Richard H. Sabot Lecture Series e Richard H. Sabot Lecture is held annually to honor the life and work of Richard “Dick” Sabot, a respected professor, celebrated development economist, successful Internet entrepreneur, and close friend of the Center for Global Development (CGD) who died suddenly in July 2005. As a founding member of CGD’s Board of Directors, Dick’s enthusiasm and intellect encouraged our beginnings. His work as a scholar and as a development practitioner helped to shape the Center’s vision of independent research and new ideas in the service of better development policies and practices. Dick held a Ph.D. in economics from Oxford University; he was Professor of Economics at Williams College, and he taught at Yale University, Oxford University, and Columbia University. He made numerous scholarly contributions in the fields of economics and international development, and he worked for ten years at the World Bank. e Sabot Lecture series hosts each year a scholar-practitioner who has made significant contributions to international development, combining, as did Dick, academic work with leadership in the policy community. In 2006, the Sabot Lecture was delivered by Lawrence Summers, Charles W. Eliot University Professor of Economics at Harvard University. We are grateful to the Sabot family and to CGD board member Bruns Grayson for support to launch the Richard H. Sabot Lecture Series. Ngozi Okonjo-Iweala Ngozi Okonjo-Iweala is Managing Director of the World Bank, overseeing the bank’s Africa region and South Asia, Europe and Central Asia region. From 2003 to 2006, she served first as Finance Minister and subsequently as Minister of Foreign Affairs of the Federal Republic of Nigeria. As Finance Minister, Okonjo-Iweala led the Presidential Economic Team, responsible for implementing a comprehensive home-grown economic reform program that fought corruption, stabilized the macro-economy, and tripled the growth rate to an average of 6 percent per year over three years. She was the lead negotiator in the cancellation of US$18 billion, or 60 percent, of Nigeria’s external debt with the Paris Club. Okonjo-Iweala oversaw Nigeria’s first ever sovereign credit rating from Fitch and Standard and Poor’s—a rating that grouped Nigeria with other emerging market countries such as Vietnam, Venezuela, and the Philippines. Prior to her role as Finance Minister and Minister of Foreign Affairs, she served 21 years as a development economist at the World Bank, working in the East Asia, Middle East and Africa regions. She held the post of Vice President and Corporate Secretary. She also served as Director of Institutional Change and Strategy (1995–1997). In this post, she assisted with the implementation of the Bank’s reform agenda. From 1989 to 1991 she was Special Assistant to the Senior Vice President, Operations, an assignment that enabled her to help formulate World Bank policy for many countries, from China to Burkina Faso. Okonjo-Iweala is the recipient of numerous honors and awards, including four honorary doctorate degrees, Euromoney Finance Minister of the Year 2005, and Forbes 100 Most Powerful Women in the World 2006. Okonjo-Iweala attended Harvard and received a Ph.D. in regional economics and development from the Massachusetts Institute of Technology. Ngozi Okonjo-Iweala | 1 Corruption: Myths & Realities in a Developing Country Context I am pleased to have this opportunity to deliver the second Richard H. Sabot Lecture at the Center for Global Development. Given his interest in examining diverse issues such as the role of government policy and markets in contributing to the East Asia miracle, Dick Sabot demonstrated that he was very concerned about understanding the conditions needed for growth and development in low-income countries. Indeed it was very fitting that last year Professor Larry Summers delivered the first Sabot lecture, “Harnessing the Development Potential of Emerging Market Reserves.” e first lecture focused on an important and pressing public policy issue of the day. Today, I have been asked, or press ganged, by Nancy Birdsall to focus on another critical and pressing public policy issue for developing countries, which I believe Dick Sabot would have approved of: “Corruption—Myths and Realities in a Developing-Country Context.” In this lecture, I would like to take a more in-depth look at corruption, and the way it undermines development in poor countries. In the course of the lecture, I will touch on this idea of myth and reality: What are the easy assumptions on corruption? And what are the realities? Are we focusing adequately on important aspects of corruption? What solutions can one proffer to guide developing countries with very weak institutions such as we find on the African continent? And what can be done and what has been done as good practice to tackle corruption in developing countries? The Effect of Corruption on Governance and Growth It is probably best to begin with definitions—and to lay out what is meant by the interrelated terms, corruption and good governance. According to a recent report prepared for the United Nations Development Programme (UNDP) by Professor Rose-Ackerman, Corruption is a symptom of something gone wrong in the management of the state. When institutions designed to govern the relationships between citizens and the state are used instead for the personal enrichment of public 1 UNDP, “Corruption and Good Governance,” Discussion Paper 3, Management Development and Governance Division (New York, 1997). 2 | Second Annual Richard H. Sabot Lecture [and I would add private ] officials, then you have corruption and the provision of benefits to the corrupt. (UNDP, 1997; pp vii) 1 e World Bank notes simply that corruption is the outcome of poor governance. Viewed in its broadest sense, corruption is simply the misuse of public office or public assets for private gains. It is also the misuse of these assets in a way that creates an unlevel playing field and which makes people feel that injustice has been done. Perhaps this is why average citizens in any country—in fact we all—feel so badly about corruption. Corruption may be manifested in various forms such as theft, fraud, bribery, extortion, request for kickbacks, nepotism, patronage, and so on. A distinction is often made between grand and petty corruption. In the case of grand corruption, big businesses are seen greasing the palms of senior state officials to receive favors. And in petty corruption, junior civil servants may be enticed to receive side payments or bribes to facilitate administrative arrangements for their clients. e existence of corruption clearly indicates that something is gone awry. And it is indeed symptomatic of weak governance and more importantly weak institutions. Of course, the desired outcome is that of good governance—a situation in which public institutions are strong and public resources and public goods and services are managed efficiently to address the needs of society. In the past, some skeptics often provided a rational defense for corruption based on economic efficiency arguments. It was argued that bribes helped in lowering the cost of doing business, in clearing the market, in providing incentive bonuses, and in distributing monopoly rents from a single agent to other officials who collude in sharing a bribe. ese are all interesting economic arguments which merit some discussion. For example, it has been argued that in an environment where there are restrictive or bureaucratic government procedures—such as bottlenecks in paying taxes, burdensome customs procedures, or difficulties in obtaining licenses—bribes could actually provide an efficient way of reducing burdensome transaction costs. Similarly, in cases where a government needs to 1 UNDP, “Corruption and Good Governance,” Discussion Paper 3, Management Development and Governance Division (New York, 1997). Ngozi Okonjo-Iweala | 3 allocate a scarce resource to various private agents, a bribe payment may help the market to clear more efficiently by allocating the resource to the highest bidder. Bribes could also be explained as a rational incentive bonus to public sector workers whose wages may be artificially depressed. And finally, some scholars have also argued that bribe payments ensure distribution of monopoly rents among other private agents participating, for example, in a large procurement contract or perhaps in the sale of some government asset. 2 Some literature even showed evidence of growth and economic development in countries with high degrees of corruption (such as Indonesia under Suharto, Bangladesh, and China) as evidence that corruption had a limited or ambiguous impact on growth. e problem with many of these arguments above is that they point to the microeconomic efficiency of an isolated corrupt event without examining its long- run systemic impacts. In the long run, widespread corruption often creates much larger negative externalities which could hinder the long-term dynamic efficiency of an economy. We understand this in Nigeria and many other countries in Africa where we have long struggled with systemic corruption that has diverted resources, corrupted values, and led to rent-seeking activities in place of productive ones. Corruption Undermines Growth and Poverty Reduction Let me share with you four corruption tales to illustrate or illuminate how corruption totally undermines growth and poverty reduction. e first concerns the wholesale theft of public monies and it is the first Abacha tale. In August 2004, Swiss authorities accepted the argument of Nigeria’s lawyers that there existed an Abacha criminal organization whose purpose was to engage in the looting and laundering of Nigerian public funds. With this acceptance of a long-fought, five-year battle to prove the criminal origin of corruptly acquired Abacha monies, the Swiss government agreed to repatriate about US$505 million of frozen Abacha funds back to Nigeria in 2005 and 2006.