Minimizing Corruption Risks to Support Economic Growth

Minimizing Corruption Risks to Support Economic Growth Brian Pinkowski, J.D. 1 and Michelle Pinkowski, J.D. 2 Abstract: Many have speculated over the past 12 months that the economic power of Brazil, Russia, India and China (BRIC countries) shows signs of weakening. Can they continue their expansion? Will they lift the global economies out of the current and grinding economic troubles? Or will they falter and succumb to the global economic challenges of the day? As might be expected in rapidly evolving economies, corruption among the civil service institutions is frequently alleged to be part of the problem that puts these countries at risk. This paper examines, from a high level, some of the corruption challenges being tackled by the BRICs and from these, offers guidance from the lessons of the BRICs for developed and emerging economies, as well as fragile states. Key Words: Anti-Corruption, Corruption, BRICs, Civil Service, Civil Service Reform The Economic Power of the BRICs Many have speculated over the past 12 months that the economic power of the BRIC countries may be weakening. Can they continue their expansion? Will they lead the way out of the global economic crisis? Or will they falter and succumb to the global economic challenges of the day? As might be expected in rapidly evolving economies, corruption is alleged to be part of the problem that puts these countries at risk. This paper examines some of the corruption challenges being tackled by the BRICs and from these offers recommendations from the BRICs experience that can be used in developed and emerging economies as well as fragile states. The term BRIC was first used by Jim O Neill in the Goldman Sachs publication, Global Economics Paper, Building Better Global Economic BRICs 3 in reference to the rapidly developing economies of Brazil, Russia, India and China. Using purchasing power ranking, the size of BRIC economies were valued significantly above their GDP ranking. In both demographic and economic terms, these countries are among the largest in the world. In financial terms, they dominate the emerging market economies. 4 Some economists now suggest that the BRIC cluster should be expanded to include other large, developing economies with a significant manufacturing base, such as Indonesia, South Korea, South Africa, Mexico and Turkey. 567 The impact of the Global Financial Crisis of 2008 and ongoing economic troubles in the Eurozone have significantly impacted the ability of BRIC nations to pursue rapid export-oriented economic development. In The Growth Map: Economic Opportunity in the BRICs and Beyond, O Neill expands upon his original assessment of the BRICS and states that the average annual real GDP growth rate of all the BRIC countries has exceeded almost all of the G-7 countries between 2000 and 2011. 8 Economic growth has been linked to the development of institutional frameworks and civil service reform in particular. 9 Each of the BRICs has been undergoing significant civil service reform in the last ten years. 10111213141516 Notwithstanding these efforts, data from the World Economic Forum

suggests that the goals of such reform have not fully matured and there are concerns about significant remaining inefficiencies, including those caused by corruption, that have a dampening effect on economic development. 17 Perception of Corruption in the BRICs While news accounts and public allegations abound, it is, in actual fact, very difficult to assess the level of corruption in a country. Because of its very nature, people do not discuss their illegal acts openly. Transparency International uses perceptions of corruption as part of the basis for its Corruption Perception Index ( CPI). 18 In TI s own words: Over time, perceptions have proved to be a reliable estimate of corruption. Measuring scandals, investigations or prosecutions, while offering non-perception data, reflect less on the prevalence of corruption in a country and more on other factors, such as freedom of the press or the efficiency of the judicial system. TI considers it of critical importance to measure both corruption and integrity, and to do so in the public and private sectors at global, national and local levels. The CPI is therefore one of many TI measurement tools that serve the fight against corruption. 19 The positive thing about the CPI is that it attempts to provide some numerical basis for measuring perceptions of corruption and change. It strives to lift the issue beyond gossip, journalism and the general complaints people may have about their government. The unfortunate thing about the CPI is that it is not a tool that is suitable for trend analysis or for monitoring changes in the perceived levels of corruption over time for all countries. 20 This is because year-to-year changes in a country/territory s score can result from a change in the perceptions of a country s performance, a change in the ranking provided by original sources or changes in the methodology resulting from TI s efforts to improve the index. 21 Despite this admonition from TI, it is almost impossible to bypass the opportunity to compare the relative scores of countries over time. The following table shows the relative rankings of the BRICs among countries included in the Corruption Perception Index. On this list, the 1st position means that the country is perceived to be very clean. The 183 rd position means that the country is perceived to be the highly corrupt as compared to all countries included in the survey. In 2011, for example, Brazil was perceived to be the least corrupt of all the BRICs, while Russia was perceived to be the most corrupt. Table 1: Transparency International s Corruption Perception Index Rankings for the BRICs Brazil Russia India China Indonesia 2001 46 79 71 57 88

2002 45 71 71 59 96 2003 54 86 83 66 122 2004 59 90 90 71 133 2005 62 126 88 78 137 2006 70 121 70 70 130 2007 72 143 72 72 143 2008 80 147 85 72 126 2009 75 146 84 84 111 2010 69 154 87 78 110 2011 73 143 95 75 100 Note: this is an inverse graph, where rising numbers indicate an increased perceived level of corruption as compared to the other countries in the survey. The data above tracks fairly well against the publically known efforts of these countries to develop important internal and external frameworks to fight corruption in a manner that assists the international community in the fight against international organized crime. Brazil, for example, has been leading the BRICs in the drive toward coming in line with the OECD Anti-Bribery Convention and the United Nations Convention Against Corruption. 22 Both Russia and Indonesia have been struggling with needed promulgation and implementation of legal measures to combat corruption. The difficulty of these efforts is reflected in the TI scoring Civil service reforms will play a role in corruption prevention. Qobo from the South Africa Policy Initiative sums up the intersection between corruption and civil service reform in plain language:

Companies from western countries are known for greasing palms to facilitate access to largescale procurement contracts. Comparatively speaking, the BRICs are the worst cases. On a recent visit to India, which coincided with the BRICs summit in New Delhi, I noticed that the most exciting point of conversation among citizens was not the summit but how to rid the country of corruption. In India, about 15 whistle-blowers have died since 2010. Sectors prone to corruption are real estate, construction, telecoms and social development. A common denominator in the corruption affecting these sectors is the government bureaucracy. Russia is gaining notoriety as a mafia state. The cocktail of corruption and a web of incestuous relationships between government officials and big business make Russia an impregnable fortress for foreigners who want to do business there. Andrei Kostin, the CEO of VTB, Russia's second-largest bank, said recently: "I think corruption and bureaucracy are much worse evils today", and noted it is much the same in China. Russia's endemic corruption has prompted some western multinationals to cut back on expanding their activities in the country or consider pulling out altogether. It is only recently that the Chinese political elite has started to take serious action on corruption. Addressing his cabinet this week, Premier Wen Jiabao remarked that corruption is "the greatest danger facing the ruling party. If this issue is not resolved, the nature of political power will change". The Chinese elite is grasping that the writing is on the wall and the masses are growing restive. Last year, China's central bank published a report, which it later withdrew, claiming that thousands of corrupt officials had stolen more than $120bn since the mid-1990s and fled abroad. Liu Zhijuan, the minister responsible for high-speed railways in China, was fired last year for receiving $152m in bribes and keeping 18 mistresses, according to a government document. Although Brazil comes out better than the rest of the BRICs countries in its crackdown on corruption, this problem remains intractable in its public sector. When President Dilma Rousseff took office a year ago, she was quick to fire two ministers, including her high-profile chief of staff, Antonio Palocci, whom she inherited from Lula da Silva, for corrupt activities. She has become an unofficial patron of the nascent anticorruption movement in Brazil. Despite these efforts, Brazil still has tolerance for corruption in the public sector. The country is yet to evolve a culture of sending the corrupt to jail, and not just removing them from office.. 23 The common thread with Qobo and several dramatic corruption stories from India and the other BRICs is adequate rules either does not exist or they are not being implemented. 24 The authors here do not believe that marketplace worries and corruption scandals are a sign of collapse. Rather, we hold the view that these upsets are a direct result of the civil service reforms underway - they are the fruit from the seeds of change planted several years ago. Corruption scandals lay unseen and not discussed publically without a change in viewpoint from politicians, government officials and the public. The fact that there is now expansive

public discussion and disclosure of significant corruption activities, in our view, may be judged a sign that the environment has shifted in favor of progress towards fighting corruption. Regardless of optimism from the authors about the outcomes of the civil service reforms underway in the BRIC countries, we see several basic lessons to be highlighted, developed and shared with developing countries and emerging markets. Many of these lessons are covered in more detail with case studies in New Tools for Fighting Corruption in Organizations. 25 Corruption Fighting Lessons From the BRICs Someone Authorized to Set Policy It seems simplistic, to be sure, but it is surprising how often it can be found that a policy doesn t exist because there is no one in place who has the authority and responsibility to create the policy. Indeed, a careful reading of some of the complaints from government and former government officials about the need for new policy indicates that they don t know who is responsible. 26 Russia s anti-corruption campaign and recent pledge to sign up to the OECD Anti-Bribery Convention, for example, indicates that there is movement toward actually putting someone in place to make effective anti-corruption policy. On the other hand, India s ill-fated Lokpal anti-corruption bill still has not been passed by parliament while the government continues to be rocked by corruption scandals and citizen protests. 27 There simply is no one there to set anti-corruption policy. An Authorized Person Actually Setting Policy. Sometimes, there is a person with the responsibility of setting policy, but they get caught up in the politics and worry about political survival, and no policy gets set. The complaints that are generally of the nature we need new policies about are simply a way of saying there is no one stepping up to set policy. Of course, it may be that there is no one stepping up because the process of research, development and consensus building is taking place. But surprisingly often it really is as simple as the authorized individuals do not realize they have a responsibility to lead the process of policy development. Setting Policies that are Needed. The BRIC countries are working through the process of civil service reform. This is not a one-time exercise. Healthy and capable civil service must have three important characteristics: A. It is able to deliver positive results with respect to its core mandate. B. It possesses broad legitimacy within the country. C. Its operation is durable and resilient. 28 Setting policies that are needed is directly linked to durable and resilient operation and is fundamental to survival of any organization. An organization must be able to change its operations

to meet the challenges of the day. There is every indication that the BRIC countries have civil service organizations that are acting on this basis. As said above, the large-scale corruption scandals would not come to light if the civil service were not changing its operations to tackle these challenges. It is an indicator the appropriate policies exist. 29 Applying Existing Policies. The main complaint from Qobo and others is that the corruption scandals occurred because policies were not being enforced. Again, the good news from the BRICs is that they are identifying those instances where policy wasn t properly applied, and are now correcting the action. Since she took office, Brazil s President Roussef has had a zero tolerance policy for corruption within her Administration. Consequently, several ministers have resigned under the specter of corruption allegations. Develop Systems to Correct Policy Implementation. Humans, being imperfect, will imperfectly carry out policies. Some mechanism must be developed to identify and correct faulty policy implementation. A U.S. Army Colonel once said, The first casualty of any engagement is the plan. The same can be said of new policies. They can be implemented well initially, if they are well disseminated. But without internal correction processes, the implementation can become watered down until the policy is essentially ignored. China s high profile prosecutions of corruption cases are good examples of maintaining focus on policy implementation intention. Although corruption in China reportedly remains high, the government s manifestation of intent to enforce the existing policies provides a deterrent effect. The authors promote mechanisms to combat corruption before a crime has actually occurred, but effective prosecution and political will to pursue corruption cases remain integral components to any anti-corruption strategy. Conclusion The BRIC s civil service advances have certainly played a role in their continued economic growth. Whether the countries can help lead the way out of the global economic crisis and maintain or strengthen economic growth depends in large part on their ability to maintain the integrity of their public institutions and to take real and meaningful steps, such as those outlined herein, to combat the scourge of corruption. Someone Authorized to Set Policy An Authorized Person Actually Setting Policy. Setting Policies that are Needed. Applying Existing Policies.

Develop Systems to Correct Policy Implementation. This list can certainly be more complex when in the midst of implementation by administrators, but as we see from the BRICS in the final analysis, these fundamental actions must be implemented to minimize corruption risks and support economic development in any country.

1 Brian J. Pinkowski, J.D., is an attorney and anticorruption expert currently implementing an extensive assignment as Chief of Party for an anticorruption project in Timor-Leste (East Timor). Brian has project management experience in more than 20 countries on projects involving a range of legal and anticorruption issues as well as public outreach. His project management experience includes a breadth of investigation and law enforcement actions have a cumulative value of approximately $850 Million, involving a combination of political issues, technical problems, media and high profile leaders. He specializes in crisis and risk management, securing positive results for clients and companies who find themselves in challenging and complex situations in crisis and conflict zones. 2 Michelle A. Pinkowski, J.D. is an attorney and project leader with wide ranging experience in delivering capacity building skills and ethical judgment. Her audiences have ranged from seasoned professional attorneys in the US to at-risk-youth in the probation system of Kenya. She is been regularly called upon for her expertise and superior communication skills and strategies. As a project leader, Michelle is highly regarded for motivating diverse groups and building teams that accomplish complex and wide-ranging goals. Her business background complements her legal training to provide a 50,000-foot level viewpoint that quickly sifts through the confusions of implementation and leads to creative and multi-faceted solutions that build upon the foundations of integrity and organizational development needed in each institution. 3 O Neil, J., Building Better Global Economic BRICs, Global Economics Paper No: 66, Goldman Sachs Economic Research Group, London (2001). 4 Jenson, T and Larsen, J., The BRIC countries. Danmarks Nationalbank, Monetary Review 4 th Quarter 2004, Vol XLIII, No. 4, pp 39-54. 5 Goel, R., Determinants of economic growth in BRIC countries, Development Research Working Paper Series, Institute for Advanced Development Studies (INESAD) (May 2011). 6 Rodrik, D., Growth Strategies, Discussion Paper Series, No 4100, Centre for Economic Policy Research (2003). 7 Wilson, D., Purushothmana, R. Dreaming with BRICs: The path to 2050. Global Economics Paper No. 99. Goldman Sachs Economic Research Group. 2003. 8 O Neill, J., Stupnytska, A. The Long Term Outlook for the BRICs and the N-11 Post Crisis. Global Economics Paper No. 192. Goldman Sachs Economic Research Group. 2009. 9 Rodik, D. Growth strategies. Centre for Economic Policy Research (Harvard - Kennedy School of Government). Discussion Paper Series No. 4100. 2004. 1-57. 10 Nickson, A., Public Sector Management Reform in Latin America, United Nations Research Unit for Social Development (UNSRID), 2006

11 Kippin, I., Snaith, I. 2011 Widening the Lens. What can the UK learn from public sector reform in the developing world? Public Services Academy. Sheffield University. 12 Bell, H., Status of the BRICs : An analysis of growth factors, International Research Journal of Finance and Economics, Issue 69 (2011) 13 Scobell, A., China s Evolving Civil-Military Relations: Creeping Guojiahua. Strategic Studies Institute, US Army War College. Professor Scobell cites unprecedented economic, political, and social changes during the past twenty-five years, and in 2002 2003 just witnessed a sweeping turnover of political and military elites. 14 Stokes and Chang, China s Evolving Space Capabilities: Implications for U.S. Interests, April 26, 2012. 15 From Poor Areas to Poor People. China s Evolving Poverty Reduction Agenda. World Bank. March 2009. 16 China s Evolving Philanthropic Landscape, Asia Philanthropy Forum, April 14, 2009 17 Global Competitiveness Report 2011-2012. World Economic Forum 18 Transparency International s Corruption Perception Index attempts to measure the perceived level of public sector corruption in 183 countries around the world. A country/territory s score indicates the perceived level of public sector corruption there on a scale of 0-10, where 0 means that a country is perceived as highly corrupt and 10 means that a country is perceived as very clean. A country s rank indicates its position relative to the other countries/territories included in the index. It is important to keep in mind that a country s rank can change simply because new countries enter the index or others drop out. What is the Corruption Perception Index, Transparency International, accessed July 15, 2012, http://cpi.transparency.org/cpi2011/in_detail/. 19 Ibid. 20 Ibid. 21 Ibid. 22 Ellis, Matt, Another BRIC in the Anti-Corruption Wall (Brazil considers foreign bribery law overhaul), FCPAméricas Blog, Jan 12, 2012, http://mattesonellislaw.com/fcpamericas/anotherbric-in-the-anti-corruption-wall-brazil-considers-foreign-bribery-law-overhaul. 23 Qobo, M. Corruption is a Major Threat to the Rise of the BRICs, South Africa Policy Initiative, March 30, 2012, http://www.safpi.org/news/article/2012/. Critics of the BRICs, who always point out that these countries have little in common, ignore their shared underbelly: pervasive public-service corruption. BRIC countries fall horribly short of

Organization for Economic Co-operation and Development standards, due to weak institutional mechanisms to combat graft. 24 Munshi, N., Another $39bn Indian corruption scandal: this time it s land, Financial Times Blogs, March 27, 2012, http://blogs.ft.com/beyond-brics/2012/03/27/another-39bn-indian-corruptionscandal-this-time-its-land. (Citing the lack of regulation or the failure to implement regulation in a series of corruption scandals that had come to light over a two-week period in India.) 25 Pinkowski, B., New Tools for Fighting Corruption in Organizations, Global Transitions and Development White Paper, August 2010, http://www.gtd-llc.com/resources 26 Colitt, R., Weaker Brazil Economy Raises Doubts About Credit-Led Growth, Bloomberg Business Week, June 01, 2012. (Providing an example of Arminio Fraga, former Brazil Central Bank President and Stock Exchange President decrying the need of the current government officials to create policies that remove growth barriers.) 27 BBC News India, India Anti-Corruption Lokpal Bill Tabled in Parliament, May 12, 2012, http://www.bbc.co.uk/news/world-asia-india-18141956. 28 Barma, N., Huybens, E., Vinuela, L. 2011, Institutions taking root: Building state capacity in challenging contexts (Draft not for circulation). World Bank, Washington DC. 29 This is a separate matter from the question of whether or not MORE policies are needed.