SECTION 3: THE IMPACT OF CORRUPTION ON
24. Transparency International noted that in the
past it had been argued that corruption was compatible with development
since the reinvestment of capital (even if it was corruptly acquired)
would increase GDP, which ultimately helped reduce poverty through
East Asia was sometimes given as an example of a region where
growth and high levels of corruption were compatible, largely
due to the local reinvestment of corruptly acquired funds.
But as the Asian economic crisis showed this was not really sustainable
growth. Transparency International said "Regardless of the
fact that some forms of corruption may be compatible with growth
for limited periods, the question of the incompatibility of corruption
with the provision of adequate services to the poor is hardly
There are no circumstances under which corruption can be condoned
and we believe that it is impossible for any government committed
to poverty reduction to tolerate any form of corruption.
25. In this Section of the Report we examine the
impact of corruption on the poor primarily through the impact
it has on service delivery before going on to consider the impact
corruption has on foreign direct investment and growth.
Impact on the Poor and Service Delivery
26. In her evidence to the Committee, Clare Short
said "Corruption is a crime against the poor above all"
and said it was petty corruption which affected the poor hardest.
In a discussion paper on corruption and good governance, UNDP
stated "A state with endemic corruption can be especially
brutal to the very poor, who have no resource to compete with
those willing to pay bribes".
Corruption continues to impact on the poorest people by:
- diverting resources away from social sectors
and the poor;
- denying access to services, security and justice;
- increasing costs;
- hampering economic progress and growth.
27. The Corner House said "Corruption makes
the poor poorer - not only do they end up paying more for services
but they also lose out when money that could have been spent on
projects that would directly benefit their communities is diverted
to big expensive projects with lucrative commissions".
CIET told us that corruption in public services denied services
to those who could not afford to pay bribes, often the very people
most in need of the service.
Mark Malloch Brown felt corruption directly affected the poor
both in terms of lost economic growth in the national economy,
but also through exclusion from basic services because they were
unable to pay the small bribes required for access.
Transparency International said that where corruption was endemic
"many, if not most, of the poor are excluded from the basic
services of health, education and energy which may be regarded
as the key building blocks of human development".
Transparency International (Bangladesh) had undertaken a study
that showed the poor had to make corrupt payments to get security,
justice, healthcare, education, basic utilities and business opportunities.
Anne Cockcroft, CIET, said "If you ask ordinary people, the
bottom of the pile, poor people, living in villages, they do not
think it is all right to be corrupt, it affects them very disastrously
in their everyday lives, they are very unhappy about it but they
do not feel there is very much they can do about it".
She stressed the poor often felt they had no choice but to pay
bribes especially in the case of access to health services.
28. DFID conducted participatory poverty assessments
in 23 developing countries. These consistently showed that corruption
reduced the access of the poor to basic services. They provided
evidence that unofficial payments were often needed for health,
education and other services and that some people went without
services as a result. They also demonstrated diversion of resources
as essential medicines and supplies went missing. In many countries
where the justice system was affected by bribery, the poor were
unable to obtain the protection of the law and in some cases were
threatened by those who should protect them.
29. Anne Cockroft, CIET, said that their studies
often reported that people perceived corruption as being worst
in the police and the judiciary. She said this was perhaps because
there were more opportunities in these areas, rather than because
they attracted more corrupt people. She noted people's perception
of high levels of corruption in the police and judiciary did not
mean that other services were free of corruption. She said health
and education services were often affected and that health was
a particular problem as people could not necessarily choose not
to use the service.
Transparency International also noted customs and excise was also
often an area prone to corruption in many countries.
30. However, poor access to services is just one
of a number ways corruption affects service delivery. The quality
of services often suffers and studies have shown that people who
pay bribes often do not get a better service. CIET found that
people's reported experience was that those who paid bribes tended
to make more visits and see more staff, so that actually it took
longer to obtain the required service. They also found that seeing
more staff simply increased the number of opportunities corrupt
staff had to collect bribes.
There is a disincentive to reform because corrupt staff have a
vested interest in maintaining systems that give them discretionary
powers. This strengthens the argument that tackling low wages
can only sensibly be done in the context of improved management
31. There can sometimes be a fine line between mismanagement
and corruption, and mismanagement of service delivery is sometimes
mistakenly attributed to corruption. Anne Cockcroft, CIET, said,
"Lack of medicines in Bangladesh may be due to inadequate
and poorly targeted supplies as well as leakage from the system,
but citizens attribute it to corruption".
It is important that a careful analysis is made of failing services
to determine whether it is corruption or mismanagement that is
the root cause of the problems.
32. There are clearly resource implications for services
as a result of corruption. Anne Cockcroft noted that "some
people say that up to 70 per cent of resources can be wasted through
She explained that there were costs to those who should be able
to access a free service and costs to those denied the service.
On the misallocation and misappropriation of goods, she said that
if drugs intended for a health service 'leak' out of the system,
there was a cost because the drugs purchased did not reach the
intended recipients. On absenteeism, she noted there was a cost
involved in paying someone to do something that was not being
33. It might be argued that if free services are
replaced by a service for which there is an open, transparent
and agreed fee then corruption could be removed or limited. However,
it might also be argued much petty corruption is already open
and that introducing a fee system would only formalise the mechanism
for collecting small bribes and introduce another official with
whom service users would have to interact. Perhaps it is not so
much whether the service is free or fee-based that is the issue,
but whether people understand how the system works, what rights
they have, what they can expect, when they have to pay, when they
do not, what any fees are for and that bribery is not required
to get either a service or a better service. Clare Short said
"In Uganda, and in some places in India, Andhra Pradesh,
they have a notice on the school saying the budget comes from
this state, and this is how much the money is; so all the people
in the local village know exactly what money is coming and to
make sure it is being properly spent".
Anne Cockcroft, CIET, explained that one of the reasons people
were vulnerable to corruption was that they did not know how the
DFID should ensure that the intended beneficiaries, of any
of the service delivery projects and programmes it is supporting,
have a clear understanding of their rights, how the service is
funded and what it should deliver. DFID should make this a part
of the formal arrangements with those providing services on its
behalf including NGOs and partner governments. External monitoring
of services, including parliamentary scrutiny, should check that
the intended beneficiaries have a clear understanding of the project
and their entitlement to the service.
Impact on the Prospects for Growth and Foreign
34. Richard Manning, DFID, told the Committee, "there
is increasing evidence that corrupt societies over the long haul
do less well than less corrupt societies. This has implications
for a sustainable level of growth without which, of course, there
will be no escaping from poverty".
Transparency International said that corruption had been a major
constraint on Foreign Direct Investment (FDI) and that many countries
were paying a high price for corruption, given that formal aid
flows accounted for only about 15 per cent of all flows to developing
John Bray, Control Risks Group, agreed that corruption made a
difference to investment flows and explained that work being done
in Harvard and the World Bank showed the impact of corruption
was analogous to tax so just as investment fell when corporation
taxes rose, investment fell as corruption increased.
Transnational corruption is often associated with large scale
investment, particularly in the power generation, telecommunications
and defence sectors.
While it is clear that corruption is a disincentive and deterrent
to further investment, corruption is also frequently generated
by the corporate sector.
DFID acknowledged that there was a growing understanding that
corruption had an adverse impact on investment and growth.
Source: World Investment Report, 1999, 'Foreign Direct
Investment and the challenge to Development'
35. The Worldaware survey of UK based companies ranked
corruption as a greater barrier to foreign direct investment than
political instability or lack of infrastructure.
In 1999, UNCTAD
conducted a survey of 44 African investment promotion agencies
for the 1999 World Investment Report. The results of the survey
make striking reading, suggesting that a business-friendly environment
does not automatically make a country more attractive for foreign
direct investment. Figure 1 shows the factors rated as most likely
to have a negative impact on investment decisions by transnational
corporations. It is clear that the level of extortion and bribery
far outweighs all other responses. The 'administrative cost of
doing business' and 'customs efficiency' - both factors which,
in themselves, are affected by corruption were also important
However, corruption was not always seen as the most significant
barrier to foreign direct investment and General Mohammed, National
Security Advisor to President Obasanjo, attributed a lack of FDI,
in the case of Nigeria, to political instability rather than corruption.
36. John Bray, Control Risks Group, said that a risk
analysis of a country for investment purposes would consider levels
of corruption and the strength of institutions.
Transparency International noted that investors built an aversion
to corruption into their analysis of investment opportunities.
This is especially true where there may be a choice of national
location. Anglo American said in their memorandum that "Stability,
the operation of the rule of law and levels of corruption are
all major factors in the political analysis which we undertake".
John Bray, Control Risks Group, explained that Chile had a better
reputation than most as a destination for foreign direct investment
due to the relative transparency and strength of its institutions.
He also said that, in Africa, Uganda was still regarded as a safer
investment destination than many of its competitors due to the
efforts it had made to tackle corruption. Anglo American gave
South Africa, Botswana, Tunisia and Namibia as examples of countries
which had relatively strong economies and a higher level of economic
development. They said it was easier to prevent corruption in
these countries because they had stronger institutions and better
levels of public sector pay. The prevalence of corruption was
one of a number of factors that led them not to pursue investments
in a number of countries.
Similarly, Mike Welton, Balfour Beatty, acknowledged that his
company had withdrawn from a number of countries because it was
not possible to operate within the company's ethical framework
in those countries.
David Philips, Crown Agents, said that the presence or absence
of the private sector was an indicator of the severity of corruption
in a country.
However, this cannot apply universally since an extractive company
is constrained to working where a particular natural resources
is to be found. This explains to some extent the case of Nigeria
which has both high levels of corruption and an active oil industry.
37. There is a link between money laundering
and foreign direct investment as some of the investment going
into a country is likely to be laundered funds being returned
as legitimate wealth. A share of the foreign direct investment
entering Russia is actually money controlled by Russian criminals
that has been laundered to disguise its origin.
The development of an effective local banking system that is properly
regulated will be essential in the battle against such money laundering.
Donors should be conscious that as improvements in money laundering
controls are made in developed countries the attention of the
launderers could switch to less well known, less well regulated
but emerging financial centres in developing countries.
38. Tackling corruption is not only important
as a measure to attract foreign investment but also to prevent
the flight of domestic capital. Mark Malloch Brown explained that
while FDI in developing countries is five times the level of official
development assistance, domestic capital formation was ten times
the level of FDI. He stressed the importance of forming and retaining
domestic capital. He said foreign investment had historically
followed the formation or return of domestic capital. The level
of domestic and foreign investment will be dependent on a number
of factors including the development of a trustworthy and active
This underlines the importance of improving the strength and regulation
of local banking systems.
39. Corruption is a major disincentive to foreign
direct investment and thus limits a country's prospects for growth,
without which there is little hope of tackling poverty. As part
of its effort to eliminate corruption, DFID should provide support
and technical assistance to the financial sectors in developing
countries, particularly banking.
64 Evidence, p.57 Back
and Good Governance, Discussion Paper 3, UNDP, July 1997, p.39 Back
67 Q.757 Back
68 Q.770 Back
and Good Governance, Discussion Paper 3, UNDP July 1997, Executive
Summary p.viii Back
72 Q.289 Back
75 Q.474 Back
76 Q.474 Back
78 Qq.463-464 Back
80 Q.478 Back
82 Q.502 Back
83 Q.757 Back
84 Q.479 Back
85 Q.2 Back
87 Q.438 Back
Nations Conference on Trade and Development Back
Investment Report1999, Foreign Direct Investment and the Challenge
of Development, United Nations, Figure II.17c Back
94 Q.679 Back
95 Q.437 Back
99 Q.371 Back
100 Q.329 Back
paragraph 130 below. Back
and Good Governance, Discussion Paper 3, UNDP, July 1997, p.44 Back
103 Qq.318-319 Back