270 Private Sector Development January 2007 Findings reports on ongoing operational, economic, and sector work carried out by the World Bank and its member governments in the Africa Region. It is published periodically by the Operations Results and Learning Unit on behalf of the Region. The views expressed in 38313 Findings are those of the author/s and should not be attributed to the World Bank Group. Can Private Sector Action Tackle Corruption? Corruption is an impediment to Why should business care? growth and poverty reduction. As the authors in this issue of "Corruption not only undermines Development Outreach well the ability of governments to document, corruption limits function properly, it also stifles the opportunities, creates in- growth of the private sector. We efficiencies and forms additional hear it from investors, domestic barriers to the smooth delivery of and foreign, investors who worry services. Crucially, from the that where corruption is rampant, perspective of the World Bank contracts are unenforceable, Group, corruption cumulatively competition is skewed, and the undermines progress towards costs of doing business becomes achieving development objectives, stifling. When investors see that, not least as its impact is most they take their money some- adversely felt by the world's poor. where else." ­ Paul Wolfowitz, The World Bank has taken a clear World Bank President, Jakarta, public stance--based on Indonesia, April 11, 2006 exhaustive research--to seek A lot is at stake for the private ways to combat corruption. To this sector. It is becoming increasingly end we do and must work together obvious that the private sector has with other international a critical role to play, alongside organizations, governments, civil more traditional government and society groups, and the private civil society actors, in fighting sector. As noted by World Bank Pre- corruption. But why should busi- sident Paul Wolfowitz, the private ness care? Continuing to sector worldwide is one of the most participate in, or turning a blind important partners in this process eye to, corrupt activities can have and, without the active engage- significant negative consequences ment of business, progress will be for the private sector in terms of limited.1 Business action is competitiveness, the ease of doing Findings already showing the potential for business and the sustainability of sustainable results in limiting development efforts. As Peter Brew opportunities for corruption, but a notes in his article in this issue core theme of this publication is on "The Power of Joining Forces," that such potential is best realized corruption is estimated to add 10 by being integrated with the efforts percent or more to the costs of of other stakeholders in the form doing business in many parts of of collective action. the world. Corruption also renders effective, which in turn produces city of the range of companies (in Collective action and the role of negative knock-on impact on the size and ownership structure) to associations. This suggests the business environment. implement procedures to reduce importance of taking anti- corruption. Multinational corruption initiatives to a more Corruption affects everyone and businesses typically have the collective action level. This endea- exists all over the world--in resources to train and monitor vor can be private sector-led, for developed and developing country internally, but local firms, example by business associations, contexts--and can greatly hinder including down to the level of small who can act as cheerleaders for firm, national and regional-level and medium enterprises, will often policy reform, develop and provide competitiveness, as well as require assistance to develop access to training tools and codes significantly affect the workable controls. relevant to their members, as well attractiveness of investment as utilize their clout that comes climates. According to Batra, So, What Is Being Done? with representing a broader Geeta, Kaufmann and Stone,2 the A range of actions are underway. swathe of business. Leading level of corruption is identified as Recent experiences show that private sector institutions, such as a serious constraint to doing busi- effective and consistent private the International Chamber of ness by over 70 percent of firms in sector efforts can be effective in Commerce (ICC), have a South Asia and almost as many in combating corruption. Actions can potentially important role to play in East Asia and in the Middle East be at the level of an individual firm, this regard, as do counterpart na- and Northern Africa regions. Sixty- through the collective action of tional chambers of commerce and four percent of firms in Africa, al- business associations, and as a business associations at the coun- most 60 percent of those in Latin result of work across entire try level. They can provide America, and about half in the industries. guidelines for member companies, Commonwealth of Independent Action by individual firms. The but also utilize their outreach States (CIS) and Central and articles by Mohamed Ibrahim of skills and typically high level ac- Eastern Europe regions report Celtel International and Glenn cess to decision makers to be corruption to be a serious impedi- Ware of Diligence LLC outline positive agents for reform, linking ment to private sector what individual firms can and are with other sectors. There is great development. currently doing to fight and avoid value in linking business with Capacity of government to corruption, for example by government and civil society to find regulate is key. The private sector instituting and enforcing tighter more comprehensive solutions, as is recognizing that it is in its own ethical codes combined with Peter Brew points out in his article best interest to fight corruption to training for employees on how to using the example of the China foster sustainable and stable busi- manage typical situations where Business Leaders Forum anti- ness growth. Global business pressures arise to participate in corruption initiative. Other leaders are more publicly corruption. However, corruption is examples include the Center for supportive of increased regulation hard for one firm to eradicate on International Private Enterprise to limit corruption and to ensure a its own--and if a firm does attempt (CIPE) country-level anti- level playing field. However, as to uphold strict standards, it can corruption initiatives, and commonly reiterated by fellow have all too real negative Transparency International's na- authors in this issue, treaties, consequences in terms of lost bu- tional integrity pacts, in which conventions and codes are only as siness. Some large companies may companies, together with effective as their enforcement. have the resources to absorb this government and civil society, Therefore a careful assessment is loss or find ingenious, but typically voluntarily implement anti-bribery needed of the capacity of more expensive, ways to supply the agreements that are monitored by government and international promised goods and service, but, for an external party. agencies to enforce, or private most companies, this is not an op- Industry-wide efforts also hold sector bodies to self-regulate, these tion and they subsequently feel promise. Effective change must agreements, as well as the capa trapped into accepting corruption. also be pursued at the industry level and through global all forms of corruption, including of law issues. The proportion of new governance channels. Industry extortion and bribery."3 Signa- projects with accountability/anti- specific initiatives among tories commit to mainstream corruption components jumped businesses and other stakeholders these principles into business from 0.4 percent in the 1995-96 have proven to be an effective activities worldwide. fiscal years to an average of five method of tackling corruption as The World Bank's Contribution percent in the 2004-05 fiscal they impact local business Leadership in international efforts years. Within its overall loan port- practices beyond the capacity of to combat corruption. To help fos- folio and operations, the Bank any single company. The Extractive ter both industry and global recognizes that it has no magic Industries Transparency Initiative initiatives to combat corruption, immunity to corruption. Therefore (EITI) and the Forest Law and the World Bank Group works anti-corruption initiatives related Enforcement and Governance closely with international anti- to its own lending portfolio are very (FLEG) initiative are just two corruption organizations and effectively spearheaded by the examples of recent ground- networks, including the Bank's Department of Institutional breaking initiatives, both Partnership for Transparency Integrity with the strong backing supported by the World Bank and Fund, Financial Action Task of senior management. International Finance Corporation, Force, the Public Expenditure and that have brought multiple stake- Financial Accountability program, The power of data and holders together to collectively and OECD-Development benchmarking. The International address corruption within a Assistance Committee Network on Finance Corporation plays a particular industry sector. In Good Governance and Capacity proactive and innovative role in further signs of this trend, we have Development. Active participation partnership with its private sector also seen significant business and in such international efforts clients in improving effective long NGO investment in ensuring good illustrates how the Bank has term corporate governance practice in specific industry seg- progressed rapidly from taking an through mechanisms such as the ments, such as the Kimberley Pro- ad hoc, low-visibility approach Equator Principles and through cess for diamond production and towards instances of fraud and development and application of the code now under development corruption in member countries, measurement tools such as the for gold mining. Bank-financed projects, and among Doing Business indicators. Many countries and businesses Global standards can be effective staff, to assuming a clear worldwide have found the data at producing peer pressure to re- leadership role among multilate- encapsulated in the Doing Business form. In terms of fostering global ral institutions in all three areas. surveys to be critical in governance, efforts to bring Increased attention to its own benchmarking their performance, together government, business and loan portfolio. The growing not least on good governance. civil society in dialogue around attention the Bank pays to anti- anti-corruption initiatives have corruption work, and, more broadly, Embedding governance and anti- proliferated, not least through to public sector governance and corruption at the heart of coun- efforts to identify appropriate glo- institutional reform, is reflected by try strategy. Increased Bank bal standards. The OECD changes in its loan portfolio. In the financing for good governance Convention on Combating Bribery 1995 fiscal year, only 0.6 percent components contributes to the core of Foreign Public Officials of Bank lending went to support objective of supporting anti- continues to gain traction and has public expenditure, fiscal manage- corruption efforts at the country been supplemented by the UN ment, and procurement reforms. level. To help meet this goal, the Convention Against Corruption As of the end of June, 2005, it had Bank now requires that all Coun- Treaty. As Georg Kell discusses in climbed to 4.6 percent. In the 2005 try Assistance Strategies (CAS) this issue, in 2004, the UN Global fiscal year, almost half of the new address governance issues. In Compact added a tenth principle to Bank projects had at least one some of the higher risk countries, its list of principles stating that component addressing governance and anti-corruption "Businesses should work against governance, public sector or rule have become central planks of the In support, the World Bank Insti- and operational findings, and solutions to fighting and reducing tute (WBI), with the benefit of fifty participatory and consensus-buil- corruption inappropriate or years of experience in capacity ding activities. It is not enough to ineffective in the long-term. Yet, development, facilitates action- look at the symptoms of corruption. there is still a need for caution. The oriented and participatory Instead we must look for new tools range of projects reviewed in this programs to promote good that will help tackle supply and issue suggests there are emerging governance and limit corruption at demand. Individual efforts, best practices and lessons to be the country level. Deliveries, in although necessary, are not learned, but there is not yet a collaboration with World Bank Ope- sufficient, and the fight against systematic operationalization of rations and often in partnership corruption needs to be taken to the concrete multi-stakeholder with international organizations, next level.4 As highlighted governance and anti-corruption are targeted to around thirty throughout this publication, the strategies. countries--principally in Sub- challenge is to work with the range Saharan Africa, Latin America, of stakeholders in society, not least Multi-stakeholder partnerships Eastern and Central Europe, and the private sector, and to maintain are a complex and nuanced more recently, Asia. an open approach that strengthens undertaking. To date, existing individual stakeholder actions, but documentation of collective action Powerful diagnosis and analytical also recognizes the potential value and multi-stakeholder partnership tools help guide actions at the of collective action through bottom- anti-corruption initiatives is country level. These efforts are up coalitions for reform. largely anecdotal. As Roderick Hills supported by rigorous empirical points out in his article, the void The Challenge of Forging diagnostics and analysis. WBI pub- created by a lack of empirical re- Effective Collective Action lishes data and analyses assessing search makes such initiatives "...fighting corruption requires a many dimensions of governance for difficult to replicate, scale-up, mo- long-term strategy that 209 countries and territories nitor and evaluate over time. systematically and progressively which are used extensively to raise Furthermore, factors such as the attacks the problem, and that is awareness nationally and globally level of political engagement and why any strategy for solving the and to help inform policy reform. the transparency of the business problem requires the commitment These indicators, which are environment, as well as the capa- and participation of governments, constructed on the basis of hund- city of individual stakeholders to private citizens, and private reds of variables, measure voice engage in partnerships, can all businesses alike." --Paul and accountability, political stabil- impact any initiative's Wolfowitz, World Bank President, ity and absence of major violence effectiveness and long-term Jakarta, Indonesia, April 11, 2006 and terror, government sustainability. Understanding bu- effectiveness, regulatory quality, Collective action is potentially an siness environment indicators, as rule of law, and control of integral part of the solution, but is Michael Klein points out based on corruption. not a panacea. As outlined above, the findings of the World Bank the Bank, along with other Doing Business surveys, are development actors, is reviewing indicative of specific economic and Affecting both the demand and approaches to combat corruption to social outcomes, among them supply side of good governance. improve efficacy. However, levels of productivity, informality, WBI utilizes such data and analy- scaleable impact will also require and corruption in a particular sis to build momentum for change. engagement from government and country.5 It is important to study The complexity and pervasive na- civil society. So, are collective these factors and to carefully build ture of the corruption problem multi-stakeholder approaches the capacity locally and across stake- pushes a capacity development most viable? On paper the logic is holders before considering and approach that moves beyond clear --corrupt activities, and the engaging in collective action conventional training to corrupting influences that gene- initiatives. WBI is committed to knowledge dissemination, policy rate them, permeate all sectors of doing exactly this through its advice based on the latest research society, often rendering unilateral learning programs that support the efforts of the private sector and among academia, government and Kaufmann et.al. emphasize the other stakeholders, individually- the private sector to effectively value of empirical research in pro- and in partnership, to fight identify corrupting influences and blem diagnosis and the monitoring corruption and render development to deal with corruption. To this of results. However, as the article efforts more effective. end, Glenn Ware points out that, points out, there is still much while governments take steps to debate on how best to go about In This Issue strengthen their own anti- these activities. This issue of Development Outreach corruption requirements, the specifically considers the role that private sector is a critical Dialogue can be a powerful tool the private sector can play in the stakeholder throughout this pro- for change. The department Voices fight against corruption. Georg Kell cess as it decides if and how to from the Field features two stresses the importance of the respond to increasing mandatory conference summaries: "Research individual responsibility of the and voluntary regulatory pressure. on Corruption and Its Control," by private sector through the expan- Moana M. Erickson, and "Seeking sion and deepening of corporate Implementation of anti- Clarity in A World of Murky citizenship and corporate corruption measures is possible Transactions." The latter covers a governance on a global scale. In even in difficult environments. global high-level e-discussion, order to affect this principles-based The next two articles concentrate "Towards a More Systematic Fight organizational change across on anti-corruption experiences at against Corruption: The Role of the organizations, institutions and the implementation level. Moha- Private Sector," organized jointly by supply chains, Kell argues, all med Ibrahim of Celtel Internatio- WBI, the UN Global Compact and actors in society must be involved nal outlines in detail how an Zicklin Center for Business Ethics in promoting organizational African company has dealt with Research at the Wharton School of change, providing necessary tools corruption, while operating in Business from June 26 to July 7, and training, and supporting action often corrupt and corrupting 2006. The impressive level of campaigns against corruption. environments. Kebour Ghenna participation in the e-discussion, Following on this message, Peter provides a civil society perspective as well as the depth and breadth of Brew argues the case for collective from Ethiopia, focusing on private- the discussion itself, reinforces the business action in fighting private corruption. Ghenna argues importance of information sharing. corruption, examining the pros and that, to be truly effective, ethics Of equal importance is remaining cons of business-led versus multi- must play an integral part in open to new and innovative ideas stakeholder initiatives and provi- organizational culture, which on how to combat corruption, while ding a concise list of the elements requires the mobilization and maintaining a level of flexibility necessary for effective collective strengthening of the civil society knowing that corrupt actors will business action. William Laufer, sector to undertake regular also adapt to new anti-corruption however, cautions against the monitoring, enhance public strategies. Corruption is a multi- immediate inclination to jump on awareness and encourage wide- headed beast that will not be slain the collective action bandwagon, spread private sector commitment easily. stressing the necessity of and support. The article by Dani assessing the situation thoroughly Kaufmann, Aart Kraay and before adopting a multi- Massimo Mastruzzi focuses on Frannie Léautier is Vice President stakeholder partnership solution. specific myths and realities related of the World Bank Institute. to the measure-ment of corruption Djordjija Petkoski is Head of the The overall success of reducing and helps set the context for Business, Competitiveness and corruption depends on two forces assessing the private sector's role Development Team, World Bank working in parallel: govern- in corruption, as well as its impact Institute. ment's own efforts and the re- in fighting it, rendering the private Michael Jarvis is Consultant, sponse of the private sector. sector more of an "investment Finance and Private Sector, World Roderick Hills continues with a call climate maker" than an "invest- Bank Institute. for business­led collective action ment climate taker." Endnotes According to Daniel Kaufmann, 1 Wolfowitz, Paul, World Bank Director of Global Programs at President, Jakarta, Indonesia, the World Bank Institute, the April 11, 2006 way forward is not "fighting 2 Batra, Geeta, Daniel Kaufmann corruption by fighting corruption" and Andrew H. W. Stone, "The (i.e. launching another anti- Firms Speak: What the World corruption initiative, introducing Business Environment Survey more anti-corruption Tells Us about Constraints on the commissions or implementing Private Sector Development," in new codes of conducts). Voices of the Firm 2000: Investment 5 Klein, Michael, Doing Business Climate and Governance Findings in 2005: Removing Obstacles to of the World Business Environment Growth, World Bank, 2005. The Survey, World Bank Group, 2002. Bank is a leader in the 3 http://www.unglobalcompact. development and application of org/AboutTheGC TheTen Princip- governance diagnosis, from the les/index.html Doing Business report to 4 Kaufmann, Daniel, "Myths and Investment Climate Assessments to Realities of Governance and indicators that assess six Corruption" in Schwab, Klaus and dimensions of governance in Michael Porter, The Global more than 200 countries. These Competitiveness Report 2005-2006, indicators are used extensively World Economic Forum, 2006. to raise awareness nationally and globally and help to support policy reform. This article has been reproduced from the World Bank Institute's De- velopment Outreach, September 2006 Findings Findings can be accessed via the World Bank Group's website at http://www.worldbank.org/ Click on Publications, then Periodicals. Or, Findings would also be of in- Name Institution Letters, comments, and requests for publications not available at the World Bank Bookstore should be addressed to: Editor, Findings Operational Quality and Knowledge Services Africa Region, The World Bank 1818 H Street NW, Mailstop J-8-811 Washington, D.C. 20433