Africa

Expert Testimony in Corruption Case

Ms Lala Camerer

February 1, 2002

Memorandum for Lesotho Highlands Water Project, Corruption Case

Qualifications of Ms Lala Camerer in the field of corruption

1. I am a policy researcher and analyst with particular expertise in
the field of corruption and anti-corruption controls. 2. Over the past
five years I have managed a number of donor-funded research projects at
the Institute for Security Studies (ISS) in South Africa on
corruption-related issues. 3. I am busy completing my PhD thesis
through the University of the Witwatersrand on policy responses to
controlling corruption in South Africa. I hold two Masters degrees in
Social Policy (Oxford 1995) and Political Philosophy (Stellenbosch
1994). 4. During the past two years I have been employed as a
consultant for the United Nations on two corruption-related projects,
namely the UNDESA study on public service ethics in Africa and the
UNODCCP Global Programme Against Corruption (in South Africa). 5. I
have completed other consultancies on corruption-related matters for
the South Africa Public Service Commission, the Open Democracy Advice
Centre, the Institute for Democracy in South Africa, the Centre for
Public Integrity and the World Bank. 6. During 1998/1999 I served on
the board of directors of Transparency International – South Africa. 7.
I am one of ten international academics appointed to a Panel of Experts
as a resource person by the Utstein Anti-Corruption Resource Centre to
be based at the Chr. Michelsen Institute in Bergen, Norway. 8. I have
spoken at numerous international anti-corruption conferences and have
published the following papers on corruption and related matters:

· Camerer, L. 2001. Controlling corruption in South Africa: Results of
an expert panel survey. Pretoria: Institute for Security Studies. (ISS
monograph; no. 65.)

· Camerer, L. 2001 Protecting whistleblowers in South Africa: The
Protected Disclosures Act, no 26 of 2000. Pretoria: Institute for
Security Studies. (ISS paper; no. 47.)

· Camerer, L. 2000. Terms of engagement for bilateral donors: A South
African perspective from civil society, in The role of bi-lateral
donors in fighting corruption: Proceedings of a conference held from
April 25-27 2000, Maastricht, The Netherlands. Washington DC: World
Bank:181-201.

· Camerer, L. 2000. Terms of endearment: Bilateral donor engagement in
fighting corruption in South Africa. African Security Review, 9(5/6).

· Camerer, L. 1999. Tackling the multi-headed dragon: Evaluating
prospects for a single anti-corruption agency, in Fighting corruption.
Pretoria: Public Service Commission.

· Camerer, L. 1999. Whistle-blowing: An effective anti-corruption tool? Nedcor/ISS Crime Index, 3(3).

· Camerer, L. 1999. Budgeting for success: The cost of fighting corruption. Nedcor/ISS Crime Index, 3(2).

¬∑ Camerer, L. 1999. Fraud and corruption in South Africa’s first national victimisation survey. Nedcor/ISS Crime Index, 3(1).

· Camerer, L. 1999. Victims of serious economic crime: A South African
perspective. Bloemfontein: Centre for Business Law, University of the
Free State. (Transactions series; no. 31)

· Camerer, L. 1998. Human security in the southern African context: Law
and the state: working paper, Pugwash meeting no. 236. Pugwash
Newsletter, 35(2):52-55.

· Camerer L. 1998. Decriminalisation and non-criminalisation: Models
for money laundering control in South Africa, in Money laundering
control in South Africa. Bloemfontein: Centre for Business Law,
University of the Free State. (Transactions series; no. 30.)

· Camerer, L & Shaw, M. 1998. Countering organised crime. South
African Institute of International Affairs Yearbook 1997/1998.

· Camerer, L. 1997. Derailing the gravy train: Controlling corruption
in South Africa. The Journal of Financial Crime, 4(4), June

· Camerer, L. 1997. Costly crimes: Commercial crime and corruption in
South Africa. Pretoria: Institute for Security Studies. (ISS monograph
series; no. 15.)

· Camerer, L. 1997. International fraud trends: South Africa at risk. African Security Review, 6.2.

¬∑ Camerer, L. 1996. Ethics and the professions: Blowing the whistle on crime”. African Security Review. 5(6):48-54.

· Camerer, L. 1996. White-collar crime in South Africa: A comparative perspective. African Security Review, 5(2):28-39.

· Camerer, L. 1996. Legislation to combat runaway corruption. Southern Africa Exclusive. December:14.

· Camerer, L. 1996. Suite vs street: Combating white-collar crime. Crime and Conflict, Indicator SA, 5. Autumn:1-5.

9. The facts contained herein are to the best of my knowledge true and
correct and are, unless otherwise stated or indicated by the context,
within my personal knowledge. 10. I have knowledge of the effects of
bribery and corruption at high levels of government, particularly where
this involves donor funds and in the context of an African country such
as Lesotho. 11. I have knowledge of the social, political and economic
impact of high level corruption in the southern African context and how
this is likely to affect Lesotho as a country, its citizens, and the
Lesotho Highlands Water Project itself.

Lala Camerer February 2002 The consequences of corruption Lala Camerer
Senior Researcher, Institute for Security Studies February 2002

Introduction

Corruption, defined as “the abuse of public power for private gain”, is
of growing international and regional concern. In a context of
political and economic globalisation we are all affected. Corruption is
not a victimless crime but negatively affects a number of people,
mainly the poor. While corruption is a feature of all societies to
varying degrees, it has a particularly devastating impact on
development and good governance in developing countries in Africa. This
is because it undermines economic growth, discourages foreign
investment and reduces the optimal utilisation of limited resources
available for infrastructure, public services and anti-poverty
programmes. It may also undermine political institutions by weakening
the legitimacy and accountability of governments.

The consequences and long-term costs of corruption take many different
and inter-related forms, including economic, political, social,
environmental and cultural impacts. These are difficult to measure,
although in recent years economists have tried to do this with some
success. The relationship between cause and effect is complex when it
comes to corruption: For example, does poverty facilitate corruption or
is corruption an underlying factor prolonging poverty? Does a corrupt
host country discourage foreign investment, or are international
companies themselves guilty of bribery and promoting corrupt practices
in developing countries?

In assessing the international literature which the study of corruption
and its control has spawned over the last thirty years, and more
intensely over the last five as the good governance agenda amongst
international aid and financial bodies has taken root, there are a
number of different schools with regard to the consequences of
corruption. So-called “moralists” have long argued that corruption is
harmful to societies and governments, impeding development and eroding
legitimacy even of honest elites and well-run institutions.
“Revisionists” by contrast, point to possible benefits of corruption,
suggesting that it can speed up cumbersome procedures, buy political
access for the excluded, and perhaps even produce de facto policies
more effective than those emerging from legitimate channels. A third
outlook suggests that the consequences of corruption depend in part
upon the characteristics of political systems, such as the balance of
political and economic opportunities, levels of economic development,
national integration and government capacity or upon the relationships
among key factions and elites.

Corruption is understood in different ways and comes in various forms
with differing consequences. However, it is generally true that there
are only ever a few “winners”, that corruption hurts most of the people
most of the time, and that it is mainly the poor who suffer.

This paper examines the international academic literature and empirical
(mainly economic) research available on the various consequences of
corruption. First however, some background is provided to the
international, regional and domestic initiatives and policy responses
that, in recognising the devastating consequences of unchecked bribery
and corruption, have been initiated in recent years.

Corruption in international transactions

The nefarious and deleterious effects of corruption have been
recognised internationally, in particular with respect to international
bribery. Peter Eigen, chairperson of the influential international
anti-corruption NGO Transparency International, has noted: “The scale
of bribe-paying by international corporations in the developing
countries of the world is massive. Actions by the majority of
governments of the leading industrial countries to curb international
corruption are modest. The results include growing poverty in poor
countries, persistent undermining of the institutions of democracy, and
mounting distortions in fair international commerce”.

Foreign business people often blame their own illegal bribe-paying
activities on the domestic environment – they say a culture of high
bribery exists in emerging market countries. However, it is all too
often the great willingness of firms to pay large bribes (the supply
side) that has been a prime cause of poisoning the domestic emerging
market economy. Without negating the important role played by the
demand side of corruption – where corrupt public officials demand
illicit compensation for performing their duties – many observers see
the supply side of corruption by international business in the form of
foreign-sponsored bribery as the most significant contributing factor
to corruption. This has been recognised by multinational bodies such as
the Organisation for Economic Co-operation and Development (OECD) as a
key area for action.

In its preamble, the OECD Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions recognises
“that bribery is a widespread phenomenon in international business
transactions, including trade and investment, which raises serious
moral and political concerns, undermines good governance and economic
development, and distorts international competitive conditions” and
that “all countries share a responsibility to combat bribery in
international business transactions.” The convention, which was born
out of the conviction that bribery of foreign public officials in
international business transactions is a serious threat to the
development and preservation of democratic institutions, was signed by
all 29 OECD countries and five non-member countries and came into force
on 15 February 1999. All 34 countries have undertaken to introduce
domestic legislation similar to the US Foreign Corrupt Practices Act,
thus making it possible to prosecute the givers of bribes in their home
countries as well as the country where the offence took place. A number
of key signatories have yet to ratify the convention and there are
serious questions about the extent to which individual countries will
be willing to enforce it. In the past, fear of competition was one of
the main justifications for paying bribes. Now, at least in theory, all
companies from the major Western trading nations will be playing by the
same rules.

Some empirical evidence on the degree of bribery by international
business is provided for by the Transparency International (TI)
Bribe-payers’ (BPI) survey conducted in 1999 as a pioneering effort to
measure the supply side of bribery: the relative propensity to pay
bribes from companies of the leading exporting states in emerging
economies. Whilst recognising that bribery happens all over the world,
the BPI survey was conducted exclusively in leading emerging market
countries because of TI’s priority focus on the impact of international
corruption on developing countries and countries in transition.
In-depth interviews (n-779) were conducted with private sector leaders
in 14 emerging market economies, including South Africa. Many of the
questions relate to perceptions of bribe-paying in these economies by
companies from the leading 19 exporting countries of the world.

Some key findings were the following: In response to the question
“which are the sectors in your country of residence where senior public
officials would be very likely, quite likely, unlikely to accept or to
extort bribes?” on a scale of 0-10 where 0 represents perceptions of
very high levels of corruption, public works contracts and construction
fared the worst at (1.5) followed by the arms and defence industry (2).
As is seen from the empirical evidence presented later, these are areas
involving large amounts of money where there is the potential (more
than in the education and health sectors) to extract large numbers of
bribes.

According to the BPI, respondents shared similar views when it came to
the issue of why senior public officials and politicians in many
countries take bribes: The fact that many of even the most senior
officials receive low salaries is widely seen as the main cause of
bribe-taking (65%), followed by immunity of public officials from
prosecution (63%). A common response in anti-corruption drives, where
affordable, has been to narrow the gap between the salaries paid to
high-level public sector officials and, for example, CEOs in the
private sector in order to reduce the temptation of public procurement
officials to accept or extract bribes. It should be noted that even
though the salaries of senior officials are often low compared to the
salaries of senior managers in the private sector, bureaucrats in
developing countries, in general, have high salaries relative to the
incomes of the average citizen. In Tanzania, for instance, “low” paid
civil servants at the local level are often better off than most people
in local communities. Low salaries are therefore not a sufficient
reason for people to engage in bribe-taking, so greed is another factor
to be considered.

Whilst corruption is a universal phenomenon, countries in Africa are
particularly adversely affected by corruption. Corruption has a greater
impact on often already fragile political and economic institutions and
is a contributing factor to development failure. These countries are
heavily reliant on both international investment as well as development
aid. High corruption reduces the effectiveness of aid-funded projects
and it weakens public support for assistance in donor countries.
Increasingly, international funding agencies are making concerted
action against corruption a precondition of aid, for example, the way
the International Monetary Fund (IMF) has been dealing with Kenya.

Recognising this, countries within the Southern African Development
Community (SADC) have recently adopted a protocol to fight corruption
in order to ensure a corruption-free regional economic grouping
attractive to foreign investors. In the preamble of the Protocol signed
in Blantyre, Malawi in August 2001 by all 14 member countries,
including Lesotho, the parties expressed their concern at “the adverse
and destabilising effects of corruption throughout the world on
cultural, economic, social and political foundations of society” and
committed themselves to introducing the necessary legislation and
mechanisms to combat all forms of corruption both within their own
countries and regionally.

Both the OECD Convention and SADC Protocol rely on countries to take
domestic action, both in terms of anti-corruption legislation and the
political will necessary to act against corruption. Whilst
international pressure is useful and should be applied whenever and
wherever possible, domestic efforts and institutions ultimately
determine whether reducing corruption is successful. Any external
pressure should be regarded only as a supplement to domestically-based
reforms. As the criminal case currently in the Lesotho High Court
indicates, the Lesotho government has recognised the adverse
consequences of not dealing appropriately with corruption, and is
taking the necessary action to deal with high-level bribery and grand
corruption in its public procurement projects. For this reason, and the
fact that the prosecution is addressing both the supply and demand
sides of bribery, anti-corruption activists and analysts around the
world are observing this case closely.

The consequences of corruption – theoretical arguments

There is widespread recognition of the negative consequences of bribery
and corruption internationally, regionally and domestically. It is
generally recognised that corruption has the following effects: · it
affects the economy by undermining growth and development through
hindering or deterring foreign and or local investment; · it affects
the quality and composition of public expenditure projects; · it
undermines the fiscus through non-optimal collection of taxes and
revenues as the unofficial underground economy flourishes; · it
distorts policy and resource allocations, thereby increasing
inefficiency; · it undermines trust and credibility in institutions and
procedures; · it threatens human security through linkages with drugs
and organised crime, and · because of the unjust access it facilitates
to often limited social and political goods and services, corruption
can create social and political unrest if it goes unchecked. In
addition: · corruption takes its greatest toll on the poor; and ·
corruption bites into the moral fibre of society.

Crucially, it has been recognised that corruption is contagious, a
“cancer”, and that it can grow exponentially if efforts are not taken
to control it when it manifests itself. Osborne sums up the organic
nature of corruption: Corruption spreads. Although it is difficult to
measure the scale of bribery there is general recognition that bribery
escalates unless efforts are taken to prevent it. If bribery that is a
matter of individual choice goes unchecked, it leads to extortion that
has to be paid to get jobs done. When corruption becomes systemic it
brings new behavioural norms that differ from the former culture of the
organisation or the nation. Systemic corruption is not necessarily
systematic, it is a condition where the disease affects the whole body
rather than causing only a local infection. But systemic corruption is
less benign than it may appear. Corruption is itself a cause of
escalating corruption, creating increased opportunity for further
corruption as bribes reduce the risks of detection and conviction. The
sight of people who get rich corruptly stimulates greed, giving
incentives to other to maximize their profits. The public anger at
corrupt riches brings political unrest.

There are a number of primary economic consequences of corruption that
have been well-documented and are supported by empirical research.
Before examining these in some detail, the “revisionist literature” on
the beneficial consequences of corruption as “grease” will be referred
to briefly, although this thinking has largely been dismissed in recent
years.

Corruption as “grease”

One line of thinking in the corruption literature which has been
largely discredited argues that the economic benefits of corruption
outweigh the costs and that corruption may not be inconsistent with
development and, at times, may even foster it. This functional theory
of corruption argues that the buying and selling of political favours
has political and economic advantages (at least for some), and that
bribery “greases the wheels” by cutting through unnecessary red tape,
thereby improving efficiency and speeding up the wheels of commerce.

While one may think of examples in which paying a bribe or the
opportunity to pay a bribe makes some firms/people better off, the
overall effect of corruption on economic development is negative. The
enormous degree of discretion that many politicians and bureaucrats can
have, particularly in corrupt societies over the creation,
proliferation, and interpretation of counterproductive regulations
means that instead of corruption being the “grease” for the squeaky
wheels of a rigid administration, it can become the fuel for excessive
and discretionary regulations. This is one mechanism where corruption
feeds off itself.

As has been noted, corruption is contagious: it starts in one specific
area, perhaps the area where the rules are in fact too rigid, and soon
it begins to spread to other areas. In time, most activities become
affected. When this happens corruption becomes like a distortionary tax
levied with uneven and random rates. Then it is no longer just “oil for
the mechanism” but it distorts economic decisions in ways that can be
damaging to the economy. For example it may encourage unproductive
public spending or economically unproductive activities, because of the
bribes or the “commissions” that some public officials can get on such
spending or protecting those activities.

Economic, political and administrative consequences – empirical evidence

There are a number of empirical studies providing overwhelming
statistical evidence to show that countries with high corruption levels
have poorer economic performance. There are several channels through
which corruption hinders economic development and growth: briefly, it
reduces investment (both domestic and foreign), distorts the size and
composition of government expenditure away from education, health and
the maintenance of infrastructure towards less efficient projects that
have more scope for manipulation and bribe-taking opportunities, and it
weakens the financial and tax system, strengthening the underground
economy and encouraging links to organised crime groups. Most
importantly, a strong connection has been demonstrated between
corruption and increasing levels of poverty and income inequality.

The consequences of corruption will be dealt with under the following statements which are underpinned by empirical evidence:

· corruption negatively impacts on investment and growth · corruption
negatively affects investment by creating uncertainty · corruption
undermines revenue collection stimulating the underground economy ·
corruption distorts public expenditure and resource allocation ·
corruption impacts negatively on industrial policies and business
development · corruption undermines efficiency · corruption exacerbates
poverty and inequality.

Corruption negatively impacts on investment and growth

Corruption has been shown to have a negative and significant impact on
foreign direct investment as well as local investment, including
investments in public expenditure. Mauro presents the first systematic
empirical cross-country analysis of the effects of corruption on
economic growth by focusing on the relationship between investment and
corruption. The study’s aim is to “identify the channels through which
corruption and other institutional factors affect economic growth, and
to quantify the magnitude of these effects”. The results of Mauro’s
work support the claim that corruption has a negative impact on
investment and, as a result, it negatively affects growth.

Using the Business International (BI) index of corruption – corruption
is one of the BI risk factors defined as “the degree to which business
transactions involve corruption or questionable payment” – he estimates
the effects of corruption on the average ratio of total and private
investment to gross domestic product (GDP) for the period 1960-1985 for
a cross-section of 27 countries . From the data he finds that
corruption lowers investment, thereby reducing growth. The negative
association between corruption and investment, as well as its negative
impact growth, is significant in both a statistical and economic sense.

A simple (bivariate) regression with “absence of corruption” as the
independent variable yields a weakly significant correlation (revealing
that an absence of corruption is indeed positively associated with
growth). For example, Mauro finds that corruption has a negative impact
on the ratio of investments to GDP – its investment rate: “if
Bangladesh (with a score of 4.7) were to improve the integrity and
efficiency of its bureaucracy to the level of that of Uruguay (score
6.8)…its investment rate would rise by almost five percentage points
and its yearly GDP growth rate would rise by over half a percentage
point”. That is, a corrupt country is likely to achieve aggregate
investment levels of almost 5% less than one which is relatively
‘uncorrupt’, it it will lose about half a percentage of gross domestic
product growth per year.

Mauro also constructs a “bureaucratic efficiency index” as the
arithmetic average of three BI indexes: those of efficiency of the
legal system and the judiciary, the amount of bureaucracy and red tape,
and corruption. This composite index is again negatively and
significantly associated with investment. Furthermore the effects are
quite strong. A one standard deviation improvement in bureaucratic
efficiency is associated with an increase in the investment rate by
4.75% of GDP.

A further study by Mauro of 67 countries covering data from 1960-85,
found that corruption slows the growth rate of countries. For example,
if a country such as Egypt were to heighten the efficiency of its
administration and improve its corruption score of 4 out of 10 to the
same level as Argentina’s 6, (again where 0 means total corruption and
10 means none at all), the rate of investment would increase by 3% and
the growth rate would increase by 0.5%. If Bangladesh reduced its level
of corruption to Singapore’s, its average annual per capita GDP growth
rate over the period 1960-1985 would have been 1.8 percentage points
higher, a potential gain of 50% in per capita income by 1985 (assuming
growth of 4% a year).

Other empirical studies surveyed by Andvig and Fjeldstad support
Mauro’s results: Using a different corruption indicator with
observations from Political Risk Services, an empirical study by Keefer
and Knack which includes “corruption in government” among other
explanatory variables into one single index of “institutional quality”
to explain economic performance, finds similar results. Brunetti,
Kisunko and Weder, using a corruption index developed by the World Bank
and the University of Basel for a sample of 41 countries, also find
that corruption significantly reduces the ratio of investment to GDP. A
similar conclusion is reached by Brunetti and Weder in a larger sample
of 60 countries making use of corruption data by Political Risk
Services.

According to Wei there is clear evidence that domestic investment,
foreign investment and economic growth are lower in more corrupt
countries. In terms of the effect of corruption on domestic investment,
Wei points out how if the Philippines could reduce its corruption level
to the Singapore level, other things being equal, it would have been
able to raise its investment/GDP ratio by 6.6 percentage points – quite
a substantial increase in investment.

In one paper, Wei explores the impact of corruption on foreign direct
investment by using a database which includes bilateral capital flows
between 14 source and 45 host countries in 1990 and 1991 and
controlling for factors such as GDP per capital. He finds that
corruption in a host country has a negative effect on inward foreign
direct investment from all source countries in a way that is
statistically significant and quantitatively large, that is, there is
clear evidence that corruption in host countries discourages foreign
investment. Investing in a relatively corrupt country as compared with
an uncorrupt one is shown to be equivalent to an additional 20%
(“private”) tax on the investment. For example an increase in the
corruption level from relatively clean Singapore to relatively corrupt
Mexico is the equivalent increase in the tax rate of over 20 percentage
points. If India could reduce its corruption level to the Singapore
level, its effect on attracting foreign investment would be the same as
reducing its marginal corporate tax rate by 22 percentage points.

Corruption negatively affects investment by creating uncertainty

In another paper, Wei examines the effect of corruption-induced
uncertainty on foreign direct investment by constructing measures of
unpredictability of corruption based on unpublished individual survey
responses on levels of corruption in host countries. He finds its
effects on foreign direct investment (FDI) to be economically negative,
statistically significant and quantitatively large. An increase in the
uncertainty level from that of Singapore to that of Mexico, at the
average level of corruption in the sample, is equivalent to raising the
tax rate on multinational firms by 32 percentage points.

Corruption therefore discourages foreign investment more than a tax
because corruption, unlike tax, is not transparent, nor preannounced,
and carries a much poorer enforcement of an agreement between one who
bribes and one who takes a bribe. As those who pay bribes have no legal
recourse, contracts through bribery cannot be enforced; this is one
reason why corruption is more harmful than taxes. Corruption embeds
arbitrariness and creates uncertainty. It is well established that the
level of uncertainty in the business environment significantly affects
investment. By increasing uncertainty, corruption raises the effective
costs of investment for the firm and countries having high levels of
both administrative corruption and state capture.

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