(Asian Intelligence 823) Political and Economic Risk Consultancy, Ltd. - PERC-Asian Corruption Update (2011)

ASIAN INTELLIGENCE
An Independent Fortnightly Report on Asian Business and Politics

No. 823 Wednesday March 23, 2011
Corruptions Impact on the Business Environment

Singapore Hong Kong Australia Japan USA Macao Taiwan Malaysia South Korea Thailand China Vietnam India Philippines Indonesia Cambodia 0.37 1.10 1.39 1.90 2.39 4.68 5.65 5.70 5.90 7.55 7.93 8.30 8.67 8.90 9.25 9.27
10
Grades are scaled from zero to 10, with zero being the best grade possible and 10 the worst. The question asked was: To what extent does corruption detract from the overall business environment?
REGIONAL OVERVIEW ................... 2 AUSTRALIA ...................................... 6 CAMBODIA ....................................... 8 CHINA ................................................ 9 HONG KONG ................................... 12 INDIA ............................................... 14 INDONESIA ..................................... 16 JAPAN .............................................. 18 MACAO ............................................ 19
MALAYSIA .......................................21 PHILIPPINES ...................................23 SINGAPORE ...................................25 SOUTH KOREA................................26 TAIWAN ...........................................28 THAILAND .......................................30 UNITED STATES .............................32 VIETNAM .........................................34 EXCHANGE RATES .........................36
POLITICAL & ECONOMIC RISK CONSULTANCY LTD.
Political & Economic Risk Consultancy, Ltd.
Issue #823 practice freedom of speech and the media can play up corruption scandals so much that the pervasiveness of graft is magnified. Recent high-profile acts of corruption can make respondents more pessimistic than respondents of countries where there have not been such incidents to dominate the headlines and private discussions. In many countries, opposition parties have a strong vested interest in playing up instances of corruption in order to discredit the government in power and either to hurt its chances of being re-elected or to justify their own actions to topple a government through a coup or other extraconstitutional means. Because corruption is, by its nature, largely invisible until the spotlight of a trial or government crackdown shines on it, it is extremely difficult measuring its actual magnitude. For the same reason, governments that argue no acts of corruption have been proven frequently sound like the emperor who is wearing no clothes. For reasons like this, perception surveys like our own are useful. They help to show how local feelings toward corruption are changing over time and if people are viewing major institutions like the police and court system with more or lesser confidence. Companies have to go by their perceptions when they select partners, suppliers and joint-venture partners. In other words, perceptions do matter. In the country entries that follow, we give the raw results of our latest survey. We show different aspects of corruption like how it is perceived at the national and local levels, how clean local civil services are perceived and how prevalent the problem of bribery in the private sector is seen. We try to provide insights into how the problem is perceived in institutions like the police, military, judiciary, and various regulatory bodies. This year, as in all previous years, we asked respondents to indicate the extent they felt corruption detracts from the overall business environment. The chart we have made from this data is on the cover of this report. This does not mean that this is the ranking of countries in terms of the magnitude of corruption or where it is worst and where it is best. Rather, it indicates where respondents encountered corruption the most on a daily basis. Not surprisingly, the worst rated
REGIONAL OVERVIEW
Asian corruption update What is the most corrupt country in the world? Its the place where you are losing your own money to graft or losing business to a competitor who is paying a bribe. Corruption is a global problem, not one that is exclusively Asian or Western. There is not a single country that is immune. It affects democracies, communist systems and authoritarian governments. It is a problem in developed countries as well as emerging markets. It has both private and public sector dimensions, and every industry from hedge funds to telecommunications is vulnerable. Religious organizations, charities and schools are not immune. Corruption also has increasing cross-border dimensions that facilitate corruption by allowing individuals and companies to circumvent laws in one country by channeling transactions through other jurisdictions and by allowing those who are guilty of corruption to avoid prosecution by fleeing to safe havens that offer protection from extradition. For well over two decades now, we have been surveying nationals and expatriates about how they perceive various aspects of corruption. We have just finished our latest survey, covering 1,725 middle and senior expatriate business executives working in Asia, the US and Australia. In each of the 16 countries and regions (Hong Kong and Macao) covered by our survey, we interviewed by mail and face-to-face at least 100 executives between the last week of November 2010 and end-February 2011. We asked expatriates to provide scores only for the country in which they are working and their country of origin. Before we get into the specific results of the survey, let us emphasize up front that we are analyzing perceptions, not reality. Biases exist in respondents, depending on both the country involved and the nationality of the respondents. Countries that threaten whistle-blowers with expensive liable suits and worse penalties can intimidate people into being unwilling to discuss the full extent of the problem, while democracies that
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Political & Economic Risk Consultancy, Ltd. in dollar terms and has the most farreaching implications. It is the worlds largest single economy and when incidents of corruption do occur, their dollar value can be larger than anything that is possible in smaller countries. No country shapes exchange rates and interest rates like the US. It is the world largest single market, a major global investor, and a destination for foreign investors. When corruption contributes to economic destabilization in the US, such as what happened in the lead up to and the aftermath of the sub-prime crisis, the global repercussions are far bigger than any fallout could possibly be from corruption in places like Cambodia, the Philippines, Vietnam or Indonesia.
Political Corruption
Singapore Australia Hong Kong USA Japan Macao Taiwan South Korea Malaysia China Thailand Vietnam Philippines India Cambodia Indonesia 1.04 1.17 1.52 2.95 3.24 4.95 6.08 6.52 6.54 7.48
7.97 7.98 8.27 8.54

9.07 9.11
10
Grades are scaled from zero to 10, with zero being the best grade possible (least corruption among politicians and civil servants) and 10 the worst grade (most corruption among politicians and civil servants).
countries were the ones with the worst paid civil services and poorest economies. These are also the places, often because of a lack of funding, that cannot afford to modernize the police and the military, where regulatory and licensing bodies frequently charge extra for their services or create extra red tape simply to have a reason for collecting a fee. Therefore, it is no coincidence that our survey scores measuring perceptions of how corruption affects the business environment match closely to the scores measuring the extent that corruption is a problem in major institutions and political circles. Cambodia, the poorest country covered in our report, ranked the worst in two of the three cases, along with Indonesia, the Philippines, and Vietnam (Indonesia ranks worse than Cambodia for political corruption). At the other end of the spectrum is Singapore, along with Hong Kong, Australia, Japan, and the US. They are the wealthiest countries covered by our survey and have some of the best-paid civil services and best-equipped institutions. This does not mean that the problem of corruption in Cambodia is the worst of any country covered here or that Singapore is not exposed to the problem. Common sense, backed up by plenty of anecdotal evidence, suggests that the problem of corruption in the US the biggest
Similar logic would put China as the country with the second most serious corruption problem. Last year China overtook Japan to become the worlds second largest economy. It is a global manufacturing powerhouse and is attracting unprecedented amounts of capital. How it employs this capital affects every country in the world. The government plays an important role by deciding where to place the countrys massive foreign exchange reserves and how to invest savings in China, but individuals and companies are playing a big role too. Corporate governance standards are low and a great deal of state wealth is finding its way
Institutional Corruption
Singapore Australia Japan Hong Kong USA Macao South Korea Taiwan Malaysia China India Thailand Vietnam Philippines Indonesia Cambodia 1.02 1.31 1.75 2.03 2.48 5.09 5.91 6.18 6.58 7.04 7.40 7.94 8.48 8.50 8.80 9.49
10
Grades are scaled from zero to 10, with zero being the best grade possible and 10 the worst. The grades are an average of the following institutions: police, courts, stock market, Customs, tax bureau, government licensing bodies, government inspection bodies, and the military.
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Political & Economic Risk Consultancy, Ltd. into the hands of individuals, many of whom figure prominently as gamblers in Macao, property buyers in Hong Kong, and forces behind other deals in other parts of the world. Corruption in China is helping to drive economic growth in neighboring economies and the threat from corruption in China comes as a twoedged sword. One edge is that corruption could make Chinas growth unsustainable and ultimately result in a derailing of the economy that causes social and political instability. This would have unsettling implications for the rest of the world. The other edge of the sword is the shock that other economies would feel if Chinas government were to suddenly clamp down on illegal capital outflows and start prosecuting those involved. This would not only be painful to economies that are growing accustomed to this illegal capital outflow but also could be politically embarrassing for the governments of these countries and prominent local companies and business people who have worked with corrupt elements in China to facilitate this outflow. Two other corruption themes that emerge in the country entries that follow relate to cross border corruption and to private sector corruption. The most successful economies in the world have all embraced globalization, none more so than Singapore, Australia and Hong Kong. All three of these economies rate strongly in terms of the absence of corruption in their political structure and key national institutions. However, the major companies of all three of these economies are expanding abroad, including into some environments like China, Vietnam, India, Thailand and Vietnam that do not have nearly as good a reputation for being free from corruption. There have been cases for every one of these countries where foreign deals have become entangled in corruption scandals. Some have involved bribery by companies from countries that hard reputations for being clean. Others have involved scandals in which the foreign companies have simply chosen the wrong partner or invested in the wrong local company and found themselves in the middle of a political dogfight in which corruption allegations are a typical part of the mudslinging.
Issue #823 Part of the difficulty is building an internal culture in foreign investments, especialy joint ventures, that meet head office compliance standards. Part of the difficulty is being able to steer clear of foreign political scandals. A place like Singapore faces an especially large threat from this type of problem since many of the largest foreign investments in political sensitive fields like infrastructure companies are by government-linked Singapore companies. It is one thing for a private Hong Kong entrepreneur to behave one way in Hong Kong and another way in China, but many Singapore companies do not have this flexibility. They have to maintain the same standards abroad that they do at home and they have to be seen doing so, something that can be almost impossible when foreign politicians can make unsubstantiated accusations in their own jurisdictions. This is one reason why we contend that corruption is a big problem even for countries that have been extremely effective in fighting it. Then there is the issue of private sector corruption. Most places that have set up special agencies to fight corruption like Hong Kong, Macao and Korea have started by focusing first on the problem of corruption in the public sector. Only after they felt they were making significant headway on cleaning up the public sector did they turn their sights to private sector corruption. With limited resources and personnel that virtually every anticorruption agency has, this makes sense. Corruption is not something that can be eradicated with the snap of a finger. It has to be done step by step, starting with the biggest priorities (usually cleaning up the police and judiciary, followed by other government offices like tax, Customs and land), and then progressing to other facets of the problem. With this is mind, it is perhaps not surprising that the perception grades in our survey for the existence of bribery in the private sector are worse than for public sector corruption in every country that has mounted a serious long-term campaign to fight graft. It has been the most difficult aspect of the problem. The anti-corruption agencies must stop companies from bribing officials in order to win contracts, obtain licenses, pass inspections, avoid taxes, and get other favors. The graft fighters must also investigate and prosecute acts of individuals and
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Issue #823 companies bribing other private sector entities for example to get a loan approved, a supply order signed, or inside information needed to gain an edge on the competition. There is another aspect to corruption in the private sector that makes it especially damaging. The vast majority of players in any given industry might be extremely ethical and have an internal policy that strictly prohibits all kinds of corruption. A very small number of bad apples might account for a majority of the problem. However, because of those bad apples and the examples of corruption in the past that have caused major problems, most developed economies like the US have passed regulation upon regulation to close loopholes that have been exploited. Compliance standards companies have to meet therefore keep getting more onerous. Unethical companies and individuals, by their nature, have no compunctions about ignoring those requirements or creating smoke screens that hide what they are really doing. It is the ethical companies and banks that meet the standards not just to the letter but also to the spirit, but this entails a heavy cost in both money and time. It can also divert the best talents of senior Singapore Australia management away from much more Japan Hong Kong productive endeavors. In other words, the cost of putting in systems to fight corruption can be so burdensome that they tilt the competitive landscape toward those who are willing to cut corners and act corruptly. This is another reason why we would rate the problem of corruption to be the worst in the US. It is not just the magnitude of corruption but also the magnitude of what it costs individuals and companies who are not corrupt to meet compliance requirements.
USA Malaysia Macao Taiwan Thailand China Vietnam India Philippines Cambodia Indonesia South Korea
Political & Economic Risk Consultancy, Ltd. Our latest survey, however, produced a different result. It put the problem of bribery in the private sector to be the biggest problem in South Korea of any country covered by this report. One way to look at this is that expatriates living and working in Korea have been shocked by the numerous scandals that involve family-owned conglomerates, or chaebol. Expatriates and the companies for which they work might even have been directly hurt by the tactics these companies have taken to protect and promote their business. Another way to look at it is that the fight against corruption in the public sector in Korea has gone about as far as it can unless the authorities now start going after privates sector corruption in a much bigger way than they have to date. This includes not just investigating and prosecuting acts of corruption but also actually carrying out those punishments, which is something Korea so far has not done.
Private Sector Corruption

2.76 3.17 3.45 4.05 4.20 5.25 5.70 7.10 7.70 7.75 8.10 8.11 8.50 8.50 8.89 8.95
10
Grades are scaled from zero to 10, with zero being the best grade possible and 10 the worst. The question asked was: How widespread is the problem of bribery by private sector parties?
How Corruption Has Been Perceived over the Past Decade

2002 Australia Cambodia China 2.08 n.a. 7.00 2003 2.50 n.a. 8.33 2004 2.20 n.a. 7.48 2005 2.24 n.a. 7.68 2006 1.67 n.a. 7.58 2007 0.83 9.10 6.29 2008 0.98 8.50 7.98 2009 1.40 8.10 7.30 2010 1.47 8.30 6.70 2011 1.39 9.27 7.93
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Hong Kong India Indonesia Japan Macao Malaysia Philippines Singapore South Korea Taiwan Thailand USA Vietnam Asian Average
3.33 9.17 9.92 3.25 n.a. 5.71 8.00 0.90 5.75 5.83 8.89 1.57 8.25 6.33
3.61 9.30 9.33 4.50 n.a. 6.00 7.67 0.38 5.50 6.33 8.75 2.57 8.83 6.54
3.60 8.90 9.25 3.00 n.a. 7.33 8.33 0.50 6.67 6.10 7.80 2.45 8.71 6.47
3.50 8.63 9.10 3.46 n.a. 6.80 8.80 0.65 6.50 6.15 7.20 2.33 8.65 6.43
3.13 6.76 8.16 3.01 4.78 6.13 7.80 1.30 5.44 5.91 7.64 2.83 7.91 5.81
1.87 6.67 8.03 2.10 5.18 6.25 9.40 1.20 6.30 6.23 8.03 2.28 7.54 6.01
1.80 7.25 7.98 2.25 3.30 6.37 9.00 1.13 5.65 6.55 8.00 1.83 7.75 5.96
1.74 6.50 7.69 2.63 3.75 7.00 7.68 0.92 4.97 5.85 6.76 2.71 7.40 5.59
1.75 8.23 9.07 2.63 5.71 6.05 8.25 0.99 4.88 5.62 7.33 1.89 7.13 5.90
1.10 8.67 9.25 1.90 4.68 5.70 8.90 0.37 5.90 5.65 7.55 1.39 8.30 6.08
Grades range from zero to 10, with zero being the best grade possible and 10 the worst. The specific survey question asked was: How big is the problem of corruption in terms of its being a feature influencing the overall business environment. The Asian Average score is a straight average of all scores except those for Australia and the US.
AUSTRALIA
Dimensions of Corruption
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all 0.97 0.88 1.07 2.07 1.55 1.87 1.81 0.25 0.70 Average Score 1.25 1.18 1.10 1.15
0.50
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How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult
1.00 3.17 1.39 1.00 0.25
Comments
Australia is the one country covered by our report that rivals Singapore in terms of being seen as a country that is relatively free from corruption. Singapores overall political score was better than Australias. That was mainly because there are fewer layers of government and bureaucracy in Singapore than in Australia due to the difference in the size of the two countries both demographically and geographically. Thus, whereas Australia received different grades for national and local level political leadership and civil servants, Singapore received only a single grade. Viewed institution by institution and at the national level of political leadership only, Australia and Singapore are comparable in terms of being perceived as clean. Australias court system actually rated slightly better than Singapores and the stock market also was graded slightly more favorably. On the other hand, Singapores Customs was rated better than Australias, as was the problem of corruption in the tax authorities. The important point is not that one place is more corrupt than the other but that perceptions are extremely positive in both places and it is really splitting hairs to call one better than the other. Both systems are effective at prosecuting instances of corruption when they are uncovered and both civil services are seen to be professional and clean. The problem of corruption in the private sector is seen to be quite a bit larger in Australia than in Singapore, and to this extent it detracts from the overall business environment. However, it was not a factor at all in discouraging foreign investors from expanding in Australia. In general, foreign investors in Australia, especially US and European investors, considered it easy to build an internal culture in their organizations to ensure they meet their compliance standards. Interestingly, Asian investors in Australia, although also bullish in their assessment of being able to meet their internal compliance standards, were less so than Western investors. Asian investors were just as bullish as Western ones when it came to assessing the problem of corruption in Australias public sector, but they were more critical than Western investors in evaluating the problem in the private sector. This could be because of what they have experienced or heard about concerning the tactics employed by some Australian companies in other parts of the world. For example, there was a recent high profile case involving the controversial behavior of Rio Tinto executives in China. In a different case, Sucurency, a joint venture between the Reserve Bank of Australia and a UK-based specialist filmmaker has been under investigation by the Australian Federal Police for the past two years over allegations that it made payments to agents in a number of countries that are suspected of having been used to pay kickbacks to government officials. Some of the countries included Indonesia, Malaysia and Vietnam. The Reserve Bank has tried to distance itself from the scandal and sold its stake in the company late last year.
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CAMBODIA
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult 9.45 9.30 n.a. 9.35 9.55 9.61 9.70 9.50 9.70 Average Score 8.00 9.20 9.47 9.60
9.00 9.00 8.50 9.27 7.50 5.00
Comments
Cambodia scores poorly for almost every measure of corruption. While the perception is quite easily explained, it is not really an accurate measure of the magnitude of the problem (in dollar terms), the threat to the countrys economic development prospects, or Cambodias attraction to foreign investors. First, look at why the perception of corruption is as bad as it is among foreign investors (and most local Cambodians, for that matter): Cambodia is an extremely poor country with an extremely large bureaucracy. This means there are comparatively few actual money makers primary generators of income. Many Cambodians either live off what they can get from these money makers or from foreign dono rs. Official pay in the civil service is barely enough to maintain a subsistence level of living, which means the motivation is
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extremely strong to supplement this income which happens both legally and illegally. Moreover, a civil service job in Cambodia does not mean your typical firefighters, policemen, teachers and lower level bureaucrats. The Cambodian public sector is actually top heavy . The executive branch of government alone consists of the King, who is head of state; an appointed prime minister; 10 deputy prime ministers, 16 senior ministers, 26 ministers, 206 secretaries of state, and 205 undersecretaries of state. There are more undersecretaries than there are legislators (the bicameral legislature consists of a 123-member National Assembly and a 61-member Senate). It is debatable whether the bigger problem for Cambodia is outright corruption or an attempt by civil servants to justify their demands for payments by creating red tape for foreign investors and other money makers that serves no purpose whatsoever other than creating an opportunity to ask for a payment. Last year the government set up an Anti-Corruption Commission, but this body has no chance of being effective in the kind of environment that exists. Other institutions like the judicial system, police and various regulatory bodies are too weak to give graft fighters much support. That will depend mainly on the desire of the Prime Minister and a few other powerful individuals to throw their personal support behind corruption crackdowns, and that means cases will be arbitrary, at best, at possibly politically motivated at times. Still, corruption is not an insurmountable obstacle to Cambodias economic development. The role of state-owned enterprises is much more limited than in many Asian countries, as is the role of entrenched local family conglomerates who have built their wealth through their local political connections. Such families certainly exist in Cambodia, but they are all in their first generation of leadership and, unlike in places like the Philippines and Indonesia, do not control most of the major economic engines. The Hun Sen government is genuinely eager for economic development. It has opened the door to foreign investment. Consequently, the majority of manufacturing is foreign owned, as are key parts of the tourism sector the countrys two major economic sectors in addition to agriculture. The banking system is also largely foreign owned and still mainly cash-based, which means there is less reliance on lending and other sophisticated facilities that define a more advanced economy but also are potential vehicles for corruption. Finally, while indigenous institutions are extremely weak, there is a large presence of multilateral organizations like the World Bank, the Asian Development Bank and foreign government aid bodies that promote certain standards of governance and have some leverage with which to pressure the government to adhere to these standards. Cambodia is decidedly less developed than any of the other countries covered by this report, and the corruption situation is not pretty, but it has not prevented the economy from growing rapidly. Real GDP has bounced back strongly from the 2009 recession. Foreign direct investment is expanding, pushing up exports in the process, and there is no indication that major foreign donors are growing so frustrated with the level of corruption that exists or with the way that the government is developing its institutions that they are reducing their aid commitments or even pressing for a major revision in the direction or pace of reform. The two most significant responses to our survey were probably not the grades assessing magnitudes of different types of corruption but the ones in which respondents could comment on the difficulties they are having in adjusting to the problem. The majority recognized that dealing with corruption on a day-in and day-out basis was a challenge but they did not think it was too difficult building an internal culture in their organization to ensure they could meet their compliance standards.
CHINA
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious
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National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult
6.90 8.23 7.00 7.79 7.47 7.50 8.23 6.72 6.10 8.21 7.32 4.73 6.20
4.25 8.33 7.75 7.93 5.67 5.67
Comments
The Central Government freely admits that rampant c orruption is one of the countrys biggest problems. It is a cause of social unrest, as increasing numbers of average Chinese grow frustrated with what they consider to be abuses by lower-level officials. It is an internal threat to the Communist Party, since the worst problems of corruption are within its own ranks and therefore threatens the image of the Party unless it can be seen to be serious about fighting this internal cancer. Finally, it is a threat to the countrys economic development by inflating costs, contributing to project inefficiency, and undermining official monetary, fiscal and other policies intended to maintain balanced growth. The dollar-value of corruption in China has grown along with the expansion of the Mainlands economy. Part of our reason for making this claim is because of official statistics. From 2003 to 2009, prosecutors at all levels investigated more than 240,000 cases of embezzlement, bribery, dereliction of duty and rights infringement. Last year alone the Central Commission for Discipline Inspection and its sub-agencies received almost 1.43 million petitions and tip-offs. They punished 146,517 officials for corruption and recovered 9.87 billion yuan in economic losses for the state.
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Chinas infrastructure building boom with so many massive projects being pushed in such a relatively short period of time has provided an enormous opportunity for corruption much more than at any other time in Chinas modern history. China has spent more than 68 billion yuan over th e past five years building or expanding 53 airports. The governments spending watchdog now says that 10 of those projects cost taxpayers some 159 million yuan in false accounting and tax avoidance, while one northeast airport cost double the amount it should have due to inflated contracts. The projects in nearly half of all the airports were not open to public tenders as they were supposed to have been. Corruption involved with airports was small change compared with rumors surrounding the Ministry of Railways, whose head, Liu Zhijun, was unceremoniously fired in February. This case undoubtedly involved much more than just corruption. It is part of the on-going struggle to reform some especially powerful ministries so they are not in as strong a position to oppose the governments development program or to pursue their own agendas without the oversight to which other government departments are subject. For example, the Ministry of Railways has extensive landholdings and warehousing space (which are now being converted for a range of purposes); it operates its own schools and hospitals; and still has its own telecommunications system all of which are a sore point with the government departments that normally are responsible for overseeing these kind of activities and industries but have had to keep their distance from the Ministry of Railways. Under Mr. Lius leadership, China was to spend 700 billion yuan in railways construction this year and trillions more in following years, as it works towards its goal of having 13,000 kilometers of high-speed rail in place by next year and more than 16,000 km by 2015. Another reason we believe the dollar value of corruption is increasing in China along with its being a concern for foreign investors is the deterioration that has taken place in our survey responses over the past few years. Perceptions have not worsened too sharply about national-level political leaders and civil servants practicing corruption, but they have toward local-level political leaders and civil servants. This supports a widespread view that corruption in China is most serious at the local level and that leaders at the top of the national government and the Party can still be trusted. However, there has been a deterioration in views toward this top strata too, which is a worrying sign. Moreover, as the transition to the next generation of leaders approaches, there are some indications that corruption is being used as a way to differentiate certain groups at the top too. The housecleaning at the Ministry of Railways is a case in point. However, the other side of the coin could be just as relevant. Some individuals positioning for advancement, like Bo Xilai, the Party Chief of Chongqing, are clearly trying to claim the moral high ground over their rivals by being seen as leading the fight against corruption at the local level. People emerging from other organizations like the Communist Youth League and the PLA are similarly being presented as deserving promotion because they have had n othing to do with corruption and have good moral standards. The above relates to the politics of corruption in China, not necessarily the dollar-and-cents reality. That is much more difficult to see. Official reports have little credibility. One of the best gauges that corruption is a large and growing problem in China is the flood of Mainland money into the casinos of Macao and the real estate of Hong Kong. In both cases, the surge in business in 2010 and continuing so far this year has been truly astounding. It explains why the Hong Kong government was able to report fiscal revenues that were more than US$10.5 billion or 28.4% more than originally budgeted for the year ending this March 31 ; why Macaos gross gaming revenues increased more than 57% last year to the equivalent of US$23.7 billion, and why the 25% increase in Chinese visitors to Singapore in 2010 was a major reason that citys gaming revenues in the ir first year of operation, at US$2.8 billion, exceeded all expectations. Nothing about these sums was illegal or corrupt for Hong Kong, Macao or Singapore, but their actual sources in China are highly suspect.
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Other countries might not see how corruption in China affects them, and to the extent that economies like Hong Kong, Macao and Singapore are benefiting from capital inflows that are in many cases the earnings of corruption in China, the problem actually feels good for these economies. However, it has made these economies extremely vulnerable to Beijings ever being successful in cracking down on the problem of corruption in the Mainland. It also makes it all but impossible to have any meaningful discussion about how much the Chinese currency might be over or under valued and what is really happening to the capital account of Chinas balance of payments. The State Administration of Foreign Exchange (SAFE) reported that US$75.5 billion entered China last year that could not be explained by transactions such as trade and foreign direct investment. Of this amount, HK$40 billion were payments under the countrys new cross-border yuansettlement program, leaving HK$35.5 billion classified as speculative investments, or hot money, an amount SAFE considers to be ant like in comparison to the size of the economy. Actually, the revise d number needs to be scrutinized. It is a net figure. As noted above, tens of billions of illegal yuan are also flowing out of the country by people gambling in places like Macao and buying real estate in places like Hong Kong. These outflows are so large that they are a major factor behind recent growth in these smaller economies. Chinas net inflow figures, which ultimately are reflected in the rise in the countrys foreign exchange reserves that are not accounted for by trade or investment flows, are undoubtedly much smaller than gross inflow figures, implying that the government has less control over total flows than it likes to give the impression. The gross figures are far from ant like and more threatening for both China and the rest of the world than Beijing is willing to admit (maybe even to itself).
HONG KONG
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 1.77 1.17 3.30 0.97 0.70 3.75 2.53 n.a. 1.00 6.92 2.10 7.77 2.15
0.90 3.25 4.05
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0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult 1.10 1.70 1.67
Comments
Hong Kong is like Singapore insofar as the problem of corruption within its borders makes it much easier to police than in larger countries where there are more layers of government and bureaucracy. However, unlike Singapore, Hong Kong is not a sovereign country but a Special Administrative Region within China. Therefore, our survey could ask expatriates in Hong Kong to evaluate aspects of corruption in China as well as in Hong Kong, since there actually is a difference between national and local levels of politicians and civil servants. Also, there is a potential for corruption to leak across borders in Hong Kong or, conversely, for Hong Kongs fight against corruption to at times catch some Mainland fish in the net who otherwise would go undetected and unpunished in the Mainland. Expatriates in Hong Kong were much more critical of the problem of corruption in China than in Hong Kong. Their perceptions of national level leaders and civil servants were in line with perceptions of expatriates living in China, but unlike those expatriates, who were much more critical of the politicians and civil servants in the localities in which they worked, Hong Kong expatriates were much more positive toward local officials. As in past years, Hong Kongs government gets high marks for keeping corruption low. Both politicians and civil servants in Hong Kong are graded favorably compared not only with other Asian countries but also with developed ones like the US. The lower and middle-ranks of the civil service those parts that most people and companies encounter on a daily basis are seen as efficient and uncorrupted. However, in some government branches senior civil servants, politicians and business mix more than is probably healthy and there have been several controversies where senior civil servants have joined major local conglomerates shortly after retirement, creating some controversy about whether or not favors were being repaid. The most critical grade in our survey of Hong Kong institutions was reserved for licensing bodies related to real estate development/land projects, which is where this type of controversy is most common. Hong Kongs police and judiciary get favorable grades . Hong Kongs Independent Commission Against Corruption is also widely credited with doing a good job of fighting corruption in both the public and private sectors. However, the ICACs own image has been hurt this past year by the arrest of three officers amid allegations that they coached a man accused of manipulating the derivatives market to give false evidence. The three officers have been charged with intending to pervert the course of public justice and misconduct. The police raid on the ICAC and the on-going trial of the officers charged is being widely covered in the local media, but the transparency with which the affair is being dealt is as much an indication of the institutional strengths for dealing with corruption as a sign that the institutions themselves are flawed. Considering that Mainland-related enterprises now account for 60% of the Hong Kong stock markets capitalization and about 70% of its daily turnover, up from less than 30% a decade ago, while the balance is dominated by shares of property-related companies in Hong Kong, it helps to explain why the local stock market is graded as critically as it is in our survey. It is probably more a reflection of a concern of vulnerability that could materialize in the future rather than one that is actually happening today. The absolute grade for Hong Kongs stock market is still good better than the US, for example but it indicates a degree of caution that has probably been exacerbated by the recent decision by regulatory bodies on the Mainland and in Hong Kong, to March 23, 2011 ASIAN INTELLIGENCE Page 13
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allow A and H share companies listed on both the Mainland and in Hong Kong to choose to prepare one set of financial statements based on Mainland accounting rules, rather than two sets of financial reports based on rules adopted by the two jurisdictions as currently practiced. Our survey indicates that corruption is perceived to be a bigger problem in the private sector in Hong Kong than it is with the public sector. This could be because of the publicity surrounding such controversies as last Novembers Jockey Club bribery scandal, when 29 people were arrested for allegedly accepting bribes of up to HK$1 million for helping people join the elite Club. Other parts of the private sector in which corruption is seen as a problem include the practices of some building management offices, while the biggest examples of people flirting with graft are those who help Mainland Chinese and others non-Hong Kong residents invest and channel funds through Hong Kong in order to avoid taxes or other penalties at home for example, by helping Mainland individuals get money out of China in order to buy real estate or stocks in Hong Kong. This might not be illegal in Hong Kong, but it is not a practice that people readily admit to openly because they know it violates Chinas laws or at least bends them so far that there is a risk of penalties or reputation damage if the Chinese or the Hong Kong authorities ever want to crack down.
INDIA
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction 6.67 6.50 6.16 8.37 7.30 8.11 8.35 7.72 8.75 8.97 9.25 7.76 8.18
8.00 6.87 8.11 8.67
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How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult
6.38 6.00
Comments
The issue of corruption has grown and overshadowed the second term in office of the Congress-led coalition headed by Prime Minister Manmohan Singh. The government has been wracked by a series of scandals involving the sale of cellular phone licenses, the preparations for the Commonwealth Games, a land scam involving high level military officers, and improper property loans made by state-owned financial institutions. Mr. Singh has promised to punish the guilty and to reform political funding. The Central Bureau of Investigation says charges are about to be brought against Indias former telecoms minister and two companies suspected of corruption (as many as 31 companies were summoned for questioning in the telecoms scandal). Those facing charges will appear before a special court, currently being established, to try the corruption case in New Delhi. Still, Indians are questioning whether or not the prime minister has the political muscle to fight graft and whether the actions now being taken are more for show than proof that the government really is cracking down on business practices that are common but corrupt. Prime Minister Singh has been put in such a defensive position that most of his recent statements have been to stress how he has not personally been involved with corruption, even through it appears that almost everyone around him was. This point is underscored by a recent Wikileaks report that the ruling Congress Party paid off parliamentarians back in 2008 to pass the US-India civil nuclear deal. Making matters worse, the Prime Ministers appointment of Mr. P. J. Thomas as chief of the Central Vigilance Commission, the countrys main anti-corruption body, was successfully challenged by the Supreme Court because Mr. Thomas was formerly the secretary of the now disgraced telecoms ministry and faces charges in a corruption case in the southern state of Kerala involving palm oil imports. Neither the Central Bureau of Investigation nor the office of Chief Vigilance Commissioner is satisfactorily independent of the government. Both need to be overhauled, given more manpower and resources, as well as independence. It is getting hard to find senior officials at the national or state level who are not tainted by corruption. This issue has struck an extremely sensitive nerve with the public. In January of this year thousands of Indians responded to a campaign organized by civil society group India Against Corruption by attending marches calling for anti-corruption laws drafted by citizens instead of measures proposed by the government. In an open letter to the government released last January, 14 industrialists, former central-bank governors and retired judges warned that corruption is harming Indias growth. Only a fraction of the money destined for infrastructure and other projects to help the poor currently reaches its intended destination. Projects are delayed until payoffs are made, and contracts frequently are awarded not on the basis of the best price or quality but under-the-table commissions. The Federation of Indian Chambers of Commerce and Industry is worried that the problem of corruption and the way it is being treated in the media could seriously hurt Indias international image and scare away potential investors. It takes two to tango and the level of corruption in the public sector would not be possible if there were not plenty of private businessmen willing to pay bribes and work the political system. This is why some leading businessmen are bemoaning the telecommunications scandal for the way it has let the genie of corrupt ion out of the bottle by revealing how business is conducted in India. The private firms that won the 2-G telecoms licenses are known names, so people can and do see both sides of the corruption equation in this case. The reputations of
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a lot of prominent businessmen have been dirtied, which explains why some have expressed concern that the anti-corruption campaign could sully the reputation of industrial houses and destabilize the government. A year ago when we did out last survey, all this was suspected. This year, it is known for fact, which is probably why so many of the grades in our survey have deteriorated as badly as they have. The only defense of the private sector that rings a bit of truth is that the government must take a bigger share of the blame because it holds up the hoops of corruption through which entrepreneurs are obliged to jump. Viewed another way, Indias problem is not the influence that businessmen wield in politics but the influence that politicians wield in business. The recent scandals have prompted a pointed debate about whether India, as its economy gallops ahead, can become more transparent or will forever be mired in a culture of corruption.
INDONESIA
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult 9.65 9.50 6.41 9.17 9.21 8.86 9.10 8.49 9.50 8.89 9.19 9.11 9.24
8.25 2.49 8.89 9.25 8.75 8.00
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Comments
The biggest change in corruption in Indonesia in the past year does not have to do with any success in cracking down on the problem or with new embarrassing incidents that show it is as bad as ever but with growing disillusionment with the credentials of President Susilo Bambang Yudhoyono as being clean and leading the fight against graft. One of the main reasons Mr. Susilo was able to win the presidential elections twice was because of his success in convincing the electorate that he was not tainted by corruption personally and would use his period in office to fight the problem. There is still no evidence that he or his family have profited personally during his time in office, but he does not have the political strength to avoid making deals and compromises with other power centers who have a worse reputation for graft. He is therefore being tainted by his association with these people. On one level, Mr. Susilos behavior can be cons idered political pragmatism. Other power centers in the civil service, state-owned companies, the military, religious groups and political parties like Golkar have the power to undermine the presidents entire agenda, not just his fight against corruption . Whatever disappointment there might be regarding the continuing high levels of corruption, Indonesias economy has performed strongly during Mr. Susilos period in office. More foreign investors are showing an interest in the country. Average Indonesians have enjoyed a rise in their standards of living. Rebellions like the insurrection in Aceh province have stopped. At a time when the gaps between the general population and the governments of countries like Egypt and Libya are looking increasingly strained, there is no indication of this kind of disenchantment in Indonesia. It is starting to be viewed as one of the most stable Islamic countries in the world and proof that Islam and democracy are compatible. Corruption is clearly a problem a big one -- but it is not a fault that is going to result in rioting in the streets in the near future. Neither are government security forces cracking down on activists who are trying to publicize incidents of corruption. This distinguishes Indonesia from a country like China and Vietnam. The problem in Indonesia is closer akin to that in India. and it is probably no coincidence that grades in our survey are similar for these two countries. Indonesias Corruption Eradication Commission (KPK) has been weak ened by special interest groups who feel threatened by the anti-corruption movement and are bent on defending the status quo. However, the KPK is still not a toothless tiger. In January, for example, it arrested 19 former and sitting members of parliament and an ex-government minister for allegedly accepting bribes for electing a leading official at the Central Bank. However, the KPK does not have the high-level backing needed to go after certain well-connected people in the private sector, military and government. Perhaps even worse, those people who are arrested and prosecuted for corruption are really not penalized as harshly as the system would like the public to believe. This is a problem Indonesia shares with places like the Philippines and South Korea. This truth was brought home by an embarrassing scandal last year in which an Indonesia tax official, Gayus Tambunan, not only made millions of dollars helping companies evade taxes but also made a mockery of the court and prison system by paying off police inspectors and prison guards in exchange for allowing him out of jail for dozens of day trips. Apparently, this was not just an isolated incident but a common practice. In another case, an Indonesian businesswoman sentenced to seven years in jail for selling government-subsidized fertilizer hired someone else to go to jail on her behalf. It is for reasons like this that police are graded as poorly as they are in Indonesia, why the system is graded so badly for prosecuting and punishing individuals for corruption when abuses are uncovered, and why bribery by private sector parties is considered to be widespread. In the case of tax official Gayus Tambunan, for example, he testified that at least 149 companies, including those linked to the powerful Bakrie family, paid him to evade taxes. President Susilo might be serious about wanting to fight corruption, and average Indonesians clearly are upset with the problem, but those favoring preservation of the status quo still have the upper hand. President Susilo has ordered
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Indonesian authorities to investigate the allegations in the 149 companies named by Mr. Tambunan. There likely will not be any convictions resulting from these investigations or more than a few token examples where companies are forced to pay the taxes they bribed Mr. Tambunan to evade.
JAPAN
1.90 7.13 3.45 1.90 1.00 3.10
Comments
Japan is an example of a country where the pervasiveness of corruption is relatively low, but its importance as an issue is large and growing. The grades in our survey reflect the former point. Corruption is not a major feature of Japans business or political landscapes and most of the grades in our survey compare favorably with perceived conditions in both developed Asian and non-Asian countries. Major institutions are
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perceived to be clean and run professionally. The court system prosecutes acts of corruption quite effectively when they are uncovered, and graft is not a feature that intimidates foreign investors much at all. However, corruption exists. One of the charges brought most frequently against senior politicians relates to campaign contributions. Seiji Maehara, for example, resigned this month as foreign minister to defuse a scandal caused by his acceptance of a campaign contribution from a Korean living in Japan (which is illegal under Japanese law), while former Democratic Party leader Ichiro Ozawa was ousted from the party over a scandal involving misuse of campaign funds. This type of abuse might seem relatively small compared with what goes on in most of the other countries covered by this report, but the scandals have seriously interfered with the governments ability to implement any major polici es. The result is legislative inertia and frequent changes in government. In the wake of last weeks earthquake and tsunami disaster, Japan has a lot more to worry about than political donation scandals. It is possible that politicians from different parties might set their differences aside temporarily so the government can concentrate on dealing with the emergency and begin the reconstruction effort. However, this process will not get far before debate and controversy flare up. In a country where so much value is placed on consensus, there is no way a government can put together and implement quickly a reconstruction program involving so much money without debate. The first part of the reconstruction program will involve a review of what Japan could have done better to prepare for the disaster. While this will involve mainly new ideas for design of port facilities and tsunami barriers along the coast, it will also mean a review of the inspection and safety procedures, which are already a source of controversy but now, in the wake of the disaster, could become even more controversial and politicized. It is the early days of the crisis, but Tokyo Electric Power (Tepco) is already coming in for criticism for the way it has handled the power blackout coordination. The public is also likely to demand and get a review of past Tepco mistakes, like when Tepco admitted back in 2002 that it had falsified the results of safety tests on the containment vessel of the No. 1 reactor, which as of this writing is one of the ones that is highly vulnerable to a meltdown. Again, in 2003, Tepco shut down all of its nuclear reactors for inspections, acknowledging the systematic cover up of inspection data showing cracks in reactors. So far it appears that the reactors stood up well to the earthquake, but the damage was caused by the tsunami. There is bound to be an investigation if anyone spotted this potential weakness before and, if so, how this report was handled. Japan is entering a new chapter. As Prime Minister Kan has already analyzed, this is the biggest challenge the country has faced since World War II. So far one of the most outstanding features has been the absence of looting and violence by individuals and gangs that was typical in so many other countries in aftermath of disasters like Hurricane Katrina in the US and the 2010 Chile earthquake. The bottom-up response of people in Japan has been to help each other as much as possible. It is an affirmation of one of the most positive aspects of one of the worlds great cultures. With the government already facing a fiscal crisis even before the reconstruction work has begun, there is even less room for the waste and inefficiency of corruption than before. If incidents are uncovered, they are likely to be dealt with severely and could be political game changers by turning the public strongly against any groups associated with such abuses.
MACAO
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders 5.70
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City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult
4.13 7.89 5.77 4.12 3.90 n.a. 5.21 4.97 6.39 5.93 n.a. 4.20
3.80 4.70 5.70 4.68 2.13 3.70
Comments
The Macao government is doing more to fight corruption, but the magnitude of money involved is so much larger than in earlier years that the dollar-value of the problem is soaring. Senior officials are under pressure, on the one hand, to let casinos and real estate developers have the free rein they need to keep expanding at a breakneck pace while, on the other, to ensure that Macaos poorer and middle-class residents are taken care of too and that the quality of life for all residents is actually enhanced. If the wealth generated by Macaos gaming boom is enjoyed only by a small elite while the rest of the population suffers from rising costs, deteriorating services, and displacement by immigrants, it is a recipe for social unrest. Striking the right balance will be a major challenge for the government. Corruption is the variable that could upset this balance. It is difficult to overstate the transformation that has taken place in Macao since 1999. Prior to the handover from Portuguese to Chinese sovereignty, Macao was an island in decline, with a growing problem of triads and gang violence. However, following the handover, China moved quickly to clean up the violence. It cracked down down on the triads, backed the Macao government in ending the gaming monopoly and opened the market to competition, including the largest casinos from Las Vegas, and turned Macao into the gaming hub of Asia. Today, the total volume of gambling in Macao is some four times larger than in Las Vegas. Back in 2002, gaming revenues totaled US$2.6 billion. Last year they amounted to US$23.7 billion. The growth in just one year from 2009 was 57.5%.
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The amounts of money involved are substantial: nearly US$43,000 last year for every man, woman and child in Macao. Officials with licensing authority have correspondingly more power if power is defined as the dollar value of the projects they are approving and with this comes more temptation and opportunity for personal profit. This is especially the case since the private players involved are eager to stake out claims to the worlds most rapidly growing gaming market. They dont want licenses tomorrow; they want them yesterday. They want property re-zoned and they want permission to bring in large numbers of foreign workers from a variety of different countries so projects can be built and staffed as quickly as possible. This kind of growth and demands associated with it are difficult to regulate. There have been a few high profile examples of senior civil servants accepting bribes, but Macaos anti-corruption police organization, set up shortly after the 1999 transition, and court system have done a good job of prosecuting these cases transparently so the public could see justice done. However, the entire focus on corruption to date has been on the problem as it exists in the public sector. What has been largely ignored are the private individuals and companies who have been willing to pay the bribes. What could be unique for Macao is that this private sector corruption could involve more foreign investors than is usual, further complicating the issue. A crack in this opaque world was opened recently when the Las Vegas Sands Corp. was sued by a former chief executive of the companys main casino in Macao, Sands China. The American executive, who says he was fired in the middle of last year without cause, alleges that his foreign employer pressured him to use improper leverage against senior government officials of Macao to get them to help the compa ny with a property deal and labor quotas. Nothing has been implied yet that the Macao officials actually helped the company, but Las Vegas Sands has announced that it has received subpoenas from the US Securities and Exchange Commission and the Department of Justice. It will be interesting to see if Macao launches any formal investigations of its own into these kinds of allegations. The local Commission Against Corruption is undergoing some changes in senior personnel, so the spotlight is on the organization, especially since it only recently got the power to investigate private sector corruption. If Macao follows the path of Hong Kongs ICAC, the initial focus and convictions will be weighted heavily in favor of public sector corruption, but as time goes on the emphasis will shift more to the private sector. This did not happen overnight in Hong Kong, but over the span of two decades beginning in the mid-1970s, but as rapid as Hong Kongs economic growth has been, it has never experienc ed anything resembling Macao gaming boom. Moreover, in Macaos case, there is also the element of gamblers from Mainland China. Some are gambling their hard-earned cash. For others, the money came more easily and was not earned but gotten through ways that could get them a jail term or worse in China. Beijing is turning a blind eye to this issue so far, but this probably will not always be the case. When the crackdown happens, it will be difficult for the Macao authorities to do anything but support it.
MALAYSIA
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? 6.92 6.98 6.10 6.15
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The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult
7.79 6.21 5.77 6.39 5.98 7.10 7.11 6.32 6.17
5.25 4.43 5.25 5.70 4.00 4.05
Comments
Malaysias problem with corruption is not so much the magnitude as the failure of leading officials to acknowledge that it exists. Throughout the Mahathir years there was a high risk that anyone who made accusations of corruption would be threatened with a lawsuit. Consequently, people were intimidated into not talking about the problem. Even our own survey scores were tainted by the bias. It was the elephant in the living room that everyone ignored. When Dr. Mahathir was succeeded by Abdullah Ahmad Badawi and led UMNO to a stunning election victory in 2004 on a strength of a campaign that emphasized the need to fight corruption, he opened the door to a public discussion of the problem. It became obvious that corruption was a political hot button that sparked a strong negative reaction from Malaysians of all races and religions. Our own survey grades suddenly jumped not because the problem was worsening but because people, including foreigners in the country, suddenly felt safer talking about it. However, the enthusiasm that greeted the anti-corruption campaign turned into disappointment and frustration as Mr. Badawis term of office wore on due to his perceived failure to fight the problem effectively. This provided opposition parties with an opportunity to claim the moral high ground and start building their base of support. Only when the scales threatened to tip in favor of the opposition did the ruling coalition pick a new leader, Dato Sri Najib Razak, who renewed calls for a crackdown on corruption, along with other reforms that would address major ethnic and religious grievances. Malaysians are waiting to see if Prime Minister Najib will be more effective than his predecessor. Our survey scores remain quite negative, especially for the police but also for civil servants and political leaders, although Malaysias scores are better than for most other developing Asian countries.
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One problem with assessing the extent of any improvement in the fight against corruption is that it is in the interests of opposition political parties to publicize instances of graft and to argue that no progress is being made. This is one reason why scandals like cost over-runs in the Port Klang Free Trade Zone, alleged mis-use of funds derived from the Sarawak timber industry, and the death of an opposition activist under mysterious circumstances after being interrogated by anti-graft officials go on and on. As long as the opposition can make political mileage from these kinds of issues, they will keep them alive in Internet discussion sites and other places. The reputation of the official media for being so tightly controlled by the government might actually be working against the government since there is distrust of the content in the official media, while the unregulated unofficial media has more credibility in the minds of many Malaysians, no matter whether it deserves it or not. It will take years to improve Malaysias reputation for corruption. There will have to be real headway in investigating and prosecuting cases and that progress will need to be seen in transparent trials and treatment in the media. If the opposition parties gain political power in elections, it might be easier to convince the public that a high-profile anti-corruption fight is working, since that would be in line with the promises of the opposition all along. However, if there are more examples of bid-rigging, cost-overruns and other abuses after the opposition comes to political power, it would only make people more cynical and convinced that corruption in Malaysia is endemic. If UMNO and the ruling coalition are able to keep winning elections (clean, transparent elections, not ones tainted by allegations of corruption or manipulation of the system), it will take longer to change perceptions, since Malaysians will have to be convinced that the leopard actually has changed its spots. There will have to be more high-profile court cases that result in convictions and tough penalties so that the reputations of key institutions can be improved. This will take actions being seen, not rhetoric heard, which is where Malaysia is at today.
PHILIPPINES
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all 8.89 8.14 6.57 8.73 8.97 8.70 8.78 9.25 9.25 7.57 8.51 8.10 8.89
8.10
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How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult
9.21 8.50 8.90 8.25 6.70
Comments
The Philippines may not be the most corrupt country covered by this report. Unlike China or the US, the magnitude of the problem in the Philippines is definitely not so large that it has many cross-border implications. But that is more a measure of just how much corruption has cost the Philippines over the decades. The Philippines is, perhaps, the Asian country that has been hurt the most by corrutpion. If one looked at the end of World War II as the starting point for modern Asia, the Philippines today should be the richest economy on a percapita basis in Asia and a leader in many fields, from the size and sophistication of its manufacturing sector to the depth and role of its capital market. After all, it started out the post-WWII period as the closest ally of the US, with relatively open access to the US market and enjoying more direct investment from US companies and banks than any other Asian country. Its educational system, judiciary, capital market and other infrastructure were superior to most other Asian countries. Unlike Korea, Taiwan, Hong Kong, British Malaya and Japan, the Philippines had a functioning democratic system. So what went wrong? Why did the Philippines mark time, allowing other countries in Asia to surpass it economically and in terms of regional and global importance? Why are average Filipinos today some of the poorest in East and Southeast Asia instead of some of the wealthiest, and why has 10% of the population left the country is search of employment abroad? Of all the reasons, corruption deserves to be near the top of the list. It was a cancer that caused the Philippines to focus on import subs titution at a time when Asias most dynamic economies were nurturing export-oriented industries. It allowed an extremely small number of families to keep an iron grip on a disproportionate amount of the countrys wealth, land resources and political power. It undermined the quality and independence of institutions like the police and judiciary. It emasculated the countrys middle class, weakened the quality of the educational system and military, and stunted the growth even of industries in which the country should have a strong natural competitive advantage (such as tourism). It is tempting to blame the abuses of the Marcos regime for all the countrys problems, but Marcos was able to consolidate power the way he did only because he could point to many of the corruption-related problems cited above as an excuse for his actions. It has been exactly 25 years since the collapse of the Marcos regime. Since then the country has had five different presidents, and yet the Philippines has not been able to start moving up places in the league of Asian economies. It still has a reputation for high levels of corruption. The Philippines now has a president who is personally untainted by corruption allegations, which stands in sharp contrast to the previous two administrations. However, it remains to be seen if Mr. Aquino will be effective in reducing the more systemic features of corruption. Stronger predecessors who were also relatively free from corruption allegations, such as former President Fidel Ramos, were unable to make a major dent in the problem. Mr. Aquino still has to work with institutions and bureaucrats who have bad habits built up over generations. All Mr. Aquino can do is to make a start in addressing the problem and to set personal standards of behavior that future presidents will be under strong pressure to match instead of being able to slip back into the
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shoddy standards of the past. If he can do this, it would be no small feat and might be enough to generate a sense of optimism about prospects for the Philippines that has been lacking for years now. Other countries that are poorly graded in our corruption survey like Cambodia, Indonesia, Vietnam, China and Thailand have not lost this sense of optimism, and that is one reason why more foreign investors seem to be attracted to these countries than to the Philippines.
SINGAPORE
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult 0.51 1.75 1.97 0.59 0.83 1.30 0.78 0.45 1.00 0.98 n.a. 1.10 n.a.
0.87 1.70 2.76 0.37 1.10 0.70
Comments
The Singapore government has no tolerance for corruption and uses an effective combination of carrot and stick to keep graft low. The carrot is to pay civil servants and politicians a high salary and to pursue policies that foster rapid economic growth in which the entire population benefits. The stick is to police and prosecute
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hard all cases of corruption when they are uncovered. Viewed from within, therefore, corruption is not an attractive proposition. The benefits are not worth the risks. If there is any big downside to Singapores zero tolerance to corruption (none is obvious from our survey results), it is that Singapores cross-border corruption risks are increasing. Foreign companies that invest in Singapore are expected to comply with Singapores laws regarding governanc e, transparency, regulatory requirements, etc. If they commit acts of corruption, they will be prosecuted according to local laws, and the onus is on the foreign companies to know what the spirit, not just the letter, of the law is in Singapore. In this aspect, Singapore is similar or even tougher than Hong Kong. Singapore does not have a relationship with any foreign government the way Hong Kong has with China. If a really major state-owned Mainland company were to fall afoul of Hong Kongs anti-corruption laws, the Hong Kong authorities would be under some pressure at least to communicate with Beijing on the best way to handle such a sensitive development. Singapore is under no such pressure. The other direction is more complicated. Hong Kong does not have a sovereign wealth fund like Temasek or GIC. Foreign direct investment from Hong Kong is undertaken by private individuals and companies, and they are responsible for meeting the requirements of the countries in which they are investing, which may or may not mean that they behave differently in, say, China, than they do in Hong Kong. In Singapores case, the biggest foreign investors are government-linked companies and they are investing what are essentially Singapores national savings. They cannot be seen to be following one set of standards in Singapore and another set in a different country. However, many of their investments are joint ventures, and they are vulnerable to being tarred with the practices of their local partner. Thus, when Temasek invested in Shin Corp. in Thailand, it fell into a public relations nightmare when Prime Minister Thaksin Shinawatra was ousted by a coup and later was accused and convicted of corruption in local courts. It does not matter that Temasek behaved completely above board in its investment. It was hurt simply by being associated with a person whose actions, for whatever reason, were labeled corrupt by his enemies. It would be nice if this was a one-off case, but it most definitely will not be. Singapore is investing in countries like India, China, Indonesia and a number of others where major deals can sometime fall victim to corruption scandals. A good example is the 2G telecoms corruption scandal in India, or the ongoing investigations in to airport and railway projects in China. These are exactly the kinds of projects that Singapores sovereign wealth funds are looking for investment opportunities. Making sure their internal standards for corruption are not in any way compromised by the different standards that exist in the countries in which they are investing will not be easy. Even if there is no legal risk, there is a reputation risk to consider. The best due diligence will not uncover some of the potential political risks that could occur further down the road, and the fallout from scandals abroad could have political repercussions back in Singapore if only by bringing into doubt the judgment of managers with close links to or appointed by the government. There is a saying: he who lies with dogs comes up with fleas. If the 1997-98 Asian financial crisis and the 2008-09 US financial sector meltdown showed anything, it is that there are many dogs in the world when it comes to companies whose managements can be accused of unethical or corrupt behavior. This is perhaps the biggest risk that Singapore faces from corruption in the future. It has its own house in order, but that will not protect it from the problem that exists elsewhere. Even if the absolute magnitude of the corruption problem in the country in which Singapore is investing is not increasing, Singapore exposure to these countries is.
SOUTH KOREA
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6.00 5.70 8.95 5.90 3.70 5.10
Comments
Progress is being made in reducing corruption in both the public and private sectors, but this is going to be a long process and many people are looking at the issue of corruption in Korea through rose tinted lenses expecting too much progress too fast, while ignoring on-going problems with graft. The countrys first anticorruption commission was set up in 2002 and since then it has merged with other bodies so that the fight against corruption is more centralized than before. Although it is portrayed as being independent, the AntiCorruption and Civil Rights Commission is vulnerable to budgeting and manpower constraints and some of its biggest backers have been found, with the benefit of hindsight, to have practiced corruption themselves, which raises the question of how much the governments anti-corruption campaign has been for public relations purposes and how much has been a substantive program backed by genuine political will and muscle. It is hard to downplay the seriousness of corruption in government circles or suggest that it has taken enormous strides over the past 20 years of democratic government when so many former presidents and/or their immediate family members have been jailed for accepting bribes. The previous president, Roh Moo-hyun (who started the first anti-corruption commission), committed suicide after apologizing over allegations his that
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family took US$6 million in bribes during his 2003-2008 term. Moreover, the fact that all this came out only after Mr. Roh left office raises the question of how much independence government investigators had to pursue rumors of corruption at the highest level. After all, the anti-corruption office reports to the president. In every election in recent years there have been some elected officials who are subsequently booted out of office because they have violated the campaign spending laws. Moreover, when it comes to major military contracts, there have been instances of bribery and influence peddling in major military equipment programs. There are also continuing allegations that promotions in the military and perhaps in the senior ranks of the civil service are based upon private favors being offered and accepted. Then there are the recent scandals such as the KEB/Lone Star case, which many Koreans still believe, despite the lack of evidence, that the former official who approved the Lone Star takeover deal was on the receiving end of some favors. And in the private sector, it is even worse! Chaebol leaders convicted for corruption have been excused from their sentences not just on rare occasions but normally! Late last year, government prosecutors indicted the chairman and six other senior executives of the Taekwang Group, the countrys 40th largest chaebol, on charges of embezzlement and breach of trust. The companys leaders are also alleged to have set up a slush fund to finance illegal lobbying of influential figures, including tax agents. The chairman apologized for causing controversy, but there has not been any day of legal reckoning or real punishment to those who were responsible. In our survey the grade Korea received for the magnitude of the problem of private sector bribery, at 8.95, was worse than for any other country covered by this report, developed or developing. This could help explain why the shares of Korean companies historically have traded at a discount compared with what they should be priced at based on the quality of their products and profits. Perhaps most serious, a number of foreign investors we interviewed noted that it is difficult setting things up in their Korean operation so that the local staff abide by head office compliance processes. The score in our survey for Korea for this variable was much worse than for any of the other developed countries covered by this report. Old habits die hard, especially where there might be a cultural dimension to them.
TAIWAN
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military 6.62 4.97 6.49 4.10 6.72 6.88 5.49 6.17 7.23 6.83 5.00 5.25
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How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult
6.94
6.70 5.89 7.10 5.65 3.65 3.75
Comments
The good news for Taiwan is that it is no longer the worst rated developed country of Asia in terms of how corruption is perceived. Korea has that dubious distinction this year. Moreover, Taiwan is also not graded as bad as China, which gives the government in Taipei an ability to claim its ethical and governance standards are higher than in the Mainland. However, the problem of corruption is Taiwan is still bad. It needs to be looked at from a longer-term perspective. The problem was much worse in the 1950s, 60s, 70s and 80s, when the KMT sat unchallenged on a much more authoritarian system of government and also owned some of the islands biggest domestic banks and industries (including many monopolies). Perpetrators of corruption in those years were largely immune from prosecution, since they controlled the police and judicial system too. Average Taiwanese did not have much choice but to accept the situation for what it was. This changed as democracy took root and the opposition DPP could use charges of KMT corruption to broaden its own grassroots base of support. However, matters took a turn for the worse once the DPP actually gained political power and won the presidency. In this position they were able to highlight instances of KMT corruption even more. Unfortunately, they were also in a position to use their new access to public funding to carry out acts of corruption themselves, which they apparently did on a fairly large scale. However, the more democratic system, including a freer press and a more independent judiciary, kept the DPP on a shorter leash than was the case when the KMT was in power. In the opposition, the KMT could play the role of whistle-blower, and the DPPs acts of corruption did not stay secret fo r long. The problem of corruption under the DPP went all the way to the top, and shortly after he left office former President Chen Shui-bian found himself facing corruption charges, of which he was convicted and jailed. The DPP is still trying to recover from this blow, but its image as the clean party has been destroye d. The KMT has tried to reinvent itself as the new clean party. So far President Ma Ying-jeou has escaped serious allegations involving his personal behavior, but there has been no shortage of scandals. Three officials from the Forestry Bureau, under the cabinet-level Ministry of Agriculture, were recently suspended due to accusations of corruption on the public bidding of offshore island afforestation projects. In the middle of last year, three High Court judges and a prosecutor were detained. Two of the judges were accused of taking bribes from a former
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KMT lawmaker facing corruption charges, in exchange for a 'not guilty' verdict. Another judge and a prosecutor allegedly acted as brokers. The military has also seen its reputation seriously tarnished by a string of scandals. Early last year a retired lieutenant general was indicted on charges of bribery, blackmail and leaking secrets. The incident led to the investigation of 114 generals for alleged corruption or bribing their way to their rank, creating questions not only about the integrity of the islands armed forces but also about their combat readiness. As in Korea, the problem of bribery, fraud and other forms of graft is probably at least as bad in the private sector as in the public sector. However, the Taiwan population is much more sensitive to the issue of corruption than it was in the old days. It is frustrated that the problem seems to permeate the system and key institutions as much as it does. This frustration has only grown with the realization that the issue tarnishes both political parties and that many previous attempts to show that the fight against corruption is being intensified were more for show than substance. Whoever runs for office in Taiwan not just for president but for any other position now has to deal with a voting public that is looking and expecting to find dirt. At best, people are skeptical, but there is a danger that they could be turning cynical. What is the difference? The former people have doubts but are still keeping an open mind about the possibility of a person being what he says he is and doing what he says he will do. The latter group have no belief what-so-ever that the person running for office is what he says he is and think he will act corruptly once in office no matter what he might promise in the election campaign.
THAILAND
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant 9.23 6.94 5.33 7.90 7.33 8.68 8.76 9.37 8.70 7.90 8.15 7.81 8.03
8.16 9.10
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How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult
7.70 7.55 3.67 4.00
Comments
Endemic corruption probably ruled out a nuclear power industry for Thailand long before the present disaster in Japan. Even Thais who favor nuclear energy have argued that its establishment in their country would be too perilous because, they say, every major infrastructure project over the years has been impaired by corrupt practices that led to design flaws, shoddy construction and the use of degraded materials. Thai academics who have been researching corruption reported recently that private companies awarded state contracts have had to pay on average 5% of a projects value in kickbacks in order to secure the contracts. They identified bureaucrats, politicians, the police and army as the most corrupt groups. Earlier the National Counter-Corruption Commission calculated that graft had siphoned off more than US$700 million from government funds in one single year although that amount covered only losses from the direct embezzlement of funds and property. Bribe money was not included in that sum. The United Nations has characterized Thai corruption as highly systematic involving people working both in the public and private sectors. Efforts to eradicate corruption are rapidly countered by more careful planning and implementation by the lawbreakers. Corrupt government officials skillfully utilize laws and regulations to benefit themselves and their business cronies. They set criteria and conditions for the bidding for construction contracts in a way that will benefit themselves and private sector clients but will discriminate against competing bidders. When the government offers a monopoly concession to private firms as it sometimes does, the temptation to pay bribes is enormous. Meanwhile, officials are also misappropriating funds from the government budget and filing falsified accounts and expenses claims. Officials who perform inspection and business licensing duties may often fail to provide those services unless those needing them reward them financially. The convoluted controls on the production and sale of a wide range of goods are an open invitation for corrupt practices as they enable politicians and officials at national and local levels to interfere in the allocation of quotas and subsidies. As these malpractices apply particularly to foodstuffs, consumers are directly hit. This happened recently by what appears to be an engineered shortage of cooking oil, a vital ingredient in Thai kitchens, and a savage leap in its price. Fears that something similar is shortly going to happen with the supply and price of sugar are now widespread. These events will be issues at the mid-year election and could damage the governments chances at that poll. While being well-aware of corruption, Thai families have not always in the past felt so directly hurt by it,
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but the current wave of anger over graft that is this close to home is evident in the slanging that the prime minister and others in the government now sometimes suffer when they appear in public places. That form of abuse is uncommon in Thailand. All the corruption reports blame chronic political instability, weak law enforcement and the fragmentation of the anti-corruption agencies for the persistence of corruption. One agency, for instance, deals with corruption among politicians, another with corrupt bureaucrats and others still with corruption in the corporate world. Shaping all their approaches to the problem is a culture that favors keeping these matters in house as much as possible (unless it is politically expedient for thos e in power to make corruption details public, as was the case when those staging the last coup tried to justify their actions by accusing former Prime Minister Thaksin Shinawatra of corruption). Another brake on the fight against corruption is the inability of the media to act as an effective watchdog. Newspapers and the broadcast media do not have the expertise, courage and legal protection for that job. There are few if any investigative reporters and on those rare occasions when someone has come up with an exposure of graft, the report risks being silenced by legal action or disowned by his bosses. The rapid spread of social networking may be improving that situation although censorship is cramping the development of new media. Corruption is often hidden by the opacity of government policies, a problem of major concern to foreign investors and of foreign business more widely and one that certainly deters new and expanded investments. As a result some foreign firms have invested elsewhere in the region. Most expatriates working in Thailand are not unduly worried about corruption as it impinges on them directly but they are convinced that the lack of government transparency in business laws and regulations facilitates corruption. The corruption of national institutions is probably even more serious than bribery and extortion. This development has been quickened by the politicization in recent years of the judiciary, the civil service, the police and military. The new political powers accorded the judges in the militarys 2007 constitution require them to appoint half of the Senate, the upper house of Parliament, as well as members of supposedly apolitical bodies that deal with elections and corruption. Public confidence in the integrity of the courts has sagged since they began delivering judgments that have seemed tailor-made to please the government and the elite groups that sustain its authority.
UNITED STATES
To what extent do you perceive corruption to be a problem in the following positions? Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious National-level political leaders City and other local-level political leaders Civil servants at the national level Civil servants at the city level To what extent do you perceive corruption to be a problem affecting the following institutions? The police department The court system The stock market Customs The taxation bureau 1.98 2.11 3.87 1.32 1.90 2.80 3.75 2.25 2.99
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Government licensing bodies related to real estate development/land projects Inspection bodies, e.g., fire, health, environmental compliance The military How effective is the system at prosecuting and punishing individuals for corruption when abuses are uncovered? 0 = effective, 5 = average, 10 = ineffective How serious is the government about fighting corruption? 0 = serious, 5 = average, 10 = not serious at all How tolerant are average citizens of corruption? 0 = intolerant, 5 = moderate, 10 = extremely tolerant How widespread is the problem of bribery by private sector parties? 0 = uncommon, 5 = average, 10 = common To what extent does corruption detract from the attractiveness of the overall business environment? 0 = not at all, 5 = moderately, 10 = a really major detraction How difficult is it for your organization to deal with corruption? 0 = easy, 5 = average, 10 = difficult How easy is it building an internal culture in your organization to ensure you meet your compliance standards: 0 = easy, 5 = average, 10 = difficult
3.79 2.36 2.50 4.20
2.37 1.53 4.20 2.39 2.30 2.13
Comments
As noted in the Regional Overview of this report, corruption is probably the biggest in dollar terms in the US than any other country in the world. Moreover, the fallout from serious acts of corruption in the US has negative global implications than is the case with other countries. This means they adversely affect the largest number of people. The US has a sophisticated monitoring system to police against corruption, but the US economy is so large and complicated, there are so many layers of government, and many rules are so complex that the potential for corruption is huge so huge the the country attracts some of the sharpest con artists, fraudsters, and unethical professionals in the world. Just look at the international cast of characters in the ongoing trial of Galleon Group founder Raj Rajaratnam, who faces 14 counts of securities fraud and conspiracy. However, it would be unfair to blame the problem of corruption in the US on foreigners. Bernie Madoff, Allen Stanford, Jeffrey Skilling were all home-grown figures. So were Ted Stevens and Tom DeLay, Charles Rangel, all of whom rose to positions were they were some of the most respected public sector people in the country until their darker sides were exposed. This is just a tiny sampling. Although some of the biggest US banks and companies have been involved in major scandals in recent years, there have been few prosecutions. Proving such cases is extremely difficult and expensive, and the system is such that companies can frequently simply pay a penalty and avoid actual prosecution. This might explain why the grade in our survey assessing how effective the system is at prosecuting and punishing individuals and companies for corruption when abuses are uncovered is as bad as it is. Perhaps it should be even higher. There is another side to the cost of corruption in the US that does not jump out from our survey results, but it is extremely significant. It is hinted at in the last two grades assessing the difficulty companies have in dealing with corruption and how easy it is to build an internal culture in organizations to ensure they meet compliance standards. At first glance this might be taken to imply the existence of a culture of corruption in the workforce, a character flaw of employees that employers have to guard against (although employers would presumably have this same character flaw). What we think respondents to our survey were referring to when they provided grades for these two variable is the extremely high cost of compliance that exists in the US, particularly in the banking industry. This could be a case where the medicine is as bad as the disease from the
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patents perspective. There have been many scandals over the past decades including but not confined to the savings and loan scandal, the Dot.com bust, different money-laundering scandals, the Long-Term Capital Management scandal, and, now, the sub-prime crisis. Industry regulators in the US have responded by slapping on more regulations and tougher compliance requirements. What is clear is that these requirements are time consuming and expensive. What is not clear is that they work well. The scandals keep happening, but the extra compliance requirements could be undermining the competitiveness of US banks and multinationals and causing an exodus of business from the US quite likely to jurisdictions where regulatory oversight errs on the other side (insufficient) and corruption is easier to do.
VIETNAM
7.50 8.30 8.10 8.30 5.36 4.61
Comments
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Corruption in Vietnam might be much more pervasive than in the US, but it has much smaller regional and global implications. Neighboring Cambodia and Laos are probably hurt by Vietnams corruption, but the main loser is Vietnam and its general public. Vietnams economy is out of step with the rest of Asia. Inflation is accelerating. There is a balance of payment crisis. And the official market has been so badly disrupted that an increasing amount of business has shifted to the black market, on which the government is now trying crack down. There are two main reasons for the current sorry state of affairs. The first is mismanagement, particularly at state-owned companies and banks. The second is corruption, which is rampant at all levels. Conditions for corruption in Vietnam are ripe. First of all, the public sector (including the government, military, Communist Party and state-owned companies) is extremely large compared with the private sector and pay levels are low. Secondly, although the economy is growing rapidly, there is still a scramble for money. A growing number of foreign companies would like to invest in, sell to or buy from Vietnam. As in the case of Cambodia, bureaucrats have the motivation and excuse to demand special payments, which frequently means requiring licenses and approvals simply for the sake of having an excuse to collect funds. With potential penalties for corruption so high, senior officials try not to be too blatant in their graft, but sometimes scandals surface that reveal the scale of the problem. A recent Australian investigation into alleged foreign payoffs by an Australian/UK joint venture uncovered allegations that the venture paid more than A$15 million in commissions to one or more Vietnamese government officials in return for help in winning a banknote printing contract. Australian newspapers said the firm, Securency, allegedly paid a bribe to Le Duc Thuy, who served as governor of the State Bank of Vietnam until 2007 and still chairs the National Committee for Financial Supervision. Average Vietnamese are increasingly resentful of a problem that they see benefiting a few at the expense of many. The government is aware of this negative grassroots feelings and tried to make the fight against corruption a main point of discussion at this years Communist Party Congress. Pressure is building for the authorities to make some high profile examples of officials being prosecuted and punished for corruption, which is likely to happen in the months ahead. These symbols of the fight against graft will not solve the problem, but it could help to deflect criticism away from the government for a while.
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Issue #823
EXCHANGE RATES
Currency Chinese renminbi Hong Kong dollar Indian rupee Indonesia rupiah Japanese yen Malaysian ringgit Philippine peso Singapore dollar South Korean won Taiwan dollar Thai baht Vietnamese dong 3/18/11 6.5694 7.8001 45.025 8,772 80.756 3.0525 43.573 1.273 1,125 29.5946 30.312 20,855
Commercial middle rate expressed in terms of US$1.
Published by: Political & Economic Risk Consultancy, Ltd. 20th Floor, Central Tower 28 Queens Road, Central, Hong Kong Mailing address: G.P.O. Box 1342, Hong Kong Tel: (852) 2541 4088 Fax: (852) 2815-5032 E-Mail: info@asiarisk.com Web site: http://www.asiarisk.com
The material in this report may not be reproduced in whole or in part without permission in writing from the publisher. While eeffort has been made to collate, check and present without ambiguity all data contained herein, the variety of sources from which they have been assembled and differing methods of reporting render verification oftentimes impossible. Thus, they are published without warranty.

(Asian Intelligence 823) Political and Economic Risk Consultancy, Ltd. - PERC-Asian Corruption Update (2011)

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(Asian Intelligence 823) Political and Economic Risk Consultancy, Ltd. - PERC-Asian Corruption Update (2011)

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ASIAN INTELLIGENCE

An Independent Fortnightly Report on Asian Business and Politics

Corruptions Impact on the Business Environment

POLITICAL & ECONOMIC RISK CONSULTANCY LTD.

Political & Economic Risk Consultancy, Ltd.

March 23, 2011

7.97 7.98 8.27 8.54

March 23, 2011

March 23, 2011

Private Sector Corruption

How Corruption Has Been Perceived over the Past Decade

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

1.00 3.17 1.39 1.00 0.25

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

9.00 9.00 8.50 9.27 7.50 5.00

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

4.25 8.33 7.75 7.93 5.67 5.67

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

0.90 3.25 4.05

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

Political & Economic Risk Consultancy, Ltd.

8.00 6.87 8.11 8.67

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

8.25 2.49 8.89 9.25 8.75 8.00

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

1.90 7.13 3.45 1.90 1.00 3.10

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

3.80 4.70 5.70 4.68 2.13 3.70

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

7.79 6.21 5.77 6.39 5.98 7.10 7.11 6.32 6.17

5.25 4.43 5.25 5.70 4.00 4.05

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

9.21 8.50 8.90 8.25 6.70

March 23, 2011

Political & Economic Risk Consultancy, Ltd.

0.87 1.70 2.76 0.37 1.10 0.70