Lecture 4

Corruption

“agency costs” + massive interventionism of the state in the economy → more possibilities
for corruption of the agents of the state (= public servants)
→ such agents accept material compensation for “favoring” certain parties which transact
with the state (they extract “private rents”)
→ from the perspective of a firm, bribery is an additional cost of doing business = in theory,
ignoring other factors, the most efficient producer is able to pay the highest bribe
However, an “adverse selection” occurs = those who follow the political means are more
successful than the most efficient producers
→ the allocation of resources in such an economy is altered = it is not an efficient allocation;
→ the incentives to be the most efficient disappear

Transparency International (2017)

Most Corrupted Countries Least Corrupted Countries

180. Somalia 1. New Zeeland
179. South Sudan 2. Denmark
178. Syria 3. Finland
177. Afganistan 4. Norway
176. Yemen 5. Switzerland
175. Sudan 6. Singapore
7. Sweden
60. Cuba 8. Canada
59. Romania, Jordan, Greece 9. Luxemburg
10. The Netherlands
 Additional issues in corruption

 active / offensive bribe (bribery is offered in order to get advantages) versus passive /
defensive bribe (bribery is demanded and paid in order to avoid being disadvantaged)
 public bribery (towards public servants) versus private bribery (towards private
employees of companies) → in a private company, corruption is eliminated through
business failure (higher costs of operation) while in the public sector, there is always
the possibility of “socializing the costs” (the government is not exposed to the profit /
loss test)

Corruption in international business

= some countries punish not only domestic corruption but also bribery of national companies
abroad (towards foreign public servants)
 USA = „Foreign Corrupt Practices Act” (1977) = the first legislation in this direction
 Today, several international agreements:
• OECD in 1997= Convention on Combating Bribery of Foreign Public Officials
in International Business Transactions → signed by 40 states
• United Nations in 2005 = Convention Against Corruption

Such legislation:
 put the two parties in bribery on the same footing (same punishment)
 illegal payments are confiscated (even the entire business turnover)
 excludes „facilitation payments” = small payments in order to facilitate the operation
of business (in Brazil, „despachantes”)
 sometimes, allow competitors to sue for damages, etc.
 Corruption Cases in International Business

1. Siemens (Germany) = 1,7 bill. USD = in Argentina

2. Halliburton (USA) = 580 mil. USD = in Nigeria
3. BAE Systems (UK) = 450 mil. USD = in Saudi Arabia
4. Snamprogetti (The Netherlands) = 240 mil. USD = in Nigeria
5. Technip (France) = 240 mil. USD = in Nigeria
...
Johnson and Johnson = 70 mil. USD = Greece, Poland, Romania

The issue of „revolving doors”

There are cases when former public servants / employees leave their state jobs and are
employed in the private sector (or vice-versa) → suspicions that they face complex conflict of
interests:
 once they are in public office, they may favor private firms with whom they do
anticipate to have business/employment connections in the future;
 once they leave the public office, they may take information and contacts that they
may employ in private business;
 such an issue is almost impossible to radically solve (such employees have human
rights too) even if there are certain measure that can be explored (a period to avoid
relating to former employment institution)
 Lobby

= an activity thourgh which private agents attempt to influence the decision making process in
a democractic state (esecially in legislative matters) so as such decisions won’t negatively
impact them
 any citizen has the right to express opinions and advance proposals for the public
legislative bodies („no taxation without representation” );
 however, no legislator is obliged to support such proposals even from his own
circumscription → his agenda may be prioritize by such professional lobbists who
argue for the public interests
 may take the form of campaign contributions (however, maximum amounts are
usually enacted in mature diplomacies)

Example: lobbying in the European Union

 there is no clearcut definition;
 lobbying includes not only self declared lobby firms but also consulting firms, legal
services firms, Public Relations firms, mass media, business associations, trade
unions, non-governmental associations;
 5678 firms are registered as explicitly lobbying firms in a voluntary registrar in the
European Union
 other assessments reach the 15.000 (Corporate Europe);
 the most targeted sectors: pharmaceuticals, agro-business (especially tobacco), etc. =
heavily regulated industries
 lobby industry = between 1.5 – 3 billion euro (EU Observer);

However:
 lobbying = can sometimes argue for the “public interest” but, in fact, follow the
“purely private” interest (or “special interest”)
 a widening gap between “discourse” and “reality”
 lobby may be deeply connected with corruption