Welcome back to our course on Corruption. This is Week Four, Lecture Three.

And
today, we're going to talk
about controlled by industries. Business groups,
business federations, industries. We're going to talk about
three kinds of things. First, we're going to talk about the fact
that corruption create something called an assurance problem, then we're going to
talk about platforms for exchange. And finally,
we'll talk about certification programs. Recall the costs imposed by
corruption at the firm level. A firm that pays bribe,
a firm that engages in corruption makes less money is a less
competitive firm, is distorted. However, in the very, very short run and I don't
encourage this,
I'm certainly not telling you to do it. But in the very short run,
the payment of a bribe, the conferral of some kind of a benefit may actually
work to the advantage of a firm. Long run, not at all. [COUGH] But in the very
short run,
it might give a firm an advantage. And so in the short run,
in the very short run, the firm that pays a bribe
may be able to drive out of business the firm that
doesn't pay a bribe. And this paradoxical way that corruption
imposes costs creates a real problem for business firms operating
in environments in which there is a measurable or
fair amount of corruption. We can go back to the great
philosopher,Jean Jacques Rousseau and he described kind of a similar problem. He
described a group of people
who are going out to hunt a stag. A stag is a large, male deer. And in hunting the
stag,
they have to be absolutely silent. Any noise and the stag will run away and
they hunt the stag by forming a circle around the stag, and
the circle gets smaller, and smaller, and smaller until there's
no room for the stag to escape. At which point, they can kill the stag and then
they will have a bounteous feast. Now a successful stag hunt depends
entirely on everyone doing what they said, they would do from the outset
without any monitoring. There's no way to monitor
the acts of the other parties. If one of the hunters sees a rabbit,
says Rousseau. That hunter's presented with a dilemma. Should the hunter leave the
stag hunt and
kill the rabbit? Or should the hunter continue
to work with the others to encircle the stag and
have the bounteous feast? If the hunter defects,
if the hunter doesn't cooperate, goes after the rabbit, kills the rabbit. That
hunter will at
least have a small meal. If the hunter continues to cooperate and
somebody else defects, if somebody else doesn't cooperate, well,
the stag will slip through the whole created in the circle and the hunters
who cooperated won't get anything. They're counting on everybody cooperating. But
when they have a chance to defect,
they're presented with a dilemma. Should they at least get the rabbit? Or should
they count on
everyone cooperating and have the bounteous meal of the stag? Some of you are
probably
familiar with game theory and some of you have probably heard of
something called a prisoner's dilemma. That's a very famous
iteration of a problem. In this problem, the stag hunt problem, it's a little bit
different,
but it's the same kind of idea. And this particular problem what
Rousseau called the stag hunt, Mark calls the assurance problem. And it's an
assurance problem,
because various people involved in a corporate endeavor will succeed
wildly if everyone cooperates. But if there's an opportunity to defect
that actor is presented with a dilemma, should I defect? Should I not cooperate? Or
should I hope everyone else cooperates? And corruption presents
exactly this kind of problem. All of the business actors know that
in the long run if they will be better off if they do not act corruptly,
they'll be much better off. But in the very short run, if there's
an opportunity to defect, if there's an opportunity to act corruptly,
they're presented with a dilemma. Should they act corruptly and
at least get a little bit of something? Or should they hope that
everyone else is acting honestly? And hope that they enjoy in the bounties
that will flow from not acting corruptly. The classic solution to
the assurance problem is law. [COUGH] Canaro argued and
argued very well that law provides the assurance that actors need that
other parties aren’t defecting. But when we’re talking
about corrupt polities, particularly when we are talking
about endemically corrupt polities, the law can't be the solution,
because there really is no effective law. The law, like everything
else can be bought and sold, it's subject to corruption. In the absence of law,
the next best solution is coordination, coordination among the actors. So that
rather than not relying on
the State to provide the assurance, the actors provide the assurance. Now one
mechanism for
actors providing assurances to one another that they are not
defecting is simply talking, simply communicating with one another. And so some
industries create
platforms for exchange, platforms at which all business people or
business people within a certain sector or business people within a certain region
can meet and interact and provide the assurances face to face, essentially
that they are in fact, cooperating. That they are not engaging in corrupt
activities and these platforms for exchange provide other benefits, as well. They
provide an opportunity for businesses to communicate with one
another with respect to best practices. They provide an opportunity for
businesses to communicate with one another In areas of particular risk and
they provide an opportunity for businesses to communicate not
just with one another, but also with other stakeholders, particularly
members of the community who as we know are deeply affected by the corrupt acts or
potentially corrupt acts, of businesses. APEDE, [COUGH] which is an organization
of elite business leaders in Panama, is one interesting example
of these kinds of platforms. APEDE regularly meets,
discusses many types of issues, but has explicitly talked about
issues involving corruption. APEDE, therefore is an opportunity for
business leaders to exchange information, to provide assurances to one another and
to explore best practices. In fact, APEDE developed something
called the Pacto Etico and the Pacto Etico is a guideline for behaviors with
respect
to issues of corruption. APEDE, essentially requires its members to
behave in accordance with the pacto edico, but APEDE made a conscious
decision not to audit its members. And therefore, not to certify that members
actually comply with the Pacto Etico and APEDE made this decision for
a number of reasons. One, of which of course was
the concern that small and small, medium size enterprises might not
be able to take on the cost to associated with certification and
the auditing required therefore. But also made this decision
in terms of enforcement, in terms of whether or
not there was enough of a real benefit to a certification to warrant
this kind of a process. And so APEDE,
which is a great organization has essentially remained a platform for
exchange and a useful one, but
there are certifications programs. An interesting certification
which also uses the phrase pacto etico is the Pacto Etico Comercial
of Bolivia developed under the leadership of people,
such as Graciela Garay. Pacto Etico Comercial in Bolivia does put forth standards
that that numbers and potentially certified business
firms need to meet and comply with and
it does require an audit, but they make that audit,
they make that certification worthwhile. Because a firm that is certified
by Pacto Etico Commercial is able to take advantage of something
called fast track through customs. A certified business firm
does not go through the usual customs channels when
bringing goods into Bolivia. Instead, they're fast tracked. They're sent through
the custom's
border without investigation and without any undo holdup
by custom's agents, and this greatly reduces the expense
of bringing goods into Bolivia. It make the certification
commercially worthwhile. It is also interesting to note
the process by which certification is not decided upon, but it is actually
awarded to a business from in Bolivia. They make a celebration pout of it. There's
a presentation of the actual
certificate that represents certification. There are speeches,
it's a wonderful event. And what's going on with respect to
these kinds of events doesn't so much have to do with the rules,
the guidelines for certification. It actually has to do
with how people think. The benefit, the psychic benefit
that's associated with certification. And conversely,
the psychic costs that might be imposed by behaving in ways other than those
suggested by the guidelines. Number of firms in Bolivia
have been certified. Large firms, small firms, medium firms. It seems to be a
program
that's actually working. I also want to talk about
a program in Russia and this program is being developed,
as I speak. So it hasn't fully been implemented, but
it's an interesting project to look at, because this project takes into
account modern technology and current global standards
regarding corruption. The program begins with
an online self-evaluation. And so a firm doesn't have to
bring in an outside auditor, nor does it have to go through
the expenses of a manual real world audit. The auditing is done using
online technologies. There is also a software
program that automatically assigns scores to the online
self-evaluation and compares it to other firms anonymously,
of course, as well as other kinds of programs. Now, while this is going on,
the technology allows for firms that have begun this process. And to be honest,
firms that
haven't to talk with one another. There's discussion platforms
built into this technology. And through these platforms for discussion, firms are
able
to exchange best practices. So, we're taking advantage of the kinds of benefits
that flow from
organizations such as APEDE. The software also allows for
training and education, and this training and education can
be targeted at specific issues that are revealed by the self-evaluation. Now after
a score is assigned, there's
two tracks that that score can take. One track is a non-public track. Scores are
only reported to the firm. The other track is made public. Scores are verified by
the compliance
alliance and are made public. Now, why would a firm want
its scores to be made public? Because the online
self-evaluation takes account of, it recognizes, global standards regarding
corruption and that's important. Because within Russia, within any country, local
firms benefit from relationships
with transnational firms. Transnational firms, of course, want local firms to
comply with global
standards regarding corruption, because the transnational firms
are liable, costs are imposed on them if firms they are associated
with don't meet those standards. Global firms, transnational firms
can undertake the expense of investigating and determining
that every single local firm that they want to deal with meets
these global standards. That's expensive or they can turn
to some other form of assessment, use that assessment and
make their decision whether or not to interact with this
particular local firm. That's far less expensive. And so firms that have taken
a self-evaluation, whose scores have been verified and made public,
are in essence making it cheaper and easier for
trans-national firms to work with them. Now both sets of data are compiled
into a longitudinal set of data that's anonymized,
it's made anonymous. And that data is really interesting
because it can be used by scholars, policy makers, others,
who want to understand both the nature of corruption in this
particular jurisdiction. And more importantly, want to understand
how that corruption changes as firms take account of the policies that are
reflected in the online self evaluation. And, of course, the hope is that we will
have an even better understanding of how these kinds of programs affect and
control corruption. The final step is similar to that
of Pacto Etico Comercial Bolivia, and that is a certification. In case of the
compliance
alliance however, certification is completely optional. Firms do not have to
undertake
the process of certification, and a firm, for reasons of its own,
might choose not to do so. Although certification programs exist, with respect to
specifically corruption
and although they've been around for a few years,
the best data we have on the effectiveness of the certification programs
has to do with ISO 9001, which is a certification program
that looks at management decisions about social issues in general,
not just issues of corruption. But they're very similar, and the research
on these programs is very instructive as to the benefits of certification
programs dealing with corruption. Manders, a couple of years ago,
brought together a number of studies, synthesized those studies, and
drew some conclusions about the effectiveness of these
certification programs. He found that the simple
implementation of the standards, the simple bringing into the firm of
the guidelines and the evaluation of the extent to which the firm followed
those guidelines, accrued benefits. It lowered costs, because it improved
the quality of decision making in respect to social issues, improved the quality of
decision making
with respect to issues such as corruption. And it also, because the firm
was operating more effectively, because the firm was making better
decisions with respect to these kinds of issues, gave the firm access
to other kinds of relationships. New markets, new partners,
new kinds of customer bases. And so just implementing the guidelines
results in lower costs and increases income. But they also found that
the certification layered on another benefit, and
that benefit is signalling. It's similar to,
in fact almost identical to, what the compliance alliance
in Russia is attempting to do. It signals to new markets. It signals to potential
customers. It signals to people, parties, and firms
with which that business firm may not be communicating at all that this is a
firm, that it is profitable to work with. This is a firm that will not
bring with it issues and costs, and it lowers the cost to those parties
of working with that firm, and therefore, lowers the cost to that firm of
creating these kinds of relationships. And so the simple implementation
of the guidelines lowers costs, increases revenue. But the added on signaling of
certification also lowers costs and brings in revenue. Both are good,
certification is slightly better. Obviously when we get down to specifics,
each industry, just does each firm,
needs to assess the lay of the land. They need to understand how corruption
manifests itself in that particular industry, in that particular region,
in that particular set of businesses. In general, however, we know that corruption
presents an
assurance problem to the individual firm. And that is the industry
wide organizations that can resolve that insurance problem. They can resolve it by
creating
simply a platform for exchange, a platform in which business firms
can interact with one another and assure one another that they're
cooperating and that they can all accrue the benefits, the long term benefits
that flow from avoiding corruption. Or they can be more specific,
they can provide guidelines for behavior and certify that firms have
complied with those guidelines, which not only solves
the assurance problem, but it also signals to other actors that these
are firms that it is good to work with. Thank you, and
I look forward to our next lecture.