Corruption and Morality in International Business

Federico Albini

Abstract

The purpose of this paper is to focus on the relationship between the economic side of corruption and the moral aspects of it. It can be argued that corruption is always morally wrong as it goes against morally accepted principles and laws. However, many economists have reasoned that corruption might have beneficial impacts on the economy of a country as a whole. Moreover, on a business perspective corruption is considered a usual practice in many countries. My opinion is that corruption becomes morally corrupt in the moment in which it will be acknowledged by society that the negative effects of corruption exceed its benefits.

The paper is divided in three parts. The first part consists in a brief introduction to the concept of corruption, which provides definitions and important classifications. The second part is a review of some of the economic research conducted providing evidence of the effect of corruption on development. The third part focuses on trying to draw a line between the cases in which corruption is already morally wrong and the cases in which further time and efforts are needed to establish corruption as an immoral practice.

I.              Introduction and definitions

Government corruption has been defined as “the sale by government officials of government property for personal gain” (Sheleifer and Vishny, 1993).

Corruption can take different forms depending on the hierarchical level at which it is occurring: from licenses and other documents to infrastructure projects and allocations of resources to industries (Rose-Ackerman, 1997). We call petty corruption the corruption resulting from the interaction between private actors and non-elected officials. Grand corruption is the result of the interaction between private actors and elected officials (Elliott, 1997).

Another important distinction for the purpose of our discussion, is introduced by Sheleifer and Vishny (1993) when they discern between corruption with theft and corruption without theft. Corruption with theft occurs when the government agent doesn’t declare the deal to the government. In this case, the price paid by the private actor might be even lower than the regular (legal) price for the transaction. Corruption without theft occurs when the private actors must pay an additional bribe to the government official over the regular (legal) price of the transaction.  An example will help to clarify the concept. Let’s imagine the case in which a private actor is fined for having parked his/her car in a no parking area. In the instance of corruption with theft, the policeman might ask for a bribe smaller than the fine and agree to nullify the fine. In the instance of corruption without theft, the policeman might threaten to block the car for one month and ask the payment of an additional bribe over the regular price of the fine.

Furthermore, certain sectors are more likely to experience corruption practices than others, this derives from the composition of bureaucracies in different government activities has, as we will see, an important negative effect on development.

I.              Macroeconomic research on corruption: social costs and benefits

Economists have argued for a long time that corruption might be beneficial for economic development. Two main arguments are used in favor of corruption. The first argument states that corruption is a way of avoiding bureaucratic delays, which increases efficiency and ultimately the enables a faster country’s development (Leff, 1964). The second argument is that corruption increases the productivity of corrupted government officials because the bribes act as an incentive therefore creating positive outcomes on the economy as a whole (Huntington, 1968).

In more recent times, however, economists have started to point out the negative relationship between corruption and economic development. Mauro (1995) has presented the first statistical analysis of this correlation and found a strong negative association between corruption and economic growth.

Many authors have given explanations for the effects involved and leading to these results. Sheleifer and Vishny (1993) have pointed, in particular, to the problem of secrecy. In many aspects, the authors argue, corruption can be thought as the twin activity of taxation. The main difference between the two is that taxation is a legal and established process while corruption requires secrecy. Secrecy costs can be divided in three main categories. The first category of cost is the one generating from the reallocation of resources to the sectors in which opportunities for corruption are higher. This process is claimed to divert the attention from strategic sectors for development, such as education and healthcare, towards activities such as infrastructure projects and military spending where possibility for corruption are much higher. The second category of secrecy costs is constituted by the reallocation of resources, perpetuated by government officials, such as time and political activity, in creating bureaucratic barriers necessary to allow rent seeking activities, which ultimately disperse the gains accumulated from the bribes. The third category of cost associated with secrecy is the hindering of innovation generated by the efforts of governments in maintaining the status quo through the protection of monopolies and the preservation of an elite class ultimately responsible for political and industrial decisions in the country.

Another set of costs associated with corruption is related to the strength of the control of the central government. Sheleifer and Vishny (1993) have showed that the organizational structure of corruption networks shares many similarities with the different kinds of industrial organization configurations. In this sense, the corruption network can act as a monopoly (maximizing profit) if a single person takes all the decisions (e.g. a dictator); it can be a collusive (profit maximizing) oligopoly if the decisions of the different officials on bribes are coordinated. In the last case, when the central government is very weak, and the number of government agencies is fixed, the prospect of imposing bribes can be employed by any government agency and even reiterated by them, thus possibly driving the bribe burden for the company to infinity. For example, if to open a new plant in a foreign country a company was forced to pay bribes to a large number of agencies with no certainty that the payment is a una tantum, the evident result would be for the company to choose another country in which to open its new plant. This outcome obviously severely impacts the country development.   

All the above-mentioned costs  (secrecy and innovation impediments) associated with corruption, have shed a new light on the matter of discussion even on an ethical standpoint. In the next part, I will try to establish why this evidence should be the engine of a generalized movement against corruption in international business.

I.              Corruption and Morality in Business

Until this point, we concentrated on the definition and economic aspect of corruption, covering its benefits and costs to a country growth and development. How does this macro perspective relate to the micro perspective in which the decisions of a business are taken?

My opinion is that when private actors become aware of the cost to society triggered by the compliance with the payment of bribes, they are no longer excused to feed the corruption cycle. If, in the past, these costs to society have been somehow neglected and instead eminent economists argued in favor of corruption, this might well be one of the reasons why so many private actors perceive corruption a rather acceptable practice.

Society should, by this time, already generally recognize as morally unacceptable certain kinds of corruption. In the case of corruption with theft, the interests of the buyer and seller align. Going back to the example of the policeman, the person fined agrees to pay less than legally defined by bribing the policeman. Both agents benefit from this conduct: the person fined pays a smaller amount and the agent receives a sum of money under the table. This kind of corruption is the most immoral, and for this reason also the most difficult to eradicate. Once the person fined has agreed to pay the bribe, he/she has no excuse and becomes an active part in the misconduct, no longer a passive victim of the situation. For this reason, the fined person will have no interest to press charges against the policeman, and this kind of behavior will last.  If we apply the same situation of corruption with theft to companies instead that to individuals, we can easily understand that the competition existing between companies will push all of them to infringe the law.

 

In the light of the new research on the effect of corruption on the development of a country, it has become obvious that corruption can no longer be accepted even when the private actor is a “victim” of the situation. Consider the following example. If company X wants to win the tender to build a highway in country Y the company must pay a bribe of 1 million euros to the ministry of infrastructures of country Y. As we know by now, not only infrastructure spending is easier subject to corruption then other more important sectors to a country development such as health and education, but also, the minister will spend his/her time (the people’s who elected him/her time) trying to set up a system to protect is position and making sure that others can’t appropriate the willingness to pay of the company. To summarize, the company might be the victim of the situation and might be hurt economically by not accepting to pay the bribe and lose the contract, but if it accepts to pay the bribe it becomes an active agent in the scenario, committing the morally unacceptable role of impeding the development of the country.

Once all companies start acting in the same way, going in the same direction against corruption, and weak governments are able to exercise more control and create competition, not collusion, between agencies providing the same services (for example in different geographic areas) corruption will slowly disappear. 

II.            Conclusion

The aim of this paper was to determine whether, in some cases, corruption could be regarded as a morally acceptable practice. As every other moral question, the issue of corruption has to do with the general awareness of its consequences on the stakeholder, in our case on whole societies. Even though many economists have for a long time argued the association of corruption with positive macroeconomic effects, recently more rigorous empirical studies have shown that the corruption’s costs exceed its benefit. In particular, these costs reflect on a strong negative relation between corruption and economic development. From this results, I argued that corruption be regarded as a morally unacceptable practice.  In some extreme case such as that of corruption with theft, corruption is already considered morally wrong while in other cases the problem is to eradicate customary practices that make corruption a relatively morally accepted behavior.

Federico Albini

References

Andrei Shleifer and Robert W. Vishny, Agust 1993, “ Corruption”, Quarterly journal of Economics, pages 599-617

Susan Rose-Ackerman, “The political Economy of Corruption", Corruption and the global Economy, Institute for International Economics, 1997, pages 31-60

Kimberly Elliott, “Corruption as an International Policy Problem: Overview and Recommendations”, in K. Elliot (ed.), Corruption and the global Economy, Institute for International Economics, 1997, pages 175-233

Ibid.

Nathaniel Leff, “Economic development through Bureaucratic Corruption”, 1964, American Behavioral Scientist, pages 8-14

Samuel P. Huntington, Political Order in Changing Societies, (New Haven, CT: Yale University Press, 1968)

Paolo Mauro, August 1995,  “Corruption and Growth”, Quarterly journal of Economics, pages 681- 712

Ibid.

Ibid.