Six tentacles of corruption

The author is a Director at the World Bank. The views expressed in this article are his personal views and do not represent those of the World Bank, its management or the Executive Directors.

                  THE recent crises in Indonesia and Russia highlighted a sobering lesson for the rest of the
                  developing countries - that whatever economic policies may be in place, the country has to
                  pay a heavy price sooner or later if the incidence of corruption crosses a certain threshold
                  limit. No amount of external assistance or foreign investment or natural resource abundance
                  can save the population from dire social and economic consequences of corruption.

                  Indonesia had pursued relatively good economic policies for the last three decades and had
                  succeeded in lifting almost 99% of its population out of poverty. But the greed and
                  insatiable ambition to accumulate wealth by a small coterie of the ruling elite in the 1990s
                  tipped the balance and more than 180 million people have suffered immensely during last
                  one year. People have lost jobs and small businesses have been shut down because of
                  recession in the economy, essential commodities can be obtained at much higher prices and
                  economic insecurity has become rampant. The value of rupiah had tumbled from 2,500 to a
                  dollar to 15,000 before stabilizing around 8,000 in the recent days. A number of financial
                  institutions have become insolvent and the country is unable to service its huge external

                  Most large corporations have become bankrupt. It is estimated that the proportion of the
                  people living below the poverty line of $1 per day has risen from 10% - an addition of 27
                  million to the ranks of the poor. All the impressive development achievements of the last 30
                  years are being wiped out. Suharto had to surrender power in the end, his family had to
                  lose their financial empire and a large number of members of the elite class had to flee the
                  country, but the country is still suffering from political instability, deterioration in law and
                  order and ethnic tensions. The damage done by a minuscule segment of the population for
                  their personal aggrandizement has cost the country a big setback. Output and incomes have
                  contracted by 16% in just one year - a suffering unparalleled in the recent history of the

                  Russia - a country with poor economic policies - has also suffered equally as a result of
                  widespread corruption of a small class of oligarchs and their benefactors. Russia had to
                  declare a unilateral moratorium on its external debt which in fact is a default on its
                  obligation. It had to devalue the currency from 7 roubles to a dollar to almost 17-18
                  roubles and the reformers had to be thrown out of the office to accommodate the old
                  Soviet style of economic managers. Food shortages, inflation rate exceeding 60 per cent in
                  a two-month period, output contraction of over 10 per cent and widespread unemployment
                  will make the coming months a winter of distress for the average Russian.

                  With its nuclear capability intact, the western governments have bent over backwards to
                  pump massive financial flows into Russia but most of the infusion ended up in the Swiss
                  accounts of the oligarchs, bureaucrats and those occupying key positions, particularly in the
                  oil and gas industry. A country so rich in natural resources, possessing an educated labour
                  force, endowed with good infrastructure and favoured by heavy external assistance has
                  ended up in serious internal turmoil. Yeltsin, who led the country to its independence, is the
                  most unpopular leader today and the prospects for the Communist Party coming to power
                  at the next elections are not that remote if the current economic miseries continue to persist.

                  These two real world examples have set to rest the debate about the economic
                  consequences of corruption. It is no longer believed that corruption has any "facilitating" or
                  "greasing the wheel" kind of benign effect. There is an emerging consensus among the
                  academics as well as the policy-makers that corruption has an inimical and corrosive
                  influence on economic development and leads to social instability. The sooner the societies
                  wake up and tackle this problem upfront the better off they will be.

                  We in Pakistan have been talking a lot about the problem but it is time to learn from the
                  lessons of Indonesia and Russia. Unless something is done about it the erosion of the social
                  and economic fabric of the country which is already underway will be accelerated and
                  instead of "muddling through", we would be faced with a rude shock.

                  In order to come to grips with the problem, it is essential first to identify the main sources
                  and channels of corruption in Pakistan. In my view there are six main channels which give
                  rise to most opportunities for corruption and if these can be plugged, the chances are that
                  its incidence will be minimized.

                  First is the leakage in the assessment and collection of tax revenues. The small tax base,
                  large-scale evasion of taxes and oppression and extortion of honest taxpayers by the
                  unscrupulous tax collectors have not only generated consistent shortfalls in revenues and
                  large budgetary deficits but promoted a buoyant black economy and conspicuous
                  consumption by a small class of tax evaders and corrupt tax collectors. The inequities from
                  this concentration of ill-gotten wealth are leading to serious social fragmentation.

                  Second, the government contracts and purchases of goods and services by different
                  departments and ministries have conferred huge windfall gains to those authorizing these
                  contracts and purchases and those who are building and supplying them. The recent history
                  of commissions, kickbacks and foreign deposits is too well known that it does not need any
                  repetition but it simply illustrates the gravity of the problem. Not only the country is stuck
                  with shoddy and poor quality works and goods and services but the inflated public
                  expenditures are one of the main contributory factors in the financial distress and heavy
                  indebtedness faced by the country.

                  Third, the public enterprises and corporations such as WAPDA, KESC, Steel Mill, PIA
                  and a host of others under the federal and provincial control have become a big sore on the
                  economic landscape of the country. While the managers and employees are "making hay
                  while the sun shines" the country is coming to the brink of financial disaster by absorbing the
                  losses (man-made) of these enterprises. The public utility bills are out of reach for a
                  common hard-working honest family while the breakdown in power, water and other
                  services is too frequent. The competitiveness of Pakistan's manufacturing industries in the
                  world market is at serious stake because of higher tariffs charged for the electricity and
                  other utilities.

                  Fourth, the nationalized commercial banks and development financial institutions have made
                  a few thousand families fabulously rich but made the rest of the population pay the price for
                  their malfeasance. The cost of capital has become exorbitantly high and the access to credit
                  has been so severely curtailed that legitimate businesses and enterprises are unable to carry
                  out their productive activities or expand. No wonder, employment opportunities are
                  shrinking and the ranks of the unemployed youth are swelling.

                  Fifth, the recruitment, postings and transfers in all government ministries, departments and
                  corporations are largely made either in exchange of outright pecuniary favours or on purely
                  political considerations. The result is that the government offices are saddled, barring some
                  honourable exceptions, with incompetent and dishonest functionaries who are always trying
                  to please their bosses or political masters while being completely oblivious to the grievances
                  of the common man whom they are supposed to serve.

                  The culture of sycophancy and catering to the whims of those in power has taken firm roots
                  and the courage to speak out the truth and render professional and objective advice to the
                  politicians has simply died down. While the upper echelons of the bureaucracy remain busy
                  in meeting the demands of those in power, the clerks and lower functionaries harass, extort
                  and misbehave with the poor public who come to their offices for legitimate need. The
                  police officials are perceived as a menace by the ordinary citizen rather than as a protector
                  of their life and property.

                  Sixth, another avenue for making a fast buck and becoming rich overnight, particularly in
                  the past, has been to lay your hands on a licence or permit of any kind - construction,
                  import, monopoly enterprise or obtain plots of land at highly subsidized prices and pocket
                  the difference between the acquired price and the market price. The prices of both the
                  commercial and residential property, therefore, soared to levels beyond the affordability of
                  a middle class family. The textile export quota has also been misused in the past to enrich a
                  chosen few while the country suffers from lower foreign exchange earnings.

                  It is much easy to diagnose the problem, analyze it and lay it out explicitly but it is more
                  difficult to prescribe as to what can be done about it. Fortunately, the solutions to all the
                  problems sketched out above are well known - transparency, openness, accountability,
                  selection on merit, privatization, competitive tendering, removal of discretion and
                  enforcement of the rule of law. Some of these elements have been spelled out even in the
                  prime minister's own national agenda. But it is the lack of credible implementation which is
                  the root cause of the stalled progress.

                  There are two options for the sane, patriotic elements in the country. The first is to sink
                  deeper and deeper into the morass of cynicism and despair and just keep on complaining
                  about all the ills and evils that are engulfing us. The other and, in my opinion, the preferred
                  option is to organize various forms of civil society groups, raise voices, keep on highlighting
                  these issues, use the free press to expose the real instances of corruption and malpractices
                  and act as pressure groups. This is already being done by a number of groups and
                  committees (Citizens Police Liaison Committee) and is aided by investigative reporting
                  done by some respected and reputed journalists and magazines and newspapers.

                  To this if we add the noble efforts made by people such as late Hakim Said, Abdul Sattar
                  Edhi, Akhtar Hamid Khan, Adeebul Hasan Rizvi and many others like them who are
                  quietly delivering essential services to the poor, we have a beginning of a vibrant and active
                  civil society which should one day make the difference. There are many committed civil
                  servants and conscientious judges who have risen to the highest ranks in present difficult
                  circumstances. Let us hope that the ranks of such functionaries also expand over time and
                  their support to the civil society groups will further strengthen these groups in fighting this
                  battle against corruption.