Corruption is currently understood to be an impediment to economic and social development. Several perspectives can be adopted to underline this acknowledgement. Corruption undermines the redistributive functions of the state; it biases the allocation of talents and capital; it produces wastes of money and capacities; and many more. It can also be understood from the point of view of business, as it significantly affects the conditions under which they have to operate.

Indeed, corruption is a barrier to the development of dynamic entrepreneurship and of healthy competition for profits, maintaining in its place an environment of unhealthy competition for rents. In societies where corruption and clientelism are pervasive, competition on the market does not centre on producing at lower costs, or on responding faster to clients’ expectations, or on proposing new products or processes. The ability that is rewarded, becomes that of knowing whom to pay, at what moment, through which channels. Corruption thus impedes the development of a mode of competition based on investment in productive assets. In the long run, corruption not only affects the sharing of the cake but the size of the cake. Corruption and rent-seeking stifle possibilities of accumulation, and thus affect growth trajectories.

The question then is how to fight corruption. Although the private sector is always acknowledged as a key actor in the corruption problem, it has rarely been considered as having a potential role in the fight against corruption in developing countries and emerging economies. The private sector is, in fact, more often considered as part of the problem and directly involved in corrupt practices, than as part of the solution. Yet, in different countries around the world, initiatives against corruption are taken by the private sector, leading to a reconsideration of the common judgement about the potential participation of this group of actors.

Is this the missing link in the present debate on the fight against corruption or rather, has this approach been left aside for good reasons, because of its lack of pertinence? The purpose of this article is to assess the potential involvement of the private sector in the fight against corruption. In order to address this question, reasons why the private sector can make a strategic contribution to anti-corruption reforms will be provided. Secondly, landmarks will be presented to analyse the feasibility and possibility of the involvement of the private sector in the fight against corruption. The third and fourth part will present concrete experiences of multinational corporations and local firms that are involved in the fight against corruption. The last part will consider the conditions and initiatives that can facilitate the involvement of the private sector.

WHY SHOULD THE PRIVATE SECTOR BE INVOLVED IN THE FIGHT AGAINST CORRUPTION?

There is an emerging consensus — among what might be called anti-corruption professionals — on how to fight corruption that proposes a mix of prevention and repression measures. This consensus puts most of the responsibility on reforms at the level of the state and thus points to the need for political will to implement these reforms as the precondition for leading a successful fight against corruption.

But how is this political will established? The prevailing view highlights the pivotal role of civil society and the exhortation to build the necessary political will. Because citizens are the ultimate victims of corruption, they will put pressure on governments to fight corruption more effectively if they are better informed of the costs to them of corruption, and of their right to have less corruption.

The importance of establishing freedom of information and other civil liberties in the fight against corruption is clear. But two further points can be raised. Firstly, fighting corruption is something like a war of position, as in the Chinese game of ‘Go’. It is not enough to have a prime minister or president who is convinced that corruption is dragging his or her country down in order to reverse the situation. Beyond getting the right person in the right place, it requires creating the broader conditions that, in turn, will permit a leader who is convinced of the need to fight corruption to implement the necessary measures. The second point is that, while the mobilisation of civil society is crucial, lessons also have to be learned from the experiences of several countries where anti-corruption movements with strong support from civil society have repeatedly been successful over the last two decades — for a few weeks only. Corrupt leaders were replaced, but no lasting changes in social organisations emerged, and within weeks of the change in regime, charges of corruption began to emerge against the new leaders or their teams.

These two points lead to the following conclusion. It is impossible to cut short the necessary process of building alliances between the different groups that want to reduce corruption. This suggests the need for a fresh look at the role of the private sector. The private sector can be a key piece in the puzzle of the internal political coalition that is necessary to carry forward the required reforms.

Moreover, the private sector’s participation can be determining in ensuring that the fight against corruption is rooted in the building of state and market institutions that will work together in a dialectical relationship to create healthy price competition in the local economy and conditions favourable to the development of the private sector.

But some may ask, if this is really possible. As mentioned above, it is more common to consider the private sector as an obstacle in the fight against corruption, rather than as an ally. What motivations could push firms to be involved in the fight against corruption?

For the private sector, the costs of corruption are significant. While some are easily quantified, such as money, other costs are far less tangible but no less significant to affected companies. The following is an overview of some of the major costs of corruption for businesses.

Although the amount of money that corruption costs the private sector is difficult to assess, a private sector survey conducted in Pakistan¹ shows that bribes paid annually in 1995, commonly ranged between US $4 000 and $20 000. This amount represents between 1,25 and 5,15 per cent of a firm’s gross sales, depending on the sector and size of the firm. Small-sized firms and those engaged in commerce face a relatively higher burden of corrupt payments than others. The value of bribes does not decrease proportionally to the size of the firm, and it is probable that commercial activities require more licences (and hence, more bribes) than other activities.

Again in Pakistan,² senior management spends an average of twelve per cent of their time dealing with officials on tax and regulatory requirements. Although it is not known how much time would have been spent without corruption, it does take time to negotiate corrupt arrangements and to build the necessary personal relations to secure the illegal transaction. The more complex the transaction, such as corruption in public procurement or political corruption, the more time and money it costs the private sector.

The uncertainty created by corruption is another cost that should be considered. This uncertainty extends from the time needed for certain operations, such as the transportation of goods, to changes in the laws and policies governing business. This affects not only a firm’s own operations, but also the operations of its subcontractors and suppliers. It makes the management of stocks and the financing of investment difficult. It also affects the investment behaviour of firms: entrepreneurs tend to keep the size of their business small, or secure their expansion by reinforcing their relations with public officials.

Finally, corruption is also expensive in terms of internal management in companies. Repeated corruption will affect a firm’s culture and what could be called its ‘ethical capital’. Employees might begin to participate in corrupt arrangements themselves, seeking or accepting bribes from their suppliers or clients. They may skim a percentage off the corrupt commissions being paid, such as stating that the commission demanded was fifteen per cent of the deal’s value, when the amount delivered was only ten per cent. Or employees may sell a company’s research and development secrets. Finally, a culture of corruption may affect employees’ performance, in as much as they lose respect for the business environment in which they are working – and perhaps for the boss personally, as well.

These internal management costs have not been fully recognised or taken into account by the private sector. However, it is clear that they have an important impact on the profile and strategy of the firm, and they diminish the firm’s ability to make the most of its human and capital resources.

On the other hand, it is true that firms that want to mobilise against corruption face several difficulties. Firstly, they have a problem of co-ordination: it is difficult to avoid participating in corruption when the competitors continue to engage in it (so-called ‘prisoner’s dilemma’). Besides, mobilising against corruption has a cost (time spent by the managers, risk of reprisal). Thus, entrepreneurs tend to remain passive while profiting from reforms supported by others (‘free-rider problem’). Secondly, the balance of power between the government and entrepreneurs in developing countries is often unfavourable to the latter. The private sector in developing countries is poorly organised or divided. Moreover, the state’s economic power is often greater than that of the private sector and the activity of enterprises largely depends on public contracts. Finally, emerging democracies are based on patronage systems: enterprises must often contribute to the financing of political parties to preserve a market they have created or to gain access to a market offered by politicians.

Despite these difficulties, the involvement of the private sector against corruption is observed in several countries. Not all firms live with corruption in the same way, and all firms do not have the same range of possible actions. It is at this point useful to distinguish between multinational subsidiaries and local firms. Indeed, in the face of corruption, multinationals operate under a different set of opportunities and constraints than do local enterprises. They have the option to exit or not invest at all; they generally do not participate in local politics; and they are accountable to the laws of their home country (including, for many, the OECD Convention).

Through concrete examples, the actions that multinational corporations and local firms can take, will be explored.³

The participation of multinational corporations in the fight against corruption should be seen in the light of important changes in standard business practices. In the past decade, there has been a strong movement to push corruption — free rules of competition in international transactions. This movement — initiated with the adoption of the Foreign Corrupt Practices Act — has gained momentum with the signature of several international agreements that contribute to prevent or repress bribery in international trade.⁴

In this context and under the pressure of a sensitised public opinion, more and more firms have been reforming their internal organisation and practices to be in line with the emerging standards. ‘Self-regulation’ is, of course, the first thing to do. Multinational corporations are striving to instil ethics throughout their corporations, both in compliance with existing laws imposed by those agreements that are binding, and increasingly to benefit from a reputation of social responsibility. Indeed, the recently signed binding international agreements should not only be seen as such, but also as a solution to the prisoner’s dilemma that facilitates self-regulation by multinational firms.

Even if these tools do not cover all forms of subsidiaries, they will contribute to the generalisation of an international business standard, for headquarters as well as for subsidiaries, as the increasing number of firms adopting global codes of ethics show. This is taking place for reasons of prevention, but also for the gains permitted by refusing corruption — gains in terms of time and money, of internal management and of reputation. Of course, the situation is more complex and problems such as extortion, ways to bypass these conventions or replace money transfers by other means of influence, need to be thoroughly examined.

A few examples of multinational corporations that have adopted internal anti-corruption programmes, and a review of their motivations will be presented. Merck and Company has adopted an anti-corruption position for both enlightened and self-interested reasons in recent years: while fostering economic and political development in host countries, its ethics programmes also work to improve the business climate and promote trust in their pharmaceutical products. Similarly, Nortel Networks describes its ethics programme as a corporate reputation initiative. For General Electric, its ethics policy has become a marketing tool. Michael Davies of Transparency International Canada noted: "As these values develop around the world, we are seeing more senior executives standing up to be counted and saying, ‘This is what our company stands for.’ And I think more and more that shareholders are behind this and see it as a shareholder value."

Can multinational firms and their subsidiaries do more than refuse to pay bribes? Beyond such focused ethics programmes, multinational corporations can work with local governments to disseminate ethical standards. Merck and Company, in co-operation with the Ethics Resource Center, for example, has established ethics institutes in collaboration with governments in Colombia, the United Arab Emirates (UAE), and South Africa. In setting up the ethics centre in the UAE, Merck realised that it was imperative "to enlist support ... by a certain number of government leaders who were visionary." Alex Zalami, Managing Director of the Gulf Centre for Excellence in Ethics, explained: "We needed to make a pitch for the fact that establishing a centre addresses a need as expressed by the leadership in the UAE which has a vision for the UAE of becoming the next Hong Kong or Singapore of the region. And those leaders understood that in order for this to happen, there are certain issues related to global expectations on how to do business and global expectations on transparency that needed to be addressed." The centre is "... working on a major project with the Ministry of Health in developing a comprehensive health care ethics initiative ... [and] ... also working very closely with the Chamber of Commerce and a certain number of business leaders to promote business ethics and compliance issues in the business communities in the Gulf."

Existing experiences show several areas for action by the private sector in developing countries and emerging economies.

In the wake of the Asian financial crisis, for example, Medco, an Indonesian drilling company, has adopted a new activist stance on corruption. A representative of this company hence explains that the first objective is "... to educate the rest of Indonesian private business" on two counts: firstly, that "... it isn’t dangerous to fight against corruption", and secondly, that "... corruption is a burden to business", rather than an aid for them to get by. According to him, "[g]lobalisation makes it all the more necessary for Indonesian business to fight corruption because if nothing is being done, Indonesia will lose any competitive advantages to other countries."

In Colombia, the Corona Foundation, a grant-making corporate foundation, polled opinion leaders about what it should do to help in the fight against corruption. The opinion leaders expressed a clear "... preference for formal and informal education programs aimed at children and youth. A lot of people said, ‘There’s nothing to be done with adults here’."

In Bulgaria, a coalition of non-governmental organisations (NGOs) called Coalition 2000, has formed to fight corruption. The coalition aims to increase awareness about the issue through public education and discussions, and the dissemination of research findings and policy recommendations. Its awareness activities target three main groups considered to be the key to the success of anti-corruption reform: the general public, policy-makers and élite professionals. The targeted approach will allow the awareness messages to be tailored to the experience and role played by the various groups.

In Mauritius, the local Transparency International chapter and the Minister of Justice organised a National Integrity Workshop in February 1998, drawing upon a business survey and a household survey of experiences with corruption. A member of Transparency Mauritius explains: "We had a lot of press coverage and a lot of decisions were taken. Too many decisions, probably, because it’s difficult to follow up as we are all volunteers. But I must say that we’ve managed to get a certain amount of sensitisation around and today it is interesting to see that in both private and public sectors, there is an awareness that we have to fight against corruption."

In St Petersburg, a number of businesses have organised an initiative to curb bribery on the supply side. Their initiative entails a voluntary commitment by corporations to adopt codes of conduct — drawing upon the International Chamber of Commerce model code and Transparency International’s best practices guide to codes of conduct — followed by a request for the government to adopt a reciprocal code. They are hoping to get more than a hundred Russian and Western companies to sign the declaration simultaneously. To promote enforcement, they plan to publish a ‘white’ list of participating companies, present awards for companies that follow codes of conduct, and induce the public sector and donors to give preference in procurement and investment funds to companies that participate in the initiative.

In the Ukraine, a public-private initiative for integrity and economic growth in Donetsk, one of the main industrial areas, has resulted in the Signatories undertook not to bribe anybody, to prevent any bribery they know about, to report cases of bribery, and to develop a general anti-bribery strategy.

Another experience is that of the Pacific Basin Economic Council, with 1 100 major corporations in twenty Pacific Rim economies that adopted a Charter on Standards for Transactions between Business and Government, prohibiting bribery and calling for corporate codes of conduct, auditing controls, and other safeguards.

In the same vein, Transparency International has spearheaded the concept of integrity pacts in public procurement. The Argentine chapter, Poder Ciudadano, has worked with the province of Mendoza and the municipality of Buenos Aires to introduce these no-bribery pledges to the bidding process that all bidders and relevant government officials must sign. Any breach of these pledges renders an offending party ineligible for participation in future contracts.

Transparency International Malaysia worked with the Federation of Publicly Listed Companies and the Malaysian Institute of Corporate Governance to produce a national code of best practice on corporate governance. It seems indeed that one of the lessons that can be drawn from the Southeast Asian crisis is that there should be full disclosure of information and the development of national codes on best practices of corporate governance. These could be industry driven.

The Hong Kong Ethics Development Centre, set up by the Independent Commission Against Corruption (ICAC) in 1995, helps companies to formulate codes of conduct and draft guidelines to help employees to observe them. According to Lily Yam, Commissioner of the ICAC, "[o]ver 1,500 publicly listed companies have now formulated codes of conduct for their staff." The Ethics Development Centre also offers corruption prevention advice to businesses that are custom-made to fit their needs, serving about 200 clients in the private sector every year. In addition, chambers of commerce are working in partnership with ICAC to train managers and workers in the private sector on the provisions of anti-corruption laws.

Bulgaria’s Coalition 2000 is monitoring the effectiveness of policy change efforts in all major areas envisioned in the Action Plan and the functioning of established anti-corruption institutions. It does this by tracking corruption-related attitudes, experiences and perceptions, and publishing the information on a regular basis.

Similarly, the West African Enterprise Network is a club of more than 300 entrepreneurs that was formed in 1991 to promote trade with the subregion. They have decided to launch an Observatory of Abnormal Practices that will capture data on irregular customs operations and report them on a monthly basis to private sector organisations and governments in the subregion. Mabousso Thiam, a member of the network, explains: "Our aim is to test the commitment of those governments and sub-regional organisations to really fight against corruption because they won’t have any excuse like we weren’t aware of the situation."

The International Federation of Engineering Consultants, comprising member associations from 67 countries, is proposing development of a new international standard (ISO) for integrity assurance. Indeed, the engineering consulting industry has already used a code of ethics in all countries for years. By applying these internal standards to project evaluation, just as it is done with quality assurance, this will be a thrust towards eliminating corruption.

In Latin America, Transparency International chapters are beginning a programme to monitor the implementation and ratification of the Inter-American Convention against Corruption. According to Robert Leventhal of Transparency International USA, the private sector "... can assist that by providing expertise and assistance on specific reform measures."

Bulgaria’s Coalition 2000 has developed an action plan that went through stages of analysis and consultations on various levels and among all concerned institutions. Six expert working groups covered areas ranging from the reform of the judiciary and public administration to the role of the media and international aspects of fighting corruption. A policy forum attended by government ministers, heads of central government agencies, members of parliament, business associations, NGOs and representatives of international organisations endorsed the action plan in November 1998. The coalition will hold subsequent annual policy forums to review the progress achieved and provide guidelines for the next period.

In September 1996, the National Association of Entrepreneurs in Ecuador began work on reform proposals to combat corruption. It has focused on six areas: the administration of justice, public procurement, customs, social security systems, privatisation and financial management. Its proposals for judicial reform were well received by the constituent assembly in place from November 1997 to April 1998 and were incorporated into the new Constitution. The association is now articulating its other proposals.

The Chamber of Commerce in north India identified the proliferation of rules, laws and procedures for conducting business as a source of corruption, finding that some 50 000 rules were added between 1947 and 1991. To counter this problem, the Chamber has drafted model laws to make them simple, understandable and short. The top bureaucrats and politicians in the country have indicated that they are willing to adopt them.

In the context of the excessive rotation of functionaries in the public sector, the Corona Foundation in Colombia aims to provide continuity in public policy through the creation of a free-standing, permanent organisation focused on anti-corruption. It could influence politics significantly by supplying information and advice in a non-partisan way.

In Malaysia, chief executive officers (CEOs) of manufacturing companies met with the government to advocate reform in port operations. They identified corruption in port services as the reason why they exported their goods through the port of Singapore rather than the refurbished port of Kuala Lumpur. As a result of this dialogue, the government has taken steps to clean up the port and manufacturers are now using it.

In 1997, the German government was not willing to sign the OECD Convention, arguing that it was against the interests of German business. To counter this position, Transparency International organised an open letter from eight CEOs that was sent to the German minister who was the key to the process, as well as to the press. The letter said: "Please sign the OECD Convention. It’s in the interests of German business to sort this matter out, because we’re caught in a mess that we want to get out of and we’re looking to the government to provide us with part of the solution." When the voice of these CEOs came through, German resistance to the Convention ended.

Not all firms are likely to get involved in the fight against corruption as some benefit more than others from corrupt systems. For multinationals as well as for local business, some firms will have more interest than others in transforming a system of corruption and unhealthy competition for rent into a system of healthy price competition for profit. Clearly, entrepreneurs who have invested in training their workers and in developing or acquiring highly competitive technologies, for example, have a strong interest in operating in an environment where they can capitalise on those investments through competition for profit. They can be strong allies in the fight against corruption.

It is also important to be pragmatic in the struggle against corruption. Entrepreneurs operating in developing countries and emerging economies often come into contact with corrupt practices and bribe solicitation regularly, if not daily. Many of them can be part of an anti-corruption drive, even if they themselves are sometimes guilty of corruption, in so far as they understand that they will be better off if they could operate in an environment where business practices guided by the rule of law prevail over those of corruption.

It is easier for the private sector to enter the battle when it can rely on another pillar: when the judicial system is functioning or when at least part of the government is committed to fight corruption.

Finally, the experiences mentioned above bring the valuable role that business associations can play to the attention. Business associations can provide an organisational solution to both the prisoner’s dilemma and free rider problems. Such associations may take the form of national or transnational networks of entrepreneurs, or official entrepreneurs’ associations, for example. They can facilitate different types of action, such as:

the adoption of codes of ethics and transparent accounting standards;



involvement in negotiations to reform the business environment;



acting as a pressure group for necessary public reforms; and



perform ‘watchdog’ activities to help strengthen the rule of law.

It is important, however, to make a further comment on the nature of these organisations. In developing countries, entrepreneurs’ associations are often tied to political power through opaque relations of corruption. What are referred to here, in contrast, are organisations that have the quest for the establishment and maintenance of conditions of healthy price competition as one of their founding principles. They must act as transparent and capable mediators to set up rules that will favour such competition. It may also be useful to allow or perhaps even to promote competition between and among different mediators on policy issues — such as industry standards and regulations. But even this competition must be backed by the establishment, by the state, of a powerful and independent competition agency. Such an agency is needed to ensure that these business associations do not have anti-competitive effects. Setting up such independent business associations will require discussions and negotiations between firms that favour the move towards working competition and firms that may fear the move, or resist it. Platforms for such negotiations are indispensable.

The variety of experiences presented here have shown that the private sector can be an important actor in the fight against corruption. But even if it has managed to correct the assumption that businesses cannot be allies in anti-corruption reforms, this article remains a very small step. For example, more research is needed in order to understand clearly how to facilitate the constitution of business groups that will support and defend anti-corruption drives. It is also important to see what support can be provided by external actors to this process. One might question whether it is appropriate for governmental aid agencies to turn to private sector associations when collaboration with the local government to implement recommended reforms proves to be difficult. Indeed, this may contribute to weaken the state further in the eyes of the local society, which can contribute to deligitimise state institutions and shake the political equilibrium in the long run.

From a more theoretical perspective, the issue of the position of the private sector vis-à-vis corruption phenomena can be a very productive entry point to analyse corruption. It would include the relations between the state and the private sector. In some countries, the state, through its direct control and by its mode of government armed with corruption, has limited the development of an independent private sector. It is very likely that, in such countries, privatisation merely leads to the private control of former nationalised firms by those in the arcane of public power. In other countries, states, even if corrupt, have still permitted the development of a private sector, quite separate from the political power. It is obviously that the private sector in the latter situations will be in a position to support anti-corruption reforms.

The type of relation existing between the public sphere and the private sphere appears to be of interest in dealing with another important issue. It is tempting to say that it is pertinent to distinguish between configurations of corruption that are more or less negative to economic development. As the implementation of anti-corruption programmes is always meant to run against strong political obstacles, it might be pertinent to raise the question of the best path to follow to reach a low corruption state. It may hence be interesting to see to what extent it is possible to transit through intermediary stages, that would leave more space and give more autonomy to the private sector as a preliminary step. This would favour economic development based on an independent and competitive private sector in the long term and, in turn, would also facilitate the control of corrupt practices.

This text draws extensively on papers presented at the conference organised by the Development Centre of the OECD, with the valuable support of sponsor and partner organisations, 22-23 February 1999, Washington DC. The OECD Development Centre will publish the complete results of this conference in 1999. The author is responsible for corruption research at the OECD Development Centre. This article represents the opinion of the author, and not of the OECD or any of its sponsors or funders.

Based on a survey conducted in early 1995 among a sample of 200 firms engaged in manufacturing and commerce in several regions of Pakistan. For a detailed account, see A Stone, The climate for private sector development in Pakistan: Results of an enterprise survey, The World Bank, Private Sector Development Department, Washington DC, April 1995.



Other World Bank surveys give similar results for Brazil and Peru. For the Ukraine, the extent of management time spent, dealing with government is much higher, reaching 28 per cent. For a detailed review of these surveys, see S Rose-Ackerman & A Stone, The costs of corruption for private business: Evidence from World Bank surveys, The World Bank, Washington DC, forthcoming.



The next two parts draw on the work of Phyllis Dininio, consultant for the OECD Development Centre, who has synthesised the experiences presented during the Washington conference.



The OECD — Revised Recommendation of the Council on Combating Bribery in International Business Transactions, adopted by the OECD Council on 23 May 1997; the OECD — Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, adopted by the Negotiating Conference on 21 November 1997; the Convention of the European Union on the Fight Against Corruption of 26 May 1997; the Criminal Law Convention on Corruption, adopted by the Committee of Ministers of the Council of Europe, in its 103rd session, 3-4 November, 1998; the Inter-American Convention Against Corruption, adopted in 1996 in the framework of the Organisation of American States; and two United Nations Resolutions adopted in 1996.