Léonce Ndikumana on Corruption

February 2007

Léonce Ndikumana is a PERI Research Associate and an Associate Professor of Economics at the University of Massachusetts, Amherst. He is on leave for 2007-07 and is serving as Chief of Macroeconomic Analysis for the Trade, Finance and Economic Development Division of the United Nations Economic Commission for Africa in Addis Ababa. Ndikumana took time to correspond with PERI's Communications Director Debbie Zeidenberg about his most recent Working Paper, Corruption and Pro-Poor Growth Outcomes: Evidence and Lessons for African Countries.

1. You write that while corruption is particularly endemic in sub-Saharan Africa today, in the past, many other regions and countries have been the sites of high levels of corruption. What specific policies have worked to fight corruption in the recent past? Have there been any success stories in sub-Saharan Africa?

Every political system has experienced high levels of corruption at some point in its history. Some societies have been able to gradually establish mechanisms that while not fully eliminating corruption nonetheless help to reduce it to levels that allow a healthy functioning of the economy and the political system. The question is: what are these mechanisms that allowed these societies to overcome debilitating corruption? A key to combating corruption is to the establishment of institutions that permit a balance of power through checks on the discretionary power of the government. The role of such institutions is to enforce transparency in the design and implementation of government operations, accountability on the part of public officials, and fair and systematic application of penalties against violation of the rules of law.

It is the failure to establish and consolidate such “institutions of restraint” in most African countries that largely explains the high levels of corruption in the continent. In some countries, corruption is debilitating to the point that it is suffocating economic exchange and preventing the formation of a democratic tradition in politics. Corruption does not magically dissipate from society by itself. It is the responsibility first and foremost of the top national leadership to commit to eradicating it. Unfortunately, evidence shows that in countries that are most corrupt, the governments are exerting little effort to fight corruption. And here again, African countries fair very poorly, but this is not surprising given that it’s the leaders that benefit most from corruption – economic and political.

The level of corruption varies vastly across countries in Africa, with some countries chronically at the bottom of the scale while others continue to experience improvements in governance. At the top we find countries such as Mauritius, Botswana, South Africa, Tunisia, and Namibia, which also happen to have higher levels of incomes and better economic performance. The bottom is much more crowded, especially with resource-rich countries such as Angola, the Democratic Republic of Congo, Sudan, Chad, Nigeria, and Equatorial Guinea, to name only a few, experiencing endemic levels of corruption. Yes, there are emerging success stories in Africa with regard to corruption; and it is not surprising that the same countries that are scoring better on the governance front are also scoring higher in terms of overall level of development. Poor governance may be one of the reasons why resource-rich countries have been unable to translate the observed high growth rates into meaningful improvements in living standards for the majority of the population. This is because corruption, and bad governance in general, result in the concentration of wealth in the hands of the few political elites and their domestic and foreign acolytes in the private sector.

One of the encouraging developments in Africa is that even in countries where corruption remains high, it is becoming easier for the public and the media to denounce it relatively freely. For instance, the Kenyan media has done a commendable job in bringing in the open substantial evidence of political and economic corruption lately. While past governments may have been more corrupt, they also managed to keep the lead on corruption by repressing the media, which in turn allowed corruption to deepen as leaders enjoyed impunity. An independent and free press constitutes an important deterrent mechanism against corruption and also an avenue to building a culture of transparency and accountability in the public sphere.  

2. Your paper makes reference to a few different indices of corruption, which measure a country’s corruption level on a scale of one to seven or one to ten. How are these indices developed, and what data and criteria are used?

The indices used in the literature to measure corruption are derived from surveys of individuals and businesses. They measure the perception of corruption by those who are affected by it in their daily lives and daily business transactions. This includes people’s perception vis-à-vis law enforcement, business regulation, access to public services, and labor market practices. The responses are then coded, with higher values representing lower corruption.

These indices are useful in ranking countries from the cleanest to the most corrupt and for examining changes in corruption within a country over time. But these indices do not say anything about the absolute social cost of corruption, which would be measured in terms of stolen national funds and assets, wasted time jumping through the hoops of administrative machinery, deepened poverty and worsened health conditions due to the embezzlement of public funds and inefficiencies in the delivery of services. Nevertheless, to the extent that the indices are measured consistently, they can tell us something about the quality of governance in a country relative to other countries, and today relative to the past.

Given these limitations of conventional measures of corruption, researchers continue to search for improved ways of gauging the governance climate in countries around the world. Thus new surveys inquire as to the public’s assessment of the attitude of governments vis-à-vis corruption, whether they are working hard enough to fight corruption. In general, respondents around the world tend to be dissatisfied by their governments’ efforts in fighting corruption, both in developed as well as developing countries (Transparency International 2007). They also find that some sectors of society are more exposed to corruption than others. For instance, the police force is reported as the most corrupt institution in most countries.

These indices, however, should be interpreted with caution. Given that they are based on respondents’ perceptions, they are by nature subjective and are subject to both understatement and overstatement of the true extent of corruption in the country. Moreover, respondents may be reluctant to provide accurate information for fear of reprisal, despite the fact that researchers do their best to preserve anonymity. This fear of reprisal is likely to be more pronounced in countries with corrupt and repressive regimes. Furthermore, records may also be biased by researchers’ own beliefs and stereotypes. In general, there is a tendency to rate African countries as more risky than they actually are because of these stereotypes. In addition, even African countries with relatively better performance in governance suffer from negative “neighborhood effects” due to the fact that they are on a continent regarded as risky. As a consequence, the payoffs from institutional reforms in a particular country tend to be slow to materialize. For example, it has been observed that for comparable performance in institutional reforms, African countries tend to benefit less than other countries from ensuing foreign investment (Asiedu 2002).  

3. Tell me more about the role of foreign nationals in this cycle of corruption. Do NGOs have a role to play in helping to change norms and expectations?

Corruption is a  systemic phenomenon that exhibits a strong tendency to persist. This is because while those who benefit from corruption have incentives to perpetuate it, the victims of corruption learn to cope with it. Thus corruption becomes self-perpetuating because it is expected. The solution involves changing the incentive structure by modifying the payoffs and sanctions that govern the interactions between bureaucrats and economic actors.

With regard to international actors, the first question is whether they also have expectations of corruption and how this affects their behavior. Yes, international actors have their own expectations about governance in African countries and most often those expectations are negative and even grossly inflated. Unfortunately, instead of trying to change the situation, international actors not only adapt to the system but also often use the system to advance their own economic and political interests. In fact, intervention of foreign actors in a corrupt system often makes it worse rather than the other way around. The history of the Congo under the Mobutu regime is a telling case in this regard. It was the collusion between Mobutu and his foreign allies that permitted the plunder of the country’s resources through embezzlement, capital flight, and outright theft (Ndikumana and Boyce 1998).

NGOs, just like business organizations, are influenced by their own beliefs about governance in their host countries. These institutions typically have precise missions in the country and those missions are rarely aimed at changing the political governance space in the country. Moreover, agents of NGOs, like agents of corporations, are strongly dedicated to accomplishing their mission at any cost. This cost often means adapting to the local norms of corruption thus colluding somehow with the national leadership. Moreover, if NGOs tried to resist corruption, let alone fighting it, they would run the risk of creating antagonism with the government, jeopardizing their primary mission. Faced with the choice between feeding the poor, educating the children, helping to fight diseases on the one hand and trying to uphold anti-corruption principles on the other hand, NGOs may find it more practical to “adapt to local norms”, thus implicitly condoning corruption.

There are two implications to the above discussion. First, one cannot expect to outsource the fight against corruption and governance reforms in general to foreign players. While foreign players can support domestic institutional reforms, these will be sustainable only if they have a domestic support base and especially if they are driven by the leadership at the top. Second, interventions by international partners in the areas of economic development are bound to be ineffective in countries suffering from endemic corruption. As the saying goes, while we can’t do much with bad governments, we can’t do much without governments either. In other words, it is impossible to go around the government to assist the citizenry. So, institutional reform is a prerequisite to success in development assistance whether through official aid or NGO interventions.  

4. In your discussion of strategies to address the odious debt incurred by corrupt regimes, you advocate an approach that places the burden of proof on the creditors to “document how the loans were used and demonstrate that they benefited citizens of African countries.” In theory, this will induce creditors to install greater mechanisms for accountability in their loans. This seems straightforward when we’re talking about loans for capital projects and infrastructure (here’s the bridge the money built), but less so when the loans are intended to support social services, particularly preventative interventions. Would this strategy potentially exacerbate the problem you mention of loans going primarily to (perhaps unnecessary or poorly targeted) capital expenditures?

In this paper and in other places, especially in our papers on capital flight, James Boyce and I argue that the burden of proof of capital flight should be not on African countries who were robbed of their resources, but on the lenders, who, knowingly poured the money in the hands of rogue leaders, often with the full knowledge of the fact that the funds were being wasted and would not be repaid.  Now, your question is an interesting one: would this strategy favor lending to activities that are easier to physically trace such as infrastructure to the detriment of social services? I don’t think so.

It is indeed saddening when countries accumulate debt for the alleged purpose of financing infrastructure and yet you find that there are no roads or that the roads are not maintained, that electricity has to be rationed because the supply has failed to keep pace with demand, that people have no access to clean water, etc. Thus, when it comes to physical infrastructure, it is definitely easy to verify whether past loans for infrastructure have been used to their intended purposes.

Just as in the case of loans for infrastructure, it is also possible to trace the use of loans for social services on the basis of outcomes. The problem currently is that too often countries get loans intended for social services, and yet children have to walk long hours before reaching a school with overcrowded classes, and no books. It is a problem when countries accumulate loans and yet literacy rates fail to increase, children are not immunized, and mothers can’t find a safe place to deliver their babies.  

The key to improving the benefits from external borrowing, whether in the area of infrastructure or social services, is to improve monitoring both on the lender’s side and the borrower’s side. To be effective, monitoring has to be transparent and participatory by including the intended beneficiaries of social services and users of the public infrastructure to be funded by external loans. If monitoring is done adequately, it is possible to document where the money went, whether in infrastructure or into improved living standards. Monitoring also minimizes the damages of corruption before millions are gone missing. It also reduces the incentives for capital flight and embezzlement of public resources in general as public officials become aware of the high likelihood of being caught. An important instrument of monitoring is the establishment of a mechanism of tracking of resources and their uses at the project level. In countries where tracking has been implemented, the result is often a significant reduction in the proportion of resources that leak between disbursement and the point of final use. For example, in Uganda, the first tracking study in education was initiated in 1996 under the supervision of a task force comprising representatives from government, donors, the private sector, and NGOs. Follow-up studies brought to the open substantial evidence of leakages in the flow of funds from the center to the final users. It is estimated that between 1996 and 2001, the fraction of central government funding that effectively reached schools rose impressively, from 36 percent to 90 percent (World Bank 2002; Ablo and Reinikka 1998; Ndikumana and Nannyonjo 2007).

All this is to say that there is nothing particular about social services that make them more difficult to monitor than public infrastructure. It is perfectly possible to document the use of funds invested in social services on the basis of outcomes. And most importantly, it is possible to minimize embezzlement of resources invested in these sectors with the appropriate monitoring system supported by careful independent tracking studies. Thus, by advocating that the lenders prove the use of the external loans, there is no risk that lending will be more biased towards infrastructure.  

5. You’ve also done a lot of work on pro-poor economic development programs, specifically in South Africa, where corruption is a significant problem. Can the economic programs you recommend—monetary and fiscal stimuli, asset reserve requirements, expansion of development banks, etc.—be practically instituted in sub-Saharan Africa, in the context of so much corruption?

The policies we propose for South Africa in our book – An Employment-Targeted Economic Program for South Africa – are aimed to accelerate the rate of the country’s economic growth and increase the impact of growth on the well-being of the majority of the South Africans. These policies are needed for all African countries, which all face the critical challenges of achieving higher growth, sustaining high growth rates, and increasing the gains from growth in terms of improvements in people’s living standards.

The 1980s and 1990s were “lost decades” for African countries, characterized by stagnation and deterioration of living standards, despite the heavy-handed economic reforms imposed on the continent by donors led by the Bretton Woods Institutions.  Since the turn of the 21st century the continent has shown signs of growth recovery. In the past three years, the growth rate has exceeded 5% (UNECA 2007).  Despite this growth recovery, the continent still faces important challenges and very few countries are on track to reach the internationally agreed development goals in a reasonable time frame. For instance, between 1998 and 2006, only five African countries recorded an average growth rate of 7% or more. As a result, the gains in terms of living standards are very small. One important reason is that the observed growth recovery has not been accompanied by any meaningful gains in job creation (UNECA 2005, 2006).

Thus for African countries to make progress in reducing poverty, they must revisit their economic policy frameworks and policy targets to emphasize strategies for (1) accelerating the rates of economic growth and (2) increasing employment creation. It is our belief that the best and most sustainable means for fighting poverty is to provide people – especially the youth – with better access to decent jobs.  It is in that spirit that we crafted the economic program that we propose for South Africa, which we believe should be endorsed by all African countries as they all face similar development challenges: mass unemployment, slow and volatile growth, narrowly-based growth (resource-led in many countries), high inequality, and increasing marginalization of the rural sector. 

The key pillars of the program we propose are

• a fiscal stimulus to accelerate demand-led growth;
• incentive mechanisms (including subsidized credit) to channel financial resources into activities with high potential for direct and indirect employment creation;
• lowering interest rates to stimulate private investment;
• increasing investment in public infrastructure to both create jobs and encourage private investment through positive externalities (lower production costs).

Now the question you ask is whether these policies “can be practically instituted in an environment rife with corruption.” I strongly believe that in sub-Saharan Africa, South Africa is the best place where these policies have the highest chance of success for several reasons.

First of all, corruption in South Africa is not so high to constitute an insurmountable handicap to economic policy and private sector activity.  In fact South Africa is one of only five countries in sub-Saharan Africa (others are Botswana, Mauritius, Tunisia, and Namibia) to record a score of four on the Corruption Perception Index of Transparency International, which is considered tolerable (Transparency International 2007).

The second and very important reason is that the South African government has both human and financial resource capacity to implement the programs that we propose. Indeed, in many African countries, financial resource and human capacity constraints constitute a major handicap to the success of well-intentioned economic programs. Even when countries have the resources, including external development assistance, they are not equipped to utilize the resources adequately. Most importantly, many governments are unable to design economic programs that are based on sound economic investigation aimed at uncovering the drivers and constraints of economic growth. South Africa is one of very few countries on the continent that has a government that can autonomously undertake the required investigation of the pre-requisites for growth, implement economic programs based on the evidence from these investigations, and monitor the outcomes of such programs.

Third, South Africa has developed and institutionalized effective bargaining mechanisms between government, labor, and business (e.g., the National Economic Development and Labor Council – NEDLAC) that are instrumental for participatory development policymaking. With the tradition of advocacy and popular struggle for people’s rights, South Africa is at an advantage relative to other African countries in the ability to develop a platform for the debate and conduct of a people-oriented economic program such as the one we propose.

Finally, South Africa has a strong and fairly independent media, which is key to enforcing accountability in policy making. The success of the program we propose will require participation of the ultimate beneficiaries of the policies. The role of the media is critical to inform the people about not only the process of economic policymaking but also and most importantly about any slippages in the implementation of economic programs.

I believe that the policies we propose for South Africa can work; all it takes is political will on the part of the government and support from the various stakeholders and partners, including commercial as well as development banks and other players in the private sector. Indeed the government’s new Accelerated and Shared Growth Initiative for South Africa (ASGISA) is very much in the same direction and proves the government’s will to move beyond the focus on stabilization to embark on a serious program aimed at achieving higher growth and translating higher growth rates into substantial increases in well being for the majority of South Africans.

For the majority of sub-Saharan African countries the kinds of programs we propose are indeed going to be difficult to implement due to capacity constraints, in addition to institutional weaknesses, including corruption. However, these difficulties are not insurmountable. With adequate political will on the part of the leaders, most countries are able to undertake the initiatives we propose, though with varying degrees of success. It is not realistic to think that African countries have to eradicate corruption first before they can undertake any meaningful reforms to accelerate growth and reduce poverty.

References

Ablo, Emmanuel and Ritva Reinikka, 1998. “Do budgets really matter? Evidence from public spending on education and health in Uganda.” World Bank, Policy Research Working Paper No. 1926.

Asiedu, E. 2002, “On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?” World Development, 30 (1), pp. 107-119.

Ndikumana, L. and J. Nannyonjo, 2007. “From Failed State to Success Story?” in Boyce, J.K., ed., Peace and the Public Purse. Forthcoming, Lynn Rinner Publishing Co.

Ndikumana, L. and J.K. Boyce, 1998. “Congo’s odious debt: External borrowing and capital flight in Zaire.” Development and Change 29 (2), 195-217.

Transparency International, 2007. “Corruption Perception Index.” www.transparency.org/policy_research/surveys_indices/cpi/2006

United Nations Economic Commission for Africa (UNECA), 2005. "Economic Report on Africa 2005: Meeting the Challenges of Unemployment and Poverty Reduction in Africa." Addis Ababa.

UNECA, 2006. "Economic Report on Africa 2006: Capital Flows and Development Financing in Africa." Addis Ababa.  

UNECA, 2007. "Economic Report on Africa: Accelerating Africa’s Development Through Diversification." Addis Ababa, forthcoming.

World Bank, 2002. "The Republic of Uganda Public Expenditure Review, Report on the Progress and Challenges of Budget Reforms." No 24882-UG. September.