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The Impacts of Corruption – Correlation Data and Policy Considerations

Working Group on Security and Corruption

The Impacts of Corruption - Correlation Data and Policy Considerations

Image courtesy of [winnond] / FreeDigitalPhotos.net

Source: http://carnegieendowment.org

Systemic corruption has an unrecognized bearing on international security. Policymakers and private companies often pay insufficient attention to corruption when deciding what foreign and defense policies to pursue or where to invest. Greater understanding of the nature of acute corruption and its impact on global security would contribute to a better assessment of costs and benefits and therefore to improved policy and practice.

Security Implications of Severe Corruption

  • Acute corruption should be understood not as a failure or distortion of government but as a functioning system in which ruling networks use selected levers of power to capture specific revenue streams. This effort often overshadows activities connected with running a state.
  • Such systematic corruption evokes indignation in populations, making it a factor in social unrest and insurgency.
  • It contributes to other international security threats, such as symbiotic relationships between states and transnational organized crime networks, facilitation for terrorist organizations, permeable international security regimes, and acute economic disruptions.
  • Corruption does not fuel these threats alone. It combines with other risk factors, such as ethnic, religious, or linguistic rifts in a population or severe economic disparities, to increase the likelihood of a security challenge.
  • Western policymakers typically prioritize other considerations, such as immediate security imperatives, the economic or strategic value of maintaining relations with a given government, or return on investment, over corruption concerns. As a result, Western institutions and individuals often enable corrupt governments, exacerbating security threats and incurring sometimes dangerous reputational risk.

Recommendations for Public- and Private-Sector Decisionmakers

Rigorously analyze systemically corrupt countries. Gather information on the structure of ruling networks, the levers of power and revenue streams they capture, and other risk factors with which acute corruption may be interacting.

Use the analysis to inform choices on engaging with severely corrupt regimes. Policymakers and business executives alike should conduct nuanced cost-benefit analyses before deciding to invest in a systemically corrupt state. Where involvement is unavoidable or fulfills a separate policy priority, modifications to standard operating procedures can reduce the likelihood of crises and help avoid the costs associated with interventions that might otherwise be required.

Devise creative ways to avoid enabling systemic corruption. Decisionmakers should take advantage of the wide variety of available tools and leverage when approaching corrupt countries (see appendix in full paper). Depending on the circumstances, changes in diplomatic practice, military assistance, development efforts, aid to civil society, membership requirements for multilateral regimes, business investment, and rules regulating international capital flows will be required.

Corruption: Misunderstanding the Impact

The latest in a string of popular uprisings that have toppled governments from Tunisia to Kyrgyzstan escalated into a crisis in 2014 as Ukrainians threw off the rule of then president Viktor Yanukovych and Moscow responded by invading Crimea.

At the same time, jihadis from several continents flocked to Syria, where an estimated 150,000 people were dead after three years of civil war and millions fled their homes. In Afghanistan, Taliban insurgents were exacting a record toll on local security forces as North Atlantic Treaty Organization (NATO) troops were leaving a still-unstable country in the wake of their withdrawal. And in Nigeria, militants from the Boko Haram extremist group were conducting a series of attacks on schoolchildren and villagers, while the governor of the country’s central bank was fired for investigating the disappearance of some $20 billion in oil revenues.

Is there a thread linking these far-flung events, all high on the West’s list of security priorities?

 

Acute, structured government corruption is a factor in all of them. Yet, despite the remarkable correlation, the role this phenomenon may play in exacerbating international insecurity is often overlooked.

Corruption is typically seen as a pathology, a fraying at the edges of a system or, at worst, a sign of system failure. Consequently, much of the work to devise remedies is entrusted to aid agencies and local civil society actors, whose hard-fought efforts strive for small-scale, concrete successes. These interventions tend to be focused on remedying technical deficiencies or building capacity.

But in a range of countries around the globe, corruption is the system. Governments have been repurposed to serve an objective that has little to do with public administration: the personal enrichment of ruling networks. And they achieve this aim quite effectively. Capacity deficits and other weaknesses may be part of the way the system functions, rather than reflecting a breakdown.

This structural dynamic—together with the strong correlation between acute corruption and breaches of international security—suggests that corruption may be a higher-stakes problem than has been commonly thought. Foreign and defense policymakers, as well as multinational corporations, need to mainstream consideration of corruption into their decisionmaking processes.

But currently, Western governments and key business actors are not well set up to respond in this holistic way. Information on the organization, manning, and practices of kleptocratic networks in key countries is not systematically gathered. Corruption is not on the agenda for high-level bilateral exchanges. Experts and specialized departments working on the issue are rarely at the table when critical decisions are made. They are insufficiently resourced even to carry out the relatively marginal tasks they are assigned. And relationships or cooperation models come in too few varieties, precluding subtle or creative ways of furthering anticorruption priorities so an all-or-nothing approach prevails.

A better understanding of acute and structured corruption as a functioning system, and of how it interacts with other risk factors to exacerbate threats to international security, could better public- and private-sector decisionmaking in a number of ways. It would:

  • Improve risk analysis, flagging countries such as Tunisia or Egypt prior to their respective revolutions in 2011, where—despite surface stability—kleptocratic governance, combined with other risk factors, made upheaval likely. It might help determine whether other countries, including Algeria, Angola, Bulgaria, Ethiopia, Turkey, and Uzbekistan, fall into this category today.
  • Contribute to a more accurate calculation of the real trade-offs when foreign policy priorities compete.
  • Paint a more detailed picture of how different interventions—including diplomatic interactions, military cooperation, private investment, and humanitarian and development assistance—play out in environments marked by acute corruption.
  • Contribute to more sustainable peace deals by reducing the distortion of negotiations between governments or between governments and insurgent groups that often hampers post-conflict consolidation.

As a result, a more sophisticated understanding of acute corruption could reduce the need for military interventions once crises erupt by helping head them off through more effective use of nonmilitary policy instruments, before conflict actually breaks out. Or, where intervention has taken place, it could increase the chances of achieving security objectives by improving operations.

Corruption and Security: Basic Correlations

An overlay of well-known indices tracking corruption on the one hand and violence or instability on the other reveals a visible correspondence: countries characterized by severe corruption also tend to suffer conflict or state failure (see figures 1 and 2). Twelve of the fifteen lowest-ranking countries on Transparency International’s 2013 Corruption Perceptions Index, for example, are the scene of insurgencies, harbor extremist groups, or pose other grave threats to international security.

 

While such simple correlations are arresting, they are not very informative about the dynamics of systemic corruption and how, precisely, it may threaten global security. Transparency International’s Corruption Perceptions Index does a great service by focusing world attention on the problem of corruption and mobilizing efforts to fight it. While it was never intended to be an authoritative analytical tool, however, analysts and policymakers often use it that way—despite Transparency International’s caveats.1  Based in part on attitudes of elite business communities, such indices may be distorted by some of the sophisticated forms today’s acute corruption takes, diminishing their value in helping predict security risks.2  When public funds are pumped into private banks to maintain a country’s capital reserves, for example, the pillage of those banks by kleptocratic elites may be invisible to outside observers—as was the case when Tunisia was widely seen as an exemplar of accountable government just months before its anticorruption revolution.3  Where pure pay-to-play arrangements are dressed up as foreign direct investments in local industries, as occurs regularly in Uzbekistan’s communications sector,4  outside perceptions of corruption may not match the reality.

Pinpointing a correlation between failing states and states that are seen as corrupt, moreover, proves nothing about causation. Could a reputation for chaos merely be translating into a reputation for corruption, muddying the analytical waters? How to determine if state collapse is providing opportunities for corruption or if corruption is causing state collapse?

Finally, the notion that disintegrating states pose dangers to their neighborhoods constitutes little more than a tautology. More difficult to discern are clues that states seen as stable—such as Tunisia, Egypt, or Mali in 2010 or Cameroon today—may represent significant threats.

To usefully build on the correlations between severe corruption and threats to international security, closer examination is needed of both the ways corruption is structured in a given country and the independent risk factors with which it interacts.

Categories of Systemic Corruption

At issue in this context is not garden-variety corruption, the kind that exists in every country. Such public-sector criminality is never to be condoned, and it presents its own security hazards. At the most basic level, such hazards can be described as vulnerabilities that mischief makers will exploit.

But the situation is qualitatively different when a country harbors endemic corruption that pervades the political system, or when the critical levers of government action are captured—resulting in a veritable repurposing of the state to the material benefit of a few elite networks. That kind of severe corruption poses security risks of a different order.

Such acutely corrupt countries fall into two rough categories.5

The first consists of those whose corruption is relatively structured, whose governing systems have been bent to benefit one or a very few cliques, best thought of as networks. States may have one or multiple kleptocratic networks, which often coexist only uneasily.

One example of this type is former president Hosni Mubarak’s Egypt, where two main networks controlled much of the economy—the military on the one hand and a crony capitalist network led by Mubarak’s son Gamal on the other. Ukraine under former president Yanukovych also fits this mold. Afghanistan, counterintuitively, is another case, for while different networks divide up the major revenue streams, President Hamid Karzai’s arbitrage has remained paramount in providing access to opportunities—and in providing protection from legal repercussions. Other countries that fit this pattern include Algeria, Angola, Azerbaijan, Cameroon, Peru under former president Alberto Fujimori, Tunisia under former president Zine el-Abidine Ben Ali, Uzbekistan, and Venezuela.

In this category of corrupt states, kleptocratic networks control the government functions that matter.

A top priority is instruments of force, both formal and informal. In Algeria and Pakistan, the ruling network is co-equal with the primary instrument of force: the army. The same is true in Egypt today. There, under Mubarak, Gamal’s crony capitalist network captured its own armed branch, the detested Amn al-Shurta, or auxiliary police, omnipresent throughout Egyptian life. In Ben Ali’s Tunisia, the army was excluded from the workings of the kleptocracy and the police provided the ruling network with muscle. In Cameroon, President Paul Biya relies heavily on the army’s elite Rapid Response Battalion (Bataillon d’Intervention Rapide).

To ensure impunity, kleptocratic networks typically co-opt judicial function. Afghanistan’s Karzai regularly calls his attorney general to influence cases or personally orders the release of suspects from pre-trial detention, aborting the cases against them.6  In Cameroon, Biya himself appoints every member of the judiciary, “from the chief justice of the supreme court to the lowliest clerk,” in the words of Christophe Fomunyoh of the National Democratic Institute.7  Judges in Mubarak’s Egypt retained a significant degree of formal independence—although the rules of criminal procedure removed much of their discretion and cultural factors encouraged a legitimist stance. As a result, the judiciary could not constitute an effective accountability mechanism.8

Control over legislative systems further guarantees corrupt networks’ ability to achieve their objectives. Arranging technical legality for corrupt activities by way of legislation that suits them is a hallmark of kleptocracies. “They made villainous laws to circumvent law by law,” says anticorruption activist Taoufik Chamari of Ben Ali’s Tunisia. The retired administrator of an urban zone in Alexandria, Egypt, remembered how Ahmad Fathi Sorour, speaker of parliament under Mubarak, “made laws for Gamal so he could circumvent the whole judicial system.” In Azerbaijan, President Ilham Aliyev and his New Azerbaijan Party control the legislature, an arrangement that facilitates “legal corruption” in ways that mask the criminality of elite windfalls.9  Otherwise, kleptocracies give network members a (revocable) pass to ignore laws.

The financial system played a remarkable role in Ben Ali’s Tunisia. Banks tendered loans to Ben Ali insiders with no expectation of recovery—except as a punishment. “Every year there was a list of loans that were written off,” says Tunis public accountant Imed Ennouri. “Accountants would sign off on the decisions to keep getting work.” Tax fraud functioned the same way: many were allowed to dodge taxes, but audits were used as a means of coercion.10

In Algeria, Egypt, Nigeria, Russia, and Uzbekistan, among other countries, the civil service siphons significant public funds into private purses through fraudulent contracting procedures. Typical ruses include funding unnecessary or overpriced public works projects, substituting inferior materials for the costly, high-quality ones called for in a contract, and contracting with companies run by officials’ family members. Civil servants are also instrumental in awarding public assets (such as land or business licenses) to network members at below-market prices.

Critical to the dynamic of this structured kleptocracy—and its impact on populations—is the significant vertical integration of the networks involved. While elite capture of staggering rents may dominate headlines, it is far from the sole dimension of corruption. Abusive extortion of “petty” bribes, with a percentage demanded by superiors up the chain, is also a key element, and one that adds to the population’s sense of grievance. Officials purchase their positions at a hefty price and then have to make good on their investments, adding to their incentive to extort bribes. Shakedowns become a daily feature of ordinary people’s lives, often inflicted with a humiliating arrogance that adds a psychological twist to the material hardship victims suffer. For those living under them, these governments become a source of lacerating shame.

The second category of severely corrupt states is somewhat different. It includes those that may experience pervasive corruption, but without the same degree of consolidation at the top of the pyramid. Monopolies on the instruments of force may be less complete, so elite networks may engage in open, violent competition to capture revenue streams—conflict that itself threatens international security. Competition over land, resources, and state revenues has fueled recent electoral violence in Ivory Coast. Pervasive, but fragmented, corrupt networks have similarly driven insecurity in Colombia for years. Local government structures, more fragile than their national counterparts, are often easier to capture. Border localities in particular play an important role for trafficking networks and may be prime targets.

Or the corrupt system in these states may simply be less coordinated. A federal political infrastructure may prevent centralization, as in India, or the weakness of government institutions even at the top may preclude the degree of control exercised by corrupt networks in the first category of states. Some further examples of this type include Colombia, Guatemala, Honduras, Mexico, Somalia, and South Sudan.

Naturally, any effort to categorize such complex phenomena will be imperfect. Some countries may fall on the cusp between these two broad categories, and their placement or precise description may be the subject of significant debate.

Even this schematic framework, however, suggests that statements about absolute levels of corruption may be of limited value, either for predicting risk or tailoring interventions. As Dominik Zaum of the University of Reading points out, “Afghanistan and Burma (Myanmar) might have the same score on Transparency International’s Corruption Perceptions Index, but how corruption affects governance, economic development, and security, what its implications are, and how it is best addressed will be different for each of these countries.”11  Popular attitudes may also differ in important details and should be investigated directly in each environment.

Similarly, emphasis on different “types” of corruption within a single country can also be misleading. When the U.S. government was developing anticorruption policy for Afghanistan in late 2010, the underlying analysis made a sharp distinction between “grand corruption,” perpetrated by political leaders, “petty corruption,” which was seen as greasing the wheels of public administration and therefore not a concern, and “predatory corruption”—largely defined as police shakedowns—which was described as most offensive to ordinary people.12  Usually, however, different types of corruption like these prove to be interconnected elements of a fairly unified system whose structure and vertical integration such descriptions underestimate. To entirely disaggregate them is akin to describing the steering and brakes of a car as two entirely separate machines.

Revenue Streams

The objective in both groups of countries is, of course, wealth. Some sources of elite rents are so distinctive in their impact as to be identified with a special category of government malfunction. The “resource curse” describes countries blessed with natural resources whose riches do little to improve their populations’ development outcomes. Hydrocarbon or mineral wealth, because of its concentration and frequent designation as government property, is particularly susceptible to capture by kleptocratic networks. Or such apparently free riches may spawn violent competition between more equally matched networks.

Looked at another way, however, natural resources represent merely one of a number of revenue streams that acutely corrupt governments seek to capture. Identifying such revenue streams on a country-by-country basis may help better understand the nature of each corrupt structure and suggest improved ways of engaging.

In resource-poor countries, public land is a source of wealth that kleptocratic networks almost universally endeavor to award to themselves. In arid countries, such as Afghanistan or Sudan, access to water and thus suitability for agriculture is the key feature determining a piece of land’s value. Elsewhere, as in Morocco or Tunisia, the most important factor may be proximity to the seashore or other tourist attractions. In tiny Bahrain, land of any kind is so scarce that the government has undertaken repeated dredging operations—at public expense—to add to the island’s surface area, increasing it by some 10 percent over several decades.13  Most of the new land was awarded to regime insiders for development purposes. Elsewhere, control over land corridors allows corrupt officials to dominate traffic in arms, drugs, and other destabilizing goods.

 

In Afghanistan, Colombia, and Yemen, opium, cocaine, or other narcotics may be a critical revenue stream that governing networks tap, usually with profoundly destabilizing consequences. Logging or the trade in restricted wildlife products may be particularly lucrative in other countries. “In Zimbabwe,” write two of France’s most distinguished Africa analysts, Jean-François Bayart and Béatrice Hibou, along with the African Studies Center’s Stephen Ellis, “the traffic in ivory and rhinoceros horn has involved not only guerrilla movements but also the military authorities.”14  Cash crops, too, such as cocoa, cotton, or palm oil, may be captured in destructive ways by kleptocratic networks.

International officials should not underestimate the degree to which corrupt networks structure themselves to monopolize external financial assistance. Ill-advised European Union or World Bank infrastructure loans—such as those financing the construction of an unnecessary high-speed rail line linking Rabat to Casablanca in Morocco or the $115 million the World Bank accorded to Kenya in 1996—have become another revenue stream for corrupt governments. And when these governments are overthrown, successor regimes are left to pay back the loans, prompting citizens of some postrevolutionary countries to push for reductions in this “odious debt.”15

Military or counterterrorism assistance provided to Algeria, Egypt, Pakistan, or Yemen may provide a perverse incentive to ensure the persistence or appearance of some terrorist activity in order to keep the dollars flowing. Even the service of soldiers, like Ghana’s, as peacekeepers may become a critical revenue stream enabling kleptocratic networks.

“Government-operated nongovernmental organizations,” referred to as GONGOs, may also be founded, expressly in order to capture development grants.16  Or governments may stridently demand that foreign assistance be channeled directly into state budgets, exploiting donor countries’ sensitivity to sovereignty issues or development practitioners’ desire to encourage local ownership and avoid creating parallel structures.

So-called petty bribery, too, when added up, proves not to be petty at all and can represent a significant revenue stream. Typical totals could make a real difference to national economies. In Afghanistan, the annual sum of daily shakedowns people suffered at the hands of the police, doctors, judges, or clerks processing applications for licenses, passports, or even death certificates is estimated to total between $2 billion and $4 billion.17

Finally, in far too many countries that practice any degree of electoral politics, campaign financing and expenditure constitute a significant source of revenue. The sheer quantity of money in politics distorts and compromises the political process and often serves as a cover for outright bribery and payoffs.

The choice of revenue stream will vary in different countries, depending on geography, topography, and historical factors, and should be examined as part of a comprehensive portrait of a given kleptocratic structure. An understanding of which revenue streams serve primarily to sustain and enable abusive government corruption—as opposed to those that provide some benefits to the population—may help inform more constructive public- and private-sector engagements.

External Enablers

In today’s globalized world, no country or governing system exists in a vacuum. The ability of highly corrupt governments to monopolize their countries’ resources is facilitated by outside enablers—often respectable Western institutions and individuals. Perhaps the most significant such enabler is the international banking industry. Despite real changes to banking secrecy norms and measures to curb money laundering, this sector continues to serve as a key vector for transferring national wealth into private hands and secreting it outside the country.18  Other Western professionals, such as prestigious attorneys or accounting firms, often acting through regional subsidiaries, play a similar, if less central, role.

Careless or undifferentiated promotion of private investment by foreign ministries in the West can provide a whitewash for dubious sectors within a corrupt country, misleading Western businesses that look to their governments for signals on how to operate abroad.

In Cameroon and Ukraine, a more powerful kleptocratic network in a neighboring country (in Nigeria and Russia, respectively) has served as a key enabler for ruling elites. The stronger network may provide cash or cut-rate natural resources, collude in customs fraud, or provide other facilities that reinforce the weaker network.

 

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