Robert Rotberg: What’s the cure for corruption?

RotbergCorruption corrodes all facets of the world’s political and corporate life, yet until now there was no one book that explained how best to battle it. The Corruption Cure provides many of the required solutions and ranges widely across continents and diverse cultures—putting some thirty-five countries under an anticorruption microscope—to show exactly how to beat back the forces of sleaze and graft. Recently, Robert Rotberg took the time to answer a few questions about his new book:

Can corruption be cured?

RR: This book says that corruption can be reduced sharply if not eliminated entirely. It shows that once wildly corrupt places like Hong Kong, Singapore, and Rwanda have suppressed corruption effectively thanks to determined leadership, that Botswana did so as well, that China may be shifting a huge country away from graft (again because of leadership actions), and that Nigeria and Brazil could follow.

The “cure” sometimes takes decades and centuries, as in Scandinavia, New Zealand, and Canada (a subject of a chapter in this book), or much shorter periods of time as in Singapore and Hong Kong (and perhaps India’s Delhi State).

But there are real remedies, and opportunities for civic as well as political and bureaucratic leadership in the battle against corruption. This book is the anti-corruption primer, with a “how to” approach.

What is corruption?

RR: Strictly speaking, corruption is the taking advantage of a public elected or appointed position for private gain. But corruption also is the abuse of any position of trust for personal profit, or to benefit one’s own family, lineage, or cohort. To be non-corrupt is to be impartial—to be fair and even-handed in all dealings between persons with power and those who are essentially powerless.

What are the three types of corruption you identify?

RR:

1) Petty, or lubricating: These are the relatively small bribes that people routinely pay to avoid standing in long queues at licensing offices, to avoid being penalized by traffic policemen, and to avoid being held up at road barricades. People also routinely pass bribes along to influence minor decisions favorably, perhaps to obtain a passport, a marriage certificate, or the like—to pay extra to obtain what is rightfully theirs.

2) Venal, or Grand: When a construction company pads its bid to build a bridge or a road (or a refinery) so that it can split the extra proceeds with a person or persons responsible for granting a contract, that is venal corruption. Likewise, when the leaders of FIFA demand large personal payments from cities and countries anxious to hold World Cup tournaments, that is also venal corruption.

3) Corporate to Corporate corruption: To influence a strategic business decision or to gain market share versus a rival, a firm often pays its competitors to turn away. Or a corporate leader might undercut decisions of the company in order to enhance his own firm or to harm the other.

What does corruption cost?

RR: Large-scale customary corruption costs most developing countries at least 1 percent of their GDP growth each year. Overall, the World Bank estimates that the world’s citizens lose $1 trillion in potential growth each year because of corruption. Of equal concern, the more corrupt a country is, the poorer its people tend to be. Corruption is a component of bad governance and the poorer a country’s governance, the worse its economic performance usually is. Corruption undermines a country’s moral fabric. It distorts or destroys national priorities. When politicians live for the rents that they can seek from national incomes, citizens lose vital services like educational opportunity and medical care.

How is corruption measured?

RR: Many indexes measure corruption, but Transparency International’s Corruption Perceptions Index and the World Bank’s Governance Institute’s Corruption Indicator are the leading ones. On both of those indexes and most others, the least corrupt countries in the world are the Nordic nations, Australia and New Zealand, the Netherlands, Canada, and Singapore. The most corrupt places are in Africa (the two Congos, Nigeria, Zimbabwe) and in South America (Venezuela). These last states are all very badly governed, poor, and unstable.

What explains Nordic and Antipodean exceptionalism?

RR: The Nordics and Australia/New Zealand were all outrageously corrupt before the early years of the twentieth century. But the rise of what we call ethical universalism gradually replaced the particularism of early corruption. A new civic consciousness, educational attainments, and the widespread embrace of new aspirations and the appropriate methods for achieving such goals led to a shunning of corrupt dealings. A special chapter of the book examines how these nations and others discarded corrupt pursuits.

What works best to reduce corruption?

RR: The key shift is to alter the mindset of citizens from accepting the inevitability of corruption to refusing to countenance corrupt dealings. Political leadership is essential. In every modern case where a country has abandoned (or greatly reduced) corruption, a political leader – a president or a prime-minister – has understood the dangers of corruption within the body politic and has punished politicians and bureaucrats who thus stole from the people or abused their trust. Where corruption has been reduced sustainably, a political leader has led the way. Other initiatives include limiting opportunities for discretion, putting all interactions between a citizen and a permit-granting official, or a law maker, online, strengthening the operations of auditors general and ombudsmen, strengthening the ability of judges to refuse bribes, encouraging judges to penalize corrupt persons severely, welcoming and supporting a free media, thus adding to the increased transparency and investigative accountability which is foundational in any successful battles against graft and sleaze, and creating a world wide, U.N. sponsored, International Anti-Corruption Court to assume jurisdiction when national courts are either powerless or compromised. This book examines each of these (and other) anti-corruption options at length.

What can corporations do to reduce corruption?

RR: Venal corruption is often stimulated by a multinational enterprise seeking a mining or petroleum-exploitation concession from a national government. The best corporate citizens abide strictly by the letter and the spirit of the American Foreign Corruption Practices Act or its Canadian or European analogues. The best corporate citizens police their compliance policies strictly, and do more than simply pay lip service to anti-corruption legislation. The best corporate leaders refuse to condone any attempts to buy influence from politicians and officials, or to facilitate decisions in their favor that are supposed otherwise to be decided impartially.

Robert I. Rotberg is founding director of the Program on Intrastate Conflict at the Harvard Kennedy School and president emeritus of the World Peace Foundation. His many books include When States Fail and The Corruption Cure: How Citizens & Leaders can Combat Graft. He is a fellow of the American Academy of Arts and Sciences and former president of Lafayette College.

Kenneth Rogoff: India’s Currency Exchange and The Curse of Cash

RogoffToday in our blog series by Kenneth Rogoff, author of The Curse of Cash, Rogoff discusses the controversy over India’s currency exchange. Read other posts in the series here.

On the same day that the United States was carrying out its 2016 presidential election, India’s Prime Minister, Narendra Modi, announced on national TV that the country’s two highest-denomination notes, the 500 and 1000 rupee (worth roughly $7.50 and $15.00) would no longer be legal tender by midnight that night, and that citizens would have until the end of the year to surrender their notes for new ones. His stated aim was to fight “black money”: cash used for tax evasion, crime, terror, and corruption. It was a bold, audacious move to radically alter the mindset of an economy where less than 2% of citizens pay income tax, and where official corruption is endemic.

MOTIVATION SAME AS IN THE CURSE OF CASH

Is India following the playbook in The Curse of Cash? On motivation, yes, absolutely. A central theme of the book is that whereas advanced country citizens still use cash extensively (amounting to about 10% of the value of all transactions in the United States), the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts. Moreover, most of this cash is held in the form of large denomination notes such as the US $100 that are increasingly unimportant in legal, tax-compliant transactions. Ninety-five percent of Americans never hold $100s, yet for every man, woman and child there are 34 of them. Paper currency is also a key driver of illegal immigration and corruption. The European Central Bank recently began phasing out the 500 euro mega-note over these concerns, partly because of the terrorist attacks in Paris.

BUT SETTING AND IMPLEMENTATION IS VASTLY DIFFERENT

On implementation, however, India’s approach is radically different, in two fundamental ways. First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges. For example this is how the European swapped out legacy national currencies (e.g the deutschmark and the French franc) during the introduction of the physical euro fifteen years ago. India has given people 50 days, and the notes are of very limited use in the meantime. The idea of taking big notes out of circulation at short notice is hardly new, it was done in Europe after World War II for example, but as a peacetime move it is extremely radical. Back in the 1970s, James Henry suggested an idea like this for the United States (see my October 26 new blog on his early approach to the big bills problem). Here is what I say there about doing a fast swap for the United States instead of the very gradual one I recommend:

 “(A very fast) swap plan absolutely merits serious discussion, but there might be significant problems even if the government only handed out small bills for the old big bills. First, there are formidable logistical problems to doing anything quickly, since at least 40% of U.S. currency is held overseas. Moreover, there is a fine line between a snap currency exchange and a debt default, especially for a highly developed economy in peacetime. Foreign dollar holders especially would feel this way. Finally, any exchange at short notice would be extremely unfair to people who acquired their big bills completely legally but might not keep tabs on the news.

In general, a slow gradual currency swap would be far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences. One idea, detailed in The Curse of Cash, is to allow people to exchange their expiring large bills relatively conveniently for the first few years (still subject to standard anti-money-laundering reporting requirements), then over time make it more inconvenient by accepting the big notes at ever fewer locations and with ever stronger reporting requirements.

Second, my approach eliminates large notes entirely. Instead of eliminating the large notes, India is exchanging them for new ones, and also introducing a larger, 2000-rupee note, which are also being given in exchange for the old notes.

MY PLAN IS EXPLICITLY TAILORED TO ADVANCED ECONOMIES

The idea in The Curse of Cash of eliminating large notes and not replacing them is not aimed at developing countries, where the share of people without effective access to banking is just too large. In the book I explain how a major part of any plan to phase out large notes must include a significant component for financial inclusion. In the United States, the poor do not really rely heavily on $100 bills (virtually no one in the legal economy does) and as long as smaller bills are around, the phase out of large notes should not be too much of a problem, However, the phaseout of large notes is golden opportunity to advance financial inclusion, in the first instance by giving low income individuals access to free basic debt accounts. The government could use these accounts to make transfers, which would in turn be a major cost saving measure. But in the US, only 8% of the population is unbanked. In Colombia, the number is closer to 50% and, by some accounts, it is near 90% in India. Indeed, the 500 rupee note in India is like the $10 or $20 bill in the US and is widely used by all classes, so India’s maneuver is radically different than my plan. (That said, I appreciate that the challenges are both different and greater, and the long-run potential upside also much higher.)

Indeed, developing countries share some of the same problems and the corruption and counterfeiting problem is often worse. Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes. Anyone turning in large amounts of cash still becomes very vulnerable to legal and tax authorities. Indeed that is Modi’s idea. And criminals have to worry that if the government has done this once, it can do it again, making large notes less desirable and less liquid. And replacing notes is also a good way to fight counterfeiting—as The Curse of Cash explains, it is a constant struggle for governments to stay ahead of counterfeiters, as for example in the case of the infamous North Korean $100 supernote.

Will Modi’s plan work? Despite apparent huge holes in the planning (for example, the new notes India is printing are a different size and do not fit the ATM machines), many economists feel it could still have large positive effects in the long-run, shaking up the corruption, tax evasion, and crime that has long crippled the country. But the long-run gains depend on implementation, and it could take years to know how history will view this unprecedented move.

THE GOAL IS A LESS-CASH SOCIETY NOT A CASHLESS ONE

In The Curse of Cash, I argue that it will likely be necessary to have a physical currency into the far distant future, but that society should try to better calibrate the use of cash. What is happening in India is an extremely ambitious step in that direction, of a staggering scale that is immediately affecting 1.2 billion people. The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

Kenneth S. Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund, is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton). He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. He lives in Cambridge, Massachusetts.

Find Kenneth Rogoff on Twitter: @krogoff