Buying our way out of corruption: performance-based incentive bonuses for developing country politicians and bureaucrats.

Publication: Yale Human Rights and Development Law Journal
Publication Date: 01-JAN-09
Format: Online
Delivery: Immediate Online Access

Article Excerpt

This Article argues for the establishment of performance-based financial incentive programs in developing countries that would pay politicians and high-level bureaucrats substantial bonuses (ten to twenty times or more of their official yearly salaries) to reduce corruption within their countries. These incentive programs would turn the weapon of greed back on itself by aligning the motivations of politicians and bureaucrats with the stated goals of government and the desires and will of citizens. Paying corrupt public officials to stop stealing may seem distasteful, but the problems that developing countries face and yet cannot overcome because of systemic corruption are staggering and have been largely resistant to other anticorruption strategies. By simply altering the source of funds to public servants, performance-based incentive programs for developing country politicians and high-level bureaucrats can, over the long run, create a culture of clean governance conducive to sustained economic growth and can make all aspects of development, such as improving infrastructure, education, and health care, more manageable.

INTRODUCTION

The trouble with Nigeria is simply and squarely a failure of leadership …. The Nigerian problem is the unwillingness or inability of its leaders to rise to the responsibility, to the challenge of personal example which are the hallmarks of true leadership. (1)

While Prime Minister of India in the 1980s, Rajiv Gandhi publicly stated that he believed 85% of government spending on development within India never reached its intended beneficiaries but was instead lost to corruption (2) at every stage along the way. (3) A 2004 survey in Chad showed that 99% of money earmarked for rural health clinics by the Ministry of Finance never reached its destination. (4) In Uganda, a relatively functional African country, “less than 30 percent of the funds dedicated to primary education was actually reaching schools” in 1998. (5) A poll by Gallup International Associations of 50,000 individuals worldwide revealed that “Africans … are painfully aware of the inadequacy of their leaders: 8 out of 10 said ‘political leaders are dishonest’; three-quarters ‘deemed them to have too much power and responsibility’; while 7 out of 10 ‘think politicians behave unethically.'” (6)

As Heineman and Heimann observe, “Although it is difficult to quantify global corruption, there is little question that huge problems exist. For example, the World Bank estimated in 2004 that public officials worldwide receive more than $1 trillion in bribes each year (and that figure does not include embezzlement).” (7) The above sum is staggering and directly harms the poor, but the larger tragedy is that systemic corruption can destroy most incentives to create wealth and can perpetuate a dynamic in which it is “in most people’s interest to take action that directly or indirectly damages everyone else” (8):

The rot starts with government but it afflicts the entire society.

There’s no point investing in a business because the government will not protect you against thieves. (So, you might as well become a thief.) There’s no point in paying your phone bill because nobody can successfully take you to court (so there’s no point being a phone company). There’s no point getting an education because jobs are not handed out on merit (and in any case, you can’t borrow money for school fees because the bank cannot collect on the loan, and the government doesn’t provide good schools). There’s no point setting up an import business because the customs officers will be the ones to benefit (and so there is little trade, and so the customs office is underfunded and looks even harder for bribes). (9)

From an economic perspective, systemic corruption reduces the beneficial effects of competition in the market, the quality of goods produced, (10) foreign direct investment (FDI), (11) government revenue, (12) and bank supervision, (13) while raising the prices that the poor pay for goods, increasing the risk premium that developing countries (LDCs) (14) pay when issuing bonds, (15) and swelling the informal economy. (16) From a political perspective, systemic corruption corrodes the legal system, turns the bureaucracy into a self-seeking entity that disregards the public interest, undermines representational democracy, reduces educational funding, (17) and increases military spending and arms procurement. (18) From a societal perspective, systemic corruption breeds cynicism, rage, despair, and factionalism, exacerbates the emigration of skilled citizens, and promotes individual advancement above ethical concerns. From an environmental perspective, systemic corruption increases pollution. (19) From a foreign aid perspective, systematic pilfering by developing country public officials blocks potentially life-saving assistance from reaching the poor and ultimately discourages foreign generosity, for developed countries (DCs) may become reluctant to contribute aid where the greater portion is stolen and never reaches those in need.

The problems that LDCs face but cannot overcome because of systemic corruption are staggering. Systemic corruption can be a matter of life or death for millions of LDC citizens. There are over 9.5 million deaths annually of children under the age of five in developing countries, two-thirds of which are “entirely preventable” (20) but extremely difficult to prevent because “fragile states, characterized by weak institutions with high levels of corruption, political instability and a shaky rule of law, are often incapable of providing basic services to their citizens.” (21) Frustration and anger regarding systemic corruption have even resulted in dramatic outbreaks of violence. In Peru, for example, corrupt public officials were lynched by disillusioned citizens. (22)

Theft by government officials has been largely resistant to anticorruption strategies. Unfortunately, “[t]he energy invested in the anticorruption drive has failed to reduce average levels of graft in government or business in the world’s poorest regions, according to World Bank officials and other leading analysts.” (23) Given the pervasiveness of corruption and the drastic nature of the problems that result, new policies that properly take into account LDC environments are desperately needed. (24)

For the poorest of poor countries, dramatically reducing corruption (25) is the most significant step that a developing country can take toward successful, sustained development. (26) As Cooper notes, “Imagine a poor country with a well-run legal system but not much else in the way of resources. Someone will somehow find an opportunity to make money. In the end, the country will probably grow rich.” (27) This is not to claim that low corruption within a state guarantees sustained development. (28) Many other factors, including education levels, the capacity of health care systems, and intelligent economic policy, play important roles. But these other factors become more manageable when a poor country has clean governance–e.g., most medicines actually reach those who need them; teachers show up to teach and do not steal and resell school materials; and politicians do not pursue economic policies whose sole purpose is to hide corrupt transactions. (29)

For low middle-income countries, substantial reductions in corruption can end the existence of extreme poverty within their borders. Low middle-income countries have little money to help lift the extreme poor within their borders out of poverty, and corruption can worsen the problem by preventing a significant amount of the money allocated for such projects from reaching the extreme poor. Large reductions in corruption would thus enable more money to be on hand for those in need.

Corruption also imposes costs on those public officials who choose to partake in it. (30) It is time-consuming and risky to solicit bribes and siphon off government funds. Plus, it wins no respect from citizens or from the international community. Corruption leads to precarious, unstable positions because public officials cannot rely on their ability and merit to maintain steady employment but instead must satisfy the whims and pleasures of those who are more powerful. (31) By stunting development, politicians and bureaucrats deprive themselves as well as their fellow citizens of clean air, safe streets, health, and longevity.

Given how devastating the effects of corruption are on most LDCs, this Article proposes providing financial incentives (legal bribes or inducements) to government officials in developing countries to stop them from partaking in corruption–from robbing the LDC’s treasury, stealing overseas development aid, or soliciting bribes from private citizens, corporations, or other public servants. (32) Performance-based financial incentive programs in developing countries, established by a coalition of DC governments, intergovernmental organizations, or others, would pay LDC politicians and high-level bureaucrats substantial bonuses–ten to twenty times or more of their official yearly salaries–to reduce corruption within their countries. (33) The incentive program would better align the motivations of politicians and bureaucrats with the stated goals of government and the desires and will of citizens. (34) There would be no doubt that the incentive bonuses would be meant to financially substitute for the money that corrupt public servants traditionally steal from the government or take from citizens. In essence, performance-based incentive programs would aim to turn the weapon of greed back on itself by exploiting it as a means of positive change. By simply altering the source of funds to public servants, performance-based incentive programs for LDC politicians and bureaucrats can, over the long run, create a culture of clean governance conducive to sustained economic growth and can make all aspects of development, such as improving infrastructure, education, and health care, more manageable. (35)

If public servants reduce their corruption enough to qualify for incentive bonuses, the payment of these bonuses would have a transformative effect on the LDC. (36) Citizens would no longer have to waste their time and money negotiating bribes for services to which they are entitled; companies would not face the surreptitious and unfair decision-making process that corruption engenders in contract bids and privatization sales; previously unprofitable business ventures would become viable because the cost of the venture would not be artificially inflated by expected expenditures on bribes; and judges would be much more apt to administer justice and signal to citizens and businesses that they could confidently proceed in their activities without the ever present threat of an arbitrary legal decision being rendered against them.

Unlike most official development assistance (ODA) projects, performance-based incentive programs for LDC public officials that target corruption would have a built-in self-enforcing momentum in that the programs would encourage eligible public officials to monitor corruption and pressure their peers, subordinates, and, at times, superiors to comply because incentive bonuses would be paid collectively based on nationwide, not individual, performance. (37) Under an incentive program, if the nationwide performance benchmark is met, all eligible public officials will receive a bonus; if the performance benchmark is not met, no one will receive a bonus.

Another potential benefit of an incentive program is to give LDC citizens a platform from which to protest state corruption. The existence of a performance-based anticorruption program would improve government responsiveness to citizen complaints, thereby encouraging citizens to report corrupt practices. (38) This increasing voice could also assume the form of pressuring LDC politicians and bureaucrats to reduce corruption and take the incentive bonus money instead of pilfering the treasury or soliciting bribes from citizens.

Incentive programs for LDC public officials also avoid the main drawback of traditional ODA: unconditional distribution to LDC public coffers, which inadvertently propagates corruption by providing a constant source of funds for public servants to embezzle. Unlike traditional ODA, incentive bonuses are not opportunities for public officials to be corrupt but rather motivation for them to reduce corruption. Public officials cannot steal incentive bonuses; they must earn them. That leads to a further advantage–if LDC public officials are not sufficiently motivated by the prospect of incentive bonuses to improve their performance, the incentive programs will simply not pay out any of the earmarked money and hence will be much less expensive and less wasteful than other forms of foreign aid. (39) Incentive programs targeting corruption have yet another advantage–they will not breed a bureaucracy of aid workers that increases the cost of ODA and recruits away the most talented local LDC individuals from other enterprises, (40) because only a handful of full-time employees staffing an independent administrative committee will be needed to manage each incentive program.

This Article argues that performance-based incentive programs should be implemented to tackle corruption in LDCs. Given the skeptical reaction many readers might have to performance-based LDC incentive programs, a substantial portion of this Article will address possible objections to the proposal. Part I articulates the contours of a model performance-based financial incentive program for LDC politicians and high-level bureaucrats, while making clear that there are dozens of components of incentive programs that can potentially be tailored to fit the unique circumstances of different LDCs. Part II sketches the general idea of principal-agent theory and then examines the literature on performance-based incentives for public officials. My analysis will show how incentive programs can be structured for maximal effectiveness, and how traditional opposition to high-powered performance incentives in the public sector can be overcome when corruption is used as a performance variable. Part III surveys possible negative consequences of setting up incentive programs for LDC public officials and potential sources of opposition to such programs. Part III also explains how these concerns can be eliminated or reduced so that they do not pose a serious problem to the successful establishment of incentive programs. Finally, Part IV concludes that performance-based incentive programs for LDC public officials are the most promising prospect for clean governance, and for attaining all of the benefits identified as flowing from it.

I. THE MODEL INCENTIVE PROGRAM

This Part describes the most salient features of performance-based incentive programs for LDC public officials. While one would expect many of the features described to be integrated into most or all incentive programs for LDCs, each LDC’s incentive program should be tailored, as appropriate, to the particular situations and needs of that developing country. Keeping this in mind, this Part presents a model performance-based incentive program, not to pronounce it as the optimal incentive program for LDCs but to outline the major components or parameters of such a program without taking firm positions on all its structural details.

A. Performance Measurement

The first component of an incentive program is identifying the performance variable. The performance variable that should be measured by incentive programs for LDC public officials is corruption–a comprehensive and accurate indication of which can be determined by aggregating data from many different sources (performance measurements). An example of such an aggregated corruption measurement, which could serve as a solid foundation for any incentive program’s measurement composite, is Transparency International’s Corruption Perceptions Index (CPI). (41) Another possible foundation for an incentive program’s measurement composite is the World Bank’s governance indicators. (42) Like the CPI or World Bank governance indicators, possible performance measurements could take the form of reports, surveys, indices, and polls. (43) Further, they should include analyses by thousands of individuals, from foreign and domestic policy experts and businesspersons to citizens of differing backgrounds.

Using numerous different performance measurements has three related benefits: (1) it leads to a more accurate assessment of the real level of corruption within a developing country; (2) it makes it more difficult for LDC public officials to game performance measurements through bribery or threats; and (3) it reduces the pressure–from both external and internal sources–that would naturally gather around a single entity charged with determining the flow of millions of dollars to a concentrated group of public officials. (44)

One of the great advantages of having the performance variable of incentive programs be corruption is that, comparatively speaking, it is a very nonideological and noncontroversial goal–i.e., almost all people agree that reducing corruption is a good thing. (45) Numerous other public policy positions are much less clear-cut. For example, some academics still disagree over the relative merit of numerous macroeconomic policies for LDCs. While the goal of reducing corruption is much more nonideological and noncontroversial than almost any other policy, it is still not completely free from all association with political ideology and economic policy debates. Certain economic policies make corruption easier to pull off. For example,

High black market premiums and negative real interest rates certainly make corruption possible. The leader gets foreign exchange at the official rate and sells it at the black market rate. He finances his purchase of foreign exchange using loans at the negative real interest rate and invests the money in foreign assets with a positive real interest rate. (46)

The same is true for some noneconomic policies and structural features of bureaucracies. Since this is the case, when incentive programs attempt to get public officials to be less corrupt, the incentive programs could be perceived as advocating certain policies that might be more contested than the value of reducing corruption.

I am not claiming that this occasional association of corruption with other policies that are more controversial is a bad thing, simply that such associations should be acknowledged and their extent well understood. In fact, certain policies and laws will likely be altered if public officials are to become substantially less corrupt. (47) Those LDCs that might disagree with some of the policies indirectly associated with reducing corruption do not have to implement the policies that they disagree with to receive the incentive bonus payouts as long as their performance in reducing corruption meets or exceeds the threshold requirements of the corruption variable. Qualifying for the bonus payouts may be more difficult if the LDCs do not follow all or most of the policies that indirectly are associated with reductions in corruption, yet in no way do they preclude the politicians and bureaucrats within LDCs from qualifying for the incentive bonuses.

B. Disbursement Structure

Another important component of a model incentive program is the structure of the payments. One possibility is to impose step benchmarks. Under this model, performance bonuses would not be paid out as a simple linear function of performance, in the sense that greater reductions in corruption would not incrementally increase the size of incentive bonuses. Instead, the incentive bonus amounts would be fixed, but to receive the bonus, politicians and bureaucrats would have to reduce corruption each performance period (each year) until corruption levels are low. The improvements in performance would have to exceed step thresholds or benchmarks.

In addition, once public officials in an LDC meet the first threshold step of improved performance, they would receive an incentive bonus payout, but to obtain the second bonus payout they would have to improve their performance over the previous year in order to meet the new performance threshold. If politicians and bureaucrats in an LDC fail to improve their performance enough in the following year, they would not receive incentive bonuses. If their performance worsens, the threshold rates of performance would not decrease the next year, and if their performance improves but not by enough to qualify for the next incentive bonus, the threshold rate in the next year would hold steady rather than moving up to the next step or level. The performance-based financial incentive program would end after thirty years of incentive bonuses have been paid out. The gradually increasing, step nature of performance thresholds would exist for the first five to ten years of an incentive program–long enough not to expect insurmountably large reductions in corruption in one year but not too long to impede momentum in reducing corruption. Afterward, the public officials would have to meet or exceed an unchanging high level of performance–i.e., a low level of corruption. The amount that corruption would have to be reduced for each step threshold to be met could be constant or could vary between thresholds.

The benefits of step benchmarks include the fact that the sizes of fixed bonuses are easy to understand and publicize. Corruption would not have to completely stop in order for public officials to meet the first performance threshold. Rather, a small percentage of public officials would have to cease being corrupt, or a larger group of public officials would have to reduce their corruption, or some combination of the two scenarios would need to occur, in order for incentive bonuses to be paid to all eligible public officials. Those that choose to reduce their corrupt activities would have tools–the ability to dismiss, demote, reprimand, prosecute, apply peer pressure, and/or inform on the corrupt public officials–to increase the chances that they could meet the first performance threshold of reduced corruption. While an increasing number of public officials would need to reduce their corruption in order to meet future performance thresholds, the higher the number of honest public officials, the more effectively they would be able to use the above-mentioned tools to push for changes among their corrupt peers and subordinates, and the more enticing the carrot of incentive bonuses would become.

The fixed, straightforward, and explicit…

http://goliath.ecnext.com/coms2/gi_0199-11352312/Buying-our-way-out-of.html