DOES PARTICIPATION IN THE GLOBAL ECONOMY REDUCE POLITICAL CORRUPTION? AN EMPIRICAL INQUIRY Hung-En Sung* and Doris Chu** ABSTRACT This comparative study investigates the relationship between integration into the global economy and national levels of corruption. The end of the Cold War, the democratization of developing countries, and a fundamental change in public attitudes toward corruption prompted a worldwide campaign against corruption in the 1990s. Under the leadership of major supranational organizations, involvement in the global economy has become a powerful source of domestic corruption control. Analysis of data from 99 countries has found a robust negative association between measures of economic globalization and corruption. Nevertheless, globalization produces the largest reductions in corruption in non-OECD, midsize GDP, or small population countries, while its impact in OECD, small-size economy, or large population countries is substantively extremely weak. In the latter societies, improvements in social and economic wellbeing, liberal democratization of politics, and higher participation of women in government would yield better results for honest and effective governance. Findings suggest that the impact of globalization on national levels of corruption is significantly moderated by the structural and institutional contexts in which it takes place.
INTRODUCTION Is globalization incompatible with political corruption? While some analysts suggest that rapid global economic integration causes corruption to spill over and resonate throughout the world (Glynn, Kobrin, and Naim 1997), others find public officials in more globalized countries more honest *
Direct correspondence to Hung-En Sung, Ph.D., The National Center on Addiction and Substance Abuse at Columbia University, 633 Third Avenue, New York, NY 10017, USA, (
[email protected]). The authors thank John Winterdyk and several anonymous reviewers for their helpful comments on an earlier version of this paper. ** Ph.D., Arkansas State University, Department of Criminology, Sociology, and Geography, P.O. Box 2410, State University, 72467, USA, (
[email protected]). © de Sitter Publications 2003
proofs
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(Sandholtz and Koetzle 2000; Foreign Policy 2001). This debate has had a profound impact on public perceptions and policy practices. Since the mid1990s, the World Bank (WB) and the International Monetary Fund (IMF), two leading institutions promoting worldwide economic growth and financial stability, have been aggressively imposing anticorruption conditions in their development and lending projects, which are in themselves powerful engines for global economic integration. In this paper, we will first review recent changes in international politics that have turned the impetus for expanding exchange and interdependence among nations into an unprecedented worldwide collaboration against corruption. We will then proceed to empirically evaluate the association between participation in the world economy and corruption, and examine the structural conditions under which this linkage strengthens or weakens. GLOBAL ECONOMIC INTEGRATION AND CORRUPTION Economic globalization is defined by increasing levels of international trade, cross-border capital flows, and a convergence of national legal and institutional arrangements to encourage and protect these economic activities (Sassen 1999). The process involves the internalization of markets, politics, and legal systems on the one hand (Berger 2001), and the recognition of local practices, values, and demands on the other hand (Gills 2002; Salcedo 2003). Facilitated by innovations in telecommunication and transportation technologies, multinational corporations (originally based in industrialized countries) develop extensive webs of offshore subsidiaries and suppliers to maximize the efficiency and productivity of available capital and technology, in the context of worldwide competition for market shares and profits. Either by choice or force, governments in developing countries abandon their traditional roles as regulators of national economies to become platform builders that strive to attract foreign capital and technology (Thurow 2000). Those countries that succeed in building skilled workforces, a sound infrastructure, political predictability, and commitment to market rules are poised to significantly raise the standards of living of their citizens (Sachs 1997). China provides a good illustration of how domestic institutions and policies arbitrate the impact of globalization on social life. Massive and continuous foreign direct investment and the nurturing of a vibrant export
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economy has dramatically improved the economic status of and life quality in major Chinese cities (Kwan and Kwok 1995; Lin and Song 2002), however, regressive social policies and the sclerotic state-owned enterprises rendered the power of globalization a contributor to its alarming economic inequality (Khan, Griffin, and Riskin 1999; Gustafsson and Li 2001). A growing consensus now affirms that the nature of the influence of global economic integration largely depends on how it is moderated by domestic forces and external pressures (Milanovic 2003). These moderators could be geographic uniqueness, characteristics of the economy, mode and quality of governance, or foreign alliances. Recent theoretical reflections on the problem of globalization and corruption point toward the need to focus on structural and institutional factors calibrating the effects of global economic integration (Cai and Treisman forthcoming; Werlin 2003) National politics and policymaking are subject to change by the willingness, if not the perceived obligation, of a given nation to join the world economy. Countries now eagerly dismantle barriers to trade and investment, and they comply with numerous rules and requirements sanctioned by supra-governmental institutions such as the World Trade Organization and the International Monetary Fund. The power of a nation to monopolize the administration of its internal affairs is concomitantly eroding. Banking systems are reformed, patent and copyright regulations are enacted and enforced, state bureaucracies are downsized, and government budget deficits are reduced at great social costs because of irresistible external pressures (Rodrik 2001). As powerful global institutions coordinate the establishment of cross-border regulations and standards covering fiscal transparency, monetary policy, data dissemination, corporate governance, and accounting supervision, the worldwide convergence of national legal standards and institutional provisions takes shape. It is in this context of coordinated market disciplines that global economic integration is said to exercise its controlling effects on corruption. Despite its multiple modalities and expressions, corruption is in essence “the abuse of public office in exchange for private benefits.” (Wei 2001:2). Although unscrupulous practices such as bribery and rent-seeking can achieve rational goals under unusual circumstances (Bayley 1966), systematic corruption invariably undermines the efficiency of the market, inflates the cost of public projects, and challenges the legitimacy of government in the long run (Gray and Kaufmann 1998; Rose-Ackerman 1999;
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Ghazanfar and May 2000). Corrupt governments reduce countries’ ability to benefit from globalization by discouraging capital inflows through more stable foreign direct investment; instead they resort to the more volatile means of foreign bank borrowing as well as misallocating resources to less efficient, bribe-paying entities (Mauro 1997; Wei 2001). Where corruption is endemic, business managers spend more time with state bureaucrats negotiating licenses, permits, and taxes (Gray and Kaufmann 1998). As a result, financial crises and stagnant or inconsistent economic growth become recurrent experiences in societies with a long succession of corrupt political regimes (Pastor and Wise 2001). Yet these harmful and very painful economic and social consequences of political corruption frequently do not trigger radical political reform for cleaner public administration. Although corruption may look inherently incompatible with global economic competition by hampering market forces through rent-seeking demands, historical data paint a very different picture. The degree of global trade today is not greater than that prevailing in the late nineteenth century (O’Rourke and Williamson 2001). International trade has grown rapidly relative to total economic output over the past fifty years, but this growth mostly reverses declines in the ratio of total trade to GDP between the two World Wars. For many industrial countries, total trade as a share of GDP is not much above the levels that were commonplace in the late nineteenth century. Bribery has provided a competitive advantage to multinational corporations and illegal earnings to unscrupulous government officials for decades. Regulation of cross-border trade was one of the main government services that generated a large amount of tempting rents. Serious worldwide efforts to reduce corruption in general and bribery in international trade in particular, were unheard of until the end of the Cold War. The incompatibility between globalization and corruption is a recent and policy-induced phenomenon. Before the widespread international push toward democracy in the 1980s and 1990s, locally initiated campaigns against pervasive corruption rarely succeeded, with a couple of exceptions provided by Hong Kong and Singapore (Klitgaard 1988; Gray and Kaufmann 1998). Foreign corporations that were developing subsidiaries, suppliers, and markets in Third World countries were not of much help either; they eagerly complied with demands from rent-seeking officials or actively sought to bypass govern-
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ment red tape through the paying of bribes. This acceptance of corrupt practices and regimes was normal during much of the 40-year long Cold War, when Western powers led by the United States poured large amounts of loans, aids, and investment into countries administered by known corrupt leaders who belonged to the anti-Communism camp (Rose-Ackerman 1999). The seed for effective worldwide corruption control was planted in 1977 when the U.S. Congress, prompted by public outrage emanating from the Watergate and Lockheed scandals that brought down heads of state in the United States and Japan, enacted the Foreign Corrupt Practices Act (FCPA). The FCPA prohibits illegal payments to foreign officials by American businesses, and mandates detailed accounting of all transactions completed abroad. This move placed American firms in a disadvantageous position in relation to their European competitors, especially when countries such as France and Germany not only allowed overseas bribery, but also made these expenses tax deductible as long as the foreign recipients of the bribes were reported to national financial authorities (Glynn, Kobrin, and Naim 1997). The repeated complaints of American businesses against the seemingly unfair restrictions on their ability to compete in overseas markets forced Washington to lobby relentlessly and to insist that other developed countries adopt anticorruption measures similar to the FCPA, to support a more just and more transparent world economy. Globalization began to exercise a new kind of influence on national politics and corruption. Major European economic powers initially saw no practical benefits in changing their patterns of business dealings in foreign countries, and they reacted to the American hassle with vehement resistance. Three events (or series of events) set off a radical change in public attitudes toward, and tolerance for, corrupt practices in international economic activities. First, the conclusion of the Cold War put an end to the ideologically and strategically justified support of corrupt anti-Communist governments by the United States and its allies (Rose-Ackerman 1999). Second, former autocratic or socialist regimes in Asia, Eastern Europe, and Latin America succumbed to popular aspirations for more freedom and participation and were replaced by political structures and institutions similar to those of Western liberal democracies throughout the 1980s (Huntington 1991). Efforts to secure greater government transparency and accountability in
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newly democratized nations have created an ideal environment to promote good governance. Lastly, a bolder investigative journalism and a new generation of more independently minded judges and prosecutors exposed several corruption scandals involving national leaders in France, Germany, Italy, and other European countries in the first half of the 1990s, which deeply upset the citizenry (Glynn, Kobrin, and Naim 1997; Unzicker 2000). Outcries against cronyism and corruption among the rich and powerful were thus heard by previously indifferent European economic powers. Following these developments in international politics, concerted efforts at curtailing corruption were made in the second half of the 1990s. The Organization for American States (OAS) led the movement by adopting the Inter-American Convention Against Corruption in 1996, which requires countries to prohibit international bribery and to collaborate with each other in punishing offenders (Rose-Ackerman 1999). At about the same time, extensive debates and negotiations among member states of the Organization for Economic Co-Operation and Development (OECD) were taking place; these led to the signing of the OECD Anti-Bribery Convention in 1999. This Convention requires that each signatory enact its own national legislation to criminalize and punish foreign bribery (OECD 2000). Along with this supply-side approach, which seeks to regulate the main suppliers of the capital and technology that powers the globalizing economy, demand-side measures have also been implemented to discipline recipients of foreign loans, aids, and/or investment. The World Bank, the world’s largest provider of development assistance to poor countries, established an Oversight Committee on Fraud and Corruption in 1998 (later reconstituted as the Corporate Commission on Fraud and Corruption Policy) to investigate allegations of corruption involving Bank staff or Bank related projects (World Bank 2001a). Additional preventive efforts have been devoted to strengthening institutional immunity to corruption of assistance recipients (World Bank 1997). Similar programs are also in place in regional development institutions such as the Inter-America Development Bank and the Asian Development Bank. The International Monetary Fund (IMF) and the World Trade Organization (WTO) promote multilateral commitment to eliminating some of the conditions and practices that breed corruption: inefficient public resource management, lack of transparency in government, excessive protectionism and state interference in the market, and absence of competition (Shihata 2000; Williams and Beare 1999; IMF 2000).
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These supra-governmental normative frameworks and concomitant mechanisms now impose powerful restraints on the behaviors of private firms and government officials of countries participating in the world economy. As barriers to free trade are being quickly dismantled, and business transactions and government decision-making are becoming more visible and more closely monitored, opportunities for systematic corruption dwindle in the current context of global interconnectedness. Involvement in the world economy per se does not reduce corruption; but participation in a global economy regulated by multilateral agreements and coordinated by supranational bodies subjects a country to external scrutiny and discipline, thus lowering local levels of political corruption. RESEARCH QUESTIONS The current mode of global economic integration that combines free trade with policy coordination among a record number of nations is propelling one of the most radical thrusts for worldwide good governance in human history. Virtually no government or country can afford not to participate, because isolation from the world economy implies “opting out on the process of economic development itself ” (Thurow 2000:30). Data analysis in this study first addresses the simple question of whether deeper involvement in cross-border trade and investment can alter domestic government corruption in the post-Cold War world. Attention is focused on both the strength of this relationship and its relative pertinence compared with other influences on good governance. According to this framework, the social, economic, and political systems that make up the domestic context act to filter global pressures that cause bureaucratic change (Welch and Wong, 2001). Recognizing that globalization is not the only significant determinant of lower corruption, and that unique features of local population and institutions facilitate or deflect the anticorruption pressures of globalization, we will assess the differential strength of the globalization-corruption link in different subgroups of countries that share structural similarities. The goal is to explore the basic political, demographic, and economic conditions under which ties to the world economy exercise stronger or weaker impact on the quality of a nation’s governance. Development literature has reported that countries of different population size, economy size, or levels of institutional infrastructure possess distinct abilities to cope with
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forces of globalization (Gray and Kaufmann 1998; Rampersad 2000; Sandholtz and Koetzle 2000; Schneider and Enste 2000). When a large population places additional strains on a country’s administrative and distributive systems, the size of its economy and the effectiveness of its political institutions will determine its ability to manage the economic and social pressures generated by its integration into the world economy. The impact of these three country-specific factors on the relationship between globalization and corruption is evaluated in this study. DATA, VARIABLES, AND ANALYTICAL METHODS Dependent Variable Data for this study is collected from a number of sources. Corruption, the dependent variable, is operationalized by the Corruption Perceptions Index (CPI) compiled by the Berlin-based Transparency International (TI). The CPI is a composite index drawn from different polls and surveys1 carried out among business people and country analysts; it ranks countries on a scale of one to ten in terms of the degree to which corruption is perceived to exist among public officials and politicians. The 99 countries and territories ranked in 1999 form the sample of this analysis (see Appendix). Independent Variable Integration into the world economy, the independent variable, is measured by three 1999 trade and investment indicators obtained from the World Bank (2001): the levels of exports and imports of goods and services as shares of gross domestic product (GDP), and net inflows of foreign direct investment as a percentage of GDP (see Table 1). These trade and capital flow measures reflect the extent to which a country’s economy depends on exchanges in goods, services, and capital with other countries. Control Variables Given that economic and social development (Ehrlich and Lui 1999; Mo 2001); liberal democratic institutions (Rose-Ackerman 1996; Sandholtz and Koetzle 2000); and female participation in government (Dollar,
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Fisman, and Gatti 2001; Swamy, Knack, Lee, and Azfar 2001) have emerged as strong correlates of decreased corruption in recent research, they are incorporated as control variables in this study. Corruption is less prevalent where people have open access to education, housing, health services, and gainful employment; less space for corruption exists when competitive elections and an independent judiciary check government behaviors; and there is a strong positive statistical connection between women in government and lower levels of corruption. Each of these three macro-level factors is measured by three operational indicators coded from data published by the World Bank (2001b), the United Nations (2000; 2001), the Inter-Parliamentary Union (2000), and the Freedom House (2000). Table 1. Description of Variables
Variable
Mean
SD
N
%
Missing
4.60
2.36
---
---
0
GNP per capita (in US dollars) 1998 (World Bank)
8042.63
10601.22
---
---
0
Life expectancy at birth (years) 1998 (World Bank)
68.16
10.92
---
---
0
Literacy rate (% of adults ages 15 and above) 1999 (United Nations)
87.55
15.84
---
---
2
---
---
Y: 73 N: 26
Y: 74% N: 26%
0
1.55
0.69
---
---
2
3.08
1.49
---
---
2
9.44
8.23
---
---
2
11.30
7.38
---
---
2
12.37
8.10
---
---
2
Exports of goods and services (% of GDP) 1999 (World Bank)
38.60
27.78
---
---
1
Imports of goods and services (% of GDP) 1999 (World Bank)
41.49
25.12
---
---
1
4.30
6.10
---
---
3
Corruption variable Corruption Perceptions Index 1999 (Transparency International)
a
Human development variables
Political liberalization variables Democratic elections (executive leaders selected through free and fair elections) 2000 (Freedom House) a
Political freedoms 1998-99 (Freedom House) a
Civil liberties 1998-99 (Freedom House) Female political participation variables
Women in ministerial positions (% of ministerial officials female) 1998 (United Nations) Women in sub-ministerial positions (% of sub-ministerial officials female) 1998 (United Nations) Women in parliaments (% of parliamentary seats occupied by female citizens) 1998 (Inter-Parliamentary Union) Globalization variables
Foreign direct investment, net flow (% of GDP) 1999 (computed from World Bank data) a
Values are inverted (e.g. multiplied by -1) in subsequent analyses to allow easier interpretations of coefficients (higher the score, higher level of corruption, political freedom or civil liberty).
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Analytical Strategy The hypothesized relationship between involvement in the world economy and corruption will be tested at both bivariate and multivariate levels. A linear regression function is used to model the links between indicators of globalization and corruption at the bivariate level. Since there are twelve independent and control variables that are highly correlated among themselves and the sample is small, factor analysis using a principal component solution with varimax rotation is performed to extract a smaller number of statistically independent and conceptually meaningful factor variables for multivariate evaluations. This procedure solves the problem of multicollinearity that is very common in cross-national research, and keeps the number of predictors in the model small; compact models are easier to understand and interpret (Agresti and Finlay 1997). In order to assess changes in the strength of the globalizationcorruption link associated with different structural contexts, the sample is segmented by OECD membership status, economy size (GDP), and population size (see Appendix). The inclusion in the OECD signals a country’s commitment to democratic capitalism or a market economy (Unzicker 2000), which furnishes the most effective institutional infrastructure to succeed in the globalized world economy (World Bank 2000). The multivariate modeling is repeated for each subgroup of nations that share institutional, economic, or demographic similarities. Changes in the unstandardized regression coefficients of the globalization factor variable are evaluated and discussed. FINDINGS Data analysis is performed to asses the argument that although overall globalization has a negative effect on corruption, the magnitude of such an impact is significantly moderated by the effectiveness of domestic political and economic institutions, the size of the economy, and the size of the population. In this analytical framework, global pressures interact with national structural and institutional systems to affect public administration outcomes (Welch and Wong 2001). The method of ordinary least squares is used to find the best linear equation to describe the relationship between measures of participation in
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HUNG-EN SUNG AND DORIS CHU Table 2. Summary of Factor Loadings for Rotated Varimax Orthogonal Solution (N=99). Factor loading Variable
Communality 1
2
3
4
GNP per capita
.57
.26
.48
.23
.67
Life expectancy
.85
.20
.15
.09
.79
Literacy
.79
.22
.14
.09
.71
Democratic elections
.20
.86
.01
-.15
.80
Political freedoms
.21
.89
.19
.08
.87
Civil liberties
.29
.79
.40
.06
.87
Women in ministerial positions
.20
.21
.80
.03
.73
Women in sub-ministerial positions
.10
.07
.53
-.03
.30
Women in parliaments
.10
.08
.85
.02
.75
Exports of goods and services
.24
-.08
.00
.94
.94
Imports of goods and services
.11
-.05
-.08
.95
.92
Foreign direct investment
-.16
.29
.33
.45
.42
Human development variables
Political liberalization variables
Female political participation variables
Globalization variables
Note: Boldface indicates highest factor loadings.
the global economy and corruption at both bivariate and multivariate levels. Results from the factor analysis confirm the content validity of the operational definitions related to the theoretical constructs of human development, liberal democracy, female political participation, and integration into the world economy. Table 2 displays the estimates of the factor loadings. The first factor is referred to as the human development factor, since it contains high correlations with GNP per capita, life expectancy, and literacy rate. Factor 2, which strongly correlates with liberal democracy variables, is interpreted as a measure of political liberalization. Factor 3 and Factor 4 reveal distinct clusters of variables representing women in government and levels of cross-border trade and investment; therefore they are
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GLOBAL ECONOMY AND POLITICAL CORRUPTION
denominated as the female political participation and globalization factors, respectively. The four factor variables are saved and replace individual measures as predictors in multivariate analyses. The Overall Impact of Globalization on Corruption The hypothesis that participation in the world economy is inversely related with corruption receives strong empirical support. Bivariate findings show that all globalization variables are significantly and negatively correlated with corruption. As the relative levels of exports, imports, and foreign direct investment increase, perceptions of government corruption decrease (r = -0.34, -0.23, and -0.19. respectively). The impact of exports of goods and services on corruption is strongest among the three globalization variables, suggesting that countries relying on exports for their subsistence are particularly less afflicted with internal corruption and more likely to be attuned to successful competition and responsive to market disciplines. At this level of analysis, indicators of global economic integration as a group are less powerful in predicting corruption than measures of human development, political liberalization, and female political participation. Multivariate findings provide additional supportive evidence. The globalization factor maintains a statistically and substantively significant Table 3. Correlation Matrix
Variable
1
2
3
4
5
6
7
8
9
10
11
12
1. Corruption
---
2. GNP per capita
-.86***
---
3. Life expectancy
-.52***
.58***
---
4. Literacy
-.40***
.50***
.62***
---
5. Democratic elections
-.26*
.26*
.32**
.37***
---
6. Political freedoms
-.54***
.46***
.39***
.37***
.70***
---
7 Civil liberties
-.69***
.62*
.43***
.43***
.65***
.87***
---
8. Women in ministerial positions
-.57***
.51***
.31**
.33***
.24*
.39***
.55***
---
9. Women in sub-ministerial positions
-.26*
.13
.21*
.16
.15
.22*
.30**
.37***
---
-.57***
.50***
.21*
.25*
.16
.26*
.42***
.60***
.28**
---
-.343**
.31**
.23*
.23*
.14
.09
.10
.11
.02
.05
---
-.225*
.17
.12
.13
.13
.06
.03
-.02
.05
-.04
.93***
---
-.194*
.25*
.16
.18
.14
.21*
.22*
.22*
.03
.27**
.25*
.25*
13
10. Women in parliaments 11. Exports of goods and services 12. Imports of goods and services 13. Foreign direct investment * p
