The differing forms of corruption across countries

I blogged here and here about the difference between corruption in India and China. This post points to some features of corruption in developed and developing countries, and private and public sectors. 

I will posit that it is only an illusion that corruption is exclusive to developing countries and governments. Corruption is not uncommon in developed countries and in the private sector. It's only that they manifest in different forms. 

Here I take a broader view of corruption and not confining it to just private gain at public cost. Instead in the context of any principal-agent framework, corruption involves illegitimate actions that benefit the agent and at the cost of the principal.

Here are three important differences - nature, manifestation, and consequences - between corruption in the former (developing countries and governments) and the latter (developed countries and private sector).

1. Nature: Harassment corruption related to the delivery of routine public services is virtually absent of all developed and most middle-income countries. This is perhaps the biggest problem with India. It is ubiquitous and impacts everyone. Besides, it is either easily measured or captured in surveys. Accordingly, global rankings of corruption allocate disproportionately higher weightage to such corruption, and invariably skews the assessment of corruption away from developed countries.

The common form of developed country corruption is transactional. Such corruption helps with preferential access on business transactions. They include changes to rules to accommodate specific interests, tinkering at the margins on procurements to favour one side, expedited clearances, benefiting from different types of public concessions etc. This is also the corruption that prevails at the higher levels of government in developing countries. Forms of such corruption are present in the private sector too, involving their managers and executives, in their transactions with other private actors. 

2. Manifestation: Corruption in the private sector and higher tiers (at all levels) of government in developed countries does not manifest as the brazen transfer of cash bribes that is common in developing countries. Instead, it is mainly in the form of various in-kind benefits, which are no less valuable than the bribes taken by their counterparts in developing countries.

These in-kind benefits come in different forms. They can be in the form of financing of family holidays, funding children's college admissions/tuitions, expensive gifts, jobs for self and family (especially children), insider information about investment opportunities, assets at discounts (say, a condominium at half the price), access to financing at favourable terms, favouring friends with deploying funds and contracts etc. Influence peddling by family members of powerful politicians and officials is a not at all uncommon practice in many developed countries.

As the latest example, Covid 19 procurements have been big source of corruption across countries. Sample this and this about nominated contracts awarded by UK's Cabinet Office to friends of Dominic Cummings and Michael Gove. See also this about how consultants have benefited through nepotistic contracts during the pandemic. This and this are examples of transactional corruption by hiring children of important politicians and officials in China and Saudi Arabia respectively. This, this, and this are exhibits from the US itself of influence peddling by giving jobs to children. This and this about influence peddling by Hunter Biden is only the latest example. 

3. Consequences: Further, the consequences of nepotism and patrimonialism in developing and developed countries are different. In case of the former, it's mainly efficiency destroying. So tenders get awarded to firms run by relatives or kinsmen or friends without the requisite expertise. Or appointments to important position of ineligible relatives and friends. In contrast, in developed countries, it is less about efficiency destruction (though it does exist) and more about preferential treatment. So among those broadly eligible, those connected and on the right side are most likely to get the tender or the job. Sample this about defence contracting in the US.

In other words, the developed countries suffer from network patrimonialism compared to the familial/kinship patrimonialism in developing countries. 

They involve niche professional services contracts being awarded to friends, nepotistic appointments to important public posts, revolving door appointments where those once inside favouring their previous employers or writing regulations that favour their previous industry etc. In this context, the emergence of the global class of free-lance service providers is important (More about this in a separate post). Inside the financial markets, they manifest in the form of fund managers deploying capital in enterprises promoted by their friends, private profiteering on insider information, preferential access to investment opportunities etc. It's all about clubby relationships. Instead of kinship, relationships are defined by being alumni of universities, leading consultancies and financial institutions. And all transactions come with quid-pro-quo

Interestingly, while kinship patrimonialism is acknowledged as a reality in developing countries, network patrimonialism is so deeply internalised as being legitimate or normal. Its corrosive effects are just as debilitating. 

Update 1 (23.02.2021)

Ananth points to this article which highlights the serious conflicts of interest around the US Surgeon General nominee, Dr Vivek Murthy. He has received $2.6 million in pandemic consulting fees and speaking engagements, most of it since after Biden clinched the nomination in April 2020, and most likely aimed at buying influence for favourable policies. 

Update 2 (17.03.2021)

David Cameron's ties with Lex Greensil has come into attention in the aftermath of the collapse of the supply chain financing firm, Greensil Capital. The FT has a story about how Greensil was able to mobilise large funding on the back of credit insurance offered by an Australian entity Bond & Credit Co (BCC), which may have involved the breaching of risk limits by one employee. 

In the summer of 2018 Greensill had hired as an adviser David Cameron, the former UK prime minister, whose spokesman said at the time that the former Tory leader had “great admiration for Lex Greensill”. Greensill, a charismatic Australian financier, had been awarded a CBE a year earlier for services to the economy. Cameron was granted stock options worth as much as 1 per cent of the company, according to industry figures with knowledge of the matter. With Greensill seeking to raise funds last year at a $7bn valuation, the options represented a potential windfall but are now presumed to be worthless. Underlining the active nature of the work and reflecting the importance of insurance to Greensill, Cameron made a visit later that year to the Sydney offices of BCC to meet Brereton, according to two people familiar with the matter... One person familiar with Cameron’s visit to the obscure BCC said that it bemused many in the Australian insurance industry. “David Cameron visiting that office was just comic,” he said.