December 8

Rebecca Regan-Sachs

Slaying the Dragon: How Small Businesses Can Fight Corruption in the Developing World (Part 1)

This two-part series contains highlights from an interview conducted with experts from the Center for International Private Enterprise (CIPE): Aleksandr Shkolnikov, Director for Policy Reform, and Marc Schleifer, Program Officer for South Asia. One of the four core institutes of the National Endowment for Democracy, CIPE works to strengthen democratic institutions worldwide through private enterprise and market-oriented reforms. Special thanks to Oscar Abello for facilitating these discussions.

Rebecca Regan-Sachs, NextBillion: How does corruption impede private enterprise in the developing world?

Alex Shkolnikov: Actually, it’s only recently that people have begun to talk about the private sector and corruption in a way that [implies] the private sector has a role in fighting corruption. If you think back even 15-20 years ago, the attitude of the private sector globally, both in developed and developing countries, was that corruption is not a problem: “If it occurs, we’ll just figure out a way to deal with it.”

From that, you had an attitude going more towards: “We’re beginning to see corruption as a problem, but it’s a problem of governments. So if there has to be something done about corruption, governments are the ones who are supposed to do something about it.”

But I’d say about 15 years ago, there was a fundamental shift in how the private sector looks at corruption. Part of it has been driven by major international agreements such as the OECD convention on combating bribery, but also in a lot of the developing countries, corruption began to emerge as a cost of doing business. So it evolved from small bribes to get things done, to an issue that is actually costing companies money. It’s not uncommon to see now that in some industries in developing countries, corruption constitutes 20, sometimes 30 percent of the cost of doing business. So it’s a significant issue.

What we’ve also seen is that corruption, from being [just] a problem of bribery, is transforming into a problem that puts companies out of business entirely… So for instance, if I want to take over Mark’s company, I don’t just buy it on the open market-I have friends in the legal system and in the tax inspector’s office, so I can launch an attack against his business and then get a court to sign over his company to me. And it’s a common occurrence.

RRS: What can businesses do to combat these problems?

Alex Shkolnikov: One of the things we do is try to work through business associations. [Among other things], it tends to de-personalize corruption transactions. So rather than dealing with individual companies and individual public officials, what you begin to do through business associations is try to identify corruption trends as they affect the private sector, and deal with those corruption trends at a systematic level.

What we do with business associations is two types of programs. One is basically going after the systemic problems…Corruption is not a problem in and of itself. It’s a symptom of underlying problems [such as], for instance, complex regulations. If you apply for a construction license and it takes you, in some countries, more than a year to get a construction permit, you have all kinds of incentives to go around the legal system and pay a bribe and get it done.

Or if public officials at customs have all kinds of discretion in applying the law, for instance, they can say, “Look, I can inspect your goods and it will take me five days-unless you pay me money.” So what we try to do through business associations is undermine reasons for corruption and try to tackle those.

The other thing that we try to do with business associations is provide entrepreneurs with tools to defend themselves. That’s really key, because most of the time when people think about corruption and small business, they think about bribery-where companies pay bribes to go around the law. What we see in a lot of countries is that in fact the opposite is true; a lot of times corruption takes the form of extortion. So businesses are not voluntary participants in corruption-they simply fall victim to corrupt public officials. So we work with a lot of business associations to develop tools that can help individual companies stand up to extortion.

Marc Schleifer: For example, we’ve got very common telephone hotlines where businesses can anonymously make a report, and then the business association tries to deal with the issue. [We help provide] free legal defense, representation in court. We’ve seen business associations do alternative dispute resolution. And we’ve got one partner who developed a comic book [raising corruption awareness].

These are informational tools, basically, so if you have a small business and the fire safety inspector comes, you know what questions he’s allowed to ask and what questions he’s not allowed to ask. What documents he can request, what he can’t, what fines he can levy, what fines are not in his jurisdiction.

So broadly defined, you have two main anticorruption tools-one is information, or protection, a safety net, and the other is working on the institutional framework that allows corruption to exist.

There are also two other kinds of anticorruption approaches that work more on the individual company level. One is what some people call CSR [corporate social responsibility], what we tend to call corporate citizenship. We had a lot of that in the early days in Russia, through a program trying to build awareness among the business community about what good business practices are, what ethical business practices are. And then the other tool that works at a company level is corporate governance. We consider corporate governance to be an anticorruption tool.

RRS: You mentioned the institutional framework that allows opportunities for corruption. How can businesses change systems that are a function of the national government?

Marc Schleifer: One thing that we’ve done a lot of in Russia in the last couple years is what they call reducing the corruption potential of draft legislation. This is an approach whereby business associations-and you need to have a strong legal team within the business association, or think tanks, or coalitions of business associations-get a copy of a law before it’s passed. Then they do close textual legal analysis of the law to see where the loopholes arise. So if it’s a licensing procedure and it says between five and 30 days-anything that’s unspecified or poorly worded-all those loopholes can be exploited and give rise to the potential for corruption. [The associations] then prepare a series of recommendations on how to amend the law, how to close those loopholes, using all the various advocacy tools that business associations use.

Even in fairly closed societies, this is possible. In Russia, we just supported a program for one of our chambers to develop an approach that, rather than looking at the corruption potential of individual laws, looks at the way systems of laws at the national, regional and local levels intersect and how gray areas and loopholes appear among various laws. What laws or regulations need to be passed to close those gaps? And then you go back to the advocacy issue.

What’s neat about it is, after you’ve advocated for change, you can then continue monitoring-it’s a circular process. On a continuous basis you’re working to improve legislation by advocating for certain changes and then monitoring whether the laws are functioning as intended. And if they’re not, you go back to the drawing board. It’s a step-by-step process. No one is saying you’re going to conquer corruption overnight. It’s a very long process.

Editor’s note: Stay tuned for Part 2 of this series.