Latin America’s Corruption Challenge

COPENHAGEN – It is difficult to distinguish the consequences from the causes of the corruption that bedevils many Latin American and Caribbean nations. Corruption limits growth, but low growth itself encourages corruption and makes it difficult to improve government effectiveness. In any case, corruption alone is not the essential problem. Rather, it symbolizes and highlights underlying weaknesses in the operation of the state and its interactions with citizens and businesses.

Some institutions are so vital that they produce either a competent and fair state if they function well or a corrupt, unfair, and ineffective state if they operate poorly. Cleaning up two such institutions – the public sector and the judiciary – should be a priority for many governments in the region.

Surveys carried out in El Salvador, Nicaragua, Bolivia, and Paraguay in the last decade have shown that people exposed to corruption have less confidence in the political system and lower trust in other citizens. Nicaraguans were asked if the payment of bribes “facilitates getting things done in the bureaucracy.” Those who agreed that corruption worked had less respect for the political system’s legitimacy.

A well-functioning bureaucracy is also necessary because it contributes to economic growth. Few of this region’s most important challenges can be tackled successfully unless the state can administer complex public programs.

The sources of public administration failure include lack of professionalism in the civil service; vague, complex, and confusing legal rules; weak management of government finances; poor distribution of tasks across levels of government; lack of transparency in government processes, and the difficulty of holding officials accountable for their actions. Weaknesses in any or all of these areas create incentives for corruption, laziness, and incompetence.

Increases in civil service salaries are not a sufficient policy response; structural reforms also are needed. Countries, with more independent and professional civil servants tend to have higher quality bureaucracies and less corruption.

A well-functioning and competent judicial system is a necessary condition for establishing the rule of law. Organized crime levels are lower in countries with independent judiciaries. In Ecuador, judicial uncertainty and delays in contract enforcement deter investment. Another study based on in-depth interviews of Ecuadoran entrepreneurs suggested that investment would rise by 10% if the judiciary were on a par with the most effective court systems.

A recent continent-wide survey by Latinobarometer found that between 20% and 40% of Latin Americans expressed “no confidence” in the judiciary. Researchers found that in Mexico, eight in ten court cases were abandoned. This figure suggests that going to court can be a thankless exercise, and that many disputes probably never reach court. A Peruvian survey revealed that the judiciary was the most corrupt institution. The incidence of bribery was high, with a staggering 42% of reported bribes paid to the judiciary.

One way to improve the administration of public programs is to go to the root and change the way governments provide goods and services and manage programs. Placing an emphasis on automated, computer-based systems for procurement and revenue collection will go a long way to limit corruption.

This reform should be packaged with a careful evaluation of the regulatory climate for business, designed to eliminate or streamline the rules. For example, although in Peru corruption was pervasive elsewhere, government reforms that lowered tax rates managed to increase tax revenue from 8.4% of GDP in 1991 to 12.3% in 1998, and increase the number of taxpayers from 895,000 in 1993 to 1,766,000 in 1999.

Of course, not all programs are successful, but some effective cases of procurement and revenue reform have benefits 100 times higher than the costs. Even if gains were much lower, it is clear that this would be a sound investment in the region’s future.

Government can also reduce corruption by limiting the reach of its activities. Latin America is currently experiencing a backlash against privatization, a trend that highlights the importance of public-sector reform. Privatization efforts are often highly salient politically and unpopular. Contracting out some activities to nonprofit/nongovernmental organizations should be considered along with improved external monitoring. For example, Guatemala contracted out primary care and nutrition services for 3.4 million people at a cost of US$6.25 per head. Studies show that benefits are higher than the costs.

The performance of the bureaucracy would also be lifted by the provision of improved audit agencies and ombudsmen, and by grassroots monitoring corruption, with technical assistance and information provision allocated centrally by government or nongovernmental organizations.

When it comes to the judiciary, it is clear that higher salaries for judges and clerks, better computer systems, and other technical equipment would improve the courts’ efficiency and performance. This would mean less wasted time and more clarity for litigants. Eliminating the red tape clogging the legal process would cost nothing, but potentially would have large benefits.

Setting up a new, independent alternative dispute-resolution system outside the courts would cost something, but it would ensure quicker and more acceptable resolution of routine disputes. Colombia has successfully implemented an alternative judicial system using “Community Boards” that deal with land title disputes.

Bureaucratic and judicial reform ought to have priority in most countries in Latin America. At the very least, there is a crisis of confidence, and, at worst, that lack of confidence is well deserved.

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