Corruption happens, lobbying rules

Nauro Campos 08 November 2008

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Conventional wisdom suggests that corruption is a fundamental barrier to economic development and endemic in developing countries. Examining the vast literature that has emerged in the last two decades or so, one could be excused for thinking that corruption is not just one way to influence policy in poor or developing countries, but it is the only way. Are there any other means? Are these other means more or less effective than corruption? Recent research raises the possibility that one alternative, lobbying, is not only much more prevalent in developing countries than previously thought, but also that it is more effective than corruption as a means of influencing public policy and in supporting the performance of business firms (in terms of sales growth.)

Developing country lobbying

We still know very little about lobbying in developing countries. To many analysts, the distinction between lobbying and corruption is not obvious. There are, however, some important differences, and they centre on the notions that corrupt practices are illegal, that corruption activities tend to involve bribes or illegal payments and, arguably the most important difference, that corrupt practices tend to directly benefit a small number of “users” (often one individual) while lobbying activities are carried out in order to benefit a group of users that share a specific interest.

Empirical evidence on lobbying in developing countries as a whole is starting to accumulate (Thomas and Hrebenar, 2008), particularly for the so-called transition economies (Frye, 2002, is an early example). The transition economies as a group provide an extraordinary setting to test ideas on the relative importance of lobbying and corruption. They provide an almost natural experiment in the sense that their political and economic systems were very similar until the collapse of communism in 1989. Afterwards, this set of countries followed different strategies of political and economic reform with many becoming fully-fledged democracies and members of the EU (e.g., Hungary and the Czech Republic) while others experienced heavy economic turmoil and limited improvement in political rights and civil liberties, including, of course, freedom of association (e.g., Kazakhstan and Belarus). Moreover, many of the transition countries are perceived as highly corrupt. For instance, the 2005 Transparency International Corruption Index ranks 159 countries: Estonia is ranked 27th (just one place behind Portugal), Poland is ranked 70th (eight places behind Brazil), and Turkmenistan is ranked 157th.

Does lobbying work in developing countries? Is it more effective than corruption?

It is difficult to assess whether lobbying, for example, contributes to the strengthening of democratic institutions or whether it helps further political stability (Coates, Heckelman and Wilson, 2007, provide evidence that the number of trade associations, as a proxy for lobbying activity, is systematically higher in democracies.) Although these are benefits normally associated with interest group activity, they are in practice difficult to measure. On the other hand, in recent research co-authored with Francesco Giovannoni, I examine whether and how extensively lobbying affects the political decision-making process (vis-à-vis corruption) and also whether firms benefit economically from membership in such associations.
Our analysis (Campos and Giovannoni 2007) focuses on two main questions:

  • What are the factors that determine the likelihood of a firm being a member of a lobby group?
  • What is the relative role of corruption and lobbying in explaining the probability of a firm being influential in terms of government laws, regulations and policies?

Lobbying is measured by membership in a trade association or lobbying group. Corruption is defined as whether or not the firm pays 10% or more of its revenue in unofficial payments to public officials per annum. On political influence, business firms were asked about how influential they have been in affecting the content of any new laws, rules, regulations, or decrees that could have a substantial impact on their businesses. Importantly, they also answered this influence question for four spheres: the executive branch, the legislative, the ministries and the regulatory agencies.

Using 1999 survey data for about 4,000 firms in 25 transition economies, we find that lobbying is a very important alternative instrument of political influence (see also Harstad and Svensson, 2008.) Our analysis also suggests that political institutions have a major effect on the choice of lobbying. Investigating the profile of firms that are members of lobby groups, we find that the number of full-time workers (firm size), foreign ownership, and the national level of economic development and political stability all have significant and positive impacts on the decision to join a lobby group.

We also study the relative effects of lobbying and corruption in terms of the production of political influence. Firstly, we find that the effect of lobbying on influence is always statistically significant, while that of corruption seldom is. And most importantly, the size of the effect of lobbying on political influence is always substantially larger than that of corruption (and this is irrespective of whether the “target” is the executive, the legislative, the ministries, or the regulatory agencies). These results are robust to various ways of measuring corruption and to accounting for the potential joint determination of lobbying, corruption and political influence. These findings support the notion that lobbying seems to be a considerably a more effective way for firms to exert political influence than corruption, even in poor, developing countries that are often perceived as highly corrupt.

In Campos and Giovannoni (2008), we delve deeper into the different determinants of the choice firms make between lobbying and corruption (with emphasis on a more comprehensive set of political institutions) and go beyond political influence to also investigate whether lobbying and corruption affect economic performance (in this case, sales growth of business firms.)

Using 2002 survey data for about 6,000 firms in 26 transition countries, our results indicate that lobbying and corruption are indeed fundamentally different and that political institutions play the central role in accounting for these differences. We find that enterprises that are more likely to engage in lobbying are older, larger, and foreign-owned. Taking these into account, firms that favour lobbying tend to be in countries that are politically more stable, more democratic, more likely to be federal states, have a more independent media, and which have experienced more alternations in political leadership (since the fall of communism in 1989.) In those countries with presidential systems, firms are more likely to join lobbying groups where the executive has fewer powers (or where checks on these powers are stronger.) Moreover, lobbying is also more effective where the electoral system features closed lists and smaller electoral districts.

Independently, the significant determinants we find for corruption are the same but carry opposite signs (for example, corruption is more prevalent in countries where the electoral system does not feature closed lists and has larger electoral districts, where the media is less independent, where the executive has more veto powers, and among smaller and domestically-owned firms.) Finally, we put forward evidence showing that lobbying is a much more effective instrument for political influence than corruption and that lobbying is also a much stronger explanatory factor for firm performance (measured as sales growth) than corruption.

Implications for policy

Research on lobbying in developing countries and that comparing lobbying and corruption is new, scarce, and has focused so far on a limited set of countries. The findings presented above are encouraging in that they show that more institutionalised ways of exerting political influence tend to be associated not only with deeper consolidation of the democratic process but also with tangible economic benefits to the firms that engage in lobbying activities (in terms of faster growth of sales.) In the last decade or so, the design and implementation of anti-corruption programs has been a major policy issue for bilateral and multilateral international development agencies, such as The World Bank and the fight “against corruption in all its forms, including extortion and bribery" became one of the ten principles of the United Nations 2000’s Global Compact. If the results from my research are correct, the ensuing policy implication for the development community is to start placing less weight in “fighting corruption” and instead start thinking about new ways to “foster lobbying” in developing countries.

References

Campos, N. and F. Giovannoni (2007), “Lobbying, Corruption and Political Influence,” Public Choice 131 (1): 1-21.
Campos, N. and F. Giovannoni (2008), “Lobbying, Corruption and Other Banes,” London, CEPR Discussion Paper 6962, September.
Coates, D., J. C. Heckelman, and B. Wilson (2007), “Determinants of Interest Group Formation,” Public Choice 133 (3-4), 377-391.
Frye, T. (2002), “Capture or Exchange? Business Lobbying in Russia,” Europe-Asia Studies 54 (7): 1017-1036.
Harstad, B. and J. Svensson (2008), “From Corruption to Lobbying and Economic Growth,” Northwestern University, mimeo
Thomas, C. and R. Hrebenar (2008), “Understanding Interest Groups, Lobbying and Lobbyists in Developing Democracies,” Journal of Public Affairs 8 (1-2): 1–14.

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Topics:  Institutions and economics

Tags:  Corruption, developing countries, lobbying

Professor of Economics, Brunel University London; Research Professor at ETH-Zürich; and Research Fellow, IZA-Bonn

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