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Cambodia's Kingdom of corruption: the high cost of doing business

'I don't agree. If you do [accept corruption], it's a vagary expense that goes from

one to infinity . . . hampering development and promotion of the private sector in

the country.'
- Sameth Suos, Cambodian Resident Representative, Asian Development Bank Bank

In the second of a three-part series on corruption in the Kingdom, Phelim

Kyne looks at the arguments for and against the notion that corruption fosters

investment and economic development.

The national community has had enough of Cambodian corruption, it would seem.

The days of foreign cash supplementing a public treasury bled white by everything

from massive illegal logging to fraudulent demining operations are fast coming to

an end.

The clucks of indignation traditionally evoked from foreign donors regarding the

Kingdom's endemic corruption are rapidly becoming a shrill chorus of demands that

the government take decisive action. Or else.

Transparency and accountability is the new mantra as everyone from the suits at the

IMF to resident ambassadors deploy decidedly more undiplomatic language to express

their hesitancy to funnel donor dollars to a country whose government makes less

than determined efforts to stop corruption.

What goes unsaid as representatives of the industrialized nations fire anti-corruption

sermons from the moral high ground, is the unique role that many of those same countries

have had in nurturing the virulent strains of official corruption that have run amok

in Cambodia and other developing countries.

In fact, the acceptance and defacto encouragement of official corruption in "overly

bureaucratic" regimes has been a basic tenet of western economic orthodoxy for

decades.

"In terms of economic growth," Samuel Huntington, the doyen of American

political science once observed, "the only thing worse than a society with a

rigid, over-centralized dishonest bureaucracy is one with a rigid, over-centralized,

honest bureaucracy."

Huntington's seemingly flip remark spoke for a generation of western economists who,

beginning in the 1960s, concluded that official corruption was an acceptable means

of operating in government systems either unaccustomed or outrightly hostile to private

foreign investment.

In this conception, corruption facilitated "win/win" relationships between

the government getting the payoffs and those doing the bribing.

"This is all at the level of theory and it's never been proved," stressed

Dr William Cole, Director of the Asia Foundation's Governance and Law Theme. "[The

theory is that] in an environment which is heavily regulated, [corruption] allows

[investors] to get around that and generate [financial] gains."

Western governments articulated their support for the theory by actually helping

to facilitate the payment of bribes to foreign officials by act or omission.

"...Until recently, most industrialized countries brushed aside the idea of

outlawing foreign bribery," noted Amanda L Morgan in the Asia Foundation's 1998

Working Paper on corruption. "[They] even provided tax deductions for bribes

as an unfortunate but legitimate business transaction."

One honorable exception to that trend was the United States, which in 1978 passed

the Foreign Corrupt Practices Act, criminalizing any attempt by American investors

abroad to bribe foreign officials.

The glaring ethical discrepancy of western economists and compliant governments disavowing

corruption in their own countries while accepting its occurrence - and the participation

of western investors - in less-developed countries was conveniently explained away

in terms of "levels of development".

"...Some scholars have argued that corruption is a natural state of development,

" states the Asian Development Bank's Anti-Corruption Policy of June 1998, "They

note that [corruption] was widespread in many advanced countries until recently,

when it was reduced (but not eliminated) through the gradual imposition of public

sector reforms over the last century."

The arguments of corruption-tolerant economic theorists are far removed from the

messy reality of corruption-fueled rampant deforestation and toxic waste dumping

so familiar to Cambodians.

Corruption performed "appropriately", they reason, serves to fine-tune

the ability to do financial transactions in economies in which the cut and thrust

of the free market is blunted by ideological or bureaucratic indolence.

"Under a well-organized system of corruption, entrepreneurs know whom they need

to bribe and how much to offer them, and are confident that they will obtain the

necessary permits for their firms," wrote economist Paulo Mauro in the March

1998 issue of the IMF's Finance and Development magazine. "It has been suggested

that government employees who are allowed to exact bribes might work harder and that

corruption might help entrepreneurs get around bureaucratic impediments."

Corruption under fire

In recent years, the perception of official corruption as a mere "operating

expense" has been losing its gloss among economists, governments and investors

alike.

A revisionist view of official corruption depicts it as distinctly negative, an impediment

to both the goals of private capital and countries' economic development.

Rather than grease for the engines of economic development, corruption is now perceived

as a harmful, clogging sand.

"The costs of doing business in a corrupt system are much higher than in an

orderly system [because] corruption raises uncertainty and distorts priorities,"

explained Martin Godfrey, Research Coordinator at the Cambodian Development and Research

Institute. "Corruption pushes people towards 'rent-seeking' rather than productive

investment."

Godfrey's rejection of the notion of corruption as an asset to a nation's progression

to developed status is strongly echoed by former Cambodian Finance Minister Sam Rainsy.

"[Corruption] is not 'grease'," Rainsy emphasized. "It is a terrible

hindrance to development."

Rainsy describes corruption, particularly as it functions in Cambodia, as perpetuating

a "facade of development" exploited by "hit and run operators".

"[The "hit and run"] investor isn't committed to lasting development,

only exploitation of natural resources, cheap labor and illegal business activities,"

Rainsy said. "[Such investors] don't need a rule of law, they can buy protection

from military and the police."

Both Rainsy's and Godfrey's assessments of the fallacy of the traditional economic

argument supporting corruption are reinforced by the Asia Foundation's (AF) 1998

Working Paper on Corruption.

"...One thing is clear: corruption is not good for development and governments

can no longer deny its pernicious effects," writes the Asia Foundation's Morgan.

"...High levels of bribery increase the costs, risks and impediments of doing

business. Lower levels of investment result and consequently slower growth and development."

Further bolstering the case against corruption as an economic booster are the statistics

from Transparency International, an NGO whose Corruption Perception Index (CPI) has

become the international measure of corruption worldwide.

Economist Paulo Mauro has noted that "... a country that improves its standing

on the [CPI] from six to eight will experience a 4% point increase in its investment

rate."

Ironically, a dearth of reliable government data has so far prevented Cambodia from

being rated on the CPI.

Growing evidence of the harm wrought by corruption worldwide resulted in the February

1999 signing of the Organization of Economic Cooperation and Dev-elopment's (OECD)

Convention on Combating Bribery of Foreign Public Officials in International Business

Transactions.

The OECD Convention ended a key support mechanism for corruption among industrialized

countries by banning the tax deductions for bribe payments among member nations.

However, the refusal of the Netherlands to become party to the convention indicates

that the nascent international anti-corruption campaign still faces an uphill battle.

Asian Values?

"Corruption in Asia is acceptable," explained Ted Ngoy. "It's existed

in Asia for one million years."

Ngoy knows of what he speaks. As a successful Khmer-American businessman and the

Special Advisor to the Council of Ministers on investment, Ngoy has insider experience

of what it takes to succeed in the Kingdom's murky economic waters.

Ngoy is in no way alone in his assertion of the culturally-determined inevitability

of corruption in Cambodia and other Asian nations.

For years, the explosive economic growth enjoyed throughout the Asia-Pacific region

served as a handy exemplar for economists who postulated the theory that corruption

and economic growth could go hand-in-hand.

For a while they seemed to have a point.

In many of the Asian countries with the fastest developing economies, the traditional

practice of "gift giving" - from expensive liquor to envelopes stuffed

with cash - was an essential tool in everything from gaining "cooperation"

from government officials to closing business deals.

To criticize such "gift giving", proponents of the practice argued, was

both churlish and culturally insensitive.

"To me, [bribery] is wrong because I [was] raised in America," Ngoy added.

"But [in Asia] it's ipso facto - you can't say that it's wrong here."

Pok Than, Secretary of State for Education, Youth and Sports, sighs wearily in response

to Ngoy's assertions.

Than, who as Executive Director of the Center for Social Development in the mid-nineties

led the Kingdom's initial push for the formulation of anti-corruption legislation,

has heard the "corruption as cultural value" argument before and is unconvinced.

"Look at Singapore and Hong Kong, where corruption used to be endemic,"

Than pointed out. "They've become very clean, so you can't say [corruption]

is a cultural issue."

While the debate about the cultural roots of corruption in Asia may still rage, the

argument that depicted corruption as a key element in Asian economic growth and development

became moot in the aftermath of the 1997 Asian financial crisis.

The lack of financial transparency and accountability in the Asian countries hardest

hit by the financial meltdown has been seen as a key factor in their present economic

woes.

Analysts see a direct correlation in the ranking of such countries as Korea, Indonesia,

Thailand and Indonesia on the bottom half of Transparency International's Corruption

Perceptions Index and their stunning fall from economic grace in 1997.

"During the boom years, many people felt we could afford to ignore corruption

and some even argued that it helped to promote high rates of economic growth,"

Wanmuhamodnor Matha, Speaker of Thailand's House of Representatives, told an international

anti-corruption conference in Bangkok in April.

"Now, following the crisis ... people recognize that controlling corruption

is an essential part of reform programs to strengthen economic policy, financial

management and good governance."

Regardless of the extent corruption might be deemed culturally appropriate in Asia,

Dr William Cole of the Asia Foundation says the new realities of modern "globalized

finance" make anti-corruption measures unavoidable for Cambodia and its neighbors.

"Developing countries need to move beyond [specializing in] cheap labor in favor

of technical tranfers and direct foreign investment," Cole said.

"These require much more openness and accountability and some degree of certainty

that contracts will be honored."

Cambodia's bouncing bribes

Like an earlier generation of western economists, Ted Ngoy contends that the debate

on Cam-bodia's corruption would be better focused on streamlining and taming its

more anarchic applications.

"Corruption is just like a crime, there's a degree, like first, second and third,"

he said. "If there's no corruption, that will help investment, but if it happens,

it must be organized and work efficiently.

Ngoy's comments are based on the bitter experience of investors during the period

in which Cambodia was governed by a tense Funcinpec/CPP alliance headed by co-Prime

Ministers Prince Norodom Ranariddh and Hun Sen.

"The government had two heads; the red tape was double, [there were] double

bribes," Ngoy recalled.

Even worse, the resultant twin bureaucracy effectively blocked the delivery of "services"

for which the bribes were intended to pay for.

"What's really bad is if people don't do anything [in return for payoffs],"

Ngoy said, adding that during the "two-headed" government period, "after

[officials] took the money, they weren't responsible [for providing the services]."

Following the formation of the new government last November, Ngoy says that the situation

has "gotten better", but warns that the threat of "corruption without

shame" remains.

"If they're corrupt, I want [government officials] to be not too greedy, to

have pride in themselves," Ngoy emphasized. "[Officials] should take less

[in bribe money] as possible and perform responsibly."

Unfortunately, Ngoy's urgings that Cambodian civil servants adopt restraint in their

demands for payoffs may be too late.

"Businessmen always complain that they pay to get things done, but they're not

getting done," said the Council for International Cooperation and Peace's Executive

Director, Kao Kim Hourn.

"This is an emerging problem ... [investors] pay but don't get 'service'."

Counting the costs

The costs of Cambodia's culture of official bribery to both individuals and the nation

as a whole are enormous.

According to Ngoy, the amounts required to bribe officials to facilitate a successful

investment are automatically built in to budgetary calculations of firms willing

to do business in the Kingdom.

"Bribes account for about 10% of [a total] investment," Ngoy said. "Every

one million dollars [in investment] requires US$100,000 in bribes."

Unfortunately, the brunt of the economic burden engendered by official corruption

is borne by the Cambodian treasury rather than foreign investors.

A grim measure of the toll wrought by corruption on funds rightly destined for government

coffers is evident in the financial losses incurred by illegal logging.

Statistics compiled by the NGO Global Witness reveal a crippling drain of funds to

a government already driven to a state of permanent bankruptcy due to revenue shortfalls.

In 1997, official forestry revenue contributed US$12.4 million to the public purse.

In contrast, Global Witness has calculated that in the same year, approximately US$50

in bribes was spent for every cubic meter of timber illegally felled in Cambodia,

resulting in between US$185-US$225 million paid to compliant military, police and

border officials.

The lost government revenue from that timber was approximately US$309 million, the

equivalent of 73% of the total 1997 national budget of US$419 million.

Whither the forests

The most damning indictment of the effect of corruption on Cambodia's long-term development

prospects is the role of official collusion in sustaining the Kingdom's illegal logging

industry.

Since the early 1970s, the percentage of Cambodian land covered by forest has been

reduced from 70% to a mere 30%-35%.

The plundering of the Kingdom's timber reserves was first finessed by the Khmer Rouge

in cooperation with corrupt Thai and Laos border officials to fund the KR's two decade

insurgency.

However, after 1992, deforestation from illegal logging accelerated dramatically

due to what Global Witness describes as "corrupt forestry officials [who] have

built up personal fiefdoms and considerable wealth by 'taxing' rather than preventing

illegal logging activities."

"The [Cambodian] military control [illegal] logging on the ground one way or

the other," explained the director of Global Witness, Patrick Alley. According

to Alley, military units are routinely employed as "subcontractors" by

concessionaires doing illegal logging, creating a form of "warlordism"

in which military commanders channel the profits to bolster their own personal power

base.

Alley notes that documents obtained by Global Witness show that in 1997 the bodyguard

units of co-Prime Ministers Prince Norodom Ranariddh and Hun Sen cut a deal with

the Thai logging company Pheapimex-Fuchan giving them US$5 for every cubic meter

of timber extracted.

"It worked out to two million dollars for each side for just one deal,"

Alley said.

Following the 1997 coup that ousted co-Prime Minister Prince Ranariddh and his Funcinpec

party, illegal logging and its profits became the sole domain of Hun Sen's Cambodian

People's Party to help solidify its political control over the Kingdom.

"The Cambodian Armed Forces ... presided over the illegal exportation of massive

quantities of Cambodian logs to Vietnam in order to fund Hun Sen's successful campaign

to win the July 1998 election campaign," Global Witness reported in a Feb 1999

Brief Document for the Consultative Group of Cambodia's foreign donors.

Last May the World Bank served notice that if unrestricted logging continued, Cambodia

would be "commercially logged out" as soon as 2003.

The bulk of illegal logging in the Kingdom has apparently come to a halt since March.

At that time, Prime Minister Hun Sen demanded that the military both cease involvement

in the trade as well as crack down on the export of Cambodian logs to neighboring

countries.

However, the damage done may be irreversible.

The Tonle Sap Lake, the world's richest inland fishery and the provider of over 60%

of Cambodia's protein, has suffered serious siltation due to massive and prolonged

deforestation.

As a result, a European Union-funded report has estimated that siltation at the current

rate will effectively cause the lake to disappear by 2025, with dramatic consequences

for Cambodia's already perilous food supply.

Empty stomachs, shortened lives

"When we say 'corruption' people tend to smile and say "That's the way

things are done in Asia'," Sam Rainsy fumed. "But corruption is killing

people softly and quietly."

Rainsy's statement underlines how the bleeding of the national treasury through corruption

deprives ordinary Cambodians of essential services taken for granted in most industrialized

countries.

Transparency International notes that the capacity for corrupt officials to enrich

themselves at the public's expense, "also means that environmental protection

and public health measures can also be readily avoided and frequently are."

As hundreds of millions of public dollars are siphoned off through the illegal sale

of state assets and illegal logging, public hospitals throughout the Kingdom lack

even the most basic medicines and medical equipment.

"The allocation of the [national] budget is affected by corruption," Rainsy

charged. "The government allocates almost nothing to health."

The result, Rainsy says, is a country with the lowest life expectancy in Asia - 50

years for men , 58 years for women.

Poor health care is compounded by widespread malnutrition that UNICEF calculates

affects as many as 50% of the Kingdom's children.

Sam Rainsy Party MP Son Chhay puts the blame for the increasing problem of malnutrition

on land grabs by corrupt government and military officials.

According to Chhay, in the last three decades the proportion of Cambodian farmers

who own their own land has decreased from 90% to 45%-50%.

Chhay blames the narrowing of private land ownership on corrupt officials staking

claim to areas for the purpose of personal enrichment.

"There's no more land available," Chhay claimed. "Everything else

has already been stolen from the people, and land is the last thing they had ...

that's why everyday you have landless people gathering outside the National Assembly

seeking justice."

"In the National Assembly I've tried to explain how corruption is socially criminal,"

Rainsy said. "What's the future of a country where half the children are potential

handicaps from physically and mentally stunted growth?"

While foreign donors address the issue of Cambodian corruption in terms of gradual

structural reform, Chhay says time is rapidly running out for a population effectively

beggared and crippled by dishonest government officials.

"The people have no alternative but to sit in front of the National Assembly

and starve themselves."

Clean as a whistle
The top ten least corrupt countries

'Investors have to go along with a country's traditions [whether] in Indonesia,

Vietnam or China. We have to do things like [bribery] to do business. It's not a

bad thing.' - Ted Ngoy, Special Advisor on Investment, Council of Ministers

 

The following ten nations rated in descending order as the world's "cleanest"

in the NGO Transparency Inter-national's 1998 Corruption Perceptions Index , coming

closest to the ranking of "10" ("not corrupt").

1

Denmark

10.0

2

Finland

9.6

3

Sweden

9.5

4

New Zealand

9.4

5

Iceland

9.3

6

Canada

9.2

7

Singapore

9.1

8

Netherlands

9.0

9

Norway

9.0

10

Switzerland

8.9

 

'Investors have to go along with a country's traditions [whether] in Indonesia,

Vietnam or China. We have to do things like [bribery] to do business. It's not a

bad thing.' - Ted Ngoy, Special Advisor on Investment, Council of Ministers

 

Dirty as sin
The ten most corrupt countries

The following ten nations rated in descending order as the word's most corrupt in

the NGO Transparency International's 1998 Corruption Perceptions Index, coming closest

to the ranking of "0" ("totally corrupt").

1.

Cameroon

1.4

2.

Paraguay

1.5

3.

Honduras

1.7

4.

Tanzania

1.9

5.

Nigeria

1.9

6.

Indonesia

2.0

7.

Columbia

2.2

8.

Venezuela

2.3

9.

Ecuador

2.3

10

Russia

2.4

 

A "lack of reliable data" prevents Cambodia from being evaluated by

Transparency International for ranking on the Corruption Perceptions Index.

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