Impact of business organizations on anti-corruption policy: Cases of Mongolia and Kazakhstan

Undoubtedly, corruption is a global issue that threatens sustainable economic, political and social development in the whole society. For government, corruption undermines the rule of law, causes widespread poverty and loss of confidence on institutions and government, and huge fall in investment and market development. Businesses lose their reputation and increases doing business costs and resource misallocation, and reduces competition, productivity, innovation, and investment. Individuals ruins their career and reputation, and triggers crime when connecting to corruption. (World Bank Institute, 2008) There are many efforts to combating corruption have been made by governments, international donors, and non-governmental organizations such as United Nations Convention against Corruption 2003, OECD Anti-Bribery Convention, the Canadian Corruption of Foreign Public Officials Act 1998, the UK Bribery Act 2010 (UKBA). However, there are several criticisms about efforts that have done before can't work well due to sole attention to corruption public officials and in the recent years, the awareness has been growing that important role of business in the fight against corruption and points importance of the business-government relation in addressing corruption.

According to the Ernst& Young survey, businesses are victim of corrupt government officials that nearly fifth of executives responded they have lost business to a competitor who paid bribes to public officials and took advantages. In the United Nations Global Compact' 10^th principal pointed “Businesses should work against corruption in all its forms, including extortion and bribery”, Transparency International's “Business Principles for Countering Corruption”, World Bank Institute “Fighting corruption through collective action”, World Economic Forum's Partnering Against Corruption Initiative (PACI) Principles and more.

This paper therefore focuses on assessing potential of business organizations, including business associations and chambers of commerce, for effective collective action between business and government in the fight against corruption. Business organizations potential for effective collective action in the fight against corruption means capacity of businesses can take important role to institutional reform through providing practical and concrete information to the government that meets real needs of the businesses, participating in policy making process and ensuring policy implementation in the organization and the industry.

Shortcomings of literature

Corruption has been and is still a hot topic in the areas of scholars for study. There are a great number of works have been done in the field but I have decided to concentrate on literatures that are relevant to business participation in the fight against corruption, particularly how businesses are combating corruption and how businesses play crucial role in anti-corruption policy. In the initial category, I have placed literatures regarding general understanding of corruption and its underlying causes and why fighting corruption is important. After then literatures concern an importance of business role in the fight corruption and why collaboration of business and government is necessary, eventually literatures are placed regarding successful relation between business and government in the field of anti-corruption policy and importance of role of business associations and chambers of commerce.

In the first category, there are many works have been done but some relevant articles to my research field have been studied in this part. (Begoviж, 2005) explained concept of corruption in applying two views of economic theory to the political process, and its types and causes. (Transparency International) defines corruption and classified it. Also, it divided cost of corruption into four main categories: political, social, economic, and environmental. (UKDID, 2015) reviewed causes and bad effects of corruption at both macro and micro level. Costs of corruption at macro level include inequality, reduced legitimacy and lack of confidence/ trust in public institution, decreased domestic investment and tax revenue. At micro level, costs of the corruption include addition cost for company's growth and productivity and conflict. (Lambsdorff, Johann Graf, 2005) studied cause of corruption in using data on perceived levels of corruption from cross section countries and clearly defined main causes of corruption. The study by World Bank shows negative effects of corruption too and emphasize it a global issue that threatens sustainable economic, political and social development in the whole society. For government, corruption undermines the rule of law, causes widespread poverty and loss of confidence on institutions and government, and huge fall in investment and market development. Businesses lose their reputation and increases doing business costs and resource misallocation, and reduces competition, productivity, innovation, and investment. Individuals ruins their career and reputation, and triggers crime when connecting to corruption. (World Bank Institute, 2008)

Second category considers literatures of an importance of business role in the fight corruption and effective business-government relation in the fight against corruption. Previously, majority of anti-corruption efforts were based on the principal agent theory developed by Susan Rose-Ackerman (1978) and Robert Klitgaard (1988), which explains corruption is a principal-agent problem and occurs when there is asymmetric information, for instance, between public and government officials and it aimed to limit ability these government officials to engage corruption through public controlling government officials' motivations to involve in corrupt behavior. However, Andvig & Fjeldstad (2001) pointed what if the principals (public) themselves involve in corruption too? Here, it is more likely to lead the principal and the agent to build coalition to make illegal, corrupt acts which results in the principal-agent framework becomes ineffective and no actor are in willing to control and monitor corrupt behavior and risk of corruption increases in the end. (Andvig & Fjeldstad , 2001) Also, study of Persson& Rothstein&Teorell (2013) shows that the main failures of the anti-corruption reforms in countries with highly corrupted environments can be explained as collective action problem on the case of Uganda and Kenya case. Several other scholars like Morrell& Bettcher (2013), Ostrom (1998), Booth&Cammack (2013), and Olson (1965), Matthew Stephenson (2015) also suggest that collective action theory can explain better understanding of corruption than the principal-agent theory, especially there is systemic corruption. Collective action approach to corruption supported by Persson&Rothstein & Teorell (2013), Rothstein (2011), Booth & Cammack (2013) and some other scholars view corruption as a collective action problem and highlights influential role of perceptions of how other group members act or trust in the group. In other word, problem occurs when individuals are in best interest in acting collectively towards common goal and group members prefer their individual interest and don't make any contribution for the group.

According to the Ernst& Young survey revealed that some businesses prefer short term benefit but that nearly fifth of executives, majority of them are small and medium entrepreneurs, responded businesses are victim of corruption and corrupted government officials too, they have lost business to a competitor who paid bribes to public officials and took advantages. Then John D. Sullivan, the executive director of the Center for International Private Enterprise (CIPE), developed the collective action approach and suggests successful strategy to combat corruption in explaining in two sides of contribution: important contribution of both public and private sectors. According to his strategy, elimination of opportunities for corruption engaged with tough enforcement is the appropriate in order to restrict public sector corruption. These include open procurement codes with reliable third party monitoring, reducing duplicative laws and regulations, reducing tax burden, and setting public officials' wage which is competitive with private sector salaries. On the other side, successful efforts of private sector corruption focused on eliminating causes and opportunities for corruption in private sector.

(John D. Sullivan and Aleksandr Shkolnikov, 2004) point out that building a system with strong, balanced institutions can reduce corruption in a way of creating a set of well-founded incentive structures, where collective action between private and public sector is essential. Meanwhile, in the United Nations Global Compact' 10^th principal pointed “Businesses should work against corruption in all its forms, including extortion and bribery”, “Business Principles for Countering Corruption” of Transparency International, “Fighting corruption through collective action” of the World Bank Institute. Key international organizations such as OECD, UNODC, and the World International Chamber of Commerce, World Economic Forum Partnering against Corruption Initiative (PACI) all endorsed important role of business in the fight against corruption and emphasizes importance of the business-government relation in addressing corruption, and developed number of guidance and handbooks regarding the issue. (World Bank Institute, 2008)

In the last category, there are literatures concerning business coalition, role of business associations and chambers of commerce, and their potential for the effective collective action of business and government effort in the fight against corruption. During my research, it seems anti-corruption initiatives including 10^th principle of United Nations Global Compact and the Revised Principles for Donor Action in Anti-Corruption promotes engaging the private sectors in anti-corruption efforts, however, they don't specifically state exactly how to engage and promote the private sector is not clearly defined and not many literatures regarding this found. Survey on corruption conducted by of Social Weather Station reveals SMEs (small and medium entrepreneurs) are relatively vulnerable to corruption compared to larger and well-known companies due to their inadequate resources to counter with bureaucrats, corrupted government officials and it is hard to fight corruption alone for them. Therefore, the awareness is growing in recent years that SMEs join forces together and build coalitions of professional or industry associations to influence or work directly with the government on making institutional reform that meet real needs of the businesses and public good through providing practical information to the government and ensuring that policies that are designed to fight corruption address the real needs of the businesses in the several literatures such in “Guidance for SMEs” of Center for Corporate Governance; “Collective Action in the fight against corruption” of United Nations, “How business together can lead the fight against corruption” of CIPE, “Fighting through collective action” of World Bank Institute, “ The role of business associations and chambers of commerce in the fight against corruption” of U4 Anti-corruption Resource Center, and more.

Business associations and chambers of commerce (CCs) are voluntary based business organizations, where their members are open to decide leave the group and which commitments and recommendations to follow or put into practice. Businesses join business associations and chambers of commerce to obtain wide knowledge/ experiences on sector-specific advice and guidance; to have well-developed and coherent technical standards on corporate sustainability performance; to get more possibility to engage with policymakers and to draw their attention to main priorities; to have wide range of access to information; corporate sustainability etc. Chambers of commerce and business associations fight against corruption through following ways: facilitating collective action of business community and build up and maintain communication with government, civil society and the media; working with other domestic and international business organizations on the issue of anti-corruption; providing practical information to the government that meets real needs of the businesses and implementing effective anti-corruption compliance programs in their organizations and industries, and take key warrant role; and supporting members to expand their investment and trade expansion, which reduces the risk of firms engaging informal businesses in turn. (U4 Anti-Corruption Resource Centre, 2007)

There are plenty of good practices where business and government work together successfully in fighting corruption. “Combating Corruption: Private Sector Perspectives” of CIPE revealed basic concepts of corruption, and gives clear explanation how can address causes of corruption, and suggests the solution that business community can play important role on making legal and regulatory reforms through promoting transparency, corporate governance, accessible information and voluntary standards in the fight against corruption in public and private sector. There are several good practices for successful business-government relation in the fight against corruption such as cases of Bulgaria, Ecuador, Armenia, Kosovo, Colombia, and so on. For instance, local business associations in Kosovo and Riinvest Institute, local think tank, collaborated with some policy makers to decrease tax burdens placed on business community and as a result legislators made some changes to the tax on property, wages, and profits. Also, Colombian Confederation of Chambers of Commerce (Confecбmaras) collaborating with policy makers initiated the project aimed at addressing corruption in the public sector and change the business culture in Colombia through encouraging business ethics and create a transparent business culture. The biggest success of the project was that Colombia's new Procurement Law No.80 adopted with private sector's recommendations that enhanced competitiveness and transparency in 2007. Then, World Bank Institute demonstrated sets of successful practices where business and government built open and effective relationship and brought big positive changes against corruption as illustrated by some practices in Mexico, Ecuador, Germany, and Indonesia. “The role of business associations and chambers of commerce in the fight against corruption “of U4 Anti-Corruption Resource Center revealed also some successful examples where chambers of commerce and business associations have played leading roles in setting integrity and anti-corruption standards for the businesses through certification programs and committing code of conduct in Thailand, Philippines e.g., as well as through trainings, awareness raising and advocacy in Vietnam and China.

Research problem and research question

This chapter consists of following four subchapters: 1. Concepts of corruption and emergence of collective action approach in the fight against corruption 2. Collective action approach to combat corruption 3. Assessment criteria for business organizations for effective business-government relation against corruption 4. Policymaking process and stages;

1.1 Concepts of corruption and emergence of collective action approach in the fight against corruption

Emergence of new approach to corruption

As previously mentioned, there are several international anti-corruption laws and conventions that are supposed to fight corruption including US Foreign Corrupt Practices Act 1977 (FCPA), OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transaction 1997, the Canadian Corruption of Foreign Public Officials Act 1998 (CFPOA), Council of Europe Criminal Law Convention on Corruption 1999 (COE Criminal Law Convention), United Nations Convention against Corruption 2003, the UK Bribery Act 2010 (UKBA), and so on. However, there are huge criticisms among many scholars that these anti-corruption efforts were not as successful as expected and couldn't work well in reducing corruption because majority of them are based on inappropriate theoretical foundations. Previously, anti-corruption programs majorly focused on limiting ability of public officials to get bribes and gifts or unfair award or contracts and licenses to his/her friends and family but participation of private sector was often ignored in combating corruption. For decades, the principal agent theory developed by Susan Rose-Ackerman (1978) and Robert Klitgaard (1988) was dominant and most of anti-corruption programs were rooted on the theory. It explains corruption is a principal-agent problem and occurs when there is asymmetric information between principals and agents. The theory is based on two principal assumptions. First, there are diverging interests between principals who are assumed to represent public interest, and agents who are assumed to prefer in favor of corruption transaction and its benefits are greater than the costs. Secondly, it is assumed that the agents have more information than the principals which results in asymmetric information between the actors and problem arises.

Broadly, because of the information asymmetry, the principal cannot fully monitor and check the actions and accountability of the agent, and the agent have preference in pursuing their own interests and benefit rather the principal's interests. (U4 Anti-Corruption Resource Centre, 2015) Depending on who is the agent and who is the principal, the principal agent-model (PAM) differs. In some case, politicians can be the `principals` and bureaucrats can be `agents`, also it is possible citizens are assumed as `principals` and public officials like political leaders or bureaucrats as `agents`. For example, true democracy is defined as where there are governments (agents) who work for the citizens (principal), and citizens pay taxes and vote the government that act on their benefits and can be perfectly monitored by citizens. However, it is common government officials (agents) have more information than the citizens (principal) and the problem arises. (Figure 1)

The principal-agent theory suggests the principal should focus on controlling agent's motivations to involve in corrupt behavior through following control instruments in order to reduce or prevent corruption, which include reducing their level of discretion, restricting the monopoly of agents, expanding monitoring mechanisms and level of the accountability, supporting transparency in the government, and promoting anti-corruption civil society organizations that work as watchdogs, and building up effective sanction system for those who engaged in corruption. Generally, principal-agent theory is based on the assumption where decreasing asymmetric information between the principal and the agent and in such case the principal-agent model promotes the principal will take key role in fight against corruption. (Robert Klitgaard, 1988).

In contrary, there are great number of scholars led by Andvig & Fjeldstad, Persson& Rothstein&Teorell, Booth&Cammack argue efficiency of the principal agent theory and emphasize several evidences that may adversely impact on further anti-corruption programs. Andvig & Fjeldstad (2001) pointed what if the principals themselves involve in corruption too? Here, it is more likely to lead the principal and the agent to build coalition to make illegal, corrupt acts which results in the principal-agent framework becomes ineffective and no actor are in willing to control and monitor corrupt behavior and risk of corruption increases in the end. (Andvig & Fjeldstad , 2001) Also, study of Persson& Rothstein&Teorell (2013) shows that the main failures of the anti-corruption reforms in countries with highly corrupted environments can be explained as collective action problem on the case of Uganda and Kenya case. In other word, principal theory doesn't work well when there is highly corrupt environment due to lack of the honest principals. (Persson& Rothstein&Teorell , 2013) Several other scholars like Morrell& Bettcher (2013), Ostrom (1998), Booth&Cammack (2013), and Olson (1965), Matthew Stephenson (2015) also suggest that collective action theory can explain better understanding of corruption than the principal-agent theory, especially where systemic corruption is common.

1.2 Collective action approach to combat corruption