Corruption and Regulatory Structures*

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Publishing AND REGULATORY STRUCTURES
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ANTHONY OGUS

The methods of constraining corruption typically adopted in Western industrial-

ized societies, increasing the transparency and accountability of decision-making,
and intensifying the enforcement of criminal justice prohibitions, have not always
proved to be effective in developing countries. This is not surprising, given that in
many of them the resources available for law enforcement are relatively modest,
and corruption is deeply embedded culturally. In this paper, I suggest a strategy
of reducing the opportunities for corruption, rather than attempting to suppress
it altogether. I focus on regulatory institutions and procedures, identifying key
aspects to these arrangements, which, if appropriately designed, can achieve this
goal. Some of the design strategies that I advocate are inconsistent with the
models of regulatory arrangements that Western institutions have been urging
developing countries to adopt.

I. INTRODUCTION

Corruption is conventionally perceived as a major obstacle to economic

growth in developing countries and, for that reason, governments in those
countries have been under pressure from the World Bank and other inter-
national organizations to combat the problem (Huther & Shah 2001). In
fact, the connection between corruption and the lack of growth is more
often assumed than demonstrated (Mauro 1995, 1998). But, if the question
still remains controversial, that is probably because commentators work
with different definitions of corruption. The broader the interpretation of
the concept, the greater the difficulties of relating the concept causally to
economic performance indicators, and the more likely corruption is to
become intertwined with cultural values, and therefore linked to the social
and political identity of a particular community.

* I wish to acknowledge the benefit I have derived from comments made by Martin Minogue,
by participants at workshops at the Universities of California (Berkeley), Hamburg, Manchester
and Trier, and by three anonymous referees.
Address correspondence to Anthony Ogus, School of Law, University of Manchester, Oxford
Road, Manchester M13 9PL, United Kingdom. Telephone: 0044-161-275-3572; e-mail:
[email protected].

LAW & POLICY, Vol. 26, Nos. 3 & 4, July & October 2004 ISSN 0265 – 8240
© 2004 UB Foundation Activities Inc., for and on behalf of the Baldy Center for Law and
Social Policy and Blackwell Publishing Ltd. 9600 Garsington Road, Oxford OX4 2DQ, UK,
and 350 Main Street, Malden, MA 02148, USA.
330 LAW & POLICY July & October 2004

In an influential paper, Williams (1999) has argued that economists

working in this area often adopt too narrow a conception of “corruption”
and that “instead of putting all our eggs in one conceptual basket, there is
a need to examine a range of related concepts,” including “rents and client-
ilism” (ibid.: 511). It may be readily acknowledged that there are diffi-
culties in drawing the line between “corruption” and “rent-seeking behaviour”
(Mbaku 1992). The latter term is generally used to refer to the process
by which interest groups adopt (lawful) means to secure competitive
advantages from the political process, and is a phenomenon widely recog-
nized as influencing law and legal institutions in industrialized societies
(Tollison 1982).
Rent-seeking may, indeed, impose costs to the economy as high, if not
higher, than those arising from corruption (narrowly defined). In this paper,
I nevertheless focus on corruption in the narrower sense, implying unlaw-
fulness, and in the particularized environment of regulatory decision-making
(see my definition and typology in Section II). I do so because I believe that
the costs and the benefits to the economy of such behavior in such a con-
text can be more easily concretized (Section III). The reference to benefits is
important because it is wrong to regard all forms of corruption as “evils”
that must be uprooted if significant economic growth is to be secured.
Indeed, even if the aim were total suppression, it would be absurdly naïve
to expect it to be achievable in many societies, simply because it is too
deeply embedded in the political and legal, as well as the administrative
fabric. The selection of devices to combat corruption (Section IV) must be
sensitive to this problem. We may create highly sophisticated anti-corruption
regimes, backed by draconian sanctions, but if there is difficulty in finding
individuals to prosecute, and judges to condemn, the process is largely
futile. The quest then becomes a less ambitious one, that of ascertaining
how regulatory structures and procedures may be designed so as to reduce
opportunities for, rather than to eliminate, the behavior that is undesirable
(Section V).
Corruption, whether given a narrower or a broader definition, is not of
course peculiar to developing countries, empirical, as well as impressionistic,
evidence revealing that some developing countries have a better record, in
this respect, than developed countries (Mauro 1995; see also the perceived
corruption rankings recorded in Transparency International 2002, based
on perceptions of the degree of corruption as seen by business people,
academics, and risk analysts). Interestingly, the development of appropriate
regulatory structures features prominently, alongside promotion of the rule
of law and the constraint of corruption, in the agenda for developing coun-
tries articulated by World Bank and other financial sponsors. And Western
models of regulatory arrangements are often proffered as ideals that develop-
ing countries are advised to follow. An intriguing finding of this paper
(Section V) is that designing regulatory institutions to limit opportunities for
corruption directly contradicts some of the received wisdom of those models.

© 2004 Baldy Center for Law and Social Policy and Blackwell Publishing Ltd.
 Ogus CORRUPTION AND REGULATORY STRUCTURES 331

II. CORRUPTION WITHIN A REGULATORY CONTEXT

For the purpose of studying the impact of corruption on regulatory systems,

I adopt the following definition: “the use of public office for private gains
where an official . . . entrusted with carrying out a task by the public
. . . engages in some sort of malfeasance for private enrichment” (Bardhan
1997: 1321). Malfeasance implies illegality. While this may give rise to dif-
ferences between jurisdictions, because “[w]hat is lawful, and therefore what
is unlawful, depends on the country and culture in question” (Klitgaard
1988: 3) the label of illegality is significant: there is formal recognition by
the country in question that the conduct should not occur.
Studies in particular countries, for example China (Manion 1996); India
(Wade 1982); Indonesia (World Bank 2003); Sierra Leone (Reno 1995); and
Suriname (Inter-American Development Bank 2001) indicate how regulatory
decision-making is an activity particularly prone to corruption. Comparative
statistical analyses provide evidence of a positive relationship not only
between corruption and the size of the public sector (LaPalombara 1994),
but also between corruption and various measures of levels of government
intervention in the economy (Ades & Di Tella 1997; Treisman 2000; see also
Johnson, Kaufmann & Zoido-Lobaton 1998, which juxtaposes the Corrup-
tion Perceptions Index, compiled by Transparency International, with the
Index of Economic Freedom, compiled by the Heritage Foundation).
It is not difficult to see why regulatory decision-making is particularly
associated with corruption (Goudie & Stasavage 1998). Regulation confers
power on institutions, but also officials, to make decisions on the use of
resources that can generate very significant gains or losses for individuals
affected by the regulatory instrument. Most obviously this applies to public
procurements and grants that generate direct financial benefits, and to
licenses and franchises, which enable profit-making activities to take place,
often with the profits enhanced by limiting the entry of others. It applies
also to standards and other controls imposed by regulatory authorities in
two different respects: the requirements may be interpreted by officials so as
to benefit, or conversely to prejudice, particular individuals; and those
apprehended for non-compliance may, or may not, be subjected to enforce-
ment procedures and sanctions.
To a greater or lesser extent, the decision maker has monopoly power
over the individual involved in the decision, in that the latter cannot have
recourse to an alternative decision maker. The official also typically benefits
from significant information asymmetry because the principle or rule to be
applied is imperfectly formulated or else confers discretion; and the decision-
making may lack transparency and accountability. The problem may be
acute where a set of formal rules, often over-prescriptive, are in practice
alleviated by informal rules that can be invoked for favored individuals.
The practice is well-documented for the transitional economies in Eastern
Europe (e.g., Radaev 2000). Some forms of regulatory decisions, for example,

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332 LAW & POLICY July & October 2004

negotiating the terms of a grant or scrutinizing behavior for compliance,

necessarily involve personal contact between official and regulatee, thus
enhancing the opportunities for corrupt transactions. In other cases, the
opportunities may be deliberately created by requiring communications, such
as applications for licenses, to be made in person.
There are different ways of classifying corrupt transactions (see also
Rose-Ackerman 1999: 9–10). For the purpose of analysing the benefits and
costs of corruption within a regulatory context (the subject of the next section)
it may be helpful to distinguish between the following categories:

1. payments to execute socially desired outcomes – the briber pays the regula-
tory official to carry out a routine task, such as the granting of a license
on the fulfilment of conditions stipulated;
2. payments to exercise discretionary powers in favor of briber – the briber
pays the official for a discretionary benefit (e.g., a franchise or grant) to
be conferred on the briber rather than on others seeking (and equally well
or better qualified for) the same benefit;
3. payments to avoid expected action to detriment of briber – the official
agrees not to proceed with some action, which, if it takes place, would be
detrimental to the briber (e.g., prosecuting for a regulatory contravention);
4. payments to avoid illegal action by official – the official agrees not to carry
out a threatened illegal action (e.g., framing an innocent person) which, if
it takes place, would be detrimental to the briber.

III. THE ECONOMIC IMPACT OF CORRUPTION IN REGULATORY

DECISION-MAKING

Corruption in regulatory decision-making is generally assumed to have a

significant impact on economic welfare – and understandably so. Nevertheless,
it is necessary to explore the matter further. This is because, first, it is too easy
to take a rigid moral stance on corruption and in consequence fail to recog-
nize that in some contexts its effects may not be too harmful (Leff 1964);
and, second, because a more profound understanding of the costs and benefits
can assist in devising appropriate strategies for dealing with corruption.
Let us begin by identifying incidents of corruption that may, in certain
regulatory contexts, generate economic benefits (Bardhan 1997: 1322–4;
Klitgaard 1988: chap. 2; Rose-Ackerman 1999: 10–21). Some regulation
may be inefficient, in the sense of generating welfare losses. Such losses may
be reduced by private transactions modifying the regulatory requirement
(cf. Ogus 1994: 259–60). One example, within corruption type 3, would be
where an official accepts a payment not to prosecute an individual who has
contravened an economically unjustified rule. Another is where price con-
trols imposed on a good impede supply meeting demand; a transaction
avoiding such controls will then enhance market efficiency.

© 2004 Baldy Center for Law and Social Policy and Blackwell Publishing Ltd.
 Ogus CORRUPTION AND REGULATORY STRUCTURES 333

Second, corruption may reduce the administrative costs of regulatory

processes. The prospect of a bribe in a type 3 situation may motivate the
official to monitor compliance more carefully, thus enhancing enforcement
and achieving the regulatory goal at lower cost (Mookherjee & Png 1995).
So also, in a type 1 situation, if an official is able to reach the desired outcome
by a shorter route, consequent on the briber’s intervention, then those costs
may be reduced by, for example, avoiding delays in decision-making (Lui
1985). And the same benefit might also accrue in cases of corruption type 2,
if readiness to pay the bribe is a reliable proxy indicator of the qualities that
the official is expected to identify as a condition for the conferring of the
benefit (Leff 1964). This is admittedly not often a plausible hypothesis, but
it can occur where, for example, creditworthiness is a criterion for the grant
of a license, or where, in competing for a public franchise, the briber’s
wealth implies an aptitude to pursue the activity in question.
We may note, thirdly, that unlawful payments to an official may enable
some of the regulatory administrative costs to be internalized to the regu-
lated industry. Applicable particularly to corruption type 1, this may arise
where, for example, the fee payable by an applicant for a license does not
cover the full costs of the regulatory process; in particular the deficit may
be borne by officials whose ordinary salary fails to reflect the social value of
their input. The unlawful payment to an official may thus correct the
inefficiency (Bowles 2000: 478). It should be noted that this argument is
distinct from the distributional, and therefore non-economic, justification
for corruption, that regulatory officials tend to be underpaid.
Of course, there are problematic aspects to these identified benefits. Illegal
contracts are not enforceable in courts, and that may induce opportunistic
behavior by either or both of the parties. The second benefit, in addition
to the stated assumption, presupposes an ability to identify the bribing capa-
city of other applicants; it may also motivate officials to create more delay,
in order to attract more bribes. All three can create perverse incentives:
the first to generate, or influence the creation of, inefficient regulatory outcomes;
the second to delay decision-making; and the third to engage in unlawful,
rather than lawful, ways of increasing income.
Whatever economic benefits result from corruption – and they are very
difficult to quantify – in the large majority of cases intuition suggests that
they will be significantly outweighed by the costs. Quantification here is no
less of a problem, but some estimates have been made. For example, Inter-
national Monetary Fund (IMF) research a decade ago suggested that an
improvement in the Transparency International Index of Freedom from
Corruption score from 6 to 8 should lead to a 0.5 percent increase in
economic growth (Mauro 1995). More recent studies have also found a
positive correlation between corruption and the level and growth of gross
domestic product (GDP) (see the literature reviewed in Goudie & Stasavage
1998; Lambsdorff 2003). Similar results emerge regarding the impact of
corruption on investment (Ades & Di Tella 1997) but an interesting study

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334 LAW & POLICY July & October 2004

also suggests that it is the unpredictability, as much as the existence, of cor-

ruption which has this negative effect (Campos, Lien & Pradhan 1999).
One problem with analysis of this kind is that it necessarily adopts very
generalized notions of corruption, and thus fails to identify types of activity
that are particularly harmful to the economy. A striking exception is provided
by a paper that explores the fact that three countries (Zaire, the Philippines,
and South Korea) with approximately equivalent scores on the Transpar-
ency International Freedom from Corruption Index achieve very different
outcomes in terms of economic growth (Wedemann 1997). The explanation
proffered is that where corruption bites hard into the legal infrastructure
(as in Zaire) by undermining property rights and contracts, its impact on
the economy will be far worse than where it operates as a predictable charge,
like taxation, on productive activities (as in South Korea). Between these
two, and most relevant for our purposes, is the Philippines, where barriers
to entry and other regulatory controls are exploited for private purposes.
To identify further how corruption within a regulatory context may
impose substantial costs, we can start with the first category of “beneficial”
corruption, where the conditions for the hypothesis are not fulfilled. So
there are welfare losses in what we have referred to as a type 2 situation, if
the bribe induces the official to select an inferior, rather than a well-
qualified, applicant. Likewise, for the purposes of type 3, the payment may
inhibit enforcement of regulation that is efficient, rather than inefficient.
Then we can draw on the rent-seeking literature (cf. Murphy, Shleifer &
Vishny 1993) to recognize that the activities of seeking to bribe or securing
a bribe give rise to dead-weight losses, in that they divert resources away
from valuable, productive activity. A good example is where resources are
used to keep a transaction secret (Rose-Ackerman 1999: 12). Indeed, in a
type 2 situation, by reducing the information available as to the successful
bid, this activity reduces the field of potential applicants and therefore
potential welfare-enhancing decisions (Alam 1990).
Corrupt payments that are perceived to be necessary to secure a regulatory
decision in type 1 situations operate effectively as a charge on transactions,
and as such can inhibit productive activity and investment. While this is true
also for lawful taxation – Wei (2001) has estimated that increasing corruption
from a low to a high level is the equivalent of raising the marginal tax
rate on foreign investment by more than 20 percent – bribes, unlike lawful
taxes, cannot be set off against tax liabilities.
It is generally assumed that there are large negative externalities arising
from corruption, facilitating, for example, crime (particularly organized
crime – Rose-Ackerman 1999: 23–4) and other illegal activity. An uncertain
business environment is likely to be connected to the same phenomenon,
although the problem may of course arise in a system free from corruption
if, for example, legal enforcement machinery is ineffective.
Viewing the matter from a dynamic, rather than static, perspective suggests
further costs (Bardhan 1997: 1327–34). There are likely to be increasing

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 Ogus CORRUPTION AND REGULATORY STRUCTURES 335

returns to bribing officials, relative to productive investment. This is because,

as the level of corruption grows, so the returns on productive investment
decline, thus reducing the opportunity cost of further corruption – an argu-
ment derived from the rent-seeking literature (e.g., Murphy, Shleifer & Vishny
1993). The reasoning is independent of another set of arguments that have
been used to explain the same phenomena and, in particular, the persistent and
widespread character of corruption in some jurisdictions (Andvic & Moene
1990). Just as the level of demand for network commodities (e.g., fax
machines) is crucially dependent on expectation as to the demand from
others, so the likely gains from corruption depend on the expectation of the
number of others also corrupt. The more corruption that is anticipated, the
greater will be the perceived need to engage in corruption. The vicious circle
then becomes difficult to break; and a reputation of corruption may be
inherited from previous generations, with little incentive for successors to
become honest (Tirole 1996).
Lastly, there are important considerations of equity that should not be
overlooked. Quite apart from the moral perspective that discounts benefits
acquired by illegal means, there is the standard hypothesis that corruption
generally benefits the rich at the expense of the poor (Klitgaard 1988: 41).
This is largely supported by a statistical study which suggests that corrup-
tion has an adverse effect particularly on those in the lowest 20-percent
income group (Gupta, Davoodi & Alonso-Terme 1998).

IV. CONVENTIONAL STRATEGIES FOR COMBATING CORRUPTION

The normative implications of the last section are not straightforward. The
importance of corruption for economic development, the large externalities
associated with it, and the vicious circle to which it typically gives rise, all
suggest that a “macro” assault to destabilize it by a variety of policies and
instruments is desirable. And, indeed, there are jurisdictions where this
approach has been taken, apparently with considerable success: Singapore
and Hong Kong are regarded as two prominent examples (Quah 2001). But
what these examples, and others, also reveal is that there must be the political
will to adopt such an all-embracing approach, often through a combination
of domestic interests and pressure from foreign institutions (Lindsey 2002).
In its absence, a virtuous circle will not emerge (see, e.g., the experience
in Cambodia, Laos, and Vietnam: Wescott 2003). It then becomes a matter
more for aiming at the optimal level of corruption (Klitgaard 1988), recogniz-
ing that the phenomenon is inevitable to some degree – and, as we have seen,
even beneficial in some contexts – but encouraging strategies that reduce the
net costs. Such strategies require sensitivity to differences in the political and
cultural environment of individual developing countries, but more importantly,
between those countries and industrialized countries, from where the tradi-
tional anti-corruption policies mainly originate.

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336 LAW & POLICY July & October 2004

It may be, as empirical evidence suggests (Lederman, Loayza & Soares

2001) that corruption is less likely in countries with stronger democratic
processes, and that empowering citizens through principles of political
accountability will be very effective (World Bank 2003), but significant con-
stitutional reform can hardly be achieved without the macro approach
which, as we have seen, is not feasible in many countries.
Somewhat less ambitious, but still subject to the same problem, are poli-
cies directed towards reforming bureaucracies by reference to traditional,
Weberian administrative and process values. These might include: depoliti-
cizing the civil service; removing conflicts of interests; raising the quality of
public officials recruited; increasing transparency by insisting on clear pro-
cedural steps and articulated reasons for decisions; improving internal
auditing and monitoring systems; and extending external powers of appeal
and review (Rose-Ackerman 1999: chap. 5; World Bank 2003). Insofar as
these developments require a strong and impartial judiciary, a proactive
citizenry, adequate resources for auditing and monitoring behavior, and
effective procedures for implementing as well as formulating the principles
of administrative law, they will in many countries have to overcome deeply
embedded cultural attitudes, and the cost will be simply too large. Experi-
ence in some Latin-American jurisdictions provides a good illustration of
this (Buscaglia 1997).
We can nevertheless envisage more modest measures which, at the margins,
may significantly improve procedures and thus prove to be cost-effective. In
South Korea, for example, resources have been invested in information
technology, which provides more information to citizens, automatically
records transactions, thus rendering decision-making more transparent,
and in some cases enables transactions to be made electronically, thus
depersonalizing the process (Seoul Metropolitan Government 2001). The
computerization of the customs services in the Philippines is reported to have
reduced the average period of processing a cargo from eight days to about
two hours, with an assumed significant reduction in corruption (Ables 2001).
Similar considerations apply to the use of the criminal justice system,
a point which seems insufficiently to have been grasped in some of the
deterrence literature which treats corruption like any other illegal activity
(Bowles 2000). This literature adopts variants of the standard Becker economic
model of crime, requiring the cost to the offender arising from conviction,
when discounted by the probability of apprehension and conviction, to
exceed the utility to be derived from the criminal act (Becker 1968). When
applied to the corruption situation, this suggests that the size of the penalty
should, after discounting for the probability of escaping detection, be
related to the amount of the bribe (Rose-Ackerman 1999: 54–6). By itself
that might not be problematic. However, account must also be taken of the
level of detection and conviction. In many countries this will be very low as
a consequence of insufficient resources being available for monitoring, and/
or the fact that corruption may have seriously infiltrated the law enforcement

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 Ogus CORRUPTION AND REGULATORY STRUCTURES 337

and criminal justice processes themselves. If, under such conditions, the
deterrent effect is to be preserved, the formal sanctions consequent on con-
viction must be of such a draconian severity that few courts will be willing
to impose them (Cooter & Garoupa 2000; Polinsky & Shavell 2001).
To combat the lax enforcement problem, some (e.g., Doig 1995; World
Bank 2003) argue that there should be a special anti-corruption agency,
independent of the police, and it has been suggested (Quah 2001) that the
existence of such an agency in Singapore contributed significantly to the
reduction of corruption in that jurisdiction. But, as we have seen, there
was the political will there to adopt the “macro” approach. In the absence
of such political will, as the experience of other countries (e.g., Georgia
Corruption Research Centre 2000) suggests, the creation of a special agency
can actually exacerbate the problem by creating more opportunities for
corruption (Kaufmann 1997).
The mirror opposite of punishing illegal behavior is to reward legal
behavior, and it is often suggested that improving the level of salaries of
officials would, to some extent at least, alleviate the corruption problem
(Seidman & Seidman 1994: 179). Of course, it may be right that where the
income from lawful activity barely covers subsistence needs, the motivation
to boost it from illegal activity may be greater than where a reasonable
wage is paid. But why should higher earners not be equally tempted by a
bribe? Statistical analysis of the issue is ambivalent (Eide 2000: 361), but
there is clear evidence from Botswana documenting instances of the relat-
ively rich becoming richer through corruption (Doig & Riley 1998).
More nuanced suggestions include bonding salary payments, perhaps in
the form of pension entitlements, contingent on good behavior; and relating
the rewards to specific outcomes (Klitgaard 1988: 77–8). There is evidence
that making bonus payments to tax officials, based on how much they collect,
raises the level of tax compliance (Bardhan 1997: 1339) and this strategy
might lead to a more general system of tax farming (Besley & McLaren 1993).
But there is also a risk that such policies will be counterproductive (Azabou
& Nugent 1988). The larger the reward paid to officials for making pub-
licly desirable decisions, the more they will demand by way of bribes to make
undesirable decisions – and if the state’s ability to apprehend such behavior
is not raised, there will be an increase of corruption (Mookherjee & Png
1995; Wade 1982).
Another, perhaps somewhat less traditional, strategy is to focus on the
briber, rather than the bribee. Attempts can, of course, be made to punish
that person, but given the resource problems already referred to in detect-
ing illegal behavior, the policy is unlikely to be any more successful. What
about rewarding “whistle-blowing”? For example, those, including bribers,
reporting corrupt transactions might become entitled to a certain propor-
tion of the penalties levied, or at least have their costs reduced, by ensuring
anonymity (Bardhan 1997: 1338). Such an approach is likely to be most
effective where the whistle-blowers are potential victims of the corruption,

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338 LAW & POLICY July & October 2004

as with attempted cases of extortion (Alam 1995), but it can also plausibly
be applied to bribers who defect from the deal and expose the corrupt
transaction. Indeed, adopting a game-theoretical perspective, Cooter and
Garoupa (2000) have argued that a most effective (and relatively cheap)
solution is to undermine the spirit of cooperation between parties to such a
transaction and thereby establish a “virtuous circle of distrust.”
The argument is compelling but there are grounds for believing that
compensating whistle-blowers may actually induce more corruption. First,
it gives the briber a sanction, should the bribee fail to comply with the
agreement, thus overcoming the problem that corruption contracts are not
enforceable in the courts. Second, it may encourage gamekeepers to become
poachers, by enabling bribers to threaten to frame innocent officials, and
thus extort payments from them (Polinsky & Shavell 2001: 19–20).

V. DESIGN OF REGULATORY INSTITUTIONS AND PRINCIPLES

What emerges from the above analysis is that conventional strategies to

constrain corruption are likely to be less effective in jurisdictions where
corruption significantly infiltrates the criminal justice and law enforcement
systems, where the resources available for monitoring the conduct of officials
are relatively modest, or where the political will to adopt a “macro” approach
to the corruption problem does not exist. We now turn to some of the more
specific implications that the existence of corruption may have for the
design of regulatory regimes. We need to see how institutional arrange-
ments may be organized so as to limit the opportunities for corruption, or
to render such opportunities less profitable. Now, of course, the problems
that were identified in the last section do not become irrelevant; in particu-
lar there must be the political willingness to accept some reorganization of
regulatory arrangements. But that is very different from what is required to
effect major cultural changes and actively to pursue and punish culprits.
Some of the possible reforms to regulatory structures correlate well with
developments and tendencies occurring in industrialized countries (Vogel
1996); others point in the opposite direction. Some remain ambiguous. For
a good example of the latter, take first the issue of privatization, perhaps
the most salient feature of regulatory reform in industrialized countries.
A recent study of bribes paid to utilities in a number of transitional eco-
nomies in Eastern Europe and Central Asia found that the replacement of
public ownership by private ownership reduced the amount of corruption,
since the owners of the privatized companies had more incentives than
officials managing a public company to control it (Clarke & Xu 2001).
Nevertheless other studies of these phenomena have shown that the pro-
cess of privatization may make the disease worse before it becomes better.
This has been particularly true of Eastern Europe (Kaufmann & Siegelbaum
1996; for China, see Duckett 2001, and for Latin America, Manzetti & Blake

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 Ogus CORRUPTION AND REGULATORY STRUCTURES 339

1997). One reason is that a temporary combination of controlled “public”

prices and market prices creates opportunities for highly profitable arbitrage
(Bardhan 1997: 1329); another is that the sale of assets can be used to benefit
vested and corrupt groups, the process being facilitated where insiders have
discretion and information not available generally (Huther & Shah 2001).
Another much-debated, though largely unresolved, question is whether a
policy of decentralization, again associated with Western regulatory think-
ing, facilitates, or hinders corruption. On the one hand, it is argued that
decentralized decision-making must by its nature be more transparent than
when carried out at a distance from the subjects affected – local informa-
tion flows being more rapid – and therefore corruption is, in such circum-
stances, more difficult to conceal (Lederman, Loyaza & Soares 2001). On
the other hand, if law enforcement is largely in the hands of a centralized
authority, the very distance of the formal audit systems from the subject of
investigation may limit its effectiveness: in remoter areas the authority of
the law may simply not be recognized (Green 1997: 67). Moreover, the
“once-for-all” payment necessary to secure the cooperation of the central
official may distort the economy less than the variety of payments at other
levels: the bribee can control deviations from agreed patterns of corruption
and render its effects less uncertain (Shleifer & Vishny 1993). Bardhan
(1997: 1325) uses this argument to explain why Indonesia (where corruption
has been centralized) has, in terms of economic development, been more
successful than India (where bribery has been more fragmented) even
though the perceived level of corruption in the two countries is not dis-
similar (in the latest Transparency International (2002) rankings India is
71st and Indonesia 96th). Empirical support for these various arguments is
sparse, but a recent study (Fisman & Gatti 2002) suggests that fiscal decen-
tralization correlates better with lower corruption than fiscal centralization.
Related to the question of decentralization is that of competition between
regulatory offices and officials. Promoting some such form of competition
would seem to offer a plausible, and not too costly, means of combating
corruption or at least reducing the levels of bribes to be paid (Rose-Ackerman
1978). There is some empirical evidence to support this: the overlap in the
power of local, state, and federal authorities to control illegal drugs has been
thought to reduce police corruption in the U.S. (Bardhan 1997: 1337); and
a statistical study of corruption among the judiciary in Latin America sug-
gests that this is less prevalent where there are viable alternative procedures
for settling disputes (Buscaglia 1997). However, care must be taken as to
how competition is introduced: a series of alternative individuals or offices
providing the same service, or perhaps overlapping services, would meet
the objective (Bowles 2000) but adding further layers of bureaucratic decision-
making would simply exacerbate the problem (Lederman, Loyaza & Soares
2001). Also, a lack of clarity in the demarcation of public services can increase
bureaucratic discretion, leading to more corruption (Wescott 2003: 261).
Suggestions linked to the competition argument include using committees

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340 LAW & POLICY July & October 2004

instead of single decision makers; and regularly moving bureaucrats between

various offices (Klitgaard 1988: chap. 3).
Deregulation is, of course, a major theme in Western regulatory develop-
ments and the first and most obvious, though not necessarily most significant,
point is that, since many opportunities for corrupt transactions arise from
regulation, a reduction in the amount, or intensity of regulation should
reduce the level of corruption (Lederman, Loyaza & Soares 2001: 6).
The legalization of off-course betting in Hong Kong is a well-known
instance of a simple deregulatory measure leading to a significant fall in police
corruption (Klitgaard 1988: 116). But that very example should alert us to
the risk of reaching superficial conclusions on deregulation. The control of
gambling is a relatively peripheral form of social regulation and, as such,
should not be the basis of too broad generalizations about the undesirab-
ility of large areas of health and safety, and environmental, protection in
developing countries. The Western concept of a competitive market is often
far removed from economic conditions prevailing there and attempts to
impose it have not generally led to welfare improvements (McAuslan 1997:
33). Given also that in many jurisdictions private law is ineffective to deal
with many types of market failure, there is a strong prima facie case for
regulatory intervention. It is, then, a question of exploring how an excess of
regulatory opportunities for corruption may be dismantled (Platteau 1996).
A prime example here is that of registration and licensing systems which,
as controls on business entry, are particularly prone to corrupt transactions
(for China, see Manion 1996). They have tended to proliferate in developing
countries with adverse economic consequences (Djankov et al. 2002, who
report inter alia that in Mozambique an entrepreneur must complete nineteen
procedures involving at least 149 business days). There are public interest
justifications for the existence of such systems. The registration of firms
prior to their lawful activity may significantly reduce costs of subsequent
routine administration (Australia. Bureau of Industrial Economics 1996:
17–18). And in some circumstances, licensing may be the optimal regulatory
instrument for dealing with certain forms of information failure and negat-
ive externalities, particularly where the potential losses are very large and/
or ex post enforcement of regulatory standards is particularly costly (Ogus
& Zhang 2004). But these arguments do not justify multiple registration
requirements where the information supplied to one authority is identical to
that provided to others (“one-stop shops”, enabling one registration applica-
tion to serve for other applications, have been successfully introduced in
some developing countries: Morisset & Neso 2002). Nor do they justify
systems imposing license requirements on ordinary business entrants whose
activities do not give rise to significant failure of the kind described.
A second possibility for positive deregulatory reforms arises from the use
of the criminal law to enforce regulatory regimes (Australia. Law Reform
Commission 2002). In industrialized countries, the heavy cost of securing a
conviction in the criminal courts may reduce its effectiveness as a deterrent;

© 2004 Baldy Center for Law and Social Policy and Blackwell Publishing Ltd.
 Ogus CORRUPTION AND REGULATORY STRUCTURES 341

and for this reason administrative sanctions may be preferable (Ogus &
Abbot 2002). In developing countries, use of the criminal process has the
added disadvantage that it creates a further opportunity for corruption.
Evidence suggests that the level of bribes increases significantly when courts
are involved in law enforcement (Green 1997: 66–7).
In other respects, the need to constrain corruption suggests regulatory
strategies that are incompatible with reforms taking place in industrialized
countries. According greater discretion to regulatory rule-makers has there,
alongside decentralization, enabled interventionist measures to be better
targeted to local and diverse circumstances (Majone 1996: 68–74). But,
particularly in a developing country context where instruments of account-
ability may be weak, it also creates more opportunities for corruption than
where regulatory requirements are the subject of clear and precise rules
(Seidman & Seidman 1994: 178). This is illustrated by Indonesian legisla-
tion on procurement systems which requires simply a standard of “fair
competition” between firms of “equal standing” and, as such, creates much
leeway for discretionary, and therefore corrupt, decision-making, depending
on how the concepts of “fair competition” and “equal standing” are inter-
preted (World Bank 2003: 33). The same applies, if less obviously, to a
Mozambique customs regulation that provides exemptions for “personal
belongings,” but leaves it to local officials to determine what is covered by
that expression (Goudie & Stasavage 1998: 129).
A similar argument applies to the choice between formal and informal
rules. In industrialized countries, there has been a perception that the tradi-
tional command-and-control sets of formal rules are often too prescriptive
and too rigid, firms often knowing better than regulators what can best
meet the regulatory goal at lowest cost. There has therefore been a move-
ment to replace formal rules by guidelines (Baldwin 1995). The experience
with informal rules in transitional economies (e.g., Russia: Radaev 2000)
and developing countries (e.g., Zimbabwe: Goredema 2000) has not been a
happy one. Individuals have often been faced with a multitude of highly
specific regulatory rules and procedures, knowing that in practice these may
not be adhered to, and that informal rules, built into informal relationships
with those who are to be favored, will prevail. Those unwilling to submit to
the conditions of the informal rules, and their financial implications, can
still be subjected to the, often unreasonable, exigencies of the formal rules.
The policy implication seems to be fewer and simpler formal rules, but not
informal rules.
Next, and perhaps more controversially, there is the question of consulta-
tion processes. Within the Western tradition there has been an increasing
emphasis on regulatees and third parties contributing to, and participating
in, regulatory policy- and rule making. The potential benefits, in terms of
improved information flows, better transparency and greater accountability
are substantial, but direct access to regulatory officials does of course
increase the opportunity for corrupt transactions. In the U.S., efforts to

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342 LAW & POLICY July & October 2004

maximize consultation and, at the same time, to limit the opportunities of

private manipulation of the policymaking processes have led to principles
that private meetings and private communications between officials and
third parties are to be placed on the official record (Breyer & Stewart 1985:
663–71). However, adequately defining and policing the requirement of a
“private” meeting, and maintaining in an accessible and transparent form
the official record, may not in practice be achievable in many jurisdictions.
If that is the case, then some compromising on the ideals of consultation
may be the price to be paid for reducing corruption.

VI. CONCLUSIONS

In this paper I have adopted a relatively narrow approach to the concept

of corruption, focusing on its application in a regulatory context. That has
not blinkered me from recognizing the huge problems in confronting
something that is so deeply embedded in many political and administrative
communities. Indeed, this very fact leads me to the conviction that the
classic approaches to constraining corruption usually advocated in Western
industrialized societies – raising the levels of sanctions and of monitoring;
increasing the transparency and accountability of decision-making – will
often prove to be futile. What I have described as the “macro” approach to
corruption cannot work without the political will to uphold it.
The main policy implication is that it may be preferable for reforms to
concentrate on reducing the opportunities for corruption, rather than on
attempting to suppress it altogether. The focus on regulatory institutions and
procedures has enabled me to identify key aspects to these arrangements, which,
if appropriately designed, can achieve this goal. Such a strategy requires
much less by way of political will than the “macro” approach and therefore
may be particularly appropriate for jurisdictions with limited democratic
structures. It is also noteworthy that some of the suggested adaptations are
inconsistent with the models of regulatory arrangements that Western insti-
tutions have in recent times been urging developing countries to adopt.
A final set of observations relates to costs. A leitmotif of this paper has
been the notion of aiming at the optimal level of corruption, the point at
which the costs of constraining it are equivalent to the benefits. Although
there are major difficulties of quantification, and therefore the aim can be
considered to be mainly a theoretical one, invoking this concept does force
attention on the costs involved, and whether anti-corruption policies are cost-
effective. Such a perspective should lead us to question many of the traditional
policies urged on developing countries, because the costs to be incurred in
effecting major changes to culture as well as institutions, and for example
investing increasingly large resources into monitoring and audit systems,
are simply in many cases far too large. The general strategy of reducing
opportunities for corruption within the context of regulatory decision-making

© 2004 Baldy Center for Law and Social Policy and Blackwell Publishing Ltd.
 Ogus CORRUPTION AND REGULATORY STRUCTURES 343

would not involve resources on such a scale. True, some of the proposals,
for example using committees instead of individual decision makers, and rules
instead of discretion, would add to administrative costs, but these would be
balanced by savings through, for example, “one-stop shops” for registration
and the distancing of relationships between officials and regulatees.

anthony ogus is Professor of Law, and Research Fellow at the Centre for Regulation
and Competition, University of Manchester. His main research interest is law and eco-
nomics and its application to regulation. A monograph on this subject was published in
1994. He is currently investigating regulation in developing countries.

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