Relationship Between Lobbying and Corruption Essay

Introduction

A very interesting and pertinent study on the relationship between lobbying and corruption was done by Nauro F Campos and Fransesco Giovannoni in a discussion paper in September 2006. The paper titled Lobbying, Corruption and Political Influence studies the situation in 24 countries and almost 4000 firms before arriving at their conclusions. This paper is intended as a critique of the work done by the duo mentioned above.

Before analyzing the lobbying, corruption and firm performance in transition economies let me brief on lobbying and corruption and transition economy. Lobbying can be defined as the act of influencing government leaders for the alteration of law or the creation of new legislation that will support the interest of a particular group or organization. Lobbyists are those people who do lobbying.

Corruption is the act of employees, politicians, government officials in which they are dysfunctional for their illegitimate personal gain. These actions include bribery, extortion, cronyism, nepotism, patronage, graft, embezzlement. A transition economy undergoes economic liberalization which leads to ownership of resources by private parties than the government. Thus the economy became a free market rather than a structured economy.

The basis of lobbying and corruption is to influence the authority to make a change in favor of. But there are significant differences between these two. One of the major differences is that corruption is prohibited by law and is a punishable offense but lobbying is not. But these differences may vary from country to country. In some countries, extreme lobbying may be treated as corruption but in some countries, it may be just the opposite. If a country is under the reign of an autocratic leader he can legalize corruption. So the difference may be described in terms of transparency. Lobbying is transparent but corruption is not as it has secrecy with it. Lobbying is done publicly within the pre-set legal network.

Corruption is done with secrecy and there will be an agreement between the corrupter and corrupted but is not enforced by law. As lobbying is public, the after-effect can be predicted. Those who oppose the influences are getting time to react and thus get a chance to create an equilibrium between the opposition and support. But in the case of corruption, the public gets no chance to know the consequence it may produce. Lobbying can melt out competition between different interest groups as it is transparent and it creates a low entry barrier for new entities. But corruption intensifies competition and creates a strong entry barrier for new entrants. Corruption includes the transfer of wealth from one party to the other. Lobbying does not involve the direct transfer of wealth but pressures the authority to altercate or formulate legislation.

Salient Points in the paper

The paper bases its assumptions on two major studies and frequent references have been made to these papers throughout the whole length of the paper Corruption and lobbying: A lot has been researched and written about corruption and lobbying, but very few studies exist that study the relationship between the two. The authors have relied upon two such major studies, one by Harstaad and Svenson and the other by a team of researchers led by Damania.

The effect of lobbying is more permanent than bribing: Firms may prefer to pay bribes to the bureaucrats for bending the rules in developing countries and bribe the government to change legislation in developed countries. Even though corruption and lobbying can be substituted for each other, there are differences in the case of the effects produced by these two. Lobbying exerts a change in the rules thus which is more permanent but the bureaucrat may or may not take bribes in a later case. As the investment is high firms normally switch from corruption to lobbying. If the investments in corruption are large, it will adversely affect lobbying and thus form an equilibrium state.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=925016

Firms prefer bribing to lobbying early in the development process. At the initial stage of firms will be ready to bribe rather than the lobby. At the initial stage to establish itself in the market, it has to cater to its necessities, not on the common needs of the industry. So it will be comfortable to give bribes to the bureaucrat. But in the later stage when the firm had made large investments it will be difficult to bribe because the needs become greater than that in the initial stage. In such circumstances, it is better to influence the government through lobbying. Since corruption discourages investment, lobbying will better suit corruption at this stage.

In politically less stable countries, firms are more likely to bribe. The government in a politically unstable country will not be in a position to altercate or bring legislation for the reason that such a move may adversely affect the survival of the government. In such cases, it will be comfortable to give bribes to the bureaucrat to bend the legislation. A weaker political system creates more bureaucrat leaders, and for this reason, also it is better to bribe than the lobby.

The size of lobbying in terms of effectiveness is much bigger than the results obtained through corruption. Bigger firms in more advanced economies tend to rely on lobbying while smaller firms in less developed countries rely more on corruption. Both lobbying and corruption tend not to go together. It means that if a firm relies more on lobbying it is less likely to indulge in corruption and vice versa. A history of low political instability will have the same effect on both lobbying and corruption. In other words, in such cases, firms will reluctant to indulge in lobbying as well as corruption. But political instability can also result in under-investment in law, which makes bribing easier. Different sectors in the industry have different levels of lobbying. There is a general trend that large firms are more inclined to join lobby groups than smaller ones, but once a part of a lobby group, smaller firms gain more benefit than larger ones. A stable political democracy will have people who have the power to veto decisions and in such a situation is preferred by lobbyists.

The reasons for a firm to join a lobby group like a trade association may be due to reasons other than to enjoy the benefits of lobbying. They may, for example, become a member for the benefits of networking.

All the observations given above are taken from the two studies relied on by the authors of this paper as well as the personal opinions of the authors themselves. The conclusion of the authors as a result of this study will be given later.

The methodology used by the authors: The data from which the analysis and conclusions have been obtained by the authors from the Business Environment and Enterprise Performance Survey which was conducted in 1999 jointly by the European Bank for Reconstruction and Development (EBRD) and The World Bank. The exact number of firms studies was 3954 situated in 25 countries. The original studies and data were arrived at through direct interviews with responsible officials of the firms. A country-wise break up with the number of firms in each country is given here: Albania (163), Armenia (125), Azerbaijan (137), Belarus (132), Bosnia (127), Bulgaria (130), Croatia (127), Czech Republic (149), Estonia (132 ), Georgia (129), Hungary (147), Kazakhstan (132), Kyrgyzstan (166), Latvia (112), Lithuania (136), Macedonia (136), Moldova (139 ), Poland (246), Serbia and Montenegro (65), Romania (125), Russia (552), Slovakia (138), Slovenia (125), Ukraine (247) and Uzbekistan (126).

The firms belonged to a wide range of industries. The Gross Domestic Product was also a factor in this study and hence the share of GDP for each type of industry in all the countries was also obtained. It was interesting to note that countries with a higher per capita GDP had a higher percentage of firms that had memberships of lobby groups. The following relevant questions were asked to the firms for obtaining relevant data.

1. Whether the firms had any experience with corruption in their respective countries? The results obtained from this question was that countries with higher per capita GDP have fewer experience with corruption
2. Whether individuals thought themselves as influential in the outcomes of policies of their respective countries?

A study conducted by Freedom House was used to determine the levels of corruption existing in the countries that came under the research. The political stability existing in each of these countries was also taken into consideration for this study. Data from other influential studies were used for this purpose.

To give credence to the conclusions an econometric methodology was also used. The following factors were considered in the equation used for the calculation. The number of firms that were members of lobby groups, the size of the firm, whether the firms were privately owned, whether the firms had any foreign owners, the per capita GDP of the country, cumulative standard deviation function, etc. Similar calculations for the level of corruption and influence were also used.

Results

A larger number of employees meant that there was a greater chance for a firm to join a lobby group by as much as 15 to 17%

1. Lobby groups that consisted of fewer big members were more effective.
2. Foreign own firms tend to favor lobbying over corruption.
3. Private ownership need not be a factor for joining a lobby group.
4. Firms located in the capital city tend to form lobby groups more when compared to firms in other cities.
5. The existence of corruption tend to discourage the formation of lobby groups
6. The existence of political instability encourages the formation of lobby groups.
7. Countries that follow a parliamentary system have a positive impact on the formation of lobby groups.
8. Lobbying is an effective substitute for corruption.
9. Firms find that a lobby group can influence decisions more than through corruption in both advanced and transitional economies.

Critical Analysis

The details and conclusions of the study was provided here to show that the authors had concluded considerable effort. Different angles were looked at before concluding. Simple data analyses were substantiated through econometric analysis. About their methodology and thorough work, it can be said that the authors had done commendable work in arriving at their conclusions and no apparent faults can be identified with the current area of work. But the study does have some inherent faults that are analyzed below.

1. Area of Study: the authors had studied nearly 4000 firms that existed in 25 countries were studied. But a close analysis of the list of countries shows that all the countries belonged to Europe. Another major drawback was that a majority of the countries were former countries of the erstwhile Soviet Union. Transitional economies exist in other parts of the world also. There are a few countries in Asia and South America that can be classified as transitional economies. Countries like India, China, and Brazil can be given as examples. India along with China and Russia has a wealth of qualified and professional workforce. The opening up of their respective economies in the 1990s has changed the economic outlook of these countries. A study by Goldman Sachs had predicted that the four economies of Brazil, Russia, India, and China, collectively termed as BRIC economies had the potential to overtake the GDP of the G6 groups of countries in the next 50 years. All of these countries do not figure prominently in the list of countries with low corruption. It can be seen that only Russia had figured as a subject of study by the authors.
2. Period of study: Even though the paper was dated and released in 2006, the period of study was for the year 1999 and before. In an era of rapidly growing economies and equally rapidly changing economic equations the period selected was according in my opinion not very relevant. If the authors were to take a look at the transitional economies a little later than 1999, they would have had to include a host of other counties too especially since one of the topics of analysis was corruption. It is a well-established fact that all the fast-developing new economies are plagued by corruption. At the least, these countries could have been included to verify the levels of lobbying that are found here.
3. The research was based on just a single study. As mentioned earlier, the data source for this study was sourced from the study by the European Bank for Reconstruction and the World Bank as a result of its survey known as the Business Environment and Enterprise Performance Survey. In my opinion, the data given in the study should have been cross-checked with other credible studies. This opinion is given not to downgrade the studies done by those two great organizations. But as a researcher, more research for accuracy of data should have been undertaken.
4. Lack of structure in the paper: The presentation of the paper too was not to my satisfaction. Too many facts were given randomly. For example, The paper jumps from the topic of corruption to influence and then suddenly moves on to econometric methodology.

Conclusion

Despite some of its shortcomings the authors have done a commendable piece of work and their conclusions are an eye-opener for serious research students. This is especially so since the topic of research was in an area that had some preconceived notions. It is commendable that such wrong notions that lobbying is favored by firms operating in advanced economies and corruption are the way to influence policies in developing and transitional economies stands corrected as a result of this study. The next step would be to increase the scope of this research by including a larger geographical area for study while maintaining and if possible improving on the techniques and methodologies used in the current study.