Corruption Accusations and Bureaucratic Performance: Evidence from Pakistan

1 Introduction

A potent cause behind the misallocation of resources in developing countries is the misuse of authority and public funds by government officials. Particularly, at the microeconomic level, bureaucratic holdups and delays are not only ethically inappropriate but also cause a significant drag on private businesses. Unsurprisingly, the efforts to conquer corruption are not confined to regulatory reforms and incentive mechanisms but also include harsh punishments like even the death penalty.^[1] Ultimately, a society’s tolerance for corruption, and the choice and effectiveness of anti-corruption measures are context specific and require careful analysis (Graaf, 2007).

The fight against corruption is usually operationalized through independent anti-corruption agencies. However, it is difficult to separate the good from bad intentions in these campaigns as those in public offices have every incentive to belittle the political statures and reputations of their rivals through fabricated cases.

In recent decades, aggressive anti-corruption campaigns have been a feature of many developing countries. Thus, a number of high-profile politicians and ex-public officials were convicted in South Korea.^[2] In China, there was a drive to purge the ruling Communist Party of corrupt officials. Corruption has been cited as one of the main factors in the decline and fall of the Indian National Congress, the political party that ruled India for most of its post-independence history.^[3]

In Pakistan too the issue has been a source of political uncertainty since 1990s when elected governments were dismissed in quick succession on grounds of corruption. In 1997, the Bureau of Accountability (called Ehtisab Bureau at that time) was established to formally investigate political corruption. In 2002, through various legal amendments, Ehtisab Bureau was replaced by the National Accountability Bureau (NAB). In the 11th Five-Year Plan (2013–2018) formulated by the Pakistan Planning Commission, corruption free governance is set as a national goal.

The efforts of NAB against corruption are highly debated in Pakistan and have caused political polarization. During the period of this study (i.e. 2002–2013), NAB maintained a conviction rate of 51% and has decided 1,762 cases. Perhaps the most controversial aspect in the NAB’s fight against corruption is the use of procedures like plea-bargaining and voluntary disclosure. These are accepted legal procedures in many other countries like Canada, the UK, the USA, and India.^[4] At least theoretically, these procedures cannot be dismissed as ineffective in the context of a developing country where judicial processes are painfully slow and replete with all types of inertia that favor the culprit. However, in the case of NAB the main criticism is that its policy allows easy escape to those involved in corruption by surrendering a proportion of the embezzled funds (currently 80%). Thus, without empirical analysis, the net benefits of the policy are unclear.

Using the case of Pakistan, this study gathers unique data about all the corruption cases involving government servants (GS) where the accused volunteered to return embezzled funds and was granted the option of plea bargaining by the court. With below potential rate of economic growth, and a slow but consistent adoption of democratic norms, the emerging political parties of Pakistan are sensitive to the administrative weaknesses and bureaucratic excesses of past regimes and have vowed to strengthen accountability mechanisms.

The empirical enquiry in this study focuses on the corruption cases involving GS and bureaucrats from all the four provinces of Pakistan. This data set is merged with the World Bank Enterprise Surveys (ES) data to see the effect of the number of plea-bargained cases and the amount used in the plea bargaining on the relevant responses of business managers. The responses of business managers to corruption-specific questions in the ES data set are interpreted here as a proxy for business–government relations. The study, therefore, helps us to understand the efficacy of the measures to curb corruption and how they affect the perceptions of firm managers.

The study fills out the following important gaps in the existing literature on anti-corruption policies in developing countries:

• It contributes by assessing the efficacy of anti-corruption policies by using both the perceptions and experiences of firm managers as indicators of business–government relations. This adds to the existing studies that rely mostly on the public perception-based measures of corruption (e.g., Donchev & Ujhelyi, 2014).

• Using information about actual corruption cases involving GS, it provides evidence that a tradeoff exists between recovering looted funds and the long-term objective of eliminating corruption. Thus, the strategies or incentives that promise easy and quick recovery of looted funds may increase corruption in the long term.

Using multiple questions related to bribery incidents in the ES data set, we discovered a negative correlation between the number of plea-bargained cases and the perception and experience of bureaucratic corruption of business firms. Interestingly, the effect of the size of the bargained amount is insignificant in baseline analysis. This finding is interpreted here as the relative importance of the punishment effect (of conviction) vis-á-vis the disincentive caused by surrendering of the gains. However, incorporating the possibility of time dependence of the effect, we find that the coefficient of the bargained-amount switches sign thus supporting the view that the availability of the plea-bargaining option may actually encourage, rather than discourage, corruption over time. This is in line with the existing finding that the policy of plea bargaining is bound to be abused (Aniche, Alumona, & Obiwulu, 2020).

Section 2 reviews the relevant literature. In Sections 3 and 4, we present data and empirical results. Section 5 concludes and notes the limitations of the research.

2 Related Literature

The economic approach to crime relies on the framework first formalized by Becker (1968). In this framework, rational agents prefer illegal exchanges if the expected net benefits from such transactions are positive. This elegant cost–benefit framework is extended to understand the underlying logic of white-collar crimes (Draca & Machin, 2015; Rose-Ackerman, 2010). Accordingly, a firm is more inclined to pay bribes if there are net benefits in avoiding complex and strict procedures, the unscrupulous court system and incompetent government service (Huang & Rice, 2012; Jiang & Nie, 2014; Wu, 2009). Thus, bribing and lobbying is an important way to avoid regulatory delays and competitive pressures (Oh, 2009; Tonoyan, Strohmeyer, Habib, & Perlitz, 2010; Zhou & Peng, 2012). In developing countries, formal sector firms view corrupt practices as “the ways things are done” (Brass, Butterfield, & Skaggs, 1998; Hallward-Driemeier & Pritchett, 2015).

The link between corruption and firm performance is influenced by the strategic activities managed by a firm in response to corruption (Galang, 2012). In the presence of regulations replete with bureaucratic hold ups, corruption may help businesses by greasing up the process of starting a new business (Dreher & Gassebner, 2013; Jiang & Nie, 2014; Wang & You, 2012)and by reducing delays in public service availability (Van Vu, Tran, Van Nguyen, & Lim, 2018; Zhou, Han, & Wang, 2013). Bribes, by winning political favors, can also serve as an instrument to increase company value (Faccio, 2006). In contrast, corruption has a negative impact on firm growth if it hurts competitiveness (Fisman & Svensson, 2007; Gaviria, 2002).

The negative effects of corruption on a firm’s productivity are more prevalent in those countries where the legal framework is weak (De Rosa, Gooroochurn, & Görg, 2015). In contrast, Bai, Jayachandran, Malesky, and Olken (2017) have estimated a reverse effect, i.e., corruption reducing the effect of growth especially for firms who can easily relocate.

The characteristics of firms also play a role in determining their preference for informal payments. For instance, bigger firms are more likely to pay bribes to get government contracts and preferential tax benefits (Delavallade, 2012; Mishina, Dykes, Block, & Pollock, 2010; Rand & Tarp, 2012). However, the cost of corruption is higher for small firms if it taxes a large proportion of their resources (Zhou & Peng, 2012). Paunov (2016) argues that small firms are negatively affected by corruption if they are adhering to international quality standards. Dutta and Sobel (2016) suggest that bribery is not a “cost of doing business,” rather corruption impairs entrepreneurship.

If corruption is a way to avoid complex administrative procedures, then voluntary disclosure and plea bargaining can also be interpreted as possible means to avoid complex and time-consuming legal procedures (Feeley, 1982). However, it is important to see how the legal option of plea-bargaining changes the usual calculus of crime by eliminating the possibility of punishment (or at least harsh punishment). For instance, Reingnaum (1993) argues that plea bargaining reduces the defender’s expected cost and induces crime. Thus, plea bargaining dilutes the deterrence effect (Miceli, 1996).

There are studies supporting the deterrence effect associated with apprehension and detection risk (e.g., Barnum, Nagin, & Pogarsky, 2020; Becker & Stigler, 1974; Rose-Ackerman, 1978). On the other side, there exist evidence that a high risk of detection has a deterrence effect but kills the intrinsic motivation for honesty (Schulze & Frank, 2003). The net effect on overall corruption is undetermined.

Another factor is the impact of public perception on corruption control, as it shows how much people are willing to support anti-corruption policies (Li, Gong, & Xiao, 2015). Thus, any state seeking a positive outcome of an anti-corruption instrument should gain public support for strongly backing it up with policy enforcement.

By contrast, corruption in law enforcement limits the deterrence effect (Polinsky & Shavell, 2001). In a weak institutional environment, public officials misuse their power and distort institutions by reducing detection and punishment to facilitate their own embezzlements (Boly & Gillanders, 2018).

This strategy (of voluntary disclosure and plea bargaining) is known for its mixed implications (Aniche et al., 2020). Theoretically, it increases welfare by motivating the truly guilty to self-select themselves and contributes to the accuracy of the legal procedure (Grossman & Katz, 1983). On the negative side, it may help institutionalize corruption and in Pakistan it is heavily criticized on this aspect. Thus, it is necessary to see whether this strategy offers any benefits to society other than having a cost-effective route to recovering embezzled funds.

Framing the discussion in the context of Pakistan we find only limited scholarship on the causes and cures for corruption in Pakistan. For instance, Farooq, Shahbaz, Arouri, and Teulon (2013) argue that corruption hinders economic growth in the case of Pakistan. In contrast, the policies and strategies adopted by the NAB, the country’s foremost anti-corruption agency, are not welcomed and debated extensively. For many, the drive against corruption is ineffective and good only for political ends (Ali, 2018). However, in the absence of scientific evidence such accusations are mere perceptions. Given the huge amount of resources at stake, it is necessary to check the extent to which the nabbing of corrupt officials temper economic outcomes.

Considering the above discussion, this inquiry intends to add two novel angles to the existing literature: (i) the study focuses on the variation in the responses of business managers to questions related to bureaucratic corruption. In particular, it estimates the effect of the number of past plea-bargained cases on the responses of business managers. It thus provides a broader assessment of the efficacy of the anti-corruption campaign; (ii) it also estimates the effect of funds recovered through plea bargaining on the outcome. Thus, by comparing the effect of recovered funds over time, it checks for the long-term consequences of the policies aimed at easy-recovery of looted public funds.

Benefiting from the above discussion we can formulate the following two hypotheses:

H1 Nab effect hypothesis: A higher number of plea-bargaining cases in the past reduce the government official’s incentive to indulge in corrupt transactions, ceteris paribus.

H2 Bargain effect hypothesis: (H2.1) The possibility that one can bargain one’s way out of corruption related charges by surrendering a part of the illicit gains may encourage corruption; (H2.2) the probability that one may have to surrender misappropriated funds in case of conviction may reduce the net expected gains from such transactions and thus reduce corruption.

3 Data

This study relies on two sources of information. The number of corruption cases involving government officials in each province of Pakistan is extracted from the NAB’s annual reports. The second source is the World Bank Enterprise Surveys (ES) which provides information on business firms operating in the formal sector of Pakistan in its four provinces. The following paragraphs explain these data sets in detail (Tables 1–2).

4 Results

Table 4 reports the baseline estimates and extensions that include additional controls. All the models employ standard errors that are robust against the clustering effects at the level of a province. The dependent variable is dichotomous which explains the use of the logit estimator. The diagnostics reported toward the end of Table 4 suggests that each of the models is highly significant overall.

In terms of the primary relationship of interest, our results suggest a strong and significant effect the number of (past) plea bargained cases has on the likelihood of corruption.^[6] The coefficient of interest (i.e., No. of Accused GS) is negative and statistically significant. More importantly, the estimated effect in the baseline regression (Column 1) amounts to an 80% reduction in the odds of a corrupt encounter with each 1 standard deviation (SD) increase in the number of accusations. Importantly, the coefficient of Plea Bargain Amount is negative but insignificant in all cases.

Among the controls we find a significant negative effect of SME on corruption likelihood. The same holds true for HDI which is a proxy for the level of development of a province. Our results also suggest a positive effect of the firm’s age on corruption likelihood although the coefficient has no statistical support. Among the sector effects we find a significantly greater likelihood of corruption across industries broadly categorized as leather products, machinery and electronics, motor vehicles, and non-metallic minerals. These sectors are prone to corrupt encounters compared to the benchmark “textiles-garments” sector.

Among the additional controls, we can see the insignificant effect of the top manager’s sector specific experience with corruption likelihood. The likelihood of corruption is significantly higher if a firm is earning at least more than 10% of its sales from exports (Exporter) or is having an international quality certification (ISO Certificate). It may suggest the greater interaction of exporting firms and those having superior quality products that make them easy targets of corrupt government officials.

The location and time effects are also significant. In the case of the former, the probability of corruption is higher in relatively developed provinces like Punjab, Sindh, and KPK compared to the base category represented by Baluchistan (the least developed province in Pakistan). While in the case of time effects, the binary variable representing 2013 suggests that the likelihood of corruption has decreased relative to the earlier time period.

5 Conclusion

An important issue in the literature on corruption involves the best way to deal with it. Huge monetary resources, besides time and effort, are devoted to designing effective institutions to get rid of this menace. Gathering scientific evidence on the efficacy of such measures directly informs the policy makers and is no less instructive for academicians.

This study tests the efficacy of anti-corruption measures in the context of Pakistan. Using theoretical insights, e.g., Becker (1968) and Rose-Ackerman (2010), it derives two hypotheses to test the impact of the plea-bargaining policy on corruption perceptions and corruption experiences of formal business firms.

The study gathers a unique data set on the number of accused government officials who availed the option of plea-bargain and voluntary disclosure of illicit gains. So unlike other corruption cases, these cases are unique in attracting public attention (and ire). The risk of detection and scrutiny by the NAB with the positive probability of surrendering the ill-gotten wealth influence the cost–benefit ratio of potential bribe seekers. Two waves of the World Bank Enterprise Surveys (2007 and 2013) provide a firm-level data set of more than 2,000 firms covering the four main provinces of Pakistan to empirically test these hypotheses.

Although the econometric results support the hypotheses, the effect of the number of accusations (H1) on reducing corruption is more consistent. The results are robust against various specifications and hold as well if we divide our sample into individual surveys. With some qualifications, the results hold for the 2SLS estimator as well. Importantly, the independent effect of the amount of plea-bargaining on firm-level corruption although negative overall comes out positive if we restrict the sample to focus only on the latter half of the sample period, thus supporting hypothesis H2.1.

In terms of good effect the practice of plea-bargaining has on the perceptions and experiences of business firms and the value of resources recovered over the period under consideration, this policy may offer net social benefits. But the positive effect it exercises on corruption in the second time period suggests that it may increase corruption in the long term. Thus, it is likely that long-term expected costs exceed short-term gains.

This research is not without limitations. First, it focuses specifically on Pakistan. Although governance issues in Pakistan are not very different from other developing countries, it is difficult to tease out many generalizations. Second, the empirical analysis relies on a data set that is pooled crosssectional and is observational in nature. This reduces the reliability of the causality analysis. Nevertheless, the study serves as a motivation for future researchers to go beyond this simple analysis and add refinements to gather more reliable insights about this important area of public administration.