The open-market creed which has become the rallying call for the international economy has its downside. Open markets have led to greater volatility on the foreign exchange markets, with countries like Thailand and Bulgaria having to adjust to speculative attack. Worse, open borders and unfettered internal markets have led to an upsurge in corruption.

In Russia, the Ukraine and some of the other republics of the former Soviet Union, corruption has become deeply embedded in business life, which means that multinational corporations doing business in the region have to engage in bribery and commission payments to officials at all levels, or find themselves excluded from transactions. In some of the transitional economies corruption has proved a real disincentive to inward investment.

Meanwhile, as China has opened itself up to inward foreign investment, power brokers like the People's Liberation Army, which has become a powerful business force in the new economic zones, are demanding their cut in terms of commissions.

The West is engaged in a major effort to bring Africa back into the global economic fold after decades of neglect, but concern that development assistance and downpayments on commercial deals will vanish into Swiss bank accounts - as was the case in former President Mobutu's Zaire where billions of dollars were siphoned off - has led to a rallying call for good governance.

Without proper standards of procurement, African countries will now find themselves excluded from new programmes, such as the effort to forgive multilateral debt, until they can convince the richer economies that they have cleaned up government and put in place the necessary systems to protect foreign aid and investment from large-scale embezzlement.

The attack on global corruption has to be intensified if business is to engage in fair competition. This has now been accepted by several of the major global economic organisations, beginning with the Organisation for Economic Cooperation and Development, which now includes some emerging market economies like Mexico and South Korea. At June's Summit of Eight in Denver, the heads of government of the most powerful economies lent their authority to the anti-corruption drive, making specific legislative commitments.

It was in the late 1970s that the exposure of commission payments by the aerospace group Lockheed - to Western as well as developing country governments - led to the passage by the US Congress of an act to outlaw foreign corrupt practices. Two decades later, this is being seen as a model for the rest of the world.

At that time the aerospace sector was seen as being particularly vulnerable to such payments, because a small band of competitors was chasing a limited pool of orders worth billions of dollars. With an upsurge in corruption in the 1990s, the issue has again become more acute.

As far as the new market economies are concerned, the Denver Eight have imposed new responsibilities on the International Monetary Fund and World Bank 'to strengthen their activities to fight corruption.' As part of their routine surveys of individual countries and the process of setting conditions for new loans - particularly important in the former Soviet Union and Eastern Europe which are heavy borrowers of official funds - the Fund and Bank will be paying greater attention to the rule of law, the efficiency and accountability of the public sector, and improving institutions to bring about more robust economic management and commerce. Specifically the World Bank, which runs a large procurement programme for developing nations, is to set new higher standards.

Following the pattern set by existing US legislation, western countries are being urged to introduce new laws to make it a criminal offence to bribe foreign officials in an effective or coordinated way, whether it is to secure extra landing rights, bypass customs officials, or gain the upper-hand in a major procurement contract.

As part of the effort to stamp out such behaviour by western corporations, the legislative code would remove any possibility of commissions, costs associated with sales, special payments to secure overseas orders, or any other form of words suggesting a bribe, being tax deductible. To ensure there is no backsliding, the leaders in Denver vowed that suitable legislation would be presented to parliaments by next April and be passed by the end of 1998. The hope is, however, that an informal convention covering much of the same territory will be in place by the end of this year.

In the case of Africa, the leading industrial countries believe it is particularly important that government is cleaned up. A paper prepared by the leading Harvard economist Professor Jeffrey Sachs, which has formed the basis for much of the new thinking on bringing Africa back into the economic fold, argues that the Continent's failure to grow reflects 'faulty economic policies, heavy debt burdens, inadequate and poorly maintained infrastructure . . . and legal and regulatory settings [that is, corruption] which deter investment.' If they are to attract corporations back, these countries need to develop stronger and more transparent governance and engage in self-help programmes to improve management and educational capabilities, says Prof Sachs.

After a decade of encouraging free-wheeling economies, the West now appears to have recognised that in some regions of the world the pendulum has swung too far. Corruption has proved a disincentive to honest investment and business. By putting sand in the wheels of corruption, through greater disclosure, criminal sanctions and tax penalties, the leading western countries are showing that they are determined to force change.

Alex Brummer

Source: Airline Business