Welcome back to our course on Corruption. This is Week Four, Lecture Three. And today, we're going to talk about controlled by industries. Business groups, business federations, industries. We're going to talk about three kinds of things. First, we're going to talk about the fact that corruption create something called an assurance problem, then we're going to talk about platforms for exchange. And finally, we'll talk about certification programs. Recall the costs imposed by corruption at the firm level. A firm that pays bribe, a firm that engages in corruption makes less money is a less competitive firm, is distorted. However, in the very, very short run and I don't encourage this, I'm certainly not telling you to do it. But in the very short run, the payment of a bribe, the conferral of some kind of a benefit may actually work to the advantage of a firm. Long run, not at all. [COUGH] But in the very short run, it might give a firm an advantage. And so in the short run, in the very short run, the firm that pays a bribe may be able to drive out of business the firm that doesn't pay a bribe. And this paradoxical way that corruption imposes costs creates a real problem for business firms operating in environments in which there is a measurable or fair amount of corruption. We can go back to the great philosopher,Jean Jacques Rousseau and he described kind of a similar problem. He described a group of people who are going out to hunt a stag. A stag is a large, male deer. And in hunting the stag, they have to be absolutely silent. Any noise and the stag will run away and they hunt the stag by forming a circle around the stag, and the circle gets smaller, and smaller, and smaller until there's no room for the stag to escape. At which point, they can kill the stag and then they will have a bounteous feast. Now a successful stag hunt depends entirely on everyone doing what they said, they would do from the outset without any monitoring. There's no way to monitor the acts of the other parties. If one of the hunters sees a rabbit, says Rousseau. That hunter's presented with a dilemma. Should the hunter leave the stag hunt and kill the rabbit? Or should the hunter continue to work with the others to encircle the stag and have the bounteous feast? If the hunter defects, if the hunter doesn't cooperate, goes after the rabbit, kills the rabbit. That hunter will at least have a small meal. If the hunter continues to cooperate and somebody else defects, if somebody else doesn't cooperate, well, the stag will slip through the whole created in the circle and the hunters who cooperated won't get anything. They're counting on everybody cooperating. But when they have a chance to defect, they're presented with a dilemma. Should they at least get the rabbit? Or should they count on everyone cooperating and have the bounteous meal of the stag? Some of you are probably familiar with game theory and some of you have probably heard of something called a prisoner's dilemma. That's a very famous iteration of a problem. In this problem, the stag hunt problem, it's a little bit different, but it's the same kind of idea. And this particular problem what Rousseau called the stag hunt, Mark calls the assurance problem. And it's an assurance problem, because various people involved in a corporate endeavor will succeed wildly if everyone cooperates. But if there's an opportunity to defect that actor is presented with a dilemma, should I defect? Should I not cooperate? Or should I hope everyone else cooperates? And corruption presents exactly this kind of problem. All of the business actors know that in the long run if they will be better off if they do not act corruptly, they'll be much better off. But in the very short run, if there's an opportunity to defect, if there's an opportunity to act corruptly, they're presented with a dilemma. Should they act corruptly and at least get a little bit of something? Or should they hope that everyone else is acting honestly? And hope that they enjoy in the bounties that will flow from not acting corruptly. The classic solution to the assurance problem is law. [COUGH] Canaro argued and argued very well that law provides the assurance that actors need that other parties aren’t defecting. But when we’re talking about corrupt polities, particularly when we are talking about endemically corrupt polities, the law can't be the solution, because there really is no effective law. The law, like everything else can be bought and sold, it's subject to corruption. In the absence of law, the next best solution is coordination, coordination among the actors. So that rather than not relying on the State to provide the assurance, the actors provide the assurance. Now one mechanism for actors providing assurances to one another that they are not defecting is simply talking, simply communicating with one another. And so some industries create platforms for exchange, platforms at which all business people or business people within a certain sector or business people within a certain region can meet and interact and provide the assurances face to face, essentially that they are in fact, cooperating. That they are not engaging in corrupt activities and these platforms for exchange provide other benefits, as well. They provide an opportunity for businesses to communicate with one another with respect to best practices. They provide an opportunity for businesses to communicate with one another In areas of particular risk and they provide an opportunity for businesses to communicate not just with one another, but also with other stakeholders, particularly members of the community who as we know are deeply affected by the corrupt acts or potentially corrupt acts, of businesses. APEDE, [COUGH] which is an organization of elite business leaders in Panama, is one interesting example of these kinds of platforms. APEDE regularly meets, discusses many types of issues, but has explicitly talked about issues involving corruption. APEDE, therefore is an opportunity for business leaders to exchange information, to provide assurances to one another and to explore best practices. In fact, APEDE developed something called the Pacto Etico and the Pacto Etico is a guideline for behaviors with respect to issues of corruption. APEDE, essentially requires its members to behave in accordance with the pacto edico, but APEDE made a conscious decision not to audit its members. And therefore, not to certify that members actually comply with the Pacto Etico and APEDE made this decision for a number of reasons. One, of which of course was the concern that small and small, medium size enterprises might not be able to take on the cost to associated with certification and the auditing required therefore. But also made this decision in terms of enforcement, in terms of whether or not there was enough of a real benefit to a certification to warrant this kind of a process. And so APEDE, which is a great organization has essentially remained a platform for exchange and a useful one, but there are certifications programs. An interesting certification which also uses the phrase pacto etico is the Pacto Etico Comercial of Bolivia developed under the leadership of people, such as Graciela Garay. Pacto Etico Comercial in Bolivia does put forth standards that that numbers and potentially certified business firms need to meet and comply with and it does require an audit, but they make that audit, they make that certification worthwhile. Because a firm that is certified by Pacto Etico Commercial is able to take advantage of something called fast track through customs. A certified business firm does not go through the usual customs channels when bringing goods into Bolivia. Instead, they're fast tracked. They're sent through the custom's border without investigation and without any undo holdup by custom's agents, and this greatly reduces the expense of bringing goods into Bolivia. It make the certification commercially worthwhile. It is also interesting to note the process by which certification is not decided upon, but it is actually awarded to a business from in Bolivia. They make a celebration pout of it. There's a presentation of the actual certificate that represents certification. There are speeches, it's a wonderful event. And what's going on with respect to these kinds of events doesn't so much have to do with the rules, the guidelines for certification. It actually has to do with how people think. The benefit, the psychic benefit that's associated with certification. And conversely, the psychic costs that might be imposed by behaving in ways other than those suggested by the guidelines. Number of firms in Bolivia have been certified. Large firms, small firms, medium firms. It seems to be a program that's actually working. I also want to talk about a program in Russia and this program is being developed, as I speak. So it hasn't fully been implemented, but it's an interesting project to look at, because this project takes into account modern technology and current global standards regarding corruption. The program begins with an online self-evaluation. And so a firm doesn't have to bring in an outside auditor, nor does it have to go through the expenses of a manual real world audit. The auditing is done using online technologies. There is also a software program that automatically assigns scores to the online self-evaluation and compares it to other firms anonymously, of course, as well as other kinds of programs. Now, while this is going on, the technology allows for firms that have begun this process. And to be honest, firms that haven't to talk with one another. There's discussion platforms built into this technology. And through these platforms for discussion, firms are able to exchange best practices. So, we're taking advantage of the kinds of benefits that flow from organizations such as APEDE. The software also allows for training and education, and this training and education can be targeted at specific issues that are revealed by the self-evaluation. Now after a score is assigned, there's two tracks that that score can take. One track is a non-public track. Scores are only reported to the firm. The other track is made public. Scores are verified by the compliance alliance and are made public. Now, why would a firm want its scores to be made public? Because the online self-evaluation takes account of, it recognizes, global standards regarding corruption and that's important. Because within Russia, within any country, local firms benefit from relationships with transnational firms. Transnational firms, of course, want local firms to comply with global standards regarding corruption, because the transnational firms are liable, costs are imposed on them if firms they are associated with don't meet those standards. Global firms, transnational firms can undertake the expense of investigating and determining that every single local firm that they want to deal with meets these global standards. That's expensive or they can turn to some other form of assessment, use that assessment and make their decision whether or not to interact with this particular local firm. That's far less expensive. And so firms that have taken a self-evaluation, whose scores have been verified and made public, are in essence making it cheaper and easier for trans-national firms to work with them. Now both sets of data are compiled into a longitudinal set of data that's anonymized, it's made anonymous. And that data is really interesting because it can be used by scholars, policy makers, others, who want to understand both the nature of corruption in this particular jurisdiction. And more importantly, want to understand how that corruption changes as firms take account of the policies that are reflected in the online self evaluation. And, of course, the hope is that we will have an even better understanding of how these kinds of programs affect and control corruption. The final step is similar to that of Pacto Etico Comercial Bolivia, and that is a certification. In case of the compliance alliance however, certification is completely optional. Firms do not have to undertake the process of certification, and a firm, for reasons of its own, might choose not to do so. Although certification programs exist, with respect to specifically corruption and although they've been around for a few years, the best data we have on the effectiveness of the certification programs has to do with ISO 9001, which is a certification program that looks at management decisions about social issues in general, not just issues of corruption. But they're very similar, and the research on these programs is very instructive as to the benefits of certification programs dealing with corruption. Manders, a couple of years ago, brought together a number of studies, synthesized those studies, and drew some conclusions about the effectiveness of these certification programs. He found that the simple implementation of the standards, the simple bringing into the firm of the guidelines and the evaluation of the extent to which the firm followed those guidelines, accrued benefits. It lowered costs, because it improved the quality of decision making in respect to social issues, improved the quality of decision making with respect to issues such as corruption. And it also, because the firm was operating more effectively, because the firm was making better decisions with respect to these kinds of issues, gave the firm access to other kinds of relationships. New markets, new partners, new kinds of customer bases. And so just implementing the guidelines results in lower costs and increases income. But they also found that the certification layered on another benefit, and that benefit is signalling. It's similar to, in fact almost identical to, what the compliance alliance in Russia is attempting to do. It signals to new markets. It signals to potential customers. It signals to people, parties, and firms with which that business firm may not be communicating at all that this is a firm, that it is profitable to work with. This is a firm that will not bring with it issues and costs, and it lowers the cost to those parties of working with that firm, and therefore, lowers the cost to that firm of creating these kinds of relationships. And so the simple implementation of the guidelines lowers costs, increases revenue. But the added on signaling of certification also lowers costs and brings in revenue. Both are good, certification is slightly better. Obviously when we get down to specifics, each industry, just does each firm, needs to assess the lay of the land. They need to understand how corruption manifests itself in that particular industry, in that particular region, in that particular set of businesses. In general, however, we know that corruption presents an assurance problem to the individual firm. And that is the industry wide organizations that can resolve that insurance problem. They can resolve it by creating simply a platform for exchange, a platform in which business firms can interact with one another and assure one another that they're cooperating and that they can all accrue the benefits, the long term benefits that flow from avoiding corruption. Or they can be more specific, they can provide guidelines for behavior and certify that firms have complied with those guidelines, which not only solves the assurance problem, but it also signals to other actors that these are firms that it is good to work with. Thank you, and I look forward to our next lecture.