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Honesty for Hire

Jul 11, 2010 Editorial

Very few, even partisans of the government, would deny that corruption in many governmental institutions –especially in its revenue-collecting arms -is a major problem in our country. In this month’s edition of Hoover Digest, Mitchener and Noel Maurer (professors at Santa Clara and Harvard University respectively) suggest the downside for the country: “Such corruption is particularly pernicious when it affects the revenue-collecting functions of the state: in addition to the deadweight costs corruption imposes on society, corruption in revenue collection reduces the state’s ability to offer fiscal incentives to public officials to obey the law.”
They went on to suggest a very novel approach for dealing with the problem that ought to be of interest to our leaders of government, who, we assume, are at the end of their tether with the intractability of the problem. “…there is a way for a troubled nation to reduce corruption and increase revenue collection: adopt external institutions.”
Angola, to give a recent example, outsourced its customs collections to Crown Agents for Overseas Governments and Administrations, a British non-profit with expertise in public financial management. In so doing, the African nation tripled its tariff revenue in the span of a few years even as it reduced its tariff rates.
Angola’s case suggests that a nation can reduce corruption and collect more public revenues if it is willing to relinquish sovereignty in some limited, well-defined capacity to either a low-corruption government or a private organisation with a strong reputation for honest management.
Crown Agents officials face a completely different set of incentives from officials in a high-corruption government. Crown Agents employees risk losing attractive, high-wage career paths and damaging the credibility of their organisation should they decide to engage in or tolerate corrupt behaviour.
Because the agents had an incentive to maximise revenue collection and punish corrupt behaviour, Angola was able to break the corruption equilibrium in Customs, generate greater public revenue, and show the way to further reforms.
In addition to Angola, the governments of Mozambique, Latvia, Kosovo, Macedonia, and Bulgaria have contracted with Crown Agents to run their Customs services. In Angola and Mozambique, Crown Agents took over direct control of the Customs service. In Kosovo, the United Nations mission officially took over Customs, with Crown Agents as prime contractor. In Latvia, Macedonia, and Bulgaria, Crown Agents managed the creation and operation of anti-corruption inspection teams.
Crown Agents did not develop its expertise and reputation as a private organisation. Rather, it developed as part of the public administration of the British Empire… The Crown Agents Act of 1995 transferred it from Britain’s Department for International Development to a private foundation consisting of representatives from a broad range of non-governmental organisations and the British government. In a sense, the new quasi-private entity uses its reputation as an efficient British tax collector (established during the Age of Empire) to win contracts today.
Outsourcing Customs management to Crown Agents led to dramatically increased Customs revenue for its new clients. In Angola, revenue jumped more than 50 percent in the first year of operation (2001), doubled in two years, and tripled by 2004, during a time when oil prices remained low and Angola lowered tariffs to meet commitments under the General Agreement on Tariffs and Trade.
Mozambique saw a similar increase. In Bulgaria, revenues jumped 19 percent during the quarter in which teams led by Crown Agents began operating. Crown Agents has, in fact, succeeded where a different and less intrusive form of outsourcing, pre-shipment inspection (PSI), has shown more mixed results.
Under PSI, governments contract with a private company to inspect and value imports in the port of embarkation and report those valuations to the government. Both Angola and Mozambique turned to Crown Agents after poor experiences with PSI.
Clearly, inviting the help of outsiders can help countries take on otherwise intractable institutional challenges and overcome obstacles to sustained economic development.”

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