The costs of corruption in Vietnam from a
macro, provincial and firm perspective
Edited Report
August, 2014
Research by
Funded by
The costs of corruption in Vietnam - Edited Report - August 2014
Managed by
1
Disclaimer: Views expressed in this report are those of the authors’ alone, and should not be
attributed to DFID or Coffey in any way.
The costs of corruption in Vietnam - Edited Report - August 2014
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CONTENTS
LIST OF ACRONYMS ................................................................................................................................. 4
LIST OF BOXES, TABLES AND FIGURES .................................................................................................... 1
EXECUTIVE SUMMARY ............................................................................................................................ 3
A.
Introduction ................................................................................................................................ 3
B.
Methodology............................................................................................................................... 6
C.
Main findings and discussion ...................................................................................................... 6
D.
Organisation of the report .......................................................................................................... 9
PART ONE: CORRUPTION - A TOP-DOWN PERSPECTIVE....................................................................... 10
A.
FINDINGS ................................................................................................................................... 10
B.
DISCUSSION............................................................................................................................... 11
C.
RESEARCH APPROACH AND DATA ............................................................................................ 12
PART TWO: CORRUPTION – A PROVINCIAL PERSPECTIVE .................................................................... 13
A.
FINDINGS ................................................................................................................................... 13
B.
DISCUSSION............................................................................................................................... 14
C.
RESEARCH APPROACH AND DATA ............................................................................................ 15
PART THREE: CORRUPTION – A FIRM LEVEL PERSPECTIVE ................................................................... 17
A.
QUANTITATIVE ANALYSIS.......................................................................................................... 17
FINDINGS........................................................................................................................................... 17
DISCUSSION....................................................................................................................................... 19
METHODOLOGY AND APPROACH ..................................................................................................... 20
B.
QUALITATIVE ANALYSIS (CASE-STUDIES) .................................................................................. 21
FACILITATIVE CORRUPTION .............................................................................................................. 21
COMPETITIVE CORRUPTION ............................................................................................................. 23
THE COSTS OF CORRUPTION ............................................................................................................. 23
DISCUSSION....................................................................................................................................... 24
REFERENCES .......................................................................................................................................... 25
APPENDIX 1: CONTRIBUTORS ............................................................................................................... 26
APPENDIX 2: GLOSSARY ........................................................................................................................ 27
APPENDIX 3: SYMPOSIUM REPORT....................................................................................................... 31
APPENDIX 4: SYMPOSIUM AGENDA ..................................................................................................... 41
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LIST OF ACRONYMS
ACSF
Anti-corruption Strategic Fund
CIEM
Center for Economic Management
CPI
Corruption Perceptions Index
DANIDA
Danish International Development Agency
DEPOCEN
Development and Policies Research Center
DFID
United Kingdom Department for International Development
FDI
Foreign Direct Investment
GSO
General Statistics Office
HDI
Human Development Index
IF
Informal Fees (see IP)
IP
Informal Payments (see IF)
OSCAC
Office of the Central Committee on Anti-Corruption
PCI
Provincial Competitiveness Index
T&C
Transformation and Change Management Consulting
UNCAC
United Nations Convention Against Corruption
UNCTAD
United Nations Conference on Trade and Development
UNDP
United Nations Development Programme
USAID
United States Agency for International Development
VBF
Vietnam Business Forum
VCCI
Vietnam Chamber of Commerce and Industry
VCP
Vietnamese Communist Party
VHLSS
Vietnam Household Living Standard Survey
WB
World Bank
WDI
World Development Indicators
WGI
Worldwide Governance Indicators
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LIST OF BOXES, TABLES AND FIGURES
Box 1: Different types of innovation
11
Box 2: Prevalence, burden and predictability of corruption
15
Table 1: Summary of findings
14
Table 2: Four case studies
21
Figure 1: CPI vs. GDP Per Capita (2012)
30
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EXECUTIVE SUMMARY
A. Introduction
The Vietnamese economy is among the most dynamic in Asia. After experiencing financial and
economic turmoil in recent years, macroeconomic stability is slowly returning, underpinned by a
better control of inflation and foreign exchange reserves, as well as stronger fiscal and monetary
discipline. GDP growth rate fell in 2012 to a low of 5.3% from 6.4% in 2010, but it has been slowly
picking up (5.4% in 2013, and 5.5% forecast for 2014). However, risks to macroeconomic stability
include among other things a weak private sector demand and loss of confidence in a fragile banking
sector which still holds large non-performing loans. The cautious pace of SOE reform also hampers
faster economic growth (World Bank, 2013, 2014).
The shift from central planning to a market economy, which began in the early 1990s has created
huge opportunities for the appropriation of rents. These risks have increased with the transition
from a low-income to a middle-income economy. Corruption has become entrenched (Vietnam
currently ranks 116 out of 177 in the 2013 Corruption Perceptions Index, CPI),1 and is undermining
the effects of Vietnam’s economic growth and developmental progress. Corruption is also a concern
for business and government alike. In a recent Government Inspectorate/World Bank Survey, firms
ranked corruption to be the second most serious issue affecting them after the cost of living. In a
PWC global survey of senior business leaders, 45% of companies said they did not enter a specific
market or pursue a particular opportunity because of corruption risks (Price Water House Coopers,
2008; Enterprise Surveys; World Bank 2012). On the Government side, the 2009 National AntiCorruption Strategy towards 2020 stresses that “corruption is still taking [hold] in a rampant, serious
and complicated fashion in multiple areas, especially in […]administration and use of land,
construction investments, equitization of SOEs, management and use of funds, natural resources,
mineral resources and State assets.” The Strategy also recognises that corruption is a serious
problem threatening both socio-economic stability and the survival of the regime.
On paper, Vietnam has a comprehensive anti-corruption legal framework in comparison to many
other countries in the region. Vietnam introduced a first Anti-Corruption Law (amended in 2007 and
2012) as early as 2005, and later adopted the National Strategy on Anti-Corruption to 20202. It also
ratified the United Nations Convention Against Corruption (UNCAC) in 2009, and has subsequently
taken part in the UNCAC review process. In 2013, a new Decree was introduced regulating asset and
income declarations for public officials. This shows anti-corruption has moved up the public agenda.
The Vietnamese Communist Party (VCP) has now taken direct control over this agenda. In 2012, it
removed the Office of the Central Committee on Anti-Corruption (OSCAC) from the government’s
portfolio and created the Central Steering Committee on Anti-Corruption within the VCP. In addition
to number of criticism and self-criticism campaigns, the National Assembly also voted in favour of
annual confidence votes for key post holders elected and approved by the National Assembly and
1
Vietnam ranked 116/178 and 123/174 on the 2010 and 2012 CPIs respectively.
One area where the legislative framework currently falls short is criminalisation of private sector corruption
(Doig et al, 2013). This might soon change if the criminalisation of bribery in the private sector is introduced as
part of the review process of the 1999 Penal Code (amended in 2009), expected in 2014/15.
2
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People’s Councils, such as top Government officials. Recently, Government vowed to improve
whistleblower protection in an attempt to encourage denunciations.
The costs of corruption for economic development are evident. Data from the World Economic
Forum show that costs of corruption equals more than 5% of global GDP and that over US$ 1 trillion
is paid in bribes each year (World Economic Forum). International research provides further
evidence of the significant costs of corruption, particularly its impact on economic growth3. That
said, questions remain over the direction of causality (does corruption affect economic growth, or
does lower economic growth spurs corruption?). As studies have shown, the robustness of the
relationship between economic growth and corruption becomes more tenuous once additional
factors are included in calculations (for example the role of corruption on human capital,
investments or even the nature of the political regime, all of which impact growth). This suggests
that the effect of corruption on economic growth can be transmitted in multiple ways which need to
be accounted for. Corruption can therefore affect growth in direct, but also indirect ways.
Corruption research in Vietnam is also producing a growing body of evidence including survey-based,
quantitative and/or qualitative data. Examples include Surveys on corruption perceptions conducted
by the VCP’s Committee on Internal Affairs in 2005, the World Bank’s Anti-Corruption Diagnostic
Surveys (WB 2012) and Modern Institutions report (WB, 2010), as well as studies by UNDP, Towards
Transparency, and the wider academic/research community (on this, see individual papers for a
detailed literature review). There are now efforts to measure the costs of corruption in a more
systematic way, for example through the Provincial Competitiveness Index (PCI).
In early 2013, DFID Vietnam launched a consultative process to identify research gaps on corruption.
Through a competitive application process, DFID selected three studies on the costs of corruption in
Vietnam4. This report summarises tentative findings from this research. By focusing on previously
unexplored dimensions of corruption in Vietnam such as the strategic and transactional costs of
corruption to firms, the research brings new elements to light. It also complements our
understanding of the impacts of corruption at the provincial level. The Development Policies
Research Center (DEPOCEN) uses both macro and micro level data sets to estimate the costs of
corruption from both national and firm perspectives. On the former, it estimates the quantitative
relationship between corruption level and economic factors such as GDP growth, whilst on the
latter, it calculates the effect of corruption on firm innovation. The Vietnam Chamber of Commerce
and Industry (VCCI), meanwhile, adds an important dimension to our understanding of corruption by
exploring how it impacts on development at the Provincial level. Finally, the key contribution by
Transformation & Change5 is its emphasis on the costs of corruption for firms, specifically in relation
to their transactional and strategic capabilities. This is an area that hasn’t received as much attention
in the literature. The key questions this research addresses are:
3
Some studies have reported a negative association between corruption levels and development or wealth
(i.e. richer countries are roughly less corrupt than poorer ones). Some studies also claim that there is no
significant negative association between growth and corruption
4
This research was funded under DFID’s Anti-Corruption Strategic Fund (ACSF). The Fund is managed by Coffey
International Development (‘Coffey’).
5
For the purpose of this study, T&C partnered with the Asia Pacific Institute of Management (APIM). For
simplicity, the research group is referred to as T&C in this report.
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1. What are the costs of corruption in terms of economic growth?
2. What are the costs of corruption at the provincial level in terms of investments, job creation,
and per capita income?
3. What are the strategic and transactional costs and benefits6 of corruption to firms, and how
does it affect their growth?
This research aims to provide both national and provincial authorities with initial evidence of how
corruption affects growth and development at the national, provincial and firm levels, and show the
benefits of tackling corruption. This research will also be useful for the international and business
communities by providing them with reliable data to engage in policy discussions. Meanwhile, it is
important to acknowledge the research includes a number of questions for further
research/discussion, as well as clear limitations:





Because of their microeconomic nature, the studies rely on existing datasets and samples for
a given time period. Although it does not preclude quantitative samples from being
representative of the Vietnamese business population, the research does not always draw
on most recent data for practical and methodological reasons. Moreover, estimation bias
may arise from corruption indices which are mostly based on the perception of people.
Data on firms and the private sector mainly refers to private firms and SMEs (unless
otherwise indicated). As such, additional research could yield interesting findings concerning
State-Owned Enterprises (SOEs), or joint-stock companies (i.e. those partly funded by
foreign capital).
The research focuses on the costs of corruption from a financial perspective. However, it is
important to recognise that society also loses out from corruption, including through
inefficient allocation of procurement contracts and licenses, through increased costs to
taxpayers because of government inefficiency, through inter-generational costs of
corruption, etc. T&C’s case study on the pharmaceutical industry illustrates this well (see
Part Three). A significant amount of the firm’s resources are by and large devoted to bribing
officials and taking a drug to market. This implies less funds to invest in research and
development, and less human and time resources to dedicate to patients’ health care.
Although this lies outside the scope of this research, further analysis of the real implications
of corruption to society in terms of winners and losers would nicely complement corruption
research in Vietnam.
Related to the above, firms can rightly be seen as both victims and perpetrators of
corruption. This study provides evidence of both, by showing not only the impact of
corruption on firms, but also by discussing how, when they follow the rules of the game,
firms can perpetrate corruption.
The greatest advantage of evidence-based research is to provide tangible explanations for a
given issue. Converting this into actionable policy recommendations is challenging. Often,
policy recommendations rest on a body of evidence, rather than a discrete number of
6
Strategic refers to the long-term impact whilst transactional refers to the day-to-day interaction between
firms, or between firms and government.
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studies. That said, this report discusses a number of policy implications where these are
deemed relevant. These are a starting point for further discussion.
B. Methodology
All three studies are primarily quantitative in nature. They rely on regression analyses to estimate
the link between two or more phenomena (e.g., corruption and growth) and more specifically, to
examine the causal effect of corruption upon a number of key variables.7 Contributors use both
indigenous and global datasets, including the Provincial Competitiveness Index (PCI), the Vietnam
Household Living Standard Survey (VHLSS) from the General Statistics Office (GSO), or a combination
thereof; as well as the WB’s Worldwide Governance Indicators (WGI), World Development Indicators
(WDI), and Transparency International’s Corruption Perceptions Index (CPI) among others. A short
methodological description for each study is included later in this report.
T&C’s study also incorporates a small qualitative component in the form of four case studies with
participants in the pharmaceutical, banking and construction sectors. These aim at obtaining a
deeper understanding of the costs and benefits these firms associate with corruption. As such, the
case-studies complement the quantitative analyses by giving a frank and detailed insight of how
firms in Vietnam live and cope with corruption.
C. Main findings and discussion
There are arguably a number of ways to evaluate the ‘cost of corruption’, including by exploring
costs to society as a whole, to individuals, and to firms, or even by honing in on a geographic area or
particular sector, like T&C’s qualitative work does. However, this research focuses specifically on the
economic and financial costs of corruption. Specifically, the three separate studies on which this
report is based aim to provide further and more concrete evidence on the relationship between
growth and corruption in Vietnam. On the whole, findings consistently demonstrate the adverse
impact of corruption, which this report defines as the abuse of public office for private gains.
a) Corruption and Economic Growth
DEPOCEN finds evidence of the negative effect of corruption on economic growth at the national
level. Corruption can affect growth both directly (e.g. it may immediately reduce outputs associated
with a public project) and indirectly through transmission channels. Studying the indirect causality of
corruption on growth leads to decomposing the total effect of corruption into its different
component parts, such as investments, human capital, political stability, etc. Without any
transmission channel, a one unit increase in Vietnam’s Corruption Perceptions Index (CPI) leads to
an increase in annual growth rate by 0.23% (from 2000 to 2012). For example, if Vietnam’s CPI in
2012 had increased by one unit, then its 2012-13 growth rate would have ramped up to 5.65%
(from 5.42% in actual figures) and its GDP in 2013 would amount to US$ 164,624 million at 2012
price level (from US$ 155,820 million). When investment is included as a transmission channel, the
analysis shows among other things that a 1% increase in the share of domestic investment in GDP
will lead to an approximate 0.2% increase in GDP growth rate. Combining the direct and indirect
effects of the investment transmission channel, a one unit increase in Vietnam’s CPI leads to an
7
Refer to the Glossary (Appendix 2) for a definition of key terms.
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increase by 0.57% in annual growth rate. This suggests that the indirect impact of corruption on
economic growth via the investment channel is much more powerful than the direct impact. In other
words, corruption negatively affects investments, which in turn hampers economic growth.
Shifting emphasis, VCCI’s analysis evaluates the impact of corruption on provincial development
through an examination of how corruption affects private sector investment, employment, and per
capita income8. The study shows that if there are less informal payments and consequently if firms
reduce the amount of money paid on informal fees, then this can be channelled towards
investments and job creation. Specifically, a one percentage drop in the measure of prevalence of
corruption (i.e. how frequent corruption is, measured by the percentage of firms that declare
making unofficial payments) leads to a 3.7% increase in private investment, a 1% increase in private
employment, and a 1.5% in per capita income. A one percentage decrease in the measure of the
burden of corruption (referring to the ratio of unofficial payments compared to a firm’s income) will
lead to a 6.4% increase in private investments, a 1.8% increase in private employment, and a 2.3%
increase in per capita income. At the same time, it was found that a one percentage point increase in
the measure of predictability of corruption (measured by the percentage of firms that say the
desired outcome is achieved when paying informal fees) will lead to a 3.6% increase in private
investment, a 1% increase in private employment, and a 1.9% increase in per capita income. One
should not assume that making corruption more predictable is a good strategy to attract investment,
however, since the prevalence and burden of corruption both have stronger negative effects on
investments and job creation. Moreover, predictability of bribe payments is a fleeting incentive to
firms; it can quickly disappear with changes to personnel or stricter management controls. Firms
would be foolish to rely on this predictability. 9
The studies show that corruption negatively affects firms’ long-term decision to invest and expand,
which in turn retards the development of the private sector and the economy as a whole. The study
also clearly demonstrates the benefits to the national and provincial economies of reducing the
prevalence and burden of corruption, since if the ratio of informal payments to revenue drops, then
firms can use these resources to invest and create employment. As Vietnam transitions towards a
middle-income country, the development of the private sector through marketisation in Vietnam
cannot simply rely on the traditional approach of equitisation of big State-Owned Enterprises (SOEs)
or on removing preferential treatments for them. As the next section also outlines, the high degree
of responsiveness of private investments with respect to the size of unofficial payments suggests
that corruption plays an important role in a firm’s decision to invest. Taking this into account would
encourage a swift transition towards a market-based economy.
b) Corruption at the Firm Level
This research establishes that firms’ corrupt behaviour affects them in different ways with varying
degrees of severity. For example, corruption affects different types of firm innovation in different
ways although the effect is consistently negative across all types of innovation. Statistically, if a firm
8
Investments and job creation (which are both initiated by firms) are typically used as indicators for growth.
Also, this result should not be interpreted as meaning that corruption is good for private business and per
capita income as long as it is predictable. Rather, this conclusion rests on the assumption that sound business
needs predictability –firms are likely to invest more when they can factor in corruption – taken as a tax – into
their calculations.
9
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bribes, then it is less likely to engage in innovation than firms that do not. Specifically, the probability
of a corrupt firm undertaking product improvement is lower than that of transparent firms by 6.2%.
Similarly, the probability of introducing either a new product or new production process is lower for
corrupt firms, as compared to transparent firms by as much as 8.7%. Further, the probability of
introducing either a new product, a new production process or improving a product is also lower for
corrupt firms as compared to transparent firms by as much as 8.2%.
Turning to the causes or psychology of corruption, rather than its effect, the analysis by T&C shows
that firms engage in corrupt activities mainly to follow the ‘rules of the game’. The amount of
informal payments as a share of its revenue is positively associated to (a) the prevalence of informal
payments at the district level, (b) the firm’s belief that other firms pay informal fees, and (c) the
firm’s perception of how important it is to negotiate with tax officers. Firm’s belief that competitors
pay informal fees has the strongest influence on both the amount and the probability of a firm
making informal payments. A vicious cycle is thus at play - firms bribe because they fear losing
competitiveness against other firms who, they believe, bribe to get things done. This is also
evidenced through qualitative interviews with firm managers.
Paying Informal fees entail high costs. From 2009 to 2011, the research suggests, firms needed to
pay between 0.7 to 1 VND in informal payments in order to generate a 1 VND profit. Corruption also
affects a firm’s technical efficiency,10 since the higher the informal payment, the higher the level of
inefficiency created. And yet, the analysis shows bribery and corruption do not always pay off, as
‘grease payments’ actually entail little transactional benefits for firms.11 The probability that a firm
pays informal fees is positively related to the firm’s belief that negotiations with tax officers are
important. In practice, however, informal payments do not help reduce time spent with officials, as
many firms would like to believe. Rather, informal payments increase with the number of visits and
length of time of each visit. Another notable finding is the absence of a clear relationship between
informal payments and revenue growth, with the exception of firms operating in restricted areas
(e.g. defence, and other priority areas). In such instances, informal payments are significantly and
positively associated with expansion plans, suggesting that if/when firms use informal payments in
these areas, they probably expect that it will benefit them.
The research sends a strong message that whilst firms may think that corruption provides them with
immediate, ‘transactional’ benefits, corruption actually harms their strategic capability. Engaging in
corruption destroys the integrity culture of firms, hampers innovation, limits expansion, and puts
their reputation at risk. Most of the long-term negative impacts of corruption are hidden and are
seldom recognised as such by firms.
One interesting implication of how firms pay bribes to stay in the game is that entry costs are high.
As the research by T&C consistently shows, smaller firms (those in operation for less than 5 years)
pay higher informal payments as a share of their revenue, and thus lose out significantly from
10
This refers to the firm’s ability to achieve the highest possible productivity, i.e., to produce a maximum
amount of output given its inputs
11
‘Transactional benefits’, as used by T&C, refer to the immediate benefits obtained from transacting with
government counterparts or other firms. ‘Strategic benefits’ refer to a firm’s longer-term development
perspective.
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corruption. Corruption acts like an informal regulation and the compliance costs of corruption
(relative to revenue) decrease as firms grow larger. Younger firms also pay higher informal payments
as a share of their revenue to establish connections and to learn how to conduct their business. Both
of these are detrimental to the development of a vigorous private sector that requires the
continuing entry of small firms to generate business opportunities, employment and income. This is
an area where a pro-active Government can step in with well-publicised and transparent rules and
guidelines to minimise the adverse effects on young and small businesses. Encouraging growth and
development also rests on breaking the wide-spread misconception that corruption is nothing more
than a ‘normal’ transaction cost (a ‘way of doing business’) that must be incurred in order to achieve
economic growth. The research shows the benefits that would accrue to firms and the economy as a
whole if corruption stopped.
Because many firms follow the rules of the game by bribing, breaking this vicious cycle should clearly
be beneficial for firms, the business sector and the economy. Doing this requires both firms and
government working together to create the right incentives and penalties (i.e. using carrots and
sticks) in order to create a level-playing field for firms to compete. Incentives (carrots) can include
educational campaigns about the strategic costs of corruption to firms, as well as designing
collective action initiatives. These allow competitors to abide by the same rules and operate on an
even playing-field without fear that competitors will use corrupt practices. This is the purpose of
Integrity Pacts for procurement or of Integrity pledges (an agreement by all firms they will refrain
from bribing). Efforts to implement these with both government and the business community in
Vietnam are underway and should be encouraged. Wielding the stick would include criminalising
private sector corruption, as this would help deter firms from engaging in malpractices. If well
implemented, this, along with existing legislation on anti-corruption could help stifle transactional
benefits of corruption.
The T&C study also points to the interdependence between firms as well as between firms and tax
officers as the two most powerful determinants of informal payments. The effect of firm’s
perception of how its peers behave remains fairly constant. The more resilient nature of this
relationship over time reiterates the importance of an educational campaign that emphasises the
true costs of corrupt practices to firms. It is important as well to continue scrutinising the interaction
between firms and tax officers to ensure that the impact of tax-related corruption at the firm level
remains negligible. Curbing corruption thus requires both addressing the supply and demand sides
of corruption, which requires the active participation from both government and businesses.
D. Organisation of the report
A summary finding for each three study is presented in Parts One, Two and Three below. Each study
will be published separately, and can be accessed upon demand. The below summaries are also
available as stand-alone policy briefs.
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PART ONE: CORRUPTION - A TOP-DOWN PERSPECTIVE
The research by DEPOCEN which this section summarises explains how corruption affects growth
and firm innovation in Vietnam.
A. FINDINGS
Impact of Corruption on Economic Growth: The analysis explores the effect of corruption on growth
for a wide range of countries over a relatively long period of time (see research approach and data
below). The analysis finds that countries with less corruption (i.e. with higher CPI) are likely to enjoy
higher growth rates. While this negative direct effect is statistically significant, its magnitude is
rather modest. Specifically, if Vietnam’s CPI increases by one unit (i.e. Vietnam becomes less
corrupt)12, then its annual GDP growth rate would increase by about 0.23% on average. For example,
in 2012, Vietnam’s GDP was about US$ 155,820 million, and its 201213 growth rate was 5.42%. If
Vietnam’s CPI in 2012 had increased by one unit, then its 201213 growth rate would ramp up to
5.65% and its GDP in 2013 would amount to US$ 164,624 million (at 2012 price level).
Corruption can affect growth both directly (e.g. it may immediately reduce outputs associated with a
public project) and indirectly through transmission channels. The indirect effects of corruption on
growth can be captured by transmission channels. These refer to various intermediary factors (such
as investment, human capital, political stability, etc) through which corruption can affect growth.
Considering transmission channels allows segregating the different ways through which corruption
can have an impact on economic growth, and particularly, to identify what aspect of economic
growth it most influences. In the case of Vietnam, investment is shown to be the most significant
transmission channel, meaning that it is most prone to suffer from the effects of corruption
Including investments into the model shows that the direct effect of corruption on growth
expectedly reduces from 0.233 to 0.211 but remains statistically significant. For a one-per cent
increase in the share of domestic investment in GDP, the GDP growth rate will increase by about
0.2%. Further, the analysis finds that the effect of corruption on investment is non-linear, so that the
indirect effect of corruption on growth (via investments) depends on the value of each country’s
corruption level. The indirect effect will expectedly become less powerful as the country becomes
less corrupt.
Combining both direct and indirect effects of the investment transmission channel reveals that if
Vienam’s CPI increases by one unit, its annual growth rate would increase on average by 0.569%
(from 2000 to 2012). This indicates that the indirect impact of corruption on economic growth via
the investment channel is much greater than the direct impact. Put differently, corruption
significantly hampers investments, which in turn undermines economic growth.
Impact of corruption on firm innovation: Shifting focus, the study provides evidence of the
detrimental impact of corruption on Vietnamese firms, particularly as it affects their potential for
innovation. The study considers different types of innovation (see Box 1). In general corruption is
found to negatively affect all types of innovation, although the magnitude and significance of
corruption varies across different types. Using the Survey of Small and Medium Scale Manufacturing
12
The CPI ranges on a scale from 100 (very clean) to 0 (highly corrupt)
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Enterprises (SMEs) in Vietnam from 2005 to 2011 conducted by the Central Institute of Economic
Management (CIEM) and DANIDA, the analysis shows that if a firm bribes13, the probability of
improving a product decreases by 6.2%. When innovation is considered from a wider perspective,
such as whether firms implement any type of new innovation (new process or new product) or any
type of general innovation (improving product or new process or new product), the impact of
corruption becomes more powerful and more statistically significant. More specifically, the
probabilities of implementing new innovation and general innovation for firms that bribe are lower
than those that do not bribe by as much as 8.7% and 8.2%, respectively.
Box 1: Different types of innovation
a. Product innovation: whether a firm introduces a new product during the surveyed year.
b. Process innovation: whether a firm introduces a new process.
c. Product improvement: whether a firm introduces major improvements to existing products or
changes its specification.
d. New innovation whether a firm introduces either product or process innovation (b or c above)
e. General innovation: whether a firm introduces new product(s) or processes, or improves products
(a, b, c above)
B. DISCUSSION
1. This analysis -- particularly evidence of the impact on growth-- is timely. Vietnam is currently
transitioning from a low to middle-income economy. The donor landscape is changing, with less
donor funding. A number of immediate neighbours from the region (Myanmar, Indonesia, the
Philippines, Thailand) are experiencing high growth rates, and as such, compete with Vietnam.
Against this backdrop, the study provides Vietnamese policy makers with evidence that tackling
corruption can help boost Vietnam’s stuttering socioeconomic development. Policy makers
would be well advised to consider the indirect impact of corruption via intermediary
transmission channels as well. While the direct effect of corruption on economic growth is
modest, its combined effect (that takes into account various transmission channels) can be
substantially larger. This strongly suggests that, in tackling corruption, the government and
policy makers ought to consider a wide-scoping strategy that encompasses a number of areas,
including growth, and investments.
2. The data set spans 12 years (2000-2012) and as such is long enough to identify trends and
patterns in the relationship between growth and corruption. As Vietnam’s corruption level is
high by international standards, there cannot be any denial of the cumulative negative impact
of corruption on Vietnam’s macroeconomic performance over the entire period under study.
3. There is also evidence that corruption hampers firms in Vietnam in many different ways when
looking at its impact on their decision to innovate. It increases uncertainty and transaction
13
Bribing firms in the SME survey responded positively to the question: “Do you have to pay informal fees?”
The costs of corruption in Vietnam - Edited Report - August 2014
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costs, and make unproductive rent seeking more appealing. It also reduces firm resources and
their trust in institutions. All of these combine to retard firms’ incentive to engage in
innovation. Corrupt firms would tend to report making advanced technologies, even though
they are not necessarily needed.
4. Reduced innovation not only gives rise to lower potential productivity but may also have a
negative impact on FDI inflows, which are a well-known source of technological transfer in
Vietnam. Thus the effect of corruption at the firm level serves as another transmission channel
that magnifies the adverse impact of corruption on economic performance of Vietnam.
5. On the whole, the findings are consistent and complement existing body of knowledge on the
impacts of corruption. For example, Rand (2009), also using a survey of SMEs for the 2005-2007
period, finds that bribery hurt firm performance. Likewise, CIEM (2012), upon which the dataset
of this study is based on, finds that bribe-paying SMEs– which, as shown by this research, are
less able to innovate – do not grow significantly faster or slower than others, but are
significantly more likely to exit the market. In particular, the results of this study, combined with
those obtained from the VCCI study (see Part Two), reinforce the clear message that it does not
pay for firms to engage in corrupt practice.
C. RESEARCH APPROACH AND DATA
The study utilises an econometric approach with various sets of panel data to examine the impact of
corruption on economic growth and innovation. To estimate the relationship, the study draws on a
mix of national-level data which includes economic indicators (based on the World Development
Indicators) and governance and corruption data (based on the Corruption Perception Index, CPI14),
Economic data goes as far back as 1960, but it is only available for Vietnam starting in the 1990s.
Likewise, Vietnam started featuring in the CPI from 1995. In order to use comparable data-sets in
terms of number of countries covered, the study uses a sample covering 80 countries over a 13-year
period (from 2000 to 2012), which generates 1,040 observations or data points. To obtain a crosscountry dataset, the study calculates the average of each variable over the studied period. Standard
multiple regression methods, including OLS, fixed effects (FE) and logit models are utilised to analyse
data (refer to the Glossary for definitions).
14
The CPI ranges from 0 to 10, where 10 indicates no/less corruption.
The costs of corruption in Vietnam - Edited Report - August 2014
12
PART TWO: CORRUPTION – A PROVINCIAL PERSPECTIVE
This section presents a summary overview of findings by the VCCI study on the costs of corruption at
the Provincial level.
A. FINDINGS
The research confirms in an unequivocal fashion the negative effect of prevalence and burden of
corruption on provincial economic development.
Private investments. The research shows that additional unofficial payments by firms – equal to 10%
or more of their income – tend to retard private investment. Rampant corruption means that
decisions to invest are risky, which in turn could affect growth prospects. Specifically, a one
percentage decrease in the prevalence or burden of corruption (see Box 1 for definitions) will cause
private investment to rise by about 3.7% or 6.4% respectively. At the same time, if unofficial
payments by firms are predictable in that, as a result of those payments, firms can always or almost
always count on officials to deliver desired services, then unofficial payments have a positive impact
on private investment on condition that burden and prevalence of corruption are held constant. A
one percentage increase in the predictability of corruption will in this case lead to a 3.6% increase in
private investment. However, this should not be interpreted in any way as meaning corruption is
good for business15.Predictability of bribe payments is a fleeting incentive for business; it can quickly
disappear with changes to personnel or stricter management controls. Firms would be foolish to rely
on this predictability. Overall, the more firms have to bribe, and the more corruption represents an
important share of their income, the less they are willing and able to invest.
Private employment. New investments typically require additional labour. Thus, we would expect
corruption to exhibit the same pattern of impact like that on private investment. The research
confirms that widespread corruption and the size of unofficial payments tend to reduce private
employment while predictability of corruption is positively related to private employment. A one
percentage decrease in the prevalence and burden of corruption will cause private employment to
rise by about 1% and 1.8% respectively, while a one percentage increase in predictability of
corruption will lead to a 1% increase in private employment. The findings suggest that when
corruption is less pervasive or firms spend less on it, then they tend to use these resources to create
jobs.
Per capita income. The research confirms that the relationship between corruption and per capita
income is similar to that of the above. The impact of unofficial payments affects per capita income
more than private employment, but less than private investment. More specifically, a one
percentage decrease in the prevalence and burden of corruption will cause per capita income to rise
by about 1.5% and 2.3% respectively, while a one percentage increase in predictability of corruption
will lead to a 1.9% increase in per capita income. In sum, there is evidence that per capita income
tends to rise if corruption is less widespread or the size of unofficial payments becomes smaller.
15
This conclusion actually rests on the assumption that sound business needs predictability. This is shown by
the fact that firms invest more if they know how to factor in corruption within their calculations. This should
not be taken to signify that businesses condone corruption, nor that corruption is good for investments.
The costs of corruption in Vietnam - Edited Report - August 2014
13
Income inequality. After taking the five control variables into account, the research is unable to
detect any statistically significant impact in either direction of any type of corruption on income
inequality, as proxied by the Gini index of income distribution. This is not surprising as the
distribution of income is most unlikely to capture illegitimate income derived from firms’ unofficial
payments, and the fact that the Gini indexes have little variation across Provinces in Vietnam.
To summarise, corruption has a detrimental effect on private sector development. Private
investment is most affected by corruption levels. If corruption drops, then private investment is
likely to incur the bigger fluctuation compared to private employment and per capita income. The
study shows that the burden of corruption takes a higher toll on private sector development in
Vietnam, followed by prevalence of corruption.
Table 1: Summary of findings
Private investment:
+3.7%
1 % drop in
Prevalence of
corruption
Private employment:
+1%
Private investment:
+6.4%
1% drop in
Burden of
corruption
Per capita income:
+1.5%
Private employment:
+1.8%
Per capita income:
+2.3%
B. DISCUSSION
These findings have several important implications for both anti-corruption policy in Vietnam and
studies on corruption.
1. As Vietnam transitions towards a middle-income country, this study suggests that marketization
(i.e. the development of the private sector) in Vietnam cannot simply rely on the traditional
approach of equitisation of big State-owned enterprises or on removing preferential treatments
for them. The high degree of responsiveness of private investment with respect to the size of
unofficial payments suggests that corruption plays an important role in a firm’s decision to
invest. Taking this into account would encourage a swift transition towards a market-based
economy.
2. However, encouraging growth and development also rests on breaking the wide-spread
misconception that corruption is nothing more than a ‘normal’ transaction cost that must be
incurred in order to achieve economic growth. Once again, figures from this study show the
benefits of stopping informal payments for firms and the economy.
3. Anticorruption in Vietnam has so far been a top down process, often depending on national
government or Party leaders sending instructions to provincial authorities. The study
convincingly argues that not only should anti-corruption efforts be stepped-up at all levels, but
a bottom-up approach in which provincial governments assume a greater role in monitoring
and controlling corruption in their own jurisdictions would seem to be the most appropriate
The costs of corruption in Vietnam - Edited Report - August 2014
14
course of action in reducing the impact of corruption. Moreover, as this research demonstrates,
tackling corruption can help Provinces become ever more competitive and developed in a
context in which decentralisation entails competition between Provinces to spur investments.
4. From a research standpoint, the study demonstrates that a better understanding and
monitoring of the impact of corruption requires a thoughtful and innovative use of data from
many different sources, particularly data from standardized business surveys – this research is
one attempt in this direction.
5. The study lends credence to the view that corruption ‘sands the wheel’ of growth. Findings
therefore provide the Vietnamese government and policy makers with much needed evidence
to argue for and implement rigorous anticorruption programmes.
C. RESEARCH APPROACH AND DATA
The study employs an econometric approach with panel data covering 63 provinces over a seven
year period (20062012) to test the impact of corruption on four socioeconomic development
indicators: private investment, employment, per capita income, and income inequality. Three
alternative measures of corruption, based on responses to the PCI, survey are utilised (See Box 1).
Five control variables are used to isolate the effect of corruption on development, that is to say, to
ensure that corruption does in fact affect economic development at the Provincial level (see
Glossary): area, population, distance from Ha Noi or Ho Chi Minh City, a proxy for infrastructure
development, and a regional variable.
Box 2: prevalence, burden and predictability of corruption
1. Prevalence of corruption is measured by the percentage of firms in a province that ‘Agree’ or
‘Strongly Agree’ with the statement: It is common for firms in my line of business to have to pay
some irregular ‘additional unofficial payments.’
2. Burden of corruption is measured by the percentage of firms in a province that answer 10% or
higher to the question: ‘On average, what percentage of income do firms in your line of business
typically pay per annum in unofficial payments to public officials?;
3. Predictability of corruption is measured by the percentage of firms that answer ‘Always’ or ‘In
most cases’ to the question: ‘If a firm has made unofficial payments, are transactions conducted
exactly as they wish?’
Data for the four development indicators is taken from the General Statistics Office (GSO)’s annual
Enterprise Surveys and Yearbooks, and Household Living Standard Surveys (VHHLSS) conducted
jointly by GSO and the World Bank. Observed values of the control variables are derived from the
GSO’s annual Yearbooks.16
This study employs random effect (RE), fixed effect (FE) and Hausman-Taylor (HT) methods to
estimate the effects of corruption variables on outcome variables concerned. First lags of corruption
variables are used to deal with endogeneity problem. The HT results are preferred to RE and FE
16
See Report for a fuller description of the methodological approach.
The costs of corruption in Vietnam - Edited Report - August 2014
15
because it can deal, to some extent, with the possible correlation between regressors and the
unobserved province-specific effects while being able to produce estimates for time-invariant
regressors. However, the results of the three methods are very consistent (for more on definitions,
see Glossary – Appendix 2).
The costs of corruption in Vietnam - Edited Report - August 2014
16
PART THREE: CORRUPTION – A FIRM LEVEL PERSPECTIVE
This analysis is based on the work of T&C, both quantitative and qualitative.
A. QUANTITATIVE ANALYSIS
This empirical study by T&C reveals how corruption affects firm development by focusing on the
costs and benefits of corruption to firms at the transactional and organisational levels. The research
employs both quantitative methods (i.e. regression analyses), as well as qualitative case studies, but
this note focuses only on the former (refer to the next section for the case studies).
The analysis shows how much, on average, a firm pays in informal fees, and how this cost compares
to the average profit or investment in research and development (R&D). At the transactional level17,
the study evaluates how informal payments relate to transactional indicators, such as wasted time
to obtain permissions, firm’s perception of corruption benefits, etc. At the strategic level18, the task
is to examine if there is a link between informal payments and firm revenue, profit, and growth.
FINDINGS
The costs of informal payments. Based on firm revenue as reported in the GSO enterprise survey
datasets, and the percentage of informal payments (IP) reported in the PCI, the research finds
that, from 2009 to 2011, each firm in the sample19 paid between 460 and 600 million VND in
informal payments on average, yet still made on average between 512 to 646 million VND of profit
before tax each year. Informal payments were thus equivalent to 78%107% of the firm’s beforetax profit, which roughly translates to saying that in order to generate 1 VND in profit, a firm
makes between 0.7 to 1 VND in informal payments. These high ratios show the benefits that would
accrue to a firm if it did not need to pay informal payments, all other things being equal20. Put
differently, the share of informal payments to a firm’s before-tax profit suggests how more
efficient Vietnamese firms could have become in the absence of corruption.
Facilitative corruption and corruption as the ‘rule of the game’. A typical firm’s informal
payments as a percentage of its revenue is shown to be positively related to (a) the prevalence of
IPs in its district (b) the firm’s belief that other firms make informal payments, and (c) the firm’s
perception of how important it is to negotiate with tax officers. With respect to both the amount
of informal payments and the probability of making informal payments, the firm’s perception of
how corrupt other firms are has the strongest influence, followed by (c) and (a). It is encouraging
to observe that the influences of factors (c) and (a) have declined steadily from 2009 to 2011. For
example, with respect to the amount of informal payments, the coefficient associated with factor
(c) decreased from 0.186 (being statistically significant) in 2009 to 0.039 (being statistically
insignificant) in 2011. However, the interdependency between firms (how a firm’s corrupt practice
influences other firms’ behaviour in the industry or market) seems to be more resilient over time
than factors (c) and (a).
17
Referring to individual transactions between firm and state agencies
Referring to a firm’s development
19
Except firms with a profit before tax greater than 100 billion VND (approximately 5 million USD), which are
left out of this sample.
20
As firms spend less on informal payments, their profits may also change. Profits cannot be held constant
while reducing informal payments.
18
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17
There is also some evidence of a high entry costs to firms in that younger or smaller firms tend to
make higher informal payments (relative to their revenues) in comparison with older or larger
firms respectively. This suggests that new firms need to pay more informal payments to catch up
and that there is some economies of scale associated with corruption (larger firms pay
disproportionally less). The regressivity effect of corruption is reasonably large (a one unit increase
in firm size21 leads to a 3- 10% decrease in the ratio of informal payments over revenue) and
remains statistically significant over the three-year study period. The age effect of corruption is,
however, much more modest in its magnitude and was only statistically significant in 2009.
In sum, the results strongly reveal the working of a vicious cycle, whereby firms that pay informal
fees in fact do so to follow the rules of the game, as already evidenced through the qualitative
case-studies (see next section). When competitors are seen using corruption as a way to get things
done, then firms tend to do this as well for fear of losing competitiveness. Facilitative corruption is
perceived by firms to be a way to lessen harassments, although as the next paragraph also
demonstrates, informal payments do not always pay off.
Facilitative corruption and transactional benefits. Informal payments are positively and significantly
associated with the number of inspections (for 2009 and 2010), with number of tax inspections
(2009) and the length of tax inspections (2010 and 2011). However, informal payments do not help
to reduce the time spent with officials as many firms would like to believe. On the contrary, informal
payments increase with the number of visits and duration of each visit. These findings tend to hold
for both young and old firms alike22. Not surprisingly, attitudinal responses from participants also
confirm that firms perceive that following the rules of the game is more important than
transactional benefits of corruption.
Competitive corruption and competitive benefits. The research explores whether corruption
benefits firm growth, but there is no evidence for this, either for established or young firms (i.e.
those with less than 10 years operation). However, when the analysis looks specifically at firms
operating in restricted business areas, there is statistical evidence for all three years showing that
informal payments are significantly and positively associated with firm’s expansion plans. Firms that
pay more in informal payments tend to be those that have expansion plans, perhaps suggesting that
they expect the IP will be a means to gain access to new (restricted) business opportunities. If true,
this again shows the high entry costs that corruption entails.
Corruption and (in)efficiencies. Finally, the research finds that corruption undermines a firm’s
technical efficiency. Technical efficiency refers to the firm’s ability to achieve the highest possible
productivity, i.e., to produce a maximum amount of output given its inputs. The analysis confirms
that informal payments hamper a firm’s efficiency; the higher the informal payment, the higher is
the level of inefficiency created. The level of experience of a firm is negatively correlated with
inefficiency, suggesting that the older the firm, the higher the level of technical efficiency. This
seems consistent with the finding that informal payments are consistently negatively associated with
(in)efficiency levels for small firm. In other words, small firms suffer more seriously from corruption
than bigger ones, measured by their level of productivity. In short, corruption does not pay.
21
Firms are divided into groups. 1) less than 0.5 BVND; 2) 0.5-1 BVND; 3) 1-5 BVND; 4) 5-10 BVND; 5) 10-50
BVND; 6) 50-200 BVND; 7) 200-500 BVND; 8) more than 500 BVND
22
However, it could also be that the sample for young firms (less than 5 years in operation) used for the
regression is too small in size.
The costs of corruption in Vietnam - Edited Report - August 2014
18
DISCUSSION
1. The true costs of corruption to firms: Firms are often seen as both the victims and facilitators of
corruption. This research (including the case studies) brings additional insights into this
perspective by exploring the type of challenges firms face and their attitude vis-à-vis corruption.
In so doing, it sends a strong message that whilst firms may think that corruption provides them
with immediate, ‘transactional’ benefits, corruption actually harms their strategic capability.
Engaging in corruption destroys firms’ integrity culture, hampers innovation and limits
expansion, and puts their reputation at risk. Most of the long-term negative impacts of
corruption are hidden and are seldom recognised as such by firms themselves (see next section
for more on strategic costs). However, to develop a good understanding of the prohibitive costs
of corruption, it would be useful to extend the time-scale of the analysis to a 5 or 10 year
period, rather than focusing on 2009, 2010 and 2011 alone. This would be particularly useful in
confirming whether findings affecting young firms in this time series are still borne out over the
longer term.
2. The effects of firms’ corrupt practice on the economy: The findings of this study complement
those obtained from the VCCI study (see Part Two of this report). Taken together, the studies
show that corruption negatively affects firms’ long-term decision to invest and expand, which
will retard the development of the private sector and the economy as a whole. The VCCI study
also clearly demonstrates the benefits to provincial economies of reducing the prevalence and
burden of corruption as well. For example, if the IP to revenue ratio drops then firms can use
these resources to invest and create employment. A drop in the prevalence of IP also improves
per capita income in a given province. Our study also shows that the PCI index is negatively
related to a firms’ technical inefficiency, meaning that Provinces with better institutional
environment should have more healthy firms, and that a firms’ performance improves in a
more transparent environment.
3. Prevalence of corruption among firms and importance of collective action: Since many firms
tend to engage in corruption because they see this as constituting the rules of the game,
breaking this vicious cycle should clearly be beneficial for firms, the business sector and the
economy. Doing this requires both firms and government working together to create the right
incentives and penalties (carrot and stick approach) in order to create a level playing field for
firms to compete. As part of this package, it seems reasonable to begin with an educational
campaign about the strategic costs of corruption to firms and follow it with prosecuting and
severely penalising well-known firms for their corrupt practice. International experience has
also shown the relevance of well implemented Integrity Pledges and Integrity Pacts as a way to
do this.
4. Extent of corruption among firms and impact on private sector development. This research
reveals the seriousness of the extent of corruption in terms of share of firms’ revenue or pre-tax
profit. These ratios are unreasonably high and should be brought down steadily over the years.
An interesting implication of paying IP to stay in the game is that corruption acts like an
informal regulatory compliance costs which are regressive in business size, i.e., smaller firms
pay higher IP as a share of their revenue. Similarly, younger firms also pay higher IP as a share of
their revenue to establish connection and to learn how to conduct their business. Both of these
The costs of corruption in Vietnam - Edited Report - August 2014
19
are detrimental to the development of a vigorous private sector that requires the continuing
entry of small firms to generate business opportunities, employment and income. This is an
area where a pro-active Government can step in with well-publicised and transparent rules and
guidelines to minimise the adverse effects on young and small businesses.
5. Factors influencing corrupt practice among firms. This research also establishes that there are
a variety of factors that affect firm’s corrupt behaviour with different degrees of severity. In
particular, the research points out the role of the interdependency between firms and the
interaction between firms and tax officers as the two most powerful determinants of informal
payments. The more resilient nature of the interdependency between firms reiterates the
importance of an educational campaign that emphasises the true costs of corrupt practice to
firms together with the need to prosecute a few high profile cases. Although the effect of firmtax officer interaction became insignificant in 2011, it is nevertheless important to continue
scrutinising this interaction to ensure that the impact of tax-related corruptions at the firm level
remains negligible. This also implies that corruption requires addressing both the supply and
demand sides, and thus that both government and businesses have a role to play in curbing
corruption.
METHODOLOGY AND APPROACH
The quantitative research relies on a sample of Vietnamese firms – primarily SMEs. Up to 70% of
firms in the sample have been in operation for less than 10 years. The sample is generated by
matching information from two data-sets: the Provincial Competitiveness Index (PCI), and the
General Statistics Office’s (GSO) firm survey for 2009, 2010 and 2011. The matched data includes
information on incidence of corruption and informal payments (IP) as self-reported by firms in the
PCI, and GSO data on firm’s financial performance. The samples include 5,638, 4,079 and 5,733 firms
for 2009, 2010 and 2011 respectively. The matched dataset and the PCI shows that the two samples
are similar in terms of size, sector, etc, although one notable difference is that the matched
database includes fewer new firms, and conversely, more mature firms (over 10 years in operation).
Because of the similarity between the two datasets, and the fact that the PCI sampling is considered
to be representative of the Vietnamese business population, the sample used for the analysis is also
representative.
Three frameworks, namely, institutional, rent-seeking and resource-based view of the firm, are
combined to generate four complementary hypotheses that are tested through regression analyses:
-
H1: Firms pay informal payments to follow the “rules” of the game (confirmed)
H2: Paying informal payments is positively related to transactional benefits (e.g. time saving)
but mainly for younger firms (not confirmed)
H3: The amounts of informal payments are positively related to revenue growth for firms in
restricted areas (confirmed)
H4: Informal Payments are negatively related to firms’ efficiency (confirmed)
The costs of corruption in Vietnam - Edited Report - August 2014
20
B. QUALITATIVE ANALYSIS (CASE-STUDIES)
This section discusses the findings from the qualitative research based on in-depth interviews with
four firms operating across three sectors (banking, pharmaceutical, and construction)23. It discusses
ways in which corruption takes shape, and the costs & benefits of corruption. Findings are not
quantitative, scientifically rigorous, or comprehensive, but are nevertheless revealing of how
corruption works in practice in Vietnam. The research shows that:
1. Firms may think they can profit from both facilitative and competitive corruption, but it
progressively degrades their strategic capability and long-term development. Even though
there is no objective evidence for this, firms feel that corruption brings administrative benefits,
for example through time-savings and lower harassment. Corruption, they feel, can also provide
competitive benefits, in that it allows a company to gain undue advantage over competitors
(e.g. new clients/contracts).
2. Firms follow the rules of the game and find it hard to quantify the costs of corruption. Whilst
most firms recognise the harmful effect of corruption, there is largely a despondent attitude:
“[firms] cannot do anything about [corruption] – [they] just follow the lead”. There is a groupeffect at play, in that firms state they follow accepted rules of the game. Firms may not
understand these costs well, but corruption clearly has strategic/longer-term implications,
including in terms of loss of competitiveness and quality, and weakening of innovation and
integrity values. Thus, finding ways to break with the vicious cycle of corruption -- including by
implementing collective action -- may be a first measure against corruption.
FACILITATIVE CORRUPTION
All four cases demonstrate how ‘facilitative corruption’ (i.e corruption whose purpose it is to ease
administrative and decision-making procedures), also known as ‘speed’ or ‘grease’ money, happens
in practice.
Table 2: Four case studies
HIP
HCMC
DCC
CCC
Hanoi-based
26 employee
3/4 Billion VND
(monthly revenue)
Asian ownership
HCMC-based
20 employees
5 Billion VND
(monthly revenue)
River-Delta Prov.
66 employees
4 Billion VND
(monthly revenue)
Vietnamese ownership
Hanoi-based
280 employees
3 trillion VND (loans)
Typically, facilitative corruption can involve one or more of the following:
Routine administrative procedures create opportunities for government officials to extract
payments from firms in return for speeding-up or approving administrative procedures such as
permits; applications; etc. Whilst recent public administration reforms try to lift administrative
23
CCC+ Commercial Bank (CCC), Hippon Pharmaceutical (HIP), HCM Pharma Co (HCPC) and DiaPhuong
Construction Co (DCC) respectively – all names have been changed from their true ones for confidentiality
purposes.
The costs of corruption in Vietnam - Edited Report - August 2014
21
hurdles that provide opportunities for graft and extortiontheir implementation is still lagging in
practice.
“This is a routine payment. Everybody does it, so we have to do it too” (HPP)
“There is no transparency in our field. When we submit our documents, [the officials] can always find
some minor errors and return the files to us. We therefore lose time. To avoid this, we pay, as others
would. The actual price tends to be commonly accepted by everyone operating in this sector” (DCC)
Visits and inspections from government officials (e.g. tax auditors) also provide opportunities for
graft. CCC declared this being a frequent problem, with up to two visits per year. Informal payments
in this case can range from gifts and hospitality, to goods and money, depending on the cases.
“How much the bank has to treat the delegation depends on seriousness of problems. On average,
we have to cover up to 30 million dong for each member of the mission” (CCC)
Using third parties is common for companies who wish to avoid complications, and also don’t have
the right social capital (‘connections’) to speed up administrative procedures. Relying on middlemen,
for example, helps HIP reduce the time taken to obtain commercial licences from 1/1.5 years to 6
months.
Facilitation payments also occur in business-to-business transactions. For example, some of CCC’s
clients resort to this practice in order to obtain preferential loans or interests from the bank.
Conversely, the Bank also uses facilitation payments in order to get new customers, or to reward and
encourage large clients to take additional loans. Within CCC, facilitation payments (in cash or in kind)
are used as well for recruitment and promotion, with managers having an important stake in this
process.
The case-studies suggest there is a wide belief among most companies that facilitative corruption is
a normal way of doing things and has become ‘the rule of the game’ in Vietnam24. Firms seem to be
lockedin a downwards spiral – they bribe because they fear that many others are also doing it in
order to get things done, but also because government officials expect it.
“Nobody asked for it – we just put 50,000 to 2,000,000 VND together with the documentation we
submitted’ (HCPC)
This shows the importance of collective action (getting people to collectively act against corruption
and abide by the same rules) in tackling corruption.
Most of the benefits associated with corruption are largely perceived. There is no objective evidence
to support the ‘administrative benefits’, in terms of costs and time savings or lower harassment,
associated with corruption. For the most part, companies consider that facilitative corruption is
important in helping maintain good relationships with state officials.
24
On this, see section above
The costs of corruption in Vietnam - Edited Report - August 2014
22
COMPETITIVE CORRUPTION
Competitive corruption refers to the process through which firms that pay bribes gain access to
limited business opportunities, thereby preventing or limiting other firms and competitors from
accessing it. Unlike facilitative corruption which is much more generalised and accepted, competitive
corruption creates losers and winners, for whom competitive benefits come in the form of new
markets or contracts and protection from the ‘patron’.
Securing high-prized contracts or markets is no easy feat. Corruption risks can occur at different
stages of the supply chain. During the needs assessment period, companies like HIP or HCPC will
develop good relationships with hospitals and local governments to ensure that the drugs they
commercialise are tendered for; at the procurement phase, these connections are key for companies
to find out insider information about competitor’s offers, or they can even be used to modify their
proposal past the deadline date. Once the contract is awarded, pharmaceutical companies work with
doctors to ensure they prescribe their drugs. If successful, the upshot of this transaction limits
opportunities for the firm’s competitors. How much money is spent on this varies. Likewise in the
construction sector, DCC also uses competitive corruption to win government contracts for public
projects, thus limiting opportunities for competitors.
THE COSTS OF CORRUPTION
It is not always clear to firms what the real cost of corruption is, as most tend to factor in the costs of
bribes into their calculations. No firm has accurately assessed the cost of competitive corruption (i.e
the benefits to a firm’s bottom-line as a result of bribing). This varies largely depending on the
transaction and sector. However, estimates range between 4 to more than 30% of the project’s
contract value or good sold. HIP, for example, calculates that getting into a provincial hospital
requires adding 40% on top of the price of goods. There is no mathematical formula, but one
manager puts it aptly:
“informal costs [tend to be] a function of the total task’s value, the quality of the relationship with
related actors, and the expected costs/benefits from the relationship in the future” (HIP)
Competitive corruption is a high-risk strategy, however, relying mainly on trust. It requires that the
firm that is making a payment does that in the belief the official being bribed will do his or herpart
and deliver the contract. Because of this, social capital is a highly prized asset. The decentralised
nature of decision-making in Vietnam makes it difficult for some companies, such as DCC, to expand
to other Provinces where patronage networks between firms and government officials are well
established. The costs of corruption in this case relate to strategic opportunities lost, even though
they may not always be clear to firms. Corruption distorts markets and creates an unequal levelplaying field for companies to compete on an equal footing.
The case-studies show that corruption can have a pernicious effect in many other ways, including by:

Jeopardising quality: Though corruption is seen as a ‘cost of doing business’, competitive
pressures can lead firms to trump quality for sales volumes, as acknowledged by the surveyed
companies. In the pharmaceutical sector, for example, poor quality ends up hurting the enduser – patients -. The company’s focus on sales and its own bottom line may tend to be done at
The costs of corruption in Vietnam - Edited Report - August 2014
23
the expense of learning how end-users feel or what their real needs are. This not only creates a
lag between real demand for and supply of medication, but may also undermine quality of
healthcare. This is an often underestimated but real cost of corruption.

Undermining innovation: Given that corruption is used as a mechanism to access new markets
and opportunities, there is no incentive for firms to compete and innovate. Relationships are a
higher-prized capital than is innovation. At HIP, a significant amount of time and effort is spent
on building relationships, collecting inside information on the offers of competitors, illegally
adjusting the offers, etc.

Encouraging inefficiencies: Nepotism and buying of positions, for example, means that jobs are
not always allocated efficiently, or that employees do not have adequate skills for a given
position. In the Banking sector, corruption can also lead to increased risks of underperforming
loans, particularly where informal payments are used as a basis, rather than the loaner’s
financial capacity.

Eroding integrity and trust: Engaging in corruption sets a bad example for employees.
Managers interviewed for the study acknowledge that because corruption has become
widespread, it is difficult to know whether and how to trust their staff.
DISCUSSION
1. Government should join hands with businesses to change ‘informal rules of the game’, as these
strongly influence what a firm does and whether it engages in corruption. Measures that
promote collective action among firms (e.g. through Codes of Conduct, or Integrity Pledges
binding Government and businesses) should be encouraged.
2. Another solution is also to increase the costs of corruption and take away the incentives for
corruption. This could include improving access to information, implementing a proper
whistleblower protection scheme, improving audit mechanisms, increasing salaries, fostering a
more competitive private sector, cutting down transaction times and making administrative
procedures more transparent, etc. This would likely result in reducing transactional benefits
from corruption.
3. The above, however, also requires that policies and laws be appropriately enforced in Vietnam,
and that fair and strict punishment apply to corrupt firms and officials.
The costs of corruption in Vietnam - Edited Report - August 2014
24
REFERENCES
CIEM, DoE, ILSSA and UNU-WIDER. “Characteristics of the Vietnamese Business Environment: Evidence from a
SME Survey in 2011.” November 2011
Darden, K, 2002, Graft and Governance: Corruption as an Informal Mechanism of State Control, New
Haven: Yale
Doig, A, Le Thu, D, Xuan Chau, H, 2013 (October), Criminalising Corruption : A Study of International
Practices and Application for Vietnam, Public Administration Reform and Anti-Corruption, A Series of
Policy Discussion Papers, Hanoi: United Nations Development Programme (UNDP)
Enterprise Surveys (http://www.enterprisesurveys.org), The World Bank: Custom query on
Corruption
PricewaterhouseCoopers, 2008, Confronting Corruption. The business case for an effective anticorruption programme
Rand, John (2009), “Understanding Firm Level Corruption in Vietnam: Who Pays and how does it affect firm
performance?”, Processed; World Bank, Global Economic Prospect Indicators. Online resource:
http://data.worldbank.org/country/vietnam (Accessed July 2014)
World Bank, 2010, Vietnam Development Report: Modern Institutions, Washington DC: World Bank
World Bank, 2012, Corruption from the perspective of citizens, firms and Public Officials; Results of
Sociological Surveys, 2nd edition, Hanoi: National Political Publishing House
World Bank, December 2013, Taking Stock: An Update on Vietnam’s Recent Economic Development,
Hanoi: World Bank
World Economic Forum, Clean Business is Good Business -- The Business Case Against Corruption,
available online: http://www.weforum.org/pdf/paci/BusinessCaseAgainstCorruption.pdf
The costs of corruption in Vietnam - Edited Report - August 2014
25
APPENDIX 1: CONTRIBUTORS
A. Development and Policies Research Center (DEPOCEN)
Established in 2005 as an independent research organisation, Development and Policy Research
Center (DEPOCEN) aims to provides timely and quality consulting services on all aspects of the
economy to government agencies, businesses and international organisations. Its range of services
includes short training courses, statistical survey and research, monitoring and evaluation, and
economic analysis and modelling. DEPOCEN has over the years developed partnerships and
cooperation with many Vietnamese and international research institutions.
B. Vietnam Chamber of Commerce and Industry (VCCI)
Founded in 1963, the Vietnam Chamber of Commerce and Industry (VCCI) is a national organisation
that assembles and represents the business community, employers, and business associations of all
economic sectors in Vietnam. The mission of VCCI is to protect and assist business enterprises, to
contribute to the socio-economic development of the country and to promote economic,
commercial and technological cooperation between Vietnam and countries around the world.
C. Transformation & Change Management Consulting (T&C)
T&C consulting is a private firm that provides a wide range of consulting services to public and
private organisations. For the purpose of this study, T&C partnered with the Asia Pacific Institute of
Management (APIM), which belongs to the National Economics University, Vietnam. The Institute
conducts research on governance and business development. Previous collaboration also includes
work on the World Bank Anti-Corruption Diagnostic Survey.
The costs of corruption in Vietnam - Edited Report - August 2014
26
APPENDIX 2: GLOSSARY
This Glossary defines terms typically used in econometric studies in a way that is easy to understand.
1. Burden of corruption: There is no universally accepted definition for this term. From the firm’s
or individual’s perspective, the burden of corruption refers to the unofficial payment(s) made to
corrupt officials. From a social perspective, two components come into play, namely, direct and
indirect costs. Direct costs of corruption include (i) bribes, embezzlement, inflated public
procurement prices, etc and (ii) the costs of controlling corruption (value of resources expended
to prevent, monitor, detect and penalise corruption). Indirect costs include (i) efficiency costs
associated with reduced output and tax revenue, reduced investment (both foreign and local
direct investment), lower growth rate, lower human capital development, and (ii) the equity
costs associated with potentially increasing income inequality as a result of corruption (for this
term, refer to the DEPOCEN and VCCI studies).
2. Independent variable: A variable is ‘independent’ when it does not vary because of changes in
other variables that are being studied. For example, age is not affected by diet or exercise and
could therefore be considered to be an independent variable in a study of health. When looking
for a relationship between variables, the independent variable is often assumed to be the cause
of a certain outcome or effect, and is assumed to create changes in the ‘dependent’ variable
(see below). In the context of an economic model, independent variables correspond to
exogenous variables (i.e, those which are outside the working of the model). Independent
variables are often called ‘explanatory variables’ or ‘regressors’. In a regression, the explanatory
variable X is plotted on the horizontal axis.
3. Dependent variable: A dependent variable refers to a variable that change in response to
changes in the value(s) of the independent variable(s). Said simply, it is a variable that ‘depends’
on other factors, unlike the independent variable. For example, health depends on diet and
exercise. In the context of an economic model, dependent variables correspond to endogenous
variables (i.e., those which are determined by a set of factors associated with the model).
Dependent variables are often called ‘explained variables’ or ‘regressands’. It should be noted
that a variable may be an independent variable in a particular study but a dependent variable in
a different study. For example, diet is an independent variable in a model of health but a
dependent variable in a consumer choice model. In a regression, the explained variable Y is
plotted on the vertical axis.
4. Control variable: In experimental sciences, a control variable refers to a factor that stays
unchanged throughout the experiment. For example, in a lab experiment that explores the
effect of salt on germination of green peas, fresh water is the control variable (it stays
constant), whereas salt water is the variable that changes to analyse its effect. In a regression
analysis, a dependent variable (e.g., health) typically depends on many independent variables
(e.g., diet, exercise, work stress, medical care, age, etc). Suppose a researcher is interested in
isolating the effect of diet on health. In econometric terminology, the researcher is required to
control for all other variables (exercise, work stress, medical care, age, etc), i.e., to keep the
values of these control variables unchanged so that the effect of the independent variable (diet)
The costs of corruption in Vietnam - Edited Report - August 2014
27
on the dependent variable (health) can be clearly observed. To do so the researcher needs to
conduct a multiple regression analysis in which all independent and control variables appear as
regressors. The estimated coefficient associated with diet then indicates the effect of diet on
health holding all other independent and control variables constant.
5. Cross-sectional studies and panel data: These refer to empirical studies that rely on cross
sectional data, i.e., data collected by observing many different subjects (such as individuals,
households, firms, regions or countries), normally at the same point in time or during the same
time period. Data obtained from the same cross section over different points in time or time
periods is called panel data (also known as longitudinal or cross-sectional time-series data).
6. Endogeneity: In a regression equation, the observed value of the dependent variable is the sum
of (unobservable) true function value of the independent variable, and a random error term. A
variable is said to be endogenous if it is correlated with the error term in the estimating
equation. When a regressor is endogenous, the problem of endogeneity is said to be present.
For example, when regressing health on diet and exercise, it is conceivable that the regressor
(diet) is correlated with the error term. Endogeneity can arise as a result of simultaneity (e.g.,
diet is itself determined by some other independent variable), omitted variables (e.g., work
stress and medical care are missing) or measurement errors. An implication of endogeneity is
that the OLS estimates of the coefficients are generally biased and inconsistent (see OLS below).
Typically, there are several methods in econometric analysis including the instrumental variable
method (see below), to minimise the adverse effects of the endogeneity problem.
7. Instrumental Variable (IV): Instrumental variable (IV) is a common method for overcoming the
problem of endogeneity and ensuring consistency of OLS estimates. A good IV is one that is
correlated with the independent variable but not with the error term in the estimating
equation. For example, a good IV for diet may be level of education, which is positively
correlated to diet but uncorrelated with the error term in the regression of health on diet and
exercise. The most common method of IV is the two-stage least-squares (see below).
8. Idiosyncrasy: In econometrics, idiosyncratic error is employed to describe an error from panel
data that changes across units and over time. In the context of the present research on the
costs of corruption in Vietnam, idiosyncratic corruption is used to describe corruption that is
peculiar to a particular firm within a particular industry, i.e., corruption that differs between
firms and across industries. That is, corruption affecting firm A may be different to the one
affecting firm B, or corruption affecting firm A in a period may be different to that affecting firm
A in another period.
9. Fixed Effects (FE): A fixed effects (FE) model is an econometric model using panel data in which
different units of observations (such as firms or regions) are assumed to have different effects
on the intercept of the regression equation. Thus, a FE model allows for different intercepts for
different units, but constraining the estimated coefficient associated with each regressor to be
the same across all units. For example, in a FE model of health regression on diet and exercise
using regional data, different regions have different intercepts but the same coefficients with
The costs of corruption in Vietnam - Edited Report - August 2014
28
respect to diet and exercise. By allowing for different intercepts, a FE model allows researchers
to assess the net effects of diet and exercise.
10. Random Effects (RE): In random effects (RE) model using panel data, the regression equation
contains a unit-specific effect which is a random variable uncorrelated with the regressors of
the same unit in all time periods. For example, in a RE model of health on diet and exercises
using panel data of individuals over time, the individual-specific effect is a random variable
which is uncorrelated with diet and exercise of the same individual in all past, current and
future time periods. The individual-specific effect is said to be random because individuals have
been chosen from a population at random. Note that the key difference between the FE and RE
models lies in the assumption about the relationship between the unit-specific effect and the
regressors (correlated in the case of FE model and uncorrelated in the case of RE model).
11. Ordinary Least Squares (OLS): OLS refers to a conventional method of estimating the
coefficients of a linear regression equation (see Fig 1 below)25 by choosing estimated
coefficients in such a way as to minimise the sum of squares of the differences between the
observed or actual values (dots representing each country) and predicted values (represented
by the line)26 of the dependent variable (2012 CPI in Figure 1). Since some of the differences
are negative while others are positive, they are squared to ensure that negative and positive
differences do not cancel out one another, i.e., the sum of squared differences more accurately
reflect the total amount of errors. Under certain assumptions (known as classical assumptions,
mainly concerning the error terms), OLS estimates possess desirable properties such as
unbiasedness (estimated coefficients are equal to true coefficients on average), consistency (as
the number of data points become indefinitely large, the estimated coefficients converge in
probability to the true coefficients) and efficiency (minimum variance).
25
In simple linear regressions, (e.g. Fig 1), the line represents the ‘best fit’ for the available data (CPI and GDP
growth).
26
This line is the estimated or predicted value of the dependent variable (2012 CPI score) for any value of the
independent variable (the 2012 GDP growth rate). This means that for a GDP growth rate of 4%, we expect the
CPI score to be equivalent to roughly 55.
The costs of corruption in Vietnam - Edited Report - August 2014
29
Figure 1: CPI vs. GDP Per Capita (2012)
GDP per capita
(1000 usd)
Singapore
50.00
Japan
40.00
Hong Kong
30.00
South Korea
20.00
Thailand
10.00
Bangladesh
0.00
0
20
Malaysia
China
Philippines
India
Vietnam
40
60
80
100
CPI 2012
12. Two-stage Least-squares (2SLQ): This method of estimation in the presence of endogeneity
has been developed to combine several IVs to produce a single IV. In stage one, the
endogenous regressor (e.g., diet) in the original equation is regressed on all exogenous
regressors and available IVs (e.g., exercise and level of education). In stage two, the IV
method is applied to the original estimating equation with the endogenous regressor (diet)
being replaced by its predicted value generated by the stage-one regression.
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30
APPENDIX 3: SYMPOSIUM REPORT
The Costs of Corruption: What do we know about it?
Picture: Nguyen Thu Phuong
Jointly organized by the
Vietnam Chamber of Commerce and Industry (VCCI)
and the UK Department for International Development (DFID)
August 25-26, 2014
Hanoi, Vietnam
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31
Contents
Summary………………………………………………………………………………………………………………………………………33
1 Research presentations…………………………………………………………………………………………………………….34
2 Discussion of the research findings…………………………………………………………………………………………..34
3 Research and policy implications……………………………………………………………………………………………..34
4 The Asian experience………………………………………………………………………………………………………………..35
5 Corruption and growth in Asia………………………………………………………………………………………………….35
6 How Anti-Corruption Commissions address corruption costs- a comparison of Indonesia and the
Philippines…………………………………………………………………………………………………………………………………..36
7 Improving the measurement of corruption……………………………………………………………………………..37
8 Innovative analytical tools……………………………………………………………………………………………………….37
9 Wrap-up: Conducting corruption research in Vietnam…………………………………………………………….38
10 Take-away messages……………………………………………………………………………………………………………..39
The costs of corruption in Vietnam - Edited Report - August 2014
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Summary
1. Preliminary findings from three research projects on the costs of corruption were presented at
a one-and-a-half day Symposium on 25-26 August 2014, organised jointly by the Vietnam
Chamber of Commerce and Industry (VCCI) and the UK Department for International
Development (DFID) with the participation of scholars, policy makers and relevant stakeholders,
both international and domestic. While the research results were central to discussion, there
was also dialogue on their policy implications and the challenges facing corruption researchers
in general.
2. Discussions on the first day of the symposium featured both local and international researchers
and practitioners. They addressed the findings and policy implications of the corruption
research, and presented new frameworks for understanding and tackling corruption. On the
second day, research experts were invited to share new tools and methods for the
measurement and analysis of corruption. The symposium ended with an interactive session
where the audience and researchers discussed challenges and identified priorities for future
corruption research.
3. The symposium achieved two important outcomes that promise to take Vietnam’s evidencebase to new levels in meeting the challenges of corruption.
a) The data and analyses presented on the costs of corruption, using accepted social science
techniques, laid out clearly the damaging economic costs of corruption for the Vietnamese
economy, as well as for individual firms and citizens. Based on this research, the extent and
dimensions of the economic costs of corruption on Vietnam are undeniable.
b) The presentations and discussions by keynote speakers and participants on the lessons
drawn and gaps remaining begin to lay out an agenda for future actionable research that can
assist policy makers in addressing key areas of anti-corruption reform in Vietnam.
4. This report summarizes the main points from the different sessions. Background papers,
presentations and other materials can be accessed separately (upon request).
The costs of corruption in Vietnam - Edited Report - August 2014
33
1. Research presentations
5. The edited report includes an overview and discussion of the research results (see above)
2. Discussion of the research findings
6. The discussion of research results focussed on a number of points:
a) The research reflects a ‘new generation’ of corruption research in Vietnam characterised by
evidence that moves us forward in terms of our understanding of corruption. A number of
emerging themes should be tackled as next steps, for example, developing a better
understanding of the proceeds of crime. From a methodological standpoint, the future of
corruption research could also focus on exploring non-linear relationships between
corruption and growth.
b) It is very important to unpack the meanings of ‘corruption’. However, most developing
countries are hugely corrupt, and actual levels are difficult to measure. Corruption is also
context-specific and depends on a number of institutions. The research teams should be
commended for maximising the utility of scarce data on corruption in Vietnam and for their
contribution to increasing our understanding of corruption and anti-corruption in Vietnam.
c) The magnitude of corruption shown in the two studies by DEPOCEN and VCCI is rather small
– although according to the authors, the methodology was carefully selected to err on the
side of caution. Further research could help to validate the quantitative effects of
corruption. T&C’s research shows a much bigger effect of corruption, but this could be
caused by firms that exaggerate their difficulties in self-reported surveys.
d) Costs may not only appear as economic losses, but also as unquantifiable distortions of the
state and the market’s regulatory ability. Social costs are also important to account for.
Because of this, qualitative research should also be used as a complement to existing
quantitative results, for example case studies at the sector level to investigate corruption
related to construction permits, traffic police, PMU procurement, taxation of businesses,
and universities/education, among others. Qualitative studies, it was remarked, are difficult
to undertake in practice as they require verification of the accuracy of sources, approaching
the right persons, and asking the right questions.
3. Research and policy implications
7. Producing actionable findings entails at least two additional types of research:
a) Process studies in particular sectors or industries, which analyse in detail (1) political and
economic structures and constraints, (2) individual costs and benefits of corruption to firms
and individuals involved in the processes, (3) and the broader impacts of corruption within
the sector.
b) Qualitative, in-depth studies that probe the motivations and interactions of the participants
in corrupt acts and try to understand these in terms of the choices and constraints faced by
individuals and firms.
The costs of corruption in Vietnam - Edited Report - August 2014
34
8. In terms of policy implications, there is still room to discuss whether distortions caused by
corruption in Vietnam are sufficiently large and visible enough to encourage policy change,
since Vietnam is still experiencing both high growth and high corruption. One way to encourage
policy change, however, would be to identify the victims and beneficiaries of corruption, so as
to better locate champions of change and supporters of reforms.
4. The Asian experience
9. Corruption takes different forms. Some are simply responses to misaligned regulations, whilst
others are far more damaging in that they distort the implementation of necessary policies and
institutions. Thus we need to (1) distinguish between different types of corruption and (2)
identify the costs of corruption based on the kind of regulatory functions/institutions that
corruption distorts. The typology below was discussed at the symposium as a way to analyse
appropriate approaches to fighting corruption under different circumstances.
Source: M. Khan
10. Feasibility and visibility underpin good anti-corruption policies. Reforms need to be practical,
gradual, and achievable, and their results should have visible economic impacts to convince
political leaders of their effectiveness.
5. Corruption and growth in Asia
11. This session revisited the classic debate on Asian exceptionalism. For a long time, scholars have
been puzzled by the co-existence of high growth and high corruption levels in many East Asian
countries. Japan, Korea, Taiwan and China have all, at various stages of their development,
witnessed a rapid rise in corruption; yet they are now leading economies in the region and the
world.
12. One potential explanation for this apparent paradox is the atypical ‘political settlement’ that
exists in East Asian countries. All successful Asian countries have a cohesive political
authority/coalition which is capable of implementing and enforcing policies over the long-term,
often from the top-down, and where governments can allocate rents/distribute resources
The costs of corruption in Vietnam - Edited Report - August 2014
35
among groups and factions in society. This differs from other countries, e.g. in Africa, where
there may be an autocratic leader who lacks authority. Translating this to Vietnam, the singleparty state is somewhat cohesive at the top, but lower-level elites are difficult to coordinate.
However, it is important to dig deeper into the sources of power of Vietnam’s various interest
groups to better understand the local context.
13. Participants questioned whether a cohesive, powerful regime is better suited to countering the
damages that corruption imposes, rather than an inclusive democratic political structure. In
response to this, it is important to emphasise that accountability and transparency can exist
within an authoritarian regime, just as much as a democracy can be non-inclusive, as in the case
of India. Furthermore, while transparency reforms should not be rejected outright, sometimes
they may be given too much priority, when in fact less corruption can be a by-product of
policies that aim to improve governance.
14. Another series of questions focused on how to incentivise political leaders to carry out
necessary reforms. As already emphasised, one speaker suggested looking for specific
corruption problems, to which there are specific solutions that are championed by specific
stakeholders. No less important, reformers should embrace incremental progress and tackle
issues both carefully and wisely to avoid political backlash.
6. How Anti-corruption Commissions address corruption costs – a comparison
of Indonesia and the Philippines.
15. Providing the results of a research study on Anti-Corruption Commissions (ACC) in Indonesia
and the Philippines, this presentation concluded that such commissions can be regarded as
effective tools in the fight against corruption because they can increase the costs of corruption.
However, there are challenges in doing this and the effectiveness of ACCs has often been
disputed.
16. The central objective of anti-corruption initiatives is to turn corruption into a high-cost and lowbenefit activity. In this regard, the Philippines’ Ombudsman has been fairly unsuccessful: the
very low conviction rate (0.6%) and lengthy case duration means that most corrupt cases go
unprosecuted. In contrast, Indonesia’s KPK has been able to both effectively convict most
corrupt officials it indicts and recover lost state funds. This success cannot be explained by
economic, social or political circumstances alone. Rather, it is the design of the agencies that
determines their effectiveness: KPK has more tools and power at its disposal and also has more
practical staff policies. Above all, its objectives are oriented towards concrete, specific results.
17. Three key ingredients should be taken into consideration for designing effective ACCs: i) a riskbased strategy; ii) a strong political, legal and regulatory infrastructure; and iii) the application
of public management best practices. In addition, new sources of outcome-based data and
measurements for the evaluation of anti-corruption initiatives should be used to evaluate the
performance of ACCs.
The costs of corruption in Vietnam - Edited Report - August 2014
36
7. Improving the measurement of corruption
18. The Data and Benchmark strategy (DB Strategy) is a novel approach to measure corruption
objectively and it replaces perception-based indices and surveys. It focuses on gathering nonnormative, policy-neutral, and specific data that measure particular governance processes and
outcomes (e.g. how many days it takes to get a business license? what fees must be paid to
complete a certain bureaucratic procedure?, etc.). Its underlying assumption is that
discrepancies in the government’s performance in specific functions can reveal corruption
vulnerabilities. Where the processes are slow and complicated, corruption likely exists or at
least the incentives and possibilities for corruption are present. The DB strategy offers
researchers the ability to make comparisons across sectors, provinces and countries. It is not
prone to subjective biases and can be verified for accuracy. This measurement method also
helps policy makers by pointing out specific problem areas and producing actionable
information.
19. Participants flagged a number of challenges with using this approach. To make the DB strategy
useful for large-scale comparisons, governments have to not only cooperate very closely, but
also collect data with an amount of rigour that may be burdensome to states with lower
governance capacity. The DB strategy can also inadvertently encourage deregulation and
encounter stiff opposition. Addressing this entails seeing the DB strategy not as a means to
accuse the corrupt, but as a way for organisations to evaluate themselves and reward good
performance.
20. Discussions also emphasised the more positive sides of the DB strategy. To be successful, results
collected from the DB approach should lead to more DBs and discussion, as well as
opportunities to highlight success and allow poor performers to explain themselves. By
selecting benchmarks to suit our needs, we can also use the DB approach to target specific
sectors/areas. Examples in participatory budgeting in Brazil provide hope that this method can
be scaled-up in practice.
8. Innovative analytical tools
21. This session discussed two tools that have successfully been used in the past to study
corruption. The Unmatched Count Technique (UCT) (or ‘list surveys’) specifically addresses
social desirability bias, i.e. the reluctance by respondents to reveal sensitive information such as
corruption. Samples are randomly divided into two groups, both of which receive a list of
items/activities and are asked to count the number of activities they participated in. Only in one
group, however, does the list contain an additional “sensitive” item. The proportion of
individuals that engage in that sensitive behaviour can be estimated by comparing the mean
results of two groups. This method, it was argued, provides both theoretical and empirical
evidence and allows for meaningful quantitative analysis, but also saves time, increases trust,
and reduces non-response in surveys
22. Another approach consists of using a triangulated process analysis in qualitative research. The
researcher reports responses from one participant to another and sees if they prompt any
change in opinion. Respondents are also encouraged to comment on responses of their peers.
The costs of corruption in Vietnam - Edited Report - August 2014
37
The exercise serves to build trust and establish interaction between the researcher and the
participants, as well as among the participants themselves. In Bangladesh, this triangulated
process analysis allowed the researchers to identify the stakeholders’ common points of
agreement, and pinpoint policy solutions that are actually feasible and generate consensus.
23. An ensuing discussion highlighted the major research challenges facing corruption studies and
how the two aforementioned methods can help in this regard. Challenges include (1)
diagnosing corruption problems from the point of view of feasibility and solvability, and (2)
identifying the impact of anti-corruption policy changes through monitoring and evaluation of
anti-corruption programmes. Moreover, all kinds of data (be they administrative, survey or
observational data) have flaws and biases, and have to be treated with some healthy
scepticism.
9. Wrap-up: Conducting corruption research in Vietnam
24. Wrapping up the Symposium, participants summarised the existing challenges and future
avenues for corruption research in Vietnam.
a) One significant issue concerns the difficulty of conducting corruption research, both in terms
of access to data, as well as its reliability. Although there should be cooperation between
research agencies, as well as between researchers and policy makers to measure both good
and bad governance – this cooperation is challenging. Some of this is due to barriers
between domestic agencies, as well as the need to improve visibility of Vietnamese research
to attract cooperation from outside Vietnam. Policy makers often ask researchers to provide
them with concrete solutions, but this is not their job. Moving forward, there is a need as
well to focus on supporting capacity and quality of domestic researchers and institutions
(e.g. Government Inspectorate, Government’s Statistics Office, Central Steering Committee,
etc.). Whilst useful, government research cannot achieve independence, however.
b) To be policy-relevant and elicit change, there was agreement that several developments are
needed. First, corruption costs should be framed in political as well as economic and social
terms -- that is, they should show politicians how they can undermine the long-term survival
of the regime. Second, there is a need to identify political interests and commitments in a
specific context. This requires sophisticated tools to identify the direct costs of corruption for
each stakeholder, including political leaders. Where relevant, efforts should also focus on
the costs and vulnerabilities of corruption in particular sectors and areas in order to pinpoint
problems and solutions.
c) In the future, both quantitative and qualitative research may be called for in order to alert
government and policy makers to the impact of corruption. Concerning quantitative
methods, the appeal of ‘predictive’ models was also emphasised -- for example, to provide
an estimate of losses in long-term potential growth due to corruption – though their
application is difficult. Moving forward, there ought to be a better way to track governance
and anti-corruption performance, with specific M&E methods used to evaluate reforms as
well.
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10. Take-away messages
25. In the organisers’ opinion, there are a number of important take-aways from the Symposium.
Participants in the panel discussions examined different data sources and particular theoretical
and analytical techniques in survey research and process analysis, while also making
suggestions for different research topics and approaches that might characterise the next
generation of anti-corruption research in Vietnam. In the process, some potential
breakthroughs were identified, pointing to new strategies and priorities:
a) In seeking to identify key research topics, the feasibility of intervention and strategic
considerations of implementation should guide data collection and analysis. Rather than
sweeping, overarching, and somewhat confrontational topics such as ‘transparency’ and
‘accountability’, or proposals for direct investigations of the nature and extent of corruption
in a particular agency or locality, the benefits were argued for focusing instead on practical
dimensions of regulatory failure and poor service quality in particular sectors or agencies,
highlighting the scope for incremental process improvements once the constraints and
motivations shaping actions, including corruption, are understood.
b) In undertaking actionable research on such topics, a wide range of data and social science
methodologies, both quantitative and qualitative, should be explored and applied in
conjunction. Some ideas for different approaches to data collection and analysis were
canvassed, for example:

In exploring process failures and outcomes in particular sectors or industries, cases
should be selected where researchers (particularly local ones) can build on or develop
personal networks among both government and non-government actors, in order to
build trust to a level that will result in frank and reliable reports and personal accounts.
These ‘actor accounts’ could be cross-checked and triangulated from participants with
different roles and standpoints in the processes being investigated, deploying
ethnographic and other ‘in-depth’ data collection techniques, based on well-established
social science research protocols. Customer or client surveys could provide additional
data in the effort to corroborate data and findings.

To take account of and compensate for non-response bias in surveys on sensitive topics,
techniques such as the Randomised Response Rate technique (RRT) and Unmatched
Count Technique (UCT) might be deployed.

In making use of administrative data to measure and diagnose corruption issues, for
example, data on the time taken to process a license, a project might as part of its remit
seek to reform and restructure the collection and production of such data by the
government agencies involved (drawing on established performance management
techniques and benchmarking methodologies) in order to make it more appropriate for
monitoring and evaluating improvements in administrative processes of the kind that
are known to reduce corruption.
The costs of corruption in Vietnam - Edited Report - August 2014
39
26. Discussion of these possible future research strategies and projects did not ignore or downplay
the difficulties involved. It was pointed out that corruption is inherently secretive. It is a topic
that many people do not wish to talk about for fear of self-incrimination or for reasons of
shame and guilt.
27. However, cases were discussed of successful, applicable anti-corruption research in other
research contexts that was able to overcome these barriers. In Vietnam, growing community
support for anti-corruption initiatives increases the prospect of obtaining willing research
subjects. Official anti-corruption policy implemented by the Government and the Party in
Vietnam also provides a climate that should be receptive to well-designed, feasible projects and
topics. Government agencies, while perhaps being hostile and suspicious towards proposals for
direct investigations of corruption within their own organizations, will share an interest in
identifying regulatory and service quality failures and exploring process reforms that will make
their agencies more effective, while also diagnosing and reducing corruption.
The costs of corruption in Vietnam - Edited Report - August 2014
40
APPENDIX 4: SYMPOSIUM AGENDA
Monday, 25 August – Cost of Corruption and policy responses
8:00-8:15
Registration
Opening
8.15-8.30
Remarks


Mr Vu Tien Loc, Chairman, Vietnam Chamber of Commerce and Industry (VCCI)
Mr. Neil Satchwell-Smith, Deputy Head, DFID Vietnam
Research on the costs of corruption in Vietnam
8.30-10.00
The impact of corruption in Vietnam. This session will present findings of three research
projects on the costs of corruption in Vietnam.
Chair: Dr. Bertram Spector, Coffey International Development
Keynote speakers:



The Impact of corruption on growth, Dr. Nguyen Ngoc Anh, Chief Economist,
Development and Policies Research Center (DEPOCEN).
The impact of corruption on Provincial Economic Development Performance, Dr. Dang
Quang Vinh, - Researcher, Vietnam Chamber of Commerce and Industry.
The impact of corruption at the firm level, Dr. Nguyen Van Thang, Director, Asia Pacific
Institute of Management, National Economics University
10.00-10.20
COFFEE BREAK
10.20-11.00
Discussion
Chair: Mr. Dau Anh Tuan, General Director, Legal Department, the Vietnam Chamber of
Commerce and Industry (VCCI)
Discussants:


11.00-12.00
Mr. Jairo Acuña-Alfaro, Policy Adviser, Public Administration Reform and AntiCorruption, UNDP Vietnam
Professor Mushtaq Khan, Department of Economics, School of Oriental and African
Studies (SOAS), London
Panel Discussion – Research and policy implications. Reflecting on the research findings
presented earlier, the panel will discuss how they compare to regional and cross-national
trends and seek to identify similarities and differences with other countries.
Chair: Mr. Jairo Acuña-Alfaro, Policy Adviser, Public Administration Reform and Anti-
The costs of corruption in Vietnam - Edited Report - August 2014
41
Corruption, UNDP Vietnam
Panellists:



Professor Mushtaq Khan, Department of Economics, School of Oriental and African
Studies (SOAS), London
Mr. Martin Painter, Emeritus Professor, Department of Public Policy, City University of
Hong Kong
Dr. Nguyen Van Thang, Director, Asia Pacific Institute of Management, National
Economics University of Vietnam
Discussion
12:00-13:00
LUNCH
Translating Research into Policy Reforms: some examples
13.00-14.00
Costs of corruption and governance responses – The Asian experience. This presentation will
highlight the costs of corruption and governance responses to different types of corruption.
Chair: Mr. Tran Nam Binh, Associate Professor, Australian School of Business, University of
New South Wales (UNSW), Australia
Keynote Speaker: Professor Mushtaq Khan, Department of Economics, School of Oriental and
African Studies (SOAS), London
Discussion
14.00-15.00
Panel Discussion - Corruption and growth in Asia. While some Asian countries experience
high growth, many are also blighted by corruption. This discussion will address global, regional
and country trends in corruption and economic growth.
Chair: Mr. Soren Davidsen, Senior Governance Specialist, World Bank
Panellists:


Professor Mushtaq Khan, Department of Economics, School of Oriental and African
Studies (SOAS), London
Mr. Tran Nam Binh, Associate Professor, Australian School of Business, University of
New South Wales (UNSW), Australia
Discussion
15.00-15.20
COFFEE BREAK
15.20-16.20
How Anti-corruption Commissions address corruption costs – a comparison of Indonesia
and the Philippines.
Chair: Dr. Bertram Spector, Coffey International Development
Keynote Speaker: Dr. Emil P. Bolongaita, Executive Director and Distinguished Service
The costs of corruption in Vietnam - Edited Report - August 2014
42
Professor of Public Policy and Management, Carnegie Mellon University Australia (via videoconference)
Discussion
16.20-16.30
Closing
Tuesday, 26 August - Opportunities and Challenges for Corruption Researchers
8.30
Introduction

8.30 -9.30
Dr. Bertram Spector, Coffey International Development
Improving the measurement of corruption. This presentation will discuss the range of ways to
measure corruption, their benefits, pitfalls and explore new approaches.
Chair: Martin Painter, Emeritus Professor, Department of Public Policy, City University of Hong
Kong
Keynote Speaker: Michael Johnston, Charles A. Dana Professor of Political Science, Colgate
University, USA (via video-conference).
Discussion
9.30-10.30
Panel Discussion - Innovative analytical tools. The panel will reflect on the different
approaches to analyse corruption, its causes and consequences, including qualitative,
quantitative and multi-pronged methods.
Chair: Dr. Bertram Spector, Coffey International Development
Panellists:



Edmund J Malesky, Associate Professor, Political Science, Duke University (via videoconference)
Professor Mushtaq Khan, Department of Economics, School of Oriental and African
Studies (SOAS), London
Martin Painter, Emeritus Professor, Department of Public Policy, City University of Hong
Kong
Discussion
10.30-10.45
COFFEE BREAK
10.45-12.00
Panel Discussion – Conducting corruption research in Vietnam. The panel will share
experience and discuss challenges researchers are confronted to when carrying out corruption
research in Vietnam. The session will also aim to identify priorities for future anti-corruption
research.
The costs of corruption in Vietnam - Edited Report - August 2014
43
Chair: Mr. Conrad Zellman, Deputy Executive Director, Towards Transparency
Panellists:




Dr. Nguyen Ngoc Anh, Chief Economist, Development and Policies Research Center
(DEPOCEN)
Dr. Dang Quang Vinh, Researcher, Vietnam Chamber of Commerce and Industry.
Dr. Nguyen Van Thang, Director, Asia Pacific Institute of Management, National
Economics University
Mr. Tran Nam Binh, Associate Professor, Australian School of Business, University of
New South Wales (UNSW), Australia
Discussion
12.00-12.15
Closing

12.15-13.00
Dr. Bertram Spector, Coffey International Development
LUNCH
The costs of corruption in Vietnam - Edited Report - August 2014
44
The costs of Corruption in Vietnam from a macro, provincial and
firm perspective
Edited Report
August, 2014