Anti-Corruption Initiatives for South Korean Water Management

The Perspective of Economic Ethics

Diploma Thesis, 2010

61 Pages, Grade: 1,3


Table of Contents

Table of Figures

Index of Tables

1. Introduction

2. An Analysis of Corruption from the Perspective of Economic Ethics
2.1 Burdening Corruption vs. Unburdening Corruption
2.2 An Analysis of Corruption from the Perspective of Economic Ethics
2.2.1 Principal-Agent Theory
2.2.2 A Game Theoretic Analysis of Corruption
2.3 Corruption in Infrastructure Projects
2.4 Integrity Pacts

3. Case Study Republic of Korea
3.1 Country Profile South Korea
3.2 Corruption in Korea and Anti-Corruption Measures in the Public Sector
3.3 K-PACT
3.3.1 History, Development and Organization of the K-PACT
3.3.2 Achievements and Limitations
3.4. Integrity Pact for Water Resource Management
3.4.1 Water Resources in Korea
3.4.2 Establishment of an Integrity Pact

4. Evaluation and Recommendations
4.1 An Evaluation of the Progress made by Korean Society
4.2 Additional Measures and Recommendations

5. Conclusion



Appendix A: The K-PACT Foundation Document

Appendix B: Interview with Geo-Sung Kim (Transparency International)

Table of Figures

Figure 1: Corruption in case of the state being the supplier of goods

Figure 2: Corruption in case of the state being the demander of goods

Figure 3: Collusion between the agent and the client

Figure 4: Extended Principal-Agent Model

Figure 5: The social dilemma underlying unburdening corruption

Figure 6: Locked-in effect resulting from undifferentiated penalties

Figure 7: Alteration of the game due to different penalties

Figure 8: Development of the CPI in Korea since 1995

Index of Tables

Table 1: A framework of corruption in different sub-sectors of the water sector

Table 2: Anti-corruption measures taken by the Korean government

1. Introduction

Corruption, defined as the “abuse of entrusted power for private gain,”[1] has been a recurrent theme throughout South Korean (hereinafter referred to as Korean) history. Since Korea joined the Organization for Economic Cooperation and Development (OECD) in 1996, it has continuously been ranked among the lowest 20th percentile in Transparency International’s Corruption Perceptions Index (CPI) barometer.[2] The term of corruption primarily refers to the public sector. Therefore, Shleifer and Vishny offer a more narrow definition of corruption as being “the sale by government officials of government property for personal gain.”[3] Corruption occurs at the interface between the public sector and the private one, whenever a public official is endowed with the discretionary power over the distribution of goods and services.[4] The consequences of corruption are multifarious, including the lowering of investment and economic growth, a loss of tax revenue, when corruption appears in form of tax evasion, adverse budgetary consequences, for instance by reducing the level of tax collection, and a reduction of the effectiveness of aid flows in developing countries and distortion of the composition of government expenditures.[5]

One sector that is known to be very susceptible to corruption is the construction sector, covering major public investment projects. The execution of these projects is usually contracted out by the government. Rent-seeking is among the key components of any corrupt act and large infrastructure projects are characterized by huge size and high capital intensity, making corruption in this sector more profitable than in any other sectors.[6] In the following paper, the problem of corruption in major infrastructure projects will be analyzed with a special focus on the water sector. Chapter two offers an analysis of the problem of corruption using two economic approaches, the principal agent theory and a game theoretical analysis of the problem and its solutions. Special focus will be led onto the problem of corruption in major infrastructure projects, as well as the introduction of the integrity pact as a device to combat corruption in this sector.

Chapter three presents to a case study of the Korean water resource management sector and its efforts to combat and prevent corruption. As mentioned above, Korea is a country marked by high levels of corruption on the one hand, yet, it is also characterized by huge efforts to fight corruption on the other hand. Having given a short introduction into the history and current state of corruption in Korea, the institutional efforts being made as to combat corruption since the 1990s are being discussed. As a complementary means to these institutional reforms, an integrity pact, the Korean Pact on Anti-Corruption and Transparency was inaugurated in 2005. This integrity pact serves as a model for the establishment of an integrity pact in the water sector and, therefore, will be analyzed with regard to its achievements and limitations, before the last part of chapter two focuses on the Korean water management sector and the suggestion of an integrity pact as an anti-corruption initiative.

The last chapter evaluates the initiatives taken by Korean society to combat and prevent corruption in the water management sector. It draws conclusions from the perspective of economic ethics and, upon this evaluation, recommendation are being made.

2. An Analysis of Corruptionfrom the Perspective of Economic Ethics

2.1 Burdening Corruption vs. Unburdening Corruption

Different types of corruption exist in the public sector, which Shleifer/Vishny and Pies characterize as corruption with theft and without theft (Shleifer and Vishny[7] ) or burdening corruption and unburdening corruption according to Pies.[8] In the model by Shleifer and Vishny corruption is examined with the state being only the supplier of goods, while Pies furthermore includes the case of the state demanding goods. Both models will be explained in the following paragraphs.

Shleifer and Vishny assume a homogenous good supplied by the state, which is demanded by private agents. A government official is endowed with the power of either approving or denying the provision of this good. Furthermore, the government official encounters no risk of detection or punishment by his superiors when restricting supply, thereby characterizing the government official as a monopolist seeking to maximize his own utility by maximizing the bribes collected by selling government provided goods.[9]

Next, Shleifer and Vishny set the price of the good being sold as p and examine the marginal costs of the government officer for the provision of the good. Underlying this assumption, Shleifer and Vishny distinguish two cases of corruption, the provision of a government good without theft and the provision of a government good with theft. In the first case, the government official may charge a price higher than the official price p of the good. However, he turns the official price of the good over to the government. The marginal costs of the officer, therefore, in this case are p. In the second case, the provision with theft, the official keeps the received money for himself, not handing it over to the government. The peculiarity of this type of corruption is, that the price of the bribe charged may be lower than the actual costs of the service initially charged by the government. This type of corruption, for instance, is a common phenomenon among custom officials, when letting goods through the border for a bribe less than the official price without handing any money to the government. The marginal costs of the corrupt official, therefore, amount to zero.[10]

Extending the model by Shleifer and Vishny further, Pies refers to these two phenomena of corruption as burdening (corruption with theft) and unburdening (corruption without theft) corruption in the case of the state being the supplier of goods.[11] Examining the phenomenon of burdening corruption with the state being the supplier of goods, analogue to corruption without theft, corruption leads to an increase in the official price: p+y with y representing the monetary value added by the corrupt official. In case of unburdening corruption, again analogue to Shleifer and Vishny, the price of the good provided by government will be lower than the actual price, p-x, since the government official has the ability to hide the service provided from the government, therefore only charging a price below the official price as to maximize his own utility.

illustration not visible in this excerpt

Figure 1: Corruption in case of the state being the supplier ofgoods

Source: Pies (2008b; p. 120)

The reverse effect occurs in the case of the public official acting on behalf of the state as a demander of goods. If a public official is able to negotiate an unofficial price reduction, which he will not report to the government, but rather directly transfers to his own bank account, one can speak about the phenomenon ofburdening corruption. In contrast, unburdening corruption occurs, when the public official and the supplier negotiate an increase in the price at the expense of the state, which they will then share among themselves.[12]

illustration not visible in this excerpt

Figure 2: Corruption in case of the state being the demander of goods

Source: Pies (2008b; p. 120)

Analyzing the incentives underlying the main actors’ willingness to engage in corruption reveals a major difference between burdening and unburdening types of corruption. While the phenomenon of burdening corruption is characterized by a conflict of interests, unburdening corruption depicts a harmony of interests. Participating in burdening corruption, the victim is the person bribing the official. Thus, both of them have diverging interests in whether or not to participate in corruption, since the official gains while the briber looses in this deal. With regard to unburdening corruption the main victim is the state, meaning that both parties, the briber and the official benefit from participating in a corrupt act. Thus they show a harmony of interests.[13]

Another distinction between burdening and unburdening corruption becomes obvious when characterizing both with regard to the state’s role in supporting the corrupt system. Burdening corruption becomes a top-down societal phenomenon. If, despite the bribers incentive not to engage in corruption, corruption in the public sector keeps persisting, and major parts of the government body must be supporting the corrupt system and an official, who engages in corruption while shielded by his colleagues and superiors. The power of the state is misused for the exploitation of its citizens, for personal enrichment by the government body, a type of corruption usually appearing in developing countries.[14]

Unburdening corruption is a bottom-up phenomenon, that, in contrast to the systemic problem of burdening corruption, appears decentralized or locally. The most important prerequisite of unburdening corruption is absolute secrecy, since it only works if the rest of the government body lacks information about the existence of corruption. Unburdening corruption harms the government, meaning that the government has a very strong incentive to fight this type of corruption. Yet it is able to exist, if performed by single government officers in secrecy, making it a local and decentralized bottom-up phenomenon.[15]

Having distinguished between these two types of corruption, in the following paper, the term of corruption refers to the phenomenon of unburdening corruption.

2.2 An Analysis of Corruptionfrom the Perspective ofEconomic Ethics 2.2.1 Principal-Agent Theory

Analyzing the determinants of corruption, economic analysis draws upon the principal-agent- theory, one approach to tackle the problem of corruption. This theory defines three actors, a principal, an agent and a client. The principal represents a high ranking government official who is assumed to be benevolent and embodies the public interest, while the agent, a lower ranking public official, interacts on behalf of the principal with the client.[16] The agent is endowed with discretion in his job, which he could misuse for his personal benefit by betraying the principal’s interests for his own.[17] Uncertainty and moral hazard, therefore, characterize the relationship between the principal and the agent, since the principal lacks the necessary information to be able to judge if the agent does everything necessary to fulfill the principal’s aims. In economic terms, corruption signifies a contract between the agent and the client that transgresses the principal’s interest.[18] Assuming a low risk of detection and rational behavior, the agent will choose to engage in corruption, if his net benefit resulting from the act of corruption outweighs his net costs. Likewise, the client will participate in an act of corruption, ifhis expected net benefit also outweighs his net costs.[19]

Colluding at the expense of the principal, the agent and the client share an interest in keeping their cooperation secretly. Thus, they purposefully erect a barrier to the access of information, by, for instance, manipulating tendering procedures, a conspirative exchange of information or inconspicuously transferring illegal payments.[20] The relationship among the three parties is depicted in the following illustration:

illustration not visible in this excerpt

Figure 3: Collusion between the agent and the client

Source: Pies (2008; p. 142)

One solution, often referred to in the context of corruption, is the law, which aims at safeguarding the integrity of the bond of trust between the principal and the agent.[21] Corruption becomes a crime that is punished with the full vigor of the law. Yet, it faces limitations with regard to its impact in the prevention of corruption, which is mainly due to the fact that penalties according to the law can only become effective, once the act of corruption has been revealed. However, the law does not prove to be an effective means in breaking the barrier to the access of information the agent and the client erect, as to hide their collusion at the expense of the principal.[22] Unlike other crimes, corruption lacks the ability of having the victim cooperate with law enforcement agencies, since in case of successful cooperation between the agent and the client, the victim, the principal, does not know about the crime itself. Another problem about the effectiveness of the law in the prevention of corruption is the fact, that the agent and the client only face a relatively low risk of detection which decreases even further through successful cooperation between both.[23]

A solution on how to solve this problem of corruption becomes more apparent, when the legal owner, upon whose behalf the client acts, is integrated into the model, as shown in figure 4.

illustration not visible in this excerpt

Figure 4: Extended Principal-Agent Model

Source: Pies (2008b; p. 147)

In this model two barriers to the access of information exist abreast. The corrupt agent takes the bribe without reporting any government services, thereby making it almost impossible for the principal to break through the barrier of access of information between him and his agent. The client, in contrast, uses company money for bribing the agent as to gain a competitive advantage over other companies. This reveals the asymmetry in the level of access of information between the principle and the legal owner of the bribing company. The owner knows about the bribe being paid and, hence, is able to make an active decision over whether to engage in corruption or not, while the principal passively has to trust in the integrity of his agent.[24]

Summarizing this, since the principal is the one being hurt by the collusion between the agent and the client, he has a strong incentive in the prevention of corruption. Yet, at the same time, due to the existence of the barrier to the access of information, his abilities to prevent corruption are very limited. The legal owner, in contrast, when already being engaged in acts of corruption, has a very low incentive to withdraw from this behavior yet he could prevent corruption relatively easy.[25] For that reason, means to prevent corruption should be addressed directly to companies, rather than targeting at the principal.

The underlying presumption of companies having an interest in the prevention of corruption will be deducted in the next chapter.

2.2.2 A Game Theoretic Analysis of Corruption

Similar to other situations, where individually rational behavior leads to an undesired outcome for the collective, the problem underlying corruption is a social dilemma. Social dilemmas are situations in which individual rationality leads to collective irrationality. Even though there is no ambiguity on the actions of a single individual, when trying to maximize the own pay-off, the collective is hurt by the outcome.[26] The best known version of such a dilemma is the “tragedy of the commons” as introduced by Hardin. Here, a common grazing area is used freely by the dairy farmers of the town. It is obvious, that every farmer, trying to maximize his own outcome, has an incentive as to increase the number of cattle he grazes in this area. Yet, if all farmers keep increasing their number of cattle, they will eventually overgraze the commons, thereby diminishing the collective interest.[27]

Situations characterized as a social dilemma share one distinct feature: a deficient equilibrium.[28] This equilibrium is deficient due to the existence of at least one other outcome, in which every player is better off. However, it represents an equilibrium since no player has an incentive to change his behavior. A group of players facing a social dilemma might be able to understand each other’s decision and realize the dilemma itself, yet may not be able to change their behavior as to escape the dilemma.[29] The following model shows the social dilemma underlying the phenomenon of unburdening corruption and deduces strategies on how to solve the dilemma situation and move to an efficient equilibrium.

Underlying the model is the assumption of an agent acting upon behalf of a principle and two competing companies representing potential clients. Each of these companies is interested in gaining a competitive advantage over the other party.[30] Facing a corrupt public official, both companies have to consider whether or not to engage in an act of corruption. The arising problem is that companies merely have a realistic choice, but to engage in corruption, since withdrawing from it will inevitably lead to a competitive disadvantage over the other company. As a direct consequence, unburdening corruption will inevitably lead to competition of corruption amongst potential clients, thereby characterizing the phenomenon of unburdening corruption as being epidemic.[31]

Given two companies the social dilemma can be illustrated as follows:

illustration not visible in this excerpt

Question: Engage in unburdening corruption?

Figure 5: The social dilemma underlying unburdening corruption

Source: Pies (2008b; p. 128)

This dilemma represents a typical prisoner’s dilemma in game theory. Both companies have to decide about their engagement in corruption. Analyzing and comparing the potential pay­offs for each company reveals their dominating strategies. A dominating strategy is a strategy that leads to the best outcome for one individual regardless of the actions of the other participants.[32] Lacking the information about company B’ behavior, company A has to decide whether or not to engage in corruption. The decision is based upon a comparison of all potential pay-offs for A. Assuming that company В decides to engage in corruption, the potential pay-off company A could realize would be in case of non engagement in corruption the worst outcome (w) in quadrant IV and in case of engagement the third best outcome (t) in quadrant III, which is better than (w), therefore implying that it will be best for company A to engage in corruption if company В decided to engage as well. In case that company В decided not to engage in corruption and company A also decides not to do so, A could realize its second best (s) outcome in quadrant I. However, it could still improve its outcome in this case, by choosing to engage in corruption, meaning that company A would be able to realize its best outcome (b) with the highest pay-off in quadrant II. This analysis shows, that, independent from the actions taken by company В, company A is always able to realize a higher pay-off, if it chooses the strategy to engage in corruption. The same applies to company В when deciding whether to engage in unburdening corruption or not.

Given these dominant strategies, both companies realize the equilibrium in quadrant III. As stated earlier, social dilemmas are characterized by a deficient equilibrium. In this case it is obvious, that both companies could realize the better outcome in quadrant I. Moreover, they do not only loose the desired competitive advantage, but also succumb to the risk of detection and punishment. Here, individually rational behavior has led to an outcome that is unfavorable for the collective. Since both companies could have realized a mutual better outcome, they show an interest in an alteration of the incentive structure underlying their actions, as to realize the outcome in quadrant I. Thus, to solve this social dilemma the incentive structure for the individual strategies of both participants has to be altered.[33]

One solution that appears to be reasonable at a first glance is to impose punishment upon engagement in corruption. Yet, there has to be a distinction between ex ante penalties and ex post penalties. The former one can serve as a device in preventing actors from their engagement in unburdening corruption. However, if this phenomenon is already established, undifferentiated penalties will rather corroborate this social dilemma situation, than supporting to overcome it, as shown below.[34]

illustration not visible in this excerpt

Question: Reveal participation in unburdening corruption?

Figure 6: Locked-in effect resultingfrom undifferentiated penalties

Source: Pies (2008b; p. 130)

Again analyzing the pay-off structure of both players shows that in the case of undifferentiated penalties, no player will have an incentive in revealing his participation in corruption. Independent from the action of the other player, each participant realizes his best outcome, when hiding his participation, because revealing it will not only result in a loose of the competitive advantage against the other player, but also in prosecution and monetary penalties.[35]

Introducing differentiated penalties proves to be a more effective means for altering the incentive structure of the various players and, therefore, eventually their behavior:


[1] Eigen (2003; p. 13).

[2] Cf. Dalton (2005; p. 237).

[3] Cf. Shleifer and Vishny (1993; p. 559).

[4] Cf. Rose-Ackerman (ND;p. 31).

[5] Cf. Mauro (1997; p. 6 f.).

[6] Cf. Tanzi and Davoodi (1998; p. 3 f.).

[7] Cf. Shleifer and Vishny (1993; p. 601-604).

[8] Cf. Pies (2008b; p. 86-93).

[9] Cf. Shleifer and Vishny (1993; p. 601).

[10] Cf. Shleifer and Vishny (1993; p. 601 f.).

[11] Cf. Pies (2003; p. 4).

[12] Ibid.

[13] Cf. Pies (2008b; p. 89).

[14] Cf. Pies (2003; p. 5 f.).

[15] Cf. Pies (2008b; p. 90).

[16] Cf. Klitgaard (1991; p. 22).

[17] Cf. Bac (1996; p. 280).

[18] Cf. Gilardi and Braun (2002; p. 147).

[19] Cf. Klitgaard (1991; p. 22-24).

[20] Cf. Pies (2008; p. 5 f.).

[21] Cf. Pies (2008b; p. 145).

[22] Ibid.

[23] Cf. Pies (2008b; p. 145 f.).

[24] Cf. Pies (2008; p. 7 f.).

[25] Cf. Pies (2008b; p. 156).

[26] Cf. Kollock (1998; p. 183-185).

[27] Cf. Marwell and Ames (1979; p. 1335 f.).

[28] Cf. Kollock (1998; p. 184).

[29] Cf. Kollock (1998; p. 184f.).

[30] Cf. Dabla-Norris (2002; p. 113).

[31] Cf. Pies (2008b; p. 104).

[32] Cf. Kollock (1998; p. 185.).

[33] Cf. Pies (2008b; p. 128 f.).

[34] Cf. Pies (2008b; p. 105 f.).

[35] Cf. Pies (2008b; p. 127 f.).

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Anti-Corruption Initiatives for South Korean Water Management
The Perspective of Economic Ethics
Martin Luther University
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Annette Nölle (Author), 2010, Anti-Corruption Initiatives for South Korean Water Management, Munich, GRIN Verlag,


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