Conflict of interest and its dangerous consequences

17 October 2005

“An increasingly commercialised public sector that works closely with the business and non-profit sectors gives rise to the potential for new forms of conflict between the individual private interests of public officials and their public duties. In the private sector conflicts of interest have been identified as a major cause behind recent corporate governance shortcomings.”

This is the opening justification of a report on Managing Conflict of Interest in the Public Service produced by the OECD two years ago. The OECD is the club of rich countries which Thaksin aspires for Thailand to join under his leadership. The report defines conflict of interest like this: “A conflict of interest involves a conflict between the public duty and private interests of a public official, in which the public official has private-capacity interests which could improperly influence the performance of their official duties and responsibilities.” It goes on to argue: “While a conflict of interest is not ipso facto corruption, there is increasing recognition that conflicts between the private interests and public duties of public officials, if inadequately managed, can result in corruption.”

In 2003, a professor from Vanderbilt University in the US published a worldwide study about the political connections of business firms. This study showed these connections are unusually high in Thailand. In fact Thailand came second in the world. The only country higher was Russia. This means that the potential for conflict-of-interest is much higher in Thailand than in all other countries of the world except Russia – which is in an unusual stage of transition. 

The OECD's report is concerned about the overall effect of conflict-of-interest on government decisions. Economists have long had a rather more specific concern: its impact on economic growth.

According to economic theory, if government decisions on economic matters are influenced by business interests, then those decisions may not be in the best interest of the country. For example, if a contract or concession is awarded to the firm which has the best political connections, rather than to the most efficient firm, then the national economy loses some benefit. A single such example may not be very damaging. But the effects can accumulate. Efficient firms which don't have political influence may eventually go bankrupt because they can't get contracts. Then the politically connected firms don't have competitors so they don't need to try hard. So the economy loses even more benefit.

Fifty years ago, the Philippines was richer than Thailand, and its economy much more dynamic. That is no longer the case. Studies have argued that one main reason for the relative failure of the Philippines economy has been conflict of interest. A group of business families has dominated politics, taken many business opportunities, and grown inefficient. Other entrepreneurs have been crowded out.

For conflict of interest to come into plya, it does not mean that an entrepreneur gets political power and then uses that power directly to take decisions. Politics is a lot more complex than that. For example, bureaucrats in some office might take a decision which favours companies connected to the prime minister because they hope to please the prime minister, because they fear their jobs might be threatened if they did not, or just because they think it's the right think to do. Conflict of interest does not require a direct chain of command.

More recently, analysts have also begun to take an interest in the political implications of conflict of interest.

Those businessmen and politicians who benefit from conflict of interest have a vested interest in hiding their actions from public scrutiny. Governments which have major problems of conflict of interest may be tempted to use their powers to obstruct transparency.

For example, they might try to disable institutions such as anti-corruption bodies, remove effective corruption-busters from office, and place compliant allies in sensitive positions. They might invest heavily in gaining political support, or even perverting the democratic process, in order to prevent the parliamentary opposition having the ability to act as a monitor. They might restrict the freedom of information by using state-owned media as propaganda outlets, taking ownership positions in privately owned media, and intimidating journalists and editors by legal proceedings. In short, they may try to sabotage checks and balances, human rights, and transparency.

Of course, there are many reasons why politicians may want to use such methods to enhance their power, but disguising conflict of interest can be a major contributor. Such actions can have long-term impact on political development and citizen rights.

The OECD report has case studies on how eight advanced countries have acted to contain conflict of interest. The range of laws, monitoring procedures, education programmes, and public campaigns set out in these examples show how important this issue has become to some of the most advanced and sophisticated countries in the world. The report explains this is a consequence of the rising power of business, and the increasingly close and complex relations between the public and private sectors.

Several of the OECD country case studies cite two areas as specially problematic: the management of megaprojects, and the privatisation of state enterprises. They note the difficulties that occur when people shuttle between public and private sector jobs. They do not deal with situations in which the prime minister's family business hold major government concessions as this would be impossible under the laws of these countries, and unacceptable to the general public.

The OECD report stresses transparency, but also places special emphasis on the leadership and example from the top: “Senior officials set a personal example to others when they arrange their private capacity interests in a manner that preserves public confidence in their integrity and the integrity of their organisation. Mere compliance with the letter of the conflict-of-interest policy or law, narrowly interpreted, is not generally sufficient to encourage public confidence in an organisation's integrity.”