The Bane Of Corruption
Corruption is a major problem for most emerging markets, and in truth, quite a few developed states. Time and time again in BMI’s analysis on emerging markets, my colleagues and I have written on how governments need to crack down on corruption, if they want to attract greater foreign investment and prosper. However, this is a lot easier said than done, for in many countries, corruption is a way of life.
From a country risk point of view, corruption has the following negative impacts:
- Corruption (or perceptions thereof) undermines the popularity and legitimacy of governments, especially if the elites are much richer than the general public and are seen to be rich mainly because their privileged positions allow them to acquire wealth through corrupt practices.
- Corruption undermines the reliability of institutions, which in turn undermines investment (both domestic and foreign). Foreign investors seek transparency in the legal system and fair competition for investment contracts. Shadowy non-transparent awarding of contracts is undesirable.
- Corruption can lead to false recording of budgetary revenues and weak tax collection, which in turn undermine countries’ fiscal safety. How can a country avoid crisis if its fiscal deficit is 10% of GDP rather than the officially recorded 2% of GDP? Sooner or later, the truth will out. Fiscal transparency is a major issue right now, given that many countries are running severe budget deficits.
- Corruption may cause international aid to be neutralised, if the bulk of the money is spirited away into the elites’ foreign bank accounts. Indeed, many commentators believe that donor aid can fuel corruption.
- Corruption tends to cause contracts to be allocated to politically well-connected rather than meritorious firms, thus undermining competition and the quality of products/services/infrastructure. In other words, corruption can foster mediocrity.
- Corruption can mean that safety regulations are bypassed. This can lead to shoddy building construction (which later becomes apparent through accidents or natural disasters), or dangerous levels of toxic substances in consumer goods (toys, food, etc, as was the case with many Chinese goods exposed by the Western media in 2007).
- Corruption can lead to essential goods (e.g. grain, food) being hoarded, leading to an artificial spike in prices (and thus inflation). Given that inflation is politically destabilising in any country, this is a potential risk.
- Corruption can undermine security, if the police and military take bribes from drug cartels or well-financed insurgents, or sell weapons on the black market. Criminality in militaries can be a big problem, because it weakens national defence against both external and internal threats. Security is a global issue in the age of terrorism, and the West doesn’t want terrorists infiltrating them or smuggling weapons via corrupt airports.
- Corruption can undermine the education of the labour force, if bribery for grades and university places is the norm. This means that the quality of graduates will be below their ‘official’ standards, making it hard for them to compete in an increasingly globalised world.
That said, there are a few areas where corruption provides some short-term economic benefits:
- Corruption can bypass red tape, thus speeding up investment and business.
- The existence of a black market economy can serve as a vital safety cushion for societies in which the official economy is performing very badly.
- The black market can also provide consumers with goods and services which they might otherwise be denied, much to their dissatisfaction.
Overall, though, I’d say the impact of corruption is highly negative from a country risk point of view. US political scientist Francis Fukuyama may have been wrong about ‘the End of History’, but he subsequently wrote a book called ‘Trust’ (1996) in which he argued that societies with low degrees of trust tend to be less economically successful, because successful economies are highly reliant on trust (e.g. between borrowers and lenders, government and public, producers and suppliers, etc). While his selection of countries may have been questionable, his basic thesis makes sense. Corruption, of course, undermines trust.
The main difficulty for governments in fighting corruption is that many of the elites benefit from the existing system and have no incentive to change it.
I will end on an anecdote. Many years ago, I met a Ukrainian postgraduate student at a leading UK university who was about to finish his course. When I asked him what he was going to do after his studies, he said that he was going to move to Canada. I then asked him if the Ukrainian government (which was partly funding his studies) would not be upset that he would go to Canada instead of returning home, where his knowledge and skills could presumably benefit the economy. His response was that Ukraine’s corrupt elites were quite happy to see people like him stay out of the country, because those who study abroad, educated in ideas such as transparency and clean governance, might challenge the existing elite and try to shake up the system. Perhaps his reply was exaggerated, but it nonetheless underscores how corruption can become so pervasive.