EMERGING ECONOMIES: …How corruption affects them

Economies that are afflicted by a high level of corruption—which involves the misuse of power in the form of money or authority to achieve certain goals in illegal, dishonest or unfair ways—are not capable of prospering as fully as those with a low level of corruption. Corrupted economies are just not able to function properly because corruption prevents the natural laws of the economy from functioning freely. As a result, corruption in a nation’s political and economic operations causes its entire society to suffer.

According to the World Bank, the average income in countries with a high level of corruption is about a third of that of countries with a low level of corruption. Also, the infant mortality rate in such countries is about three times higher and the literacy rate is 25% lower. No country has been able to completely eliminate corruption, but studies show that the level of corruption in countries with emerging market economies is much higher than it is in developed countries.

Corruption causes artificially high prices for low quality products and services

Corruption in the way deals are made, contracts are awarded, or economic operations are carried out, leads to monopolies or oligopolies in the economy. Those business owners who can use their connections or money to bribe government officials can manipulate policies and market mechanisms to ensure they are the sole provider of goods or services in the market. Monopolists, because they do not have to compete against alternative providers, tend to keep their prices high and are not compelled to improve the quality of goods or services they provide by market forces that would have been in operation if they had significant competition.

Embedded in those high prices are also the illegal costs of the corrupt transactions that were necessary to create such a monopoly. If, for example, a home construction company had to pay bribes to officials to be granted licences for operations, those costs incurred will, of course, be reflected in artificially high housing prices.

Inefficient allocation of resources

In best practice, companies choose their suppliers via tender processes (requests for tender or requests for proposal), which serve as mechanisms to enable the selection of suppliers offering the best combination of price and quality. This ensures the efficient allocation of resources.

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In corrupted economies, the companies that otherwise would not be qualified to win the tenders are often awarded projects as a result of unfair or illegal tenders (e.g. tenders that involve kickbacks). This results in excessive expenditure in the execution of projects, and substandard or failed projects, leading to overall inefficiency in the use of resources. Public procurement is perhaps most vulnerable to fraud and corruption due to the large size of financial flows involved. It is estimated that, in most countries, public procurement constitutes between 15% and 30% of gross domestic product (GDP).

Uneven distribution of wealth

Corrupted economies are characterised by a disproportionately small middle-class and significant divergence between the living standards of the upper-class and lower-class. Because most of the country’s capital is aggregated in the hands of oligarchs or persons who back corrupted public officials, most of the created wealth also flows to these individuals. Small businesses are not widely spread, and are usually discouraged because they face unfair competition and illegal pressures by large companies who are connected with government officials.

Low stimulus for technology advancement

Because little confidence can be placed in the legal system of corrupted economies in which legal judgments can be rigged, potential innovators cannot be certain their invention will be protected by patents and not copied by those who know they can get away with it by bribing the authorities. There is thus a disincentive for innovation – and as a result emerging countries are usually importers of technology, because such technology is not created within their own societies.

 

Shadow economy (shadow market)

Small businesses in corrupt countries tend to avoid having their businesses officially registered with tax authorities to avoid taxation. As a result, the income generated by many businesses exists outside the official economy and thus are not subject to state taxation or included in calculating the country’s GDP. Another negative of shadow businesses is they usually pay their employees lower wages than the minimum amount designated by government; and they do not provide acceptable working conditions, including appropriate health insurance benefits, for employees.

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Low attractiveness for foreign investors and international trade

Corruption is one of the disincentives for foreign investment. Investors who seek a fair, competitive business environment will avoid investing in countries where there is a high level of corruption. Studies show a direct link between the level of corruption in a country and measurements of its business environment’s competitiveness.

Low-quality education and healthcare provision

A working paper of the International Monetary Fund (IMF) shows corruption has an adverse impact on the quality of education and healthcare provided in countries with emerging economies. Corruption increases the cost of education in countries where bribery and connections play an important role in the recruitment and promotion of teachers. As a result, the quality of education decreases. Also, corruption in the designation of healthcare providers and recruitment of personnel, as well as the procurement of medical supplies and equipment, in emerging economies results in inadequate healthcare treatment and a substandard, or restricted, medical supply -thus lowering the overall quality of healthcare.

Ghana’s Case

The country’s parliament, last year, passed the Special Prosecutor’s bill into law to fight corruption; the President has subsequently nominated someone into that office (awaiting parliamentary approval). Ghanaians, for that matter, are waiting to see if corruption can be brought to the barest minimum, for the economy to thrive.

Summary

Many countries with emerging economies suffer from a high level of corruption that slows their overall development. The entire society is affected as a result of the inefficient allocation of resources, the presence of a shadow economy, and low-quality education and healthcare. Corruption thus makes these societies worse off and lowers the living standards for most of their populations.

ABOUT THE AUTHOUR

Sam Bediako-Asante is the CEO of Sambed Consult, a Business/Investment Advisory firm. He is also a former Banker, a Professional Administrator, and is presently a certified and accredited SA Specialist of South African Tourism in Ghana.

He can be reached on 0277518634 or email: sambed33@gmail.com

 

Credit: Elvin Mirzayev CFA, FRM

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