Over the years, corruption has become a rising menace that its effect is rampant throughout our society. Recently, this issue created headlines across several countries such as India, Mexico, and China who have been struggling to combat corruption. Charles Caleb Colton once said: “Corruption is like a ball of snow, once it is set rolling, it must increase.” It is a type of insatiability which manipulates the human mind. It has made its roots strong in both developed and developing economies. It can take several forms such as bribery, extortion, embezzlement, fraud etc. According to World Bank statistics, the average income of countries with high levels of corruption is about one-third of the countries with low levels of corruption. Through this blog, we take a look at how corruption can affect businesses and an economy as a whole.

Let us take a look at the Berlin based corruption watchdog, Transparency International’s (TI) Corruption Perception Index (CPI) that provides rankings for over 176 countries on corruption levels. In 2016, Northwestern European countries (Nordic countries) such as Denmark, Norway, and Sweden continued to maintain their top rankings in the CPI index as least corrupt countries. Meanwhile, isolated, underdeveloped authoritarian countries such as South Sudan, North Korea, and Somalia scored bottom level/least scores as most corrupt countries. These are the countries afflicted with inefficiently functioning public institutions whereas least corrupt Nordic countries have greater degree of press freedom, access to information about public expenditure, and independent judicial systems.

India is reeling under the issue of rampant bureaucratic corruption. Ranked 79th in the CPI index, it shares the ranking with countries such as China, Brazil, and Belarus. In recent years, China and India have been pro-actively implementing reforms to combat high levels of corruption. Recently, in a sudden and unanticipated move, India abolished INR 500 & 1,000 notes as means to end corruption and black money. The rationale behind the move was to curb black market economy that sustains illegal activities such as bribery, tax evasion, counterfeiting, and terrorist finance etc. where the transactions are largely dealt in cash. Also, the informal sector in India predominantly deals in cash transactions. Hence, the demonetization move was expected to slow down the fastest growing Indian economy, mainly because of the curtailed cash circulation. Nevertheless, recently India released its GDP figures for the fourth quarter that startled economists and financial institutions across the world by exhibiting a growth rate of 7%, beating IMF’s forecast of 6.5%.

Mexico’s rank plummeted 28 places on the 2016 CPI Index. As per TI, corruption scandals continue to escalate in Mexico, whose decline on the index was the largest in Latin America (LATAM). The anti-corruption reforms and the implementation of the first stage of the National Anti-Corruption System weren’t adequate to mitigate the effect of continuous corruption scandals throughout the country. Jamaica’s ranking plunged by 14 places from 69 in 2015 to 83 in 2016. The reason for the decline is primarily owing to a key anti-corruption bill still languishing in Parliament as it continues to face criticism over its adequacy/efficacy.

On the other hand, countries like Singapore and Denmark have persistently maintained low corruption levels. Therefore, businesses operating in these locations would relish lower disruptions in operations because of less geo-political tensions, fewer bureaucratic hurdles, and minimal economic impact  due to bribery, fraud etc. when compared to locations such as Somalia and, South Sudan. On the flip side, higher ranked countries are not completely immune to issues like conflict of interests, illicit finance, and wrongful law enforcement that aggravates corruption.

The Paradox of Corruption

There is a saying that “A coin has two sides”. So now, a question arises, “Can corruption be good for the economy?” Corruption is certainly considered bad for an economy but there are times when it can lead to desired outcomes. Can this be true? In Blattman’s words, “Most of us fail to imagine that corruption can also grease the wheels of prosperity. Yet in places where bureaucracies and organizations are inefficient (meaning entrepreneurs and big firms struggle to transport or export or comply with regulation), corruption could improve efficiency and growth. Bribes can act like a piece rate or price discrimination, and give faster or better service to the firms with highest opportunity cost of waiting.”

However, on the other hand, as corruption becomes prevalent, people start losing faith in the system which is never good for an economy. It hampers the growth and prosperity of an economy as it becomes strenuous for an economy to function in an efficient manner. Corruption inevitably results in sluggish business climate when public trust is put at risk. When resources are misused, the efficiency of business suffers. It is difficult to eliminate corruption completely. Also, what can few honest people do when it is so deeply rooted in the minds of some people?

How can businesses safeguard themselves from this never ending threat/risk of corruption?

As a result of prevailing corruption levels worldwide, it is critical for a business to choose a location for expanding their operations wisely. Once they decide upon a location, it is important to study and understand the legalities of the contracts there and be vigilant while drafting contracts. Firms should seek legal advice or appoint a local statutory expert to review specific documents for a deeper understanding of the functioning of government agencies. Furthermore, it is crucial to hire clean resources. Thus, companies must be extra cautious with their recruitment process. Mandatory background check is recommended especially while appointing people for higher level and critical job positions.

Alarming cases of corruption and frauds have been encapsulated by our Location & Supplier Risk monitoring tool- SupplyWisdomSM. For more insights and regular monitoring of these frauds/incidents impacting businesses and economy, subscribe to location reports and alerts from SupplyWisdomSM.

Soumya Rajan

Soumya Rajan

Research Analyst at Neo Group
Soumya Rajan is a Research Analyst in the Supply WisdomSM Team at Neo Group. She is responsible for monitoring location risks globally and identifying key trends on global locations. Her role involves research and analysis of data sets and creating comprehensive reports with actionable guidance and valuable insights to help clients comprehend location risks. Besides this, she also offers cross functional support to Supplier risk monitoring, Advisory and Marketing teams at Neo. Soumya holds a Master’s degree in Business Administration and a Bachelor’s degree in Commerce.
Soumya Rajan