Corruption is a cost factor for the society or as Transparency International chairman Jose Ugaz said: “Corruption is a tax that is paid by the poorest in our countries.” But what about the companies? Corruption is also for them an additional tax?

The World Bank Group elaborates an annual index, which ranks 189 countries, based on their ease of doing business in relation to the local regulatory environment. In the 2014 list we find Singapore, New Zealand, Hong Kong, Denmark and South Korea on the first five positions. Two of these countries, Denmark and New Zealand, are also in the Top Five of Transparency International’s Corruption Perception Index 2014. If we compare the complete country listings and calculate the correlation coefficient, we get 0.79 as result. As this formula creates a value from 0 to 1, our results presents a strong statistic relation between the two indices.

EaseCorruption

Such a relation can be explained as in countries with a higher corruption level, an adequate execution of laws is not guaranteed by following the processes. Often governmental officials ask for bribes or at least a facilitation payment (interpreted as bribe according to most local laws).

Further it means that bribing often leads to success on the short run: the wished outcome gets achieved and thanks to general impunity, the chance of getting caught (“casino risk”) is relative low.

The “homo economicus” is following the direction, which seems to create the highest profit. This can mean giving in to the temptation to pay a bribe or going the hard way, denying the informal payment, use the legal opportunities and escalate the topic or as worst case, give up this particular business. All possible decisions mean that conducting business is complicated, including legal and financial risks.

The correlation shows a strong relation between the perceived corruption level and the difficulty to conduct business in the country. For the case that both values present a  difference, there is the pressure to come together at some point:

  • Corruption > Difficulty: As paying bribes does not seem to be necessary to conduct business, the society has the opportunity to use the available transparency to combat the local corruption level. On the other hand, corrupt institutions have an interest to keep the status quo and will try to raise bureaucracy to ensure their illegal position of power.
  • Difficulty > Corruption: Bureaucracy can provoke corruption, as employees and companies might start to look for “short-cuts” through the legal jungle. As the corruption level is still relative low, it is mandatory to reduce inefficient regulations to achieve a smooth and legal way to conduct business.

It is not possible to predict which of the two sides will be stronger. To reduce the corruption level, a political consensus is required, beyond the boundaries of political borders. An active society and independent journalism is requirement for this. Against this are efficient informal networks, which try to protect their-selves.

  • Difficulty = Corruption: A relative equilibrium is reached. As described above, the perceived corruption level is no result of a culture, but learnt. This insight gets fostered by the idea that the country is not a closed group, but includes temporary players; foreigners which do not have a problem to adapt to the relative equilibrium.

As the country is not a closed group, an external factor pressures the local status quo. Laws as the US “Foreign Corrupt Practices Act” or the “United Kingdom Bribery Act” evolve a global responsibility for companies to comply with, independent if they act in- or out-side the US / UK. For this companies not just have to comply with local laws, but with the strict US and UK one, including the risk of their potential fines.

With this the absolute equilibrium lays at perfect ease to conduct business together with zero corruption: low temptation (corruption) with low motivation (bureaucracy). This effect gets fostered as through globalization the group members are in interchange with others. Even if you live most of your time in a country with a higher corruption level, you have the possibility to stay temporally (holidays, work, university, etc.) in a country with a lower one. Here people enjoy the results of transparency and less inefficient bureaucracy. With a changed mindset they come back and demand a similar environment for their own region, groups and companies.

As the ease of doing business depends on the local corruption level, we can say that corruption is not only a tax for citizens, but also for companies. As countries are in a global competition for foreign investments, perceived corruption is a negative factor to attract such investments. At the end the sufferer are again the people, as adequate jobs are missing.

Sources

[1] Transparency International (2015): “Grand Corruption – The New Challenge”

[2] World Bank Group (2014): Doing Business

[3] Transparency International (2014): Corruption Perception Index

Advertisements