Corruption: The latent impediment of investor confidence

Preamble:

THIS week’s instalment is a continuation of the previous week’s article on investor confidence as a key to unlocking MFIs financial support and FDI.

It is no secret that Zimbabwe is controversially classified among corrupt nations of this world, with a corruption perception index (CPI) of 21 and ranking number 150 out of 177 corrupt countries. The truth though is that corruption in this country is not a myth, but an institutionalised pandemic. Highest offices in the land have acknowledged the existence of corruption in this country, the latest being the office of the Vice-President. We were made to understand that not all ministers are corrupt by Vice-President Mnangagwa when he was speaking to journalists at the launch of the $344 million Special Programme on Maize Production for Import Substitution recently when he said, “Zimbabweans are very innovative and they may find a window of stealing from the system that we are putting down. But we cannot be afraid to implement a good programme because we fear somebody stole something last year and those who would be found wanting, the records will be there, you must pay and nothing will be for free and if you are found to be corrupt we have our courts and they will deal with you”.

How corruption affects emerging or developing economies:

Economies that are afflicted by a high level of corruption — which involves the misuse of power, whether in the form of money or authority, in order 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. 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 percent 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.

Low attractiveness for foreign investors and international trade

Corruption is one of the impediments and disincentives for foreign investment. Investors who seek a transparent and fair, competitive business environment will avoid investing in countries where there is a high level of corruption. Studies show that there is a direct link between the level of corruption in a country and measurements of the competitiveness of its business environment. 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 that their invention will be protected by patents and will not be copied by those who are not afraid of being subject to punitive measures by the authorities, because they can bribe these authorities. There is thus a disincentive for innovation, and as a result emerging economies are usually the importers of technology, because such technology is not created within their own domestic economic sectors.

Shadow economy

Small entrepreneurs in corrupted economies 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 and are not included in the calculation of the country’s GDP. Another negative effect of shadow businesses is that they usually pay their employees lower wages than the minimum amount designated by the Government and they do not provide acceptable working conditions (including appropriate health insurance benefits) for employees.

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 entrepreneurs are not widely spread and are usually discouraged because they face unfair competition and illegal pressures by large companies who are connected with these corrupt government officials.

Inefficient allocation of resources — In best practice companies choose their suppliers via tender processes (request for tender or request for proposal) which serve as mechanisms to enable the selection of suppliers that offer the best combination of price and quality. This ensures the efficient allocation of resources. In corrupted economies the companies that otherwise would not be qualified to win the tenders, are oftentimes awarded projects as a result of unfair or illegal tenders — tenders that involve kickbacks. This results in excessive expenditure in the execution of projects, and substandard or failed projects etc, that lead to overall inefficiency in the use of resources. Public procurement perhaps is most vulnerable to fraud and corruption due to the large size of financial flows involved. It’s estimated that in most countries public procurement constitutes between 15 percent and 30 percent of GDP.

Artificially high prices and low quality of products and services — Corruption in the way deals are made, contracts are awarded, or economic operations are carried out, may lead 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 impelled 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, these costs incurred will, of course, be reflected in artificially high housing prices.

The bottom line — Most 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 of most of their populations.

In conclusion, corruption and economic turmoil often go hand-in-hand. Where corruption is systemic, the formal rules remain in place, but they are superseded by informal rules. It may be a crime to bribe a public official, but in practice the law is not enforced or is applied in a partisan way, and informal rules prevail. Government tender boards may continue to operate even though the criteria by which contracts are awarded have changed. Seen in this light, strengthening institutions to control corruption is about shifting the emphasis back to the formal rules. This implies acknowledging that a strong legal framework to control corruption requires more than having the right legal rules in place. It means addressing the sources of informality, first by understanding why the informal rules are at odds with the formal rules and then by tackling the causes of divergence. In some countries the primary reason for divergence may be political, a manifestation of the way power is exercised and retained.

Dr Bongani Ngwenya is a Bulawayo-based economist and senior Lecturer at Solusi University’s Post Graduate School of Business.