The cost of corruption - too big to ignore?

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Paying the price for corruption

In May 2016, UK Prime Minister David Cameron will host an anti-corruption summit. With this in mind, and following on from our report on the impact of corruption on Nigeria’s economy, we have analysed the relationship between corruption and GDP per capita, a proxy for the standard of living. We have also used our 2016 Global CEO Survey to examine the views of business leaders on corruption across countries and sectors.

Figure 1 shows the real motivation behind stamping out corruption. Our analysis shows that a one notch-increase in perceived corruption levels is associated with a $380 decrease in GDP per capita and so lower standards of living. Conversely, persistently lower levels of perceived corruption are associated with higher levels of GDP per capita. While correlation does not necessarily imply causation, as there could be many other factors driving income levels, there are good reasons to believe that reducing corruption should also boost economic prosperity, as discussed further below. 

According to CEOs the mining sector is most suspectible corruption

What does this mean for businesses?

High levels of corruption act like an additional tax on businesses and so tend to increase the cost of doing business. This has implications for consumer welfare as these costs are typically passed on to consumers, especially if demand for the associated products or services are less sensitive to changes in prices. 

Figure 3 shows the top five and bottom five sectors where CEOs think bribery and corruption is a threat to business. We have sourced the data from our own Global CEO Survey, which is carried out annually. We have averaged the responses over the last two years.

Our analysis suggests that commodity-intensive industries such as mining, construction and oil and gas extraction are areas where CEOs feel that corruption poses a significant threat. This makes sense as extractive industries are often in less developed economies, where corruption tends to be more of a problem and require a set of permits and official interactions with government which can create opportunities for bribery, and so, corruption. Also, these are sectors where demand for commodities is expected to be inelastic partly due to the lack of alternatives.

Conversely, sectors like retail, healthcare (excluding pharmaceuticals) and utilities appear less threatened by the effects of bribery and corruption partly because of the transparency of some of these sectors, particularly in terms of pricing. 

Awareness in the G7

Our CEO survey also provides insight as to how concerns about corruption vary across the G7 economies. For example, in Italy, the perception of corruption is high and this corroborates with the views of the CEOs in our survey, as one third of CEOs in Italy are concerned about corruption – the second highest of the G7 countries. 

More surprisingly – given the relatively high level (among the G7) of perceived corruption indicated by the Transparency International Corruption Perception Index –France has the lowest proportion of ‘somewhat’ or ‘extremely concerned’ CEOs at just 14% according to our survey. 

For the remaining five G7 countries, levels of concern range from 20% in Canada to 37% in Japan. But all remain well below the global average concern figure of 53%, suggesting that the advanced economies have made greater progress in minimising the presence of corruption.

A more global problem

According to Transparency International, corruption could be even more pervasive than our survey suggests, with 68% of countries worldwide identified as having a serious corruption problem. It is in the interest of businesses to contribute to eliminating this problem. Research from the World Bank1 has found that firms who pay bribes are likely to face higher costs and spend more, not less, management time dealing with red tape and regulatory burden. While reducing systemic corruption is difficult and requires many years of sustained effort, the opportunities are significant for governments and businesses alike.

 

1“Does “Grease Money” speed up the wheels of commerce”, World Bank (1999)

Contact us

Barret Kupelian
Senior Economist
Tel: +44 (0)20 7213 1579
Email

Conor Lambe
Economist
Tel: +44 (0)20 7212 8783
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