Dog Bites Man: It Turns Out Corruption is Actually Bad

Blame Malcolm Gladwell. Everybody loves being taken on a little journey through a complex social phenomenon only to arrive, triumphantly and in the closing act, at the satisfyingly counter-intuitive conclusion. Having read Outliers and listened to a good chunk of Revisionist History, your correspondent was all lined up to tell a story of how corruption was yes of course bad but, cue Gladwellian flourish, the real culprit is something else entirely! Unfortunately, the truth is much more prosaic. The literature on the effects of corruption is mixed about size but clear about the trend. Corruption hinders government service provision and lowers business investment. And if the poorest countries in the world are going to raise the living standards of their citizens, a lot more investment is needed.

Of course, we all know how the corruption story goes. Africa will never develop until their rulers stop stealing. Mubuto’s Quixotic jungle palace or Presidents’ family members having enough spare change to buy €120M Parisian mansions as well as Michael Jackson’s white glove for $275,000. Corruption is endemic and it dooms the continent. But the story is not quite correct and certainly much too fatalistic. The poorest countries in the world are the most corrupt but corruption can be, and is being, tackled. However, from time to time it is worth reminding ourselves just what effect corruption has.

Figure 1: Sometimes there is wisdom in the crowd

Educating your kids with one hand tied behind your back

Children are, almost tautologically, the future. Investing in primary school education is one of the best investments a country can make. In the mid-1990s and early 2000s, often with funds from the World Bank, several countries implemented similar programs of a large once-off non-wage transfer from the central government to district governments for school capital improvements. Once external audits were completed, massive corruption was uncovered. In Ghana half the money ended up in people’s pockets, in Tanzania 57% of the funds were diverted, Zambian officials made off with 76%, and in Uganda a whopping 87% of the funds meant for building classrooms and toilets never reached the schools. In each instance, the total amount of money pilfered was small; the average transfer per school in Uganda was ~$5,000. No one bought a house on the 16th arrondissement from their ill-gotten gains. But schoolchildren missed out and the development of the country in question was slowed.

Investment means jobs. Without jobs, it’s tough to move out of poverty

Measuring corruption is hard. Few people are willing admit to bribing the customs official. But perceptions of corruption are easy to measure, and people’s perceptions influence their actions. Unsurprisingly, in countries where Foreign Direct Investment (FDI) is the lowest, perceptions of corruption are the highest. In 2017 German researchers found that moving one-standard deviation down the CPI ranking decreases investment by 2.9% of GDP. Research from 2012 found that the level of corruption negatively impacts FDI decisions to the tune of 3%. Concretely, if Italy got a handle on corruption to the same extent as Japan, Itay would be 5% more attractive as an investment option than they are now. Millions of dollars each and every year are not being invested into countries with corruption problems. This isn’t money that buys a government minister a new Lexus; it’s money that poor countries don’t even see.

Heading the right way, slowly.

The good news is that corruption is not intractable. The bad news is that progress has been sporadic, slow, and prone to backsliding. The Dos Santos family vacated the Angolan presidential palace in 2017. Since then, Angola has improved 14 points on the Corruption Perceptions Index. Feel free to draw your own conclusions. Improved rule of law and procurement provisions have seen Ethiopia, Kenya, Seychelles, and Tanzania all improve their CPI scores over the last 15 years. Unfortunately, some of that progress is now under threat as governments change, priorities shift, and civil unrest continues to unsettle Ethiopia.

Sadly, some countries are already backsliding. Lesotho has fallen from 49 to 37 points on the CPI over the last decade, South Sudanese leaders continue to disappoint their people with corruption steadily increasing after a post-independence decline, and across the Atlantic the governments of several central American countries are pushing back against independent corruption fighting bodies.

The world, and importantly domestic governments, must fight harder against corruption. But unfortunately, magically doing away with corruption isn’t going to magically make DRC into Denmark. The reason DRC isn’t already Denmark is of course well… 1,000 things and then 1,000 more. There really just isn’t enough money, business scaling is hard, inter-African trade is embryonic, slavery was really bad, colonisation was a terrible thing for the colonised, the Belgians and the CIA murdered their first democratically elected President and yes, the next one looted his way to private flights on the Concorde. Corruption is just one of the many. We should not fall into the easy trap of “if only corruption…”. At best it’s lazy thinking, at worst it’s racist. But to think that DRC will develop without seriously tackling corruption is Panglossian.

In a few weeks we’ll have more to say about corruption. There are different types, with different effects on growth and which require different responses. It’s a complex topic that is too often simplified into unhelpful stereotypes. But for now, it is by no means too simplistic to remind ourselves of just how damaging corruption is to broad-based sustainable economic growth