The Cost of Corruption and Red Tape

Index Reveals Extent of Graft Around the World

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BERLIN, OCT. 29, 2005 ( More than two-thirds of countries in a recent survey showed serious levels of corruption. On Oct. 18 the Berlin-based organization Transparency International released its latest annual report, the Corruption Perceptions Index 2005.

The CPI ranks countries on a scale of 1 to 10, with 10 being clean, in terms how corruption is perceived to exist among public officials and politicians. The score is awarded after studying data from surveys and reflects the views of businesspeople and analysts, including local experts in the countries evaluated.

Of the 159 countries surveyed, no fewer than 113 scored less than 5 out of 10, and 70 scored less than 3. “It is noteworthy that many of the lowest scoring countries on the index are also among the poorest,” commented Transparency International Chairman Peter Eigen during the report’s launch.

“The two scourges feed off each other, locking their populations in a cycle of misery,” he said. “Corruption must be vigorously addressed if aid is to make a real difference in freeing people from poverty.”

Eigen was careful to point out that rich countries also suffer from corruption. As well, they bear part of the blame for corruption in developing nations. In the past, he noted, companies from the wealthier nations freely paid bribes when doing business overseas. The anti-bribery convention formulated by the Organization for Economic Cooperation and Development has improved matters. But Eigen said that rich and poor countries alike must now work hand-in-hand to break the cycle of corruption.

The report explained that foreign investment is lower in countries perceived to be corrupt, which further thwarts their chance to prosper. Reducing corruption would help them attract more investment, and increase their rate of development.

No region is exempt from corruption problems, noted David Nussbaum, chief executive of Transparency International. Even in the extended European Union, the average score is only a passable 6.7, “indicating that many of its countries are still wrestling with a sizable corruption problem.”

The areas worst affected are Central and Eastern Europe and Central Asia, with an average score of 2.7. This indicates “devastating levels of perceived corruption which pose a serious threat to political and social stability, as well as compromising the everyday lives of the people in those countries,” said Nussbaum.

Debt relief at risk

Transparency International also noted that corruption could place in risk the economic benefits of debt relief. Nineteen of the world’s poorest countries have been granted debt service relief under the Heavily Indebted Poor Countries initiative. But not one of these countries scored above 4 on the CPI, indicating serious to severe levels of corruption.

The risk is that the money freed from making debt payments will not be used for development, but could be wasted through corruption and mismanagement. The report also argues that stamping out corruption is critical to making aid more effective.

Becoming richer, however, will not mean that countries can relax their efforts against corruption. Transparency International noted that a long-term analysis of changes in the CPI shows that the perception of corruption has decreased significantly in some lower-income countries, such as Estonia, Colombia and Bulgaria, over the past decade. At the same time, some higher-income countries, such as Canada and Ireland, have experienced a marked increase in the perception of corruption.

The report expressed the hope that the U.N. Convention against Corruption, due to enter into force this December, will establish a global legal framework for fighting against corruption.

The convention is designed to accelerate the retrieval of stolen funds and pushes banks to take action against money laundering. It will allow nations to pursue foreign companies and individuals that have committed corrupt acts on their soil, and to prohibit bribery of foreign public officials.

Doing business

Another series of obstacles to economic development was dealt with in the report “Doing Business in 2006: Creating Jobs.” The report, published in September by the World Bank, argues that reforming governmental regulations to reduce red tape and simplify taxes would greatly stimulate business activity.

“Jobs are a priority for every country, and especially the poorest countries,” stated Paul Wolfowitz, president of the World Bank. “Doing more to improve regulation and help entrepreneurs is key to creating more jobs — and more growth.”

The report contrasted the economic success of the Eastern European nations, which have led the way in streamlining regulations and encouraging entrepreneurs, with African countries. For the first time the annual report gives a global ranking of 155 nations on key business regulations and reforms. It found that African nations impose the most regulatory obstacles on entrepreneurs and have been the slowest reformers over the past year. By contrast, every country in Eastern Europe improved at least one aspect of the business environment.

The report provided a number of graphic examples of problems facing businesses in Africa. For example, an entrepreneur in Mozambique must undergo 14 separate procedures taking 153 days to register a new business. In Sierra Leone, if all business taxes were paid, they would consume 164% of a company’s gross profits. In Burundi, it takes 55 signatures and 124 days from the time imported goods arrive in ports until they reach the factory gate.

Some African countries did introduce reforms during the last year, but the report noted that much remains to be done. African countries levy the highest business taxes in the world: on average, 62% of gross profits. These high taxes create incentives to evade, driving many firms into the underground economy.

Excessive regulations and taxes also obstruct countries from growing by exporting goods. In Ethiopia, for example, exporters have to get 33 signatures before their goods reach the port of exit. And in Nigeria administrative costs can account for as much as 18% of the value of exports.

The report also stated that Latin American and Caribbean nations need to implement further reforms to help small and medium businesses generate more jobs. Some progress has been made, but heavy legal burdens on business remain in most countries in the region. In the region, only Chile makes the top 30 list of countries where it is easiest to do business.

Moral principles

The recently published Compendium of the Social Doctrine of the Church had something to say on corruption and red tape. Several numbers note corruption as an obstacle to economic development. And, in the context of political systems, the Compendium, in No. 411, describes corruption as a betrayal of both moral principles and the norms of social justice.

“Corruption radically distorts the role of representative institutions, because they become an arena for political bartering between clients’ requests and governmental services,” notes the Compendium. The following number deals with excessive bureaucratization, noting that it causes institutions to lose their effectiveness.

The Compendium proposes a solution to these problems based on moral principles rather than on international agreements. Instead of over-regulation, it suggests that public administration be oriented by the idea of the state being at the service of citizens. The state is a steward of the people’s resources and should administer them with a view to ensuring the common good.

A similar recommendation is given for those in political power, notes No. 410. They should remember that “responsible authority” means “authority exercised with those virtues that make it possible to put power into practice as service.” Such advice could prove to be good business, too.

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