Corruption too costly to society to be complacent about

Abuse of power, illicit gains … such acts will only incur economic costs, destroy society and deter investment

PUBLISHED : Wednesday, 05 February, 2014, 10:25am
UPDATED : Thursday, 06 February, 2014, 1:34am

Corruption is never far from public discussion. In September last year, members of New Jersey governor Chris Christie's staff ordered the closure of road lanes on the George Washington Bridge, causing massive traffic chaos on the world's busiest bridge that lasted four days.

This was an act of political revenge against a local mayor who refrained from supporting the governor's re-election bid. The governor himself has been accused of being aware at the time that this was going on. Political fortunes will be decided by the outcome of this affair.

What, one might ask, has this to do with corruption? The answer is everything. Corruption is the abuse of power, usually involving government authority, and it can take multiple forms. The New Jersey incident shows corruption does not have to be about the illicit acquisition of money or assets, or at least not directly.

Corruption may be petty, where less than fully accountable officials seek to fatten their pay packets. They are extracting additional payment for what they are supposed to do anyway.

Illicit behaviour involving sins of commission - usually collusive illegalities of one sort or another - can be far more devastating socially and economically, potentially promising huge ill-gotten gains for those that get away with it.

Corruption might also be systemic, for example, where an unhealthy nexus exists between political financing and the agendas of elected representatives.

In December, Transparency International, a non-governmental organisation, issued its corruption perceptions index for last year, which covered 177 economies. Some of the details are interesting. Hong Kong came in at No 15, behind Singapore (5) and ahead of the United States (19), France (22), Spain (40) and Italy (69).

Some scored better than others, but no government should feel it has earned a passport to self-righteousness as it lectures lower-income countries about their errant ways.

For individual economies, the costs of corruption will depend on its incidence and the form it takes. Endemic, generalised corruption destroys the fabric of society and is likely to lead to conflict.

All corruption incurs economic costs for society to a greater or lesser degree, even where the cost might be comparatively small, and its main consequence is an income transfer.

Economists have demonstrated how the potential for influencing government decisions itself becomes a cost to the economy because prospective beneficiaries from bent decisions eat up real resources in seeking these favours.

This is referred to as rent-seeking, and it has been estimated to amount to enormous sums - more than 7 per cent of gross domestic product in the case of one country.

The World Bank has estimated that the global value of bribes is US$1 trillion. This excludes embezzlement, theft or misuse of public funds, and government procurement. When all this is added in, the cost of corruption is reckoned to amount to more than 5 per cent of world GDP.

The European Commission said in a report this week the level of corruption in the European Union was "breathtaking", estimated to cost at least 1 per cent of GDP.

A 2005 academic study estimated a one-point rise in an index for corruption would lead to a reduction of US$425 per capita, or the equivalent of a 7.5 per cent rise in the tax rate.

These are huge numbers, even if they were half right. But they are also less than half the story. Corruption erodes social cohesion, reduces investment, frustrates access to public services, especially among the poor, and works against a fairer distribution of income.

It seems extraordinary now that some development literature back in the 1960s and '70s held that corruption could be pro-development. Some writers argued that where governments were not operating in the public interest or were pursuing wrong-headed policies, corruption could be a palliative, smoothing a path around the problems.

It is equally extraordinary that until comparatively recently, it was considered politically improper even to mention the word corruption. Weak government or governance challenges were polite descriptions for a taboo word.

Today, we should be better able to address the abusive exercise of power for personal gain.

Last week, the chairman of the operations review committee of the Independent Commission Against Corruption expressed concern about increased corruption in the public service.

Hong Kong has great interest in being clean and is crucially dependent on external perceptions of the matter. It has the advantage of possessing institutional machinery that significantly enhances the likelihood of detection and consequent action.

Institutions indeed matter, but the only way any society controls corruption is through leadership by example. It requires a top-down approach. No amount of public disgust will do it on its own.

Patrick Low is vice-president of research at the Fung Global Institute