Corruption v Economic Development

There is a growing consensus among industry professionals, academics, governments, and international institutions that corruption is the greatest impediment to economic development.

Frankly, I would go further. I believe corruption to be the only impediment to economic development. There is no secret formula to economic development. Actually the opposite is true. Economic development is a natural process, requiring remarkably little outside assistance. Every country has its share of in-house natural developers — individuals who see a profitable niche and have the ability, the courage and the capital to develop that niche into a viable business. Each new operation creates a niche for other businesses. Left to itself, economic growth is a natural exponential process.

Unfortunately economic growth is seldom equitable. The benefits of economic development are seldom if ever spread equally across the board. Ineluctably, some benefit more than others. At the same time, the speed of economic development can differ dramatically from one region to another and from one ethnic group to another. Some places and some people are better than others. For example, China has developed rapidly because China is filled with Chinese people. However, despite the inequalities everyone benefits at least to some degree. Wealth is created. National income rises. And, the economy moves ahead.

My point is that we should not waste our time trying to determine how to move economic development forward, because economic development is not a mechanical process which must be built. Rather, we should try to determine where and why development is not occurring — what is impeding development — because economic development is an organic process which, if allowed to, will occur naturally.

That impediment is invariably corruption.

We tend to think of corruption as passing money under-the-table to illegitimately achieve some personal benefit.

A few years ago I wrote:

Corruption begins with a group of people standing in a line, waiting to have a form stamped. Someone, Tom, is in a hurry, decides he cannot wait, and takes steps to solve his problem. A bit of money changes hands and Tom jumps to the head of the line. Two other people standing in the line — Dick and Harry — seeing Tom’s success, decide to follow suit. More money changes hands, and they too jump to the head of the line. Fred, the guy behind the counter whose job it is to stamp the forms, sees he is on to a good thing and decides to go into the line-jumping business full-time. If Tom, Dick, and Harry will pay, so too will everybody else. Thus Fred discovers the first law of corruption: The longer the line, the more attractive the line-jumping service. Some time later, Fred invites his unemployed brother-in-law George into the family business by adding a new regulation whereby the form needs two stamps, thus giving George his own line and his own livelihood. Eventually, Fred franchises his service throughout the government. At that point everybody gets rich while at the same time nothing works anymore[1].

The story of Tom, Dick, Harry and the ever-ingenious Fred is one of those fictional stories taken from real life.

For example, there was a time when importing a container of goods through Tanjug Priok (the port of Jakarta) required a form with 37 signatures costing approximately US$250 and requiring about two weeks. In 1985, the problem disappeared when the Indonesian Government turned the entire customs-clearance process over to SGS who quickly turned the Indonesian Customs Service into to one of the world’s most efficient operations, while at the same time markedly increasing the legitimate revenue accrued to the Indonesian Government. This happy state of affairs continued until 1997 when The Customs and Excise Director General Soehardjo married a distant relative of President Suharto, with the result that SGS was fired[2].

The case of the Indonesian customs service is by no means exceptional, particularly where government is a family business. However, corruption is more than just passing money.

Corruption is misappropriation of resources for personal gain. The operative words are misappropriation and resources. Misappropriation need not be theft and the resources need not even be tangible.

For example, in March 1998 Ms. Henrietta So, Mr. David Wong, and Mr. Tang Cheong-shing three senior executives of the Hong Kong Standard Newspapers Ltd were convicted of fraud. The three had devised a scheme to increase advertising revenue. As in most countries advertising rates in Hong Kong are based on paid circulation. The more newspapers sold, the more the Hong Kong Standard could charge for each ad. To increase circulation, Mssrs. So, Wang and Tang, created a shell company which supposedly purchased thousands of Newspapers each day but which were in fact dumped in a warehouse to be subsequently sold as waste paper.

This is where fraud becomes corruption. The corruption part occurs when you consider that Mssrs, So, Wang and Tan did not benefit from the fraud. Why would three people gratuitously commit a fraud? The only beneficiary was the company chairman Sally Aw Sian, who although declared an un-indicted co-conspirator, was never brought to court.

Hong Kong people pride themselves on knowing the story behind the story behind the story. The generally accepted version was that then Hong Kong Governor CH Tung, who was a close friend of Madam Aw, intervened on her behalf. No one believed that Madam Aw paid off the governor of Hong Kong. CH Tung is a multi-billionaire who in fact accepted the position as Hong Kong’s Chief executive at great financial loss. If the story is true, he intervened only because Madam Aw was a friend, and the least one can do is help your friends.

If this story is true, the resources; i.e., the Hong Kong judiciary was misappropriated for personal use and as a result the Hong Kong legal system became that much less credible.

Consider this example. In many countries as far apart and as different as India and Dominican Republic theft of electricity is endemic often reaching 50% of total consumption. The thieves are neither venal factory owners nor dishonest politicians. In fact they come from the lowest level of society — people who simply cannot afford to pay for electricity. Why does government allow this to continue?

This again is where theft becomes corruption. The answer is that both these countries have democratically elected governments. The electricity thieves have neither influence nor power. However, they do vote and no democratically government wants to alienate a large voting bloc, particularly when the cost of the benefit is bourn by someone else. The result is that just as citizens in the developed world think of free education and free protection from crime and fire as natural rights, so too do the poor citizens of India and the Dominican Republic think of free electricity as their natural right.

Who loses? The answer is, just about everybody. It is no coincidence that cost of electricity in India and Dominican Republic — at least for those who pay — is among the highest in the world. It is no coincidence that when electricity accounts for a whopping 3% of the fob price, employment in the Dominican garment industry has fallen from a high of 191,000 to the current 25,000. And it is no coincidence the both countries find it difficult to attract foreign investment in the electric power industry. Which foreign company is going to invest in building an electric power generating plant, when 50% of their product disappears .

The resources; i.e., the police whose job it is to protect people’s property were misappropriated and by doing so makes both countries more difficult and more insecure places in which to invest and work.

The greater the corruption, the greater the cost and greater the number of people who must foot the bill for that cost.

In our industry, the two countries that appear most often at the bottom of the corruption list are Bangladesh (139th) and Cambodia (158th)[3]. Nevertheless both are very important garment suppliers. Customers work in Bangladesh and Cambodia because the added cost of corruption is more than off-set by the low wages paid to its workers. It is no coincidence that Bangladesh and Cambodia, the two countries with highest rate of corruption are also the two countries which pay the lowest wages. Corruption is simply a transfer of wealth from the many at the bottom to the few at the top.

The resources of Bangladesh and Cambodia — the skills and hard work of their people—have been misappropriated by the corrupt few at the top, with the result economic development has been severely impeded.

The sad truth is that dumping large scale foreign aid or soft loan money into a corrupt society in the hope of encouraging development is the economic equivalent of supporting a junkey’s habit. In both cases only the pushers gain while the users become locked further into their addiction.

[1] Crisis in the 21st Century Garment Industry and Breakthrough Unified Strategies, Fashiondex, New York 2008. Page 54

[2] The good news is that the end of the Suharto regime brought reform to the Indonesian Customs Service

[3] Zimbabwe ranks 146th

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