What do we understand for corruption? Everybody appears to know the definition. We always heard about politicians using their influence to do things that are morally wrong, or, in simpler terms: lie through their teeth.

Corruption is the bane of any nation, no matter which ideology it holds. Is especially harmful to its economy.  The way the economy is holding can be confusing, but it’s necessary for a nation citizen to have a striving economy for two reasons: they can live a proper life, and to find a better alternative to improve the economy in the uncertain future. The economies affected by high level of corruption —which involves the use of the influence of authority or money to achieve an objective in dishonest or illegal behavior such as bribery— will not be able to function as well as their low-level counterparts.

Corrupted economies won’t work, because similar to a disease, it prevents the natural flow of the body to properly work, causing the society to suffer.

According to the World Bank, the average income in countries with a high level of corruption is significantly lower than their low-level counterparts. Likewise, the infant mortality rate in such places is about three times higher and the literacy rate is 25% lower. This information does not speak kindly to the future of a nation, since future employees will not be as available as one could wish, and people will not be as educated, trained or healthy to help the economy grow in different areas.

Corruption can’t be fully destroyed, but studies show that emerging market economies come from nations with low levels of corruption. Is a nation’s duty to decrease corruption at any cost?

Corruption Causes Artificially High Prices for Low-Quality Products and Services

A society that is a victim of corruption will find itself victim of unethical circumstances with the way deals is made, contracts are awarded or economic operations are carried out, leading to monopolies or worse, oligopolies in the economy. In this corrupt society, people with the right connections or money can bribe government officials to manipulate policies and market mechanisms to ensure they are the sole provider in a market. Because there isn’t a competition in the market, Monopolist can keep high prices and keep products and/or services of low quality because they are the only provider.

In a corrupt economy, the client isn’t right, just the provider with their low-quality content. Since there isn’t the competition, nothing will change except the price, which will increase due to inflation.

Among those high prices, there are also the illegal costs of transactions necessary to create such corrupt monopoly.  A stereotypical example would be small business owners having to pay to policemen to defend them, or else they would turn a blind eye when a thief steal from them. The cost of this, obviously, is reflected in the high housing prices.

Resources are Inefficiently Allocated

In healthy economies, the projects of Public Administration are proposed with what it’s called A request for tender (RFT). These procedures secure the company with better characteristics, either with an innovative project or having good providers that can make the project more economical, high quality and carefully selected.

In corrupt economies, these requests can be bribed. In cases like these, Public Administration will combine the projects it has with companies that though some sort of agreement, undisclosed to the contributors. This means that part of the public revenue designated for the project will go into the pocket of corrupt individuals. Due to this, corrupt companies tend to use equipment that is much cheaper, and as a result, low quality. This results in the failure of any project

Corruption can manifest in many ways. For example, these two Spanish cases: The Punica Operation and the Gürtel case. Influential people from the central government used their power to create huge scandals of corruption that little by little has come into of the light thanks to important investigations done by the Spanish Anti-corruption Prosecution.

Economies have an unequal distribution of wealth

Corrupt economies are characterized by a drastic difference between how upper-class and lower-class living standards are treated, with very little middle-class effort. Since most of the capital goes to the pockets of corrupt oligarchs or people in power (although in corrupt nations, there is very little difference between the two), and wealth is distributed among these members of society, it is a way Always maintain the power.

Small businesses do not spread and are discouraged because they face:

A totally disloyal competition. Causing the economic market cannot be maintained on a large scale, and only be maintained among a small portion of companies.
2. Illegal pressure, either by large companies that are connected with government officials, or by the clandestine criminal.
Expropriation. In the worst case, the government does not want you to be a rival to its economic wealth and will take your rights. The corrupt countries like Venezuela do this, and with nepotism, they took many companies and put the inexperienced people who were with the government in charge, which led the expropriated companies to collapse due to bad administration.
Due to the high level of corruption, anyone who wants to invest their time, talent and capital in their business will feel discouraged and simply leave the country in search of a better opportunity elsewhere, further paralyzing the economy of it.

Low attractiveness for foreign investors and international trade

Foreign investment is fundamental for a healthy economy, and corruption will only cause investors to avoid a country that suffers it. Investors seek a fair and competitive environment for business, and investing time and money in a country where capital goes to the oligarchs is simply a waste of time and money for them.

Not surprisingly, the US bank Santander includes the following words on its website, “the country remains an attractive destination for FDI for a variety of reasons, including its large consumer base, the predictable and transparent judicial system, a productive work, highly developed infrastructure and a business environment that encourages innovation. “It may seem obvious, but it is necessary to point out: foreign investors want:

A large consumer bases. What a corrupt economy cannot pay due to the severe inflation that many of these countries have. To give an example, let’s say you’re a movie distributor and you want your movie to be seen in a foreign country. Citizens cannot pay for it because of the prices that may sound fair, but for them it is as expensive as their monthly salary. This is a factor in why a black market is formed, with cheaper bootleg editions.
Predictable and transparent judicial system. There are no signs of nepotism and the law works for the benefit of all in a healthy and corruption free economy, allowing the profits of the foreign investor to be adequate.
Productive workforce. What corrupt economies cannot afford because of high mortality rates and low literacy rates, since there are not so many employees in the future.
Highly developed infrastructure. Infrastructure contributes to the development of a country, so it is beneficial both for the government and for foreign investors to have this. The bullet train did wonders for Japan’s economy, to give an example. Countries with corruption do not worry about these developments and are only looking for their own economic benefit.
A business environment that encourages innovation. Corrupt countries tend to stagnate, maintaining a superficial status quo to provide a part of the members. With this, foreign investors will be repelled to work with such a country. The goal of a foreign investor is to stay in the economy, something that can be achieved by allowing to advance and innovate in the market.
Low Stimulus for Technology Advancement

Because there is little confidence in the legal system of a corrupt economy, in which legal judgments can be manipulated and bribed, potential innovators cannot be certain their invention will be protected by patents and not plagiarized by third parties who know they can get away with it. There is thus a disincentive for innovation, and as a result, emerging countries tend to be the importers of technology because such inventions can’t be found within their own societies.

In a corrupt economy, there is no place for new inventions, and if there are, someone else will take the credit for your hard work.

A Shadow Economy Exists (Shadow Market)

What is a Shadow Economy? Also known as the Underground, informal or parallel economy, is any hidden activity concealed from the government. This can range from extra works to the illegal and immoral means of obtaining money.

Since a corrupt economy is not exactly trustworthy, there are businesses in this kind of countries that avoid being officially registered with the authorities to avoid paying taxes. This results in some downs:

Since the income generated by the Shadow Economy doesn’t appear in the official economy, is not subject to taxation or included in the calculation of the country’s GDP.
Shadow businesses are not part of the official economy, they could pay their employees lower wages than the minimum amount designated by the government.
The shadow business doesn’t provide acceptable working conditions, like health insurance benefits.
While a Shadow Economy can exist in countries with low corruption, the truth is that illegal acts such as gambling, the trade of stolen goods, prostitution and trade of human trafficking are all part of the underground economy, and are more frequent in corrupt countries.

Education and Healthcare are Low Quality

According to the International Monetary Fund (IMF), healthcare and education in countries with emerging economies will be affected in the following ways by corruption:

Corruption increases the cost of education in countries where nepotism is a factor.  Not only are the members of a party the only ones who can gain the privilege of education, in many corrupt societies, only the members of this party can be recruited to become teachers.
The quality of education decreases, leaving very little room for the future of corrupt country citizens, since not only there will be less available jobs for them, there will be also fewer companies that can provide them.
Healthcare is also affected by corruption. Not only is about the medical and sanitary personnel, that no longer has anything to do with the education or preparation they have but their connections with the higher-ups. Likewise, their medical equipment is affected since it doesn’t reach the minimum sanitary standards and, in some cases, there is also a lack of medicines and treatments like surgical interventions. All of this because it depends on only the higher-ups. All of this takes the sanity of these types of economies to be dreadful and with a cost that is too much for the user.
The Bottom Line

Many countries with emerging economies such as Romania, Macedonia, Croatia and Montenegro suffer from a high level of corruption that slows their development down and lowers their population standard of living. With the lack of distribution of goods either because of geographical causes or because the government wants those natural resources, this affects the economy of the country. Adding the low quality of sanity and education, and the presence of the underground economy, we have the perfect recipe for a country not prospering as it should.

Corruption is something heinous for a country, it slows its expansion and any foreign investment, and innovation and scientific investigation are either affected or canceled. With this outlook is not a surprise that any person that wants to start a business or simply prosper chooses to leave the country in search of luck anywhere else.

The worst case is when a society accepts the corruption as something normal, and when they don’t notice, they lost their rights. History has also taught us that these corrupt societies can start civil wars and revolutions in search to stop it, but like with Cuba and Venezuela, these aren’t always a good thing.

The Zeigar Consulting Team

 

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