CEME Senior Fellow Paul Schulte (F'88) on Corruption in the Emerging World

Brazil shows great improvement, catapults over India and Russia, in corruption battle

The Corruption Perception Index (CPI) is a global monitor of corruption in more than 200 countries.  It monitors the progress of countries in eradicating corruption, is widely followed and is compiled by Transparency International.  A full accounting of this process is available on www.transparency.org/cpi2012/results.  The list highlights the cleanest 15 countries in the world as Scandinavia, Australasia, Singapore, Hong Kong, Switzerland, Chile and Canada.  The list then highlights the most corrupt countries in the world as Somalia, North Korea, Afghanistan and Myanmar. The bottom line is that countries which are successful at eradicating corruption tend to get very wealthy while those that dilly dally on the corruption issue tend to stay poor. The eradication of corruption takes time – many generations. Older democracies have had much time to clean up messy corruption, while many new democracies are emerging from egregious colonial legacies such as slavery and backward legal systems which hobble progress. 

We may quibble with the specifics of this or that country, but the general trend is clear.  Countries which do not tolerate corruption become richer over time.  Countries which tolerate high levels of corruption stay poor.  There is no getting around it.  12 of the 14 countries which are seen as the cleanest globally are Anglo-Saxon.  (The US and UK have fallen a bit but remain in the top 20).  And without exception, these countries are fairly old democracies.  The two upstarts in Asia which have achieved global status as clean and smartly administered city-states are Singapore and Hong Kong.  It is no coincidence that they both are among the richest countries in the world. 

These countries which do not tolerate corruption demand four basic requirements of their systems. First, they demand clear rules on lobbying and political financing.  Second, corrupt officials who get caught with their hands in the cookie jar are punished. Third, public spending and contracting by government is public and transparent.  And fourth, public ministries are accountable to a parliament. On the latter point, Hong Kong is now working to keep this reputation as it deals with allegations of impropriety in the bidding process for the development of property by the largest developer in the city-state.  In summary, these are nations of laws.  Brazilian courts are also fighting back, having convicted some of the most powerful people in the country on corruption charges.

The important point here is that these nations (with the exceptions of Hong Kong and Singapore) are old democracies with several generations of experience with parliamentary democracy.  They have a system, as the old saying goes, which can “throw the bums out.”  They have the confidence borne of success to ‘name and shame’ individuals and institutions which are stealing from the public or which are abusing power.  It is safe to say that in the earlier stages of democratic development in almost all of these countries, there was mayhem, chaos, currency volatility and fiscal irresponsibility.  The reduction of corruption seems to be a part of the evolution of a country as it passes the often messy $6,000 to $12,000 mark in terms of per capita income.  Countries like Brazil and China are there now.  And both of them are dealing with these issues in forceful ways.

Brazil shows great improvement, catapults over India and Russia, in corruption battle

Corruption Perception Index: The 14 least corrupt countries globally.

  1. Denmark
  2. Finland
  3. New Zealand
  4. Sweden
  5. Singapore
  6. Switzerland
  7. Australia
  8. Norway
  9. Canada
  10. Netherlands
  11. Iceland
  12. Luxembourg
  13. Germany
  14. Hong Kong

One only needs to look at the excellent book Hamilton by Ron Chernow to see how much of a mess the United States was after its own independence in 1776.  Well into 1790 (15 years after independence), New York City was a burned out mess with squalor and disease. Bitter hatred persisted between patriots and leftover Torys faithful to Great Britain.  The currency was worthless.  The debt was trading at 25 cents on the dollar, similar to Greece in 2011.  Indeed, many individual states had their own currencies.  Several of these states were demanding that Congress be disbanded as a troublesome nuisance.  The issue of slavery was to simmer for another 70 years until the Civil War put an end to the debate.  In New York in 1790, kidnapping of freed slaves for servitude was commonplace. 

Creating institutions which can reduce corruption takes time – perhaps many generations.  To expect a quick end to corruption is unrealistic for countries which inherited chaotic economic and ethnic messes from their colonial masters.  Nation-building is a messy business which takes time.

If we focus on the emerging markets (which have a PPP per capita income in the neighborhood of $7,000 to 20,000), the cleanest country within the emerging markets is Chile.  It has benefited mightily from this with astonishing advances in wealth, income, financial services, education and stock market wealth over the past few decades.  It is the healthiest economy in Latin America and the richest …and can boast that it has among the better educational systems in Latin America.  Rich countries do not suddenly wake up and try to reduce corruption.  It is the other way around.  Countries which stamp out corruption over time will tend to get rich.  Democratic institutions tend to be part of this process.  The evidence is undeniable.

Eastern Europe is a standout of countries which tends to be fairly clean when it comes to government institutions.  Poland, Hungary and the Czech Republic all rank among the cleanest of the emerging markets.  After this come Costa Rica, Turkey and Malaysia. 

GEMS Corruption Index

15.  Chile

41.  Poland

45.  Korea

46.  Hungary

48.  Costa Rica

54.  Czech Republic

55.  Malaysia

56.  Turkey

69.  Brazil

80.  China (below Sri Lanka)

88.  Thailand

94.  India (below Greece)

118.Indonesia (tie with Egypt)

123.Vietnam (tie with Sierra Leone)

133.Russia (below Iran)

When we compare the BRICS countries, we arrive at some staggering results.  Brazil comes up as the cleanest of the BRICS by far.  Brazil ranks as the 69th cleanest country among more than 200 countries.  Recent convictions of several politicians demonstrate a commitment by the country’s leaders to cleaning up the system of allotting contracts, licenses and concessions.  The same goes for China.  In a year of important political transition, China took a big risk by publicizing the trials of several senior officials linked to corruption and misdeeds in Chongqing.  There is more to come.  Watch this space.  The shocker of this index is Russia.  The way in which the economy is in a political stranglehold by a few oligarchs is not going unnoticed by international companies.  Russia ranks at 133 below Iran and 50 countries below Brazil.  If Brazil plays its cards right, it may challenge Russia in the global oil and gas industry.

Furthermore, there is another trend which jumps out at you.  The bitter colonial legacy of many countries lingers decades after independence.  The four countries which are the newest democracies in the top 15 least corrupt (and also the richest countries globally) are ALL former British colonies.  These are Singapore, Hong Kong and Australasia.  They were the lucky ones.  Spain, Portugal, Italy, France and Belgium largely left behind poverty-filled countries which were bereft of legal institutions which often had a sorry legacy of slavery.  China is arguably the most abused country in that period.  Between 1880 and 1949, China was occupied by AT LEAST TEN COUNTRIES.  Entire provinces were regularly traded like chess pawns by imperial powers and it was enduring a civil war at the same time.  In the 1700s and 1800s, the Caribbean and Brazil were economies that were built on slavery.  The occupation of Cuba and the Philippines by the US in the 1900s was not a proud period, either.  These colonial legacies are still powerful and present today.  It takes time to create legal institutions, implement competitive education systems and gain sovereign self-confidence.  But this is happening now.  

Lastly, we look at poor Africa, the colonial legacy of which has to be the most shameful in world history.  Ghana, Mauritius and Namibia now come out on top in terms of the least corrupt on the continent.  This is followed by Lesotho and South Africa.  But one country after another is – in a stealth-like way – developing institutions and coming out of the financial dark ages.  Zaire and Kenya are emerging.  China is offering huge amounts of capital to aid in this development.  The Chinese are smartly avoiding country aid – which always has hidden agendas and political chains attached – and are following a ‘project by project’ approach.  Countries like Angola, Guinea, Zambia and Mozambique are attracting large amounts of capital as China seeks out stable supplies of oil, gas, minerals and agricultural products at a fair price.  It is not negotiating with these countries in the shadow of a shameful colonial legacy, either.  So, it should be met with a greater degree of partnership. 

Cleanest Countries in Africa

  1. Ghana
  2. Mauritius
  3. Namibia
  4. Lesotho
  5. South Africa

In conclusion, countries like Chile and Brazil in Latin America are moving up the ranks in terms of getting cleaner.  Of the BRICs, Russia and India rank among the most corrupt countries globally.  Hong Kong and Singapore are two countries in Asia which are in the Top 10 globally.  Finally, let’s look at an interesting ranking in the Economist magazine’s World in 2013. One article asks the question “Where is the best place to be born in 2013?”  In 1988, the magazine claimed that the best country in which to be born was the US.  In 2013, its ranking of the best places to be born are an uncanny match for the Corruption perceptions Index.  11 of the 15 countries it says are the best places to be born in 2013 are also found in the top spots for the least amount of corruption.  Interestingly, three of the best places to be born in 2013 are in Asia – Hong Kong, Singapore and Taiwan. The US has dropped to 18th place.

Why? The simple answer is that in a clean country, a college graduate has a decent chance of getting a job based on merit and hard work.  In a corrupt country, a college graduate may end up working at a fast food joint because he cannot pay bribes or because he does not have the right father.  In a clean country, the system offers incentives for those who want to climb the ladder of merit.  In a corrupt country, the benefits of criminality and illegitimate activity are logical choices and participation in the educational and political system seems like a waste of time. 

The eradication of corruption is a virtuous circle.  Young people in less corrupt countries feel like they have an even chance to succeed.  Conversely, those countries unwilling to address corruption ‘head on’ go down the macroeconomic bathtub drain and experience brain drain, capital flight and civil unrest. 

Paul Schulte is a Senior Fellow at The Fletcher School of Law and Diplomacy at Tufts University and an Adjunct Associate Professor of Finance at the Hong Kong University of Science and Technology.  He is CEO of SGI Emerging Markets research and can be reached at SGIemergingmarkets@gmail.com.

Back to IBGC News