July 27

Rebecca Regan-Sachs

International Development’s Dirty Little Secret

This is the first post in a series that will focus on the impact of corruption and poor governance on enterprise and development in the “bottom of the pyramid.”

There is a curious phenomenon in international development-one that has been a taboo subject for many years. It eludes the calculations of economists, confounds private sector growth, and interferes with the proper functioning of public services. And it helps explain the following facts:

International development is a notoriously complex process, and many factors lie behind these grim statistics. But there is one particularly noxious culprit: corruption.

“[T]here is now growing recognition that corruption and bad governance play an extraordinary role in the effectiveness of development,” noted a 2007 Center for Global Development report. Such acknowledgments were once all too rare at institutions like the World Bank, which until about 15 years ago regarded the problem with a mixture of apathy and denial, vowing (somewhat hypocritically) that it didn’t interfere with countries’ internal “politics.”

But the widespread misappropriation of funds across sectors has been directly linked to lower national GDP and lower growth rates for private enterprise-and some of the best data come from Bank institutions themselves.

A 2000 IMF study found that an improvement of one standard deviation in a country’s control of corruption could lead to between a 200% and 400% average long-term increase in that country’s per capita income. It would also lead to an average three percent higher annual growth rate for private enterprises (and incidentally, an average 75% drop in child mortality).

While the perception still lingers that corruption can “grease the wheels” of an inefficient economy, increasing evidence shows that it in fact stifles competition, discourages entrepreneurship, and hinders a country’s overall development. Small businesses are forced to pay bribes to crooked officials, diverting capital that could otherwise be invested in expansion. Large corporations strike shady deals for lucrative government contracts, robbing profits from deserving firms and generally lowering business standards.

“Who loses?” asks development policy expert Russ Webster (p. 133). “Workers who could have received a better wage working for a more competitive enterprise; consumers who could have gotten better quality goods or services at a better price; ultimately, the economy, which could have generated a better standard of living for all citizens.”

The prevalence of the problem is highlighted in recent enterprise surveys conducted by the World Bank. In OECD countries, only 8% of firms reported corruption as a “major constraint” to their business. In sub-Saharan Africa, that total was 35%; in Latin American and the Caribbean, it reached 54%.

While businesses in developing countries often cited factors like lack of electricity or access to finance as their biggest impediments to growth, these too can be traced to corruption. Banking reforms and investments in power generation are frequently thwarted by corrupt interest groups, although businesses may not make the direct connection.

Knowing the effects of development’s “dirty little secret,” the statistics at the beginning of this post start to make more sense. South Korea’s government invested heavily in industry and courted foreign investors; Kenya was led for 24 years by Daniel arap Moi, whose family and associates stole more than $1 billion from the national coffers. Part of the $2.3 trillion in foreign aid since 1944 has gone to countries whose governments, while not perfect, are at least reasonably stable and responsive. That leaves the “bottom billion” with their Chicago-like combined GDPs and largely corrupt governments and institutions. With this in mind, the last statistic on diverted aid dollars is not so mysterious after all.

So what can be done about this enormously pervasive and destructive problem? Part of the answer lies in finally shining a spotlight on this “dirty little secret”. Groups like Transparency International and Global Integrity publish frequent reports and “scorecards” monitoring corruption and governance issues in most countries in the world. The Millennium Challenge Corporation, established six years ago, makes aid funding directly contingent upon factors like government effectiveness and control of corruption. Mo Ibrahim, the Sudanese telecommunications magnate, created an influential foundation that works to improve governance in Africa and to reward African leaders who embody democratic principles.

This blog series will take a closer look at the people, the organizations, and the trends behind governance and corruption issues in the developing world, with a particular focus on the problem’s impact on the “bottom of the pyramid.” For these are the people most in need of true development assistance, and thus the ones who suffer most when such assistance is thwarted by mismanagement, favoritism and greed.

The web site for the Mo Ibrahim Foundation puts it succinctly: “Development cannot be achieved without good governance.”