Why Corruption is Harmful

Text by Alistair G. Speirs

You can't live in many countries these days without reading about corruption, or reading about it on the news. It's everywhere, it's rampant, its effects are incredibly harmful but invisible, and unless you are directly affected you may think, "So What? It's just a few politicians scamming the system, let it be". But despite its invisibility, corruption really does harm countries - and people - to an extraordinary agree. Publisher Alistair Speirs explains why.

Corruption can be most easily defined as the manipulation or perversion of a system for the benefit of a single party rather than for the benefit of the public or the intended beneficiaries. Complicated isn't it? And hard to pin down, that's why it's so widespread, so endemic (that means widespread!), so engrained, and so hard to eliminate. But is it really necessary to eliminate? After all many countries are still advancing despite allegations of corrupt systems and have positive economic growth rates? Absolutely, totally and without a doubt, is my personal take on the matter, and if we have to be ruthless about it, so be it, for the only way to be a fair and just society is through the complete elimination of corruption from the public and private sectors alike.

I have just been reading a marvelous book called "How the Scots Invented the Modern World" by an American professor of history called Arthur Herman, which brilliantly clarifies the birth of modern political, economic and commercial thinking, and which traces the development of the theories which guide modern democratic society and the commercial world which thrives in it. And there is no doubt, starting from as far back as 1760, that the systems which enable civilized communities to live well have to be fair, just and clearly understood and adhered to by all.

In "Wealth of Nations", which is probably the book which launched modern economic theory, the author Adam Smith is quite adamant that progress is driven by personal interest, but that interest must be channeled and guided by law so that the outcomes are for the overall benefit of society, and not just for the individual. Anyone interested in this whole area would benefit greatly from a dip into these extraordinarily visionary works from Smith, Adam Fergueson, Lord Kames, David Hume and Alexander Caryle, who combined philosophy and economic theory, commerce and the law and often religion as well! It was not uncommon for someone to be a Lord Chief Justice, a University Professor and a Minister of the Church of Scotland all at same time. These gentlemen knew how to think but also combined their debates with evenings of serious drinking of claret and port! Quite the metropolitan man 250 years ago!

But back to the point: these brilliant minds honed the theories of how to advance society through law and justice, through commerce and industry hundreds of years ago, and they work. That's why Britain became a world power and is still one of the leading educators of the world today, with a currency which is still extraordinarily strong.

And where is all this information? Is it a secret used by Britain and Western countries to dominate the world economy? No, its free, open and easily accessible, and should be mandatory reading for all Government officials, legislators, parliamentarians and the whole judiciary. Sadly, the great majority of those in power prefer to ignore these good advices and in the case of ex-colonial nations blame their continuing political and economic woes on "300 years of Dutch occupation" as in Indonesia's case conveniently ignoring 60 years of independence during which time other countries as Singapore have transformed their social and legal structure to become world class economic powers.

So why is corruption harmful? At its simplest level it inhibits the wealth of the country in favour of the wealth of the individual, at its most complex level it denies justice and human rights, it creates fear and confusion, it wastes time and money, it inhibits development, it destroys the environment, it wastes valuable resources and ultimately diminishes the value of human life. That's hardly a trivial list, but let's look at some examples to illustrate these claims:

Let's start with a very hard area to identify: investment fraud. A company gets a license to build a cement factory, for example, with all the appropriate government permits. It borrows US$100M on the promise that the plant will have a total value of US$200M with the rest funded by equity (capital). In fact, they only use the borrowed US$100M and build a much under specified plant. This results in the company suffering losses but because it is an "essential industry" the government bails it out and buys 50% of the company for, you've guessed it, US$100M and imposes a price control on the cement industry raising prices until the factory is profitable. No one is hurt, but the country has wasted US$100M, the owners have not spend a cent and now own 50% of a factory which produces overpriced cement which the consumer pays for making the whole economy worse. A brilliant and invisible scheme.

Repeat that over 100 industries and you have a completely inefficient economy supported by a corrupt government with let's say 10 companies or commercial groups owning 10 industries each paid for by the consumers and taxpayers. My imagination? No. A real scenario in the 60's and 70's and the root of many of today's problems in ex-colonial countries.

Let's move on to a much smaller – and more endemic – example: commissions. One person gets paid a commission in return for placing business with a certain supplier. Harmless, right? Wrong. This destroys the selection process based on best performance and "steals" the profit margin from purchasing company. In the case of public works contracts the country ends up with low quality roads, water systems, airports, education, well everything provided by the government. And in the private sector you get lower profits (or actual losses), lower employment, lower wages, lower quality of work. Again the same people pay – the consumer and the taxpayer.

Now if the legal system is itself subject to abuse, whereby court decisions can be influenced by promised benefits or prosecution avoided by the careful application of funds (which themselves were stolen!), then there is little incentive to pursue this course, and even less chance of recovery for those who have been harmed, wronged or defrauded. This is exactly the point that Kames and Smith made, that people are driven by the urge to create wealth for themselves but they must be able to feel secure in the legal system or they will lose incentive even to try, and the only "entrepreneurs" left will be those engaged in illegal acts. A chilling and yet realistic prognosis.

Then there are the 'harmless' results of corruption: un-repaired roads causing delays (and increased stress, wasted time and wasted fuel); idiotic bureaucracy over permits, licences, ID cards, well just about everything; wasted money over badly planned programs such as tourism promotion, health services, traffic systems and well just about everything again! These are not criminal in the strict sense of the word but where there is a "good way" of doing things which is ignored in favour of a 'bad way' this is wasting taxpayer money and worse than that allowing profitable, efficient opportunities to go to other competing countries.
Perhaps this is why Singapore with a total population of just 4 million can buy foreign companies with a total customer base of over 10 million! And Malaysia with no better resource has 18 million visitors and Myanmar only 1 million! Just a thought.

So how to eliminate this astonishingly ingrained disease? During a seminar with Singapore's Senior Minister Goh Chok Tong, I asked him that very question and he was very clear in his answer. First of all, he said pay government officials well – equal to top private sector packages – that means a million dollars a year for ministers. Then ensure the legal system is sound, again by paying very well. Then punish public sector corruptions very, very severely, but that punishment should not just be for the person involved but his whole family. A complete ban on all public office, all commercial activities, complete social ostracism. No escape. Perhaps when the family also suffers, the lesson will be learnt. Who knows, but it worked in Singapore!

But as Mr. Goh said, "when a man can live in any house, drive any car, educate his family in any school worldwide, have any holiday, any luxury, why should he be corrupt?"

Well, one of the answers to that is the fact that so many countries have a 'price of entry' system which is hard to break. To become a general, a governor, an MP, a head of a state owned company, the price is so steep that the successful applicant has to pursue illegal activities to repay their backers. This is extremely difficult to put an end to since it is like tenured labour but at the highest levels. But at some point there will have to be an amnesty for all in that situation and call a halt, otherwise the world will never be free of corruption.

And that means we can never be healthy, wealthy and free from guilt. Anyone ready for the challenge?