Please enable Java in your browser's "Options" (or "Preferance") menu to view this page Concordia's Thursday Report____________April 1, 1999

Economist Arvind Jain rates countries, from squeaky-clean Denmark down to Congo

Corruption is a costly, worldwide phenomenon

by Tim Hornyak

JainIf you wanted to invest money in a foreign country, you could do a lot worse than Denmark. The land that once spawned Viking marauders is now considered the least corrupt country in the world, and being clean is good for business. While you would stand a good chance of recouping your Danish stake, when it comes to countries like Congo, the perception is that you could easily lose your shirt.

Corruption has traditionally received little attention from economists, says Finance Professor Arvind Jain, editor and co-author of a recent book on the phenomenon called Economics of Corruption, published by Kluwer Academic of Massachusetts.

"Corruption was not even considered a subject worth teaching or researching," Jain said. "Even two years ago, the academic papers paying attention to corruption were very sparse. The field has just exploded since then."

Jain began writing about corruption 10 years ago, and has since collaborated with Transparency International, a Berlin-based anti-corruption group that contributed its 1997 Corruption Perception Index (CPI) to the book.

The Index ranks states by their perceived levels of corruption according to experts and the general public around the world. Denmark and Congo (formerly known as Zaire) represent opposite ends of the 1997 ranking. Slipping from fifth place in 1997, Canada placed sixth in the latest 1998 CPI, earning 9.2 out of a possible 10, a score that represents a virtually corruption-free economy. The U.S., by comparison, scored 7.5, below Hong Kong's 7.8. At the bottom of the 1997 CPI was Zaire (Congo), at -0.11. It was not listed in the 1998 Index.

Jain said the book was published to stimulate more research into the causes, consequences and current knowledge of corruption, as well as how it can be solved. Part of that involves defining the phenomenon itself: economic orthodoxy once held that corruption was a relatively innocuous aid to market transactions.

"Corruption is much more vicious than that," Jain said. "The World Bank and the International Monetary Fund have begun to recognize in the last five years that corruption is an extremely serious problem -- much, much more so than we think it is."

The problem is that corruption extends far beyond its visual manifestations, such as the Egyptian practice of baksheesh, a form of palm greasing that can range from giving alms to tips to bribes. Far more important, Jain said, is when governments distort entire economic policies to favour those in power. Recent examples include the rampant cronyism of the former Suharto regime of Indonesia, which ranked 46th with a score of 2.72 on the 1997 CPI, and Thailand's 1990s exchange-rate policy, which precipitated the recent Asian financial crisis.

"The exchange rate was kept controlled. It was not allowed to devalue. Why? Because the devaluation would have hurt a lot of people who were in power," Jain said. "The whole society ends up paying for it. That is the worst kind of corruption."

Because of its clandestine nature, economists like Jain are reluctant to estimate the size of global corruption, but point to specific cases that may provide clues.

One example is the storage of ill-gotten gains. The International Monetary Fund's Managing Director, Michel Camdessus, noted in a 1998 speech that "estimates of the present scale of money-laundering transactions are almost beyond imagination -- two to five per cent of global GDP."

Another example is a country's underground economy. One study cited by Jain reckons that 40 to 60 per cent of Russia's economy is underground, and Swiss authorities believe that Russians have stashed $40 billion US in Switzerland, nearly half of which is thought to be criminal proceeds. Although he plans another book on such macroeconomic graft, Jain believes worldwide corruption is on the decline.

"We have become very conscious of the impact of corruption," said Jain, who cited criticism of Canada's foreign aid to Indonesia as an example. "As more information comes out about how money is being used, there's going to be less and less tolerance for giving money to corrupt governments. I see a trend toward recognizing that ultimately, corruption undermines a lot of the goals of society."

Copyright 1999 Concordia's Thursday Report.