The investment climate and corruption (Part III)

Corruption reduces domestic investment. It discourages foreign direct investment. It makes government spending larger than it should be. Worst, it shifts away resources that could go into more important uses for the nation.

These are strong and desirable statements. They are statements more often asserted as true. Often, they indeed are. Proving them to be true may be more challenging for analysis.

But this much can be said with greater confidence. Corruption can reduce total investments. It can distort the investment climate. Studies have helped establish that bribery is not a necessary inducement (grease) for investment to take place. Corruption also alters the recipients of economic benefits within a nation, oftentimes resulting in a worse outcome. Greater income inequality is often a result of a corrupt society. In short, corruption does not have useful consequences for society.

The World Bank has defined corruption as the abuse of public office for private gain. Whenever public office is abused, a public objective is set aside in favor of personal gain. The development objective is therefore compromised.

The eradication of corruption as a crusade has a good ring to it. It helps to win elections. This explains why Noynoy Aquino became president of the country. “Kung walang corrupt, walang mahirap” was an effective campaign line: if there is no corruption, there is no poverty. The people bought it with their votes. It also helped that the other candidates were embroiled with accusation of corruption.

“Philippine corruption score.” Transparency International has devised a widely used perception index of corruption across countries. The least corrupt country scores 10 or nearer. The most corrupt has a score that is close to zero. The Philippine index in 2010 is at “2.3”. The least corrupt country in 2010 is “9.3” is Denmark. The most corrupt country is Somalia at “1.1”.

The Philippine is ranked 134 out of a total of 178 countries. This ranking among countries is dismally low. In 2005, the country’s score was 2.6. Today, it is even lower at 2.3. This rating is 0.3 percentage points worse than before. Most ratings of countries are clustered around the corruption index of 3 and 2. The Philippines is mired in the middle of this group of similarly looking countries in terms of corruption.

The Philippines had a better corruption index than Indonesia before. But lately, Indonesia has moved up a few small notches in its score. Indonesia is now ranked 110 among countries while we are down to 134. Vietnam scores six countries below Indonesia, so that it is highly ranked ahead of us.

The low score in the corruption index can be aligned with the country’s recent political history. Just before the fall of Marcos, the dominant theme of news reporting about the country was corruption and business cronyism.

This intensified even more in the post-Marcos era. Joseph Estrada’s removal from the presidency highlights high level corruption as public theater. The many corruption scandals of the Gloria Macapagal Arroyo presidency has further brought us down the drain in the perception index.

“East Asian neighbors and their corruption indexes.” Major economic neighbors in East Asia – Malaysia, China, Thailand – have corruption perception indexes that are distinctly better than the Philippine index. Their corruption index scores are, respectively, 4.4, 3.5, and 3.4. Of 178 countries in 2010, they are, respectively, ranked 56 and tied at 78.

Singapore and Hong Kong are the exceptional neighbors. Singapore has a score of 9.3. Hong Kong has a score of 8.4. They have high scores for the corruption index. They belong to the ranks of leaders in the corruption index, with Singapore sharing the highest rating with Denmark and New Zealand.

These two city states are models of speedy business processes, high level of enforcement of laws and regulations, and relatively simple economic and business systems that facilitate enforcement. They are also high growth performers – among the first countries to move up the development ladder.

What characteristics do they possess with respect to public enforcement of laws? Their civil service systems are based on merit and performance. It is well paid but their ranks are not bloated by the presence of unproductive workers. These countries have enforceable laws that are not excessively complicated. Discretion by the enforcing agencies is seldom present. Their public service has a strong mechanism for sanctions against poor performance but have a good reward system for successful work.

“A deserved low score?” As in the Doing Business index, the Philippine corruption score is probably ill deserved at this low score. The index is essentially based on perception. Our country is probably brought down some notches lower because the corruption phenomenon is a subject that is most often openly and publicly discussed compared to those of many other countries in the developing world.

Most of the countries do not have vibrant criticisms of government corruption. Corruption is not exposed above ground. In our case, our dirty linen is often discussed openly. Reports of corruption are publicly debated and openly made. Hence, the country’s score probably gets inflated compared to those of others which might even be less noticed.

The danger about relying mainly on corruption index ranking and scores as guide to policy is that the anti-corruption could be simply seen as an attempt to bring corrupt officials to court and to jail. That however is only part of the solution.

But the more substantial actions of the government (that is not articulated yet by the present government) are those steps undertaken so that economic institutions are reformed. Just as important, the laws and regulations need to be changed so that they are enforceable and are reasonably within the capacity of the civil service as reformed.

“A two-faced strategy: enforcement of anti-corruption”. The twin requirements of civilized society are founded upon the complementary presence of laws and regulations along with their proper enforcement. Without the enforcement of existing laws, the credibility of the legal system breaks down. Today, the Philippine society is full of the unenforceable laws. The legal system malfunctions when enforcement fails.

One of the major economic reforms of the country in the past was to open trade and industry in the country toward more international competition. Before the policy of industrial protection was liberalized, there was a high level of corruption. As trade and industry became more open, corruption receded. Economic agents began recognizing that they would have to accept greater exposure to market competition.

In line with the current issue of the impeachment trial of the ombudsman, it must be remembered that assuring the accountability of public officers goes beyond making the ombudsman accountable for a job that is poorly performed. The impeachment process will put to test whether the accountability for inaction (or incompetence) is deserving of conviction.

The record is tainted further by the fact that the only conviction for corruption of a president in recent history was turned into political forgiveness. In other countries, the convicted public officials serve their sentences.

Some of those reading into this will detect that the removal of the restrictive economic provisions of the Philippine constitution is part of this program of reforms. As argued elsewhere in this column, important gains will result from these amendments of the restrictive provisions. Such an effort would involve simplifying and perhaps liberalizing them more.

Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/