East Asian entrepreneurs rate corruption as a serious problem among business constraints just as much as do their counterparts elsewhere (see table 2.3).
21
no obstacle, to 4, major obstacle)
China Malaysia Singapore Indonesia Philippines Thailand India Argentina Mexico Poland Russia
Availability of financing 3.35 2.32 1.86 2.86 2.68 3.11 2.55 2.99 3.19 2.41 3.21
Infrastructure 1.96 1.79 1.35 2.36 2.84 2.81 2.77 1.92 2.31 1.63 2.09
Policy instability 2.27 1.95 1.47 3.10 2.91 3.48 2.84 3.10 3.29 2.65 3.43
Inflation 2.28 2.29 1.56 3.14 3.40 3.36 2.87 2.01 3.42 2.57 3.51
Exchange rate 1.79 1.93 1.82 3.36 3.45 3.63 2.48 1.81 3.19 2.21 3.12
Street crime 1.80 1.74 1.20 2.66 2.85 3.52 1.99 2.47 3.38 2.34 2.60
Organized crime 1.72 1.58 1.29 2.55 2.58 3.73 1.90 1.90 3.31 1.94 2.56
Taxes and regulations 2.08 1.86 1.50 2.54 3.08 3.22 2.28 3.32 3.20 3.04 3.53
Corruption 2.03 1.85 1.25 2.63 3.11 3.47 2.80 2.62 3.33 2.21 2.55
Police 1.56 1.69 1.32 2.20 2.28 2.13 2.01 2.33 2.84 2.21 2.13
Note: Entrepreneurs were asked to judge on a four-point scale how problematic each factor was for the operation and growth of their business.
Source: World Business Environment Survey, 2000.
Box 2.5. The World Business Environment Survey
The World Business Environment Survey (WBES) is a unique source of both quantitative and qualitative information on the impact of corrup- tion at the firm level. It includes not only subjective information about perceived levels of corruption but also some quantitative data about the frequency and level of bribery and its prevalence within a number of public services.
The survey was carried out in 1999–2000 under World Bank super- vision in 83 countries with the aim of improving understanding of the constraints on the development of private business. Targeting at least 100 medium-size corporations in each country, it focused on issues such as the quality of public services, rules and regulations, the legal system, corruption, predictability of policies, financial infrastructure, and competition. The full database covers more than 10,000 com- panies.
Several questions deal directly with corruption and bribery. One measures the perception—from 1 (best) to 4 (worst)—of corruption as an obstacle to business (one of 12 institutional, physical, and financial obstacles covered). Another measures the level of bribes paid as a per- centage of the firm’s sales, on an ascending scale of 1 to 7.
Information from the WBES has made possible new, in-depth research in the area (see Batra, Kaufmann, and Stone 2003).
R2 = 0.6273 1.0
1.5 2.0 2.5 3.0 3.5 4.0
Transparency International Corruption Perceptions Index World Business Environment Survey
0 1 2 3 4 5 6 7 8 9 10
Best Best
Worst
Note: The WBES rating is for the perception of corruption as an obstacle to business on a scale of 1 (best) to 4 (worst).
Source: World Business Environment Survey, 2000, and authors’ calculations.
Figure 2.3. Perceptions of Corruption as an Obstacle to Business
surveys cannot be ruled out, the greater vulnerability of smaller firms seems to be quite general and has been documented by studies carried out at the country level around the world, including the Partnership for Gov- ernance Reform in Indonesia survey.
The econometric analysis reported in appendix A in this volume shows that the difference in vulnerability between smaller firms (with fewer than 50 employees) and larger firms (with more than 500 employees) is equivalent to the effect of a substantial reduction in the level of cor- ruption in the country at large—that is, to a 2-point reduction in the Trans- parency International Corruption Perceptions Index for that country.
Table 2.4. Principal Causes of Corruption in Indonesia
Percentage of
Top-ranked cause respondents
Low salaries of public officials 37
Lack of controls and lack of accountability of public officials 21
Lack of morals (ethics) 17
Poor law enforcement; inadequate punishment of corrupters 10
Cultural reasons 5
Lack of an independent and effective judiciary 3 Too many and too complex government regulations 3 Lack of an effective corruption-reporting system 2
Lack of democracy 2
Legacy of New Order regime 1
High cost of living 1
Lack of effective civil society 0
Source: Partnership for Governance Reform in Indonesia 2001: enterprise survey.
0 10 20 30 40
Percentage of the firms in the size category
0 0–1 1–2 2–10 10–12 13–25 >25 Bribes paid as percentage of sales
Small < 50 employees Medium size (50–500 employees) Large (> 500 employees)
Source: World Business Environment Survey, 2000, and authors’ calculations.
Figure 2.4. Vulnerability to Extortion in Relation to Size of Firm, Thailand
These observations are consistent with the fact that large and foreign- owned corporations are more likely than small local ones to rely success- fully on internal procedures to resist extortion. Regional or country managers of international firms who were interviewed for the present study tended to confirm this view and also mentioned that the ability to invoke a firm’s anticorruption rules and procedures helped in resisting extortion in the field.
Not surprisingly, vulnerability to extortion is dependent on other attributes, such as the industry sector or whether the firm supplies the public sector. In the survey for Indonesia it appears that about two-thirds of the firms in construction and public works, the most vulnerable sector, acknowledge paying at least 5 percent of their sales in bribes. Only one- third of the firms in manufacturing and financial services gave this response.
A Negative Alchemy
It is now well established in the literature that in most countries firms engaging in corrupt practices experience lower performance (see fig- ure 2.5). The causality is debatable. It could be that firms experiencing dif- ficult times are tempted to salvage business by bribing public officials. Or it could be that time and resources are expended in corrupt practices at the expense of firm competitiveness. Indeed, there is some correlation between the level of bribery and the time spent by managers with the bureaucracy (Gray and Kaufmann 1998).
Furthermore, bribery appears to have a rather low yield. Firms sur- veyed for the WBES were asked to gauge the degree of predictability of
0 5 10 15 20 25 30 35
0 0–1 1–2 2–10 10–12 13–25 >25
Performing Nonperforming
Bribes paid as percentage of sales Percentage of the firms in the size category
Source: World Business Environment Survey, 2000, and authors’ calculations.
Figure 2.5. Vulnerability to Extortion in Relation to Firm Performance, Thailand
bribery, particularly regarding the amount to be paid or the expected out- come of additional payments. According to the survey, the more firms pay, the more unpredictable is the result (see figure 2.6).
The individual firm’s response to bribery is not fully determined by its characteristics or its environment. Beyond averages, there are wide dif- ferences in vulnerability and in the acceptance of corruption in a corrup- tion-prone country (see figures 2.4–2.6). Another illustration of the idiosyncratic nature of attitudes toward corruption is that in a given coun- try the perception of corruption as a business constraint is only poorly correlated with actual vulnerability and other business constraints (see appendix B). In the end, there is room for better standards of behavior in which firms avoid being locked into the vicious circle of low growth and corruption.