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February 23, by LSB

The influence of corruption on economic performance and national wealth

Dino Dogan, Ph.D., Luxembourg School of Business

2020 was not a good year for me either. Many hopes are therefore directed towards the year 2021. Individuals, companies and economies are in the process of developing strategies on how the restart after the Corona crisis should be successfully implemented. It will be interesting to see who succeeds in restarting well and who does not. Even before the Corona crisis, it could be observed that companies and economies with excellent potential were unable to guarantee their employees and residents the corresponding standard of income and living. Corruption, especially in context-driven companies and countries, has repeatedly been cited as the reason for this.

Last year I took this as an opportunity to start a small research project to find out whether there is a connection between the level of corruption in a country and its economic performance respectively the standard of living of its residents. 

The term corruption comes from the Latin corruptio (corruption, corruption, bribery). Today criminological research defines corruption as “the abuse of a public office, a function in the economy or a political mandate in favour of another, at his own initiative or on the other’s initiative, in order to gain an advantage for himself or a third party, with anticipation of harm or disadvantage for the general public … “[1].

As country-specific indicators, the index of perceived corruption (CPI) determined and published annually by Transparency International was used. The second used indicator is the per capita gross national product (GDP per capita), which is also collected and published annually by the World Bank. 

The Corruption Perception Index (CPI) compiled by Transparency International (TI) is used as a representative indicator for the level of corruption in a country. TI defines corruption as “abuse of entrusted power for private benefit or advantage”[2]. The index ranges from 0 to 100 (max. 10 points up to 2011), with 100 indicating the lowest level of perception of corruption and thus the best possible result.

The CPI is the most widely used indicator of corruption in the world. It ranks countries based on how corrupt a country’s public sector is perceived by experts and business people. It is a composite index, a combination of 13 surveys and corruption ratings collected by various reputable institutions[3]. This is where the criticism of the CPI comes in, because the index ‘only’ reflects the perceived corruption. 

The per capita GDP (Gross Domestic Product GDP per capita) is the gross domestic product divided by the population at the middle of the year. The GDP is the sum of the gross value added of all manufacturers based in the economy plus any product taxes and minus any subsidies that are not included in the value of the products. It is calculated without any deductions for the depreciation of manufactured assets or for the depletion and deterioration of natural resources[4].

GDP per capita is a global measure of the prosperity of nations and is used by economists along with GDP to analyse a country’s prosperity in terms of its economic growth. The per capita GDP shows how much economic production value or wealth can be ascribed to each individual citizen[5]. The per capita gross domestic product is also used in the following analysis as an indicator of a country’s economic performance and the level of prosperity of its population.

The data from 2000, 2005, 2010, 2015 and 2019 were used for both indicators. In addition, the 15 first, 15 last and 15 countries from the middle range were used for the CPI published annually by Transparency International. The data of the per capita gross domestic product published by the World Bank are given in current US dollars (as of July 1, 2020).

  • For the year 2000 there is a high positive correlation of 0.889313.
  • For the year 2005 there is a high positive correlation of 0,90449.
  • For the year 2010 there is a high positive correlation of 0,868617.
  • For the year 2015 there is a high positive correlation of 0,893357.
  • For the year 2019 there is a high positive correlation of 0,879739.

For the year 2019 there is a high positive correlation of 0,879739.

On the basis of the analyses carried out above, a very high positive correlation between the perceived corruption index and the per capita gross domestic product can be determined for the past 20 years. It follows from this that countries with less pronounced corruption achieve higher economic output and greater prosperity for the population. The systematic and consistent fight against corruption is therefore an effective approach to transform an economy in a positive way. The restart after the Corona crisis is a very good moment for such an initiative.

If companies or economies want to successfully master the Corona restart with their corresponding strategies, they are well advised to eradicate any existing corruption. Otherwise, every strategy will be destroyed by corruption right from the start. But how can corruption be mastered? I see the following approaches:

1. Consensus on plan and strategy

First of all, a strategic plan is needed that shows what long-term goals the state wants to achieve, what are the milestones along the way and what strategy should be used to achieve those long-term goals. Appropriate operational measures, aimed at ensuring the effective implementation of the strategy, are derived from the strategic plan. There are two important aspects to consider in operational implementation. On the one hand, the successful implementation of the operational strategy requires a positive selection of all persons involved according to the criteria: formal education, practical experience, demonstrable results, international experience and agile way of thinking. This goes hand in hand with the rule, that organizations are not built around people (‘he is ours so he needs to be taken care of’), but are based on tasks to be performed. The most competent executors are also required for these tasks.

The next increasingly important aspect of the successful implementation of the plan is the environmental, social and economic sustainability of decisions and measures taken by leaders and managers. Past and present success is no guarantee of a prosperous future. The decisions we make today have a significant impact on the prosperity and quality of life of our descendants. Ubiquitous climate change and (non) decision-making today are just one example.

As the fight against corruption is a lengthy process, a national and supra-party consensus on the plan itself is needed to avoid resetting activities every four years. And let’s not forget: a lot of “friendly” countries advocate a politically and economically strong other country, and in fact they like the continuity of the country’s weakness and non-transparency, because in the dark they hunt well.

2. Strong leadership

300 years ago, the inhabitants of the southwestern part of Germany lived quite riotously, wastefully, and did not care much for the laws. At one point, the Protestant church took the strings into its own hands, prescribed a new code of conduct, and punished disobedience with draconian measures. Today, Baden-Württemberg is a very well-organized German province, with very diligent and innovative people, one of the highest living standards in the world and a very low rate of perceived corruption. This does not mean advocating the intervention of any church. But we also see in many other historical and current examples that a serious fight against corruption requires the determination, knowledge and strength of those who lead and carry out this fight. At the same time, we have to bear in mind that leaders who only act for the public are actually not strong at all.

3. Moral integrity

When it comes to change, only authentic and credible leaders will lead the masses on a new and good path. As far as leadership is concerned, one gets the impression that a kind of transformation process is taking place in many countries well known for their corruption. People from the former regime hand over the baton to their successors, who at first glance seem polite and socially responsible. At a second glance, however, it can be seen that some of them inherited patterns of behaviour of their ancestors who only protect their particular material interests. At the same time, national interests are sold for a handful of foreign exchange. But that is why they divert the attention of the masses from these facts to irrelevant but emotionally intriguing topics. Therefore, these countries desperately need unencumbered and truly new people, who authentically represent a new and professional approach in resolving burning national, social, security and economic issues. It doesn’t matter what someone says, but who says it!

Every four years people in more or less democratic societies have the opportunity to choose new people. The problem, meanwhile, is the fact that corrupt octopuses have taken on such dimensions, that the votes of those who are part of these octopuses are sufficient to sustain them. Increasing voter turnout, for example through compulsory voting or through the organization of elections every year or for two years, increases the pressure on the corrupt part of society.

4. Draconian punishments

When we analyse in detail the countries with the lowest perceived corruption rates (in 2019 it was Denmark, New Zealand, Finland, Singapore, Sweden, Switzerland, Norway, the Netherlands, Germany and Luxembourg), then it is obvious that in these countries corrupt practices are punished draconian. There are not only laws, but also politically independent institutions and processes that guarantee that corrupt actions are sanctioned as soon as possible. If such a regime is applied for a long period of time, uncorrupted behaviour becomes normal. It is therefore not surprising that, for example, politicians in the above-mentioned countries have a very low tolerance for corruption and resign on their own initiative, even with the slightest deviation from the law. 8 of these countries are in Europe, most of them are members of the European Union. Unlike them, in corrupt countries the people admire certain corrupt actors. Corrupt actors in these countries do not have problems with the crimes committed and the damage they have done to honest citizens, but they are ashamed that they were discovered in these actions because they were not skilled enough. Could it be sicker? Therefore, public communication of corrupt practices and perpetrators, speedy prosecutions and draconian penalties that include, for example, temporary blocking of all accounts, prompt seizure of illegally acquired property, banning work in public services, are a country’s last chance to get out of the corrupt vortex that is leading the whole country to ruin. It is also a clear warning that something is fundamentally changing.

5. Competitive spirit

In sports we see that even small countries can be very competitive in global matches. Why? Because they constantly compare themselves with the best ones and strive to overtake them.
Implementing systematic Benchmarking, where a country would be compared with other / best in class countries, setting ambitious goals based on the comparison and introducing and applying proven successful approaches and measures in the fight against corruption, would be the beginning of reviving a healthy competitive spirit in society as a whole. Therefore, there is no need to establish various committees and councils at the national level where the same people will offer already well-known ineffective solutions. By learning from the best and being efficient in introducing and implementing the best solutions, and a country can put an end to corruption. 

And last but not least: as it takes two for tango, it takes two for corruption too. Very often those ones who are denouncing corruption, are those ones who benefit from it…

Dr. Dino Dogan

Dr. Dino Dogan is an experienced executive, a professor of Management, and a Dean of Luxembourg School of Business. Dino has worked 10 years with Alcatel in their German subsidiary and in their Paris headquarters. In the Telekom Austria Group, he acted as the CFO of their Croatian subsidiary and as CFO of Mobilkom Austria, overseeing and implementing the merger with Telekom Austria to create Austria’s largest telecommunications operator – A1 Telekom Austria. For the successful integration, he was awarded the European Change Communication Award. Dino has also served as the CFO of Croatian Telekom (a member of Deutsche Telekom Group), CEO of the Croatian subsidiary of JCDecaux, and has worked as a senior advisor at the Boston Consulting Group. Dino currently runs his own Business consulting and Design management company. 

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