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How Does Corruption Affect Emerging Markets?


Economies with a high level of corruption—defined as the misappropriation of power in the form of money or authority to achieve certain goals in illegal, dishonest, or unjust ways—are unable to prosper as fully as those with a low level of corruption. Because corruption prohibits the economy’s natural laws from operating freely, corrupted economies are unable to function correctly. As a result, corruption in a country’s political and economic processes has a negative impact on the entire society.

Countries with high levels of corruption are unable to function effectively or develop economically, resulting in suffering for the entire society.

In comparison to developed countries, emerging market economies have substantially higher levels of corruption.

Because small businesses confront unfair competition from bigger corporations with illicit connections to government officials, corruption can lead to an unequal distribution of wealth.

Resources are inefficiently distributed in a corrupt economy, and enterprises that would not otherwise be qualified to receive government contracts are frequently awarded projects as a consequence of bribery or kickbacks.

Under a corrupt economy, the quality of education and healthcare deteriorates as well, resulting in a worse standard of living for the country’s population.

Data on the Effects of Corruption

According to the World Bank, countries with a high level of corruption have an average income that is around a third of that of nations with a low level of corruption. In addition, the infant mortality rate in these countries is three times greater, and literacy is 25% lower. Although no government has been able to totally eradicate corruption, studies suggest that the amount of corruption in emerging market economies is significantly higher than in industrialized nations.

The map below depicts the various levels of corruption perception in various countries in 2016. Higher levels of corruption perception are represented by darker hues, whereas lesser levels are represented by lighter hues. The regions with developed economies, such as North America, Western Europe, and Australia, have low levels of corruption perception, according to this map. In contrast, practically every country with a developing economy has a high sense of corruption.

Price for a poor performance

Monopolies or oligopolies in the economy result from corruption in the way deals are done, contracts are awarded, or economic activities are carried out. Those who can bribe government officials with their connections or money can manipulate policies and market mechanisms to assure they are the only provider of products or services in the market.

Monopolies tend to keep their prices high because they don’t have to compete with alternative providers, and they aren’t driven to enhance the quality of the goods or services they supply by market forces that would be in effect if they had sufficient competition. The illegal costs of the dishonest transactions that were required to create such a monopoly are also included in those high prices. If a home construction company, for example, had to pay bribes to officials in order to obtain operating licenses, the costs paid would, of course, be reflected in falsely inflated house prices.

Resources that have been allocated inefficiently

Companies should select their suppliers using tender processes (requests for tender or requests for proposal), which serve as tools for selecting suppliers who offer the best price/quality combination. This ensures that resources are allocated efficiently. Companies that would not otherwise be qualified to win bids are frequently given projects in corrupted economies as a result of unfair or unlawful tenders (e.g. tenders that involve kickbacks).

As a result, there is excessive spending on project execution, as well as inferior or unsuccessful initiatives, resulting in overall resource inefficiencies. Because of the massive cash flows involved, public procurement is likely the most vulnerable to fraud and corruption. Public procurement accounts for between 15% and 30% of gross domestic product in most nations, according to estimates (GDP).

Uneven Wealth Distribution

Corrupted economies have a disproportionately small middle class and a large disparity in living conditions between the upper and lowest classes. Because the majority of the country’s capital is concentrated in the hands of oligarchs or those who support corrupted public officials, the majority of the country’s wealth is likewise concentrated in their hands.

Small firms are scarce in a corrupt system, and they are often discouraged by unfair competition and illegal demands from bigger corporations with ties to government officials. Certain industries are more prone to corruption than others, exposing small enterprises in certain industries to unethical business practices.

Low Incentives for Innovation

Potential innovators cannot be convinced that their idea will be protected by patents and not duplicated by those who know they can get away with it by bribing the authorities because they have little faith in the legal system in corrupted economies where judicial rulings can be skewed. As a result, there is a disincentive to innovate, and as a result, emerging countries are typically technology importers because such technology is not developed in their own cultures.

Grey Economy

To avoid taxation, small firms in corrupt countries avoid having their operations officially registered with tax authorities. As a result, many enterprises’ earnings operate outside of the formal economy and are not subject to governmental taxation or included in the country’s GDP calculation.

Another disadvantage of shadow firms is that they frequently pay their employees less than the government-mandated minimum wage. They also do not provide suitable working circumstances, such as adequate health insurance benefits for their employees.

Foreign investment and trade are both low.

One of the barriers to international investment is corruption. Investors looking for a fair and competitive business environment will shun countries with high levels of corruption. While investing in emerging economies remains popular, investors are understandably wary about putting their money at risk in nations with high levels of corruption. According to studies, there is a direct relation between a country’s level of corruption and measures of its business environment’s competitiveness.

Education and healthcare are both in poor condition.

According to a working paper published by the International Monetary Fund (IMF), corruption has a negative influence on the quality of education and healthcare in emerging nations. In countries where bribery and connections play a significant role in the recruitment and promotion of teachers, corruption raises the cost of education. As a result, the quality of education suffers, affecting the economy’s general health.

Furthermore, in emerging economies, corruption in the designation of healthcare providers and recruitment of personnel, as well as the procurement of medical supplies and equipment, results in inadequate healthcare treatment and a substandard or limited medical supply, lowering overall healthcare quality.

Final Thoughts

Many emerging economies are plagued by high levels of corruption, which stymies their overall development. Inefficient resource allocation, the emergence of a shadow economy, and low-quality education and healthcare have an impact on the entire society. As a result, corruption deteriorates these countries and decreases the living standards of the majority of their citizens.