Corruption poses largest threat to emerging markets in ECR survey

By:
Matthew Turner
Published on:

Corruption levels are worsening across emerging markets and pose a real danger to the sustainability of economic growth, reckon ECR analysts

Corruption poses the largest risk to businesses investing in emerging markets, according to the Euromoney Country Risk Q1 2013 results. The alarming level of corruption across emerging markets could bring an abrupt halt to investment inflows and poses a substantial risk the sustainability of economic expansion in emerging markets.

The fact that emerging markets continue to see rapid economic growth, as corruption levels grow reveals that investors are often willing to turn a blind eye to malpractice for the sake of higher return and growth. But is this trend sustainable? Or will government and businesses in emerging markets have to re-think their practices?

ECR data reveals that rising corruption levels are negatively impacting on economic growth. Corruption scores for emerging markets declined by an average of 1.2 points, to 3.9 points (out of 10) between 2011 and 2013. This versus an average corruption score of 7.3 points for the OECD countries.

Meanwhile, economic outlook scores for emerging markets deteriorated by 1.1 points, to 5.5 points over the two year period examined.

 

Richard Segal, emerging markets economist at Jeffries and one of ECR’s contributors, explains “any country which is resource based and where there is a lot of infrastructure spending; it’s quite natural that there is opportunities for abuse as it more difficult to monitor.”

ECR’s corruption indicator measured the perceptions of how corruption affects country risk, where a score of 10 shows there is no corruption and a score of 0 means corruption is endemic and a serious drag on stability and a major contributor of risk.

Corruption levels by country and region

Venezuela (1.8), Pakistan (2.1), Russia and Ukraine (2.4) were considered the most corrupt emerging markets, according to country risk experts; a result which mirrors the findings of the Transparency International 2012 Corruption Perceptions Index, which also ranks Venezuela, Ukraine, Pakistan and Russia among the most corrupt emerging markets in the world.

The only notable difference between Transparency International and ECR’s corruption indicator is in the perceived corruption levels in India and Argentina. Whereas ECR ranks both Argentina and India among the ten most corrupt emerging markets in the world, Transparency International rates India and Argentina mid-table for corruption in emerging markets.

Only four of the 31 emerging markets (Turkey, Poland, Uruguay and Chile) examined in the ECR survey had a corruption score of 5 points or above, indicating a serious corruption problem across emerging markets.

On a regional basis, corruption levels were worst in Asia, due to low scores for Pakistan, India, Vietnam and Indonesia.

 

The results correspond closely with the Transparency International Index 2012, which found a reversal of positive improvements in Indonesia.

“President Suharto and his family controlled not just the political institutions but also a lot of the larger corporations and therefore it was the crony capitalism which went unchecked for a couple of decades, which is to blame for Indonesia’s low corruption index,” says Richard Segal.

“And although the political leadership have tried to make progress; it is difficult when heads of corporations remain in power after Suharto meaning they still have access to political influence and the court system,” says Segal.

Transparency International attributes low corruption scores in Asia to “a lack of transparency in contracting procedures and public sector accountability”, which was blamed for the overall continuing discouraging results, “with over two-thirds of the countries reviewed remaining very corrupt, according to their scores,” notes a report by law-firm, Clifford Chance.

Lain America, on the other hand, was the least corrupt region for emerging markets, but represents the highest disparity in corruption levels. Venezuela and Argentina both languish in the bottom quartile of ECR’s Emerging Markets corruption table, while Uruguay and Argentina are the least corrupt emerging markets.

A TI report cites attributes Venezuela’s low corruption scores to weak democratic governance and violence (mostly drug related), which creates conditions for corruption in the region. The report also recognises that citizens are yet to identify the potential of democracy beyond voting (i.e. laying claim to their rights).

There were also corruption concerns in Latin America’s largest economies; Brazil and Mexico, both of whom scored only 4.6 and 4.0 points respectively in ECR’s corruption indicator. Mexico fell 5 places, to 105 in Transperency International’s Corruption Perception Index 2012.

Central and Eastern European Emerging Markets also exhibited worrying levels of corruption, with Russia and Ukraine ranked in the bottom 5 for corruption in emerging markets.

“Russia, for example, is 143rd on the list, despite introducing anti-corruption legislation, recently signing the OECD Anti-Bribery Convention and joining the OECD Working Group on Bribery in International Business Transactions. It seems patently obvious that more action is required,” notes a report by Transparency International.