The impact of corruption on international trade.

• Author: Shirazi, Moiz A.

1. INTRODUCTION

   The issue of corruption is a continuing one in legal literature and is the premise of many laws, regulations, and international norms, such as the Foreign Corrupt Practices Act ("FCPA"), the Organisation of Economic Cooperation and Development ("OECD") Anti-Bribery Convention, the UK Bribery Act, the United Nations anti-corruption rules, as well as local anti-corruption laws and regulations. All of these measures aim to deter corrupt practices and encourage, and often require, multinational corporations to implement policies and procedures to not only monitor the behavior of employees, but also the actions of third parties, including, but not limited to, business partners, suppliers, and potential acquisition targets. These laws and regulations are often backed by strong enforcement mechanisms that can lead to severe fines and punishment for multinational corporations and individuals engaging in, or failing to identify and prevent corrupt practices.

   While most, if not all, developed countries have adopted these international norms and have well established cultures of enforcement, the countries designated as emerging and frontier markets have only recently started to tackle the issue of corruption. For these markets, it is vitally important to get ahead of the corruption issue as not tackling corruption can come at a high economic price. As these countries compete for international trade opportunities, they should assign a high priority to combating corruption, as a high perception of corruption is strongly correlated with low levels of international trade. As shown in this article, a significant reduction in the perception of corruption for certain countries can have as much, if not more, of an impact on international trade as favorable labor laws, tax rates, and capital (currency) control measures.

   In this article, we affirm the link between perceptions of corruption and perceptions regarding ease of doing business. Having established this link, we conduct a comparative analysis of the countries considered to be emerging or frontier markets based on perceptions of corruption and ease of trading across borders, as well as an analysis of actual levels of international trade per capita for each market. Based on the takeaways from this comparison, we identify the countries that could have the most to gain from combating corruption and quantify the possible impact on international trade levels from improvements in the perception of corruption.

2. CORRELATION BETWEEN CORRUPTION AND EASE OF TRADE

   In general, corruption, or the perception of corruption, is highly correlated with perceptions regarding difficulty of trade. Figure 1 below illustrates this point by comparing the ranking of 178 countries based on Transparency International's ("TI") Corruption Perception Index ("CPI") (1) for 2010 to the ranking of the same countries based on the ease of Trading Across Borders as reported in the Ease of Doing Business Index (2) for 2010 as published by the World Bank. A higher number on TI's CPI equates to a lower perception of corruption. Singapore has the highest value of 9.3 (perceived as least corrupt) and Afghanistan has the lowest value of 1.4 (perceived as the most corrupt). A higher number on the Trading Across Borders category of the Ease of Doing Business Index translates to a worse perception in regards to the ease of conducting international trade, meaning that countries with the highest value are considered to be the least business friendly jurisdictions for international trade. Based on 2010 data, Singapore has the lowest value and is considered to be the most business friendly and Afghanistan has the highest value and is considered the most difficult place to conduct international trade.

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   As TI's CPI is one of many indices that aim to provide cross-country indicators of levels of corruption, we also present a comparison of the World Bank's Worldwide Governance Indicators ("WGI") to the Trading Across Borders data in figure 2. (3) Both comparisons show a strong correlation between perception of corruption and ease of conducting international trade, a correlation of 0.70 based on TI's CPI and 0.73 for WGI, respectively. This is not surprising as the barriers to international trade, principally, administrative red tape and heavy bureaucratic organizations, frequently go hand in hand with corruption.

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3. ECONOMIC COST OF CORRUPTION--EMERGING MARKETS

   Having established that perceptions of corruption and perceptions around ease of conducting international trade generally move in a parallel manner based on the correlation coefficients of -0.70 and -0.73 from figures 1 and 2, we now turn to evaluating the specific impact of corruption on international trade. In order to isolate the impact of corruption on international trade, we need to identify markets where there has been or is expected to be movement both in terms of perceptions of corruption and levels of international trade. The developed markets are generally not useful in this regard as their perception of corruption is relatively low and their ranking on TFs CPI is generally stable from year to year. (4) Fluctuations in levels of international trade for developed markets are likely more the result of economic policy changes, tax regimes, and changes in the perceived corruption levels of current or future trading partners. The emerging and frontier markets, on the other hand, have higher perceptions of corruption and are competing against each other for international trade opportunities. These markets provide the best opportunity to identify and isolate the impact of corruption on international trade.

   Brazil, Russia, India, and China, otherwise known as "BRIC", have long been considered as emerging markets, but there are other countries such as South Africa, Turkey, Republic of Korea, Mexico, and Poland, among others, that are also experiencing rapid economic growth] There are also a number of countries that are considered to be the next wave of emerging markets, commonly referred to as frontier markets. (6) As there is no single definition of emerging or frontier market, we considered the list of emerging and frontier markets as listed by various sources, including The Economist, the World Bank, Morgan Stanley Capital lnternational, and Goldman Sachs' list of next 11 frontier markets. (7) Based on this review, we identified a total of 30 countries for this analysis as shown in figure 3 below. This is an appropriate sample as it includes countries that cover all geographic regions and are at different stages of development.

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   The top left hand corner of figure 3 shows the countries that potentially could benefit the most from improvements in their perception of corruption, including Russia, Ukraine, Kazakhstan, Nigeria, and...