Corruption is a deceptively good bad investment
A list of the world’s most corrupt countries released by Transparency International on December 5 includes some of the past decade’s fastest growing markets. Corruption may not be enough to derail growth or scare away investors, but that doesn’t mean it won’t come back to haunt them later.
China and Vietnam, for example, rank low in the 2012 Corruption Perception Index. Both have been stuck in the lower two thirds of the index for the past ten years. Yet, in the same period, these countries have enjoyed rapid economic growth. China’s real GDP growth has averaged above 10 per cent a year; Vietnam’s seven per cent. Poor-scoring Indonesia too has grown more than five per cent a year - compared with less than two per cent in cleaner Britain and the United States.
Myanmar may repeat the story in the next decade. The once-isolated country has bumped along the very bottom of the index for the last 10 years, and is deemed “highly corrupt”. This year Myanmar came in at 172nd despite some promising reforms. Yet, investors are rushing to get a foot in the door, with Intel becoming the latest multinational to start operations there. These investors know dirty economies can still get rich, and quickly.
There’s a catch. Corruption may not destroy growth, but it can stop the benefits from being spread fairly. China’s benchmark index in Shanghai has increased by just three per cent a year on average over the past decade, despite the economy’s rapid growth. And the association with poor reputations can cost investors later. Wal-Mart and Rolls-Royce are both embroiled in investigations over their activities in emerging markets, while the US Securities and Exchanges Commission has been investigating alleged fraud at some Chinese companies listed on American markets, casting doubt on whether such companies are still welcome.
Besides, cleaner economies seem to be the ones that get richest. Only countries in the upper third of the Transparency International index made it into the list of top ten richest countries by GDP per capita in 2011. That suggests that in the long run, graft doesn’t pay. Perhaps the point is not how far China and Vietnam have come despite corruption, but how much further they could have come without it.
Performance across parameters ahead of Street expectations
US, Europe unlikely to confront an assertive Russia; Japanese liquidity to support Asian markets