- August 21, 2018
- Posted by: vitalclick
- Category: Investments
On the surface, the cost of direct corruption can be calculated, but the true or knock-on effect is both greater than the financial implications and is difficult to calculate. Yet, the manner in which such costs are incurred can be logically demonstrated.
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Mike Brown, chief executive: Nedbank Group |
Investment – both foreign and local – will suffer when it comes to malfeasance. Prudent investors favour environments that are relatively predictable, as this relates to trust.
“I strongly believe that unless a society has at its foundations ethical behaviour and zero tolerance to corruption, you will have a breakdown of trust among certain segments of society. This leads to lower confidence and lower economic growth than you would otherwise have had and this, in turn, creates a lack of social cohesion,” says Mike Brown, chief executive of Nedbank Group.
Social cohesion
The consequent lack of social cohesion itself has a financial cost. Societies divided by inequality, and the absence of the rule of law, are likely to be more costly to government than those that are not. Society needs trust before it will have the confidence to invest and create jobs, so corruption really goes to the core of damaging the economic progress of our society.
Corruption takes many nefarious forms. It can hide in plain sight at many levels of society. Neither the public nor private sector is immune to its pernicious spread. Yet, it is within the public sector that it is at its most destructive and therefore most costly.
“When those given the responsibility of policing our society are themselves corrupt, it means the private sector loses critical checks on its own behaviour,” he says.
There are multiple factors that contribute to high inflation rates. It is difficult to examine these in isolation. Yet, the consensus is there is a strong positive correlation between corruption and inflation.
The effects of corruption as we have seen can easily spiral out of control – each consequence leading to yet another; all of which add liabilities to the balance sheet, or costs to the income statement. It is likely that corruption results in a decrease in tax revenues. This happens because of tax evasion, corrupt tax officials, and because of the effect extra costs have on profits and consequently on taxable profits.
The knock-on effect of deteriorating government collections are declines in infrastructure spending and service delivery – which makes the prospects of economic recovery and sustainable growth all the more remote.
“There are many reasons why countries grow at differing rates at points in time and many reasons why countries fail to achieve their potential growth rates. Corruption is certainly one of them, but it is difficult to measure its precise impact,” concludes Brown.