Evaluating Corruption in Emerging Markets

Emerging markets are vulnerable to corruption. Understanding the rules and behavior you see in some emerging markets can help you make investment decisions. Corruption is more common in emerging markets where established institutions may not work well. But bribes, kickbacks, and campaign contributions may be the cost of doing business in any market.

Transparency International conducts surveys and on-the-ground research to assess the amount of corruption in different countries. The organization is a great source of information on different corrupt practices and their effects on local economies.

Some investors separate corruption into good and bad: Good corruption means that although government officials take their cut, at least the money from bribes and kickbacks is used to purchase goods and services in the local economy; With bad corruption, the money is wired off to a private account at an offshore bank, curtailing growth and development at home.

Another perspective is that good corruption is aligned to economic activity and follows a generally acknowledged price structure. It involves illegal payments to government officials, but at least everyone involved knows the rules of the game. Of course, if the structure breaks down or the rules change, then you have a big mess and a big headache.

When thinking about the relative rightness or wrongness of corruption, consider whether the amounts demanded are large or small. Small payments made to get things done may be thought of as tips, not bribes, and such payments may have a history and an etiquette. And in many countries, it’s customary for people who do business together to exchange expensive presents. At a higher level, corruption may come in the form of very large payments to a national leader or someone who reports to him. This form of corruption leads to inflated costs and shoddy work, and it interferes with a government’s relationship to its people.

The hallmark of corruption is secrecy; no one wants to admit that he’s paying or receiving money for better service, favorable regulation, or major contracts. A culture of secrecy makes dealing with corruption complicated, erodes trust, and burdens citizens. Corruption weakens economies, corrodes trust in governments and institutions, and exacerbates conflicts — none of which is good for economic growth.

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