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First Hand Look at a Scandal
Alumnus Douglas Brown describes his experience cleaning up a state agency after a few bad apples spoiled the barrel.
How to Prevent Cheating
To minimize corruption, leaders must pay attention to incentives, say those who study and teach ethics.
MBA Classes Address Ethics, Cheating
First year MBA students at the GSB take a required course on ethical analysis called Ethics and Management, but the discussion of ethics does not end there.
Preventing Corruption
Corruption Costs Businesses Competitive Advantage
By Marguerite Rigoglioso
CORRUPTION SWELLS the number of employees needed, driving up costs and sidetracking workers from jobs that could help grow a country’s economy, say researchers who studied the issue in Latin America’s electricity distribution industry.
It has long been known that corruption is associated with lower GNP per capita, and lower investments and growth rates, but the study by Ernesto Dal Bó, associate professor of political economy at the Business School, and Martin Rossi of the Universidád de San Andrés in Argentina, is the first to show that corruption damages nations by making firms inefficient. They postulate that corruption—the misuse of an office for private gain—leads to the needless inflation of employee ranks, which, in turn, creates a less favorable business climate and ultimately serves as a serious drag on a nation’s wealth.
The researchers studied data from 80 electricity distribution firms in Latin America between 1994 and 2001. Using a theoretical model combined with data, they found that in countries where government corruption was higher—as measured by the International Country Risk Guide and Transparency International—firms used significantly more employees to get the same job done. They found that if a country in their sample of Latin American nations with a median corruption level, namely Brazil, were to lower its corruption level to that of the least corrupt country—Costa Rica—its utilities firms would use 7 percent fewer workers. The effect is independent of a country’s general economic or political stability.
“We’re talking about a large industry here, so this is not peanuts,” Dal Bó says. “The money this represents is significant.”
Why would corruption inflate employee ranks? Managers might hire extra people to make their own jobs easier and then influence regulatory officials to raise prices to cover the costs. Or regulators might harass firms with costly “official” requests. In exchange for being relieved of these requests, firms might spend resources, both human and monetary, courting officials—outlays that inflate labor and operational costs.
Yet a third possibility is that in a country where corruption is the order of the day, a firm may be hiring more employees to manage its own internal corruption. “It’s likely that your purchasing officer may be getting kickbacks or may be stealing, for example,” Dal Bó says. “Then you have to hire someone to monitor him. Again, this is wasteful.”
The research, published in the June 2007 issue of the Journal of Public Economics, doesn’t say exactly what drives the added cost but it provides empirical evidence that, when seen at the microeconomic firm level, corruption destroys a country’s wealth. “Problems like corruption may ultimately determine the viability and health of business in any given country,” Dal Bó concludes.