Can Corruption Act as a Barrier to Entry in the Private Sector

This blog post was originally published by Accountability Lab. Posted on CCTrends with permission.

“Power doesn’t corrupt people, people corrupt power.” – William Gaddis

Corruption, defined as exploitation of entrusted power for private benefit is, unfortunately,  prevalent in Pakistan. It can take many forms, including bribery, graft, theft and extortion. In the corporate sector, its presence reduces business credibility when professionals misuse their positions for personal gain. Corruption has not only been identified as one of the most significant constraints to private sector development but is also becoming a leading problem for people all around the world.

Engagement in corruption depends heavily on the costs and risks involved, and these vary from region to region. Corruption in business is an economic issue, and it will linger as long as the gains from unethical behavior surpass the anticipated losses that are, in turn, closely linked to the probability of being caught. Some of the key consequences of corruption in the private sector are:

1. When resources are mismanaged, damaged or used inadequately, the efficiency of the business suffers. As a result, available  resources are insufficient to effectively run the business and sustain its level of operations. When the news breaks about a corrupt business leader, customers lose both their trust and respect towards the company and its officials. Moreover, penalties, legal fees and public relations efforts redirect significant resources from core business priorities and lead to an unproductive use of company funds.
2. Employee ranks are often inflated due to lack of internal accountability. As a result, the cost of increasing employee ranks, in addition to any fraud that is going on, is passed on to customers in the form of higher prices. Customers also pay the costs of vendor corruption when purchasing agents require payoffs or raise prices to shield their illegal activities.
3. Investors are hesitant to do business with companies that are known to be corrupt.  Whether seeking investment for a firm’s growth or  selling investments, a company’s history of corruption may pose a challenge to potential investors. Competition is unfairly affected when investors’ risk is multiplied by changing business climates that follow corrupt business practices.
4. The consequences of corruption in business adds to the mushrooming role of crime-fighting government agencies, police departments and internal investigators. The trickledown effect of corruption usually ends up feeding black market interests, and may even support the efforts of organized crime as the activities infiltrate various business levels.

In Pakistan, both the private sector and commercial enterprise have been stifled by corruption. A business operation depends heavily on a climate where contracts can be made and enforced, and where risks can be predicted with confidence. Unnecessary and invasive bureaucracy hinders healthy businesses and disincentivizes investment. Furthermore, Pakistan’s legal system affords little or no protection to small and medium sized businesses. This cripples private sector development by: reducing profits for public purposes, encouraging massive wastes, and increasing costs to consumers.

The majority of Pakistan’s stakeholders agree that the private sector suffers from weak professional standards and slipshod implementation of regulations. There is no consolidated consumer protection law, and even the limited legal fragments addressing the issue are inadequate.

The private sector has failed to develop a professional corporate culture. The growth of private sector enterprises has been restricted since large scale nationalisation shielded them from adopting modern management techniques. Moreover, a lack of documentation is very common in the private sector, leaving much room for tax evasion and other malpractices.

There are four predominant corporate governance principles that must be in place for anti-corruption efforts to be effective:

• Transparency: leaders must be transparent to providers of capital.
• Accountability: people with power should be held accountable for their decisions, and should account to shareholders by submitting themselves to appropriate scrutiny.
• Fairness: all shareholders should receive equal consideration by the leaders without bias or injustice.
• Responsibility: private sector actors should carry out their duties with honesty, probity, and integrity.

The Centre for International Private Enterprise (CIPE) has been working in Pakistan since 2006 in this regard. At a global level, businesses find themselves competing against companies and working with supply chains that have different governance structures. They face varying legal requirements and a diverse quality of law enforcement, as well as different views of corruption and approaches to combat it. Amidst this environment of weak rule of law, it is very challenging for companies to remain transparent and accountable. In order to develop a free and fair business environment, we need to start by strengthening corporate governance and business ethics within the private sector.

Non-governmental organizations (NGOs) can also assist to combat corruption by conducting research, publishing information, educating businesses, and raising awareness. This requires that NGOs build a solid understanding of and trust within the business world. Together, we can improve business processes and ethics, encourage entrepreneurship, and promote sustainable business growth. As a step towards this goal, I am partnering with Accountability Lab Pakistan to design a business transparency and compliance scorecard.

Talib uz Zaman, CIPE Pakistan Programme Officer, and Accountability Lab Pakistan Accountapreneur