The Impact of Corruption on Private Businesses and their Job Creation Potential

Contrary to what many people think, corruption is a serious problem in many countries of the world, not just Africa. However, due to the high rate of poverty associated with the region and the lack of basic infrastructures, the effects appear to be more significant in this part of the world.

Private businesses are also seriously affected by corruption. The burden of corruption on businesses can be grouped based on their financial strength:

  1. The financially-constrained or 'struggling/growing' businesses [those without enough financial resources and cannot afford to borrow externally]

  2. The financially-prosperous or 'flourishing' business [the established ones, with large funds/capital].

It is important to understand how corruption affects these two business groups and their job creation capacity, as there has been little evidence to verify this.

Photo credit: Mindcoverters

Thankfully, Mohammad Amin, Senior Economist with World Bank’s Enterprise Analysis Unit in Malaysia and Soh Yew Chong, a consultant at the World Bank, recently conducted a study that sheds more light. Their study analyzed data of 41,203 firms in 109 countries from the World Bank’s Enterprise Survey.

Here is a summary of the key findings discussed in the report:

  • Bribe payments and costs of lobbying for government benefits e.g. grants, tax waivers or subsidies (common instances of corruption) impose serious financial burden on all private businesses, regardless of size. However, the impact of such burden on ‘struggling’ or financially-constrained businesses is more significant than those businesses that are financially-prosperous.

  • Corrupt practices can hurt some firms and at the same time benefit others depending on their conditions, such as access to finance.

  • Corruption helps “grease the wheels” for businesses that have easy access to finance, but "sands the wheels” for struggling businesses without easy access to finance.

  • Corruption has a larger negative impact on employment growth for firms that are financially-constrained compared to firms that are not financially-constrained.

  • An increase in bribery rate (by one standard deviation) leads to a -2.3% more decline in the annual growth rate of employment for financially-constrained business, than financially-prosperous businesses.

  • High rate of corruption favour informal businesses as they are "under the radar" and can easily escape much of the financial burden of corruption.

  • Therefore, formal firms that compete against informal firms may suffer more from corruption, compared to formal firms that do not compete against the informal firms.

This study proves that corruption is not just a challenge for individuals and private firms; but their capacity to create jobs are likewise affected. The government and anti-graft agencies will have to employ stricter penalties for corrupt public officials, especially those that tend to target the financially-constrained businesses.


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Article Credit: Michael Adesanya

Tags: #business #corruption #privatebusiness

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