Wednesday, September 24, 2014

THE COST OF CORRUPTION IS HARD TO MEASURE



A recent talk “The hidden costs of rent seeking in Uganda’s financial sector” reminded me of an article many years ago about how trust plays an important role in economies.

The talk given by Professor Sam Sejjaaka outlined how rent seeking – a euphemism for corruption, is raising the cost of borrowing, encouraging misallocation of valuable resources and cannot be guaranteed to have a universal benefit.

Going by last year’s annual accounts, he pointed out that banking industry wrote off sh206b as bad loans or almost 40 percent of the industry’s profitability. This statistic pointed to a high risk environment. A lot of the bad loans did not come about out of genuine market failure but through the connivance of bank officials and borrowers in falsifying securities and flouting regulations to lend money to individuals who have no intention of repaying the money. These bad loans are a cost to the industry which force up the cost of credit for upright borrowers.

On a more global level corruption hurts the economy by diverting resources away from innovation, which is at the heart of growing economies. Why think very hard when you can steal public funds?
Speaking at the function that was hosted by the US Ambassador Scott Delisi, Sejjaka’s solution to the scourge it would seem, emanates from what he considers the root of corruption not only in the financial sector. Moral hazard, where those charged with decision making are insulated from the consequences of their actions. So make them accountable and moral hazard will disappear and corruption will follow suit.

Which brings us to the role of trust in economies. World Bank economist Steve Knack reported about a decade ago that trust accounted for 99.5% of the US’ economic output. Put another way if the US GDP was $1000 that portion that would be attributable to hardwork is a mere $5...

This means that the more trust there is an economy the better it is able to grow.

He explained that there were two kinds of trust – personal and institutionalised. Strong economies have more of the latter than lesser developed nations. But institutionalised trust is derived from personal trust. A country’s institutions are only as trustworthy as its peoples are perceived to be.

Think of a situation where trust is very low and one has to buy sugar from the shop. First of all because you trust no one else you would go down to the shops yourself to buy the sugar. Forgoing more productive endevours to do so. At the shop you will insist on transacting with only one shopkeeper and even then will whip out your chemistry set and portable weighing scale to make sure you are getting what you are paying for.

Now extrapolate this across thousands even millions of transactions in a day and it’s easy to see how the economy would be affected.

And credit cannot operate in a low trust situation. Without credit there will always be a ceiling on how big economies can grow.

Up to about 15 years ago when the banks started unsecured lending, the middle class was much smaller. But using salaries as collateral for borrowing the lending to the private sector has exploded and it is reflected in the expansion of Kampala out into previously godforsaken areas, increased traffic on the roads and increased demand for goods and services.


Trust while intangible means more for this economy than all the roads, dams, schools and hospitals you can build.


Corruption is not only increasing the cost of doing business, but is also widening income inequalities and threatening social stability.

Actually we should focus more on opportunity inequalities, which lead to income inequalities.
 When because the of corruption schools go unbuilt and under facilitated, hospitals go unequipped and roads are eaten up by portholes, it is not unlike kicking the ladder away by the rich and powerful so that other people cannot join them at the party.

Various figures have been bandied around about the cost of corruption to this economy. The world Bank estimated that at least sh300b was being pilfered, a figure that was dismissed by some as not reflecting the scale of the situation.

But the anecdotal evidence is there for all to see.

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