Some industries are more susceptible to corruption than others. As part of their analysis on the cost of corruption, PricewaterhouseCoopers asked CEOs around the world which sectors were most susceptible to corruption. Over two years, global CEOs rated mining as the most susceptible to corruption, followed by other commodity intensive industries where political and bureaucratic decisions are important – construction and oil and gas extraction.
Mining, property and gas, and the banks that fund them, are big business in Australia. It’s not surprising that Australian research also supports these international findings. A study by University of Queensland and University of New South Wales economists found evidence that commodity-intensive and heavily regulated industries are likely to be more corrupt. They find that 80% of the richest 200 Australians made their fortunes in mining, property and other sectors where political favours including favours in the distribution of mining concessions can be extremely profitable.
Yet while there are regular public calls for a new national anti-corruption agency, one voice has too often been missing. Australian business would be one of the biggest beneficiaries of a wider crackdown on corruption in Australia yet they are not being heard in the debate.
Corruption increases the costs of doing business. The World Economic Forum estimates that corruption adds on average 10% to the cost of doing business, as corruption can involve additional transaction costs such as bribes. The total economic cost of corruption worldwide is estimated to be equivalent of 5% of global GDP.
When corruption exists, the optimal allocation of capital will be distorted. Corruption leads to the best-connected contractors and those more likely to give bribes being chosen above those offering the best product. Corruption leads to governments giving advantage to projects that offer personal benefit above those that have maximum public benefit.
Corruption can also limit competition in a market. Using corrupt government and political connections to stop new entrants into a business market can help create or entrench monopolies and oligopolies. This can happen particularly with privatisations of services, for example energy, resources and telecommunications.
On the other hand, businesses are less likely to invest in countries that have high levels of perceived corruption. There is strong empirical evidence to show that corruption has an adverse impact on the ratio of investment to GDP. Unsurprisingly researchers have found a correlation between levels of perceived corruption and economic growth.
While much is being made of the need to attract foreign capital to Australia via an expensive company tax cut of dubious economic benefit, there has been no talk of this much bigger detriment in attracting foreign capital to Australia.
Australia has a strong working democracy with an adherence to the rule of law well in advance of many other places on the planet. Of course resource companies invest in Australia because of the availability of the resource. But a key determining factor in making an investment decision to pursue a development in Australia is the stability, reliability and fairness of the legal and business environment.
Perceptions of corruption have worsened since 2012, when Australia ranked as the seventh least corrupt country in the world with a score of 85 on Transparency International’s corruption perception index. By 2016, our ranking among countries had dropped to 13th place, with a score of 79. PwC has calculated that globally, a one point reduction lost in this index score is associated with a $486 decrease in per capita GDP.
A report released this week by The Australia Institute finds that Australia’s worsening perception of corruption since 2012 may have reduced GDP by $72.3bn, or 4% of GDP.
The mining industry in Australia has the most to gain from being outspoken on the need to fight corruption in Australia. It’s time they joined the push for a strong federal anti-corruption body – one with teeth and the ability to hold public hearings so all of the community can better trust government and business interaction.
The business community, alongside the political class, has taken a public relations battering over recent years. While a federal Icac will not solve the reputational loss for either group, it could go a long way to helping stem the tide while being good for the bottom line as well.
- Ben Oquist is executive director of The Australia Institute