I attended a meeting on the need for global infrastructure investments the other day. One of the speakers said, “If corruption were an industry, it would be the third-largest one in the world in terms of income flows.” Research suggests that annual income flow via corruption is worth a little less than $3 trillion. The largest global industry based on income flow is food and agriculture with $4 trillion, followed by transportation and global supply chain management. Global corruption ranks third on the list. The annual growth rate of the sector, as the experts of the issue say, is as high as five percent on average. Apparently, the rate is much higher in some countries.

What grabbed my attention most was that corruption was raised as an issue during a meeting on the necessity of global infrastructure investments. Today, more than half of the world population lives in urban areas. There is a strong and fast dynamic that attracts people to urban areas. At the same time, industrialization has been gaining pace around the world. More frankly, industrialization is now spreading to formerly unindustrialized regions. Thanks to the services sector corporations that run global value chains, the operations of developing country SMEs (small- and medium-sized enterprises) go beyond national borders. Their target markets have switched from  neighboring cities to overseas. International banking operations facilitate the overseas operations of SMEs.

At the end of the day, there has emerged a huge need for infrastructure investments. According to this, for the world to become flat, infrastructure investments worth about $56 trillion are needed. There is a long to-do-list: roads, ports, pipelines, airports, new urban transformation programs... To meet this need, states have to launch a series of tenders and guide the private sector. Research suggests that the greater the number of tenders and the amount of funds allocated for these, the higher the level of corruption. In other words, corruption grows as infrastructure grows.  As the volume of financial public tenders grows, the volume of corruption grows. That why corporate representatives discussing global infrastructure investment also discuss the requirement of corruption and ways to control it.

The Chinese experience best illustrates the first point: Xi Jinping, the General Secretary of the Communist Party of China, has been carrying out a massive anti-corruption campaign, reported to be the largest one since Mao. Jinping says that the campaign targets tigers and mosquitoes. A big clean-up within the party cadres, of the  tigers at the politburo, has been going on as well as of minor local officials, that is, mosquitoes.

Graft in China can be divided into two categories. The cases that predate the Deng Xiapong reforms were relatively small-scale ones, such as the bribery of traffic officers. During the reform period, however, instances of large cases of corruption that involved huge infrastructure projects, foreign investments, and politicians began. In the 1980-2009 period, China allocated a total of $870 billion for investments as well as an additional budget $3.5 trillion to be used for the high-speed train project until 2015. The minister in charge of railway works allegedly has misappropriated $800 million of this amount, and the chief engineer of the project has taken some $1.8 billion. Corruption indeed grows as the investment budget grows. Corruption exacerbates as roads lengthen and infrastructures advance. That’s what people said during the meeting.

So, is there no way out? Of course, there is. The findings of a survey on corruption carried out with 3,000 Vietnamese companies are interesting. What I can say is that companies achieve some mobility in fighting corruption, or at least managing the process, after they grow to a certain size. How? A company that has operations in more than one city has the chance to concentrate growth and employment in the most convenient location. It extends its bargaining power before public officials as it grows larger. So, the results of the survey make sense under the assumption that the decision-making process is not completely central, and not all of the major decisions are made in Hanoi. But it is worth nothing that the more centralized the decision-making process is, the higher the risk of corruption will be, and vice versa. From this perspective, SMEs receive the biggest harm from corruption. The smallest firms bear the highest costs.

Two points of the meeting remain in my mind: First, corruption grows as infrastructure grows. And second, decentralization is of key importance in curbing corruption.

Just wanted to share.

This commentary was published in Radikal daily on 22.07.2014