What everyone gets wrong about corruption

By:

Jun 13, 2019

There’s a common misconception that until corruption in poor countries is eliminated, or at least significantly reduced, these countries will not be able to develop. This line of thinking is understandable, given what know about the phenomenon:

  1. People living in poverty are disproportionately impacted by corruption. For example, according to research cited by the World Bank, in Paraguay those living in poverty pay 12.6% of their income on bribes while those in high-income households pay barely half that percentage. In Sierra Leone the disparity is even worse. Corruption affects how billions of people already struggling to eke out a living access healthcare, education, justice, and other government services.
  2. Corruption is both economically corrosive and politically cancerous, and incidences of it create a vicious cycle that is difficult for countries and companies to escape. Anecdotally, I felt the metastasizing nature of corruption when I began discussing the ideas in our book, The Prosperity Paradox. Everywhere I turned, people kept telling me innovation can never work in Country A or Country B because of corruption. The “that country is too corrupt” reputation causes investors—foreign and domestic—to not want to conduct business with and in these nations, resulting in less economic opportunity. The lack of economic opportunity makes corruption more attractive, thereby causing a vicious cycle that is incredibly difficult to escape. Corruption then, not only increases in size and scale, but also continues to disproportionately affect the poor and vulnerable.

Clearly corruption is a force to be reckoned with. But the notion that it must be eradicated for development to occur is not only false, but severely limiting since it hinders investments in innovation that are vital to the development of any country.

The truth is that we have the corruption equation backwards. As my co-authors and I dug into the relationship between corruption and economic development, poring through historical examples of countries that had escaped poverty and reduced corruption, we discovered something surprising. Poor countries don’t need to eliminate corruption in order to become prosperous; they must become prosperous in order to eliminate corruption. It’s what happened in the US, South Korea, and countless other countries. Our research also yielded another insight: poor countries can begin that march towards prosperity through investments in market-creating innovations.

The evolution of Africa’s telecommunications industry illustrates this perfectly:

In the late 1990s, barely 5% of people in Sub-Saharan Africa had landlines. In Nigeria, for example, there were more than 110 million people but fewer than half a million phones. The country’s waiting list to get a phone had 10 million names on it, and the estimated wait time was 10 years. This scarcity fueled widespread corruption in the industry as public officials who worked for the phone company collected bribes and extorted money from customers who wanted phones.

Then, Sudanese entrepreneur Mo Ibrahim decided to create a new market for mobile telecommunications on the continent. When he told his colleagues about his idea, they laughed at him. To them, Africans were not only too poor to afford cell phones, but their governments were also too corrupt. There was just no way investing hundreds of millions of dollars to build this industry in Africa would work. But Mo was undeterred; where others saw only risk he saw opportunity.

In 1998 Mo Ibrahim founded Celtel, a company that provided mobile telecommunications services to millions of people. Celtel quickly developed operations in some of the poorest and most corrupt countries in the region: Gabon, the two Congos, Malawi, Sierra Leone, and Uganda.

Something interesting happened when Celtel developed this market-creating innovation. Other entrepreneurs and investors, who were previously skeptical about investing in a “corrupt” Africa, saw that it was possible to create a successful telecommunications company on the continent, and so they flooded in with billions of dollars of investment. This led to explosive growth in the industry. In 2018, Africa’s telecommunications sector had roughly one billion customers and supported nearly four million jobs.

And what of corruption? At least within this industry, it has reduced significantly. Since most people can now afford to buy a phone from one of the many phone companies, public officials have lost their power to collect bribes. At the same time, the new market has provided governments an impressive fifteen billion dollars in taxes—in 2018 alone—that can then be reinvested to strengthen institutions, social services, infrastructure, and anti-corruption efforts.

Clayton Christensen, my co-author, colleague, and co-founder of the Christensen Institute said it best: If we categorize problems properly before trying to solve them, we are more likely to be successful. The problem of corruption is no different.

Efosa Ojomo is a senior research fellow at the Christensen Institute, and co-author of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty. Efosa’s work focuses on using Disruptive Innovation theory to fundamentally change the discourse in the global development community, thus enabling nations to engender their own path to long-term growth and prosperity.