Corruption can clearly have a negative impact on economic growth at the country level. But what impact do corruption and bribery have on the growth of individual businesses? And is corruption more harmful to business growth than taxation?

Research from the Columbia Business School, USA, and the Institute for International Economic Studies, Sweden, assesses the impact of corruption and taxation on business growth in Uganda. The research uses information from a 1998 survey on bribe payments for 176 small and medium sized businesses from the most important industrial sectors (agriculture, agro-processing, manufacturing, construction and tourism) and regions in the country.

Corruption is widespread in Uganda. Small enterprise managers see it as one of the main barriers to doing business. Bribes are paid to public officials for a number of reasons:

• to get an electricity or telephone connection, or access to other public infrastructure and services such as water, waste disposal and paved roads
• to reduce tax liability (tax authorities can exercise a high degree of discretion in the tax rates they require businesses to pay)
• or to get things done faster and sidestep bureaucratic processes, such as licensing requirements or customs.

Collecting information on corruption is notoriously difficult because of its secretive nature. This problem was overcome through appropriate survey design. Information collection was also made easier by the fact that corruption had already been de-sensitised in Uganda through government awareness-raising campaigns and media attention.

Assessing the direct negative effect of bribery on business growth can also be difficult. One of the main reasons is that public officials often demand higher bribes from businesses with higher current or expected future profits. This link between bribery and business success at the firm-level can mask the negative effect of corruption on business growth generally. The researchers overcome this problem by using industry-location averages (using average information from a range of small businesses operating in different sectors and regions).

Key research findings include:

• Both corruption and taxation constrain business growth in Uganda.
• Every one percent increase in the tax rate will reduce business growth by about 1.5 percent.
• Every one percent increase in the bribery rate will reduce business growth by about 3.3 percent (more than twice the effect of taxation).
• These are likely to be conservative figures (when the researchers removed a small number of very atypical results they found a much greater negative impact of bribery on growth, while the effect of taxation was reduced).

The research findings provide empirical evidence in support of the view that corruption and bribery have a negative effect on business performance. More research, however, is needed on the firm-level effects of corruption.

The authors conclude that corruption is a serious constraint on business growth in Uganda – much more so than taxation. The donor community and other organisations should continue to focus efforts on tackling corruption in poor countries.

Source(s):
‘Are corruption and taxation really harmful to growth? Firm level evidence’, Journal of Development Economics, 83.1, pages 63-75, by Raymond Fisman and Jakob Svensson, May 2007

id21 Research Highlight: 20 July 2007

Further Information:
Raymond Fisman
Columbia Business School
Uris Hall
3022 Broadway
New York, NY 10027
USA

Tel: +1 212 8549157
Fax: +1 212 8549895
Contact the contributor: rf250@columbia.edu

Columbia Business School, USA

Jakob Svensson
Institute of International Economic Studies
Stockholm University
106 91 Stockholm
Sweden

Tel: +46 (0)8 163060
Fax: +46 (0)8 161443
Contact the contributor: Jakob.svensson@iies.su.se

Stockholm University, Sweden

Centre for Economic Policy Research
90-98 Goswell Road
London EC1V 7RR
UK

Tel: +44 (0)20 78782900
Fax: +44 (0)20 78782999
Contact the contributor: cepr@cepr.org

Centre for Economic Policy Research, UK

Other related links:
"Lessons for governance reform from Uganda"

"Ending corruption through accountability: improving public services in Uganda"

"Tackling corruption realistically"

Assessing the Effects of Corruption and Crime on Firm Performance: Evidence from Latin America, Working Paper from the World Bank (PDF)

NEW FINDINGS ON BUSINESS-RELATED CORRUPTION IN EASTERN EUROPE AND CENTRAL ASIA, Press Release from the World Bank