Seeing money in transparency

How fight against corruption could save Korean economy

By Kim Tong-hyung

As Korea finds itself dragged into a disastrous vortex of faltering exports, collapsed consumer spending and spiraling debt, government officials appear at a loss on how to prevent the country’s fragile recovery from derailing. But they could do much worse than starting from eliminating corruption and cronyism from the bureaucratic veins, according to a number of economists here.

The subduing economy pretty much ensures that President Lee Myung-bak is going out on a whimper. Upon unpacking at Cheong Wa Dae, the CEO-turned-politician had vowed to hang his legacy as head of state on adding pace to the country’s economic growth.

But for all his preparation and scheming, the economy had a mind of its own. Subduing exports and decimated consumption continue to take a bite out of gross domestic product (GDP), while the triple fears of a toxic Europe, sluggish recovery in the United States and a slowing China have policymakers beaten down intellectually and emotionally.

With the benefit of hindsight, it’s difficult to find a more ridiculous tale than Lee winning the presidential vote on a Mayan-like prediction of ``747’’ (7 percent annual growth, $40,000 per capita income and Korea’s emergence as a top-7 world economy).

Obviously, Lee’s promised figures were never probable ― a grown economy will never expand at the pace of its infant days and it’s no use breast feeding it again with mottos about industriousness, working hours and low pay.

That said, Lee might have been able to get more oomph from the GDP department had he managed to deliver on his promise of a transparent and clean government, a Hyundai Research Institute (HRI) study suggests.

There are numerous indicators suggesting that Korea continues to be one of the most corrupt nations among rich economies. HRI argues that Korea could add 0.65 percentage point to its economic growth just by clamping down on corruption and matching it closer to the average level of OECD nations.

``There is a direct relation between the levels of corruption and the levels of economic growth,’’ said Han Zae-zin, an HRI economist who co-authored the report with Lee Bu-hyeong.

``Corruption, as defined as gaining material and social advantages through unlawful means, will fuel rapid growth in social and economic cost when it begins to spread in the public sector. It could distort the decision-making process of policies involving public-sector investment. This will also discourage private sector investment, dragging down the overall upward momentum of the economy.’’

The Lee government is suffering an acute version of lame duck disease, and the erosion in respect appears to have much to do with the slew of corruption allegations involving Cheong Wa Dae and what is described as the President’s ``inner-circle’’ of policymakers, politicians and businessmen.

From the massive restoration project of the country’s four major rivers to the licensing of new television channels, it seems that every major project that had been pushed by the Lee government is now linked with allegations of under-the-table maneuvering, irregularities and bribery.

The corruption perceptions index (CPI) released annually by Transparency International indicates to halted progress in the Korean efforts to purge its political and bureaucratic dirtiness.

The CPI scores countries on a scale of zero to 10, with zero indicating high levels of corruption and 10, low levels. Korea’s index was at an embarrassing 3.8 in 1999, but improved to 5.7 in 2008. But interestingly in the aftermath of the global economic crisis, Korea’s CPI slipped to 5.4 last year, when the average of the 34 developed nations of the OECD was 6.9.

The CPI for 2011 was 9.4 for Finland, 8 for Japan and Germany, 7.8 for Britain, 7.1 for the United States, 7 for France and 6.1 for Taiwan. Countries in a worse state than Korea included Italy (3.9), China (3.6), India (3.1), Mexico (3) and Russia (2.4).

Afghanistan and Myanmar shared second to last place with a score of 1.5, with Somalia and North Korea, measured for the first time, came in last with a score of 1.

Han’s study of the relationship between the corruption index of OECD countries and GDP figures between 1995 and 2010 showed that each 1 percent improvement in the corruption index generally correlated to a 0.029 percent increase in nominal per-capita GDP.

Korea’s average corruption index over the 1995-2010 period was 4.7, while the OECD average was 7. A 2.3 point improvement in CPI would have meant a $138.5 difference annually in per-capita GDP and perhaps an economic growth rate of over 4 percent last year, when expansion was measured at 3.6 percent, a sharp pullback from 6.2 percent in 2010.

While his math is simple, Han insists this doesn’t make it any less true.

``Numbers show that countries with a higher CPI are growing 0.6 to 1.4 percent faster than nations below them, and it’s hard to deny that uncontrolled corruption is costing Korea dearly in economic growth. The country needs to show more urgency to improve the integrity and structural equality at every level of society and government if it intends to further solidify itself as a rich economy and achieve sustainable growth,’’ Han said.

``Korea’s annual potential growth rate averaged 4.4 percent between 2001 and 2007, but has now slid to 3.4 percent, with structural problems diminishing the upside. However, an improvement in transparency alone would be enough to put the country back in the 4 percent range.

``We need to do a better job in informing and educating the public about the economic consequences of corruption, which will prepare the country when the government opts to clamp down harder on it. We need to review the efficiency of current systems in laws, social systems and regulatory and auditing frameworks, and also get cooperation from the civic society.’’