THE ECONOMICS OF CORRUPTION
National Integrity Summit, Melbourne
Wednesday, 30 August 2023
I acknowledge the people of the Kulin Nations, the Traditional Custodians of the land on which we gather today.
I pay my respects to their Elders, extend that respect to other First Nations people present today, and commit myself, as a member of the Albanese Government, to the implementation in full of the Uluru Statement from the Heart. including a constitutionally enshrined Voice to Parliament.
Thanks to Transparency International Australia and your CEO Clancy Moore for inviting me to speak today. I also acknowledge the National Anti-Corruption Commissioner Paul Brereton, Deputy Commissioner of Victoria’s Independent Broad-based Anti-corruption Commission Kylie Kilgour, and longtime anti-corruption campaigner Professor A.J. Brown.
The Moonlight State
While Australia has had many corruption scandals, the Fitzgerald Inquiry and the systemic corruption among police and Queensland politicians it unearthed stands out both because of the scale of the corruption that it revealed and the long-term impact it had.
Historian Raymond Evans described the Fitzgerald Inquiry as ‘the most remarkable Commission of Inquiry in Australia’s history’. In 2009 – in the lead up to the 20th anniversary of the tabling of Fitzgerald’s report in Parliament – then Premier Anna Bligh said:
‘In many ways, the Fitzgerald inquiry was Queensland’s Berlin Wall. It washed away an old regime and heralded in a new era. Nothing on Queensland’s political landscape has been the same since.’
The system whereby corruption police would take protection payments from the sex industry was called ‘the Joke’, but the cost was no laughing matter. By the 1980s tens of thousands of dollars in bribes were being paid each month to senior police the culture that grew up around the crooked cops went far beyond one industry. To quote the Fitzgerald Report:
The later segment of evidence involving political figures demonstrated that misconduct in the Police Force was not isolated, but part of a wider malaise to do with attitudes to public office and public duty.
Indeed the Fitzgerald Inquiry may never have happened if then Premier Joh Bjelke-Peterson hadn’t been on a trip to the United States on the night the Four Corners show ‘Moonlight State’ aired. As a result it fell to the Acting Premier Bill Gunn to initiate the inquiry.
The Inquiry ultimately led to four former state ministers, and multiple senior police being found to have engaged in corrupt conduct, and the establishment of Queensland’s first anti-corruption body, the Crime and Misconduct Commission (now the Crime and Corruption Commission) in 1988.
Corruption ultimately brought Joh’s premiership to an end. According to party-room records revealed years later – Joh was allegedly set to receive up to $20 million to facilitate the construction of what would have then been the world’s tallest building in Brisbane.
His National Party colleagues refused to wave the deal through, so Joh tried to reshape his Cabinet. He demanded five Ministers resign – they refused. He demanded the Governor of Queensland, Walter Campbell call an election despite the Parliament only being a year old – which Campbell declined. Joh was ultimately challenged by Mike Ahern – ending 19 years as Premier.
Joh himself was put on trial for perjury in 1992 but the jury deadlocked.
According to another episode of Four Corners from 2008: ‘A later inquiry conducted by Justice Bill Carter found the [jury] selection process had been manipulated by ... ex-police officers ... helping to put Joh before a jury led by Young Nationals member, Luke Shaw’.
When corruption really gets into the bones of a society the damage it does to institutions can take generations to heal.
Despite being a mere thirty years old, Transparency International’s research and advocacy have shaped how we see corruption.
The Corruption Perceptions Index has become the leading global indicator of public sector corruption. The World Bank has described the Corruption Perceptions Index as the most ‘valid measure of the magnitude of overall corruption in many countries.’
I also want to acknowledge the importance of Transparency International’s advocacy in the establishment of international agreements on corruption.
Transparency International’s advocacy has contributed to the OECD’s Foreign Bribery Convention in 1999, and the United Nations Convention against Corruption in 2003. These are substantial achievements but combating international corruption is not without its cost.
Indeed in March of 2023 Transparency International was declared an undesirable organisation in Russia – a mark both of the importance of your work, but also of the risks of speaking truth to power.
National Anti-Corruption Commission
Sixty days ago today, Australia’s National Anti-Corruption Commission began its work. As Attorney General Mark Dreyfus said of the legislation to create it:
‘This is the single biggest reform to the Commonwealth integrity framework in decades…’
‘One thing we have learnt is that tackling corruption doesn’t just reduce crime, it strengthens public trust in institutions and improves the delivery of services.’
On the first day of its operation the NACC received 44 referrals, with more than 300 referrals made in its first 10 days. As of today, it has received 738 referrals. So while we have had to wait far too long for the NACC to come into existence – it seems likely that they’ll have plenty to do for the foreseeable future.
It was a key election pledge, but the campaign for it has a long genesis.
Transparency International has been advocating for a National Anti-Corruption Commission since 2005.
The NSW ICAC was established in 1988 and it has taken a quarter of a century to establish its federal counterpart.
One notable NSW ICAC investigation was Operation Savoy in 2002 – which ultimately found that an employee of the Australian Museum had stolen more than 2000 items over five years, including 339 mammals, 32 reptiles and between 32 and 46 fish.
I highlight that example because it’s a reminder of why an independent corruption body is so important. Without proper mechanisms to investigate and unearth corruption, it can be allowed to run rampant in unexpected places that are subject to far less scrutiny than the decisions of a Premier or a Prime Minister.
So it is reassuring to know that there is finally a federal anti-corruption commission. Not just to secure the museum collections of Canberra’s many institutions but because – as Transparency International’s own Corruption Perception Index highlights, perception matters when it comes to the integrity and transparency of government.
Indeed, though Australia has traditionally done quite well on the Corruption Perception Index, under the last government, Australia’s rank on the Corruption Perception Index dropped precipitously.
Between 2013, the final year of the Gillard Government, and 2021, the final full year of the Morrison Government, Australia fell 11 places in the rankings to 18th in the world, the worst result in our history. Over the same period New Zealand was consistently in the top 3 in the world.
In January of this year – for the first time in a decade – Australia’s ranking in Transparency International’s Corruption Perceptions Index has risen, lifting us five places to 13th, just ahead of Canada, Estonia and Iceland, and just behind Ireland, Luxembourg, and Hong Kong.
Transparency International directly attributed this jump to the introduction of ‘the landmark National Anti-Corruption Commission.’
THE ECONOMIC COST OF CORRUPTION
Transparency International’s definition of corruption is the ‘misuse of entrusted power for private gain’. Much of what is written about corruption focuses on its immorality. It’s certainly true. Corruption is deeply immoral.
But I want to make the case today that corruption also has an economic cost.
So how do we begin estimating the economist costs of corruption? Its clandestine nature corruption can make putting a specific figure on its economic cost can be challenging. Australian researcher Tony Ward estimates that the fall in the Corruption Perception Index over the nine years of Coalition Government equated to 0.6% lower economic growth.
Today, I will outline ten reasons why corruption has an economic cost.
1. Corruption Increases the Cost of Doing Business
Companies operating in corrupt environments often face higher costs due to bribery demands, unofficial ‘fees,’ and bureaucratic delays. Countries with more corruption tend to have slower growth.
The World Economic Forum estimates that corruption increases the cost of doing business by up to 10% globally.
2. Corruption Undermines Competition and Innovation
Corruption can create barriers to entry for new businesses, limiting competition and stifling innovation in the economy.
Corrupt economies are – almost by their very nature – uncompetitive economies. If bribes are the price of entry then only those who can afford to pay a bribe ever have the opportunity to get started.
Research suggests that small firms pay a higher percentage of their total sales – then larger firms and also face greater interruptions to infrastructure services.
Even for those who can afford it – given the risks that are inherent to starting a new business the need to continue paying off officials creates an ongoing burden.
In economies where bribery is the pathway to success – the incentive to invest to innovate disappears. Investing in new ideas takes time and money – money that could be spent convincing officials to grant a contract or block a competitor’s proposal.
Research analysing four Latin American nations found that ‘the more firms offer bribes, the lower their innovation capability and productivity are.’
3. Corruption Worsens Infrastructure
Corruption in public procurement and infrastructure projects results in the construction of substandard facilities, leading to higher maintenance costs and reduced productivity.
As the Infrastructure Transparency Initiative notes:
‘It is difficult to determine precisely the value of losses through corruption, but estimates tend to range between 10 and 30%. The experience of the CoST programme suggests that a similar amount could be lost through mismanagement and inefficiency.’
Researchers at the International Monetary Fund have noted that large scale public procurement can be a ‘hot spot’ for corruption. Because such projects often have unique features that make it ‘harder to compare costs and easier to conceal bribes and inflate costs’ they can be particularly susceptible to corruption.
‘Government purchases of goods and services are another hot spot, partly because of the large amounts of money involved; public procurement accounts for 13 percent of GDP, on average, among members of the Organisation for Economic Co-operation and Development, which represents 36 advanced economies. Procurement related to public investment is particularly susceptible because big projects often have unique features, which make it harder to compare costs and easier to conceal bribes and inflate costs.’
4. Corruption Distorts Public Spending
Corrupt officials may divert public funds intended for essential services (e.g., education, healthcare) to their own pockets, resulting in inadequate public services.
But as the International Monetary Fund notes, corruption can also distort spending priorities in more fundamental ways:
‘This is why grand corruption is usually associated with complex and costly projects such as construction and defense equipment. By comparison, it is harder to collect bribes on teachers’ and health care workers’ wages. As a result, spending on education and health is likely to be lower where corruption is high, making it less likely that worker productivity and living standards will improve. Among low-income countries, the share of the budget dedicated to education and health is one-third lower in more corrupt countries.’
5. Corruption Reduces Human Capital
When access to education is dependent on talent rather than connections, it undermines meritocracy, and deters outsiders from seeking spots at the best institutions.
‘Corruption has a direct and negative impact on the performance of education as it creates a lack of motivation in learning and in plans to pursue higher education because the return is very low’
One of the strengths of a good education system is that it allocates places to those who will benefit most, and then provides high quality education. But a corrupt system can admit the wrong people to educational institutions, and erode the quality of those institutions.
6. Corruption Sickens Our Health Care System
Corruption in the health sector diverts resources from the sick and it can also very literally cost lives.
Researchers have noted that corruption can impact the construction and maintenance of health facilities, the purchase of equipment and supplies, the distribution and use of drugs, safety regulations for products used in procedures, the education of health professionals, and medical research.
A 2015 paper on the Financial Cost of Health Fraud estimated that of the US$7 trillion spent on health that year, the total lost to fraud and corruption was US$455 billion.
Research on the human cost from corruption estimated it accounted for 1.6% of the deaths of children under five – more than 140,000 a year.
7. Corruption Reduces Investment
Corruption creates an unpredictable and risky business environment, deterring foreign investors from committing capital to corrupt-prone countries.
Columbia University’s Shang-Jin Wei argues that corruption operates like a tax on investment, with the tax rate sometimes being as high as 20 percent. For countries that rely on investment to create jobs and boost earnings, corruption can erode this important source of productivity growth.
8. Corruption Decreases Tax Revenues
Corruption reduces tax collection efficiency as bribes may be used to evade taxes, leading to a decline in government revenue.
Research from the International Monetary Fund suggests that revenues are higher in countries perceived to be less corrupt. They note:
‘the least corrupt governments collect 4 percent of GDP more in taxes than those at the same level of economic development with the highest levels of corruption. Some countries have made progress over the past two decades, and if all countries were to reduce corruption in a similar way, they could gain [US]$1 trillion in lost tax revenues, or 1.25 percent of global GDP.’ 
We pay our taxes in large part because we believe others are doing so. By undermining this social compact, corruption can hollow out government revenues.
9. Corruption Worsens Income Inequality
Corruption exacerbates income inequality as it benefits the wealthy and well-connected, while the diverting resources away from poverty alleviation programs. As one study puts it:
‘Corruption increases income inequality and poverty through lower economic growth; biased tax systems favouring the rich and well-connected; poor targeting of social programs; use of wealth by the well-to-do to lobby government for favourable policies that perpetuate inequality in asset ownership; lower social spending; unequal access to education; and a higher risk in investment decisions of the poor.’
10. Corruption Erodes Trust
Corruption erodes public trust in government institutions and undermines social cohesion that is fundamental to a dynamic economy.
Researchers have found that:
‘Efforts to control corruption increase levels of trust in the ability of the state and market institutions to reliably and impartially enforce law and the rules of trade.’
Corruption diminishes us all. To live in a corrupt society is to live a less fulfilling life. But corruption has economic costs too. It undermines health and education. It diminishes tax revenues. It worsens inequality. It discourages investment. And it erodes trust.
That is why the Australian Government is proud to have established the National Anti-Corruption Commission, and why all Australians have benefited from the valuable work that Transparency International has done since its inception in 1993. Just as corruption is a public ill, the work of fighting it is a public good, and I thank you on behalf of the community for all that you have done to make Australia a more honest and transparent nation.
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