Corruption on the rise in Gulf countries

Middle Eastern countries have seen a “drastic” rise in their perceived level of corruption in the past year, according to analysis by Transparency International.

Qatar, Kuwait, Bahrain and Saudi Arabia all took larger backward steps in the campaign group’s annual Corruption Perceptions Index than any of the other 176 countries in the rankings.

In contrast, TI saw signs of progress in some unlikely places, including North Korea, Afghanistan and Belarus, as well as China, Brazil and India.

The collapsing standings of the four Gulf states point to the deeper problems across much of the Arab world, with Somalia, Syria, Sudan, Yemen and Libya all among the seven most corrupt states in the world, according to the rankings.

“Despite the political changes that shook the Arab region six years ago, the hope for Arab countries to fight corruption and end impunity has not seen any progress yet,” said Kinda Hattar, regional co-ordinator for Transparency International.

A survey of 11,000 people in nine Middle East and North African countries conducted by TI concluded that 50m people, almost a third of public service users, have to pay bribes to access basic services. Some 61 per cent of those surveyed thought corruption was increasing, with just 15 per cent saying it was diminishing.

Qatar saw the biggest fall in the 2016 index, with its score sliding 10 points from 71 to 61 on a scale of 0-100 where countries with the highest scores are seen as the cleanest, based on combining 13 indices created by the likes of the World Bank, Bertelsmann Foundation and Freedom House.

Kuwait and Bahrain both fell eight points, to 41 and 43 respectively, and Saudi Arabia six points to 46, as the first table shows.

The worsening of perceived corruption levels has come just as the Gulf states are increasingly turning to foreign investors for funding, with record international bond issuance of $66bn in 2016.

“Gulf States have dropped on the index as ruling families continue to hold power politically and economically, public freedoms are oppressed, and an active independent civil society is absent,” said Ms Hattar. “The military involvement of these states in regional coalitions has raised the levels of secrecy and ambiguity of public expenditure and state budgets.”

Qatar’s perceived corruption levels were further heightened by its implication in Fifa’s corruption scandals, particularly the decision to award the 2022 football World Cup to the country, as well as reports of human rights abuses of migrant workers.

Shahin Shamsabadi, head of business intelligence for the Mena region at the Risk Advisory Group, a consultancy which launched its own Corruption Challenges Index this week, said: “Corruption is something of an occupational hazard for foreign investors in Mena. Anti-corruption measures are typically reactive rather than proactive, and in some jurisdictions bribes are not only accepted but expected.”

Despite the poor showing by Arab states in general, Finn Heinrich, research director at TI, said there was no single reason for their failings.

“At the bottom [of the index] there are two types of countries. You have countries that are falling apart, where the state has retreated and where corruption is the way to get by for people. But there are others where the state has a lot of power but in a way that doesn’t provide any space for people to hold the government to account,” Mr Heinrich said.

On a brighter note, the score of authoritarian Belarus has jumped by eight points, to an admittedly still low 40, as the second table shows.

Mr Heinrich said the government of the former Soviet state has taken steps to prosecute a number of oligarchs suspected of corruption in the past year, but added “whether that is sustainable or is politically motivated we do not know,” at this stage.

More-troubled still Afghanistan has also seen a meaningful improvement, rising four points to 15. Mr Heinrich said Kabul had passed anti-corruption legislation, created a National High Council for Rule of Law and Anti-Corruption, a National Procurement Authority and a mandatory asset declaration policy for senior government officials, although he admits the jury is still out as to how effective these steps will prove.

Brazil, up two points to 40, is perhaps another surprising riser in the Corruption Perceptions index, given the vast and sprawling Lava Jato (car wash) corruption scandal that has exposed widespread wrongdoing by politicians, construction groups and Petrobras, the state-owned oil company.

However Mr Heinrich said Brazil’s rating had fallen from 43 points in 2012 as a result of the scandal, and was now starting to recover due to the fact it is finally beginning to tackle endemic corruption.

China, likewise, rose three points to 40 as a result of President Xi Jinping’s continuing anti-corruption drive. Last year alone, 415,000 Communist party members were disciplined and 11,000 expelled from the party and handed over to China’s courts for prosecution, according to the Central Commission for Discipline Inspection.

Charles Robertson, global chief economist at Renaissance Capital, an emerging markets-focused investment bank, argued that alongside Mr Xi’s crackdown, China’s per capita gross domestic product was now approaching levels where “the middle class begins to demand less corruption”.

However, China is ranked as the country where businesses face the greatest corruption challenges by the Risk Advisory Group. Its 181-country index is based on the threat of corruption, the level to which foreign investors are exposed to enforcement action under the US Foreign and Corrupt Practices Act (FCPA) and the availability of reliable information to conduct integrity-based due diligence.

“There is no denying that the country’s large market and growing middle class is attractive for foreign investors, but endemic corruption in some sectors, the close nexus between business and politics, and the high incidence of FCPA enforcement actions make for a high-risk business environment,” said Brendan McGloin, head of business intelligence, Asia for the group.

Iraq, Nigeria and Angola are ranked as the next most challenging countries by the Risk Advisory Group, with Venezuela, Indonesia and Vietnam also in the top ten.

Elsewhere, Mr Robertson highlighted improvements in a number of frontier markets, such as Argentina, Tunisia, Vietnam, Romania and Pakistan.

He also praised Nigerian president Muhammadu Buhari and John Magufuli, his Tanzanian counterpart, for their focus on fighting corruption, which in both cases has yielded a two-point improvement in the TI’s index, to 28 and 32 respectively.

Mr Robertson argued that reducing corruption tended to lead to higher equity prices, “because it increases the confidence investors have in the legal system which can be needed to support minority investor rights”.

Some of the year-to-year movements in the index can be little more than “noise”, Mr Heinrich said. Larger, multi-year moves typically tend to be more significant.

He cited Hungary, which has fallen seven points to 48 since 2012, and Turkey, down eight points to 41, as shown in the third chart, as examples.

José Ugaz, chair of TI, warned that “systemic corruption and social inequality” was feeding “popular disenchantment with political establishments . . . providing fertile ground” for the rise of so-called populist parties.

However, Mr Ugaz argued that populism was “the wrong medicine”, with the rise of autocratic leaders in Hungary and Turkey prime examples of that.

“People are fed up by too many politicians’ empty assurances to tackle corruption and many are turning towards populist politicians who promise to change the system and break the cycle of corruption and privilege. Yet this is likely to only exacerbate the issue,” he said.

“In countries with populist or autocratic leaders, we often see democracies in decline and a disturbing pattern of attempts to crack down on civil society, limit press freedom and weaken the independence of the judiciary. Instead of tackling crony capitalism, those leaders usually install even worse forms of corrupt systems.”

Mr Ugaz cited Argentina, up four points to 36 in this year’s index, as an example of a country that has ousted a populist leader, Cristina Fernández de Kirchner, and is now starting to improve.

TI’s overall rankings are headed by New Zealand and Denmark, with the highest-placed countries that some might consider to be emerging being Singapore in seventh out of 176 countries, Hong Kong in 15th and Uruguay in 21st.

The Risk Advisory Group’s rankings are headed by Finland and Ireland, with Slovakia, Singapore and Bermuda scoring strongly.

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