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How Does Corruption Affect Emerging Economies and Small Business

 

Corruption has long been a difficulty for emerging economies, yet it is one of the least discussed challenges in conversations around SMEs and emerging economies. While limited access to funding, information and communications technology and less viable branding are common discussions in analysing the failure of SMEs, the issue of corruption is still shrouded in secrecy – and perhaps that is why it prevails.

For years, funds reserved for the betterment of civil society have been misused across the globe and, quite notably, in Africa. Corruption in developing countries is threatening efforts to reduce poverty, increase employment and rebuild economies. While it is certainly an issue for all types of businesses, corruption is particularly crippling to SMEs that, in many cases, do not have the power or privilege to resist corrupt practices and policies.

In South Africa, the business landscape exemplifies both grand corruption and demand-driven corruption. Grand corruption is more visible, as it involves high-profile individuals, large organisations and large sums of money. Contrastingly, demand-driven corruption is maintained by the practice of giving and accepting bribery, and often involves SMEs who seek opportunities for their growth. As a result, corruption in the SME landscape is logically a result of lacking the resources, power and influence to survive in the market whilst maintaining integrity. This means that as long as corruption is normalised, SMEs have little chance of avoiding it. With 64% of firms in Africa reporting that corruption is a serious impediment to their development, as confirmed by the International Federation of Accountants (IFAC), it goes without saying that business owners are well aware of the ramifications.

The Implications of Corruption

In a 2019 survey by the Association of Chartered Certified Accountants (ACCA), a respondent from sub-Saharan Africa stated that bribery and corruption “disrupt the fair market opportunity and competition trajectory, thereby giving opportunity to low-performing SMEs… bribery and corruption brings about poor service delivery and less regards for quality of services and quality of life in general”. The survey served as a global analysis of the awareness and attitudes surrounding bribery and corruption in the SME sector. From these responses, it is clear that corruption poses a very real threat to the way that small and medium enterprises operate. Moreover, it threatens their existence altogether. Demand-driven corruption leaves small business owners feeling powerless, and the stark reality is that it either robs them of opportunities, or requires them to part with their hard-earned money. This, in turn, affects SMEs’ ability to be sustainable and self-sufficient. In this way, corruption makes it almost impossible for SMEs to make meaningful contributions to the economy.

But outside of business operations and the lived experiences of entrepreneurs, corruption is a major culprit in stifling the progress of entire nations. Globally, the effects of corruption are similar: it greatly reduces public revenues intended for those who need them most, which directly increases inequality and poverty. When funds that are reserved for job creation, investments in SMEs and poverty alleviation are misused, the result is a nation in which the rich get richer and the poor get poorer. Furthermore, a country rife with corrupt practices is less likely to receive foreign direct and domestic investments. As foreign direct investments are key facilitators of access to international markets and technology, they remain crucial for the development of emerging economies.

In the ACCA survey, 76% of global respondents believed that SMEs could benefit from advice from accountants around policies and practices that address bribery and corruption. Respondents also expressed that implementing such policies could improve their reputations by maintaining high standards of business conduct, reducing their chances of breaching legal requirements, and increasing customer confidence in their businesses.

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Small business owners are aware of the ramifications of corruption, but many of them feel helpless in avoiding a system that has been pervasive for years. There is a persistent feeling of powerlessness, in which business owners do not necessarily want to partake in corrupt practices, but feel that they have to in order to gain access to opportunities. There is an urgent need for support to SMEs by providing access to opportunities that do not compromise their integrity. There is also a growing need to facilitate awareness around the deep-rooted impact of corruption on the economy and those who suffer most at its hands. In addition, governments have a critical role to play in implementing stringent policies and greatly increasing cases of prosecution for corruption.

If the goal is economic development through poverty reduction, job creation and foreign investment is a goal for emerging countries, these objectives can never truly be realised without targeted efforts at eradicating corruption.