Not too long ago I was in India on a two-week trip to speak to business owners and experts about small business support there. But while I was there they were more eager than anything to talk to me about the problem of corruption. Then again corruption if not dealt with correctly can undo any help you offer SMEs.
The release yesterday of the 2014 Corruption Perceptions Index by Transparency International again confirms the high levels of corruption that not only India suffers, but that affect every one of the Brics countries. India (ranked 85), South Africa (67), Brazil (69), China (100) and Russia (136).
Topping this year's rankings is Denmark, followed by New Zealand and Finland. Lowest on the index are Somalia (at 174), North Korea and Sudan, respectively.
Some of the Brics improved their rankings on tackling corruption (India moved from 94 out of 177 countries last year to 85 out of 175 countries this year; South Africa from 72 to 67; Brazil from 72 to 69 and But others, like China and Russia fell (20 and nine places respectively). In China's case it seems the arrest of top officials hasn't been enough to stem the perception of rising graft there.
Some argue that part of what drives corruption is the cost of business. The more paperwork an entrepreneur has to fill out the more chance there is for officials to extract bribes or favours from them. It's partly why corruption is so rampant in India (and most other emerging economies).
The many licenses that Indians must have to run a business adds to this. A head of a small business support agency told me five years ago of a visit one labour inspector once made to his offices. When the inspector discovered that one of agency head's many business licences had expired he asked for a little sweetener – 4,000 rupees ($65) – before he renewed the certificate.
The agency head however refused to pay the bribe and so the inspector dragged him to court. The head won the case, but in a final act of spitefulness the inspector scribbled on top of the certificate, changing the validation date from three years to one year.
A Delhi business owner who exports buttons and items such as garden tools and handicrafts also told me how he had bought the certificate he needed to run his factory, by paying “quite a large bribe”. He reasoned that had he not done so he would still be waiting for officials to process the license.
Economist Arvind Panagariya in India: The Emerging Giant, argues that at independence the country inherited a “largely honest and efficient bureaucracy”. To encourage more entrepreneurs to enter the economy the government introduced licenses, which reserved many sectors for small businesses.
As the economy started growing and became more complex, as the paperwork began piling up and bribes became the order of the day. Many smaller businesses unable to afford the bribes lost out to more cash-endowed larger businesses.
Says one entrepreneur: “I myself unsuccessfully participated in bidding processes of government
contracts and I was shocked to know the level of intimidation and corruption – the same goes on the in
private sector. If you have a pocket full of money to buy anyone, certainly you will succeed.”
India is a warning to South Africa and other countries. But perhaps South Africa isn't listening. The Business Licensing Bill in its first version, introduced last year, requires every business in South Africa, irrespective of size, to apply for a license to operate from the local municipality in which they are situated.
It’s the small businesses, who start out that will be most affected as the bill intends to give authorities broad powers over the granting and removal of licenses. The penalty for operating a business without a valid license could be up to 10 years in prison.
A parliamentary reply in July reveals that the Minister of Trade and Industry, Rob Davies, is preparing to bring the bill before Parliament before the end of the current financial year.
Paying for payments
Another problem plaguing South Africa is that of late payments by government. It's a legal requirement for government agencies and departments to pay suppliers within 30 days upon the submission of an invoice. Yet in the 2012/13 financial year just 56% of the 156 national and provincial departments met this requirement.
Worse is that little disciplinary action has been taken against officials guilty of gross negligence, while a top government official, the Department of Performance Monitoring and Evaluation's director general Sean Phillips admitted last year that it appears that in some instances that public servants have held back payments until frustrated suppliers paid them a bribe.
An electronic procurement portal, would help improve transparency, make payments more efficient and boost small business involvement, as the case of Chile's e-procurement portal (read this article).
Clean up the public sector
More importantly South Africa and other emerging economies should follow the example of Georgia (ranked 50 this year) and clean up their public sector. Despite some recent concerns the Caucasus country has made impressive advances.
Following the Rose Revolution in 2002, then president Mikheil Saakashvili fired almost the entire traffic police force and placed a glass fronting at the charge office of every police station (read this article).
But one of the most impressive in its low level of corruption is Chile (ranked 21 this year). It strikes a stark contrast to the sea of often highly corrupt emerging economies. It's rare that a taxi driver or policeman will try bribe you. Chile has long been relatively clean, says one report. In the end well-functioning, independent institutions, a stable political environment and an open economy have helped.
South Africa's high perception of corruption has increased under Jacob Zuma, a man tainted by a number of scandals. When he was elected president in 2009 the country was ranked higher, at 55 on Transparency International's index. He was re-elected for another five years earlier this year.
But things could be worse than they appear. Transparency International's ranking was compiled seven months ago - as such it did not include Zuma's latest scandal, Nkandla, where he is alleged to have used state funds to finance renovations on his home. Had it included the scandal, South Africa may well have been ranked lower, reckons a corruption expert.
It seems the longer tainted Zuma remains in power the more corruption and bribery will increase in the country where Nelson Mandela's high values are still revered by all. Tomorrow the world commemorate one year since his death last year. As they do so many will be wishing for a cleaner government.
Corruption is worrying because it increases the cost of running a business and makes investment less predictable. It can stunt everything from the roll out of new roads and public services to the funding of small businesses. No one wins in the end.
Stephen Timm writes on small business. Click here to sign up to his monthly newsletter. Follow him on twitter at @Smallbinsight and on Facebook.
Stephen Timm is a