Impact of Corruption in Latin Americas Investment Climate

Corruption and the brood it provokes is a major concern for the well being of economies in Latin America. The root causes of corruption lie in both the cultural and government backgrounds of countries. Measuring corruption from a cultural perspective relies heavily on perception and the degree to which firms and officials view bribes, extortion, and other "greasing" methods as a means of doing business. From a policy perspective, the causes of corruption are highly correlated with the quality of the judicial system, level of government involvement in the economy and regulatory compliance among others. As it pertains to the investment climate, corruption is a vine so interwoven in the societies and governments of developing countries that economic growth is essentially trapped. The future and sustainability of the investment climate will depend on identifying and confronting the causes of corruption through proactive macro and microeconomic policies. Doing so requires assessing the current environment, results from improvements in it, and finally taking action.

Empirical evidence from the Enterprise Surveys uses an econometric model to assess the current environment of corruption and tests three hypotheses used to explain the variables causing corruption, the control rights, bargaining, and greasing the wheels hypothesis. The model takes into account firm size, country, industry and region, and the control variables associated with each hypothesis to calculate the probability of a firm paying a bribe. The results show that the frequency of bribe payments is highest in Brazil (76%), Ecuador (68.3%), Paraguay (50.3%), and Bolivia (43.4%). It also shows the proportion of bribes paid by firm size. In Brazil, small firms pay the largest proportion, medium size firms pay the largest proportion in Ecuador and Paraguay, and in Bolivia large firms pay the largest proportion. Bribe payments are least frequent in Chile (6.1%), Uruguay (9.2%), Columbia (11.4%), and Mexico (12.8%). In both Chile and Mexico, small firms contribute to largest proportion, whereas in Columbia large firms pay nearly double the amount of what small and medium size firms pay, and in Uruguay, medium size firms pay triple the amount small firms and approximately ten times that of large firms. The significant difference between the frequency of bribes at the highest and lowest levels should not ignore the ominous reality that one third of firms throughout the entire region pay bribes on a regular basis.

The reasons behind the differences in frequency among countries is explained by the control rights hypothesis, which uses the degree of regulatory compliance as an index for the quantity and quality of regulations, the differences in regulatory framework across borders, and the differences in enforcement and management of regulatory agencies. Under this hypothesis, excessive and or ineffective