Thursday, December 2, 2010

Ideas to Ponder: Need to Re-look at World Corruption Perceptions Index!

Since 1995, Transparency International has published an annual Corruption Perceptions Index (CPI) ordering the countries of the world according to "the degree to which corruption is perceived to exist among public officials and politicians". The organization defines corruption as "the abuse of entrusted power for private gain".

Transparency International's 2009 Corruption Perceptions Index is the world's most credible measure of of domestic, public sector corruption. The CPI is an aggregate indicator that combines different sources of information about corruption, making it possible to compare countries.

Method CPI calculation

The CPI 2010 is calculated using data from 13 different surveys or assessments produced by the following 10 independent organisations:

1. Africa Development Bank- Country Policy and Institutional Assessments 2009 (AFDB 2009)
2. Asian Development Bank -Country Performance Assessment Ratings 2009 (ADB 2009)
3. Bertelsmann Foundation- Bertelsmann Transformation Index (BF 2009)
4. Economist Intelligence Unit -Country Risk Service and Country Forecast 2009 (EIU 2010)
5. Freedom House -Nations in Transit 2009 (FH 2010)
6. Global Insights, formerly World Markets Research Centre- Country Risk Ratings 2009 (GI 2010)
7. Institute for Management Development - World Competitiveness Report 2009 and 2010 (IMD 2009 and IMD 2010)
8. Political and Economic Risk Consultancy, Hong Kong - Asian Intelligence 2009 and 2010 (PERC 2009 and PERC 2010).
9. World Economic Forum - Global Competitiveness Report 2009 and 2010 (WEF 2009 and WEF 2010)
10. World Bank - Country Policy and Institutional Assessments for IDA Countries (WB 2009)

Some of the questions that are dealt with before calculating this score are:
  • To what extent are there legal or political penalties for officeholders who abuse their positions?
  • To what extent can the government successfully contain corruption?
  • Has the government implemented executive anticorruption initiatives?
  • Is the country’s economy free of excessive state involvement?
  • What is level of bribe payment for different processes?  Etc…

To enter the index, individual responses from business people opinion surveys are averaged by country. When more than one question is used, first the simple average score across questions is calculated for each respondent, and then the average score by country is calculated.

Where is the problem?

The problem lies on the way this data is collected and the mindset of people who provide their judgments on the questionnaires used to collect the data!

Ranking counties on the basis of judgment of selected few is never a good strategy. Although there is no other alternative available for comparing 178 countries which also include countries like Somalia, Burma, and Afghanistan!

Why survey respondent make wrong judgments?

Accuracy of any judgment depends upon two things: 
1) the level of attention paid by the respondent, and 
2) accuracy of information available to him. And often both these things are missing…

People are least concerned when it comes to filling surveys of government agency (forget about international agencies!), and these people often make their judgment based on their gut feelings. Let’s be very clear on one thing: ‘nobody has full and perfect information’ and specially when it’s about corruption.  

Recent leaks by WikiLeaks supports this line of argument. Corruption Perceptions Index has ranked countries like US and UK at 22nd and 20th positions respectively. But financial meltdown, forced war, and multitude of corrupt politicians tell a totally different story. Some of the frauds in US alone account more than annual GDP of many countries listed in the CPI list.

Let me give you an example to make it easy to understand for you:

Suppose there are two persons A and B. A’s annual income is $5000 out of which $2500 is being earned via corrupt means. On the other hand B’s annual income is $50000, and he earns only $10000 through corrupt means.

A simple mathematical calculation shows that:

A is 50% corrupt and B is only 20% corrupt. And the corruption visibility of A will be more to an outsider/third party. So he would rate A, as more corrupt than B. But in absolute terms, B is 4 times as corrupt as A.

Also, because B is wealthier than A, he would have better means to hide his corrupt actions than A!

These two arguments can be used to develop an analogy which disproves the statement -"US is less corrupt than Somalia!"

It is the 16th of many posts written under "Idea to Ponder series".
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