Corruption refers to dishonest behavior by the people who are in power, like managers, government officials and other bureaucrats. It can manifest itself in many ways, from accepting bribes and inappropriate gifts, manipulating elections, double dealing, money laundering, rent seeking, defrauding investors to under the table financial deals. An investment manager running a Ponzi scheme would be a very good example of corruption.

 

Breaking down the CPI

Transparency International’s Corruption Perception Index has become the most robust index to measure the corruption perception of countries since its inception in 1995. But since it refers to perceptions, it has some inevitable limitations. Let us take a closer look.

 

The methodology

The CPI aggregates data from a wide variety of sources that provide a perception of country experts and business people of the level of corruption that is prevalent in the country’s public sector.

 

  1. Select the data sources – Every data source used in the construction of CPI must fulfill some basic criteria to qualify as valid:
    1. It must quantify the corruption perception in the country’s public sector.
    2. It must be based on a valid and reliable methodology, which has been used to score and rank different countries on the same scale.
    3. It must be performed by a trustworthy institution which can be expected to repeat them on a regular basis.
    4. It must make room for sufficient score variations to distinguish between the different countries.

 

In the year 2015, the CPI was calculated using twelve different data sources from eleven separate institutions which captured the corruption perceptions in the respective countries over the last two years.

 

  1. Standardize the data sources – Once the data is collected, they are standardized on a scale of 0-100 where a score of 0 stands for the highest level of corruption and a score of 100 stands for the lowest. The number is arrived at by subtracting the data set’s mean and then dividing it by the standard deviation. The resultant z-scores are adjusted to have a mean of 45 (approximately) and a standard deviation of 20 so that the data fits within the CPI scale. The standard deviation and mean are usually taken from the last CPI measurements, and the rescaled scores are compared against that year.

 

  1. Calculating the average – If a territory or country has to be qualified to be included in the CPI, a minimum number of three scores must be used to assess that territory or country. The CPI score is then calculated by averaging all the available standardized scores for that particular country. The scores are then rounded off to the nearest whole number.

 

  1. Uncertainty measures – The CPI is usually accompanied by a confidence interval and standard error associated with that particular score, which is used to capture the variation in the data sources available for that territory/country.

 

The good and the bad

CPI provided the first systematic attempt to compare the perceived levels of corruption among countries, as determined by opinion surveys and expert assessments. According to the CPI, corruption is defined as the misuse of entrusted power for private gains. They rank the countries from a score of 0 (extremely corrupt) to 100 (extremely clean). This measure has given rise to a lot of academic research and has also generated significant attention from the media. It has singularly been responsible for galvanizing a number of anti-corruption initiatives across a host of international organizations and national governments.

 

Despite the fact that it is the prominently used measure to quantify corruption, CPI has become very controversial in recent years. It has been open to criticism for a number of reasons – problems with the definition, perception bias, flawed statistical models, false accuracy as well as a failure to capture the long term trends. Most importantly, the perceptions do not exactly reflect the reality of the situation. There is also the question of whose perception is being tracked. If the respondents to the surveys are business men, then their perception usually tends to focus on bribes and bribe-takers. However, corruption includes a host of other things and the CPI has had some struggle in distinguishing between the different types of corruption, their severity and impact.

 

There is also the matter of the way the CPI views corruption. It sees corruption as a ‘single thing’, an indivisible property of the political systems that can be summed up through a single score or number, applicable to the entire territory. In reality, however, corruption takes place in specific places and concrete settings and cannot be easily mapped on to the nation state for two reasons. There might be a significant variance at the local level when dealing with sectoral corruption or because the instances of corruption could involve cross-border or trans-national networks.

 

Cooking the books

In response to some of the above concerns, there have been a lot of new attempts to create new measures that rely on more objective sources like accountancy data or crime statistics, in the hopes that they can provide objective information on the rate of corruption. Accounts show where the money is being spent without any significant returns, and crime data is a good record of the number of people who have been convicted for corruption. One thing is certain – in spite of the commendable work done by organizations to measure the corruption perception of countries, we still have a long way to go till we come up with a completely objective measure.

 

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