Damage from Spain’s crooked dark side

C orruption is a journey into the night of the dark side of human nature, the place where, for F. Scott Fitzgerald, it is always three o'clock in the morning. It is a journey with moral and ethical tolls, but also an economic cost. And although there are no specific figures, experts' estimates suggest that the numbers are high, and the damage considerable. Friedrich Schneider, a lecturer in Economics at the Johannes Kepler University in Linz, Austria, a specialist in the economic impact of corruption, has made some calculations for Spain: "Around one percent of GDP," he says. In other words, the cost to the Spanish economy of corruption is some 10.5 billion euros a year.

Schneider's estimate is not the only one of its kind. The World Bank says that the cost of corruption is between 0.5 percent and two percent of the wealth of OECD member states, such as Spain. Italian former Prime Minister Mario Monti, eager to get an idea of the cost of graft, discovered that 3.8 percent (60 billion euros) of the goods and services his country produced was washed down the sewers of corruption. That said, these calculations could well be just the tip of the iceberg for the simple reason that the victims of corruption are afraid to report it.

Accurate or not, trying to put a figure on corruption at least helps us to understand that the practice has a direct impact on the economy and everybody's lives. "It isn't some kind of strange world that is removed from the realities of our life [...]. The money that the corrupt take is money that doesn't go into education and health. What's more, it is putting limits on our growth and the future of our children," says Enrique Alcat, who teaches at the IE Business School.

"Corruption is slowing down Spain's recovery from the crisis. It generates political instability; damages the country's image abroad; damages investor confidence; and increases financial uncertainty," says José María Mella, the chair of the Economics department at Madrid's Autónoma University. "It is a predatory mechanism that devours society's resources," he sums up. How? Because it channels money away from the majority toward a minority that controls wealth and that tends to be well connected to decision-making elites. At the same time, it increases poverty, because it reduces public spending and weakens the welfare state, he argues.

The World Bank puts the cost at between 0.5 and two percent of wealth

Last month, corruption watchdog Transparency International organized a conference in Lisbon that brought together 150 activists from around the world to assess the global impact of corruption. Its calculations for the European Union were shocking. Between 10 and 20 percent of public contracts are lost through corruption, and five percent of Europe's annual spending is not accounted for. A European Commission draft document produced this month provides a more detailed picture. Brussels calculates that corruption costs the EU 120 billion euros a year, 1.1 percent of GDP across the 28-member bloc.

Corruption is a dark, sticky stain: there are some 20 million cases of small-scale corruption in the public sector each year. According to Europol, there are some 3,600 criminal organizations operating within the EU.

Corruption is far more pervasive, and far more tolerated, than we would like to think, and Spain has a big problem, say the experts. "Corruption in Spain has always been tolerated," says Jesús Lizcano, the head of the Spanish division of Transparency International.

"Let me give you a figure," he continues: "Around 70 percent of the politicians who have been arraigned for corruption were subsequently re-elected in the most recent local elections." But despite the gloomy picture, there is some hope. The government-run Center for Sociological Investigations (CIS) last month noted that corruption is now Spaniards' second-biggest concern, after unemployment. This is good news, because the more that we are aware of the problem, and are concerned about tackling it, the more likely we are, as a society, to support measures to stop it and to fight our own demons.

It channels money from the majority toward the minority that controls wealth

"In Spain, historically we have always lived with the idea that everybody is trying to get away with it, by not paying their taxes, or whatever," says Carlos Cruzado, the head of the tax collectors' association, Gestha.

The big corporations and the individuals with huge net wealth are the main culprits in not paying their share: estimates put their non-payment of tax revenue at 42.7 billion euros a year. The SME sector's shortfall is around 10.5 billion, and the self-employed around 5.1 billion. Estimates suggest that some 20 percent of Spanish economic activity takes place in the shadows.

There is no doubt that corruption impacts negatively on state revenue; and not just as a result of unpaid taxes, but also because of the increase in unproductive public spending: the cost of uncompetitive contracts. At the same time, corruption reduces the state's ability to invest, and reduces the quality of public services. It also hits the private sector hard by eliminating competition, as well as making regulation ineffective.

70 percent of the politicians arraigned for corruption were then re-elected"

But this journey into the dark side goes further. "Corruption means that the economy is not working efficiently. It distorts the market and prevents certain activities being carried out by the companies best suited to do so," says Beñat Bilbao-Osorio, an associate director and economist at the World Economic Forum's Center for Global Competition and Performance. It also takes us to places we don't want to be in.

"Scandals put us in the same league as Greece, Italy and Cyprus, which is not where we want to be. One thing is having a deficit, high unemployment and lack of competitiveness, but we don't want to be a player in the corruption stakes," says economist José Carlos Díez.

Every country has developed its own form of corruption, with its own DNA and characteristics. In Spain, corruption is particularly associated with property development. In his novel Crematoria , writer Rafael Chirbes paints a detailed and vivid picture of this underworld where corruption, local politics and bricks and mortar come together. He describes the spread of corruption in Spain during the boom years of the first decade of the century as "a fire that burned too quickly." Too quickly and too easily, says José María Mella of the Autónoma: "It is easy in those sectors to steal the money generated by concessions by establishing privileged relationships with government at the local and regional levels."

But construction is not the only sector that encourages and facilitates corruption. Many experts say that the way the country's political parties are financed is a huge problem.

These scandals put us in the same league as Greece, Italy and Cyprus"

"The number of property development scandals has diminished, because the bubble burst, but the question of how the political parties finance themselves remains. This is a subject that has to be brought out into the open," argues Manuel Escudero, the director general of the Deusto Business School. The solution, he says, is to impose shorter contracts for public posts, bar anybody convicted of corruption from holding public office, remove politicians' privileges, and beef up the powers of the Audit Office.

At the same time, as Segismundo Álvarez Royo-Villanova wrote recently in EL PAÍS: "do away with the outrageous practice of providing a retirement home for senior politicians on the boards of the country's semi-public companies" - otherwise known as the revolving door syndrome.

Noted jurist Antonio Garrigues Walker says that despite the general mood of despondency about corruption, he is optimistic about the future. "A large number of the scandals are related to the boom years. That doesn't reduce their importance, but what is now clear is that eventually the truth will out, and that we are learning a hard lesson, but a positive one, in how to eradicate corruption at all levels of society. We are moving toward better times, and the government's new legislation on transparency

[which would allow for some scrutiny of the Royal Household's accounts, for example] will help considerably," he says.

But it doesn't affect Spain's public debt: investment is not endangered"

But is Garrigues' optimism well founded? Is Spain getting better? According to international corruption rankings, such as that published by Transparency International, Spain is the 30th least corrupt country out of 176: between Botswana and Estonia; and far from Italy, which is 72nd, a country with a major problem, but equally distant from Denmark, supposedly the world's least corrupt country.

There have been some 800 cases of criminal corruption over the last decade in Spain, resulting in the arrest of about 2,000 people, say the police. But the impact on the money markets is less than we might like to think. It seems that capitalism keeps moving along, according to its own rules.

"The recent spate of corruption cases have had little impact on the bond markets," says Emilio Ontiveros, head of financial analyst firm AFI. "In other words, it doesn't affect Spain's public debt: investment is not endangered." Federico Steinberg, head of research at the Elcano Institute think-tank, concurs: "Except in the case of a major political crisis, investors pretty much focus on what interests them and ignore everything else."

This is what prompts young people to seek a new life abroad"

Cristina Manzano, the editor of online political analysis magazine Esglobal, cites a recent Elcano Institute study that illustrates investors' lack of interest in corruption. "The information provided by ratings agencies have an impact on Spain's markets, as do reports by Brussels. But pretty much everything else any other organization has to say has no impact on our capital markets." Daniel Pingarrón, an analyst at IG Markets, agrees: "Data about unemployment in the United States has a bigger impact on the Spanish bourse than Spain's own employment figures. That is the nature of globalization."

Keith Salmon, an expert in Spanish politics at the Oxford Analytica think-tank, says that Spain's corruption problem is seen in Britain as "a serious matter, one that has similarities not just to what is going on in the south of Europe, but in some countries in Latin America." He also warns of a bigger danger: "the loss of faith and trust on the part of a whole generation of Spaniards in their governments, in the democratic system itself, and in the economy overall. This is part of what prompts many young people to seek a new life abroad, and so Spain loses the talent it needs to make a new tomorrow. This is a high price to pay, and will affect the country for many years."