Barrier To Business - One of the defining trends of the past three decades has been globalization. In order to take advantage of low-cost labor in emerging economies, companies have unbundled production processes and outsourced manufacturing to remote markets. As economies, such as China, move from "emerging" to "emerged" status, manufacturers seek new, even more remote markets to take advantage of lower rates of pay. Such countries may be unstable, have a fragile security situation, and weak legislative and judicial systems, factors that have allowed corruption to become endemic in society and government.

One of the little-understood implications of this trend has been the exposure to corrupt practices that companies face when establishing operations in emerging markets. This not only applies to manufacturers but also to the logistics companies they employ.

Obstacle To Development

Although corruption is not a subject many companies are happy to discuss, there is no doubting its importance. Corruption has been identified as the leading barrier to conducting business in 22 out of 144 economies, according to the World Economic Forum's Global Competitiveness Report. In fact the WEF describes corruption - the widespread and deep-rooted abuse of entrusted power for private gain - as the single greatest obstacle to economic and social development around the world. This includes fraud, bribery and kickbacks but can also include in other contexts non-financial forms of corruption, such as preferential treatment in the assistance or hiring processes for family members or friends, or even the intimidation of staff to turn a blind eye to illegal acts.

Part of the problem is cultural. In many parts of the world kinships and affinity to social networks are more important than in the West; therefore, it seems perfectly legitimate to provide job opportunities or kickbacks to friends and family. Even in the EU this can be a problem, especially on the eastern border. For instance, the Russian ethnic community on both sides of the Russian/Latvian border has been identified as being complicit in organized smuggling networks, and the border officials are drawn from the local community. Bribery is often not needed to ensure that a customs officer turns a blind eye, as a culture of exchange of favors already exists.

According to a survey by Transparency International, a consultancy involved in highlighting corruption on a global basis, emerging markets score particularly badly in terms of perceived levels of public sector corruption.

Countries highlighted by the organization for high levels of corruption include Somalia, North Korea, Afghanistan, Myanmar and Sudan - the bottom five in the ranking of 174 countries. This is perhaps not surprising given that these countries could all be classified as failed or on the verge of failing. Central Asian countries such as Tajikistan, Uzbekistan and Turkmenistan all perform poorly as well.

However, it is perhaps more interesting to look at the performance of the major emerging countries - for example, those included in the BRIC group. On a list of 174 countries, Brazil had the "cleanest" public sector of the four appearing in 69th position, followed by China in 80th. India was 94th and Russia lagged behind in 133rd position.

Given the importance of these countries to the logistics sector, it is not surprising that international freight forwarders have run into trouble when attempting to do business in them. Nigeria, a country with massive potential for economic growth, appears at 139th in the list.

High Standards, Low Corruption

At the other end of the spectrum, some countries in emerging regions have exceptional records in addressing corruption. The two most outstanding are Singapore (fifth) and Hong Kong (14th), both of which have high regulatory standards and governance. In the Middle East, the United Arab Emirates performs best (27th). It is no coincidence that these three countries have very successfully transformed themselves into global logistics hubs, with efficient administration and customs processes largely untroubled by corruption.

One of the reasons the logistics industry - and freight forwarding in particular - is so vulnerable to corruption is its close engagement with customs officials. In the developing world, government employees are often poorly paid, and there is an understanding that they will make their wages up from "facilitation" payments made by forwarding and express companies to ensure fast clearance of goods. In many countries, particularly in Africa (but certainly not restricted to the continent), corruption is so deeply ingrained in the system that it is seen as an operational cost to be absorbed within the cost of moving goods.

In any case, customs corruption is a two-way problem. Not only do customs offices attempt to solicit bribes, but they are also the targets of bribes from organized crime, attempting to smuggle goods across borders, and in some cases private-sector companies; the involvement of the latter organizations is by far the most frequent as companies attempt to expedite slow bureaucratic processes.

An investigation by Indian authorities found that the number of people involved in bribery schemes goes far beyond just logistics companies and customs offices. In one instance it was estimated that 100 people at Nhava Sheva port, Mumbai, were involved, including middlemen and couriers collecting bribes and delivering them to the officers. Couriers may even take money directly to officers' hometowns or villages and give it directly to their families.

In Africa, customs corruption affects local traders and international shippers alike. Cross-border activity in parts of West Africa is characterized by the endemic payment of bribes and harassment. A common catch phrase of customs officials is, "Sans argent, on ne passe pas."

One of the problems highlighted about trade with Nigeria has been the length of the restricted goods list, which prohibits or limits the importation of goods from neighboring countries. This means that smuggling of these goods is rife, and so is the payment of customs officers by organized crime.

Time And Money

Another problem is the extent of bureaucracy and delays. An African Development Bank report found that the average customs transaction involves 30-40 different parties, 40 documents, 200 individual pieces of data (30 of which are repeated at least 30 times) and the rekeying of 60%-70% of data at least once. This is not only an issue on the importing side of the border - there are controls to go through on the exporting side, too, doubling the bureaucracy. Waiting time for a truck at a border crossing can be anything up to three days. Customs clearance adds an estimated $185 for each day delayed to the cost of a consignment. It is for this reason that many shippers prefer to bribe customs officials to cut the process short. Of course there has to be a willingness on both sides of this transaction.

This article has been excerpted from John Manners-Bell's forthcoming book, "Global Supply Chain Risk: Understanding Emerging Threats to Global Supply Chains," published by Kogan Page.