In today’s Finshots, we break down the concept of Corruption Perceptions Index (CPI).

But before we begin, if you’re someone who loves to keep tabs on what’s happening in the world of business and finance, then hit subscribe if you haven’t already. If you’re already a subscriber or you’re reading this on the app, you can just go ahead and read the story.

The Story

India ranks 96th out of 180 countries in the 2024 Corruption Perceptions Index (CPI).

And if that number doesn’t immediately make sense, what it really means is that India is the 96th least corrupt country in the world. Not exactly a stellar position, we know.

But who decides this ranking?

Well, it’s not Transparency International, the organisation that has been publishing the CPI since 1995. Instead, 13 global institutions, including the Asian Development Bank, World Bank and World Economic Forum, conduct surveys. They ask business leaders, analysts and experts simple questions like: How common is it for firms to pay bribes in your country?

Now, their answers aren’t necessarily based on hard data. Some might answer based on first-hand experiences. Like dealing with red tape or bribes. Others might form opinions from media reports, past trends or even global rankings.

Each institution then assigns corruption scores based on its own scale. Some could use a 0-10 scale, where 0 is highly corrupt and 10 is least corrupt, while others might go with 0-50, flipping the scoring rules altogether. And that’s where Transparency International steps in. They take this jumbled mess of numbers and standardise everything onto a scale of 0 to 100, where 0 means highly corrupt and 100 means squeaky clean.

Once that’s done, countries are ranked accordingly. And that’s how India, with a score of 38, landed at 96th place.

So, how bad is it? Well, it’s worse than last year. In 2023, India had a CPI score of 39 and ranked 93rd. What’s worse is that the global average CPI score is 43, and two-thirds of the 180 countries have scored below the 50 score, India included.

But why does the CPI even matter, you ask?

Well, you see CPI isn’t just a score. It has real-world implications. For policymakers, it’s a public report card on corruption and it helps them gauge where their country stands. That could ideally help them push for stronger anti-corruption measures. So, a better score could mean better governance.

Investors around the world keep a close eye on the CPI too. If a foreign company is considering expansion in a particular country, they would want to know how much red tape they’ll have to cut through there. A low CPI score signals trouble. It could mean bureaucratic hurdles, bribery risks and inefficiencies, all of which could make setting up shop a nightmare. And this isn’t just speculation. The numbers back it up. A study that analysed ICRG’s corruption index data from 1960 to 1985 found that a one-point improvement in a country’s corruption index boosted investment rates by over 4% and increased per capita GDP (Gross Domestic Product) growth by more than 0.5%. Sure, the data might be old, but it gives you a fair idea of why the perception of corruption matters to investors.

That’s not all. CPI scores can even influence sovereign credit ratings, which is basically a key measure of a country’s ability to repay its debts. If a country wants to borrow from global lenders like the IMF or World Bank, a low CPI score could work against it, leading to higher interest rates on loans. That, in turn, could put pressure on its budget and widen the fiscal deficit (the gap between government spending and income).

But here’s the thing. Not everyone’s a fan of the CPI. In fact, many experts dislike using a country’s CPI score to gauge its corruption levels, because they think that it could actually be based on a flawed statistical model. Their argument is simple. How do you measure something as subjective as corruption?

Unlike hard data like GDP or inflation, corruption is a perception-based concept, much like democracy or fairness. So, what one person sees as a minor inconvenience might be outright corruption for someone else. Businesses, policymakers and organisations all have different lenses, which means the CPI is built on opinions rather than concrete evidence.

Then there’s another big problem. Who’s actually answering these surveys? It’s mostly business elites and industry experts, which means that the voices of folks like you and me who also deal with corruption firsthand, aren’t really factored in. That’s not all. CPI only looks at corruption in the public sector, completely ignoring what happens behind closed doors in the private sector.

Take the Volkswagen Dieselgate scandal, for example. Back in 2015, the German carmaker was caught rigging its diesel engines to cheat emissions tests in the US. On paper, the cars seemed eco-friendly, but in reality, they spewed out 40 times more nitrogen oxide than the legal limit. It was a massive corporate scandal. Yet, after Germany fined Volkswagen billions of dollars in 2018, it didn’t shake up Germany and the US’ CPI scores much. They still consistently ranked among the top 25 least corrupt countries on the CPI between 2015 and 2018. 

Now, we’re not saying that one scandal should drastically change a country’s ranking, but how many such cases go unnoticed simply because the CPI doesn’t even look at private sector corruption?

And finally, comparing a country’s CPI over the years isn’t entirely practical. That’s because the number of countries in the index changes each year. Some drop out due to insufficient data, while new ones are added. So a country’s ranking rising or falling doesn’t always reflect its actual corruption levels. It could simply be a result of a change in the total number of countries in the CPI list.

Plus, let’s say a country had a CPI score of 40 last year and 45 this year. Does that mean corruption actually decreased? Or did other countries just perform worse, making its score look better in comparison?

Besides, here’s something interesting we noticed. Transparency International states that “Each country’s score is a combination of at least 3 data sources drawn from 13 different corruption surveys and assessments.” In other words, a country’s CPI score isn’t based on all 13 surveys. It’s derived from just 3 or more. This creates a problem. Not every country has the same number of surveys feeding into its score. Some may have data from a wider range of sources, while others rely on fewer assessments. And if a country reports more data and appears in multiple surveys, it could benefit from averaging effects, potentially leading to a higher CPI score. And this lack of uniformity raises questions about how directly comparable these rankings really are.

So yeah, CPI isn’t the best scoreboard for measuring corruption in a country. That said, it’s not entirely useless either. It at least gives a rough idea of which countries have cleaner public governance systems. But maybe it’s best to take it with a pinch of salt.

Until then…

Don’t forget to share this story on WhatsApp, LinkedIn and X.

📢Finshots College Weekly Programme is now on Whatsapp Channels! Click here to join the Finshots Student Community and get your weekly financial fix.

75% of Indians are NOT covered by Life Insurance!

Don’t be a part of the herd — take the first step and lead the way.

A term life insurance plan offers a crucial safety net for your loved ones, ensuring they’ll be financially supported even in your absence.

Book a FREE call with Ditto to learn more about term life insurance and find the best plan for you and your family.