Latin American Countries: A Dynamic Analysis of Country Clusters, the Role of Corruption and Implications for Global Firms

By Prof. Grein, Ph.D, (City University of New York, U.S.A)

(From “A Dynamic Analysis of Country Clusters, the Role of Corruption, and Implications for Global Firms”, Andreas F. Grein, S. Prakash Sethi & Lawrence G. Tatum, Zicklin School of Business, Baruch College, the City University of New York, July 2009; forthcoming East-West Journal of Economics and Business).

            Country clustering has been explored as a technique for reducing the complexity and exploring relationships between countries.  Rather than examining country level indicators (such as economic statistics) separately, clustering can determine which countries are similar and explore the relationships driving cluster membership.  We examine 39 countries using economic, technological, cultural, demographic and quality of life variables.  Corruption is captured using Transparency International’s corruption perceptions index (CPI).  The data cover 1995, 2000, and 2005.  Principal components analysis reveals 3 factors and the role of CPI is relatively stable over the period studied.  Of particular interest are changes in the cluster membership of 5 Latin American countries: Argentina, Brazil, Chile, Mexico and Venezuela.

            In 1995 these Latin American countries form a cluster which also includes Russia and Poland.  It appears that regional similarities are important, but Russia and Poland have sufficient similarity to the Latin American countries that they joined this cluster.  This cluster has a relatively low average CPI value (3.87), indicating a high level of corruption but there is a large range in CPI scores (Venezuela 2.5; Brazil  2.96; Mexico 3.3, Argentina 3.41; Chile 6.8).  Clearly there are many factors which determine why countries join the same cluster, and corruption is only one among these factors. 

            By 2005, the Latin American countries have joined a cluster with Asian countries (e.g., China, Indonesia, Philippines).  Again this cluster has a low average CPI (3.63) with a large range of from Indonesia (2.2) to Chile (7.3).  (Other Latin American countries’ scores are: Venezuela 2.3; Argentina 2.8; Mexico 3.5; Brazil 3.7.)  This is a very intriguing finding because the role of regions appears to have diminished so that the Asian and Latin American countries are broadly speaking similar.  However, it would be incorrect to conclude that corruption does not hurt country economic development.  For most countries, CPI values do not change much over time.  While corruption imposes costs on doing business, stable and predictable corruption could give firms the opportunity to form effective strategies for succeeding in such an environment. What is surprising in this analysis is that countries appear to be increasingly similar (in terms of cluster membership) despite divergence in the level of corruption. 

            The role of corruption, in terms of influencing similarities between countries, could be overstated if not examined in conjunction with the many other variables which represent a country’s well-being. Without a doubt, it is beneficial to reduce corruption.  Countries, institutions and policy makers must evaluate which problems to tackle first and with what means.  However, this research suggests firms may view certain countries as becoming more similar even if the level of corruption appears to be quite different.