The Effects of Corruption

There is no predetermined state or fixed correlation between any particular level of economic development and the incidence of corruption. Corruption can be prevalent in countries with low, medium and high levels of economic development. According to the Transparency International Corruption Perceptions Index (2009), for example, the incidence of corruption in Italy is higher than it is in Botswana and the incidence of corruption is higher in the US than in Hong Kong. Although corruption is definitely significant in all contexts, it can be damaging in a myriad of different ways related to the type of corrupt activity and the nature of the society concerned (e.g. levels of inequality, poverty, level of support for democratic institutions etc). Perhaps the most important point about the impacts of corruption is that its negative effects often seem

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to hit the poorest and most marginalised sectors of society the hardest and its impacts are more devastating in those societies where resources are most scarce (Perry 1997: 22). According to Transparency International (nd), for example, endemic corruption can reduce the growth rate of a country to 0.5 to 1.0 percent point lower than a similar country with less corruption, although there are plenty of analysts who would dispute these figures. Corruption can breed cynicism, criminality and distrust; it also undermines effective democratic reform and popular participation in a political system of governance (Alatas 1993: 199).

The extent and severity of the effect of corruption on economic development, to some extent, is a function of the developmental stages of the various socio-political institutions in a particular country, thus highlighting the connection between corruption and the broader issues of governance discussed in the preceding chapter. A convincing argument can be made to suggest that the detrimental effect of corruption on economic development is more severe in developing and transiting economies than in the industrialised countries where social and economic institutions are better developed and proceeds that are derived illegally are more likely to be re- invested locally. Conversely, in many developing and transiting economies, illegally acquired proceeds are kept in foreign bank accounts. According to Ayittey (2005), for example, capital flight from the African continent accounts for over $20 billion per year. Similarly, the United Nations has estimated that, “$200 billion, representing 90 percent of the sub-Saharan part of the African continent‟s gross domestic product, was shipped to foreign banks in 1991 alone” (Ayittey 2005). Despite these arguments, there are also clearly instances where corruption and mismanagement in the industrialised countries like the US appears to have led to economic hardships. For instance, as argued in the preceding section, Transparency International point out that the global financial crisis, which started from the US, was caused by the “enormous mismanagement of funds entrusted to financial institutions by the public” and Hugutte Labelle, TI Chair, further states that the crisis has resulted in broad detrimental economic and humanitarian impacts (TI 2008).

Corruption is also said to undermine political development and it can weaken the political will needed for effective governance reforms (Knack and Keefer 1995). The negative effects of corruption upon economic and political development can also

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make externally funded projects ineffective, discouraging the efforts of aid donors and international organisations (IMF, 1995, Isham, Kaufman, and Pritchett, 1995, Rauch 1995). For example, according to Eigen (1996), corruption wastes resources when government policies are distorted against the interest of people-oriented projects and turns the energies and efforts of public officials and citizens towards easy money instead of more productive exercises. Similar arguments suggest that corruption could hamper the growth of competitiveness, frustrate efforts to alleviate poverty and generate apathy and cynicism (UNDP, nd).

By contrast, however, others have held the view that corruption may not necessarily lead to underdevelopment and at times may even promote economic development. For example, Nathaniel Leff of Columbia University in the 1970s, asserted that "corruption may create opportunities for a more competitive environment into what is otherwise a comfortably monopolistic system of administration, where payments of the highest bribes, becomes a major condition for allocation, thereby introducing efficiency into the system” (Kaufmann 1997: 114-131). This notion, which inspired sophisticated academic models and also legitimized the behaviour of private companies that offer bribes to get contracts, failed to consider the enormous discretionary powers that are available to politicians and bureaucrats over the creation and interpretation of counterproductive regulations. Contrary to the notion that corruption is the grease that lubricates the squeaky wheels of rigid administration, others have argued strongly that it promotes the increase of excessive and discretionary regulations (see: Kaufmann 1998).

Lui (1985) has also argued that there are some beneficial effects to corruption; for example, those related to the effects of corruption on efficiency and time issues. When bureaucrats are allocating business licenses to firms they are often bribed into speeding up administrative procedures. Beck and Macher (1986) and Lien (1986) also argue along these lines, they assert that the most efficient firms are often those who can afford the highest bribe in bidding processes, thus promoting efficiency. However, Tanzi (1998: 582) and Aidt (2003: 634-35), establish effective counter arguments to these assertions. They argue that private firms who pay high bribes are not necessarily economically competitive firms and that when potentially talented individuals engage in corrupt activities instead of more productive activities, there is

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a misuse of human capital which may lead to a damage in macroeconomic growth. Furthermore, Myrdal (1968) contends that, because corrupt officials know that bribes are used to facilitate the speeding up of administrative procedures, bureaucrats may then further slow down the administrative procedure by deliberately imposing more rigidities to create more opportunities for extracting bribes. Thus, one of the deficiencies of this notion of "speed money" is the assumption that there will be no circumvention and that both parties will automatically stick with the deal and that there will be no further demands for bribes. Moreover, as argued earlier in this section, corruption represents a theft of public resources as bribes and embezzlement; for example, effectively divert funds from public treasury revenues, which undermine macroeconomic stability, particularly in developing countries where bribes are laundered into overseas accounts, thereby negating any potentially productive use of such looted funds in the country.

Since there is a cloud of ambiguity surrounding the meaning of corruption, in many ways it is not that surprising that this ambiguity is also clearly expressed in discussions over the effects of corruption on economic development. These debates have resurfaced again most recently in relation to the cases of some Asian economies, particularly China, for combining the phenomena of economic growth and high levels of corruption. In reality, however, analysts suggest that the direct and indirect costs of corruption in China are enormous. Corruption in China has, for example, arguably further widened the gap between the rich and poor. According to Pei (2007), the economic loss due to corruption in China is estimated at roughly 3 percent of its GDP per year, which represents a large transfer of wealth to a tiny group of elites. Furthermore, at the local level, instances of corruption have frequently led to riots, violence and collective protests undermining social stability and therefore necessitating extra spending on internal security (see: Pei 2007). Corruption in China is also said to have contributed to serious environmental degradation, the high cost of health care, education and the provision of social services. For instance, following an earthquake in Sichuan province in 2008, which left more than 86,000 dead or missing and millions homeless, there was a strong protest and allegations of corruption. The uproar came as a result of allegations that the bribery of local officials had resulted in the construction of shoddy buildings, including several thousand classrooms which had crumbled in face of the

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earthquake (Wong 2008). Similarly, after the earthquake, there were widespread reports that local government officials had diverted aid funds that were meant for victims of the earthquake, which further stoked the flames of public discontent (Don 2008). Thus, whilst, on the one hand, China may have experienced relatively high economic growth despite rampant corruption, on the other hand, had China been less corrupt, its economic growth would have possibly been of a higher quality, with much less damage to the environment, economic efficiency, public health, and social stability.

From the above arguments, it could be said that under certain circumstances, corruption may be seen to promote efficiency in the process of doing business, thereby promoting growth in the short term. But in the long run, corruption itself is inimical to sustainable economic development. According to Lui, “corruption has two side effects” a positive effect on allocative efficiency which is short term, and a negative effect on sustainable economic development for the common good in the long run (Lui 1996; 28). Thus, the suggested positive impact is highly controversial, it exacerbates socio-economic inequality between the enriched few (bureaucrats and corrupt private officials) at the expense of ordinary citizens and income distribution becomes highly skewed among many other side effects. The controversies trailing discussions of the effects of corruption are also reflected in discussions over the major causes of different types of corruption and this will be treated in more detail in the following section.