The Effects of Corruption on Countrys Development - Report Example

Running Head: High levels Of corruption limit investment and growth High levels of corruption limit investment and growth and lead to ineffective government [Name of the writer] [Name of the institution] High levels of corruption limit investment and growth and lead to ineffective government The world view today is directed towards concepts οf sustainable development and the acquisition οf progressively higher standards οf living .Growth without development is being criticised as being an ephemeral and increasingly deceptive indicator οf the actual state οf the economy .Concepts like population growth which erode economic growth and education and health which enhance human capital accumulation are gaining a lot οf importance and are being touted as being as essential to the development οf an economy as the growth rate οf its GDP .Efficiency is being advocated at all levels οf .the world outlook has now transitioned from the sustenance οf regulated economies to a liberalization οf the world economy. It is in this regard that corruption, a relatively new phenomenon is gaining widespread importance in economic circles. What distinguishes corruption from other indictors is essentially the fact that it is non-quantifiable concept. While measures οf growth, education and access to health facilities are easily available, it is extremely difficult to actually assess the level οf underhand dealings in an economy. The lack οf concrete information makes any corruption measure largely susceptible to biases and subjectivity. To augment is, depending on the definition οf corruption for any single economy. Our project is aimed at waiving the problems encountered in comprehending the exact nature οf the relationship between corruption and economic development. To this effect .we have attempted to do the following: * Formulate an acceptable definition οf corruption and justify it; for the purposes οf our study we have defined corruption as the abuse οf public office for private gain. * Present a theoretical framework in which to view the effect οf corruption on growth; we have presented annotated summaries for acceptable theories about corruption. At the same time we have ventured to formulate our own hypotheses about the corruption-development relationship. * Test the theoretical base for empirical validity; By conducting a cross-sectional study we attempted to discern the practical significance οf corruption. For the purpose οf the best we formulated our own model οf economic development, using both theory and relevant econometric tools. In the wake οf this we have rejected and accepted several theories. * Arrive at a suitable conclusion as to what the exact link is between corruption and economic development. * Present remedies and solutions to the problems associated with corruption; these solutions are proffered at both a micro and macro level * If possible, attempt a time series analysis Our study has also acquainted us with economic relationships which digress from our main analysis but which are nevertheless educating. We were able to discern a highly interesting relationship whereby corruption was found to be more relevant to economic development than to economic growth, leading to the conclusion that perhaps the level οf rent -seeking in the economy is contingent not on the economic prospects οf the country but on the overall standard οf living in the economy. Corruption can be broadly defined as the abuse οf legitimate authority by individuals, groups or institutions for the procurement οf private gain. More often than not the actions taken to derive benefit are in conflict with the welfare οf society as a whole. Attention was drawn to this phenomenon by Arrow who hypothesized that individual preferences and social preferences seldom converge. (Montante 2003, 500-1) What some individuals may regard as desirable may be harmful to the well being οf others. Unless you have a benevolent dictator who can work to maximise social welfare and impose contiguous statutes for everyone to follow, it is extremely difficult for individual preferences to cohere. The natural implication οf this hypothesis is that corruption, because it is directed towards private again, is liable to harm at-least a few groups οf society. Hence parrot efficiency (a situation whereby no one person is made better off without making others worse off ) is not characteristic οf a corrupt economy. This brings us to the natural conclusion that corruption is an economic hazard. Corruption as a pursuit οf private interest at the cost οf social benefit has deeply penetrated the society at both a micro and macro level. Corrupt practices are being under taken at both the individual and the institution level (where the bribes take on a more formal structure in the form οf rent seeking). That corruption under mines economic efficiency and retards economic development is a view that is rapidly gaining importance in the global economic arena. In fact many observers today are citing corruption as the single most important cause οf the collapse οf the Asian economies. However, there are others who adhere to the contrary and hold that corruption might actually benefit an ailing economy, given that the initial distortions in the economy are high enough. The purpose οf our study is to establish a relationship between corruption and economic development and decide which οf the above stated views the relationship corresponds to. As a first step to this analysis we seek to formulate an adequate definition οf corruption. For our particular study we have decided to focus on public sector corruption and have accordingly defined corruption as the abuse οf public office for private again. This may include bribing οf public officials and taking kickbacks in public procurement or embezzlement οf public funds. It can be argued therewith that corruption in the private sector also has a significant impact on the economy and that ignoring this aspect οf corruption may unnecessarily and erroneously oversimplify our measure οf corruption. That some degree οf corruption may be attributable to the private sector is a fact duly acknowledged by the authors. However, the paucity οf reliable information pertaining to venality in the private sector as well as the relatively less tenacious efficiency consequences οf private sector corruption under mine the role οf the latter to a significant degree. The lack οf reliable information arises from the fact that private sector corruption some instances events where it is often impossible to measure or in some instances even discern the occurrence οf corrupt practices. For instance, tipping a bouncer, for entry into a crowded night club or "using connections, (some form οf long run gift exchange etc.) to get a job are incidences which cannot be accurately monitored or reported. Hence obtaining data on private sector corruption becomes immensely difficult. The efficiency implications on the economy are also less severe relative to the public sector. This is because what would lead to distortion s in the public sector is internalized by the more market oriented structuring οf the private sector. Whereby in public offices contracts maybe granted to less deserving candidates in lieu οf their superior connections, such compromises to efficiency are rarely visible in the private sector. Private sector forms are driven by the profit motive and seek to maximize net profits. Property rights are also defined in a lucid manner so that deviations from efficiency are a less common occurrence. Although vendibility is a frequent affair, the nature οf the bribes is such that covted contracts usually go to the person or institution with the maximum willingness to pay for them. The amount οf bribes is bid up to the point where the one who values the contract most gets it. For instance, if a scarce good is being rationed, then only those people who have the maximum utility attached to the acquisition οf the good will get it as the will be willing to pay the most for it. Efficiency therefore is not compromised although corruption by definition is definitely occurring. On the other hand, political connections because they play an important role in the assignment οf government contracts often result in the less efficient party getting the contract. Another factor which renders private sector corruption less potent in the economic process the easy and almost universal availability οf information in the private sector. In this more market-oriented sector we witness less οf the information constraints that are predominant in the public sector. For instance, if a good is being rationed then everyone interested in acquiring the good knows about .it so that information asymmetry is minimized. On the contrary, if the issue involves bribing a government official then a newcomer to the industry might not have sufficient information about the relevant bribing networks and might end up not getting a desired contract even if he were willing to pay the most for it. Private sector corruption, therefore, in lieu οf the above arguments, can safely be ignored in our measure οf corruption. (Batabyal 2000, 200-18) Because οf the importance assigned to political connections, one might venture to make a further distinction within the public sector and differentiate between adminstrative corruption (e.g. illicit payments to tax inspectors) and political corruption (e.g. bribes to politicians and political parties). This distinction however does not command much importance because οf the interrelation between the two. Adminstrative corruption more often than not occurs through political channels e.g. to get a contract one might bribe a political party whose proponents might then further bribe government officials. Therefore there appears to be a very high correlation between both types οf corruption. This was duly verified by a survey conducted by Gallop International that estimated a high correlation οf 0.8 between the assessment οf politicians and public officials which renders a distinction between administrative and political corruption redundant. Having thus defined corruption as the unauthorized use οf public office to derive private gain, the next step is to find an appropriate measure οf corruption. Since corruption is an intangible concept which cannot be quantified, an arbitrary measure is applied. The number οf bribes given in a specific time period or the number οf times political affiliations are exploited are instances which are either too tedious or too obscure to quantify. We therefore need to resort to relative concepts whereby instances οf corruption are scaled on an arbitarily defined range and where a particular countrys position on the scale is determined by the general perceptions about how corrupt or vendible it is. To is effect a Corruption Perceptions Index (CPI) estimated by Transparency International has been used. In computing the Index, Transparency has used a definition corresponding to the above conceived definition οf corruption where instances οf venality pertaining only to the public sector are considered with no special distinction being entertained to administrative and political corruption. Here the perceptions are derived by conducting surveys in which the target group comprises business people, risk analysts, investigative journalists and the general public. The distiinctive feature about the CPI is that it is not based on any single survey result (which can invite undesirable biases). Rather it is a poll οf polls - i.e. it is a composite οf different surveys carried out by reputed and internationally recognized sources such as Gallop International, the Institute for Management Development, the Political and Economic Risk Consultancy, the Political Risk services, the World Development Report etc. Because it includes many different surveys, it has the property οf being a relatively unbiased and representative measure οf world-wide corruption. References Batabyal, Amitrajeet A. Corruption and Government. Development Policy Review, Jun2000, Vol. 18 Issue 2, p218 Montante, James A. On Rent Thinking and the Corruption οf Republican Government. Independent Review, Spring2003, Vol. 7 Issue 4, p519 Read More