Governance and Business Strategy - Literature review Example

? Governance and business strategy Table of Contents Introduction 3 Corruption and Economic Development-Critical Analysis 3 Conclusion 7 Reference 9 Bibliography 10 Introduction The role of government in an economy generates numerous points or possibilities of conflicts between the interests of the public and the private sector. Against the backdrop of lacking administrative and institutional capacities and traditions this can be responsible and can be grounds for the creation of favourable environment for corruption. Corruption, along with the hidden economy complements each other to a vicious circle and redistributes the economic resources of the country outside the formal market institutions and the democratic government. It leads to the expansion of the hidden economy not only not only because of tax rates or social security rates, but for the arbitrary and inefficient implementation of regulatory and tax regimes in the economy with the existence of corruption. Having implications on the various aspects of the economy, the present project seeks to bring forth these implications of corruption in the economy. Critical reviews are provided with regards to the implications of corruption on the economic development of a nation (CSD, 2005, p.73). Corruption and Economic Development-Critical Analysis The empirical and theoretical debate on the effects of corruption on the economic development of nations remains unclear and unresolved. Available nationwide evidences show that the economic implications of corruption on economic development of nations can be either positive or negative. Previous empirical literature has tried to explore the relationship between corruption and development in great detail and has come up with surprising results. It is seen that corruption affects developing and developed countries differently. This is on account of the fact they differ significantly in terms of their economic and cultural characteristics but are plagued by similar levels of corruption in their economies (Kutan, Douglas & Judge, n.d., p.2). Some researchers have argued over the fact that corruption has negative effects on the economic development of nations as it redirects the nation’s resources into unproductive directions and consequently distorts the normal functioning of the economy. Tanzi and Davoodi (1997) has out firth four different channels through which corruption can have damaging implications over the economic growth of nations. These are high public investments; low revenue by the government; low expenses on business maintenance and operations and; poor quality of public infrastructure. On the other hand, some researchers have declared that corruption can be economically favourable in certain nations under certain circumstances as it triggers efficient government services in the form of bypassing such aspects like inefficient regulations and red tapes (Kutan, Douglas & Judge, n.d., p.3). Bureaucratic corruption can also be influenced by economic development. This is considered to be two-way causality and can be demonstrated through threshold effects as well as multiple equilibrium which form grounds for varying incidence of corruption across different countries (Blackburn, Bose & Haque, 2005, p.21). Implications of corruption on the economic activities are studied from many different perspectives. Mauro (1995), has tried to identify the effects of corruption and various other institutional factors includes red tapes, efficiency of the judicial system, political stability on the economic development of 67 nations across the world between the period 1980 and 1983. This analysis revealed that corruption reduced private investments considerably. Influencing investments corruption alters the composition of the government expenditures particularly reducing its share on its spending on education in the economy. Research conducted by Tanzi and Davoodi (1997) revealed that high corruption causes higher public investments, low revenues for the government, low expenditures on maintenance and operations and reduction in the quality of the infrastructure in the economy. They have particularly highlighted on the fact corruption increases public investments but reduce its productivity considerably (Kutan, Douglas & Judge, n.d., p.3). According to a research conducted by Ehrlich and Lui (1999) on 68 nations between the period 1981 and 1992, the results showed that changes in corruption and size of the government has adverse implications on the economic development of the nation through changes in per capita income of the nation. However it does not affect the long run growth rates of nations. On the contrary Mo (2000) has identified negative implications of corruption on economic development and the different channels through which it might impact on the same. The findings were similar to that of Mauro (1995). They have found out that an increase in the corruption level by 1% lowers the rate of growth of the nation by 0.72% and most crucial channel through which it happens is political instability, which accounts for 53% of the entire effect of corruption. He was also of the opinion that corruption reduces human capital level considerably and consequently the share of private investments (Mo, 2000, p.11). Rose-Ackerman (1997) have identified several channels through which the poor people in particular are affected by the levels of corruption in the economy, thereby increasing the rich and poor gaps which consequently drives down economic growth. In such cases the poor are seen to get lower levels of social services; investments in infrastructure are biased towards projects which mainly aid the rich in society; poor faces higher taxes and fewer services; selling agricultural products are disadvantage for them, and finally their ability to come out of poverty through small scale and indigenous enterprises are considerably reduced (Wei, 1999, p.13). Gupta et al (1998) have also found a positive association between growth of corruption and income inequality. They have discovered that increase in corruption causes hindrances in the income growth of the bottom 20 percent of the income distribution (Dearden, 2000, p.6). Wei (1997) has found out in his research on fourteen nations that corruption prevailing in the host nations discourages foreign investments. He has shown estimates that if India was able to reduce its level of corruption to that prevailing in Singapore, its impact on the level of foreign investment would be equal to a reduction of marginal corporate tax by an amount of 22 percentage points (Wei, 1999, p.10). Many of the Asian countries offer huge tax incentives for hiring multinational firms for making investments in the host nations. For example, China offers foreign investors tax holiday of initial two years in addition to half of normal tax for three consecutive years. This particular research throws light on the fact that the Asian nations would be successful in attracting much higher foreign investments without having to provide any tax incentives if they had been able to curb domestic corruption in the home country (Wei, 1999, p.10). China is one of the leading examples of being a victim of corruption because of which it has been an underachiever of investments from nations like UK, Germany, Japan, US and France considering its size and proximity to these nations (Wei, 1999, p.10). While previous evidences show that domestic and foreign investment and economic growth are lower in the most corrupt nations; however, one can hear the version of virtuous bribery in which bribes are considered to work like grease which consequently speed up the process of commerce. Countries which are overloaded with heavy and bad regulations bribes can often easily avoid inconvenient government control and act as deregulation which consequently can be good for working of the nation. However, Kaufmann and Wei (1998) have argued that this can be considered true only a very narrow perspective which heavy and bad regulations and official harassments are taken to be exogenous. Officials generally have numerous ways or leeway of customizing the amount and type of harassments on the individual firms. Tax inspectors have enough avenues of over reporting the taxable incomes. A survey conducted on 2400 firms located across 58 nations have shown that within a nation managers for the firms who pay more bribes are found to spend more time than less on negotiating with the government officials. The above facts throws light on the fact that bribes can cause disadvantage for the officials as well as for the society. The evidence also supports the hypothesis of endogenous obstacles and tailored harassment and rejects the idea of exogenous obstacles and beneficial grease (Wei, 1999, p.14). Conclusion Research suggests that corruption's negative implications on economic development of nations are much greater as compared to the few positive effects it causes in highly bureaucratic regulations. Corruption prominently reflects through expansion of the hidden economy, inefficient resource allocation and inefficient tax regimes and regulations in the economy. In this context researchers have put four of the most important channels of through which corruption ruins the society. They are increasing public investments; lowering revenues of the governments, lowering expenses business operations and maintenance; and lowering quality of public infrastructure. However some researchers’ have highlighted on the positive effects of corruption in the economy. They have said that in highly bureaucratic societies, corruption often helps in bypassing the heavy, redundant and bad regulations which characterises red tapes. This consequently speed up the work processes which otherwise would have taken considerable more time often rendering the process ineffective. Evidences also show that economies with higher rates of corruption attract less foreign investments and vice versa, one of the leading examples of which is China which has failed attract sufficient investments from nations like US, UK, Germany, France and Germany despite its size and proximity. Considering all aspects it can be said that corruption is ruining for the society and can have long term negative implications for the society lowering its rate of growth and development. Reference Blackburn, K., Bose, N. & Haque, M. E. (2005). Endogenous Corruption in Economic Development. [Pdf]. Available at: http://www.isid.ac.in/~planning/Niloy.pdf. [Accessed on February 22, 2012]. CSD. (2005). Corruption and Economic development. [Pdf]. Available at: http://www.csd.bg/files/4en.pdf. [Accessed on February 22, 2012]. Dearden, S. J. H. (2000). Corruption and Economic Development. Discussion Paper No. 18, October 2000. [Pdf]. Available at: http://www.e-space.mmu.ac.uk/e-space/bitstream/2173/1870/2/Dearden%2018.pdf. [Accessed on February 22, 2012]. Kutan, A. M., Douglas, T. J. & Judge, W. Q. (No Date). Does corruption hurt economic development?: evidence from middle eastern, north African and Latin American countries. [Pdf]. Available at: http://www.siue.edu/business/economicsandfinance/pdf/070102.pdf. [Accessed on February 22, 2012]. Mo, P. K. (2000). Corruption and Economic Growth. Journal of Comparative Economics 29, 66–79 (2001). [Pdf]. Available at: http://projects.iq.harvard.edu/gov2126/files/sdarticle-3.pdf. [Accessed on February 22, 2012]. Wei, S. J. (1999). Corruption in Economic Development: Beneficial Grease, Minor Annoyance, or Major Obstacle?. Harvard University and National Bureau of Economic Research. [Pdf]. Available at: http://zunia.org/uploads/media/knowledge/wei.pdf. [Accessed on February 22, 2012]. Bibliography Abed, G. T. & Gupta, S. (2002). Governance, corruption & economic performance. International Monetary Fund. Askari, H., Rehman, S. S. & Arfaa, N. (2010). Corruption and its manifestation in the Persian Gulf. Edward Elgar Publishing. Nnadozie, E. U. (2003). African economic development. Emerald Group Publishing. United Nations. (2003). Survey of Economic and Social Developments in the ESCWA Region. United Nations Publications. Read More