Opportunity cost of corruption - Essay Example

MACROECONOMICS OPPORTUNITY COST OF CORRUPTION Prepared by Submitted to Word Count Abstract The research is aiming to find the impact of corruption on the economy of the country and the people as individuals. What are the sources and consequences of corruption The results are based on the empirical study and search work available on the Internet. By combining these two research method, a thorough investigate is made. The overall research question or the main objective of the study is as follows: The impact of corruption and its cost on economic development of individuals and the country as a whole. The results of the study and research leaded to outcome that corruption is a global problem that exists at all levels. Corruption can be defined as the abuse of public power for personal ends. The result is inequality, poverty, unstablized governments, unrest in public, and lower public reforms. Corruption happens at all levels be it at individual level or national level. Corruption leads to a growing gap between the rich and the poor. Corruption can create conflict between nations and destroys trust and confidence in democracy and in governments. It further paves the way for terrorism, theft, and money laundering as criminals find it easy to make their way to commit crimes by bribing the corrupt officials. Table of Contents Title Page Number Introduction ..4 Effects of Corruption5 Consequences.10 Conclusion 11 Macroeconomics Opportunity Cost of Corruption 1. Introduction Corruption can be defined as use of authority or power to meet personal ends. It has always existed in the world and now-a-days is being treated as global concern. In a corrupted society, personal enrichment considerations take preference over the establishment of rights for all, resulting in biased decision making. Corruption is not confined to a State or country but is prevalent at a global level. Let's have a look at state of corruption on a worldwide scale. The figures are indeed shocking. According to the Asian Development Bank, one East Asian country is estimated to have lost $48 billion over 20 years due to corruption, surpassing its entire foreign debt of $40.6 billion. It has been calculated that as much as $30 billion in aid for Africa has ended up not in Africa, but in foreign bank accounts. Thirty billion dollars is twice the annual gross domestic product of Ghana, Kenya, and Uganda combined. Corruption, it turns out, costs many governments as much as 50 percent of their tax revenues1. 2. Effects of Corruption When the effects of the corruption are considered they cannot be shown as a direct relation ship with the economic changes. The negative changes in the economy due to the corrupt ideas and deeds can be connected with each other to estimate cost of corruption. For example the subprime market is overloaded with bad loans that smashed the holes into a financial ship. This is due to the fact that the banks are giving loans to the borrowers without substantial proof of their income sources. The disbursal of loans without substantial proof or guarantee will result in bad loans. The loans that are given to the borrowers who have no source to pay are due to corruption. This resulted in 40 percent of sub prime market is made up of these loans. The appraisal will be fraudulent when the officers are corrupted and it costs the bank or any financial organization thousands and millions of dollars in the form of non profitable assets. This in turn will halt or slows down the growth of the economy in the near future. When the loans are going bad the mortgage companies are making lot of money and the banks are at receiving end. These companies are spending few million dollars and are making money from billions of mortgage loans. As long as the artificial rise of the property continued the borrowers are able to pay the loan by rolling a loan into a larger loan. When the property prices are falling down, the corruption of granting the loans without proper mortgage comes to the fore. A mortgage company met a loss of $10 million for a fund of $100,000,000. This is due to the corrupt sanctioning of loans. 2.1 Government Based Corruption As a result of corruption in society the lot of money will be accumulated with those persons or organizations that are capable of manipulating the market. This manipulating of the market results in wrong calculations of GDP as some companies are put at a greater price than they deserve and some companies at a lesser price. This brings loss to the exchequer as the increase of wealth is not noticed or recorded. This system of corruption results in inequality and poverty as the prices are increased by a fewer organizations or individuals who control a particular market. This results in inflation and the value of the currency can be decreased resulting in imports being costlier. This makes the value of the domestic assets of the country to decrease in the international market and the credit rating is affected. When the people are paying higher prices for the essential services, they left with little or no money to spend on other items and it results in slow growth of economy and yet times even GDP is decreased. The decrease of GDP can be in terms of currency or in the terms of quantity. The corruption results in the decrease of GDP in terms of currency though there is increase of production in terms of quantity. This is due to the corrupted ways of estimating the values and deciding the prices of essential services and commodities. If a company pays a bribe to secure a contract to supply electricity or water, for example, and the poor buy the electricity or water, then they will be paying an artificially high price for that service. Furthermore, specific goods and services may be bought that would not otherwise have been bought at all. There will almost certainly be over-investment in capital goods ('white elephant' projects, large defense contracts) at the expense of GDP growth. This type of corruption will decrease the production and may result in decrease of GDP in terms of quantity to make a few individual or organizations earn more profits on the basis of scarcity. 2 Trade restrictions are the foremost example of Government induced rent. Rent in economic terms is the difference between the original price and best alternative use, which indirectly if not directly, promotes corruption. For example, the US Government during 1980s imposed restriction on import of Japanese cars to a specific quota creating an artificial shortage of cars in the market. As a result, General Motors and other US car manufacturers were able to sell more cars that too on raised prices. This resulted in the protection for the domestic industry and reduced the competition. As there is no specific reason shown for the prohibition of Japanese cars, the fraudulent practices of General Motors and other US car manufacturers resulted in restriction on the import of Japanese cars. This has resulted in the decrease of exports of the cars from those companies and they did not try to establish their units in other companies as they are finding enough market in the country. This resulted in non establishment of American assets and companies in the other parts of the world and in turn decreased the American presence and production world wide. This visibly shows that protecting a home industry from foreign competition through tariffs creates a semi-monopoly for the local industry. This monopoly costs the benefit of the common man. He do not have any choice except to buy the available ones in the market. The absence of competition results in increase of price of the products and this results in increase of inflation. The companies have free hand in price framing and this results in non availability of the luxury products to the common man. This in long term will reduce the growth in GDP and in turn economy. The decrease of GDP will be in terms of quantity as the people are not able to buy the products at the increased price due to absence of the competition. This is due to the fact that the local players got rid of competition due to paying bribes to corrupt influential politicians to keep the monopoly going. Studies reveal that open economies have relatively lower corruption. In other words, nations tend to be less corrupt if the trade practices and regulations are relatively free of government restrictions that corrupt officials can abuse. The disastrous affect of corruption on national level can be gauged by flipping through pages of USA. The Watergate scandal was a 1972 break-in at the Democratic National Committee headquarters at the Watergate Hotel in Washington, D.C. by administrative members of Richard Nixon's office and the resulting cover-up which led to the resignation of the President. As this can be termed as a result of the organized crime and it can be decided that the corrupt officials and leaders led to the resignation of the president and a temporary economical slow down of the growth. This is due to the temporary political vacuum the scandal created. Though it is temporary, perhaps the biggest in the US history, brought into light the existence of corruption in White House. The incident revealed the involvement of the Attorney General, John N. Mitchell, and Key white house advisors in the scandal, funds and cover up, all of whom went to prison for the crime committed. These type of scandal are a result of change of hands of unaccounted funds and even these type of activities will result in accumulation of surplus cash in the hands of few individuals. This in turn results in inflation that neutralizes the economic growth. This is capable of working as a weapon in the corrupted officials and politicians damaging the growth of the industry.3 2.1 Corruption at State Level Another source of rent or corruption in economic terms is Government Subsidies. The subsidies in unnecessary sectors will result in the waste of tax payers' money. The money that should be used in developing infrastructure that develops economy will be wasted in the form of subsidies. If the sector that is receiving subsidies is able to perform without them, they can be removed. The continuation of the subsidies will result in cost ineffectiveness of the companies. This is due to the fact that the part of the cost when compensated by the government for long time, the planning for the cost effectiveness will be absent. This affects the management decisions of the company and after a particular threshold point will restrict. The main problem is that the subsidies are being continued due to corrupted officials who receive bribes from the receiving companies will continue them in spite of absence of necessity. This is due to the thriving of corruption on the name of industrial policy. These are capable of leading the companies to be inefficient to compete with the foreign firms and will be unable to produce export oriented goods for a long time. This results in decrease of economic growth and GDP as the limited production also can gain subsidies for the company. The more is availability of such subsidies to industries, the higher is the corruption index and the slow down of economic growth. Price controls, whose real purpose is to keep the price of some goods below its market value (usually for social or political reasons), also tends to encourage rent-seeking or corruption. Individuals and group many a times bribe officials to acquire goods at below-market prices to sell it later at higher prices. Natural resource endowments like gold, oil, exotic lumber are considered as important elements of promoting corruption, since they can easily be further sold at very high prices far above the cost of their extraction and their sale which is usually subjected to stringent government regulations is easily managed by bribing the related officers who than easily turn a blind eye to the soaring prices. The soaring of prices result in a problem for the government to buy gold when the dollar value is decreasing. This may lead to fall of the value of the dollar and can result in country's inefficiency to deal with the other currencies. Economies that are rich in resources may be more likely to be subject to extreme rent seeking behavior than the countries that have shortage of resources. 3. Consequences of Corruption In a corrupted society, businessmen are aware that unless they pay up-front bribe, they cannot start their enterprise. Even after the enterprise is set up, there will be a list of corrupt officials laying their hands on to the proceedings of investment. Empirical research suggests that corruption result in significant lowering of private investment and retarded economic growth and decrease in GDP associated with the increase of prices. Corruption in the form of tax evasion or claiming improper tax exemptions bring about loss of tax revenue leading to adversary budgetary consequences. Corruption Escalates Poverty Levels 3.1 Corruption leads to Corrosion of Economic Development Corruption hampers economic reforms affecting the overall national growth leading to further creation of unfair competition. This may result in increased prices wasted resources and increased unemployment. Inevitable, poverty increases due to wastage of millions of dollars value of natural resources. 3.2 Corruption Leads to Undermined Legitimacy of Public Service Corruption leads to increased cost of administration, since the public has to pay more to access public services. The burden of corruption falls more heavily on the poor as they cannot afford to pay the required bribes4. 3.3 Corruption leads to Destabilized Government and Democracy Corruption creates conflict between nations damaging the trust and confidence in democracy and in governments. This results in undermining of democracy and the legitimacy of the regime and may be a direct cause of political instability and the disintegration of existing political institutions5. 4. Conclusion Corruption is a social evil that that affects an individual at personal level to the economy and development of the country. The result of corruption is biased decision making which concentrates on selfish interest of few corrupt officials rather than the whole community. Corruption leads to lower economic growth, poor infrastructure, in-equality, poverty, and social unrest destabilizing the government system and democracy. References 1- Ambassador Sue M. Cobb: The Price of Corruption; Reference not plagrisim, Retrieved on 15 June 20007 from http://kingston.usembassy.gov/051604.html 2-Bryns R Evans; The cost of Corruption; Reference not plagrisim, Retrieved on 15 June 2007from http://tilz.tearfund.org/webdocs/Website/Campaigning/Policy%20and%20research/The%20cost%20of%20corruption.pdf 3- Referencing not plagrisim, Retrieved on 15 June 20007 from http://en.wikipedia.org/wiki/Watergate_scandal 4-5- Referencing not plagrisim, Retrieved on 15 June 20007 http://www.anticorruption.info/cost.htm 5. Richard Benson, 2007, US subprime worries just a tip of iceberg, mparent7777-2.blogspot.com, ,electronic, 16-06-07, http://mparent7777-2.blogspot.com/2007_02_26_archive.html Read More