Corruption and the Economic Growth of a Nation - Term Paper Example

Corruption and the Economic Growth of a Nation of the of the Corruption and the Economic Growth of a Nation This research work deals with an examination of the nexus betwixt Corruption and economic growth. It is the contention of this work that corruption in a nation, adversely affects its economic growth. The thesis statement of this work is: The presence of corruption in a nation has an adverse impact upon its economic growth. In this regard, an examination and comparison of corruption in the developed and developing nations of the world had been taken up. Introduction Corruption transpires when the law is beached by public officials, in order to further their private interests. Some of the worst forms of corruption are bribery and extortion. In addition, corruption includes the apportioning of public resources to specific people for political benefit. As such, corruption exacts a heavy toll on developing nations. This assumes various forms, such as the subversion of development plans, and the diversion of resources that would otherwise have been used judiciously for the welfare of the people. Another form of corruption is interference with the normal operation of the markets, thereby causing uncertainty among investors (Khan, 2006). In addition, corruption tends to increase with poverty. Thus, the richer countries tend to be significantly less corrupt than the poorer nations. It has been discerned that corruption is one of the cardinal causes for bringing about the downfall of economic progress in the developing nations. Some of the questions that naturally arise, with regard to corruption are given in the sequel. First, what is the damage caused by corruption and what constitute the best methods for eradicating corruption from institutions. Second, can the promotion of whistle-blowing lead to the desired consequences. Third, does the facilitation of transparency and the provision of advice to citizens regarding the submission of complaints, and the introduction of institutions to deal with the resulting cases, provide pragmatic and tangible solutions (Global Economic Symposium, 2014). As such, the system of corruption tends to be pervasive and very powerful in the developing nations. Any person who opposes corruption is sidelined. In fact, civil servants who oppose corrupt practices are dismissed from service, after being falsely implicated and charged for offences that they have not committed. A businessman who opposes the corrupt bureaucracy is compelled to overcome obstacles at every stage of his enterprise (Hors, 2000). It is in this milieu that the civil service of the developing nations is regarded as the least risky option for acquiring enormous wealth in a very short time. The majority of the citizens do not believe that the civil service has been constituted with the objective of implementing their rights. The developing nations have monolithic bureaucracies. The latter are governed by arcane procedures and rules that promote confusion and provide various interpretations. This leeway proves to be of great benefit to the corrupt bureaucracy, which takes decisions or grants licenses to citizens, upon being adequately bribed (Hors, 2000). Consequently, in the majority of the developing nations, corruption is rampant. Such is its invasiveness that people accept it as one of the unpleasant features of their existence. On account of corruption, official decisions are swayed by bribes or political influence, and government contracts are granted only upon the receipt of a bribe. Moreover, access to public services or the exercise of a right depends on the provision of a bribe. Some instances of these are the payment of bribes to procure civil documents, such as birth and death certificates, driving licenses, and passports (Hors, 2000). Additionally, corruption has emerged as a global phenomenon. In this context, Transparency International created the Corruption Perceptions Index (CPI), which declared that in the year 2010, out of 178 countries, corruption was endemic in 32% of these nations, and that 41% of these countries had rampant corruption. A perusal of the empirical evidence makes it obvious that corruption affects economic growth adversely. For instance, corruption brings about deceleration in economic growth, which diminishes the quantity and productivity of investment. Moreover, it dissuades foreign direct investment (Lash & Batavia, 2013, p. 1). Moreover, innovation tends to be subjected to gradual strangulation, due to corruption, as entrepreneurs have to bribe government officials to procure the necessary permits and licenses. Furthermore, corruption leads to glaring disparities in income and increases in poverty levels. Moreover, it diminishes expenditure on education and health (Lash & Batavia, 2013, p. 1). Bangladesh Several scholars have shown that corruption adversely impacts economic growth. For instance, studies conducted in Bangladesh disclosed that corruption results in a reduction in foreign direct investment, which has a tremendous adverse impact upon economic growth. Moreover, corruption reduces domestic investment and furthers slows down economic growth. As such, a fifth of the increase in capital expenditure, undertaken by the government is misappropriated by the corrupt officials and politicians (Freckleton, Wright, & Craigwell, 2012, p. 642). Several researchers have established that a weak rule of law promotes a high level of corruption. It is in this context that the World Bank regards the rule of law to be an important feature of governance aimed at controlling corruption. Where the rule of law is prominent, corruption tends to be at a minimum, as no person is deemed to be above the law. Data provided by the Worldwide Governance Indicators of the World Bank, clearly indicates that the level of rule of law in a nation is inversely proportional to the level of corruption in that country (de Mendonça & da Fonseca, 2012, p. 310). (de Mendonça & da Fonseca, 2012, p. 310). Sub-Saharan Africa This region is replete with natural resources. However, it constitutes the poorest region of the world. The average per-capita income PPP of this region is less than $4,000. In addition, 50% of the population of this region survives on amounts that are less than a dollar a day. The Sub-Saharan Africa experienced an increase in poverty levels during the past 25 years. On the other hand, the rest of the world has achieved a reduction in their poverty levels (Lash & Batavia, 2013, p. 10). In addition, this region is extremely violent and labors under dictatorial and uncaring regimes. It is exceedingly corrupt and has a CPI of just 2.83. As per the classification provided by Transparency International, any nation or region with a CPI less than 3.0 is home to rampant corruption. In its 2007 report, the Transparency International disclosed that some improvement had occurred in nations, such as Namibia, Seychelles, and South Africa. However, this report also identified Chad, Somalia, and Sudan as some of the most corrupt countries on the planet (Lash & Batavia, 2013, p. 10). As such, the Sub-Saharan Africa has been recognized as the most economically repressed in the world, due to its IEF being just 54.12. Property rights and business freedom are almost non-existent, and this region has perpetuated the worst practices of its erstwhile colonial masters, without any prosperity (Lash & Batavia, 2013, p. 10). Corruption has been promoted and preserved, principally due to the absence of property rights. The legal system of this region has to be targeted for anti-corruption initiatives. Some of the suggestions for reducing corruption are the implementation of transparent laws and the simultaneous promotion of an independent and honest judiciary. Quite frequently, the governments of this region engage in the high-handed expropriation of private property. There is substantial evidence to establish that corruption is related to governmental intervention in business, monetary, and trade sectors. In fact, enhanced government spending results in lesser corruption. The implication is that it is not the size of the government that contributes to corruption, rather it is intrusiveness of regulations and the provision of inadequate protection to property rights that promotes corruption. It has been rightly concluded that there is sufficient scope to simplify and reduce government intervention, which would diminish corruption and inefficiency (Lash & Batavia, 2013, p. 10). The World Bank has declared that good regulation does not denote the absence of regulation. In its opinion, the ideal amount of regulation could be significantly lesser than what obtains at present in several countries, especially among the poorer nations (Lash & Batavia, 2013, p. 10). In addition, corruption has been observed to be much more endemic in certain regions, in comparison to the other areas. A glaring example is provided by the Sub-Saharan Africa, whose corruption level is much higher than that of Western Europe. As a result, it is feasible that features of governmental economic intervention that are intertwined with corruption vary from region to region. It has been demonstrated by several researchers that the abundant availability of natural resources leads to corruption, due to the creation of rent seeking opportunities. Moreover, corruption among the neighbors of a nation could increase corruption levels in that nation (Lash & Batavia, 2013, p. 7). Corruption is also enhanced, when a country is located at a distance from the major trading centers. This could be due to the low level of competition to be found in such remote areas (Lash & Batavia, 2013, p. 8). Western Europe The per-capita income of Western Europe, after rationalizing for a purchasing power parity (PPP) of $38,000 constitutes twice the world average of $15,000. The nations of Western Europe possess the least corrupt governments with a mean CPI of 7.68. This is significantly more than the world average of 4.34. In addition, Western Europe enjoys the highest average Index of Economic Freedom (IEF) at 70.60. Moreover, Western Europe has more than 50% of the most economically free nations of the world (Lash & Batavia, 2013, p. 10). The nations of Western Europe have substantially greater business freedom and they have an IEF of 61.3. The IEF of the other regions of the world is less than 50. The Western European region has the highest levels of free trade, investment, and other financial indicators. Furthermore, this region has the best property rights (Lash & Batavia, 2013, p. 10). The Americas The mean per-capital income PPP of the Americas is around $13,000. However, this varies from the extremely high $48,000 of the US to the $1,000 of Haiti. The population of this region is second to only that of Asia. With regard to overall corruption, this region has a CPI of just 4.17, making it a significantly corrupt region (Lash & Batavia, 2013, p. 10). Moreover, corruption in the Northern part of this region is exemplified by the infrequent financial and political outrages. However, in Latin America, corruption constitutes a major structural problem, which explains the low average CPI of the Americas. With an IEF of 62.54, the Americas had the second best economic freedom in the regions of the world (Lash & Batavia, 2013, p. 10). Middle East and North Africa The average per-capita income of the region consisting of the Middle East and North Africa was above $26,000, which was the second highest among the regions of the world. The CPI was just 4.89, indicating major corruption issues. With regard to clean governance, this region was second only to the region of Western Europe. This region is home to autocratic regimes and economies that are totally controlled by the state. Corruption emerges from these twin features (Lash & Batavia, 2013, p. 11). Moreover, with regard to the economic freedom of the financial sector, this region ranks last, and the IEF of this region is just 57.6. The nations of this region with comparatively less restricted economies are those that do not produce oil. From this it can be concluded that natural resource abundance has strangulated the economic liberalization of this region (Lash & Batavia, 2013, p. 11). Evidently, the presence of poor regulation and ineffective sanctions in the developing nations have prevented the prosecution of the corrupt. The capacity of a nation to enact and implement regulations to address corruption is thwarted by the influence and active intervention of the government officials who are corrupt. The most corrupt persons in the developing world are the politicians and the holders of public office. The Western media has been frequently publishing the names of these notorious individuals. The Transparency International has contended that the corrupt practices of these individuals are facilitated by the national and international banking systems of the Western nations. These corrupt leaders collaborate with the elite and the professionals to achieve their nefarious ends (Otusanya, 2011, p. 388). Several initiatives against corruption have been adopted at the international level, and these have concentrated upon international business. It would be safe to presume that these initiatives promote the view that bribery and corruption are synonymous. Conventions pertaining to anti-corruption place reliance upon the traditional offence of bribery as the paradigm of corruption. These conventions describe bribery as the offer of a benefit in the context of carrying out of public duties (Otusanya, 2011, p. 389). As such, these conventions address a very limited area of corruption, such as the misuse of office for deriving some personal benefit. Implications of Corruption There has been considerable debate regarding corruption. A significant portion of the relevant literature, decries corruption as an evil that institutionalizes undesirable practices by escalating costs and distancing the poor from social activities. In addition, several scholars had contended that the presence of emasculated institutional structures in an economy had compelled individuals and the corporate sector to engage in the activity of giving bribes to procure their requirements from the governmental authorities. This had resulted in a tremendous increase in rent-seeking, a corrupt practice, by government officials. At the same time, other scholars had claimed that corruption served to disrupt the functioning of government institutions, leading to substantial harm to the nation’s economic performance (Otusanya, 2011, p. 390). Although, public investment could increase, due to the presence of systemic corruption, there would be a corresponding reduction in productivity. This negative outcome can be attributed to the fact that such investment is designed to benefit the services that promote rent seeking activities and not activities that provide an advantage to the population at large. Consequently, corruption and loss in tax revenue severely limits resources for social investment. This has resulted in a reduction in the average life expectancy, increased child mortality rates, diminished the loyalty and trust reposed in political leaders, and revitalized inequalities (Otusanya, 2011, p. 390). Economic underdevelopment has been cited as the cause for the presence of corruption, in the major portion of the literature. Specifically, the dependency theories, which deem the underdevelopment of the developing nations to be the outcome of capitalist exploitation, corruption, political autocracy, and economic underdevelopment consider these ills to be the socio-political outcomes of such exploitation. Moreover, the liberal economic theory declares that corruption persists due to economic underdevelopment (Pakdel, Damirchi, & Gholizadeh, 2012, p. 197). In addition, it has been discerned that societal demarcations, on ethnic and linguistic bases, can be associated with corruption. Moreover, in societies with strong family relationships, public officials could exhibit a greater tendency to favor their relatives. In corrupt nations, businessmen accept the fact that a bribe has to be paid to the concerned officials, prior to commencing a commercial enterprise. Thereafter, these officials could claim a portion of the profits being made, or could demand bribes on a recurrent basis or during important festivals (Pakdel, Damirchi, & Gholizadeh, 2012, p. 199). The political set up of a nation determines the level of corruption and its character in the nation. Thus, it has been observed that corruption levels vary with the nature of the regime, wherein it occurs. In general, it is presumed that the level of corruption is inversely proportional to the level of democracy. The governments tend to induce source of rents, and a telling example is that of trade restrictions. For instance, when there is quantitative restriction upon the import of a specific good, then the related import licenses acquire tremendous value. Under these circumstances, importers will actively consider the option of bribing the government officials, who exercise control over this issue, in order to procure these licenses. When the economy is significantly open, then corruption in that economy tends to be very low. Nations that enjoy a system of trade that is subject to a minimum of governmental restriction, have a very low level of corruption, as the corrupt officials have very less leeway to grant favors for illegal gratification (Pakdel, Damirchi, & Gholizadeh, 2012, p. 197). Corruption has economic effects that are dependent on the nature of corruption in the nation, under consideration. This is specifically with regard to the manner in which corruption is organized. The difference is principally between corruption that can be calculated and corruption that is random (Pakdel, Damirchi, & Gholizadeh, 2012, p. 198). For example, the imposition of building regulations, by the government of a nation, can have the following outcomes. The bureaucrats could utilize the presence of these regulations to demand bribes for permitting or facilitating construction firms to evade these regulations. Moreover, these regulations could have emerged from the desire of the bureaucrats to realize economic rents (Pakdel, Damirchi, & Gholizadeh, 2012, p. 198). In addition, gold, gas, and oil are major sources of rents. These substances can be sold at prices that are far in excess of their cost, and this explains their value as a source of rent. The presence of low wages in the civil service, in comparison to the wages in the private sector, constitutes a source of low-level corruption. The low pay and the comparatively high cost of living, could induce civil servants to misuse their official position and demand bribes for performing their duties. The situation is exacerbated when the possibility of being apprehended for taking bribes is low (Pakdel, Damirchi, & Gholizadeh, 2012, p. 198). Furthermore, corruption produces an increase in public expenditure, which in conjunction with diminished tax revenues could generate adverse budgetary outcomes. In addition, monetary problems could arise, with the public financial institutions lending at less than the market interest rate upon being bribed. The allocation of public funds for welfare programs would be determined by the quantum of bribe that could be exacted by corrupt officials, and not by the extent to which they would benefit the country. There would be a preference for large and unwieldy projects, whose success would be difficult to estimate, as these would provide a much greater opportunity to take bribes (Pakdel, Damirchi, & Gholizadeh, 2012, p. 199). The relationship between the Gross Domestic Product (GDP) and corruption has been demonstrated in a number of empirical studies. In a study based on the corruption index provided by Business International, 67 countries were examined for corruption and its outcomes. This study found that corruption had an adverse effect upon the ratio of investment to GDP. For instance, it was disclosed by this study that if Bangladesh were to reduce its level of corruption to that of Uruguay, then it would witness an increase in the investment rate that would be around five percent of GDP. Corruption, per se, can reduce the GDP per head (Pakdel, Damirchi, & Gholizadeh, 2012, p. 200). However, the majority of the developing nations are devoid of the resources required to effectively combat corruption. A few researchers studied the effect of corruption upon the quality of public investments. Their studies revealed that corruption reduced the quality of the infrastructure, as determined by power failures and the condition of the roads. As such, these studies established that countries afflicted with high corruption levels had poor government services and dismal public health care facilities (Pakdel, Damirchi, & Gholizadeh, 2012, p. 200). In addition, a study based on the Conference Board Manufacturers database provided interesting insights into the issue of corruption. This database constitutes a compendium of data related to foreign market entry. From the results of this study, it became apparent that the presence of unexpected corruption was a major deterrent to market entry. In this context, a variable on unexpected corruption was defined as the difference between the expected corruption, as derived from the data on the political system, and the actual corruption. It was also noticed that foreign direct investment was significantly discouraged by corruption, and that foreign investors were affected to a greater extent by corruption than their native counterparts (Pakdel, Damirchi, & Gholizadeh, 2012, p. 200). Moreover, a study, involving bilateral trade data for the period 1992 to 1995 was conducted with respect to 18 exporting countries and 87 importing nations. This study found that Belgium, France, Italy, the Netherlands, and South Korea enjoyed a competitive advantage, in comparison to Australia, Malaysia, Sweden, and the USA, with regard to investing in corrupt nations. This disparity was attributed to the willingness of exporters from the former group of companies to offer bribes than the exporters from the latter group of nations (Pakdel, Damirchi, & Gholizadeh, 2012, p. 201). Consequently, the exporting nations are to some extent, responsible for the amount of corruption prevailing in international trade. Conclusion Corruption constitutes a global phenomenon, and prevails to different degrees in the various nations of the world. Corruption has been defined as the efforts made to obtain power or wealth, via illegal methods for private benefit at the expense of the public, or the abuse of public power to derive personal benefit. Corruption is of ancient origin and has been a constant companion of humanity from millennia. It constitutes a major problem in the developing nations and it exerts an extremely harmful effect upon those countries. Corruption, in the developing nations reduces income and increases crime, inflation, inequality, policy ambiguities, and facilitates the plunder of the nation and its populace by monopolies. Competition in corrupt countries is virtually non-existent. The presence of a democratic system of governance is no guarantee against corruption. In addition, to being democratic, the citizens have to participate wholeheartedly in the electoral process. International, as well as domestic investors tend to avoid corruption nations, which diminishes capital inflows and capital accumulation. Economic growth and investments are affected severely by corruption. Moreover, corruption prevents the proper collection of taxes. This transpires due to tax evasions and improper claims for tax exemption, which the taxation authorities permit upon receiving adequate bribe. With regard to contracts for public procurement, the presence of a corrupt system in the country, results in inferior quality public services and infrastructure. Corruption has been identified as one of the cardinal impediments to improving democratic governance in the world. As such, corruption discourages investment, impairs economic growth, and transforms the composition of governmental spending. These consequences, frequently affect future economic growth adversely. However, the rule of law has to invariably prevail in the nation for controlling corruption, as this has a tremendous deterrent effect upon corruption. Therefore, all possible measures have to be adopted to ensure that corruption is rooted out without any compunctions or exceptions. Many developing countries such as Bangladesh, and the countries of Sub- Saharan Africa, Middle East and West Africa are noted for their rampant corruption. At the same time, the nations of Western Europe proved to be much less corrupt. The reasons behind this disparity have been discussed in this work. This work proves that poverty enhances the occurrence of corruption. The developing nations, where poverty is a common phenomenon, tend to be more corrupt, in comparison to the developed nations that are economically strong. Thus, it can be surmised that the presence of corruption in a nation, has an adverse impact upon its economic growth. References de Mendonça, H. F., & da Fonseca, A. O. (2012). Corruption, income, and rule of law: empirical evidence from developing and developed economies. Brazilian Journal of Political Economy, 32(2), 305-314. Freckleton, M., Wright, A., & Craigwell, R. (2012). Economic growth, foreign direct investment and corruption in developed and developing countries. Journal of Economic Studies, 39(6), 639-652. Global Economic Symposium. (2014). Fighting Corruption in Developing Countries. Retrieved October 22, 2014, from http://www.global-economic-symposium.org/knowledgebase/the-global-polity/fighting-corruption-in-developing-countries?from=11 Hors, I. (2000, April). Fighting corruption in the developing countries. Retrieved October 22, 2014, from OECD Observer: http://www.oecdobserver.org/news/archivestory.php/aid/291/Fighting_corruption_in_the_developing_countries.html Khan, M. H. (2006, November). Governance and Anti-Corruption Reforms in Developing Countries: Policies, Evidence and Ways Forward. Retrieved October 22, 2014, from United Nations Conference on Trade and Development: http://unctad.org/en/Docs/gdsmdpbg2420064_en.pdf Lash, N. A., & Batavia, B. (2013). Government Economic Intervention and Corruption. Journal of Developing Areas, 47(2), 1-15. Otusanya, O. J. (2011). Corruption as an obstacle to development in developing countries: a review of literature. Journal of Money Laundering Control, 14(4), 387-422. Pakdel, A., Damirchi, Q. V., & Gholizadeh, H. (2012). Corruption and Anticorruption Policies in Developing Countries. Interdisciplinary Journal of Contemporary Research In Business, 3(9), 194-204. Read More