What Was Behind all of the Corruption that Was Revealed by the Euro Zone Financial Crisis - Literature review Example

What was behind all of the corruption that was revealed by the Euro zone financial crisis? Competition and corruption have traditionally been known to be two concepts that work directly opposite of each other. Thus, conventional wisdom has held that corruption exists due to lack of competition, with the premise that any reform that increases competition reduces the incentives for corruption (Celentani & Ganuza, 2002: 1274). Corruption is a vice that is both rampant and pervasive globally (Shleifer and Vishny, 599). However, the level of corruption whether in a single state or on the global platform is dependent on two major factors, namely the structure of the government, and the structure of the political process. In this respect, the Euro zone crisis can only be attributed to “the corruption of the ruling class” (Catania, 2013:n.p.). The weakness of the central governments has been identified as one of the major reason why corruption thrives and eventually becomes very costly to economic development. A weak central government system allows for different government bureaucracies and agencies to impose bribes independently on the public and the private sector seeking the government permits to accomplish different economic activities (Shleifer and Vishny, 615). It is such corruption that hampers investment around the world, but mostly in the countries with weak government systems and structures, resulting in the global financial crises that have faced the world severally over the course of the past few decades (Catania, 2013:n.p.). Thus, government corruption has been termed as the selling of government property by the government officials for their personal gain (Shleifer and Vishny, 1993:599). The persistence of corruption has been attributed to a principle-agent working relationship, which creates a middleman between the goods/services provider and the consumer of these commodities. The delegation of roles and duties has also been seen as one of the concepts that allow corruption to thrive. For example, all governments globally work through a principle-agent relationship, where the government is the owner of crucial goods that the citizens require, and the government officials are the agents who distribute the government goods to the citizenry. Similarly, in auction, the auctioneer is always the agent of the seller of goods. (Lengwiler and Wolfstetter, 2000) argue that the delegation of duties and roles from the principle to the agent creates an avenue for perpetrating corruption (1). Nevertheless, while corruption has been seen as an evil that is disruptive of development, it has actually been considered as advantageous in other quarters. Corruption has been seen to help in reducing the bureaucratic procedures of the government processes by having people buy their way easily, while it has also been seen to benefit the entrepreneurs through having them avoid fulfilling numerous regulations (Shleifer and Vishny, 1993:599). Corruption may not be a very bad thing after all, if it delivers certain advantages. The only problem is that it often delivers such advantages to the few who have the influential powers of bribery, to the detriment of the rest of the society. This argument however, has been disputed by a counter-argument holding that the welfare of the larger society is not adversely affected by the actions of a rationally instigated corruption (Bliss & Di Tella, 1997:1001). A rational corruption agent may cause a firm to exit from the economy through using the superior power of information held by the agent regarding the tendering and procurement process, which the firms do not have. The exit of such a firm may create an opportunity for the rest of the firms to compete in a healthier environment. In this case, “the exit of the firm caused by corruption does not necessarily reduce the social welfare” (Bliss & Di Tella, 1997:1001). Simply put therefore, corruption is not largely affected by the level of competition, but more by the existence of the structure of a delegated system. Thuse, regardless of whether the system is competitive or not, the fact that there exists a delegation of roles and duties that create a principle-agent relationship means that the chances of corruption increases. Thus, according to (Celentani & Ganuza, 2002), while conventional wisdom has associated the competitiveness of a system with low chances of corruption, the reality is that “more competition may lead to either higher or lower corruption” (1274). In fact, despite the fact that the degree of competition in the economy increases when the firms are operating in free-entry equilibrium, the increase in competition may not lower corruption (Bliss & Di Tella, 1997:1001). This argument might seem to be farfetched, owing to the fact that corruption has been known to disrupt the competitiveness of a system or process, through influencing the system or process to favor a certain party directly, without undergoing the essential competitive procedures (Wei, 2000:36). However, the argument that competition increases corruption is also supported in the example of the auction process. Auctioneering is a competitive process that entails different parties bidding for the commodity on sale, and the highest bidder ends up buying the commodity (McAfee & McMillan, 1987:721). This notwithstanding, corruption affects the competitive game of bidding, since even in the competitive procurement and auction processes of government tenders, bribery buys its way to winning the tenders. Therefore, corruption can also thrive very well even in highly competitive systems and processes (Lengwiler and Wolfstetter, 2000:1). This becomes possible because the principle may set the applicable rules and guidelines that guide the procurement process which the bidders must follow, and then delegate the work to the agent to oversee the bidding process. Since the agent may not be able to alter the procurement rules without incurring a possible punishment, the agent can apply the superior information they posses regarding the quality of goods to earn a bribe from the highest bidder, through bribing the bidder’s way into getting the tender by way of a claiming to offer technically high quality goods (Celentani & Ganuza, 2002: 1277). Further, the nature of the regulation policy environment also affects the rate of corruption that can prevail in the environment. Thus, an active and highly regulating industrial policy increases the levels of corruption, while the higher levels of openness and low levels of policy regulations to trade are associated with lower corruption (Wei, 2000:12). Additionally, corruption cannot thrive in an open-bid auction system, owing to the fact that such a system lacks the most essential factor for corruption to thrive; secrecy (Lengwiler and Wolfstetter, 2000:3). The detriment of the secrecy concept that perpetuates corruption is that; it has disrupted essential development globally and thus caused the economic development of regions such as some parts of Africa to be totally irredeemable. Secrecy is a necessity for corruption to thrive, and its impact is to cause a wide range of distortions that have seen important projects such as education and health being shelved in favor of other less important projects such as infrastructure and defense, if such less important projects offer better chances of secret corruption (Shleifer and Vishny, 1993:616). Since corruption only thrives in a closed-auction bid system; the overall gainer of the corruption benefits is the auction agent. However, while it might be perceived that corruption actually lowers the rate of competition, the truth has pointed on the contrary. Corruption increases the aggressiveness of the bidders to bid for the auction, in hope that they will manage to fall in the category that will entice the corruption agent, who in this case might be a government official or an auctioneer, to consider them for bribery (Bliss & Di Tella, R. (1997:1012). The highest bidders, for example the top three bidders, are the ones most likely to get an opportunity to bribe their way into winning the procurement tenders or auctions, through paying bribes to eliminate the other potential bidders. Therefore, corruption increases competition through increasing the aggressiveness of the bidders (Lengwiler and Wolfstetter, 2000:8). Nevertheless, the fact that competition and corruption are perceived to be growing together does not mean that a competitive environment within an economy is not desirable. This because the survival and thriving of corruption does not so much depend on whether the economy is competitive, but only boils down to the structure of the government and the structure of the political processes within an economy (McAfee & McMillan, 1987:727). Thus, where there is strong government and political processes control, corruption may find it difficult to thrive, however, where there exists a weak government; competing bureaucracies arise and perpetuate corruption that eventually hampers investment and economic development (Shleifer and Vishny, 1993:615). Corruption has therefore been found to thrive more in a competitive environment, owing to the fact that tougher competition breeds higher corruption, and for that reason, corruption and competition will be found to grow together in certain markets (Celentani & Ganuza, 2002: 1297). Competition does not only harm the welfare of the public and the economy, but also harms the bidders. This is because; the prospect t of the bidders being considered for participation in a corrupt scheme will induce the bidders to increase their levels of competition and the amount of their bids, such that they eventually lose on the entire surplus that they bid away (Lengwiler and Wolfstetter, 2000:23). Nevertheless, the fact that competition is perceived to breed corruption does not mean that competition is not desirable. Competition might even be beneficial in an environment with sufficient and strong controls. The only important thing is that the conventional wisdom has now been challenged. The challenge is such that the negative association between corruption and competition that had previously been created under the conventional wisdom does not have to be applied to“mean that any increase in competition is guaranteed to reduce corruption” (Celentani & Ganuza, 2002: 1276). The economic detriment of corruption is purely based on the nature of corruption that occurs. While some type of corruption is harmful to the economy and the welfare of the society, other types actually seem beneficial to the welfare of the society. Corruption without theft is detrimental to the economy and the welfare of the society, since it entails the firms paying both the actual price of the procurement contract and an additional bribe (Shleifer and Vishny, 1993:602). The overall effect is that this type of corruption without theft increases the prices of goods, for the firms to recoup both the cost of the contract, the cost of bribery and then earn a profit (Kajsiu, 2014:161). On the other hand, corruption with theft is less detrimental to the economy and even the welfare of the society, since it does not increase the prices of goods, and better still it might even lower the prices (OECD, 2005:55). This is because, corruption with theft just entails the firms paying for the bribe, which might equal the cost of the contract or be even cheaper (Shleifer and Vishny, 1993:602). On the event that corruption occurs with theft, the societal welfare might benefit through buying the commodities at low prices. Nevertheless, one thing that is indisputable is the fact that the possibility of corruption decreases the weight paid to quality, by reducing the agent’s ability to verify quality, since the agent is held in discretion by the firms that paid a bribe (Celentani & Ganuza, 2002: 1297). It can therefore be concluded that corruption does not mainly depend on the nature of the economy, but on the nature of the governance and the political structure governing the economy (United Nations, 1989:33). It can also be concluded that corruption can eventually be eliminated or at least limited through the application of certain incentives and regulatory measures. Nevertheless, it must be noted that strict policy regulations also creates incentives for corruption to survive (Celentani & Ganuza, 2002: 1275). On the other hand, the application of an ordinary linear profit sharing contract between the government and its agents (officials) can help in curbing corruption (Lengwiler and Wolfstetter, 2000:23). The only sure thing is that corruption introduces a large share of welfare costs on the public, by driving some firms out of the competitive market, although competition is not a sufficient condition for eliminating corruption. Nevertheless, the increment of competition on the product market is a major way through which the adverse effects of corruption can be mitigated (Bliss & Di Tella, 1997:1022). References Bliss, C. & Di Tella, R. (1997). Does Competition Kill Corruption? Journal of Political Economy105 (5), 1001-1023. Catania, G. (2013). Eurozone crisis: The religion of bribes. Vox Europ. Web. February 18, 2015. < http://www.voxeurop.eu/en/content/article/3933281-religion-bribes> Celentani, M. & Ganuza, J. J. (2002). Corruption and competition in procurement. European Economic Review 46, 1273–1303. Kajsiu, B. (2014). A discourse analysis of corruption: Instituting neoliberalism against corruption in Albania, 1998-2005. 161-170. Lengwiler, Y. & Wolfstetter, E. (2000). Auctions and Corruption. CESifo Working Paper Series, 1-23. McAfee, R. & McMillan, J. (1987). Auctions and bidding. Journal of Economic Literature, 25, 699-738. OECD. (2005). Fighting corruption and promoting integrity in public procurement. Paris: Organisation for Economic Co-operation and Development. 55-61. Shleifer, A. & Vishny, R. W. (1993). Corruption. The Quarterly Journal of Economics, 599-617. United Nations. (1989). Corruption in Government. New York: United Nations. Wei, S..J. (2000). Natural openness and good government. Working Paper No. W7765, NBER, USA. Read More