Impact of Corruption to Economic Growth - Term Paper Example

Impact of corruption on economic growth. due: Impact of corruption to economic growth Corruption is simply the abuse of public office for public gains and is a persistent feature affecting human societies. Corruption is a problem that occurs in both developing and developed countries such as America, Britain, and France. It may take place both at a high level or at a low level throughout the system of governance. It may then spread from the low level to high levels. Corruption can be sporadic or occasional. Corruption at high levels is, however, very dangerous especially to democracy than low-level corruption. If the high-levels of governments are honest, citizens are more likely to demand change in administration at the lower levels. Systemic corruption is dangerous to the democracy of a country since it change the outlook of a population. This may leave the trustworthy feel as if they have wasted opportunities for growth and may end up encouraging their children and adults to engage in cheating as a way of bettering their lives. Corruption is a hindrance to growth and development of nations, regardless of how well-endowed they are. Poor management of a nation’s resources results in a retarded growth of all the sectors of the economy. Corruption is the biggest obstacle to economic and social development. That is why countries with the highest risk of corruption end up being desperately poor. Foreign aid and assistance is diverted to private and selfish uses. Consequently, the impact of corruption extends beyond the economic sphere to affect millions of innocent citizens. Corruption is in a big way, an abuse of human rights of citizens. This paper will investigate the reasons why corruption has become a global problem due to its negative implications on economic growth. This will be done by comparing effects of corruption in Zimbabwe, a developing country, and Italy, which is a developed country. Three reasons will be exhaustively discussed to show the effects of corruption on nations, and the effect of corruption on democracy. They include negative growth of business operations, poverty, and obstacle to economic growth. Corruption and democracy Corruption has a negative impact on development, economic growth, trust, and income inequality. It is due to its negative impact that it is considered a severe obstacle to development. It has detrimental effects on the democracies. Democracy, unlike other forms of government, is prone to charges of corruption. This is because the freedom of speech, political challenge, and press which accompany democracy may allow the opponents of a corrupt administration to make much of its corruption. Politicians also play a role in the propagation of corruption. For instance, party competition encourages unethical politicians to win elections by exploiting the opportunities for buying of votes and illegal party financing. Some governments, however, like military governments may not tolerate such. Secondly, democracies have a problem of funding expensive and in most cases unnecessary political activities. If such activities are not funded from tax revenues, then private individuals fund them and claim something from the candidates they support. Effects of corruption 1. Negative growth of business operations Corruption affects the growth of business operations in any nation. Corruption significantly affects the economy of a country. It has a negative impact on the growth and development of the particular country. Corruption is detrimental even in countries where institutions are effective. Even though corruption may help reduce the costs induced by lengthy cumbersome administrative processes, in the long-run it affects the operations of the different companies creating a corrosive impact on a country’s overall governance environment. This erodes the level of efficiency and the legitimacy of the various institutions within a country. As a result, the sustainable development and rule of law of the country is undermined (Gupta, Davoodi & Alonso, 2002). 2. Poverty Corruption is a major problem that has caused poverty globally. It occurs in various levels of the society, both institutions like national governments, military forces and the functions of judiciary. Corruption is an issue that is very much inter-related with other issues. Nationally, people’s effective participation and representation in the society can significantly be undermined by corruption. Corruption is an issue that affects both rich and poor nations. All elements of the society are affected in various ways as corruption undermines political development, democracy, economic development, the environment, and people’s health. At a local level, corruption affects the daily lives of people. Corruption mainly stems from laws that are badly drafted or enforced (Rahman, Kisunko & Kapoor, 2000). Even though corruption is a global phenomenon, occurring in all countries, evidence shows that poor countries are affected more than the developed countries. Corruption stifles the economic growth and eventually diverts the desperately required funds from education, healthcare, and other public services. It has been estimated that one trillion US dollars get siphoned off through bribes annually. This is in accordance with the World Bank. This is a serious problem which poses a global threat and a real roadblock to economic development. It also escalates inequality and injustice, thus undermining stability, especially in regions that are highly vulnerable. Corrupt activities are barriers to development and also diverts resources away from efforts of poverty eradication (Hanf, 2011). The private sector is also not free from corruption. It is badly affected by corruption which has eroded corporate identity, undermining confidence between business partners and can as well destroy the reputation of the companies. Leaders in the health sector and citizens of all countries recognize the disastrous effects of corruption both at micro and macro levels. Even at individual levels, there exists a mounting evidence of the negative effects caused by corruption especially on the health and welfare of citizens. According to a report by Transparency International, the corruption level undermines the achievement of Millennium Development Goals (MDGs). Corruption is a primary cause of lots of social evils affecting the global community. This has derailed the process of attainment of the MDGs. Rom research on various works, seven distinguished areas in the health sector has been badly affected by corruption resulting in discouraging health consequences. For instance, purchase of equipment required in the health facilities, construction of health facilities, education of health professionals, and provision of services by the medical personnel has become a challenge due to corruption-related activities (Hanf, 2011). In Zimbabwe, for instance, the regulatory framework is costly and time-consuming. Licensing requirements for incorporating business costs takes more than 400 days. Dollarization was introduced in 2009 in an effort to end hyperinflation. The government of Zimbabwe, however, has continued to delay proper structural reforms (Foundation, 2009). Corruption has deprived members of the public basic services such as access to quality sanitation and clean water for use in households. Approximately 1.2 billion people worldwide lack adequate sanitation and, therefore, have suffered devastating consequences such as illnesses. Developing countries are the worst hit by cases of corruption. About 80 percent of health problems can be linked to inadequate water and sanitation. Poor women are the most affected by the problem of water and sanitation. Poor water governance has resulted in water crisis which have affected the water and sanitation sector. From a global perspective, corruption has affected all domains of life from education to economic performances, something which could impact on health outcomes. Due to its effects on health, water/sanitation services, education and economic development have great potential in impacting on the dynamics of child mortality. According to a study conducted using data from 1 years old in 2002, there is a significant connection between corruption level and child mortality. This calls for an urgent move to save and improve children survival (Hanf, 2011). Data collected by Business International (BI) for 70 countries, showed that there is a significant negative relationship between corruption and the rate of economic growth. Corruption will also affect investments. Corruption also increases public finance and increases public investment at the expense of other private investment. This makes it hard for private investors to thrive. Escalated corruption reduces tax revenue and encourages collusion between tax and other officials. As a result of corrupt bureaucracy, governments are finding it hard to raise tax revenues as firms go underground to avoid the bureaucratic regulation (Rahman, Kisunko & Kapoor, 2000). Corruption increases inequality and poverty through lower economic growth. It introduces a biased tax system which favor the rich and influential; lower social spending, unequal access to education and poor target of social programs. 3. Obstacle to Economic Growth Another reason is that corruption is a great obstacle to economic growth. The performance of a country’s economy is badly affected by activities of corruption rendered by corrupt officials. From a macro level, corruption has all the negative effects causing a direct impact on the economic growth and development. A country’s economic performance is also o affected by corruption which directly affects many factors that fuel the economic growth such as investment, taxation, composition and effectiveness of the public expenditure. This is because corruption diverts resources such as human resources to other unwanted users instead of focusing them on more productive activities. By reducing the quality of resources, corruption may also decrease the productivity of investments. For instance, by undermining the quality and the quantity of health and education services, a country’s human resource are reduced by high levels of corruption. In addition, inefficiencies caused by the rent-seeking behavior fuels waste of resources which undermines the public expenditure (Jong-Sung & Khagram, 2005). For instance in Zimbabwe, corruption has reduced the country to the poorest nation in the world. Zimbabwe has just a meager $200 of GDP per capita. Recent reports accused President Mugabe of embezzling $7 million in foreign aid. The fund was meant for distribution of medicine to combat malaria. He allegedly used the money to finance his political machinery (Gage, 2009). Italy, on the other hand, fell 12 spots in the corruption ranking after it passed laws to protect top officials from prosecution while in office. Prime Minister Silvio Berlusconi had previously been involved in an investigation regarding payment of money in excess of $500,000 to the husband of an Olympic minister in the U.K (Gage, 2009). The other reason corruption destabilizes the economy of a country is that it reduces the quality, quantity, cost and profitability of the investment. Many studies have shown that corruption discourages investments and increases the cost of carrying out business, resulting in the reduction of profitability of many investment projects. Empirical evidence has shown that the ratio of investment to GDP is greatly affected by corruption. This lowers investment and also retards the economic growth to a large extent. The decision-making process is also badly affected by corruption. Corrupt public officials may allocate public resources to wrong persons without considering the public welfare. They will most likely be motivated by bribes such as large infrastructure or even sensitive projects like defense. This may put the particular country at a high risk of external attacks due to its poor defense system. When it comes to education, corruption may also cripple the whole system. The evil spreads from the highest office trickling down to the grassroots level. With increased cases of corruption, the whole education system may be brought down to its knees producing professionals who are not even fit to drive the economy of the given country. This creates a cycle of poverty within the country. Capital productivity is also lowered by corruption, impairing decision-making processes. The impact of corruption is also heavily felt in the levels of investment within foreign direct investment (FDI). For instance, the US FDI was badly affected in 2008 by high levels of corruption in 42 countries. As a result, US is very careful when it comes to investment in countries dominated by corruption. Costs of investment are also increased by corruption. This discourages investors thus denying a corrupt country many opportunities for growth. A research conducted in 200 showed that corruption in host countries largely results in less FDI from countries that take corruption as a criminal offense abroad (Li, Xu & Zou, 2000). In Italy, a developed country, corruption has become a major problem. Organized crimes and businesses have ruined the integrity of public officials. For instance, public procurement is facing a high risk of corruption involving large resources and also exposing the companies to organized crimes. Cases of bribing public officials has been on the rise. Italy is a signatory to the OECD Convention and has prohibited facilitation payments. The high corruption cases have, however, affected the nation’s economy. In the recent past, Italy was ranked as just corrupt as Senegal and Swaziland. The country has failed in maintaining Rome and managing migrant refugee centers in Sicily (Day, 2015). Conclusion Corruption is a vice and an enemy to democracy. Corruption should, therefore, be attacked from all sides. The citizens of every country, whether developing or developed, hate corruption and feel betrayed their states due to the vice. However, as a government becomes more responsive to the citizen’s wishes, the more likely the agents of government tend to feel a counterbalance to the temptations of corruption. The press in the country, also plays a significant role in mediating for public opinion. The press discovers and documents the instances of corruption which are then revealed to the population. At times, this awareness results in a powerful deterrent. There are mainly four channels through which corruption affects the economic growth. This includes higher public investments, lower government revenues, poor quality of public infrastructure and low level of expenditure reducing public spending, on issues such as health and education. Corruption is a menace that has to be fought by all means due to its retrogressive effects on the national and international arena. They suffer most from corrupt officials who deny them even their most basic wants like water and proper sanitation services. Investors will also try avoid countries where corruption is high. Fundamental services like health and education are poorly offered in corrupt countries. The whole governance and institutional environment is impaired by corruption creating long-term detrimental impacts on the whole country. As a matter of fact, unemployment levels are high in corrupt countries. In most cases, the ones holding jobs are not qualified enough for them. The result is low productivity and poor economic growth. References Day,M. (2015,March 20).Corruption in Italy ‘worse than ever’ as minister quits over links with gang accuses of bribery.Retrieved May 8,2015,from http://www.independent.co.uk/news/world/europe/corruption-in-italy-worse-than-ever-as-minister-quits-over-links-with-gang-accused-of-bribery-10124024.html Foundation,H (2015). Zimbabwe. Retrieved May 8,2015, from http://www.heritage.org/index/country/zimbabwe Gage,J. (2009,March 20). The Most Corrupt Countries. Retrieved May 8,2015, from http://www.forbes.com/2009/03/20/most-corrupt-countries-bizcountries09-business-washington-corrupt-countries.html Gupta, S., Davoodi, H., & Alonso-Terme, R. (2002). Does corruption affect income inequality and poverty?. Economics of Governance, 3(1), 23-45. Hanf,M. (2011,November 2).Corruption Kills: Estimating the Global Impact of Corruption on Children Deaths. Retrieved May 5, 2015, from http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0026990 Jong-Sung, Y., & Khagram, S. (2005). A comparative study of inequality and corruption. American Sociological Review, 70(1), 136-157. Li, H., Xu, L. C., & Zou, H. F. (2000). Corruption, income distribution, and growth. Economics & Politics, 12(2), 155-182. Rahman, A., Kisunko, G., & Kapoor, K. (2000). Estimating the effects of corruption: implications for Bangladesh (Vol. 2479). World Bank Publications. Read More