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Why Should You Be Concerned About Corruption?

Corruption has existed for a long time and will continue to exist in the future unless governments can devise effective strategies to prevent it. It’s not going to be simple. Although economics has a long history of studying the causes and consequences of corruption, with seminal contributions on what economists call rent seeking dating back 30 years, empirical work on quantifying the extent of corruption and putting a dollar sign on its economic effects has been limited. This is unsurprising, given that the majority of corruption occurs behind closed doors. Furthermore, measuring the efficiency of government organizations is far from an exact science. As a result, corruption is notoriously difficult to quantify, and empirical economic study on the topic is limited. This study focuses solely on corrupt public practices, which are criminal behaviors that decrease governments’ economic efficiency. It does not address private corruption, such as that perpetrated by organized crime on individuals and private businesses.

The Managing Director of the International Monetary Fund’s statement that governments must demonstrate their intolerance for corruption in all its forms, as well as the President of the World Bank’s statement that the “cancer of corruption” must be dealt with, sparked renewed interest in the topic at the multinational financial institutions’ 1996 Annual Meetings. Researchers have begun to investigate so-called corruption indices, which are created by private rating firms and are often based on responses to standardized questionnaires by consultants stationed in the nations. Obviously, the responses are subjective, but the correlation between different rating agencies’ indices is very strong, implying that most observers agree on how to evaluate countries based on how corrupt they appear to be. The hefty fees charged by rating agencies to their clients (typically multinational corporations and international banks) are an indirect indication that the information is valuable and can have a measurable economic impact. The economic performance of the countries monitored, on the other hand, may distort the judgment of the consultants who create these indices. Poor economic performance by itself does not imply widespread corruption, nor is economic success an infallible indicator of corruption-free status. It’s crucial to be cautious when interpreting correlations as cause-and-effect interactions when studying the relationship between perceived corruption and economic indicators. Another flaw with these indices is that they don’t differentiate between different types of corruption, such as high-level versus low-level corruption, or well-organized versus poorly organized corruption. Despite these drawbacks, the indices offer a variety of important data.

The purpose of this study is twofold. First, it presents a list of potential corruption causes and effects based on a study of recent empirical research that used cross-country regressions to assess the strength of the relationships between corruption and its causes and consequences. (A regression is a statistical method for determining the equation that best fits a collection of data.) In this scenario, regressions point to the most likely sources of corruption as well as the most likely outcomes.) Despite the inherent problems that empirical study faces due to data restrictions, these studies give preliminary evidence that corruption can substantially impede economic performance. Second, the study examines current research on the impact of corruption on investment and economic growth, as well as how it influences governments’ spending decisions. It is discovered that corruption discourages investment, inhibits economic growth, and changes the mix of government expenditures, all of which are detrimental to future economic progress.


Corruption’s Root Causes

Because government engagement in the economy is a major source of public corruption, measures aimed at liberalization, stabilization, deregulation, and privatization can drastically diminish the opportunity for rent-seeking and corruption. Individuals are often willing to give bribes to officials to avoid the rules if government restrictions are prevalent and authorities have discretion in administering them, and officials, unfortunately, are occasionally tempted to accept these bribes. Identifying policy-related sources of corruption is obviously beneficial in combating it. The following sources have been well-known for some time.

  • A prominent example of a government-induced source of rents is trade restrictions. If importing a certain commodity is subject to a quantitative limit (for example, only a specific number of foreign autos can be imported each year), the requisite import licenses become extremely valuable, and importers may contemplate bribing the officials in charge of their issuing. More broadly, tariffs create a semi-monopoly for a domestic industry (such as plywood manufacture) by insulating it against international competition. Local manufacturers will campaign for the tariffs to be established and maintained, and some may be willing to bribe powerful politicians to keep the monopoly alive. According to studies, a highly open economy is connected with lower levels of corruption. In other words, when a country’s trade is mostly free of government constraints that corrupt officials can exploit, it tends to be less corrupt.

  • Government subsidies can be a source of rental income. According to studies, corruption thrives in industries with policies that allow subsidies to be misappropriated by enterprises for which they were not intended. The higher the corruption score, the more such subsidies are accessible to industries.

  • Price controls, which are used to reduce the price of an item below its market value (typically for social or political reasons), are likewise a source of rents and the rent-seeking behavior that follows. Individuals or groups may be enticed to bribe officials in order to sustain the flow of such products or to obtain an unfair portion at a below-market price.

  • Rents are caused by multiple exchange rate procedures and foreign exchange allocation methods. Some countries have multiple exchange rates, such as one for importers, one for tourists, and one for investors. Differentials between these rates can lead to attempts to acquire the best rate, even if that rate does not relate to the exchange’s intended usage. Multiple exchange rate regimes are frequently linked to anti-competitive banking systems in which a central bank with ties to the government can earn handsomely by arbitraging between markets. Some governments have a limited amount of foreign money and distribute it through various programs with varied degrees of openness. If state-owned commercial banks, for example, ration scarce foreign cash by assigning it according to priorities set by government officials, interested parties may be inclined to bribe these officials in order to get more than their fair share.

  • Low civil service wages compared to private sector pay are a cause of low-level corruption. When government servant pay is insufficient, they may be forced to utilize their positions to collect bribes in order to make ends meet, especially if the risk of getting found is low.

Other grounds for corruption have been highlighted in addition to government restrictions as a source of corruption.

  •  Natural resource endowments (oil, gold, exotic lumber) are a textbook example of a source of rents, because they can normally be sold for far more than their cost of extraction, and they are normally subject to tight government control, which corrupt officials can overlook. Extreme rent-seeking behavior may be more common in resource-rich economies than in resource-poor countries.

  • Rent-seeking behavior may be influenced by sociological factors. A measure of ethnolinguistic fractionalization (social divisions along ethnic and linguistic lines) has been linked to corruption. Furthermore, in societies with strong family ties, public officials are more prone to do favors for their kin.