Effects of corruption on economic development

By: Dr. Mofasi Lekota???–

Equal Access Group – Email [email protected]?

???-Johannesburg +27 82 904 2228??– Los Angeles +1 213 469 7681?

To come up with possible solutions to corruption and its destructive effects on economic development, we should first seek to gain insight into its causes. It is a complex feat to come up with a comprehensive list of causes of any human behaviour, however due to extensive research conducted on this behaviour, we are able to identify commonly cited causes of corruption. In their study?Dimant and Tosato (2018)?cited some of the common causes as:

·??????Administrative and Political Structure: An inefficient bureaucracy increases the levels of corruption because transaction authorization procedures require human interaction between private sector and select public sector officials. Inefficient bureaucratic structures and processes tend to be less transparent, hence inherently vulnerable to corruptive manipulation.?

·??????Limited Civil Participation and Press Freedom: Effective civil participation in the democratic processes of government curb corruption if and when these processes have the effect of removing corrupt officials through regular elections.??Suppression of press freedom also tends to foster corruption as it goes without public the exposure of perpetrators.?

·??????Curtailed Economic Freedom: The more economic freedom prevails in society the less corruption. Higher economic freedom entails less economic controls and permit requirements. This provides more choices and opportunities of involvement in economic activities.?

·??????Declining Economic Growth:?Corruption decreases economic growth level (Ali & Isse, 2003; Pellegrini & Gerlagh, 2004) through its adverse effects on investments and trade policies. A consistently declining economic growth results in panic corruption where people are so uncertain of the future that they engage in corrupt activities as short-term measures to secure their financial well-being. The confusion of cause and effect embedded in this hypothesis is evident. There are studies that support the corollary hypothesis that higher economic growth reduces corruption as evidenced in Vietnam and Singapore (Aidt, Dutta, & Sena, 2008;??Bai, Jayachandran, Malesky, & Olken,?2013). This hypothesis requires strong institutional and public policy support.?

·??????Ethnic Diversity:?Significant ethnic division characterized by ethnolinguistic fragmentation increases corruption due to in-group favoritism tendencies. “If members of one ethnicity are elected to a public position, they are more likely to maintain that position even if they display corrupt behavior. This is because they are more likely to allocate resources favorably to members of their same ethnic group who will reciprocate by helping to keep them in office”, (Dimant & Tosato (2018, p. 337)

·??????Gender:?Studies to look at relative propensity of women to engage in corruption found women are less prone to corruption (Dollar, Fisman, & Gatti,?2001;?Frank, Lambsdorff, & Boehm, 2011; Rivas, 2012). Women were found to be more socially conscious and ethical than men thus exhibiting less corrupt behavior.?

·??????Globalization:?Higher levels of globalization tend to reduce levels of corruption because of the compliance requirements set by international organizations and global media attention. Globalization as a restrictor of corruption was found to apply especially in developing countries (Badinger & Nindl, 2014).?

·??????Government Size:?A large size of government comes with higher the levels of corruption because of decreased individual accountability, increased bureaucracy, and state intervention in the economy especially in the form of spending.?Kotera, Okada, & Samreth, (2012) posited?reduction in democratic governance increases corruption, and??higher levels of democracy decreases corruption.?

·??????Governmental Structure and Government System:?Decentralization of government reduces corruption because of increased regional competition, fiscal decentralization, and inter-regional mobility of people who would like to avoid corruption (Fisman and Gatti, 2002). However, multi-tiered government structures with subnational bureaucracies tend to increase corruption (Dell’Anno & Teobaldelli, 2015; Fan, Lin, & Treisman, 2009).?

·??????Historical Drivers:?Background factors such history of colonialism, religion, legal systems, and political instability influences levels of corruption in countries. Angeles and Neanidis (2015) asserted that because European settler colonialists established themselves as powerful elites in their colonies they were able to practice corruption with impunity. However, post-colonial rulers in their attempt to mimic such behavior are faced different challenges because of changed governance requirements. Post-colonial corruption tends to embed violence and election manipulation.

Corruption is one of those human constructs that have different circumstantial definitions but its effects present minimal differential discourse. Both scholars and practitioners seem to agree that in the main corruption has adverse effect on human transactional interaction. It is therefore useful to analyze the negative effects of corruption in more details and to use that analysis as a framework for the contextualization of possible solutions. The most identifiably destructive effects of corruption are it engenders bureaucratic inefficiency, disincentivizes investment, and?erodes human rights.?

According to Dimant and Tosato (2018), there is a causal relationship between corruption and?bureaucratic inefficiency. Because beneficiaries of an inefficient system have no incentive to change the system, corrupt public service would deliberately encourage the perpetuation of bureaucratic inefficiency that they benefit from. This results in a viscous cycle characterized by a continual crossbreeding between bureaucratic inefficiency and corruption.??Additionally, because corruption reduces real or perceived return on investment it therefore disrupts both local and foreign direct investment flow into corrupt environments (Lekota 2020). This has a negative influence on infrastructure development, job creation, and gross domestic production. The consequence of lackluster investment complimented by reduced tax revenues, increased indirect tax or cost of doing business, and misallocated resources; is the curtailment of economic growth. Related to low levels of economic growth is biased taxation, poor delivery of social services including health and education that are all foundational to socio-economic inequality.?

The relationship between corruption and?socio-economic?inequality exacerbates creation of an environment within which the richest and better networked members of society benefit disproportionately and perpetuate their privileged position (Urbina, 2020). The resultant corruption-induced regressive tax system entails the furtherance of disproportionate taxation on the poorer members of society (Hendriks, Keen, & Muthoo, 1998). According to Uslaner (2008), corruption and inequality are self-reinforcing to form inequality trap wherein society’s loss of trust in the government results in more corruption and more inequality.?

Of more detriment to economic growth is the tendency of entrepreneurs in a corrupt economy to go underground into a shadow economy. Another detrimental effect of corruption according to?Dimant and Tosato (2018), is increasing brain drain as high skilled members of the population emigrate due the decline in educational standards, unemployment, and other push factors adversely affecting the standard of living. Lower levels of public income results in increased public deficits perpetuating some of the ills identified earlier such as income inequality and deterred economic growth. Finally, brain drain and decline in quality of education and other social services resulting from high levels of corruption reduces the productivity of human capital.

Scholars have differentiated between the “sand the wheels” and “grease the wheels” hypotheses of corruption. The former infers that “corruption deters economic growth by affecting expectations, incentives, and allocation of resources” (Urbina, 2020, p. 68) and the latter infers that corruption spurs economic growth because it promotes efficiency in overregulated conditions allowing private businesses to avoid government restrictions. The respective conjurers of these hypotheses base their arguments on the interpretation of the effects of corruption on?investors’ expected returns and efficiency in the allocation of resources.

The proponents of “sand the wheels” conjure that corruption lowers investment because of its contingent and reducing effects on the return on investment, disrupts efficient resource allocation, and causes political instability.??Corruption breeds transactional uncertainty because agreements based on corrupt negotiations are unenforceable (Boyco et al., 1996) and reduces real ROI because investors pay bribes to win contracts (Campos et al., 1999).??The argument of corruption reducing efficient resource allocation emanates from the practice of politicians directing more resources to projects they have a corrupt interest in rather than those with optimal developmental impact.

The supporters of “grease the wheels” hypothesis argue that corruption promotes efficiency in overregulated economies. This argument is based on the belief that wrong policies can be corrected through bad business practices such as corruption. This is the same argument a fireman in hell would advance that to reduce the fire he suggests adding more fuel to accelerate the dissipation of the source of fire. Méon and Weil (2010) posited that this attitude is premised on a view that a solution to bureaucratic inefficiency is the application of “grease” money to lubricate project delivery.??

It is a known fact that corruption tends to thrive in developing countries where extraction of natural resources represents a significant?economic activity.??According to?Transparency International (2023) ranking countries such as Somalia, South Sudan, Equatorial Guinea, Libya, Nicaragua, DRC Congo, Iraq, Nigeria, and Paraguay are among top hundred most corrupt countries. South Africa at 72nd?is closer to the median levels together with Ghana, Senegal, and Jamaica. On the opposite side of the rankings, Denmark, New Zealand, Finland, Norway, and Singapore are regarded the least corrupt.

If we were to ignore other external factors such as history of colonialism, conflict, and geopolitical positions, one of the common characteristics of countries ranked among the highest in levels of corruption is that their economies are least industrialized and therefore depending on extraction of natural resources. Somalia, for instance, has large deposits of uranium and unexplored bauxite, copper, and oil. South Sudan is endowed with petroleum, copper, chromium, and gold. DRC Congo is a significant world supplier of cobalt, gold, and copper. The vice is versa on countries with least corruption. Finland major natural resource is trees, Denmark has sand, limestone, salt, and natural gas. New Zealand has limestone, iron-sands, gold, and silver. The point is made that both level of development and natural resources endowment affect the level of corruption in a country, therefore the solution we seek should fuse both political and economic prescriptions.

Resolving Corruption

Although possible solutions to corruption would need some localization, there are solutions that should be effective to deal with generic corruption. The starting political action should entail change of leadership and re-orientation followed by the restructuring of natural resource ownership and professionalization of management and governance structures of public assets. Import and export controls should also be reviewed to regulate conditions of export volumes vis a vis satisfaction of local resource requirements. Next should be the strengthening of anti-corruption laws in both public and private sectors and implementation institutions. All these measure, need to be undergird by a gradual but deliberate social transformation of society to return to the core cultural principles, moral or spiritual values, and shared economics. These guidelines towards a new society are generally embodied in the MAAT and UBUNTU principles.

In summary, to deal with corruption and put our society on a sustainable economic growth trajectory that would have real empowerment of our people Africa needs to:

-???????Engagement in a stealth but radical revolution entailing simultaneous nationalization, commercialization, and industrialization in targeted sectors and institutions.

-???????Punishment of corruption, violent crimes, and immorality.

-???????Pan-Africanization of key institutions related to central banking, law enforcement, security and protection. services, mining and financial services policies.

-???????Redefinition of new relationships with global partners.

-???????Designing of a new culture including language, spirituality, morality, and values. One of the effective ways of achieving this would include re-creation of our original icons.??

Transformation and revolution are two constructs that entail similarities in design and desired goals but may have fundamentally different applications and implementation pace. As in any good meal that balances taste and nutrition, we find food stuff that may provide comparable dietary value but require different methods and pace of preparation. The key to all these is effective strategy implemented through balanced and effective project management.?

References

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Ali, A.M. and Isse, H.S. (2003) Determinants of economic corruption: a cross-country comparison.?Cato Journal?22, 449–466.

Angeles, L. and Neanidis, K.C. (2015) The persistent effect of colonialism on corruption.?Economica?82: 319–349.?

Bai, J., Jayachandran, S., Malesky, E.J. and Olken, B.A. (2013) Does economic growth reduce corruption? Theory and evidence from Vietnam. National Bureau of Economic Research, No. w19483.?

Badinger, H. and Nindl, E. (2014) Globalisation and corruption, revisited.?The World Economy?37(10): 1424– 1440.?

Boyco, M., Shleifer, A., and Vishny, R. (1996). A theory of privatization.?The Economic Journal?106, 309-319.

Campos, J. E., Lien, D., and Pradhan, S. (1999). The impact of corruption on investment: Predictability matters.?World Development 27(6), 1059-1067.?

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Dollar, D., Fisman, R. and Gatti, R. (2001) Are women really the “fairer” sex? Corruption and women in government.?Journal of Economic Behavior and Organization?46(4): 423–429.

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