Why is it that some developing countries are experiencing rapid economic growth while others are falling more and more behind? Recent empirical evidence suggests that a key distinguishing factor between high growth and low or negative growth countries is the quality of governance, i.e. the quality of its economic, social and political institutions. Governance and corruption are closely interlinked. Corruption undermines good governance, and bad governance produces corruption. Corruption dampens economic growth through many channels. The section on Corruption and Fiscal Stability describes how corruption reduces government revenue, therefore limiting the state's capability of investing in education, health, infrastructure, harming the country's social and economic development. In this section we are reviewing the consequences of corruption for growth through its effects on public investment and private investment.  Corruption increases public investment while decreasing its quality and productivity. Construction companies mark up their bids in order to include kickbacks for public officials presiding over procurement decisions and other counterparts demanding bribes throughout the construction process. Or the contractor uses materials of inferior quality or in reduced quantity to reduce cost on the assignment. Since everyone involved in the project benefits from kickbacks no one speaks up, at the cost of the beneficiaries who have to bear the cost of poor quality infrastructure. To make things worse, corruption tends to discourage investments in operation or maintenance, further undermining the quality and sustainability of the initial investment. The result is public infrastructure of inferior quality, which leads to inefficiencies in transportation with all its spill-over effects for public and private sector as well as individuals. Tanzi and Davoodi were able to establish this correlation empirically using data on the quality of roads, power outages and railway diesels. In contrast, sectors which offer less opportunities for bribes tend to attract less public spending. Mauro found tentative evidence that corruption alters the composition of public expenditures: higher levels of corruption are correlated with lower levels of spending on education. [Mauro 1997.]. Corrupt countries also generally spend more public funds on payrolls of public officials, which is also associated with lower levels of economic growth. Corruption and Private Investment In Indonesia, 56% of firms would be willing to pay additional taxes, and 50% of these up to 5% of their revenue if corruption were to be eliminated, which serves as a proxy for estimating the cost of corruption on businesses. | A large portion of how corruption hampers growth, however, is through its deterring effect on private investment. Levels of investment, both, foreign and domestic depend on the quality of the business environment of a country. The business environment among others is a function of the rule of law, in particular the stability of rules and regulations governing business transactions, political stability and transparency. Corruption increases the uncertainty of doing business because it erodes the rule of law and is associated with high levels of bureaucratic redtape. |
Red tape delays business transactions but also bears uncertainty since often, the price ofgrease moneyis unknown and – depending on the culture of bribing in that specific country – bribing is not necessarily a guarantee for delivery. Some describe corruption as a tax which adds to the cost of doing business. Various business surveys have concerned themselves with the prevalence of corruption in everyday business operations. An empirical analysis of transition economies in Eastern Europe and Central Asia showed that investment levels in countries with high levels of corruption were 6% lower on average than in countries with medium levels of corruption (21% and 27% respectively) [The World Bank. 2000]. The same survey revealed that firms operating in environments with high levels of administrative corruption performed significantly poorer than firms in countries with moderate levels of corruption. | A study examining the impact of corruption on foreign direct investment found that an increase in corruption comparable to the difference between Singapore (which is widely perceived to have low corruption) and Mexico (which typically ranks around the middle of countries in the world in rankings of corruption perceptions) would have the same negative effect on foreign direct investment as a 50 percentage point increase in marginal tax rates on foreign investment income.” World Development Report 2002 | In Russia and Ukraine 90% of managers consider it to be normal to pay bribes to public officials. [Johnson et al 2000]. A survey of firms’ varying bribe payments within Uganda prompted the insight that public officials tailor their requests for bribes to the profitability of the company and the firm’s leverage in the negotiation. This means that firms possess bargaining power which they could increase by establishing business associations to coordinate their strategies and exchange best practice vis-à-vis public officials. [Svensson. 2001] Another channel through which corruption affects growth is through the effects of rent-seeking activities on innovation. In countries with a weak legal framework, rent-seeking activities reduce the centives to invest in innovation, therefore reducing the opportunities for in expanding economic activity [Murphy et al., 1993]. Overall, corruption deters investment and undermines competition in an economy and therefore affects its productivity. |
This page was developed by Stefanie Teggemann. |
RSS