A number of researchers found that corruption discourages investment, and affect growth, increase inequality. Nowadays corruption is thought by many to be the primary cause of underdevelopment. Shleifer and Vishny (1993) is the classic theoretical discussion of how corruption undermines economic activity. Mauro (1995), Knack and Keefer (1995) offer empirical accounts of the cross-country relationship between corruption and growth. The literature on corruption is reviewed by Bardhan (1997) and Azfar (2002a).
I would like to give my understanding from my observations of how corruption affects growth.
Corruption can hurt growth through many channels.
and fiscal stability: The tax evasion, weak tax administration harms the government revenue. It distorts the way the government uses its money. Reducing its revenues the government reduces the wages and so decrease the standard of living. The expenditures that the government is supposed to do in order to provide public schools, health, roads, and other public goods, can be less than they would otherwise be. The government spending for public investments goes where the corrupter in the government office and particularly politicians gain the most, form shifting investment from more productive projects and investments to less productive ones. This will automatically push growth downwards. So the expenditures are high but not useful for the economy. Even the best possible project, no matter how helpful and useful it can be to the public and economy, can not be realized because it does not serve the interests of the official who wants to enrich himself. P. Mauro in his study “Why worry about corruption”, found robust evidence that government spending on education as a ratio to GDP is negatively and significantly correlated with corruption; the more corruption the less spent on education). He found as well similar components of government expenditures (social insurance and welfare payments) are also negatively associated with corruption index.
Privatization is another weak point in fiscal policy. Privatizing the state owned companies to nonefficient companies because of the bribes that the officials first push the government revenues down and the second this enterprise would not be productive for the economy, reducing the production, increasing the demand for imported goods hence increasing the deficit.
As the results we would have low revenue and high but not useful expenditures. So we could have a persistent fiscal deficit which cause monetary problem as well financing continuously this deficit by reducing the foreign reserves of the Central Bank.
Investment: Corruption threatens growth by discouraging foreign direct investment. Investors are very careful on what is happening in the country they are investing the capital because corruption increases the costs of transactions. The World Bank estimates the cost of corruption accordingly: if just 5% of the value of all direct foreign investment and imports go into countries with extensive corruption, the yearly take would total around US $80 billion. Many developing countries try to attract foreign direct investment (FDI) using different promoting policies like soften taxes. Developing countries have the advantage of being labor abundant so the labor is cheap attracting more the foreign direct investment. However, mainly local corruption may discourage more there investment than what cheap labor or generous taxes can attract. Shang-Jin Wei in his study “Local Corruption and the Global Economy” using data on a matrix of bilateral FDI from 14 source countries to 41 host countries, found the negative correlation between corruption, specially local corruption and FDI. Its negative effect on inward FDI, for example, can easily offset a generous tax giveaway typical in developing countries. He found that the host government's corruption level in Singapore and in Mexico has the same negative effect on inward FDI as if the tax rate increases by 42 percentage points.
Corruption affects the private domestic investment as well. As the bribe that the investor should give to invest their capital, the willingness to invest decline, hence the investment and the GDP. P. Mauro in his paper “Corruption and Growth” 1995, found that corruption lowers private investment, reducing economic growth. In his survey he conducted in 67 developing countries, he found negative associations between corruption and investment. He found that the corruption and bureaucratic efficiency are significantly and robustly negatively associated with investment. A one-standard deviation decrease corruption index is associated with an increase in the investment rate by 2.9 per cent of GDP. He used the investment to show the growth because the component of investment has been found to be more closely associated with economic growth (De Long and Summers 1991). So as corruption lowers investment hence retards growth.
Finally, corruption also may raise the probability of a currency crisis by altering the composition of a country's capital inflows. As the FDI are the one of the most important financing of current account deficit, declining them consistently, we will face a persistent current account deficit bringing balance of payments crises. One the other side the hight and persistent fiscal deficit financed by reducing the foreign reserves of Central Bank, predicts a future currency crisis. The economic crisis in Asia, at least partially attributed to corruption.
It is a saying in Albania: Every bad thing has its good side. Can we say the same thing for corruption?
Based on the experience of my county sometimes I see corruption as a response to justifying bureaucratic regulation. I can argue this idea with the black market in Albania. In this situation bribes can help an entrepreneurial activity to build up, using the capital coming form money laundering in black market but this activity in the future have good impact in production in the economy increasing GDP and growth. Natasha Kogan, in her paper “Economists debate its nature, costs, and consequences” argue that sometimes exist a positive relationship between corruption and economic growth assuming that two conditions are true: government policies are not conducive to economic growth, and business incentives exist to invest corruption capital in the country rather than taking it abroad. She mentioned that in 19th century the lawless activities of the American "robber barons" are often cited as an example of economic growth resulting from investment of capital obtained through corruption.” I think that this phenomenon (corruption) may be good only at the beginning of the process (in our case of Albania which is in transition period still), later on, if this phenomenon keeps going the economy will suffer the consequences.
How to fight corruption?
Is eliminating corruption a myth or reality? I think that nothing is impossible as nothing succeeds like success. But if you don’t fight, the corruption phenomenon will remain a reality.
Actually there is no any universally applicable strategy to fight corruption. The anticorruption strategy should be created based on the characteristic of a country. Albania faces a high corruption spreaded everywhere. So it requires institutional mechanisms appropriate to face the main factor of causing this phenomen (corruption) in albanian reality like poverty, new weak institutions, missing of rules and law, economic and social crisis happend in the past, the lack of experience in transition period and the personal greedness. Changing the reality is difficult and takes time. It requires cooperation of three groups of society: government-private sector-civil society. I would start fighting corruption in three main elements:
- The cosolidation of the legislation framework
- Improving the government institution
- Increasing the participation of the public and NGO
1. “The more corrupt the state the more numerous the laws”. The first is simplification of rules and laws and standartisation of the legislation. Many of our rules and procedures breed corruption. The Albanian legislation should be improved in this direction. Looking from the credible point of view, clear laws and right property are very important for the outside investors.
2. In order to sucess in reforms one important step should be simplifying the institutions and public services. This requires:
- Elimination of excess functions in the governmet oficces (public administration) which means simple institutions, small no of stuff with clear responsibilities and law abiding in terms of public services.
- Avoiding administrative procedures bureocracies. One important step should be the reforms in public procurement.
- Building a transparent system, easy to controll etc. One step is empowering the public and bringing in greater transparency
3. Important for a small country like Albania is increasing the incentives of the public and NGO participating in the reform against the phenomen. Some of the priorities are:
- Increasing the conscience of the Albanian society for the causes and the damages the corruption has on the society. NGO should be very helpful in this direction.
- Participating in the implementation of the reforms and measures for reducing the corruption.
- Encouraging the public with such objectives like association stabilization and the participating in the big family of Europe (EU), hence increasing their incentives to participate.
4. Increasing the cooperation between groups of interests in the fight against corruption.
Conclusion
I conclude that corruption retard growth through scaring off investors, causing high fiscal deficit, amplifying economic transaction costs, misallocating public resources, and can bring the economy in crisis. The strategies for fighting corruption depend on the characteristics of the country. For example for Albania faced with an unclear legal framework, weak institution as well as the culture should be taken important steps in dealing with these challenges. This requires time and participation of all forces government, private sector and NGO and the participation of the public as well.
References
- “The Persistence of Corruption and Slow Economic Growth” by Paolo Mauro
- “Corruption and Growth” by Paolo Mauro
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“Subverting Corruption" by Robert Klitgaard, IMF Finance and Development, June 2000.
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"Corruption and Development: A Review of Issues" by Pranab Bardhan, Journal of Economic Literature, September 1997.
- “Why to worry about corruption” by Paolo Mauro ©1997 International Monetary Fund February 1997
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“Economists debate its nature, costs, and consequences” by Natasha Kogan
“Local Corruption and the Global Economy” by Shang-Jin-Wei
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“Combatting corruption” by N. VITTAL