File Name: corruption and national development .zip
Corruption is believed to be widespread and it adversely affects countries at different intervals, in different degrees. Corruption scandals show that bribes are commonplace and that even societies that are supposedly free of corruption are affected by it.
Nigeria has been increasingly portrayed as a very corrupt nation state both internationally and locally. Although one is not implying that it is only Nigeria that suffers from this impasse. However, the disturbing issue is that the case of Nigeria is so alarming that it threatens its national development. It is therefore, the view of this paper to pry into reasons accounting for this ugly state of affairs with a view to arresting the situation.
Erwann Sabai and Dr. Chirok Han from University of Auckland for their valuable comments and to the following people: Dr. Shahid M. Alam of Northeastern University, Boston, for their intuitive comments; and Ms. However, the authors are responsible for any errors or omissions, which are of course unintended. Using panel data from the International Country Risk Guide corruption index, institutional quality and political stability indices and several state variables for developed and developing countries, this paper explores the linear quadratic empirical relationship between corruption and economic growth.
Empirical literature has shown a linear relationship between corruption and economic growth but hasn't differentiated between growth-enhancing and growth-reducing levels of corruption. An analysis based on the generalized method of moments estimation shows that a decrease in corruption raises the economic growth rate in an inverted U-shaped way.
This result is robust with respect to alternative specifications of the econometric relationship. Keywords: corruption, economic growth, institutional quality, bureaucratic efficiency, political stability. Until the s, scholarly research on corruption was largely confined to the fields of sociology, political science, history, public administration, and criminal law.
Since then, economists have also turned their interest to this topic, largely on account of its increasingly evident link to economic performance. Much of the early research focused on weaknesses in public institutions and distortions in economic policies that gave rise to rent-seeking by public officials and the incubation of corrupt practices. Concern about the negative social and economic impacts of corruption has grown rapidly, and major international organizations consistently claim that corruption hinders economic growth.
Theoretical studies suggest that corruption may counteract government failure and promote economic growth in the short run, given exogenously determined suboptimal bureaucratic rules and regulations. As government failure is itself a function of corruption, however, corruption should have detrimental effects on economic growth in the long run.
In practice, economists care more about such long-term consequences of corruption than the short-term effects. Corruption can affect resource allocation in two ways. First, it can change mostly private investors' assessments of the relative merits of various investments.
This influence follows from corruption-induced changes in the relative prices of goods and services as well as of resources and factors of production, including entrepreneurial talent.
Second, corruption can result in resource misallocation when decisions on how public funds will be invested, or which private investments will be permitted, are made by a corrupt government agency.
The misallocation follows from the possibility that a corrupt decision-maker will consider potential "corruption payments" as one of the decision criteria. Ranking of projects based on their social value may differ from a ranking based on the corruption income that the agent expects to receive.
Empirical literature in the field has consistently reported a negative correlation between economic growth and the level of corruption, and evidence on beneficial effects has been scarce at best Mauro, ; Barreto, ; Tanzi, Mauro and Li et al. The authors also suggested that the direction of causality is from corruption to development, rather than vice versa.
While most of the theoretical literature has taken a microeconomic approach Shleifer and Vishny, , ; Cadot, , in Section 3 we present growth modeling of corruption to show the impact of corruption and institutional variables on economic growth.
In this model, weak institutions, political instability and inefficient bureaucracy are detrimental to economic growth. Specifically, we find corruption to be growth-enhancing at low levels of incidence and growth-reducing at high levels of incidence.
This implies that the existence of a positive level of corruption that maximizes long-run growth has two separate effects. The main purpose of this study is to increase understanding of the relationship between corruption and economic growth using panel data. An attempt has therefore been made in the present study to understand the problem of corruption, weak institutions, inefficient bureaucracy and political instability through empirical evidence and to offer policy recommendations based on findings.
The specific objectives of the study are: a specification of a model of corruption based on a theoretical foundation for cross-country analysis; b to determine the growth maximizing level of corruption; and c to determine whether it is the combined effect of corruption and institutional quality that causes growth. Consistent with the ob jectives of the study, the following hypotheses will be tested:.
Hypothesis 1: In the linear specification, corruption is negatively correlated with real GDP. In the case of non-linear specification, a moderate level of corruption positively affects real GDP, while a high level of corruption is detrimental to growth. Hypothesis 2: Other things being equal, better institutional quality tends to be positively related to economic growth. The study proceeds by reviewing the existing literature on institutions, corruption, and economic growth in Section 2.
Growth modeling of corruption on the basis of the theoretical framework described in Section 2 is presented in Section 3; this section also provides a detailed discussion of data, construction of variables and estimation techniques.
The empirical analysis of the results is carried out in Section 4. Finally, Section 5 summarizes the main findings of the study to offer policy recommendations. Corruption is a complex and multifaceted phenomenon with multiple causes and effects, as it takes on various forms and functions in different contexts.
The phenomenon of corruption ranges from a single act of an illegal payment to the endemic malfunction of a political and economic system. The problem of corruption has been seen either as a structural problem of politics or economics, or as a cultural and individual moral problem.
The definition of corruption consequently ranges from the broad terms of "misuse of public power" and "moral decay" to strict legal definitions of corruption as an act of bribery involving a public servant and a transfer of tangible resources Andvig et al.
The decisive role of the state is reflected in most definitions of corruption, which view it as a particular and perverted state-society relationship. Corruption is conventionally understood and referred to as the private wealth-seeking behavior of someone who represents the state and public authority. It also includes the misuse of public resources by public officials for private gain.
The encyclopedic and working definition used by the World Bank , Transparency International and others is that corruption is the abuse of public power for private benefit or profit.
Another widely used description is that corruption is a transaction between private and public sector actors through which collective goods are illegally converted into private goods Heidenheimer et al. This point is also emphasized by Rose-Ackerman , who says corruption exists at the interface of the public and private sectors.
Nye defines corruption as "behavior that deviates from the formal duties of a public role elective or appointive because of private-regarding personal, close family, private clique wealth or status gains. Theoretical and empirical background. A natural starting point for the economic analysis of corruption is to treat it as any other crime and apply to it the standard economic model of crime developed originally in Becker and extended subsequently by many authors such as Polinsky and Shavell , In this basic model, persons contemplating corruption take into account the expected benefits in the form of bribes, favors or payment in kind and compare the monetary equivalent of these gains with the expected costs in the form of the probability that they will be detected and the monetary sum or equivalent of the punishment should they be convicted.
Such a formulation has close parallels with the application of Becker's model to the economics of tax evasion by Allingham and Sandmo Corruption is predicted to occur if the net expected gain is positive. The theoretical and empirical literature on corruption has generated a rich debate over the last 30 years.
On one hand, researchers such as Krueger , Myrdal , Shleifer and Vishny , Tanzi , and Mauro , have argued that corruption is detrimental to economic growth. They point out that corruption modifies government goals and diverts resources from public purposes to private ones, thereby resulting in a deadweight loss to society. On the other hand, Leff , Huntington , and Friedrich have suggested that it is also possible for corruption to be beneficial for economic growth. They argue that if the government has produced a package of pervasive and inefficient regulations, then corruption may help circumvent these regulations at a low cost.
Under this scenario, it is plausible that corruption may improve the efficiency of the system and actually help economic growth. Another argument in favor of corruption views bribery as "speed money," that is, payments that speed up the bureaucratic process, or payments that are intended to "mediate" between political parties that would not reach agreement otherwise.
Then, as long as the time consumed by administrative procedures is reduced by the bribe, the bribers could be made better off. Lui , for example, presented a model in which the costs of "standing in line" are minimized by the use of bribes.
Kaufmann and Wei , however, contested the empirical validity of this hypothesis. Ehrlich stated that corruption and per capita income are expected to be negatively correlated across different stages of economic development.
The difference between corruption and crime is that corruption depends on investment in political capital as a ticket for entry to the bureaucratic ranks, unlike entry to many criminal activities, which requires little skill.
The author argued that such an investment has repercussions on the incentive of productive agents to invest in human capital. The relationship between corruption and the economy is thus explained as an endogenous outcome of competition between growth-enhancing and socially unproductive investments and its reaction to exogenous factors, especially government intervention in private economic activity.
Cartier-Bresson suggested five economic conditions that encourage corruption to flourish in a society. The first of these conditions is the existence of an exploitable natural resource e. Secondly, the general scarcity of public assets relative to demand accompanied by policies of fixed official prices creates opportunities for informal rationing through bribery. Thirdly, low wages in the public sector are also likely to be associated with extensive low-level corruption payments. Finally, economies in transition are likely to experience particular problems that cause corruption as they undertake privatization and establish the relevant legal framework of corporate and contract law, etc.
Empirical literature in the field has consistently reported a negative correlation between economic growth and the level of corruption, and the evidence for beneficial effects on growth has been scarce at best. Keefer and Knack also reported a negative correlation between corruption and GDP growth.
Others such as Hall and Jones and Sachs and Warner have obtained similar results. Tanzi and Davoodi found evidence of bureaucratic malpractice manifesting in the diversion of public funds to the areas where bribes are easiest to collect, implying a bias in the composition of public spending towards low-productivity projects e. Thus, abuse of public office may not only reduce the volume of public funds available to the government through corrupt practices in tax collection , but may also lead to misallocation of those funds.
According to Lambsdorff , empirical research on the causes of corruption has focused on political institutions, government regulations, legal systems, GDP levels, salaries of public employees, gender, religion and other cultural dimensions, poverty, and the history of colonialism.
Lambsdorff stated that it is often difficult to assess whether corruption causes other variables or is itself the consequence of certain characteristics. Empirical research based on various corruption indexes has reported a correlation between certain forms of government regulations, poor public institutions, poverty and income inequality.
But conclusions with respect to causality are vague. A major obstacle for cross-national comparative empirical research is the difficulty in measuring the levels of relative corruption in different countries. However, in recent years economists and political scientists have started to analyze the indexes of perceived corruption prepared by Political Risk Services 6 and various business risk analysts and polling organizations.
A number of econometric studies using these indexes as explanatory variables examine historical, cultural, political and economic determinants of a variety of indicators of government quality, including corruption e.
Thus, most of the empirical evidence seems to be consistent with the theories that hold corruption to be purely detrimental. However, all of these empirical studies assume that corruption has only a monotonic impact upon economic growth, and therefore, they provide an incomplete test of the hypotheses that have treated this impact as a differentiated phenomenon depending on the extent of the corruption. A common view among economists is that corruption affects output by distorting the allocation of resources.
This view contrasts with the hypothesis prevalent among many economic historians and political scientists that in an economy with a rigid bureaucracy, corruption may be beneficial in that it "oils the wheels of bureaucracy. This study follows Hall and Jones in taking the view that TFP mainly reflects market efficiency. Following the empirics of Mauro , we develop and modify the growth model of corruption.
Since the author does not test whether there is a growth-enhancing or growth-reducing level of corruption, one wonders whether corruption still affects economic growth adversely if more policy controls are added. It is apparent from the specification used in Mauro's study that the linear framework can only provide a partial test of the theory, as it only captures the linear ef fect and the growth-maximizing level of corruption is forced to lie in a corner.
The analysis starts from the standard production function, which extends Solow's original approach to the growth accounting process. We can model the aggregate production function in the following way. Dividing Equation 2 by L and then taking natural logarithms, we obtain:.
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Though largely ignored for many years, interest in world wide corruption has been rekindled by recent corporate scandals in the US and Europe. Corruption in the developing nations is said to result from a number of factors. Mass poverty has been cited as a facilitating condition for corruption just as an inability to manage a sudden upsurge in mineral revenues has been credited with breeding corruption and adventurous government procurement among public officials in countries like Nigeria and Venezuela. Virtually all developing nations that have serious corruption problems also have very limited economic freedom and a very weak enforcement of the rule of law. In such nations, corruption represents a regressive taxation that bears hard on the poor. It has a dampening effect on development and it could result in the production of inferior goods as companies find ways to accommodate under-the-table payments.
Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. Corruption is so endemic in Nigeria in such a way that the entire fabric of the society is affected. Save to Library. Create Alert. Launch Research Feed.
Corruption is a constant in the society and occurs in all civilizations; however, it has only been in the past 20 years that this phenomenon has begun being seriously explored. It has many different shapes as well as many various effects, both on the economy and the society at large. Among the most common causes of corruption are the political and economic environment, professional ethics and morality and, of course, habits, customs, tradition and demography.
PDF | On Jan 1, , Samson Akpati Nzeribe published Corruption and National Development: The Nigerian Experience | Find, read and cite.
Erwann Sabai and Dr. Chirok Han from University of Auckland for their valuable comments and to the following people: Dr. Shahid M. Alam of Northeastern University, Boston, for their intuitive comments; and Ms. However, the authors are responsible for any errors or omissions, which are of course unintended.
Economics of corruption deals with the misuse of public power for private benefit and its economic impact on society.
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