Friday, 27 July 2007

Corruption in a Developing Country Context

From theGlobalist comes an excellent easy to read summary of corruption in a developing country. China's rapid growth will cure some of the excess but it worth reminding ourselves of the impact of corruption can have on the development process.

Corruption in a Developing Country Context

Corruption plagues every aspect of society and causes more substantial damage in developing countries. As Ngozi Okonjo-Iweala, Nigeria's former Finance Minister, observed in her Sabot Memorial Lecture to the Center for Global Development, corruption affects all walks of life including education, governance and hinders progress in developing economies.

Viewed in its broadest sense, corruption is simply the misuse of public office or public assets for private gains.

It is also the misuse of these assets in a way that creates an unlevel playing field and that makes people feel injustice has been done. Perhaps this is why the average citizen in any country, in fact all of us, feel so badly about corruption.

Manifestations of corruption

Corruption may be manifested in various forms, such as theft, fraud, bribery, extortion, request for kickbacks, nepotism and patronage. A distinction is often made between grand and petty corruption.

In the case of grand corruption, big businesses are seen greasing the palms of senior state officials to receive favors.

And in petty corruption junior civil servants may be enticed to receive side payments or bribes to facilitate administrative arrangements for their clients. The existence of corruption clearly indicates that something has gone awry. And it is indeed symptomatic of weak governance and, more importantly, weak institutions.

Good governance

Of course, the desired outcome is that of good governance — a situation in which public institutions are strong, and public resources and public goods and services are managed efficiently to address the needs of society.

In the past, some skeptics often provided a rational defense for corruption based on economic efficiency arguments. It was argued that bribes helped in lowering the cost of doing business, in clearing the market, in providing incentive bonuses, and in distributing monopoly rents from a single agent to other officials who collude in sharing a bribe.

Bribes might be efficient

For example, it has been argued that in an environment where there are restrictive or bureaucratic government procedures — such as burdensome customs procedures or difficulties in obtaining licenses — bribes could actually provide an efficient way of reducing burdensome transaction costs.

Similarly, in cases where a government needs to allocate a scarce resource to various private agents, a bribe payment may help the market to clear more efficiently by allocating the resource to the highest bidder.

Bribes could also be explained as a rational incentive bonus to public sector workers whose wages may be artificially depressed.

Damaging development

The problem with many of these arguments is that they point to the microeconomic efficiency of an isolated corrupt event without examining its long-run systemic impacts.

In the long run, widespread corruption often creates much larger negative effects which can hinder the dynamic efficiency of an economy.

Affecting the poor

In Nigeria and many other countries in Africa where we have struggled with this problem, systemic corruption has diverted resources, bottlenecks in paying taxes,corrupted values, and led to rent-seeking activities in place of productive ones.

While corruption damages a country’s development, what is not at all sufficiently understood is that, in practice, it is highly regressive and inequitable. This is simply because corruption ultimately is most vicious on the poor. This may occur in various ways.

First, poor households are likely to be excluded from public services which require grease payments since the burden of corruption (that is, the cost of a bribe as a share of income) for the poor is likely to be disproportionately large compared to that of wealthier households. In this sense, bribery acts as a form of regressive taxation.

Public service

Second, in instances when public service delivery is weak due to corruption, the poor tend to be heavily disadvantaged as they may lack resources to obtain private services (in private clinics or schools, for example).

Teachers and lecturers take bribes to pass children on exams. Education, which is the one way for the poor to open doors of opportunity, is perverted — and such means of upward mobility is closed to them.

Roads to nowhere

Third, there is evidence that in a corrupt environment, government spending tends to be diverted away from social expenditures (such as health and education, which benefit the poor) towards infrastructure projects such as "roads to nowhere" or electricity projects that do not function.

Such projects are heavily transactional, yielding contracts that lend themselves to bribes.

When the environment becomes purely transactional with little focus on policy, the impacts on the poor is devastating. In fact, in a corrupt environment, actions of ministers and civil servants focus heavily on transactions rather than policies. Ample evidence exists in Nigeria of the so-called "juicy government ministries," such as Works, Power, Defense, Agriculture and Water Resources, which have large procurement budgets each year.

Non-economic effects

Finally, in instances when infrastructure projects are financed, procurement fraud leads to inflated contracts which further divert scarce public resources away from competing pro-poor programs.

A sad thing is that corruption could have even more pernicious non-economic effects on a society.

Nigeria is still fighting

In Nigeria, prior to the recent reforms, the culture of impunity and corruption that crept in under non-transparent, authoritarian regimes was so pervasive that it had corroded the psyche and moral fiber of Nigerian society.

There was complete invasion of our moral and values system, reaching well beyond the economic sphere as illustrated in the corruption examples above. Despite a vigorous fight launched against corruption, Nigeria is still fighting these ills today. But it is by no means the only country in Africa struggling with these issues at present.

Editor's Note: This feature is adapted from the Second Annual Center for Global Development (CGD) Richard "Dick" Sabot Memorial Lecture given by Dr. Ngozi Okonjo-Iweala on June 20, 2007.

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