Letters & Opinion

The Economics Of Corruption

By Clement Wulf-SoulageIN 1999, I had the privilege of attending an insightful seminar and workshop dubbed “The Economics of Corruption” conducted by the globe-trotting Professor Johann Graf Lambsdorff – internationally renowned for his work on measuring corruption and the behavioural economics of reform. What made this seminar particularly interesting and memorable is the fact that Graf Lambsdorff himself had designed the Corruption Perceptions Index on behalf of Transparency International, the global corruption watchdog – and had supervised its production until 2008.

Present at the workshop were advanced level students and public officials (including permanent secretaries) from around the world who came seeking to understand the anatomy of corruption (demand and supply theories) and how it affects public welfare, productivity, capital flows and economic growth. I recall participating in a trenchant discussion on “Corruption and Reciprocity” where each participant was asked to identify and report on an egregious case of corruption in their respective countries.

Of course, I had no difficulty at the time finding a corruption narrative, as just a few years previously, Saint Lucia had been rocked by a scandal over the use of United Nations funds which had implicated the country’s then UN Ambassador along with several senior government officials.

At any rate, one of the points Graf Lambsdorff drove home was the fact that developed countries were just as guilty as developing countries on corruption – generally defined as the misuse of public power for private benefit. As in most developed countries, the issue is not specifically bribery or embezzlement, but a lessening of political transparency in campaign finance, regulatory oversight and lobbying. For too long, we have harboured the myth that corruption only happens in poor, developing nations saddled with cumbersome regulations, excessive bureaucracy and market restrictions – exacerbated by poor governance structures and weak institutions.

But it would appear that industrialized nations have developed more sophisticated ways to conceal their own corruption, which makes it harder to track. In the years leading to the introduction of the Euro, creative accounting machinated wisely by the Greek political establishment was used to mask the true extent of the deficit and circumvent the EU Maastricht deficit rules. In May 2015, several FIFA officials were arrested in raids at a hotel in Zurich over allegations of racketeering, wire fraud and money-laundering conspiracies spanning 24 years. Also just recently, the German Football Association President resigned over a controversial €6.7m payment to FIFA that was allegedly used to bribe officials to vote for Germany’s World Cup bid. What these developments demonstrate is that corruption transcends geographical and cultural boundaries and has assumed a single global standard.

Even so, corruption research in economics has a long history – centering around what actually determines graft, the cataclysm it has wrought on society and how it can be reduced in the most effective and efficient way. The challenge this global epidemic poses to contemporary society is tremendous as it can easily undermine good governance and lead to unsustainable wastage of scarce resources. Further, research has revealed the negative impact of corruption on levels of investment, which is “the most important causal link to the impact of corruption on the growth of GDP.” Alas, in some countries, corruption has become a way of life – hampering development to the point where special government departments and ministries have had to be set up to deal solely with the problem.

The Indian government, for instance, has set up special councils to deal with the scourge of corruption because they believe that it, like cancer, can metastasize beyond the confines of officialdom to infect the behaviour of the general population. Moreover, it threatens to distort public policy – systematically percolating into vital sectors and industries in the economy, and hurting those who can afford it least. In other words, not only does corruption exacerbate the inequality trifecta (income, wealth and opportunity) and affect the provision of basic public services, it also affects the poor disproportionately (in essence a tax on the poor). When economic conditions are bad in a country where political corruption is widespread, it’s only a question of time before violence erupts. On that calculus, the Arab Spring amounted to a mass uprising against kleptocratic practices.

Citing the “invisible foot” (which shows that the unreliability of corrupt counterparts induces honesty and good governance) as a novel strategy to fight corruption, Graf Lambsdorff believes that poor institutional conditions can provide fertile ground for corruption to flourish; however they are often not the basis but themselves a consequence of corruption. In addition, he has identified the following as fundamental causes of corrupt behaviour: lack of press freedom, availability of raw materials, a culture of reciprocity, lack of rights for women and lack of judicial independence.

Many questions have also been raised in terms of the correlation between corruption and international aid. When international donors provide aid packages without proper monitoring and assessment mechanisms, this can open the door to opportunism leading to graft and corruption. According to the Department for International Development in the UK: “Weak governance emerges from the evidence review as one of the fundamental leading causes of corruption. The political and economic opportunities that different political systems present, as well as the strength and effectiveness of state, social and economic institutions, shape the conditions in which corruption can thrive. Centralisation of power, lack of political competition and weak accountability mechanisms afford too much discretion.”

Transparency International, the global corruption watchdog, has developed several tools including the Corruption Perceptions Index (how corrupt the public sector is perceived to be), Bribe Payers Index, Global Corruption Barometer and Financial Secrecy Index – used to measure and monitor corruption around the world. The institution has reported that corruption still remains a global threat whereby “bribes and backroom deals don’t just steal resources from the most vulnerable – they undermine justice and economic development, and destroy public trust in government and leaders.”

In its 2013 report, the Berlin-based institution explains: “The Corruption Perceptions Index 2013 serves as a reminder that the abuse of power, secret dealings and bribery continue to ravage societies around the world. No country has a perfect score, and two-thirds of countries score below 50. This indicates a serious, worldwide corruption problem.”

In 2013, St. Lucia ranked 22 among 177 countries in the world retaining the same ranking and score of 2012. However, in the 2014 index, which Denmark, New Zealand and Finland topped as the least corrupt nations, Saint Lucia together with Brunei and Equatorial Guinea were not included owing to insufficient survey information. For that year, Sudan, North Korea and Somalia ended at the bottom of the list.

Although there isn’t sufficient evidence to show whether corruption is truly a men’s game, it is generally accepted that higher levels of women participation in public life are associated with lower levels of corruption. Still, by any measure, corruption in genderless and cuts across political parties, cultures and countries. Going on the conclusions of Graf Lambsdorff, “corruption is highly context-specific as it depends on the institutional setup, stage of development, but also norms and culture.” For the developing world especially, targeting the problem can help governments unlock critical funds for sustainable development.

For comments, write to ClementSoulage@hotmail.de – Clement Wulf-Soulage is a Management Economist, Published Author and Former University Lecturer.

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