COSTS IMPACT OF CORRUPTION
Democracy and good governance undermined: By subverting rule of law, reducing accountability, corrupting elections, and reducing equal provision of government services
Government institutions eroded: By siphoning off resources, maintaining incompetent public officials, and making government procedures and regulations overly complex
Legitimacy of government undermined: By reducing public trust in government
Economic development reduced: By creating economic inefficiencies, increasing the costs of doing business, reducing competition, and scaring potential investors
Economic distortion in the public sector: By diverting public funds from services that benefit citizens and reducing compliance with regulations
The body of theoretical and empirical research that objectively addresses the economic impact of corruption has grown significantly in recent years. It leads, in general, to the following conclusions:
Bribery is widespread, but there are significant variations across and within regions. For example, survey responses suggest that Botswana and Chile have less bribery than many fully industrialized countries.
Bribery raises transaction costs and uncertainty in an economy.
Bribery usually leads to inefficient economic outcomes. It impedes long-term foreign and domestic investment, misallocates talent to rent-seeking activities, and distorts sectoral priorities and technology choices (by, for example, creating incentives to contract for large defense projects rather than rural health clinics specializing in preventive care). It pushes firms underground (outside the formal sector), undercuts the state's ability to raise revenues, and leads to ever-higher tax rates being levied on fewer and fewer taxpayers. This, in turn, reduces the state's ability to provide essential public goods, including the rule of law. A vicious circle of increasing corruption and underground economic activity can result.
Bribery is unfair. It imposes a regressive tax that falls particularly heavily on trade and service activities undertaken by small enterprises.
Corruption undermines the state's legitimacy.
Some observers have argued that bribery can have positive effects, under certain circumstances, by giving firms and individuals a means of avoiding burdensome regulations and ineffective legal systems. But this argument ignores the enormous discretion that manypoliticians and bureaucrats have (particularly in corrupt societies) over the creation and interpretation of counterproductive regulations. Instead of corruption being the "grease" that lubricates the "squeaky wheels" of a rigid administration, it fuels the growth of excessive and discretionary regulations. The argument that bribery can enhance efficiency by cutting down on the time needed to process permits is also questionable. The possibility of bribery may be what causes the process to slow down in the first place.
Available empirical evidence refutes the grease and "speed money" arguments by showing a positive relationship between the extent of bribery and the amount of time that enterprise managers spend with public officials. Responses from more than 3,000 firms in 59 countries surveyed in the World Economic Forum's Global Competitiveness Survey for 1997 indicate that enterprises reporting a greater incidence of bribery also tend--even after taking firm and country characteristics into account--to spend a greater share of management time with bureaucrats and public officials negotiating licenses, permits, signatures, and taxes (Chart 1). And the evidence also suggests that the cost of capital for firms tends to be higher where bribery is more prevalent. Further, there is no empirical evidence that "East Asia is different," as some people argued during its years of high growth: the same relationship between bribery and additional management time spent with officials applies there as elsewhere.
In any society, there should also be a core of laws and regulations that serve productive social objectives, such as building codes, environmental controls, and prudential banking sector regulations. The grease argument is particularly troublesome in this context, since bribes can override such regulations and cause serious social harm, such as illegal logging of tropical rain forests or failure to observe building codes designed to ensure public safety. Bribers can also purchase monopoly rights to markets--as, for example, in the energy sectors in some formerly communist countries, where unprecedented amounts of grease payments buttress gigantic monopolistic structures. Finally, the obscure insider lending practices and improper financial schemes inherent in poorly supervised financial systems have contributed to macroeconomic crises in Albania, Bulgaria, and--very recently--in some countries in East Asia
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