causes and consequences of corruption

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Different forms of corruption, causes and consequences Class on Public Administration. Seminar 1 - Corruption in an international perspective L.A. Latif, Graduate Student

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Page 1: Causes and consequences of corruption

Different forms of corruption, causes and consequences

Class on Public Administration. Seminar 1 - Corruption in an international perspective

L.A. Latif, Graduate Student

Page 2: Causes and consequences of corruption

Table of Contents

Introduction Definitions

Corruption Bribes Kickbacks Embezzlement

Discussion: Causes, and Consequences

Recommendations

Reference sources

Page 3: Causes and consequences of corruption

Introduction: Definitions

Corruption Abuse of public office for private gain (World Bank). Misuse of entrusted power for private gain (Transparency

International). Abuse of power for private gain (European Union, 2003). Misuse of office for unofficial ends (Klitgaard, 1998)

Page 4: Causes and consequences of corruption

Bribes

Where a government official asks for or obtains money or favor in return for a preferential treatment or government services

Exchange of favors between 2 persons

2 people are involved: briber (a civilian) and a bribee (commonly a state agent where the state agent misuses his or her power)

3rd party is harmed (consequence)

Page 5: Causes and consequences of corruption

Embezzlement

Stealing!

Theft of resources. Disloyal employees steal from their employers

Different from bribe: only 1 person is involved

Overlap with bribery: A minister cannot directly transfer money to his/her account without reason. So, he/she obfuscates embezzlement by asking for fake receipts from non existent companies whose ownership is not disclosed. This introduces a fake client to the transaction and blurs the difference between bribery and embezzlement

Page 6: Causes and consequences of corruption

Kickbacks

Form of a bribe

“Pay me from what I pay you”

Difficult to distinguish between bribes and kickbacks

Any ideas??

Page 7: Causes and consequences of corruption

Causes and consequences: same coin?

According to Lambsdorff research on corruption is challenging because:

Causes of corruption seem to be its consequences; and Consequences of corruption seem to be its causes.

Page 8: Causes and consequences of corruption

Causes of corruption

Size of the public sector

Quality of regulation

Degree of economic competition

Structure of government

Amount of decentralization

Impact of culture, values and gender

Role of invariant features such as geography and history

Page 9: Causes and consequences of corruption

1. Size of the public sector –limited role of the state in the modern society

Economists (Boyko et al. 1996; Shleifer and Vishny 1998) argument: privatize (corruption can be contained by minimizing the public sector) – limit government power. Boomerang effect: Corruption could be shifted from the public to private sector. Example: ??? Regulation. IFFS, TP, TE, transition period and corruption

Empirical findings: NO: little support for this proposition. Little correlation between

overall size of the public sector and corruption. Gerring and Thacker (2005). Example: ???

YES: corruption significantly decreases with government size in high income countries. Graeff and Mehlkop (2003). Low income countries? Example: ???

Page 10: Causes and consequences of corruption

2. Quality of regulation

Argument: Bad regulation is a cause of corruption. So it is not the size of government but administration. Complicated rules. Example; The Advertising of bill boards case (boundaries of counties in dispute). Former Land Laws of Kenya: BRIBES

The opposite is also true that corruption causes bad regulation. For example in procurement and creation of monopolies (unregulated). The case of Pakistan and Geothermal power plant in Kenya: KICKBACKS

Bad regulation and good regulation: what is this? Ask whether a regulation creates opportunities for corruption. This will take us in circles and we will have no causal connection. Hints helping us detect corruption: Ambiguities, gaps in law, higher barriers to market entry, time for registering businesses

State intervention in private sector: too much or too little? Gerring and Thacker 2005 positive correlation between regulatory quality and absence of corruption.

Page 11: Causes and consequences of corruption

3. Degree of economic competition

Economists argue that the absence of economic competition results in corruption. When there is competition, politicians have less to sell. When competition is restricted, profits increase and politicians can take the opportunity to assign these profits – in exchange for a share.

Reverse is also true: private firms can give bribes to politicians to offer market restrictions. Example; The Pakistani gold case.

Openness as a variable: The less competitive a market environment, the higher will be the extent of corruption. Ades and Di Tella (1995).

Page 12: Causes and consequences of corruption

4. Structure of government

Page 13: Causes and consequences of corruption

Democracy: constitutional structure and electoral system

Schumpeter’s argument: democracy limits corruption because of: Political competition (checks and balances from opposition and

accountability). Treisman: there is a reduction but not immediately: IFF and the case of Zambian mining industry – Glencore (in

transition) Authoritarian (Goldenberg scandal) to democratic (Anglo

leasing). Democracy does not reduce corruption. Corruption increases where president is more powerful (presidential system versus parliamentary system as the cause of corruption)

Voting process (leads to monitoring. What about electoral rigging? Manow: political party influence in election reduces corruption. Disagree: it is a cause and consequence of corruption

Page 14: Causes and consequences of corruption

5. Decentralization: cause/consequence

Argument: can reduce corruption because brings government close to people, can work where there is good governance.

Corruption is high when spending is decentralized while revenue collection remains in control of the central government. The CDF system in Kenya as example

Goes to the earlier argument on size of government

Introduced kickbacks in award of local government contracts: case of Nairobi city council

Triesman (1999), Adsera et al (2000) and Panizza (2001) find no significant impact between between decentralization and corruption

Goldsmith (1999), Kunicova (2005), Gerring and Thacker (2004): federalism increases corruption

Page 15: Causes and consequences of corruption

Decentralization (cont’d)

Testa (2003): bicameralism lowers corruption but ethnic, religious or linguistic fractions cause corruption

Page 16: Causes and consequences of corruption

6. Impact of culture, value and gender

Trust placed in civil servants and evaluation of political system and low levels of corruption: “It’s our time to eat” culture of the Luos of Kisumu in Kenya

Values: ethnicity comes in and becomes a cause of corruption (retention in politics)

Male dominated networks may be causes of corruption (?? Bhutto, Sirleaf and 2 Japanese ministers)

Page 17: Causes and consequences of corruption

7. Geography and History: Natural resources

Natural resources cause of corruption (Dutch companies in DRC, Canadian and Swiss companies in Zambia and Tanzania)

See GFI reports & StAR for more examples

Corrupt neighbors cause of domestic corruption where there is a strong regional exchange

Colonial heritages as causes of corruption: Land in Kenya

Page 18: Causes and consequences of corruption

Consequences of corruption

Generates inequality

Impacts productivity and investment

Distorts the public and private sectors

Page 19: Causes and consequences of corruption

Inequality

Of income (Gupta et. al, 2002 using Gini Coefficient), land and education

Inequality also causes corruption (Swamy et. Al, 2001)

Page 20: Causes and consequences of corruption

Productivity and investment

Corruption decreases GDP per head (Slum dweller and DTA/Kickbacks effect on DRM)

Ali and Isse (2003): lowers growth (DRC and Leopold embezzlements)

Rock and Bonnet (2004): increases growth (East Asian newly industrializing countries – government promotional privileges for bribes)

Page 21: Causes and consequences of corruption

Distorts public and private sector

Public

Corruption leads to: Misallocation of public resources (public servants appointed

based on bribes and not competency)- good base for kickbacks – Mozambique case on bottle labeling machine

Distortions in budget allocation (need to conceal illicit payments so some goods preferred over others)

Reduced and low quality of public investments, services and environmental regulation

Esty & Porter (2002): Overinvestment in public infrastructure (though link is poor)

Mauro (1998): lower government spending on education

Page 22: Causes and consequences of corruption

Continued

Private Markets are affected (SMEs lose out on market share) Aid and lending Stocks and tax evasion Underground economies Deters foreign investors Deters market entry

Page 23: Causes and consequences of corruption

Corruption on investments

Reduces FDI

Vulnerability to currency rises

Studies show that firms adapt to a country’s level of corruption (shell companies, mailbox companies)

Page 24: Causes and consequences of corruption

Recommendations

Creation of the office of the ombudsman (e.g., Kenya, 2010)

Stringent laws – punishable offences

Declaration of wealth and name and shame blacklists

Regulations where MNCs are concerned

Exchange of informations where DTAs are concerned

Civil service salaries

Merit based recruitment

Freedom of information (media/press) deters corruption

Independent judiciary

Alert public

Page 25: Causes and consequences of corruption

Reference sources

Baker, R. W. 2005. Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free- Market System. Hoboken, NJ: John Wiley & Sons. 

Global Financial Integrity, 2014. Hiding in Plain Sight: Trade Misinvoicing and the impact of Revenue Loss in Ghana, Kenya, Mozambique, Tanzania, and Uganda: 2002-2011. Available at: http://www.gfintegrity.org/wp-content/uploads/2014/05/Hiding_In_Plain_Sight_Report-Final.pdf  

Johann Graf Lambsdorff, Causes and consequences of corruption: What do we know from a cross-section of countries.  

Pech, Birgit/Debiel, Tobias, 2011: Corruption as an Obstacle to Development?, in: Unikate, No. 40, 16-25. 

See: “For whom the windfalls? Winners and losers in the privatization of Zambia’s copper mines” by Alastair Fraser (Oxford University) and John Lungu (Copperbelt University), p. 7-87; July 2009. Publication available at: http://www.liberationafrique.org/IMG/pdf/Minewatchzambia.pdf  

World Bank. 2008. Democratic Republic of Congo: Growth with Governance in the Mining Sector. Report 43402-ZR. Washington, DC: World Bank.

Page 26: Causes and consequences of corruption

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