Corruption: A View from the Persian Gulf

Global Economy JournalVolume 12, Issue 1 2012 Article 1

Corruption: A View from the Persian Gulf

Hossein Askari∗ Scheherazade S. Rehman†

Noora Arfaa‡

∗The George Washington University, [email protected]†The George Washington University, [email protected]

‡The World Bank, [email protected]

DOI; 10.1515/1935-1682.1698

Copyright c©2012 De Gruyter. All rights reserved.

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Corruption: A View from the Persian Gulf∗

Hossein Askari, Scheherazade S. Rehman, and Noora Arfaa

Abstract

Corruption has been and continues to be evident in all societies, with differences only in man-ifestation and degrees. We focus on the manifestation and impact of corruption in the Persian Gulfoil-exporting countries and benchmark these countries against a set of non-oil-exporting Islamiccountries and major non-Islamic oil-exporting countries. We first measure the degree of corruptionin these countries using five of the most widely accepted direct and indirect indices of corruption.We then examine the relationship between corruption and various indicators of economic, social,and human development. Finally, we examine the association between corruption and oil endow-ment and the Islamic label, two common characteristics of the countries in the Persian Gulf. Assuch, the key focus of the paper is on the manifestation and impact of corruption in the PersianGulf oil-exporting countries from a political-economy stand point and measurement of the impactof corruption on economic, social, and human development in the region. It should be mentionedthat this paper was written before the blossoming of the “2011 Arab Spring.” The major reasons,to varying degrees, for the protests in the Mideast and North Africa have been because of decadesof economic deprivation, autocratic rule, political injustice, institutional corruption, and humanrights violations.

KEYWORDS: corruption, Persian Gulf, oil

∗Hossein Askari and Scheherazade Rehman are at The George Washington University, and NooraArfaa is at the World Bank. The views presented in this paper are those of the authors. This articleis based on the book by Askari, Hossein, Scheherazade Rehman, and Noora Arfaa, Corruptionand its Manifestation in the Persian Gulf, (Massachusetts: Edward Elgar, 2010).



INTRODUCTION1

Corruption has been and continues to be a fact of life in all societies. What constitutes corruption is, however, in the eye of the beholder, and defies a neat definition. A general definition is “…impairment of integrity, virtue or moral principle, decay, decomposition, inducement to wrong by improper or unlawful means (as bribery), a departure from the original or from what is pure or correct.”

2 A more analytical definition is “…corruption is the intentional non-compliance with the arm’s-length principle3 aimed at deriving some advantage for oneself or for related individuals from this behavior.” 4 While another definition of corruption used by multilateral agencies, such as the World Bank, identifies corruption as “…the abuse of public office for private gain”5 and correlates “…corruption to the state, its activities, state intervention on the market and the existence of the public sector.” This latter definition excludes the possibility of corruption in the private sector, and it focuses exclusively on corruption at the public sector level. This is consistent with Gary Becker’s often-quoted view that “if we abolish the state, we abolish corruption.”6 None of these definitions, however, encompasses all the elements that diverse observers have in mind. For example, the World Bank definition neglects other forms of abuses by non-public officials i.e. market-based corruption. There are many types of institutional corruption that incorporate, among others, market-based/private, government, legal, political, international elements and acts of corruption can be classified in various categories: “…bureaucratic (or “petty”) or political (or “grand”) – for example corruption by the bureaucracy or by the political leadership; cost-reducing (to the briber) of benefit-enhancing; briber-initiated or bribe-initiated, coercive or collusive; centralized or decentralized; predictable or arbitrary; or involving cash payments or not…”, and so on.

At the intersection of political economy and governance, corruption can be defined as the attainment and granting of favors and rewards that are not available to every member of society through transparent means; public policy decisions that benefit only a particular interest group and are not in the best interest of the broad citizenry; and abuse of authority for economic gain. In economics, “rent

1 This article is based on the book by Askari, Hossein, Scheherazade Rehman, and Noora Arfaa, Corruption and its Manifestation in the Persian Gulf, (Massachusetts: Edward Elgar, 2010.) 2 Merriam-Webster’s Dictionary (10th edition), Merriam-Webster Incorporated, 2001. 3 For the three elements to this definition see Tanzi, Vito, “Corruption: Arm’s-length Relationships and Markets, in Fiorentini, G. and Pelzman, S.M (eds.), The Economics of Organized Crime (Cambridge: Cambridge University Press, 1995). 4 Ibid. 5 Begovic, Boris, “Corruption: Concepts, Types, Causes And Consequences”, Center for the Opening and Development of Latin America (CADAL), Year III, No 26, (March 1, 2005) p.2. 6 Ibid.

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Askari et al.: Corruption: A View from the Persian Gulf

Published by De Gruyter, 2012



seeking behavior” is often associated with corruption, although rent seeking is not necessarily corrupt and corruption is not necessarily rent seeking. The term rent seeking is used when an individual, organization or firm does not make money in a transparent way through the market but relies on monopoly power and other non-market means to gain abnormal returns. Rent seeking can be legal, as for example the Organization of the Petroleum Countries (OPEC) uses its monoply power to restrict oil supplies to increase the price of oil and earn monopoly rents, or lobbyists can make campaign contributions for political support; or they can be illegal, as in case of bribes for changing government regualtions on tariffs or restricted market entry.

Although academic interest in corruption is multifaceted, a principal reason for examining corruption is for its deleterious impact on economic growth and development. Corruption is generally assumed to be detrimental for economic growth—destroying economic and social incentives for good conduct and confidence in the economic system, reducing domestic investment, and increasing capital flight and class conflict. While the negative impact of corruption on growth is generally accepted, there are nuances to this broad claim. For example, Drury et al. (2006), in a cross-sectional analysis of more than one hundred countries, show that while corruption has a significant negative impact in non-democratic countries, a benefit of democracy is that it mitigates the detrimental effect of corruption on economic growth. Also, Kang (2002) reconciles corruption and rapid economic growth in South Korea and in the Philippines by arguing that political, not economic, considerations dominated policymaking in both countries.

In this paper, we focus on the manifestation and impact of corruption in the Persian Gulf oil-exporting countries (PGOE) from a political-economy stand point. We measure the degree of corruption in the PGOE and then examine the relationship between corruption and various indicators of economic, social, and human development. The countries in our study include our benchmark PGOE group, six Islamic non-oil comparator countries, and six oil-exporting non-Islamic comparators.

In this paper, because we focus on the manifestation and impact of corruption in the Persian Gulf oil-exporting countries (PGOE) we must pay particular attention to corruption from the political-economy standpoint. Most of these countries have for decades (since the discovery of oil) had one entity in power and with full control over policies and practices, i.e. a pyramid structure. The degree of corruption would be negatively correlated with the extent of checks and balances on the conduct of those in government or who want to attain power. The underlining assumption is twofold. First, that individuals and groups invariably go to great lengths to maintain power and second, while in power they will invariably enrich themselves, and their relatives and friends. As with most things, there is also “learning by doing” in corruption, as those in power tend to

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Global Economy Journal, Vol. 12 [2012], Iss. 1, Art. 1



learn how best to implement their corrupt practices with each new act of corruption.

We first measure the degree of corruption in the PGOE using five of the most widely accepted direct and indirect indices of corruption. We then examine the relationship between corruption and various indicators of economic, social, and human development. These correlations and manifestation of corruption on various selected proxies for the level of socio-economic development, such as per capita GDP growth, protecting investors, life-expectancy, and the like7, where direct data on corruption and corrupt practices is unavailable. The PGOE share two common elements: Islam as their religion and oil/natural gas as their major source of export and government revenues. As a result, we also investigate the correlation of oil endowment and a country’s Islamic label with corrupt practices. Based on the interaction between the corruption indicators and other social and economic variables we benchmark the PGOE against a set of non-oil exporting Islamic countries and major non-Islamic oil-exporting countries to get a sense as to the extent that the Islamic “label” and the abundance of oil revenues correlate with corruption.

The countries in our study include our benchmark PGOE group8 (Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates), six Islamic non-oil comparator countries (Jordan, Lebanon, Morocco, Senegal, Tunisia, and Turkey) which were selected based on three criteria: (i) a significant source of the countries’ revenues did not come from oil, (ii) they are members of the Organization of Islamic Conference (OIC)9, and (iii) regional representation; and six oil-exporting non-Islamic comparators (Canada, Mexico, Norway, Russia, UK, and Venezuela) are the largest oil producers and are not members of the OIC.

7 If corruption is especially widespread, public officials often design projects and programs with only limited public benefits and with many opportunities for private gain – for more details see Rose-Ackerman, Susan, “The Challenge of Poor Governance and Corruption,” (Copenhagen Consensus Challenge Paper, April 2004). Perception-based indicators alone may not capture the full extent of this type of corruption. In such cases an analysis of the manifestation of corruption may be more appropriate. In addition, such indicators may be of limited use in certain countries because the modalities for corruption most pervasive may simply not fully register on the popular perception based corruption measures. For example, in some oil-exporting countries the lines between public and private wealth are distorted and corruption extends beyond oil to include local industry, services and trade, through public and private contracting. In other words, entities judging the degree of corruption in a country may have little reason to classify the taking of oil revenues before it enters official coffers as corruption. As a result much of our discussion that is based on these indicators may be susceptible to this shortcoming. 8 Bahrain is not included as it has not been an oil-exporting country for many decades. 9 The 57 OIC countries have either (a) governments who have adopted Islam as the official state religion, or (b) Islam as their primary religion, or (c) a significant Muslim population, or (d) simply declared themselves as an Islamic republic.

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ISLAMIC TEACHINGS AND CORRUPTION

As mentioned above, corruption becomes more pronounced the longer the same party or ruler remains in power. In the PGOE, continuous rule by the same party or ruler has been the norm in every case, except Iran and Iraq, since the inception of the country10. Even in the case of the two exceptions, longevity of rule has existed in other ways. For example, Iran claims that elections have changed governments, when in fact the religious clerics have been the backbone of the real power ever since the Iranian Revolution in 1979; and before that it was the Pahlavi dynasty from WWII on. In Iraq, the Baath Party held power for about thirty-five years.

Support for continuous rule in the PGOE has come from different sources. In both Saudi Arabia and Iran since 1979, the ruling class has tended to seek to maintain legitimacy through support from religious establishments. While in the smaller Persian Gulf oil-exporting countries (Kuwait, Qatar, and the UAE) governments have traditionally derived their authority through support from both the religious establishment and the merchant class. However, in all these economies, to one degree or another, the legitimacy of the ruling class has become closely associated with their ability to use oil revenues to provide material well being to citizens no matter what the economic costs (Crystal, 1989). As such, it is not surprising that the form of political control in the PGOE countries has been a decisive determinant of how oil revenues have been managed.

In all these countries, religion plays a significant role, even if superficially, in shaping the behavior of the ruling elite. For this reason, it is important to briefly assess what Islamic teachings convey regarding governance and corruption in particular.

It is general accepted that corruption and corrupt practices are un-Islamic and are specifically condemned in the Quran. In Islam, individuals are expected to work hard for economic gain, compete in business, own private property, and take risk in investment. It was understood that economic and emotional strains of poverty may compel an individual to resort to unhealthy or unethical means of earning an income. Thus the principles of an Islamic economic system were formulated to ensure the availability of education and equal opportunity for employment for all, poverty reduction and prevention, and continuous social and intellectual development for all individuals. As such, critical areas in gauging the Islamicity of governments are: quality of policy formulation, equal opportunity for all, economic growth and prosperity, and economic justice. This is further re-enforced by emphasis in Islam on income distribution Mirakhor (1989, p. 25):

10 This is true for Kuwait, Qatar, Bahrain and the United Arab Emirates (UAE).

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“…Islam asserts unambiguously that poverty is neither caused by scarcity and paucity of natural resources, nor is due to the lack of proper synchronization between the mode of production and the relation of distribution, but as a result of waste, opulence, extravagance, and nonpayment of what rightfully belongs to the less able segments of the society. This position is illustrated by the Prophetic saying that: “Nothing makes a poor man starve except that with which a rich person avails in luxury”

The notion of “work” is considered by Islam to be the most crucial aspect of economic success, and hard work on the part of any individual’s-- regardless of his or her religious convictions—is both a duty and the best guarantee for economic and social progress. Islamic law permits all forms of labor. It does, however, specifically prohibit corruption, routine “beggary” and freeloading, and any vocations that may promote social instability or political, economic, or social oppression.11 Recognizing that an individual’s capacity to produce may vary according to his or her talent and ability, Islam does not call for perfect income equality and does not stipulate a limit on the amount of income an individual may earn. It strives to reduce and prevent exceptionally large inequalities in wealth and income, and thus requires that employees receive no less than a living wage that can sufficiently cover basic expenses (Iqbal, 1986).

In Islam, work and investment (risk sharing as opposed to debt and predetermined interest) are the only legitimate (barring corruption) means of acquiring property rights. Islamic law maintains that all individuals have the right to keep what they earn, and acquire a right of priority in the use of any goods they produce. Property may also be transferred by means of an exchange, contract, grant, or inheritance. Ownership rights are held inviolable and private property cannot be forcefully appropriated or confiscated. Thus Islam recognizes the importance of institutions, the guarantee of property rights, and the enforcement of contracts to economic growth and development. Ownership of natural resources, however, is treated somewhat differently than in other societies because natural resources (such as raw land, water, and mineral deposits) are considered to be a gift bestowed to humanity by God, and only God has absolute ownership (Cummings et al., 1980). The logic here is that since humans did not actually create any of the world’s natural resources they cannot exert unequivocal ownership over them. They may only privately own anything they produce with their work or gain through legitimate investment and inheritance. This brief discussion should affirm that Islam preaches good governance and prohibits corruption.

11 See Quran 2:11 “…they are told, ‘Do not spread corruption on earth…;” 2: 205 “…and God does not love corruption…;” 7:56 “do not spread corruption on earth after it has been so well ordered;” 7: 85 “…do not deprive people of what is rightfully theirs…;” 11:111 “And, verily, unto each and all will thy Sustainer give their full due…”

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OIL AND CORRUPTION IN THE PERSIAN GULF

In the oil-exporting countries of the Persian Gulf, the depletion of oil and gas has been the major source of income and wealth over the last fifty or so years and will most likely continue to be so for some time to come. Oil and gas resources are natural depletable resources and should, according to Islam, benefit all citizens of this and future generations equally. Thus it is not unreasonable for the population to expect a more even distribution of wealth in these countries than in other countries because they rely heavily on oil and gas as a source of national income. This, in fact, has been the foundation of the argument used by governments in the region to support their widely used socio-economic policy tool of heavily subsidizing the population (health, education, housing, etc) using oil and gas revenue.

The most persistent allegations of corruption against the governments in the PGOE countries has been that ruling public officials have for decades taken a portion, in some cases a significant portion, of the oil wealth for personal use in addition to receiving their sanctioned stipends. Readily available data confirms that oil and gas revenues have constituted a significant component of GDP, although declining since the early 1980s in most of these countries. It is because of the unique manner in which natural resources are viewed in Islam that the depletion of oil and gas takes on importance.

For the oil-rich economies the effect of corruption on human development is sometimes disguised by oil windfalls used to subsidize generous social welfare programs. To the extent that the PGOE are able to continue to develop in the areas of health, education, infrastructure and employment guarantees during boom periods of oil-driven development, few question the conspicuous wealth accumulation of those in power and the corrupt practices that they may embrace. However, as oil prices fall, development lags, the effects of corruption become more noticeable, greater tension between the rulers and the general population arise. It is then that the disparity in lifestyles, existence of poverty, lack of equal access to economic opportunities, all point to an un-Islamic distribution of oil wealth, especially if the welfare of future generations is taken into account.

Although there is no direct statistical data available to substantiate these allegations, various facts are illustrative. In post-invasion Iraq, the number and size of Saddam Hussein’s numerous palaces are well documented. In Saudi Arabia, the lavish palaces of the senior Al-Saud princes are legendary, as are their foreign real estate holdings. In Iran, the income disparity between North and South Teheran as seen in residences and the business and property ownership of those in office is striking. In Kuwait, Qatar and the UAE, the ostentatious lifestyles of the ruling elite are routine fodder for the international media. These excesses are in sharp contrast to the general population and migrant workers, who

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in some cases account for almost half the population in several of the smaller countries. If these rulers were western financial CEOs one might not question their lifestyles as one might assume that they were financed from hard work and thoughtful investment. But heads of these countries and the ruling elite derive much of their wealth directly or indirectly from oil and gas depletion. As Islamic countries, however, not only excessive use of oil revenues for amassing personal wealth is prohibited, so are, among others, wasteful economic policies geared towards consumption, subsidies (instead of market and job creation), uncompetitive bidding and procurement contracts, favored business loans and licensing agreements, lack of fiscal and economic data transparency, lack of adequate savings and returns on the oil revenues for future generations.

In oil-exporting countries, instead of hard work and good investments (but not without risk) as the basis for advancement, success is dependent on the ability to penetrate the inner circles of access to get a piece of the “pie” with no risk. While the poor and marginalized suffer disproportionately from corruption, for those who fall within the system of patronage untold energies are spent getting to know someone who knows someone who is in a position to help them financially. Most oil-exporting governments tend to use oil rents to provide employment guarantees in the public sector leading to often non-value added jobs with little room for advancement and often bloated government bureaucracies that serve to further entrench systemic corruption and disenfranchise individual drive and ambition. The PGOEs are no exception. Research suggests that for natural resource-rich countries, the misallocation of talent from productive sectors of the economy to rent-seeking activities has had a negative impact on overall economic growth (Leite and Wiedmann, 1999). Until the mid 1980s, the effort to create non-oil wealth and revenue streams has been nominal in the PGOE. It should be noted that while Iran has the only long-standing income tax system in the region, it is largely ineffective. Corruption (i.e. kick-backs, bribes) serves as an informal tax in the region, however, without the demands of accountability and transparency inherent in a formal system of taxation.

NON-OIL CHANNELS OF CORRUPTION IN THE PERSIAN GULF

In addition to the corruption associated with natural resources, not unexpectedly, other forms of corruption that are traditionally found in other developing countries are also present in the Persian Gulf. In the oil-exporting countries corruption tends to be generally more blatant and immediate (“cash on the barrel head” so to speak). The popular belief is that corruption is largely associated with economic underdevelopment and rent seeking behavior. Even in the US, members of Congress, be they Republicans or Democrats, incorporate into their objective function factors such as winning elections -- a task that may involve following

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through on campaign promises, exchanging political and economic favors to supporters in exchange for votes or campaign financing support. US politicians accept campaign donations and favors (exotic trips and non-cash gifts) in return for support and favorable legislations, which ultimately means financial benefits. Individuals also accept political appointments, which they in turn and over time transform into financial benefits; awarding contracts to companies now with the implicit understanding that they will receive financial benefits, such as lucrative employment, in the future (generally referred to as the “revolving door”). The impact of economic policy decision at both the macro and micro levels could be better understood and forecasted if economic models could better capture some of the more subtle forms of corruption. But as noted earlier corruption in democratic societies may not have the same deleterious effect as in developing countries.

In addition to affecting the broad course of social and economic policies, corruption in developing countries reduces the level of economic activity in direct and indirect ways. Corruption reduces domestic investment in areas critical to productivity, albeit less visible or politically desirable. A number of studies (Tanzi and Davoodi, 1997) provide further evidence that when the incidence of corruption is high, investments made in public infrastructure tend to be of a lower quality and expenditures on operations and maintenance are insufficient. Public official choose to fund projects where financing structures are opaque and the collection of bribes made easier, while limiting expenditures on public services that provide quality healthcare and education. Similarly, other studies (Leite and Wiedmann, 1999) provide examples where high levels of corruption are associated with lower levels of foreign investment and “trade openness” in natural resource abundant countries. And the development of a vibrant private sector is likely to be severely constrained by the broad-based effects of corruption in the economy.

After the mid-1980s, many of the governments in the Persian Gulf region faced the stark reality that if they did not begin to create real markets and meaningful jobs their own survival was in jeopardy given the growing discontent concerning economic progress and human development. It was, in fact, affording more influence to religious leaders who were promising a more even distribution of oil wealth. Because oil revenues had been squandered and savings were proving not enough to finance future generations, some of these governments began to realize the need to draw in foreign investments. Thus began the mega-construction projects in Dubai. Some of the PGOE followed suit and adopted the elements of the “Dubai Model” (Rehman and Dairabayeva, 2008) of economic growth, i.e., growth through private (domestic and foreign) investment in the service, education and R&D-driven sectors.12 Qatar, for example, has made its

12 Wells, Peter R.A., “Emerging Oil supply Crisis”, Oil and Gas Journal (March 7, 2005).

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move to become a regional hub of higher education. Saudi Arabia scrambled to introduce economic and knowledge cities in the middle of the desert under their 10x10 Program, with the goal of putting Saudi Arabia among the world's top 10 globally competitive investment destinations by 2010.

CATEGORIES OF CORRUPTION INDICATORS

There are three broad categories of corruption and corruption-related indicators: (a) those developed by private political risk firms, (b) perception based indices designed by advocacy groups, and (c) broad governance indicators thought to be related to corruption. Each approach has its limitations and strengths. These indices differ in key dimensions i.e. the precision and scope of the definition of corruption, statistical and survey methodology, level of transparency, and the like, and in their attempt to assess the incidence of corruption, e.g. on business or infrastructure (Knack, 2006). a) Indices Developed by Private Political Risk Firms

The first category of indicators, primarily designed by private risk assessment firms, such as the Economist Intelligence Unit (EIU) and Political Risk Services (PRS) collect data from a network of correspondents with county specific expertise, in addition to using business surveys and other quantitative sources of data. By assessing the relative incidence of corrupt transaction, PSR’s International Country Risk Guide (ICRG) corruption indicator is designed to capture the likelihood that high-level government authorities will extract illegal payments and the extent to which such payments are expected to exist throughout the government hierarchy (Svensson, 2005). Since most subscribers are typically private sector actors (banks, multinational corporations and international investors), these ratings can be expected to focus primarily on issues of corruption most pertinent to business and foreign investment, measuring the quality or attractiveness of the business environment and the degree to which business activity can be expected to involve corrupt or potentially illegal transactions. In the ICRG, corruption is measured as a single dimension in a broader index of political risk, which is a component of an overall risk rating. The index is based on a scale of 0 - 6 with a lower score representing that “high government officials are likely to demand special payments” and “illegal payments are generally expected throughout the lower levels of government” and the form of “bribes connected to import and export licenses, exchange controls, tax assessments, policy, protection, or loans” (Leite and Wiedmann, 1999). Generally, the methodologies employed by these rating systems seem to be less transparent then those employed by advocacy groups.

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(b) Perception Based Indices Designed by Advocacy Groups The second set of indicators, typically developed by advocacy groups such as Transparency International (TI) and the World Bank Institute (WBI), measures corruption based on surveys, which are reported by the public at large and business representatives. Some surveys focus on business leaders’ direct experience with issues related to corruption, while others solicit their “expert opinion” or perception of corruption in a particular country. Perception based indicators assume that the perception of a specific set of respondents (business leader, public servants, etc) is accurately correlated to levels or patterns of corruption. Similar to indicators developed by private political risk firms, the scope of survey questions (and thereby the implicit definition of corruption) designed by advocacy groups also illicit responses most relevant to their constituents and their mission; whether it be to assess the need for technical assistance in the areas of governance, to determine a countries eligibility for international aid, or simply to raise international awareness of corruption.

The initial goal for the TI Corruption Perception Index (CPI) was to raise global awareness of corruption and to provide researchers with data for evaluating the causes and consequences of corruption (Knack, 2006). It has emerged as the most popular quantitative indicator of cross-country corruption comparisons. The CPI ranks more than 150 countries in terms of perceived levels of corruption, as determined by expert assessments and opinion surveys. Unlike private sector risk analysis firms, TI’s corruption index is not based on information from its own experts, but on the basis of a weighted average of between three to 16 sources from about nine different organizations, depending on the country and available data. A score of ten represents total absence of corruption, while zero indicates that a country is perceived as completely corrupt.

The World Bank Institute’s Control of Corruption Index (CCI) tries to build on and improve on Transparency International’s corruption measurement. Both organizations use a composite set of indices to develop a single standardized measurement. There are some important differences between these indicators. While the CPI requires that country ratings be based on at least three survey sources, the CCI requires only one source per country. Accordingly, they have employed a broader definition of corruption and include most cross-country indices reporting rankings on some aspect of corruption (Svensson, 2005). Moreover, the designers of the Control of Corruption Index (Kaufmann, Kraay, and Mastruzzi) argue that the TI’s approach has limitations as data is not randomly distributed. Therefore, those countries with the poorest institutional capacity, questionable mechanisms of governance, and perhaps the highest levels of corruption will most likely have the fewest sources of corruption ratings. The

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CCI is measured in units ranging from -2.5 to 2.5, with higher values corresponding to better governance.

As to be expected, there have been a number of criticisms of these perception based corruption indices. While the composite method may make for a more accurate index because measurement errors are likely to be minimized by aggregating data for multiple sources (Knack, 2006), many professionals have criticized the methodology. Some of these indices are also more (or less) appropriate for measuring changes over time and comparisons across countries. As organizations periodically attempt to improve statistical methodology, such changes may ultimately limit cross-country and time-series comparability. Drawing comparisons between countries is further hampered because the number of sources and the sources of data are often inconsistent across countries. Moreover, different sources may measure different dimensions of corruption and may define corruption differently; composite indices therefore lack clear definition. Perhaps the most widely cited criticism of these indices is that they are based on subjective perception. For instance, during periods of rapid economic growth fueled by high oil export revenues, respondents in oil-exporting countries may attribute the increased ease of doing business to decreased corruption. Similarly, increased media hype as a result of a government initiative to tackle corruption, may exacerbate corruption perception. However, it is clear that given the inherent insidiousness of corruption, an empirical rating system is not always possible, particularly on a large scale. Finally, while corruption may take different forms, most corruption indices do not identify the forms of corruption that prevail in a particular country.

(C) Broad Governance Indicators thought to be related to Corruption The third category of indicators are also typically designed by advocacy organizations, but with corruption a component of a broader set of governance indices. These indicators generally describe corruption as a function of institutional arrangements and government policies – such as the presence of institutional bureaucracy, business and regulatory environment, and economic, political and civil freedoms. While such indicators may not be a measure of corruption per se, to some, the benefits of empirically driven data outweigh the use of perception-based indices. Many have criticized governance indicators as representing cultural or political biases.

FIVE GLOBAL INDICES MEASURING CORRUPTION

In this section we measure the extent of corruption in PGOE countries using the five most widely accepted direct and indirect indices of corruption. These are well

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established and globally recognized indices that can serve as direct proxies for corruption. First, we consider what we know to be the three most popular and explicit corruption indices: the “Control of Corruption Index”, International “Corruption Index”, and “Corruption Perception Index”. To augment these direct measures of corruption we also use other indices that have elements of corruption in them or are either associated or reflective of the various indicators of corruption. Second, we use indices that encapsulate civil and political rights and economic freedom, such as, “Freedom in the World”, “Economic Freedom in the World,” and “Index of Economic Freedom.” Third, we utilize the regulatory environment that controls business and investment as a proxy for the close association between corruption and good business environment and practices. Fourth, we measure failure of governance and corruption by using the “World Bank Worldwide Governance Indicators.” Finally, while the linkages between human development and corruption may seem less obvious than the relationship between the business environment or governance and corruption, it has been found that corruption, institutional development and human capital formation are closely linked. Then, in the ensuing section we examine our test groups (Persian Gulf Oil Exporters, Non-Islamic Oil Exporters and Islamic on-Oil Exporters) to assess the level of corruption. In addition, we simplistically look into the manifestation of corruption on various selected proxies for the level of socio-economic development, such as per capita GDP growth, protecting investors and life expectancy. 1) Corruption Indices We use three corruption indices: the World Bank Indicators’ (WBI) “Control of Corruption Index” (CCI)13, International Country Risk Guide’s “Corruption Index”14, and Transparency International’s “Corruption Perception Index” (CPI)15. The World Bank Indicators’ (WBI) “Control of Corruption Index (CCI)” is part of its overall Worldwide Governance Indicators16. The Control of Corruption “…measures the extent to which public power is exercised for private gain, including petty and grand forms of corruption, as well as “capture” of the state by elites and private interests.”17 The International Country Risk Guide’s

13 For more details see “Governance Matters - Worldwide Governance Indicators, 1996-2008”, World Bank website. 14 For more details see Shah, Anwar, Performance Accountability and Combating Corruption, The World Bank (Washington D.C., 2007). 15 For more details see “Transparency International: The Global Coalition Against Corruption” website. 16 “Governance Matters: Worldwide Governance Indicators, 1996-2008”, World Bank website. 17 Ibid.

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“Corruption Index” focuses on political-level corruption. Transparency International’s “Corruption Perception Index” (CPI) measures “…the perceived levels of public-sector corruption in a given country and is a composite index, drawing on different expert and business surveys. The index scores countries on a scale from zero (highly corrupt) to ten (highly clean).”18 In Table 1 we summarize the three key corruption indicators from 1996 to 2008. Looking at all three corruption indicators in Table 2, from TI and ICRG corruption is on average higher in the Islamic Oil-exporting countries, followed closely by the Islamic Non-Oil group of countries; whereas according to the World Bank’s Control of Corruption index, corruption is on average higher in the Islamic Non-Oil countries followed by the PGOEs. However, perception of corruption in the Islamic countries is less than that of the three developing oil exporters (Mexico, Russia, and Venezuela). Iraq, followed by Venezuela, is the most corrupt country in the study.

18 “Transparency International: The Global Coalition Against Corruption” website.

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Table 1: Key Corruption Indicators, 1996-2008

WBI Control of Corruption Index, Percentile (ranked)

ICRG Corruption Index7

TI Corruption Perception Index

(ranked) 20071 20032 19963 2008 2003 1996 20084 20035 19966

PGOE Iran 37 46 20 2.0 2.0 4.0 141 78 .. Iraq 2 9 3 1.0 5.0 1.0 178 113 .. Kuwait 72 82 76 3.0 2.0 3.0 65 35 .. Qatar 82 75 54 2.5 2.0 2.0 28 32 .. Saudi Arabia 58 67 36 2.0

2.0 2.0 80 46 ..

United Arab Emirates

82 85 63 2.0 2.0 2.0 35 37 ..

Islamic Non-Oil Exporters

Jordan 67 65 53 3.0 3.0 4.0 47 43 30 Lebanon 31 41 49 1.0 1.0 2.0 102 78 .. Morocco 53 54 64 3.0 3.0 3.0 80 70 .. Senegal 38 46 35 2.5 2.5 3.0 85 76 .. Tunisia 60 70 55 2.0 2.0 3.0 62 39 .. Turkey 59 50 58 2.5 2.5 2.0 58 77 33 Non-Islamic Oil-Exporters

Canada 96 95 97 5.0 4.0 6.0 9 11 5 Mexico 49 53 36 2.0 2.0 3.0 72 64 38 Norway 95 97 100 5.0 5.0 6.0 14 8 6 Russia 16 27 23 2.0 1.0 2.0 147 86 47 United Kingdom 94 96 96 4.0

4.5 5.0 16 11 12

Venezuela 10 10 24 1.0 1.5 3.0 158 100 48 Notes: Number of countries ranked: WBI - 1 208 ;2 205 3 154 ICRG – 4180; 5 133; 6 54 7 Countries are not ranked for the ICRG Corruption index, numbers represent overall scores. Low scores represent more corruption.

Source: World Bank, ICRG, TI data.

14




Table 2: Averages Of The Three Key Corruption Indicators From 1996 To 2008.

Source: Table 1.

Figure 1: Evolution of Corruption, 1996 – 2007

0

20

40

60

80

100

120

Nor

way

Canad

aUK

Kuwait

Mor

occo

UAE

Turk

ey

Tunisia

Qatar

Jord

an

Leba

non

Mex

ico

Saud

i Arabia

Sene

gal

Venezue

la

Russia

Iran

Iraq

Control of Corruption Percentile Rank

1996

2003

2007

Source: World Bank data.

WBI Control of Corruption Index, Percentile (rank)

ICRG Corruption

Index

TI Corruption Perception Index

(rank) PGOE 52.7 2.3 72.3 Islamic Non-Oil Exporters 52.7 2.5 65.3 Non-Islamic Oil-Exporters 61.9 3.4 47.3

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House19 is an attempt to evaluate “the state of global freedom as experienced by individuals.”20 The Fraser Institute21 and Heritage Foundation22 indices measure the extent to which policies and institution are aligned with the imperatives of economic freedom. While again these are not direct indicators of corruption per se, they do consider the various dimension of economic freedom, which includes corruption. Table 3 shows a snapshot of Civil and Political Rights and Economic Freedom Indicators from1995 to 2007 for the 18 countries in our study. Table 4 shows that, on average, in the oil-exporting non-Islamic group of countries there is a higher degree of political and civil freedom, followed by the non-oil exporters. On economic freedoms, with the exception of Russia and Venezuela, the oil-exporting non-Islamic group again ranks amongst the most free, followed by the Persian Gulf oil exporters. That is to say, while the institutions in major oil-exporting countries in the Persian Gulf may embrace a moderate degree of economic freedom, they are weak in terms of providing for basic political and civil liberties.

19 More detailed information on Freedom House can be found at http://www.freedomhouse.org. 20 Ibid. 21 More detailed information on the Fraser Institute can be found at http://www.fraserinstitute.org. 22 More detailed information on the Heritage Foundation can be found at http://www.heritage.org/Index/.

2) Civil and Political Rights and Economic Freedom Indices

There are three well-established indicators that capture civil and political rights and economic freedom: “Freedom in the World”, “Economic Freedom in the World”, and “Index of Economic Freedom.” The survey conducted by Freedom

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Table 3: Civil and Political Rights and Economic Freedom Indicators (1995-2007)

Freedom in the World1 (Freedom House)

Economic Freedom In the World

(Fraser Institute)

Index of Economic Freedom 11 (Heritage

Foundation)

Political Rights, 20072

Civil Rights, 20072


Civil Rights, 20003


Civil Rights, 19954

20065 20006 19957 20078 20009 199510

PGOE Iran 6 6 6 6 6 7 80 88 107 151 153 .. Iraq 6 5 7 7 7 7 .. .. .. .. 160 .. Kuwait 4 5 4 5 5 5 19 47 58 39 25 .. Qatar 6 5 6 6 7 6 .. .. .. 66 66 .. Saudi Arabia 7 6 7 7 7 7 .. 60 39 .. United Arab Emirates 6 6 6 5 6 5 26 40 20 63 14 .. Islamic Non-Oil Jordan 5 4 4 4 4 4 45 30 64 58 34 36 Lebanon 5 4 6 5 6 5 .. .. .. 73 99 .. Morocco 5 4 5 4 5 5 95 78 67 98 60 35 Senegal 2 3 3 4 4 5 119 85 103 91 82 .. Tunisia 6 5 6 5 6 5 82 79 66 84 70 29 Turkey 3 3 4 5 5 5 90 94 73 74 56 49 Non-Islamic Oil Canada 1 1 1 1 1 1 7 70 46 7 20 18 Mexico 2 2 2 3 4 4 58 7 10 44 79 31 Norway 1 1 1 1 1 1 23 20 16 34 22 .. Russia 6 5 5 5 3 4 101 114 117 134 117 75 United Kingdom 1 1 1 2 1 2 5 5 6 10 4 3 Venezuela 4 4 3 5 3 3 136 102 115 148 92 47 1 Countries are in ranked for the Freedom House index , numbers represent overall scores. Low scores represent more freedom. Number of countries ranked: Freedom House: 2 193; 3 192 ; 4 191; Fraser Institute: 5 141; 6 123; 7 123; Heritage Foundation :8 157; 9 161; 10 101. 11 Note that this is the overall ranking and not the actual score of the Index. Sources: Freedom House, Freedom in the World 2008 (2001 and 1996): Annual Report of Political and Civil Liberties, 2008, 2001, and 1996. Fraser Institute, Economic Freedom in the World: 2008 Annual Report. Heritage Foundation, 2008. Heritage Foundation, Index of Economic Freedom Report, 2008, 2001, and 1996.

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Table 4: Averaged Ranking for Civil and Political Rights

and Economic Freedom Indicators From 1995-2007

Freedom in the World

(Freedom House)

Economic Freedom In the World (Fraser

Institute)

Index of Economic Freedom (rank)

(Heritage Foundation) PGOE 6.0 53.9 83.0 Islamic Non-Oil Exporters 4.5 78.0 66.7 Non-Islamic Oil Exporters 2.4 53.4 50.7

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3) Business Environment and Practices Index In recent years, there has been an increasing recognition of the linkages between governance, business and investment climate, and economic growth. Although sound macro-level economic policies are important for economic development, institutional and regulatory factors may have an even more fundamental impact on prosperity. A direct result of good governance is an attractive business climate that encourages investment, provides incentives for private sector development, and creates jobs, thereby setting in motion new potentialities for economic growth. The World Bank’s 2005 World Development Report echoes this idea that enhancing the investment climate must be a principal feature of any sustainable development agenda. Moreover, there is clear evidence suggesting that there is a close association between corruption and the regulatory environment controlling business and investment. For instance, a number of studies have found that countries with heavier regulatory burden for business entry tend to also have significantly higher levels of corruption, in addition to larger informal economies and poor quality public and private goods (Djankov et al., 2002). To a degree, government regulations that impose barriers to business formation are enacted to give public official the authority to demand and extract bribes, and as such tend to fuel corruption (Svensson, 2005). Thus deregulation, coupled with mechanisms to enhance transparency and accountability, may serve to limit abuse by public officials. The natural question that follows is how should a country’s business or investment climate be measured. There are a number of cross-country data sets including the World Bank’s Doing Business indicators, which measure business regulations and their enforcement. Broadly, these indicators measure the regulatory costs of business and can be used to analyze specific regulations that enhance or constrain investment, productivity, and growth based on the cost of doing business, regulations on licensing, contract, employment, trade among others. Using the Doing Business indicators, we see that the PGOE have a number of distortions and inefficiencies at the firm level, particularly in terms of the cost, time and number of procedures associated with: 1) starting a business; 2) dealing with licenses; 3) international trade; and 4) closing businesses. Table 5, the World Bank Ease of Doing Business Rankings for 2008, provides rankings for all of the aggregate doing business indicators in the dataset. Figures 2 – 8 provide a graphical view of the relationship between corruption and business environment for those variables where the correlation was high (0.60+), including: the overall Ease of Doing Business, Dealing with Construction Permits, Getting Credit, Protecting Investors, Trading Across Borders, the Ease of Paying Taxes and Closing a Business. The overall business environment, measured by the ease of doing business, is poorest in Venezuela, closely followed by Iran, Iraq, and Senegal.

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Table 5: World Bank Ease of Doing Business in 2008 Rankings

Ease of Doing

Business 10 Key Sub-categories

Starting a Business

Dealing with

Construction Permits

Employing Workers

Registering Property

Getting Credit

Protecting Investors

Paying Taxes

Trading Across

Borders

Enforcing Contracts

Closing a Business

PGOE Iran 142 96 165 147 147 84 164 104 142 56 107 Iraq 152 175 111 67 43 163 113 43 178 148 181 Kuwait 52 134 82 43 83 84 24 9 104 94 66 Qatar 37 57 27 88 54 131 88 2 36 98 31 S. Arabia 16 28 50 45 1 59 24 7 16 137 57 UAE 46 113 41 47 11 68 113 4 14 145 141 Group Average 74.17 100.50 79.33 72.83 56.50 98.17 87.67 28.17 81.67 113.00 97.17 Islamic Non-Oil Exporters Jordan 101 131 74 52 115 123 113 22 74 128 93 Lebanon 128 62 90 168 117 131 164 119 64 112 64 Morocco 99 98 121 58 102 84 88 45 83 118 121 Senegal 149 95 118 165 161 145 164 170 60 146 77 Tunisia 73 37 101 113 55 84 142 106 38 72 32 Turkey 59 43 131 138 34 68 53 68 59 27 118 Group Average 101.50 77.67 105.83 115.67 97.33 105.83 120.67 88.33 63.00 100.50 84.17 Non-Islamic Oil-Exporters Canada 8 2 29 18 32 28 5 28 44 58 4 Mexico 56 115 33 141 88 59 38 149 87 79 23 Norway 10 33 66 99 8 43 18 18 7 7 3 Russia 120 65 180 101 49 109 88 134 161 18 89 UK 6 8 61 28 22 2 9 16 28 24 9 Venezuela 174 142 96 180 92 163 170 177 164 71 149 Group Average 62.33 60.83 77.50 94.50 48.50 67.33 54.67 87.00 81.83 42.83 46.17 Source: World Bank, Doing Business Report, 2009

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Figure 2: Ease of Doing Business

Source: World Bank, Doing Business Report, 2009.

Figure 3: Dealing with Construction Permits


Correlation Coefficient = -0.89

Correlation Coefficient = 0.64

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Figure 4: Getting Credit Rank


Figure 5: Protecting Investors Rank




22




Figure 6: Trading Across Borders Rank

Source: World Bank, Doing Business Report, 2009

Figure 7: Closing a Business Rank




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Figure 8: Ease of Paying Taxes Rank


Correlations between corruption and the ease of doing business ranking are in line with the results of other research. Corruption is strongly associated with the overall business environment (-0.89). Similarly, a country’s ranking in terms of Getting Credit (-0.75), Protecting Investors (-0.64), Trading Across Borders (-0.83), Closing a Business (-0.66), and Paying Taxes (-0.69) were also found to be correlated with corruption (based on the Control of Corruption percentile rank). In Figure 3, however, a country’s ranking in terms of Dealing with Construction Permits (0.64) yielded a positive correlation. Nonetheless, overall, those economies that scored poorly in terms of the ease of doing business, such as Iran, Iraq, Senegal, and Venezuela, have also relatively high levels of corruption. It should be noted that we found that corruption was not an accurate predictor of some other dimensions of the business environment (i.e. starting a business and labor regulations).

4) Good Governance Most observers agree that, ultimately, widespread corruption is a failure in governance. In most countries the common modalities of corruption, such as the fraud, embezzlement, and the paying and receiving of bribes are considered illegal. However, the issue of governance arises where governments fail to draw the legal line on what may be seen as borderline issues, such as state control of natural resources or limiting free-market mechanisms, where a select group may have disproportionate influence over public policy formulation (Rose-Ackerman, 2004). In some instances, the incidence of outright fraud or bribery may be low; however, ownership rights to public resources, such as oil in the oil-exporting countries, may still not be adequately addressed by the regulatory or legal system.


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Corruption has a tendency to strengthen when it is out of public view and benefits only a small group, it is, as expected, threatened by mechanisms that are the hallmark of ‘good governance’ -- transparency, accountability and inclusiveness. In resource-rich countries, corruption tends to translate to special access to natural resources, while denying the general population access. Corruption in the ruling elite manifests itself as the desire to insure self-preservation as leaders, and institutions of governance are designed for promoting and protecting this objective. They are perhaps practicing the highest form of corruption that can be more adequately captured through a broader set of governance indicators, such as, voice and accountability, political stability, government effectiveness, regulatory quality, and rule of law. Establishing mechanisms for good governance is a necessary step towards reducing corruption. Ultimately, governments determine the societies’ allocation of resources (including oil). Table 6 shows that mechanisms that ensure voice and accountability, rule of law, and regulatory quality are particularly weak in the Islamic oil-exporting countries, with the exception of political stability. 23 On voice and accountability, Iran, Iraq, and Saudi Arabia rank amongst the lowest of the 18 countries in our study in terms of extent to which their citizens are able to be engaged in the political process. It should be noted that in comparison to most other countries in our study, there is little evidence that much progress has occurred over the last decade in the Islamic oil-exporting countries to adequately establish modalities essential for good governance.

23 Analysis is primarily based on the World Bank Worldwide Governance Indictors which categorize governance based on the following six broad indicators: (1) “Government Effectiveness” and “Regulatory Quality”; (2) “Rule of Law” and “Control of Corruption”; (3) “Political Stability and Absence of Violence”; and (4) “Voice and Accountability”.

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Table 6: World Bank Worldwide Governance Indicators, 2007 Percentile Rank

Voice&

AccountabilityPolitical Stability

Government Effectiveness

Regulatory Quality

Rule of

Law PGOE Iran (Islamic Republic of) 8 11 24 4 21 Iraq 10 0 2 7 1 Kuwait 34 60 63 61 71 Qatar 28 76 58 67 80 Saudi Arabia 7 25 51 52 59 United Arab Emirates 23 73 79 72 70 Average Group 18.33 40.83 46.17 43.83 50.33Islamic Non-Oil Exporters Jordan 27 34 65 62 65 Lebanon 34 4 29 48 30 Morocco 29 27 55 51 51 Senegal 48 38 45 40 45 Tunisia 13 47 69 57 60 Turkey 42 21 64 60 53 Average Group 32.17 28.50 54.50 53.00 50.67Non-Islamic Oil Exporters Canada 93 85 96 94 96 Mexico 49 25 60 64 34 Norway 99 93 99 90 100 Russian Federation 20 23 42 35 17 United Kingdom 94 66 94 98 93 Venezuela 31 12 17 5 3 Average Group 64.33 50.67 68.00 64.33 57.17

Source: World Bank, World Governance Indicators, 2008.

5) Human Development Index While the linkage between corruption and human development may seem less obvious than to business environment or governance, there is significant evidence supporting the close linkage between corruption, institutional development and human capital formation. For instance, education is essential for the development of an effective judicial system or for that matter for any other public institution. Similarly, misuse of public funds by the government is more likely if a large

26




portion of the population is uneducated or illiterate (Svensson, 2005). Although not illustrated in Table 7, the MENA region as a whole has made notable progress towards improving human development over the last few decades. For the oil economies, human development (as measured by those variable included in the human development composite index -- normalized measures of life expectancy, literacy, educational attainment, and GDP per capita) tends to be more advanced than that of the non-oil exporting countries in the region. However, the overall impact of corruption on human development in MENA is difficult to support because of insufficient empirical evidence. As mentioned previously, in the oil-rich economies the effect of corruption on human development tends to be “hidden” as oil windfalls are used to subsidize generous social welfare programs. Of the three country groupings, the non-oil exporters on average have experienced lower levels of human development. Senegal and the Morocco have the lowest life expectancy rate (with the exception of Russia), the highest infant mortality rate, the lowest youth and adult literacy rates, and the lowest HDI value.

On other specific measures of human development, Figures 9 and 10 shed some light on the association between corruption HDI, corruption and life expectancy. Correlations between corruption and all the variables that make-up HDI suggest that those countries with a high HDI and a high life expectancy rate also have lower levels of corruption, whereas there is little association between corruption and the other three variables in the HDI composite. Based on scatter diagram in Figure 9, we can see that the non-Islamic oil exporters fall on either extreme end of the diagram, illustrating that these countries tend to have either high levels of corruption and a relatively low HDI and visa-versa; and for the PGOEs, almost uniformly as corruption levels increase (low on the CC percentile rank) HDI levels decrease. A very similar trend is seen in Figure 10 where for the PGOE countries there appears to be a linear relationship between corruption and life expectancy; and the non-Islamic oil exporters tend to lie on either extreme with very low life expectancy rates and high corruption in some countries, and vise-versa in others.

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Table 7: Key Human Development Indicators

Overall UN

HDI Rank 2005

Human Development Index Value,

2005

Life Expectancy

at Birth, Annual

Estimates (years) 2005

Adult Literacy Rate (% aged 15

and older) 1995-2005

Combined Gross

Enrollment Ratio for Primary,

Secondary and

Tertiary Education (%), 2005

GDP Per

Capita (PPP), 2005

PGOE Iran (Islamic Republic of) 94 0.759 70.2 82.4 72.8 7,968 Iraq .. .. 57.7 74.1 59.6 .. Kuwait 33 0.891 77.3 93.3 74.9 26,321 Qatar 35 0.875 75 89 77.7 27,664 Saudi Arabia 61 0.812 72.2 82.9 76 15,711 United Arab Emirates 39 0.868 78.3 88.7 59.9 25,514 Group Average 52.40 0.84 71.78 85.07 70.15 20,636 Islamic Non-Oil Exporters

Jordan 86 0.773 71.9 91.1 78.1 5,530 Lebanon 88 0.772 71.5 .. 84.6 5,584 Morocco 126 0.646 70.4 52.3 58.5 4,555 Senegal 156 0.499 62.3 39.3 39.6 1,792 Tunisia 91 0.766 73.5 74.3 76.3 8,371 Turkey 84 0.775 71.4 87.4 68.7 8,407 Group Average 105.17 0.71 70.17 68.88 67.63 5,707 Non-Islamic Oil Exporters Canada 4 0.961 80.3 .. 99.2 33,375 Mexico 52 0.829 75.6 91.6 75.6 10,751 Norway 2 0.968 79.8 .. 99.2 41,420 Russian Federation 67 0.802 65 99.4 88.9 10,845 United Kingdom 16 0.946 79 .. 93 33,238 Venezuela 74 0.792 73.2 93 75.5 6,632

Group Average 35.83 0.88 75.48 94.67 88.57 22,710

Source: UNDP Human Development Report, 2007 and 2008.

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Figure 9: Human Development and Corruption

Source: UNDP Human Development Report, 2007 to 2008.

Figure 10: Life Expectancy and Corruption

Source: UNDP Human Development Report, 2007-2008.

5) Economic Development If economic development is placed in focus, the Middle East and North Africa (MENA) region as a whole has experienced lackluster economic growth over the past two to three decades, and growth to a large extent has been dependant on booms in the oil market. Over the period 1975-2002, real per capita GDP annual growth was 0 .1 percent, as compared to 2.3 percent for all developing countries.



29





The growth trend for all the Middle East oil-exporting countries, in fact, reveals negative economic growth rates in real GDP per capita for the period of 1975-2002 (before the spike in oil prices that reached $147 in July of 2008), a dismal record that is only matched by Sub-Saharan Africa, and growth rates far lower then that of the East Asia region of 5.9 percent and the developing country average during that same period. Economic and financial policies have been misguided, with oil revenues used to finance poorly targeted subsidies and to buy public loyalty for autocratic regimes, as opposed to being used to promote economic liberalization, reforms and investments in nearly all areas.

For the county groupings under study the relationship between corruption and proxy indicators for economic growth is insignificant. Based a simple correlation using the Transparency International’s CPI and the World Bank’s CCI, on a worldwide scale the relationship between corruption and annual GDP growth and corruption and per capita annual GDP growth is low. Similarly, isolating the three country groupings under study (Oil-exporting Islamic, Oil-exporting non-Islamic, and Islamic non-oil exporting) reveals that there is no relationship between economic growth and the level of corruption simply because a country is Islamic. But the correlation coefficient (-0.70 based on the World Bank’s Control of Corruption percentile rank) for all of the oil-exporting countries (Persian Gulf and the non-Islamic oil exporters) suggests a higher degree of association between economic growth and corruption (Figure 11). The negative correlation indicates that, for oil exporters, as corruption decreases annual per capita GDP growth increases, a result that would be supported by others (Drury et al., 2006).

The paradox between countries rich in natural resource endowments and stunted economic development—termed the “resource curse”—has been well documented and is in part attributable to corruption (Sachs and Warner, 2001). However, that is not to say that the exploitation of oil has necessarily a negative effect on growth as attested in countries that had good governance and were developed before oil was discovered, such as Norway and the United Kingdom. The key is the quality of institutions when oil was discovered; if they were good, then oil would in all likelihood be a blessing.

30




Figure 11: Per Capita GDP Growth (Annual %) and WB Control of Corruption

Source: World Development Indicators, 2007 and World Governance Indicators, 2008; World Bank.

CONCLUSION

The major oil-exporting countries of the Persian Gulf do not display a significantly higher level of perceived corruption than a comparable group of Islamic non-oil-exporting countries; and their perceived corruption level is somewhat lower than that for three selected developing oil-exporting countries chosen from outside the region. When we, however, look at individual indicators such as poor business environment, and weak mechanisms for good governance, we find that corruption is correlated with these variables in all of our oil-exporting countries, including the Persian Gulf. The association between corruption and per capita annual GDP growth is low. Similarly, isolating the three country groupings under study reveals that there is no relationship between economic growth and the level of corruption simply because a country is Islamic. But the correlation coefficient for all of the oil-exporting countries (Persian Gulf included) suggests a higher degree of association between economic growth and corruption. The negative correlation indicates that, for oil exporters, as corruption decreases annual per capita GDP growth increases, a result that would be supported by others (Drury et al., 2006). A major effort in these countries to reduce corruption should, therefore, be helpful in their development process.

While oil revenues were plentiful and expected to last for many decades, these countries could simultaneously subsidize the population, finance basic economic development and reward the ruling elite. This was particularly true of


31





the richer countries of the Persian Gulf. This, however, is not sustainable for the countries that are not as resource rich in per capita terms--Iran, Iraq and Saudi Arabia-- and only possible as long as oil lasts and oil prices are high. The only long-term solution is to embrace better institutions and policies to achieve higher levels of sustained growth.

Finally, we should emphasize that this paper was written before the blossoming of the “2011 Arab Spring”. The major reasons, to varying degrees, for the protests in the Mideast and North Africa have been because of decades of economic deprivation, autocratic rule, political injustice, institutional corruption, and human rights violations.

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Documents

Corruption: A View from the Persian Gulf