GEH1002_GEK1018 - ToPIC 6 - Economic Growth and Corruption (1)

8/19/2019 GEH1002_GEK1018 - ToPIC 6 - Economic Growth and Corruption (1)

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Objectives

• What are the manifestations ofcorruption?

• What are the reasons for widespread

corruption?• What measures would you suggest for

reducing corruption?

• Is there any role for internationalcooperation in fighting corruption?

Bribe-takers ranked(Source: The Nation/Asia News Network, highlighted in the

Straits Times, 20/11/2014)

• “BANGKOK – A survey in Thailand hasfound that people were asked to pay thehighest combined amount of bribes and

“tea money” at the Land Department’s

offices.• On average, public schools demanded

the largest bribes, at 11,796 baht(S$467) each, followed by 10, 538 baht atCustoms offices, ChulalongkornUniversity’s Faculty of Economicsconduced the survey this year.”

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Poorer countries generally tend toexhibit higher levels of corruption?

• While the statement particularly highlightsabuse of international project funds as wellas public funds in Indonesia, corruptiontakes many forms and is by no meansconfined to Indonesia

• In fact there is hardly any country which isperfectly ‘clean’ though poorer countriesgenerally tend to exhibit higher levelsof corruption


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Afghans forced to pay billions in bribes(Source: AP, TODAY, 21/01/2010)

• “Half of all Afghan adults paid at least one bribe to apublic official over the course of a year to cut throughred tape or get help with poor service, the UNOffice on Drugs and Crime said in a report on Tuesday.

• Afghans paid nearly US$2.5 billion ($3.5 billion) inbribes – nearly a quarter of the country’s GDP – inthe 12-month period ending last autumn.

• The average bribe cost US$160, according to thereport, which was based on thousands of interviews.

• Most of the payments went to officials but Afghanswere also asked to bribe school teachers anddoctors.”

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“….. it is the abuse of public powerfor private benefit”

• The most popular and simplest definition of corruption is that“….. it is the abuse of public power for private benefit”(Source: Tanzi, Vito (1998). “Corruption around the world”)

• Corruption also exists in private sector activities

• Sometimes, the abuse of public power is not necessarily forone’s private benefit but for the benefit of one’s party, class,tribe, friends, family, etc.

• Not all acts of corruption result in bribes

! a public employee who claims to be sick but goes on

vacation is also abusing his power for personal use

• In many instances, bribes can be disguised as ‘gifts’

! A bribe implies reciprocity but gift should not

Corruption Ranking(www.transparency.org)

• Transparency International (TI) is theglobal civil society organization leading the fightagainst corruption (a Berlin-based NGO)

• TI raises awareness of the damaging effectsof corruption and works with partners in

government, business and civil society todevelop and implement effective measures totackle it

• TI defines corruption as the “abuse ofentrusted power for private gain”

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Corruption Perception Index(CPI)

• Published since 1995

• Ranks countries according toperception of corruption in the

PUBLIC SECTOR • An aggregate indicator that bringstogether data from 13 sources thatcover the past two years (rangingbetween 10, highly clean, and 0,highly corrupt)

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TABLE 1

Corruption Perceptions Index, 2015

(168 countries and territories)

RANK COUNTRY

1 Denmark

2 Finland

3 Sweden

4 New Zealand

5 Netherlands/Norway

7 Switzerland

8 Singapore

16 Austria/USA

18 Hong Kong SAR /Ireland/Japan

83 Benin/China /Columbia/Liberia/Sri Lanka

167 North Korea / SomaliaConnie CHUNG 9

TABLE 2Corruption Perceptions Index

ASEAN countries

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TABLE 3Corruption Perceptions Index, 2015

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Uganda example

• Another study of manufacturing firms inUganda, found that a 1% increase inbribes paid by a firm was associated with areduction in firm growth of 3%

• while a 1% increase in taxation reducedfirm growth by only about 1%• Survey evidence from transitional

economies suggests that firms would bewilling to pay significantly higher formaltaxes in exchange for eliminating corruption(World Development Report 2002, pp 106)

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World Bank Group(Source: Straits Times 07/02/2008)

• A country moving from the lowest end of the CPIdistribution to a position in the middle of the pack:may enjoy an increase in investment by up to 8%

of GDP; per capital income growth may rise byover 1%

• Every US$100 million of stolen assetsrestituted to a developing country could fund fullimmunization of four million children, or about250,000 water connections for households, or asmany as 50 million to 100 million Artemisinin-based treatment for malaria

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Manifestations of corruption

1. Corruption also undermines thecompetitive forces (as new firms mustpay bribes at every turn beginning fromregistering the business) that are centralto well-functioning markets

2. Corruption lowers public spending onhealth and education, which in turnlimits opportunities for poor people toinvest in their human capital and toparticipate in markets

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Manifestations of corruption …

3. Across countries, greater corruption is alsoassociated with lower overall tax revenues

4. Corruption undermines the legitimacy of thestate itself and weakens the capacity of thestate to provide institutions that support markets

! study of firms in Indonesia with close linksto Suharto regime concluded that one-quarter of the value of these firms wasdirectly attributable to their politicalconnections (World Development Report2002, pp 106)


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What are the root causes of corruption?

• World Development Report 1997emphasized three factors:

1. a distorted policy environment thatcreates greater opportunities for public

officials to manipulate rules for their ownbenefit

2. a weak judiciary that is unable toprovide a credible threat of punishmentwhen official misconduct is discovered

3. poor civil service management and lowpublic sector pay

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More open international tradelowers corruption

• There is growing evidence that countries that aremore open to international trade (improvesinformation flows, competition, and removes tariffbarriers) have lower corruption

• The evidence also shows that a more complexregulatory environment breeds corruption

• Cross-country evidence shows that corruption issignificantly higher in countries where inflation ishigh and variable (information about prices isdifficult to obtain and that creates opportunities forcorruption in public procurement)

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How to combat corruption?

• Tanzi, Vito (1998) (“Corruption around theworld”) recommends action on four fronts:

1. Honest and visible commitment by leadership tofight against corruption

2. Reduce demand for corruption by scaling down

regulations and other policies such as taxincentives

3. Reduce supply of corruption by increasing publicsector wages, effective controls and penalties

on public servants

4. Solve the problem of financing of the politicalparties

TABLE 4: Anti-Corruption Strategies of

Selected Asia-Pacific Countries(Source: Quah (2008))

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Study Conclusions

• Of the three patterns of corruption control, Pattern3 is more effective than Patterns 1 and 2

• The key factor responsible for combating corruptioneffectively in a country is the political will orcommitment of its political leadership

• Pattern 2 is also not a good option as thereliance on multiple anti-corruption agencies inChina, India, and the Philippines has not beeneffective in curbing corruption because of the lack ofcoordination, inter-agency competition, and thedilution of the anti-corruption effort by spreadingthe limited resources among these agencies.

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• Pattern 3 is more effective than Patterns 1and 2 because the independent anti-corruptionagency is a specialized agency concerned solelywith minimizing corruption. The agency’ssingle-minded focus on combating corruption isa tremendous advantage as it is notdistracted by other priorities.

• The CPIB in Singapore and the ICAC inHong Kong focus their energies and resourceson curbing corruption unlike India’s CBI, whichis concerned also with also with tacklingterrorism and organized crime in addition tofighting corruption.

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Singapore(Source: Quah (2008))

• The first anti-corruption law was introduced in Singaporewhen the Prevention of Corruption Ordinance (POCO)was enacted in December 1937

• The POCO was implemented by the Anti-Corruption Branch(ACB) of the Criminal Investigation Department (CID)of the Singapore Police Force

• The ACB was replaced by the Corrupt PracticesInvestigation Bureau (CPIB), which was established as anindependent agency in October 1952

• When the People’s Action Party (PAP) governmentassumed office in June 1959, corruption was a way of lifein Singapore and perceived by many to be a low-risk, high-reward activity

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• To minimize corruption and change the publicperception of corruption to a high-risk, low-rewardactivity, the PAP leaders initiated acomprehensive anti-corruption strategy in

1960 by enacting the Prevention of CorruptionAct (POCA) and strengthening the CPIB

• As Singapore’s GNP per capita in 1960 wasS$1,330 (US$443), the PAP government could not

afford to raise the salaries of civil servants.• Accordingly, it was left with the alternative of

strengthening the existing anti-corruption

laws to reduce the opportunities for corruptionand to increase the penalty for corrupt behaviour

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• The CPIB is the anti-corruption agency responsible forenforcing the POCA’s provisions

• The CPIB performs three functions:

1. receives and investigates complaints oncorruption in the public and private sectors

2. investigates malpractice and misconduct bypublic officials

3. examine the practices and procedures in thepublic service to minimize opportunities for corruptpractices

• Unl ike Hong Kong SAR’s Independent CommissionAgainst Corruption (ICAC), the CPIB can perform itsduties without a large staff as its location within thePrime Minister’s Office and its legal powers enable itto obtain the required cooperation from both public andprivate organizations

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Combating corruption inBotswana and Lithuania

• In 1974 Hong Kong SAR established athree-pronged anti-corruption strategyfocused on investigation, prevention,

and education, implemented by theautonomous Commission AgainstCorruption

• Drawing inspiration from its success,similar initiatives have been adopted incountries as diverse as Botswana andLithuania

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Botswana

• Following a series of high-levelcorruption scandals, Botswana createda Directorate of Corruption andEconomic Crime in 1994 withpowers to investigate and prosecute

suspects, prevent corruption, andeducate the public

• The directorate is an autonomousagency under the office of thePresident

Botswana …

• In its first two years of operation, itlaunched 828 investigations, bringing 141persons before the court and recoveringapproximately $1 million in fines,forfeitures, seizures, and taxes

• It has sustained an active publicitycampaign through seminars, postercampaigns, displays at trade exhibitions,and cartoon strips, as part of the moraleducation of the young

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Lithuania

• In 1997 Lithuania established a SpecialInvestigation Service that reports tothe President and the Parliament

• The number of prosecutions for bribe-taking increased sevenfold between 1997and 2002 (from 10 a year to 73), and thecases of prosecution for abuse of office,from 2 in 1997 to 19 in 2002

• World Development Report 2005

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Fighting graft– doing a global public good

• UN Convention against Corruption agreementrecognizes global responsibility in fightingcorruption[https://www.unodc.org/documents/treaties/UNCAC/Publications/Convention/08-50026_E.pdf}

• Developing countries might have a long way to go inimproving transparency, accountability and goodgovernance

• But progress made by these countries will be deemedinsufficient as long as the international financialarchitecture provides a risk-free alternative for theconcealment of stolen funds

• An estimated US$20 billion to US$40 billion leavesdeveloping countries each year as il licit flows – asignificant part of this money is corruptly stolen funds

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Fighting graft– doing a global public good …

• Developed countries can step up the pace andundertake decisive and creative measures tofacilitate the recovery of stolen assets

• Can also make substantial progress by establishingindependent anti-corruption bodies,

implementing public asset declarations forpublic officials as well as establishingtransparent, competitive and objectiveprocurement systems

• World Bank – through its Stolen Asset RecoveryInitiative, it helps developing countries to recoverstolen assets

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References

• Elliot, Kimberly Ann (1996). Corruption and the GlobalEconomy , Washington, D.C.: Institute for InternationalEconomics, Chapter 10

• Gray, C. W. and Kaufmann, Daniel (1998). Corruptionand Development, Finance and Development , March

• Klitgaard, Robert (1998). “International cooperationagainst corruption”, Finance and Development

• Quah, J, S.T. (1988). Corruption in Asia with SpecialReference to Singapore: Patterns and Consequences,

Asian Journal of Public Administration , 10 (1), pp 80-98• Quah, J, S.T. (2008). Combating Corruption in the Asia-

Pacific Countries: What do We Know and What Needs to

be Done? , presented at the Asia-Pacific GovernanceInstitute´s Conference on “The Many Faces of PublicManagement Reform in the Asia-Pacific” in Bangkok,Thailand, July 7-9


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References

• Quah, J, S.T. (2011). Curbing Corruption in AsianCountries: An Impossible Dream?. Research inPublic Policy Analysis and Management , Volume20, pp 439-469. United Kingdom: Emerald Group

Publishing Limited• Tanzi, Vito (1998). “Corruption around the world”,IMF Staff Papers, Vol. 45, No.4, December

• Transparency International (1995, 2009-2015).Corruption Perceptions Index ,http://www.transparency.org

• World Bank (1997,2002,2005). WorldDevelopment Report

• World Bank (2002). “Building Institutions forMarkets”, World Development Report

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GEH1002_GEK1018 - ToPIC 6 - Economic Growth and Corruption (1)