2 - Corruption and its global impact

What is the definition of corruption?

Distortion in decision-making process that creates opportunities for some and costs for others

What are the levels of corruption

Petty corruption: small payments to low-levbel bureaucrats in order to get small favours in return

Grand corruption: related to higher level beaurcrats or politicians. It involved large amounts of money and the favours are respectively bigger e.g. Michelle Mone scandal

What are the variants of corruption?

Bottom u: Low-level officials collect bribes which they share with their superiors

top down: high-level officials collect bribes and share with low- level employees

What are the categories of corruption and their description

Bribery

• act of dishonestly persuading someone to act in ones favour by a payment or other induscement. Inducements can take the form of gifts, loans, fees, rewards or other advantages. Use of bribes can lead to collusion and/or extortian

Embezzlement

• To steal, misdirect or misappropriate funds or assets placed in one’s trust or under ones control. From a legal point of view, embezzlement need not necessarily be oor involve corruption

Facilitation payment

• a small payment, also called a ‘seed’ or ‘grease’ payment made to secure or expedite the performance of a routineor necessary action to which the payer has legal or other entitlement

Frauf

• the act of intentionally and dishonestly deceiving someone in order to gain an unfair or illegal advantage

Collusion

• arrangement between 2 or more parties designed to achieve an improper purposes, including influencing improperly the actions of another party

Extortion

• the act of impairing or harming or threatening to impair or harm, directly or indirectly, any party or the property of the party to influence improperly the actions of a party

Patronage,clientelism and nepotism

• Patronage at its core means the support given by a patron, in gov, it refers to the practice of appointing people directly

What are the causes of corruption? (Part 1)

1. Size and structure of governments

• gov expenditure: 2 perspectives

  • large gov leads to more corrupt politicians → increases the rents from illegal behaviour

  • Large gov is more effective in fighting corruption → it has a bigger budget for law enforcement

• Risk of reverse causality: countries with high levels might not be effective in generating financial resources

2. Salaries of civil service

• Negative correlation - higher wages correspond with less corruption due to its costs of dishonest behaviour → if a bureaucrat accepts bribes and get detected, he will lose his job

• The evidence is weak

• Reverse causality?

  • some countries might pay low salaries to their employees because there is commonon notion that the bureaucrats make enough money off corruption (anyway involved in corruption

3. Democracy and the political system

• political moderinsation is usually accompanied by an increase in corruption → underdeveloped institutions

• Democracy reduces corruption but only if the institution are evolved and fully functional - level of naturalisation

• Inverted U pattern between corruption and the durability of new democracies

4. Quality of institutions

• Negative correlation btw level of corruption and proxies for quality of institutions:

  • institutional quality measured by a rule of law index and an index of government effectiveness - standardised of whole world to make it easier to do

  • Institutional quality measured by the risk of expropriation

  • Institutional quality measured by an index of regulation of market entry, inc: required procedures, costs and time to start a new business

5. Economic Freedom/ openness of the economy

• Negative correlation btw level of corruption and indexes of economic freedom:

• The more competition, the harder it is to high corrupt payments → competitors might uncover the corrupt activities - when they can see others bids - creates another layer of checks and balances

What are the causes of corruption? (Part 2)

6. Press freedom and judiciary

• Negative correlation

• a high quality and uncensored press sheds light on misuse of power and makes it more difficult to engage in it undetected

• Risk of reverse causality: it might be that it is not a free press that lowers corruption levels, but a corrupt gov that lowers the freedom of press.

7. Cultural determinants

• Trust → negative relationship. Trust facilities and encourages cooperation between all members of society, reducing corruption

• Religion → positive correlation between the % of population belonging to ‘hierarchical’ religions and corruption

8. Percentage of women in labour force

• negative correlation → countries with a high share of women in the labour force suffer less from opportunistic behaviour at public expenses

  • Women engages in less corruption than men

  • Female representation in Gov corresponds to lower levels of corruption

  • Corruption is higher in societies where women are less able to participate in the social life

9. Colonial heritage

• depends on the country of heritage

10. Endowment of natural resources

• 2 perspectives:

  • Abundance on natural resources should have a positive effect on development → it encourages trade and investment

  • Resource - curse: In the presence of resource abundance Gov become less efficient → citizens and officials compete for rents and invest less in other forms of capital - when a country discovers rich supplies of NR, strong institutions are necessary to prevent the rise of corruption

What is the Rational Choice theory?

models human behaviour as the result of individual, self-interested preferences

What are the 3 rational choice explanations for corruption?

1. Cooperation game (prisoners dilemma)

   Individuals have incentives to pursue self-interest rather than work with others towards the collective good → docial dilemma

   Regardless of optimal outcome for everyone

2. Collective action (prevailing norms

   Corruption might widespread because of the existence of pro-corruption social norms

   In this type of contect corruption is the expected form of behaviour → no sanctioning ag/ corruption

   If corruption is a normative issue tehre are a few benefits of acting athically in a predominantly corrupt environment - cultural movement

3. Principal-agent model:

   A way of organising cooperative behaviour which requires delegation of responsibility for tasks both to and within institutions and organisation

   Relationship btw:

   The principal - top level gov

   the agent - an official who take sthe bribes from the private individuals interested in a gov produced good

Is corruption “grease in the wheel” or “sand in the wheel”?

“Grease in the wheel”

• some economists claim that corruption has economic advantages

• Corruption is an opportunity to allocate resources to individuals with the highest WTO - therefore most productive

• Can help to increase efficiency in bureacratic process

• Avoid over regulation

“sand in the wheel”

• corruption cannot speed up complex bureaucratic processes → but an official can help to delay them

• evidence of negative impacts of corruption prevail on the economic literature

What are the consequences of corruption?

1. Corruption reduces GDP

• strong negative corrleation btw corruption and GDP

• Reverse cauality? Does corruption reduce GDP or does a low GDP generate corruption?

  • High corruption deters investment and creates inefficiet levels of production

  • Low GDP restricts the abilities of a country to control corruption → more corruption

2. Corruption increases inequality

• positive corelation between corruption and inequality

• bribes are paid to the officials in power with the possibility of giving something in return

• Corruption often occurs in sectors where the gov offers goods to all social classes

3. Corruption reduced total investment and capital flow

• it increases transaction costs for investor

• Grand corruption is preferred to petty corruption - by investor

4. Corruption reduces Foreign Direct Investment

• Corruption reduces the likeligood of FDI taking place

  • Effect is more damaging for developed countries

  • Corrupt countries have a higher level of politicak and economic instability. Corrupt officials are decision-makers

5. Corruption reduces foreign trade

• generates competitive disadvantages

What are the different measures of corruption?

Global corruption Barometer → transparency international

• measures ordinary household interaction with corruption in basic services delivery

Bribe Payers Index → Transparency International

• measures the corruption angegament of the private sector

• How often do firms headquarterred in that country engage in bribery in this country - survey

• Countries are scored on scale 0-10

• 10: companies from that country never bribe

• 0: companies frm that country always bribe

Corruption Perception Index (CPI) → transparency international

• measures the degree to which politicians are believed to accept bribes

  • ranks countries by their perceives levels of public sector corruption as determined by expert assessment and opinion surveys

• CPI ranks 180 countries on a scale from 100 to 0. Support for the CPI is centred on the acknowledgement that while it is not a perfect tool it is one of the best available

What are the global implications of corruption?

Corruption is an international phenomenon in scope and consequences

• global amount of bribes paid ~ $1 trillion USD/year

• Global cost of corruption ~ $2.6 trillion USD/year

• UN announces global cost of corruption at least 5 % of world GDP in 2018

• Combting corruption calls for broad-based international collaboration

What is the effect of globalisation on corruption

2 theories

• globalisation has increased the opportunities for corruption and made corruption practices more difficult to detect

• Globalisaton has led to a decrease in corruption → countries must comply with international anti-corruption regulations

Evidence suggests a non-linear relationship btw globalisation and corruption

what was the OECD anti-bribery convention (1997)?

Objective: create a level of playing field to imrpove the international business environment

• first and only international anticorruption instrument focused on the supply side of bribery

• First anti-corruption initiative with global reach

• 43 member states

Weaknesses:

Enforcement: Most policies are recommendation → OECD members are not forced to implement standards

What was the UN convention against corruption UNCAC (2003)?

UN convention Against Corruption UNCAC(2003)

Objective: Facilitate the fight against corruption by strengthening policies and by promoting international cooperation. It requires signatory parties to prohibit their officials and enterprises from receiving bribes

• first global treaty against corruption with broad international consensus

• 186 member states

• Weaknesses

• - no definition of corruption

• No follow up system to ensure the implementation of recommendations

• Fails to criminalise certain acts: bribery of a foreign public official, trading in influence abuse of public functions or illicit enrichment

What are the limits of international anti-corruption institutions

There is little evidence of a decrease inthe incidence of corruption in, and by nationals of, the participating countries

Why have international anti-corruption institutions been inefficient in reducing corruption?

How can we achieve a more robust implementation of international anti-corruption

Case study: OECD Anti-bribery convention → a game theoretic approach

What is the game theory approach to international corruption?

A game ceased to be a prisoner’s dilemma following the passage of the US Foreign Corrupt Practices Act

• during 1970s - number of corruption scandals worldwide → only in the US did congress pass legislation

• 1977- US congress approved the fCPA → it makes it illegal for US firms to pay bribes to foreign Gov officials

US fims complaints: The FCPA placed them at a competitive disavnatge relative to international firms based in other countries

US Department of Commerce estimates that during 1994-1996 US firms lost about $11 billion in contracts due to bribes

The FCPA changed the payoffs of the game for US companies

whats the dominant strategy in the game theory approacj D

Why have the conevntion been inefficient in reducing global corruption?

Only one prosecution initiated by a country other than the US for bribery of a foreign official → canada

There was a lack of will or capacity of OECD members to meet their obligations

No cost, no enforcement

Having looked at enforcement, is an inefficient outcome surprising

The convention did not represent a credible threat for OECD members → no change in expected payoffs

With the US committed for cooperation due to internal regulation (and politics) → bribery remine dthe dominant maximising strategy for foreign companies

International anti-bribery policy should focus on achieving an effective change in expected payoffs → enforcement

• there are 22 countries showing little or no enforcement

• countries that fail to investigate and prosecute foreign bribery include Japan, Russia, Spain, South Korea and the Netherlands

Is it feasible to end corruption?

there are no quick fixes or simple solutions for corruption

• reforms that open up and liberalise the economy

• reforms that eliminate unnecessary regulation

• Political reforms that give more power to citizens and voters

Reducing corruption takes real resources. thus cust must also be considered in the development of anticorruption strategies and the selection of particular tactics

• IMF, World bank, etc. can lend valuable support for anticorruption efforts in a variety of ways. these agencies can provide advice, technocal assistance and financial support for institutional and policy reforms

• International institutions also have a role to play. they can encourage and support the internal reforms