Friday, 27 May 2011


Department of Economics
University Of Lagos, 2011
+234 803644990; +234 8096683620

Corruption is a human condition and an ancient phenomenon. Ancient civilizations had traces of widespread illegality and corruption. Thus, corruption has been ubiquitous in complex societies from ancient Egypt, Israel, Rome, Greece down to the present. From the beginnings of civilization, public notables have abused their offices for personal gain while citizens have sought advantage by corrupting those holding power. It is a multifaceted vice supported by different historical and socio-economic conditions in each country. It exists at all levels of society. Its consequences are global; its hidden costs immense.
Today, global security is threatened as never before by fiscal uncertainty, competition and mutual suspicion among world powers, nuclear proliferation, terrorism, and tyranny. A close look reveals corruption to be at the very center of these global threats. On a day-to-day basis, corruption ‘scandals’ are widely reported in the press from almost all walks of life including politics, government, business.
Simply, corruption is dishonesty for personal gain. Corruption, according to Encarta, is extreme immorality or depravity, exploitation, and degeneracy. Corruption encompasses all sorts of illicit activities from bribery, extortion, fraud, embezzlement, nepotism, cronyism, appropriation of public assets and property for private use, and influence peddling to contract inflation.
Ultimately, defining corruption is a social and political process. However, the most commonly specified definition is something along corruption in public authority and its abuse. It also links corruption to the state, and its intervention in the market. In other words, the use of this definition excludes the possibility of corruption in the private sector, and it focuses exclusively on malfeasance at various levels in the public sector. This definition is consistent with the belief of Nobel laureate Gary Becker that “if we abolish the state, we abolish corruption.
 A more compassing definition of corruption has been given by Vito Tanzi renowned economists. He defines corruptions as “the intentional non-compliance with the arm’s length principle aimed at deriving some advantage for oneself or for related individual from this behaviour”. There are three basic elements of this definition. This first element deals with the arm’s length principle as it requires that personal or other relationships should play no part in the economic decisions that involve more than one party. Equal treatment of the economic agents is essential for a well working market economy. Bias towards particular economic agent definitely violates the arm’s length principle and fulfils a necessary condition for corruption. Quite simply, if there is no bias, there is no corruption.
There are two additional necessary conditions for corruption, or rather conditions that must be fulfilled for observed bias [“non compliance with that arm’s length principle”] to be specified as corruption. The first condition is that the bias must be intentional – accidental violation of the arm’s length principle because of, for example, imperfect information, does not represent corruption. Secondly, there must be some advantage for the individual who commits a violation of the arm’s length principle; otherwise, there is no corruption. It is a rather widespread notion, that corruption is receiving money [this form of corruption is most often called bribery], but corruption can manifest itself in different forms. Similar gain can imply expensive gifts or various favours returned.
Incidence of corruption varies among societies, and it can be rare, widespread or systemic. When it is rare, it is relatively easy to detect, isolate and punish and to prevent the disease from becoming widespread. When corruption becomes widespread, it is more difficult to control and to deal with. But the worst scenario is when it becomes systemic. When systemic corruption takes hold of a country, the institutions, rules and peoples’ behaviour and attitudes become adapted to the corrupt way of doing things, and corruption becomes a way of life. Systemic corruption is very difficult to overcome and it can have a devastating effect on the economy, as is the case in Nigeria.

Corruption in Nigeria
Corruption remains elusive and ever strives to thrive in most unlikely places. Corruption in Nigeria has become so disturbing that the ex-president, Chief Olusegun Obasanjo once said; “The truth is that, it is much tougher to fight corruption in a developing society than it is in the developed world” (Obasanjo, 2003). Whatever dimension may assume, it is certain that a nation with high incidence of corruption cannot grow or develop. This is because corruption is antithesis of growth and development, leaving in it trail negative social-economic consequences.
Corruption malady had become so disturbing that the German-based non-governmental organization, Transparency International (TI), has taken it upon itself to carry out annual survey of corrupt countries all over the world. The survey has been conducted annually for about a decade. The organization ranked Nigeria as the second most corrupt nation in the world in its 1999, 2001, 2002 and 2003 surveys. The country was the most corrupt nation in the world in TI’s survey of 2000. Survey of 2004 was carried on 146 countries, and Nigeria was ranked third most corruption nation. In its 2005 survey carried out on 159 countries, Nigeria was ranked the sixth most corrupt nation in the world. The organization’s surveys of 2006 and 2007 carried out on 163 and 180 countries respectively ranked Nigeria as seventeenth and thirty-third most corrupt nation in the world (TI, 2006, 2007).
Trends in Nigerian Corruption
As a local issue, it goes without saying that corruption has been an endemic problem in Nigeria. The monster rears its ugly head in virtually all facets of the Nigerian society. From the police man who is more interested in N20 notes of motorists than their driving licenses, to the bureaucrats in the various ministers who are determined to eat their share of the national cake, corruption has eroded the moral fabric of citizens from all walks of life.
There are many unresolved problems in Nigeria, but the issue of the upsurge of corruption is troubling and the damages it has done to the policy are astronomical. The menace of corruption leads to slow movement of files in offices, police extortion, congestion, and election irregularities, among others.
Transparency International consistently rates the levels of corruption in Nigeria among the highest in the world. Pervasive corruption appears to permeate many levels of Nigerian society. The government, however, has taken great steps to combat this problem through cooperation with the U.N. Global Programme.
Corruption is a detrimental force that hinders democracy and represses individuals in many countries throughout the world. As one Nigerian official noted, "there is corruption everywhere."  He further explained that "the word 'corruption' is not a Nigerian word; it is an English word." While "corruption" is an English word, necessarily laced with Western ideas, the concept behind corruption is found in other cultures. In fact, over the past five years there is little doubt over which country is the most corrupt: Nigeria. "Corruption, as the name rages like a desert storm blowing from the North, has been institutionalized in Nigeria."  Nigeria possesses the dubious honor as one of the world's most corrupt societies according to Transparency International's Corrupt Practices Index.  
In 2002, Nigeria placed 101 out of the 102 nations where Transparency International performed the study.  According to the organization's index, which measures the "degree of corruption as seen by business people, academics and risk analysts," only Bangladesh scored lower.  Corrupt practices transcend nearly "every stratum of Nigerian society."  Thus, when seeking to mediate corruption, the Nigerian government faces a trying task. While "corruption" is an English word, it does not exist without equivalents in other languages. In Nigeria one describes similar acts as okonjuwa, iri nso azu, or zamba. Low-level corruption scandals have crippled Nigeria over the past several decades. Between 1983 and 1999, the Nigerian government lost more than one billion U.S. dollars annually to smuggling networks, many in collusion with the top elite of the nation.  The situation in Nigeria provides a glimpse of how corruption can destroy an entire economy in a developing nation.
LAGOS: On the streets of Lagos, it is never difficult to find people angry about the notorious level of corruption in the country.
For example, Sam Olawale owns a small photography shop at Yaba. Asked if he will vote only for a candidate who will fight corruption, he says: "Yes, of course, all the people of Nigeria should pay attention to the fact that our last fifty years have been in misery. So, when they choose for the upcoming four years, people should vote carefully. They should vote for those who can take our country forward.”
Other people express similar sentiments. “For the better future of Nigeria, I think, it’s important that people should be elected who are not like the past ones, that day-by-day we go forward," says Amaka, who works nearby University of Lagos. "I think, firstly, we should have good security, that we do not engage in strife anymore. And secondly, corruption should be removed. Then I think our country will flourish.”
Trends in Global Corruption
The recently-adopted Organization for Economic Cooperation and Development(OECD) convention outlawing bribery of foreign public officials is welcome evidence of how much progress has been made in the battle against corruption. The financial crisis in East Asia is an indication of how much remains to be done. Corruption is by no means a new issue but it has only recently emerged as a global issue. With the end of the World War II, the pace and breadth of the trends toward democratization and international economic integration accelerated and expanded globally. Yet corruption could slow or even reverse these trends, potentially threatening economic development and high-level stability in some countries.
While every country has laws, usually of a criminal nature, prohibiting bribery – particularly in the public sector – until recently, laws prohibiting foreign bribery were relatively rare. The US Foreign Corrupt Practices Act (FCPA) stood for almost 20 years as the only transnational bribery statute in the world. The last 10 years have, however, seen dramatic changes in this landscape. With the adoption of a series of international treaties, some highly targeted and others far-reaching, today dozens of countries have laws criminalizing the bribery of foreign public officials in international business. Some of these countries have extended their laws to purely commercial conduct as well. Moreover, these treaties create a legal infrastructure to facilitate cross-border investigations and enforcement.
International financial institutions such as the World Bank, which previously turned a blind eye to corruption in projects they financed, are now investigating and sanctioning firms and their personnel found to have engaged in improper practices. As exemplified by the Siemens case, multijurisdictional investigations are on the rise, as are the penalties for violations, particularly where so-called ‘high-level’ corruption is concerned.
Although enforcement is still quite uneven across countries, where there is the strong will and capacity to enforce, the level of enforcement activity is rising rapidly. In the United States, enforcement of the FCPA is at an all-time high, with cases focusing not only on high-level corruption in the procurement or business development context, but in many cases on lower-level operational corruption, in dealings with customs, tax, immigration and other regulatory authorities. In the last year, the United Kingdom went from being an enforcement laggard to apparent aggressive regulator and enforcer engaged in close cooperation with the United States.
In a speech given in February 1998, Mr Michel Camdessus, IMF’s Managing Director, said: “estimates of the present scale of money laundering transactions are almost beyond imagination – 2 to 5 per cent of global GNP”. The World Bank estimates world GNP to be $29,926 billion in 1997 (World Bank 1998). Two to five per cent of this comes roughly to around $600 billion to $1,500 billion. Since the total GNP of low income countries in the same year is estimated at $722 billion2, the share going to officials from poor countries is likely to form only a tiny percentage of the huge sums involved in global money laundering transactions.
As in the case of world trade, investment and finance, the developed countries are probably each others’ best customers in the international money laundering business. Consequently, new and innovative regulatory initiatives have been taken in many of these countries to strengthen detection of money laundering and to improve supervision of financial institutions to limit the scope of this activity. But time and again, corruption has been able to stay one step ahead of the best regulatory measure that can be devised to control it, and the fight is turning out to be an uphill battle.
On December 9, 2004 citizens around the world have celebrated the first ever United Nations International Anti-Corruption Day. In the same time the Oil for Food Program Corruption is storming the United Nations! This event illustrates that there is a gap between rhetoric and reality. In fact, World Corruption is increasing.
According to our exclusive calculations, world corruption accounts for about $700 billion. This figure is twofold the entire African GDP (316 billions). It is a massive phenomena and a real cancer destroying the benefits of globalization in many poor countries.
According to a new report from Transparency International, countries like Pakistan ranks 34th in Global Corruption Index, war-torn states are still seen as being the most corrupt in the world. Denmark, New Zealand and Singapore maintained their top position on the list with scores of 9.3. They were followed by Finland, Sweden, Canada and the Netherlands while Afghanistan, Myanmar and Somalia came last with scores as low as 1.1. The US ranked 22nd on the list, down from 19th last year, with a score of 7.1 out of 10, compared with 7.5 in 2009. Meanwhile, emerging economic powerhouse China is in 78th place.
Countries that improved their rankings included Chile, Kuwait, Qatar, Ecuador, Jamaica and Haiti. The Czech Republic, Hungary, Madagascar and Niger also saw their scores decline on the index.
This year’s index, which measures the perception of corruption in the public sector, showed that 132 of the 180 nations reviewed scored below five on a 0-to-10 scale, with 10 indicating the least corrupt, Transparency said.
Transparency International in its 2010 Global Corruption Barometer said the civil service and parliament are considered two of the most corrupt institutions in any country.

The Economics of Corruption
From an academic perspective, and by extension, viewing the phenomenon within the context of economics, corruption makes for an interesting reading. Prior to the 1970s, the issue of corruption was mainly regarded as sociological and political issue. In fact, in 1968, Nobel laureate economists Gunnar Myrdal found corruption ‘almost a taboo [among economists] as research topic’. However, during the last thirty years or so, economists from different fields have made enormous contributions to the analysis of corruption.
Corruption as Rent-seeking
Corruption is in most cases, the consequence of rent appropriation. Rent is a factor’s income that is above the competitive returns of the factor. Competitive returns are those achieved on the competitive market; hence in the world of perfectly competitive markets, there will be no rents. In Economics, rent seeking occurs when an individual, organisation or firm seeks to earn income by capturing rent through manipulation or exploitation of the economic or political environment, rather than by earning profits through economic transactions and the production of added wealth. Corruption is just a form of rent appropriation and its dissipation, i.e. a situation in which economic agents are willing to pay a bribe to be included in the rent appropriation scheme – they are paying to earn some rent. This origin of corruption should always be taken into account when discussing the factors influencing corruption. The factors that create rent are the ones that create fertile ground for corruption.
Theories of Corruption
Economists, in recent times, have taken a keen interest on the issue of corruption. They propounded theories to demystify corruption. Two of such theories are considered here.
Theory of Public Choice
Propounded by James Buchanan, the basic assumption behind the theory of public choice is that individuals always want to maximise utility. Those who reside in places of authority want to maximise their satisfaction and obtain maximum benefit of being in that position. This theory simply says that it is rational behaviour for a politician or any official to ‘loot the treasury‘ as they are only trying to maximise the utility derived from that office. Put simply, public choice theory says that the activities of corrupt public officials are completely rational as they are just trying to maximise utility. It employs microeconomic tools to understand why these decisions are made.
Application to Games Theory
Games theory can be used to explain the economic behaviour of those in authority. Games theory is the ways in which strategic interactions among economic agents. Those who are in power possess some sort of monopoly rights. Generally, politicians, bureaucrats and lobbyists’ are rent seekers with each group trying to maximise votes, the budget and wealth respectively. Here, we simply use a pay off matrix to analyse economic behaviour. All situations in which at least one agent can only act to maximise his utility through anticipating the responses to his actions by one or more other agents is called a game. Agents involved in a game are referred to as players. Each player in a game faces a choice among two or more possible strategies. Game theory is simply the rational action of an economic agent given the strategically significant actions of others.
In the game, all players choose security whether to keep faith or betray each other, and then points are scored when the choices are revealed. If the two played keep faith with other, then moderate benefits earned by both. If both players betray each other, then there is minimal benefit. But if one player can trick the other into keeping faith while betraying him, he earns the maximum benefit while the victim gets nothing.
In explaining the matrix, at (3,3) we assume that both members of society and those in government play their parts and there is no corruption in the society leading to (3,3) but in the event that the government betrays the people and misappropriates public funds to his/her personal gains, we have (5,0) depicting that only one section of the economy gains maximum benefits (i.e those in government) while the general society losses in the form of welfare losses.

A, B

Keeps Faith


 Keeps  Faith



5, 0


Where we assume
A = Members of society and;
B = People who run the government.
In the event that this happens, the members of society may tend not to play their part by not paying their taxes (tax evasion: a form of corruption) as they believe the public funds would be looted by public office holders and we then obtain (0,5) meaning that the economy losses out and those in government have no access to funds in which they can loot (or use in carrying out the proper their functions in the economy in the hypothetical event that they play their part and keep faith). However, if both the members of society and those who run the government do not play their part, the society as a whole losses out and is worse-off, as it is observed that (1,1) is less favourable than (3,3) a situation where both members of society and those who run the government keep faith by playing their part with no corruption in existence, ether at the government or societal level.
The largest benefits with the least effort come from political rent seeking, and those who fail to participate in the political process of corruption will have their wealth drained way with no corresponding return. It is obvious to all that not everyone can live off of the wealth of everyone else. [1,1], and that the best mutually beneficial course is for everyone to give  up individual rent seeking [3,3], it is obvious that the best course for each individual group is to get everyone else to give up rent seeking while they alone covertly continue to collect their monopoly rents [5,0]. The fear that others will pursue such a strategy is easily sufficient motivate
Klitgaard’s Theory of Corruption: The Corruption Equation
His equation of corruption can be set out as follows:
C = M + D – A
C = corruption,
R = monopoly power,
D = discretionary powers, and
 A = accountability.
Mathematically speaking, we can say C varies directly with M and D, and inversely with A.
The equation states that the more opportunities for corruption (M) exist in a country, the larger will be the corruption. Similarly, the greater the discretionary powers (D) granted to administrators, the greater will be the corruption. However, the more administrators are held accountable (A) for their actions, the less will be the corruption, and hence a minus sign in   A.
This theory tends to focus on concentrated, unaccountable power as the primary source of corruption. The more power and unbridled discretion officials have in their formal activities, the easier it is for them to extract bribes from people who need their approval, service, or assistance.
Measuring Corruption
By the very nature of corruption (secrecy, illegality, variation across different economic activities), it is impossible to obtain precise informa-
(1996 - 2005)

South Africa
Source: Transparency International (TI) Publication for Various Years (1994 - 2005)
N/A = Not available.
tion on the extent of corruption in a country, unlike, for instance, measuring inflation. There are several survey-based measures of “corruption perception” but the only one we shall consider here is Transparency International (TI) Index

Transparency International (TI) Index
This the most popular index of measuring corruption worldwide. Produced annually since 1995 by Transparency International, an international nongovernmental organization dedicated to fight corruption worldwide, the index is based on a weighted average of approximately ten surveys of varying coverage. It ranks countries on a one-to-ten scale. Nigeria ranked the most corrupt country in the world, under this index in 1996 when there was widespread corruption during the military and oppressive regime of late Gen. Sanni Abacha.

The index has become a benchmark gauge of perceptions of a country’s corruption, an assessment of risks for investors. It is an aggregate indicator that combines data from as many as 13 surveys and assessments from 10 independent institutions, including country experts and business leaders.

Levels of Corruption
Although corruption can occur at a variety of levels, attention has usually been directed at only two – namely, the high and the low – and these are believed to reinforce each other.
High Level Corruption
High level corruption refers to misconduct at the top and by leading politicians. Since these people are generally well-off and have a lot of privileges associated with their high office, their corrupt behaviour is not attributable to low pay and out of necessity to meet the living expenses of their families. Instead, greed is considered a main motivating factor. But there are other compulsions. To remain in office, for example, can also be an overriding motivating force. With election campaigns becoming expensive, corruption related to campaign financing is a big political issue in some countries.
The need to dispense favours among political allies, colleagues and subordinates to keep them happy, cooperative and loyal is another factor. Moreover, in some societies there are traditions and customs whereby elected officials are expected to make substantive contributions to the welfare of the people in constituencies that elect them. For instance, in some countries a politician is required by tradition to present an expensive gift at a wedding involving a supporter in his electoral district. When such a community has a large number of wedding receptions, birthday parties, anniversaries, celebrations, rituals, festivals, and fund raising ceremonies for all sorts of worthy causes, the financial burden of these festivities can fall heavily on elected officials. And the higher up you are in the pecking order, the larger is the contribution you are expected to make by custom and long held traditions of the land.
Low-level Corruption
Beside high-level corruption there is the low-level corruption: Poor people have to pay low or middle civil servants in order to get access to security, health, education, justice and so on. Authorities have a benign neglect for this low-level corruption (or facilitation's) because it corresponds to some cultural habits and involves small amounts of money and relatively low level officials.
We think that this day to day corruption corresponds to bad cultural habits and must be condemned because it is always paving the way to high-level corruption. The existence of this low-level corruption is often the sign that you are in a country exposed to high-level corruption. Moreover, this low-level corruption affects large populations.
Most households reported paying bribes in relation with the police, the judiciary, or the land administration. In most undeveloped countries, public services such as drinking water, education, health and law enforcement are supposed to be free but nurses, forestry guard, policemen and so on are constantly asking bribes.
As a result, this low-level corruption may represent huge amounts of money since the little streams make the big rivers! A survey reports that more than half of the users of public hospitals in Bangladesh, had paid a bribe to access a service, with bribes averaging $33.
The global low-level corruption represents: $89 billions!
Naughty western companies are bribering poor Third world leaders. In fact, the low-level corruption is more disturbing than the high-level corruption for the very poor people. It means that the worst exploitation occurs inside the poor populations: Poor civil servants such as nurses, military, policemen, forestry guards, custom officers constantly pressure, without any compassion, the poor's farmers and merchants in the undeveloped world.
Indeed, we observe everywhere many middlemen with easy money. I mean money that they spent ostensibly and they have earned without any effort. It means that more and more people are involved in corruption and illegal activities. We have estimated illegal activities and have found a picture accounting for about $1200 billion (Drug trafficking, counterfeiting, prostitution, monkey business and so on)
In short, it could be said that corruption is threatening human rights, economic development and high-level stability. In fact, corruption has undermined the benefits of globalization in many countries. Clearly, its increase and spreading all over the world is introducing negatives changes in the structures of Capitalism.
Every fortress has its trojan horse. The corrupt network functions with banks and many persons just like a criminal or a spy organization. In these organizations, the failure always occurs thank to an inner treachery.
Fiscal Paradises
We have to question ourselves about the existence of these so-called fiscal paradises. As long as fiscal paradises do exist, all the speeches about the struggle against corruption will only be lip service.
A recent report estimates at 5 trillions of dollars the amount of saving accounts in fiscal paradises (There are all over the world at least 55 fiscal paradises. The best known are the Cayman Islands, the Bahamas, the British Virgin Islands, the Bermudas, Saint Martin, Vanuatu, the Cook Islands, Luxembourg, Maurice Island, Switzerland, the Anglo-Normand Islands, Monaco, Gibraltar, Malta)
The fiscal paradises are used by many wealthy people in order to avoid taxes. We may argue that this fiscal evasion is also a case of corruption. It means that some people make pressure on their own politicians in order to protect the existence of these fiscal paradises. Of course, one may argue that fiscal evasion is a legitimate reaction against massive fiscal pressure but I cannot agree with that. If you think that your fiscal pressure is too high, you have just to close your luggage's, to buy an one way flight ticket and to expatriate in another country. On the other hand, when you stay in the country, it means that you continue to enjoy high roads or free education without paying the correspondent taxes. It means that you are a free rider: The taxes you do not pay are supported by the other taxpayers!
What is more, fiscal paradises are fueled by crime, narcotics, terrorism and mainly high-level corruption. Unfortunately, the Western governments do not want to dismantle these “hell spots”! Consequently, we may claim that this refusal is due to a dilute form of corruption (Pressure of some very wealthy persons who contribute to finance the electoral campaigns).
As an alternative, we could propose to set up a world agency in order to monitor all the flow and outflow of money in connection with the worst fiscal paradises. Of course, it could be a difficult task but we may assert that the technology which facilitates the circulation of money may also facilitate its monitoring. Of course we know that people use phony names and numerated accounts but the technology is able to decrypt that. It is just a question of willingness.
Criminal Activities
According to the UN, the profits controlled by prostitution, drug trafficking, gambling, and the illegal trafficking of arms account for about 1000 billion dollars. In including counterfeiting, the figure could be higher. According to our own evaluations (See below) the total illegal activities (without high-level corruption and fiscal evasion) could account for $1200 billions.

i. Drug trafficking
According to the UN and NGO’s, drug trafficking estimates at $500 billion. Some specific sources indicate only 150 billion. Of course the difference is due to the level of the trade channel: Primary production in Afghanistan, Pakistan, Morocco, Burma, Columbia does not exceed 150 billion. In including all the margins until the retailer dealers, it may reach $500 billion.  (190 millions people in the world are drug addicted)
ii. Counterfeiting
Counterfeiting accounts for 5% to 7% of world trade. Since the world trade represents $12,000 billions, counterfeiting could account for $600 billions. Motor vehicles, household appliances, toys, medicines and foods are the most concerned sectors. The phenomenon is experiencing unprecedented growth (25 millions products seized in the European Union in 1999, 70 millions in 2000 and more than 100 millions in 2001).
iii. Arms trafficking
NGO claim that Global military expenditures and arms trade account for $900 billions, annually. This figure includes national expenditures (such as the US defence budget: $400 billions). The real Arms trade is about $50 billion and the illegal arm traffic should not exceed 5 or $10 billion.
iv. Prostitution and so on
We may retain $100 billions in including all the other types of crimes and illegal trafficking such as animals (Washington convention) and so on.
Developing countries
Corruption is both a major cause and a result of poverty around the world. It occurs at all levels of society, from local and national governments, civil society, judiciary functions, large and small businesses, military and other services and so on. Corruption affects the poorest the most, whether in rich or poor nations.
Corruption scandals that sometimes make headline news in Western media can often be worse in developing countries. This is especially the case when it is multinational companies going into poorer countries to do business. The international business environment, encouraged by a form of globalization that is heavily influenced by the wealthier and more powerful countries in the world makes it easier for multinationals to make profit and even for a few countries to benefit. However, some policies behind globalization appear to encourage and exacerbate corruption as accountability of governments and companies have been reduced along the way.
For multinationals, bribery enables companies to gain contracts (particularly for public works and military equipment) or concessions which they would not otherwise have won, or to do so on more favorable terms. Every year, Western businesses pay huge amounts of money in bribes to win friends, influence and contracts. These bribes are conservatively estimated to run to US$80 billion a year—roughly the amount that the UN believes is needed to eradicate global poverty.
Developing countries face both real and perceived problems with corruption. They always feature prominently in the lower part of international corruption indices. According to the 1998 Transparency International Corruption Perception Index, for example, the African country perceived to be the least corrupt is Botswana, who rates 23rd out of the 85 countries listed. South Africa is rated 32nd. Significantly, four African countries are listed among the last thirteen on the list: Uganda, Kenya, Nigeria and Tanzania.
While this list does not necessarily reflect how corrupt countries actually are, the perceptions among international investors are naturally important. As will be pointed out below, many investors are cautious about being involved in corrupt environments because corruption increases the costs of transactions and makes them vulnerable to sanction elsewhere.
As this reluctance to invest in some countries widen, a cycle of underdevelopment evolves where the links between corruption and a lack of development could become mutually reinforcing. Whether these links are real or perceived, they form an important part of the corruption issue in the global community and have had distinct effects on the plight of emerging economies and poor people across the world. This analysis therefore reflects on some of the possible linkages between development and corruption.
Developing societies and their people are not inherently more corrupt than developed ones. Yet, the argument is sometimes made that the lack of development opportunities automatically encourages corruption.

From this perspective, economic growth and development create social opportunities that are of potential benefit to people so that they tend to engage in honest activity to sustain themselves. The specific rewards for entrepreneurship and productive investment rise in relation to rent-seeking investment when there is sustained growth. A prospering economy can also afford to pay its civil servants well, reducing their motivation for corruption.
In contrast, the despair caused by inequality and pervasive poverty may encourage people to break the rules of honesty and decency. People’s access to or shortages of resources often develop a self-perpetuating momentum so that the well-endowed get even more and the poor get even less. Low-level development-related assets in this regard are land, educational opportunities and access to capital. The distribution of land affects income distribution in most developing societies because income from land constitutes a low-level share of households’ income in such countries.
Furthermore, land is often used in such contexts as collateral for borrowing and investing. Hence, the lack of land among those who are poor constrains their access to loans and other forms of financial assistance. The income earning potential and productivity of capital-poor people and institutions is also lower than that of those with capital assets. Educational inequality often translates into broader income inequalities. Firstly, people’s earning power is affected by their relative levels of education. Secondly, higher education levels empower some groups to lobby government more effectively to prioritise their particular needs and requirements.
While none of these factors intrinsically lead to corruption, shortages of resources raise the stakes of competition for those resources that are available and slant the balance of power towards those with access. Such intense competition may either encourage people with access to resources to use corrupt means to hold on to those privileges, or serve as an incentive for the deprived to use corrupt means to improve their own plight.
However, nothing is inevitable or automatic in this relationship and its policy implications should be approached with caution. Corruption is a global phenomenon. Both first and third world countries have experienced blatant corruption. Transparency International’s ranking shows large variations in the perception of corruption among groups of countries at similar stages of development.
In fact and contrary to conventional wisdom, pervasive high-level corruption can be an entrenched element of highly industrialised, democratic societies. It is not merely a by-product of underdevelopment or authoritarianism. Italy’s Mani Pulite (clean hands) prosecutions against top politicians and business persons, which began in February 1992, led to the investigation of more than 4 000 people, the indictment of 1 063 and the conviction of 460, including a former prime minister (Bettino Craxi) who held office twice. Recently, a spell of disgrace engulfed significant numbers of German construction companies and many local officials, while Japan’s Finance Ministry, long esteemed as a citadel of virtue, is still paralysed by scandals involving charges of payoffs and favours from big business.
Corruption cuts across international borders. Many cases of corruption reported in emerging economies involved corporations from the first world. Transnational corruption, for example, is particularly rife in the arms trade. A United States Commerce Department confidential annexe to a report on international bribery in July 1998, noted that half of the recorded corruption complaints involved arms sales.
Implications of Corruption
Corruption may cause significant negative impact on a nation's economy and adversely affect the general well being of its members or citizens. There is increasing recognition that corruption has substantial, adverse effects on economic growth.
Corruption kills the development spirit. Nothing is as destructive to a society as the rush to quick and easy money which makes fools of those who can work honestly and constructively.
Major Implications
      I.            Large Underground Economy
Underground economic activities become pervasive where corruption is widespread. When a large portion of an economy goes underground, official macroeconomic data which mostly cover only the formal sector, become unreliable to assess economic performance or to provide a basis for policy making and analysis. Official foreign trade statistics, for example, no longer reflect a country’s true volume, or value, of exports and imports because of large illegal and unrecorded movements of goods and services across the border in a thriving smuggling business. Under these circumstances, proper economic accounting and macroeconomic management become difficult. In the absence of reliable data, transparent policies, and proper macroeconomic management, there is not much hope for economic development, modernization, or emergence of a well functioning market economy.
   II.            Inequitable Income Distribution
Under a corrupt system, the privileged and the well-connected enjoy economic rent. Economic rent, by definition, represents abnormal or monopoly profits and can bestow large benefits. As such, there is a tendency for wealth to be concentrated in the hands of a tiny minority of the population. This is not to deny the fact that interest rates in any informal credit market tend to be high, due to the unorganized nature of the market, lack of adequate information, lack of collateral, high transaction costs associated with servicing a large number of small loans, high risk premiums, and other market imperfections.
In addition, the burden of corruption falls more heavily on the poor as they cannot afford to pay the required bribes to send their children to a decent school, to obtain proper health care, or to have adequate access to government provided services such as domestic water supply, electricity, sanitation and community waste disposal facilities.
III.            Warped Consumption Pattern
Closely associated with an unequal income distribution and concentration of wealth in the hands of a few, there emerges a distorted consumption pattern aimed at meeting the lifestyle of the new and extremely rich urban elite. This involves import of a large variety of luxury goods from abroad – flashy cars, lavish home furnishings, state-of-the-art consumer durables and electronic products. Most of these goods are, of course, beyond the reach of ordinary citizens in the cities and in the countryside. Conspicuous consumption with expensive cars cruising along dirt roads, and conspicuous construction with luxury apartment buildings rising amidst poverty and squalor, bring home the point that affluence is not widely shared in these countries.
IV.            Negative Impact on Investment
Corruption’s adverse impact on private investment, both domestic and foreign, is considered to be particularly harmful for a developing economy. Bribes may have to be given before any investment takes place and upon entering into negotiations for the establishment of an enterprise. More payments usually follow in the process of setting up the business. Procurement of leases for land and buildings; permission to engage in activities such as production, transport, storage, marketing, distribution, import and export; obtaining connections for water, gas, electricity, and telephone; having access to telex, fax and e-mail facilities and so on; can involve payment of substantial bribes at various stages and may require the services of agents with specialized expertise on how to get around complex rules and procedures to acquire these things. Unfortunately, these agents and middlemen, instead of being part of the solution can often become a part of the problem. Their services do not come cheaply and they add to the cost and complexity of doing business under a corrupt regime.
Then, when the enterprise is finally established and up and running, corrupt officials may demand cuts from the firm’s earnings. Hence, corruption not only raises the initial costs of investment but by substantially increasing risks and uncertainty for a venture, can significantly reduce the incentive to invest.
  V.            Adverse Effect on the Government Budget
Corruption can have undesirable consequences the revenue and expenditure of the government budget. The consequences on the revenue side are more familiar. Paying bribes to reduce taxes, fees, dues, custom duties and public utility charges such as for water and electricity, are common in many countries. Bribes are also used to make illegal water, electricity, gas and telephone connections to have access to these facilities without paying for the services obtained. All these result in serious losses of revenue for the government. Fraud, embezzlement and misappropriation of public funds add to the losses.
The consequences on the expenditure side are more insidious. Corruption adversely affects the composition of government expenditure. This is because large benefits can be realized from corrupt deals on expenditure items that are expensive, whose costs are not readily apparent, and which are considered to serve some high national priority concern so that they have to be undertaken in a discreet and secretive way. Purchase of jet fighter aircraft, for example, ideally meets these requirements.
Large and expensive projects whose costs are hard to determine but with huge potential for kickbacks and economic rent are good candidates for corrupt deals and hence for inclusion in the national budget. Corrupt regimes therefore tend to devote a large share of their national budget expenditures on acquiring sophisticated military hardware and on large projects, and less on education and health, and on other priority needs.
IV.  Social costs
In any society, there are laws and regulations to serve social objectives and to protect the public interest, such as building codes, environmental controls, traffic laws and prudential banking regulations. Violating these laws for economic gain through corrupt means can cause serious social harm. Violating building codes through the connivance of corrupt officials and building contractors has resulted in collapse of apartment buildings, department stores and hotels in some countries. Paying bribes to operate un-roadworthy and poorly maintained public vehicles have led to accidents on the highways and buses plunging down gorges due to mechanical failure are common in many countries.
There has also been growing concern over corruption in large infrastructure projects. Shoddy workmanship, use of substandard materials and disregard for proper design and engineering specifications, due mainly to corruption, have caused bridges to collapse and dams to burst, resulting in heavy loss of life and property.
Obscure insider trading practices and financial scams that can result from poorly supervised financial systems also have serious economic and social consequences. People have lost their life savings and fortunes in financial scams.
VI.            Price Controls, Subsidized Goods and Black Markets
It is a common practice in many developing countries to institute price controls and to provide essential goods and services at subsidized prices to consumers. Fixing prices at artificially low levels lead to demand exceeding supply for the subsidized goods so that the all too familiar shortages, rationing, corruption and black markets result, and there is a loss of potential government revenue.
Thus, price controls, subsidies and the corruption and black markets they generate, can lead to undesirable social and economic consequences. This also illustrates the point that dismantling controls, getting rid of subsidies, preventing price distortions, and “getting prices right” in general, form a key element in economic reforms and for the establishment of a properly functioning market economy.
VII.            Negative Impact on Economic Reforms
Unfortunately, corruption places severe constraints on a country’s capacity to undertake economic reforms. This is because reforms require greater transparency, accountability, free and fair competition, deregulation, and reliance on market forces and private initiative, as well as limiting discretionary powers, special privileges, and price distortions – all of which will reduce opportunities for economic rent on which corruption thrives. The rich and the powerful, the main gainers of a corrupt system, will therefore oppose reforms.
Other Implications
The general agreement is that corruption is bad for development. The World Bank estimates the cost of corruption accordingly: if just 5% of the value of all direct foreign investment and imports go into countries with extensive corruption, the yearly take would total around US $80 billion. Significantly, this only takes into account theft from commerce crossing borders, not the stealing of state assets or the fleecing of fellow citizens.
Corruption jeopardises development in several ways:
It distorts public spending. Distortions arise in three ways: from shaping the official priorities of government, by deflecting allocated resources away from their original purpose, and by undermining the tax base of government.
Priorities are distorted and public resources deflected in corrupt regimes, because allocations go where corrupt officials and politicians personally gain the most. The public interest is no longer the measure. Where corruption is rife, even the best possible project, no matter how supportive it may be of public goals of growth and development, can go astray because it does not serve the interests of public office bearers who want to enrich themselves.
In some of the world’s most notorious cases, the Philippines lost some 20% of internal revenue through corruption in the 1970’s, around 10% of Nigeria’s GDP and 25% of Zaire’s went lost due to corruption.
Corrupt officials also deflect funds that have been earmarked specifically for developmental goals away from their original purpose.
Because the poor have so little resources, their prospects of influencing the allocation of public resources are limited by corrupt regimes. Poor people become primary victims. They are denied services either because resources are moved elsewhere or because corrupt payoffs make services unaffordable. In many cases, ill-structured projects, geared towards the wealth of corrupt officials and their co-conspirators, limit the number of jobs and opportunities that are created or cause these benefits of development to be allocated on the basis of favouritism. When bribery results in public officials turning a blind eye to key risks, such as the negative environmental consequences of developments, the poor are often the ones who suffer the most. Even in perfectly honest systems, public priorities are often shaped by the lobbying power of those with relatively more resources. However, where corruption occurs, distortions become more routine and the public good is generally regarded as being of secondary importance.
Tax evasion, weak tax administration and tax exemptions that favour the well-connected and wealthy limit the scope for effective development policy in a number of ways. These practices harm the fiscus, curb redistribution through undermining progressive taxes and prevent public expenditure on and investment in development ventures.

The consequences for development are manifold. Talent is often misallocated and opportunities for labour-based construction are missed because corrupt bureaucrats tend to favour non-standard, complex and expensive capital-intensive projects that make it easier to skim significant sums. A large defence or infrastructure contract may thus be favoured over the construction of primary schools and health clinics. Inevitably, poor people become primary victims. They are denied services either because resources are moved elsewhere or because the cost of services becomes inflated through corrupt payoffs. In many cases, ill-structured projects, geared towards the wealth of corrupt officials and their co-conspirators, fail to meet appropriate technical standards, limit the number of jobs and opportunities created, or allocate them on the basis of unfair favours. In this manner, corruption distorts the initial aim of social and anti-poverty programmes, i.e. to allocate resources according to the needs of the recipients.
Corruption undermines efficiency. Time and money wasted through corrupt activities come at the expense of productive activities. This impacts both on public administration and private enterprises.
Public sector efficiency becomes compromised because corruption superimposes informal practices over the proper rules and procedures of government. This adds direct and indirect costs to the execution of programmes.
This also affects private sector parties:
The Global Competitiveness Report of 1997 shows that firms confronted by corrupt regimes have had to spend vast additional time to negotiate licences, permits, taxes and approvals. This is underscored by the results of a recent World Bank survey in 69 countries which shows that some 40% of firms working in those countries have engaged in some form of bribery.23 One can imagine the cumulative effect on the national and the international economy.
Data from the World Economic Forum’s Global Competitiveness Report for 1996 (2 000 enterprises surveyed across 49 countries) shows that the incidence of corrupt practices is significantly higher in settings with higher regulatory and state-bureaucratic interference in business.
Corruption discourages investment and growth. While some investors might well conduct their business through bribes, the overall implication of notoriously corrupt environments is that many potential investors avoid them. Incidences of corruption deter investment because higher bribes imply declining profitability on productive investments relative to rent-seeking investments, thus tending to crowd out the former. In general, when there is slow growth, the returns to entrepreneurship (particularly in the production of new goods) fall relative to those of rent seeking, and the ensuing increase in the pace of rent-seeking activities further slows down growth.
Furthermore, corruption intrinsically means that the economic rationale for projects gets distorted. It is therefore likely to shift investment from more productive projects and investments to less productive ones. This will automatically push growth downwards. Finally, corruption often goes alongside incentives for capital-intensive investments as opposed to labour-intensive ventures. This could have a more immediate impact on poverty alleviation.
Particularly damaging to the economy’s long-term growth prospects is the fact that innovators are particularly at the mercy of corrupt public officials, because new producers need government-supplied goods like permits and licences more than established producers. In any case, corruption as a tax on profits may stifle the entry of new goods or technology that require an initial fixed cost investment, in general. The World Development Report of 1997 points out that bribes are not only a disincentive to further investment because of the immediate costs, but also because they entangle businesses in "... a web of time-consuming and economically unproductive relations" while negotiating through growing government arbitrariness.
The problem with corrupt regimes is that they are intrinsically arbitrary. Hence, they introduce risks of uncertainty that many investors are simply not willing to take. This also automatically increases the transaction costs of investment. As a result, other key economic objectives, such as job creation and the development of vibrant small and medium enterprises, are likely to suffer.
Corruption intrinsically undermines the quality of governance. It does so firstly, because it creates distrust, and the uncertainties associated with arbitrary governance feed such distrust. Furthermore, corruption fundamentally runs contrary to accountability. Corrupt politicians, officials and their cohorts do not want others to know. Information about resource allocations and the basis for decisions therefore becomes deliberately obscured. In the longer run, corruption undermines governance, public trust in the state’s credibility and the ethics of government and society. Corruption negatively impacts on the rule of law. The more systemic, the more difficult it becomes to be identified, dealt with and penalised.
High-level Corruption increases the likelihood of currency crisis: The financial crisis in East Asia and in South America illustrates this phenomenon.
Corruption also increases inequalities and boosts a resentment among population and a lost of confidence in any institution. Corruption introduces a negative change in our societies. Increasingly, corruption places participants at risk of international castigation.
Dr Hawley also lists a number of impacts that multinationals’ corrupt practices have on the Third World, or developing countries, including:
They undermine development and exacerbate inequality and poverty.
They disadvantage smaller domestic firms.
They transfer money that could be put towards poverty eradication into the hands of the rich.
They distort decision-making in favour of projects that benefit the few rather than the many.
They also increase debt; benefit the company, not the country; bypass local democratic processes; damage the environment; circumvent legislation; and promote weapons sales.

Plausible Solutions

Corruption is a symptom of deep-seated and fundamental economic, political and institutional weaknesses and shortcomings in a country. To be effective, measures against corruption must therefore address these underlying causes and not the symptoms. Emphasis must thus be placed on preventing corruption by tackling the root causes that give rise to it through undertaking economic, political and institutional reforms. Anti-corruption enforcement measures such as oversight bodies, a strengthened police force and more efficient law courts will not be effective in the absence of a serious effort to address the fundamental causes.

(i)         Leadership
For proper house cleaning and repairs, it is a good idea to begin by fixing the roof. Hence, many authors, including Professor Syed Hussein Alatas of Malaysia, a noted authority on corruption, are of the view that the leadership in a country has a key role to play in combating corruption (Alatas 1999). It is an Asian tradition to hold leaders and those in authority in high regard and esteem. Hence the top leadership must set a good example with respect to honesty, integrity and capacity for hard work. Since fighting corruption will involve taking difficult decisions, the leadership must also display firmness, political will and commitment to carry out the required reforms. But honest and dedicated leaders are a necessary, but not a sufficient, condition to counter corruption. Several other conditions need to be satisfied.
(ii) Credibility
Credibility is one of them. For success, the offenders both on the demand and supply side of a corrupt deal must be convinced that the government is serious about fighting corruption. One suggestion towards this end is to “fry some big fish”, that is to publicly try and punish some well-known corrupt people in the country. Some highly publicized trials and convictions of important officials and businessmen on charges of corruption have taken place in several Asian countries. However, since allegations of corruption are often used to discredit political opponents, the suggestion is further made that the fish that is fried should preferably be from your own pond.
(iii) Involving people
A publicity campaign to create greater awareness on the adverse effects of corruption and a clear and unequivocal official pronouncement on the desirability to bring it under control would be helpful. Ordinary citizens have a lot of first hand experience with corruption, they are a good source of information and their help and cooperation should be solicited for the successful launch of an anti-corruption drive. Once people are convinced that a sincere and genuine effort to combat corruption is underway, they will respond and extend their full cooperation in resolving the problem. Just a little opening up and providing opportunities for them to express their views on the matter will bring forth an outpouring of information, ideas and suggestions that will be beyond anyone’s imagination.
(iv) Responsible press
A responsible press to gather, analyse, organize, present and disseminate information is considered vital to create greater public awareness and to provide the momentum for undertaking reforms to overcome corruption. Secretiveness has been a key factor that has enabled public officials and politicians to get away with corruption. A responsible and an investigative press has played an important role in many countries, both developed and developing, in exposing misconduct as well as in serving as a watchdog to limit corruption and preventing it from getting out of hand. The press has not always acted in a responsible manner, and like everything else in this world, it is not perfect. Nevertheless, its power to limit misconduct and improper behaviour should not be underestimated.
(v) Oversight bodies
Views on the effectiveness of anti-corruption oversight or watchdog bodies are mixed. There are instances where they have proved useful. For example, Economic and Financial crimes Commission in Nigeria, the Independent Commission Against Corruption in Hong Kong, China, and similar institutions in Botswana, Chile, Malaysia and Singapore are regarded as having done a good job. However, in surveys and interviews of public officials and members of civil society organizations, most respondents do not have a high opinion of them. The prevailing view is that for such bodies to be effective, they have to be created in a political atmosphere where leaders are honest, civil servants are insulated from political interference, and better incentives are provided to discourage corruption. Otherwise, the oversight bodies will be rendered useless or worse, misused for political gain (Gray and Kaufmann op. cit.).

(vi) Improving Institutions
This is a very large area and only brief mention can be made of the relevant issues. It involves such things as improving the legal framework; smoother, less time-consuming and less burdensome ways to conduct business in the functioning of law courts and in the administration of justice; promoting efficiency of the police force; strengthening the auditor general’s office; and appointment of a responsible inspector general empowered to investigate and prosecute corruption.
Corruption is a plague. Fight it!
Nicholas A. Goodling, Nigeria's Crisis Of Corruption-Can The U.N. Global Programme Hope To Resolve This Dilemma? Vanderbilt Journal Of Transnational Law, Vol. 36, 2003
Kimberly Ann Elliott, Corruption And The Global Economy -The Oil For Food Program Corruption, Free World Academy, World Corruption, 2005

Robert I. Rotberg, Ed., Corruption, Global Security, And World Order, Brookings Institution Press 2009 C. 497pp.

Talea Miller, Global Fund Defends Corruption Policies

E. A. Adegun Etal, An X-Ray Of Economic Implications Of Corruption
In The Nigerian Economy
Anup Shah, Corruption, 2010
Gray, Cheryl W. and Daniel Kaufmann, Corruption and development, in IMF/World Bank, Finance and Development, 1998.
Kiltgaard, Robert, International Cooperation Against Corruption, IMF/World Bank, 1998.
Mauro, Paolo, Corruption: Causes, Consequences And Agenda For Further Research, IMF/World, 1998.

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