Corruption

Question 1

Introduction

Answer 1

Introduction: Since 1995, Transparency International publishes the Corruption Perceptions Index (CPI) annually ranking countries “by their perceived levels of corruption, as determined by expert assessments and opinion surveys.” According to the most recent survey, New Zealand is ranked as the least corrupt, whilst Somalia as the most corrupt. The World Bank estimates that corruption accounts for about $1tn a year worldwide.

Question 2

Three points

Answer 2

Loss of efficiency

Loss of tax revenue

Loss of domestic investment and FDI

Other factors: Limits effectiveness of aid programmes

Question 3

Efficiency point

Answer 3

Loss of Efficiency: Corruption can result in a loss of fair competition. Choice of suppliers might not be determined by who can supply at the lowest price or the highest quality. For example in China, the railway minister was fired in 2011over allegations he received huge bribes when handing out contracts for the country’s impressive new high-speed rail network. If competition isn’t fair, this can lead to reduced efficiency amongst producers and as such can reduce international competitiveness.

Question 4

Efficiency evaluation

Answer 4

Evaluation: The most serious examples of corruption exist are commonly in the areas of development focus within a country. As well as the example above relating to the railways in China, much corruption has also be uncovered within the telecommunications industry in India. If these areas of priority of investment see the highest levels of corruption, then the impact on development will be even more significant.

Question 5

Tax revenue point

Answer 5

Loss of Tax Revenue: Corruption is more widespread in developing countries because legal frameworks and accountability are not yet well in place. Corruption and weak governance in general, undermines government revenues by making reporting of incomes inaccurate and collection of tax revenue very difficult. In developing countries, where millions are living below the poverty line, corruption is inevitably a tax on those that are most vulnerable. A loss of government revenues results in reduced provision of public services.

Question 6

Tax revenue evaluation

Answer 6

Evaluation: Estimates of corruption are invariably difficult to measure. Because corruption is wilfully hidden, it is impossible to measure directly; instead proxies for corruption are used. As such many have criticised attempts to measure levels of corruption, and highlight large differences between different measures. For example the CPI (which relies on reports from the business world) differs widely by a measure produced by the European Commission called the Eurobarometer (which draws on views of the general public).

Question 7

FDI point

Answer 7

Loss of Domestic Investment and FDI: Concerns over property rights and fair competition can inhibit levels of investment in a county (both domestically and from foreign sources). This loss of potential investment inhibits improvements in international competitiveness. Where foreign direct investment is lost, this also causes a worsening in the foreign currency gap which can limit a country’s ability to import foreign capital.

Question 8

FDI evaluation

Answer 8

Evaluation: Increased investment can also exhibit negative externalities so it is important not to overplay the loss of FDI in this situation. The benefits that FDI exhibits are also often exaggerated. For example, the impact on the foreign currency gap might not be a significant as first thought as profits generated are moved overseas