*Global Economy B: Topic 2 - Corruption and its Global Impact

Question 1

Give a quote that proves that corruption has been around for ages

Answer 1

“Just as it is impossible not to taste the honey or the poison on
the tip of the tongue, so it is impossible for a government
servant not to eat up at least part of the king’s revenue. Just
as fish moving under water cannot possibly be found out
either as drinking or not drinking water, so servants employed
in government work cannot be found out while taking money
for themselves.”
(Kautilya (350 – 275 BCE). Arthashastra)

Question 2

Describe the definition of corruption

Include quotes

Answer 2

• Corruption is both pervasive and significant around the world -> However, it is an
  understudied and poorly understood phenomenon.
• There is no single and clear definition of corruption:
  “… the sale by government officials of government property for personal gain.”
  (Shleifer and Vishny, 1993)
  “… the abuse of public office for private gains.”
  (World Bank, 1997)
  “… activities that are illegal, unethical, and dishonest business practices carried out by
  a bureaucracy, or by political leadership.”
  (Tanzi, 1998)
  “… payments are corrupt if they are illegally made to public agents with the goal of
  obtaining a benefit or avoiding a cost.”
  (Rose-Ackerman, 1999)
• In general: Corruption is seen as a distortion in decision-making process that creates
  opportunities for some and costs for others

Question 3

Describe levels & variations of corruption

Answer 3

• Levels of corruption:
  (Enste and Heldman, 2017)
  1. Petty corruption: Small payments to low-level bureaucrats in order to get small
  favours in return (e.g. issuing a permit).
  2. Grand corruption: Related to higher level bureaucrats or politicians. It involves large
  amounts of money and the favours are respectively bigger (e.g. major contracts).
• Variants of corruption:
  (Enste and Heldman, 2017)
  1. Bottom-up: Low-level officials collect bribes, which they share with superiors.
  2. Top-down: High-level officials collect bribes and share with low-level employees

Question 4

Describe the categories of corruption

Answer 4

• Bribery: The act of dishonestly persuading someone to act in one’s favour by a payment or other inducement; inducements can take the form of gifts, loans, fees, rewards or other advantages (taxes, services, donations etc.). The use of bribes can lead to collusion (e.g. inspectors under-reporting offences in exchange for bribes) and/or extortion (e.g. bribes extracted against the threat of over-reporting)
• Embezzlement: To steal, misdirect or misappropriate funds or assets placed in one’s trust or under one’s control. From a legal point of view, embezzlement need not necessarily be or involve corruption
• Facilitation payment: A small payment, also called a ‘speed’ or ‘grease’ payment, made to secure or expedite the performance of a routine or necessary action to which the payer has legal or other entitlement
• Fraud: The act of intentionally and dishonestly deceiving someone in order to gain an unfair or illegal advantage (financial, political or otherwise)
• Collusion: An arrangement between two or more parties designed to achieve an improper purpose, 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 government, it refers to the practice of appointing people directly

Question 5

List & explain the causes of corruption

Answer 5

• From the research of Enste and Heldman (2017), the following was found as causes (the ‘+’ and ‘-‘ in brackets represents how conclusive the evidence is; where the signs mean positive or negative evidence)
  1) Size and structure of governments (+ / -)
• Gov expenditure: Two perspectives:
  a) Large Gov leads to more corrupt politicians -> increases the rents from illegal behaviour.
  b) Large Gov is more effective in fighting corruption -> it has a bigger budget for law
  enforcement (Kotera et al, 2010).
  -> Risk of reverse causality: Countries with high levels might not be effective in generating
  financial resources (Lambsdorff, 2006).
  2) Salaries of civil service (-)
  Negative correlation:
• Becker and Stigler (1974). Higher wages correspond with less corruption due to the costs of
  dishonest behaviour -> If a bureaucrat accepts bribes and gets detected, he will lose his job.
  -> The evidence is weak.
  Reverse causality?
  -> Some countries (especially poor countries) might pay low salaries to their employees
  because there is common notion that the bureaucrats make enough money off corruption.
  3) Democracy and the political system (+ / -)
• Political modernisation is usually accompanied by an increase in corruption -> underdeveloped
  institutions (Huntington, 1968).
• Democracy reduces corruption, but only if the institutions are evolved and fully functional
  (Huntington, 1968; Lambsdorff, 2006).
• Diagram of “Durability of democracy” (x-axis) against “Corruption” (y-axis). Then there;s a U-curve with a vertical line splitting the curve in symmetrical half, and then a symmetrical dotted vertical line on either side of the middle line. There’s 3 arrows along the curve from left to right (going up and down with the curve). The first arrow in the upwards part of the curve is labelled “Yound democracy”, the next arrow at the top of the curve is “Consolidation of institutions” and the last arrow heading down is “Established democracy”. Inverted U pattern between corruption and the durability of new democracies (Rock, 2009;
  Mohtadi and Roe, 2003).
  4) Quality of institutions (-)
  Negative correlation between level of corruption and proxies for quality of institutions:
• Dreher et al. (2009). Institutional quality measured by a rule of law index and an index of
  government effectiveness.
• Mocan (2008). Institutional quality measured by the risk of expropriation.
• Djamkov et al. (2002). Institutional quality measured by an index of regulation of market
  entry, including: required procedures, costs and time to start a new business.
  5) Economic freedom / openness of the economy (-)
  Negative correlation between level of corruption and indexes of economic freedom:
  -> The more competition, the harder it is to hide corrupt payments -> competitors might
  uncover the corrupt activities
  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 (Lederman et al., 2005; Pellegrini, 2011).
  -> 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 (Brunetti and Weder, 2003).
  7) Cultural determinants
• Trust (-) -> Negative relationship. Trust facilitates 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.
• Swamy et al. (2001). Women engages less in corruption than men.
• Sung (2003). Female representation in Gov corresponds to lower levels of corruption.
• Branisa et al. (2011). 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:
• Serra (2006). Positive: French and Spanish
  Negative: British (Treisman, 2000; Swamy et al., 2001)
  10) Endowment of natural resources (+ / -)
  Two perspectives:
  a) Abundance on natural resources should have a positive effect on development ->
  it encourages trade and investment.
  b) 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 (e.g. human capital)
  (Ades and DiTella, 1999)
  Corruption and Its Global Impact (I)
  When a country discovers rich supplies of NR, strong institutions are necessary
  to prevent the rise of corruption.