How Could Corruption Affect Economic Growth

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Student ID Number:   1857714

Programme Of Study:           International business and economy

Module:           Development economics

Assignment Title:           essay 2

Date and Time of Submission:   10am 20/3/2018

Name of Module Leader:     Dr Jan Jozwik

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Corruption is hard to measure, so as its impacts to economy. People usually face difficulties to observe it, because both its forms and impacts can be in vary ways, and those corruptible officials would always try to introduce distortions to cover their activities. Therefore, some have argued that in certain circumstances, corruption may not be such harmful, instead individual corrupt activities could even help to increase the efficiency of government activities. Nevertheless, evidences from some macroeconomic analysis and empirical studies on its influences on investment and institutions have suggested an opposite outcome. Olken and Pande (2011) have also illustrated in their detailed studies on some specific corrupt activities that corruption could retard economic growth. This essay would mainly discuss how corruption affect economic growth in three aspects, including institution, investment and government efficiency. Once identified the influence, how to prevent such crime activities and how efficient the method would be needs to be considered.  

Despite a lot of debates over whether institution is the fundamental factor of economic development, it is widely accepted that efficient public institution could definitely promote a country`s economic performance. Besides the institution itself, the key contribute factor of its efficiency is the credibility, in other words, whether the citizens would obey the rules and how confident citizens are towards the institution. From Clausen`s empirical study (2010) based on the household survey named Gallup World Poll (GWP), a negative relationship was found between corruption and public confidence in institutions. The study shows that in countries where the index of personal corruption experiences is high, confidence of public institution is reported to be low correspondently (Clausen et al., 2010). This might be resulted from the low executive force of institution with the existence of corrupt activities. People may believe in that only bribe could “get things done” rather than laws and regulations would conduct a fair outcome (Olken and Pande, 2011). For an example, before the establishment of Independent Commission Against Corruption (ICAC) in Hongkong, almost all of the civil servants would require a certain amount of so called “tea money” or “lucky money” for providing services, and even firemen lived by saying, “No money no water” (En.Wikipidia.org, 2018). Widespread corruption would even lead to a worse situation, in which citizens viewing laws as useless and therefore causing a higher rate of crime.  

In addition to the impacts on institution, corruption is also proven as the barrier of investment, especially foreign investment. Lack of confidence in institution would not only cause domestic problems but also influence foreign investors and international trade. Firms which have low confidence in institutions would treat investment as risky and full of uncertainty, and their concerns over property rights, patents and profits would reduce opportunities and motivations of investment and innovations (Mauro, 1995). Evidences from empirical analysis also support this idea. Based on the regression model built by Mauro (1995), there is a significant negative relationship between corruption and investment. In order to solve the endogeneity problem, ethnolinguistic fractionalization is used as an instrumental variable. However, a more serious problem of this analyze is the accuracy of its dataset, more specifically, the indices of corruption. Since it was based on a questionnaire survey, and the supporting idea behind its reliability was only the fact that companies` willingness to pay high price. It could be argued that the data might have bias because of the problem of distorted perceptions and the most server corruption may be less likely to disclosure or notice (Olken and Pande, 2010). The same problem could also happen in other empirical studies which used questionnaire as the instrument to measure corruption. In that case, more attention might need to be paid on some specific corrupt activities as well as their impacts.  

Olken and Pande (2010) suggest that a more direct method to estimate corruption is by studying surveys of bribe-payers. They have used Svensson`s survey in Uganda (2003), where firms were reported to pay 88 USD as bribe per worker as an example. The total amount of bribe payment is estimated as about 8 percent of a firm`s total cost, which significantly reduces firms` motivation of production. Moreover, other cases even show a result of direct efficient loss in government activities. An example of this is Olken`s (2007) rural road projects, in which the difference between the cost of road estimated by outside engineers and the actual cost was more than 20 percent of its total cost. In a large anti-poverty program in Indonesian, an estimate of 18 percent of subsidized rice loss is also observed (Olken, 2006). This has shown that though in some countries governments try to mitigate the uneven income level by redistribution and anti-poverty program, corruption may hinder such process which would lead to more serious inequality and retard both physical and human capital accumulation, therefore slowing down economic growth. Ferraz, Finan, and Moreira (2010) provide other evidence for this. According to their report, students in Brazilian schools where corruption is detected tend to have lower test scores than students in schools without corruption. Even the teaching ability of teachers and the quality of facilities used for education are relatively poorer in such schools.