The Growth-damaging Channels of Corruption in the Developing World

Résumé du document

If the word corruption needs to be defined with the hope that its meaning would gain common acceptance, then one must consider the words coined by Tanzi in 1998. The words read as ?the abuse of power for private benefit.' The point to be considered is that corruption still remains a concept that is struggling to gain the degree and extent of measurement. The latest release undertaken by the Transparency International Corruption Index (year 2004) reveals that no country remains corruption free. All developed countries are as dangerous as the other developing countries located all over the world. If we broadly classify the corruption countries in the developing world, they range from Ethiopia, Sierra Leone, Sudan, and Pakistan through Georgia, the Ivory Coast, and Tajikistan to Chad, Nigeria, Bangladesh and Haiti. When trying to infer the reasons for corruption in these developing countries, the common understanding and claim is that they are poor and in some cases even below poverty line. Merely investigating the direction of the causality will not be beneficial and satisfactory for this paper. Our concern will be rather on analysing the channels through which corruption affects growth. Therefore, we shall first gain a brief insight into what economic theory tells us about the economic relevance of corruption by having a rapid look at the works of the New Institutional Economics.

Extraits

[...] Tanzi & H.R Davoodi, Corruption, Public Investment & Growth, IMF Working Paper, Washington DC, IMF V. Tanzi, Corruption Around the World: Causes, Consequences, Scope and Cures, Washington DC, IMF Transparency International: Corruption Perceptions Index 2004. Beatrice Weder, Institutions Corruption and Development and their Ramifications for International Cooperation, Tokyo, United Nations University Press S-J. Wei, How Taxing is Corruption On International Investors? Cambridge, MA, 1997a. S-J. Wei, Why is corruption So much more Taxing than Tax? Arbitrariness kills, Cambridge, MA, 1997b. [...]

[...] Our concern will be rather to analyse through which channels corruption affects growth. Therefore, we shall first have a brief insight into what economic theory tells us about the economic relevance of corruption by having a rapid look at the works of the New Institutional Economics. Then we will go through the impacts of corruption on foreign investors and foreign aid before stressing the endogenous economic inefficiency of corruption. Finally, we will analyse the ways corruption impacts the government expenditures structure, rendering it less productive. [...]

[...] According to Shang Hin Wei (1997b) would an increase in the corruption index by 1 point, reduce the flow of FDI by about 11 percent. This shows how sensitive the FDI are to corruption. Of course, it is clear that FDI are not the only sort of investment which suffers from corruption. It is ever more obvious that corruption is becoming the biggest concern of the aid donors and global institutions because of the inefficiency of aid that it brings with it. [...]

[...] As J.S Nye (1967) puts it there is a clear “waste of skills” since the elite spends its all time in attempting to get richer, instead of having any willingness of making the country economically efficient. In other words: “Individuals will be diverted by existing incentives, from pursuing socially productive activities and toward rent-seeking activities” (Murphy, Shleifer & Vishny, 1991) These three authors developed an empirical model for explaining corruption as an incentive to rent-seeking rather than to productive activities. Their method of operationalization is to look at the repartition of lawyers and engineers in a given country. [...]

[...] One may still wonder why the inhibiting characteristic of corruption in regards to small firms is that important. The economic reality is plain: among economists it is for now considered as evident that the dynamism of an economy comes predominantly from its firm creations and the extension of its small firms. As Tanzi (1998) puts it, “small enterprises are the engine of growth in most countries. Obstacles to their creation and growth cause economies to languish”. Corruption, hence, in its conservative logic aims at restraining weak and small firms from entering the market by setting up high tax barriers (i.e. [...]