Wednesday, June 10, 2009

Costs of Corruption

In most economies, corruption is institutional and it seems that living with it on a daily basis is much more convenient than rooting it. Bribery is more than any wrong doing. It is the most unjustified crime. The functioning of the economy is paralysed with the widespread of ‘coffee money’. In the end, it will be the society, private sector and government, who bear the brunt.

This is a very common malpractice in developing economies such as Malaysia, Indonesia, Bangladesh, India and many more. It flourish in an environment where there is ample of natural resources, development projects, high level of bureaucracy in government’s administration, income per capita is usually very low and where media is strictly controlled by government

It is the root of all evil as most of the time, few benefit at the expense of millions

Economic costs of corruption:

(1) Misallocation of resources. Tax revenue from multiple sources whether direct or indirect, are not spent onto production of goods and services that can raise the standard of living. It is siphoned off in many ways, often for personal enrichment or to ensure a success in political agenda. For instance, the Prime Minister of Malaysia is accused of spending RM25 million to buy an opposition member which eventually led to the fall of Perak state into the hand of government. Also financial resources for development projects often ended up in the wrong hands. It is not the most cost-efficient firms but rather those well-connected firms that get the government contract

(2) Judiciary system that is questionable. In a corrupted system, lawmakers will often generate policies and regulations that have no intention to unite peace, economic and political stability. Laws are amended in a way that favour top government officials. Judges are equally corrupted and decisions announced in highest level of court is usually going against the public will

(3) Lower investment level. Corruption is perceived to have a significant adverse impact onto level of investment. Investors probably would have to pay a sum of money to acquire license, land or to expedite the application process. It raises the costs of investing and doing business and yet there is no guarantee that the business will be profitable. There is also no assurance that the same corrupt officials will not ask for bribery in future. For an example, my friend is in the dragon fruit plantation business. I was told that to acquire a land, he needs to pay large sum of money. At later stage, when the business kick start and becomes profitable the corrupt government officials want a share but losses will be fully borne by my friend. Therefore it said that an economy that is corrupt increases uncertainty and risks as well as reducing incentive for entrepreneurs

(4) Lesser money for public investment. Difficulty to start up a business will also force many of these firms to go into informal sector which do not report their profits and hence evade taxes. Some of the firms which are in formal economy meanwhile choose to pay some fees to high rank officials rather than tax since the latter costs more. It is hoped that these top-guns in public administration will help them to escape from being detected. The combination of these two will lead to rampant shortage of tax revenues which are essential for public spending which in return generate job opportunities

(5) Ballooning fiscal deficit. A corrupt government loves to declare mega scale projects such as the building of dam, airport, hospitals etc since it increases their opportunities to get bribes. As such they will tend to promote as many development projects as possible which very often have no details when tabled in the annual budget. They may announce spending like $5 billion onto construction but lack of transparency in how the money is allocated. These projects given to cronies are never finished as funds got ‘stolen’ half way. Then the government will announce bigger scale of spending, thus creating fiscal deficit due to shrinking tax base

(6) Higher inflation. Firms that have to continuously pay bribery fee will incur an increase in production costs and to remain profitable or ensure certain level of profit margin, these costs will inevitably be passed on to consumers in the form of higher price, leading to cost-push inflation. In a poor economy, this will depress lives if the item is food-related. Also expensive goods reduce consumer surplus. In a case where businesses are in very competitive environment, costs may not be passed down but rather cost-cutting at the expense of quality of goods. Consumer welfare is eroded here

(7) Retard growth and development. Corruption can distort these two in many ways. Tax evasion leads to shortage of funds to build necessities such as schools and hospitals. Even if there is enough funding, we also need to consider possibility of the money not being spent in accordance with its objective. Also it can influence the decision of donor community to provide aid and financial assistance. They may consider the withdraw those aid if it’s spent onto projects with high corruption potential such as the purchase of military equipments

(8) Aggravates poverty and violation of human rights. With corrupted system it will be the Prime Minister, its cronies and relatives that laugh their way to Swiss bank all the time. One project could provide several millions if approve. Those who helm the administration throne for a decade or more are good enough to live a life like Forbes billionaire though they don’t declare their assets in black and white. On the other hand, those poor will remain poor having insufficient income to fulfill basic needs. In the poorest part of the world, parents would have to bribe head teachers or else their kids will be denied even a basic education. This is said to have violated the child’s right. Having no education will condemn their job-hunting opportunities in long run. The vicious cycle of poverty kicks in and relative poverty is chronic

(9) High profile crime rates. High profile white-collar criminals or Ministers that are caught in scandals can easily slip off by ‘owning’ the law and the judges they bribe. In such circumstance, normally the public will despise these people, and even those once well-respected figures are ‘spitted’. Also it deteriorates the profile of the country and may hinder inward investment

(10) Devastator to environment. Where natural resources are abundant, corruption thrives. Corruption help accelerates the exploitation of resources disregard of environment impact. Tycoons will just have to pay some fee and asked a government to relax regulations on environment or perhaps requiring them not to meddle with their business. Hence there is often overexploitation of forests, fisheries and farmlands in pursuit of quick profits at the expense of local populations


Rezv 1000 said...

I shell out a good amount of money of MY OWN to help my own students, I don't get it back in taxes, because I rent an apartment. And this action is going to inspire me to stay in Michigan. If all goes through as planned I face a 20% pay cut...5% and the 20% of healthcare that I need to pay my own. At some point, they won't be able to do anything else to the teachers...who will be the next target?
Rezv 1000

ThermoCleanse said...

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Anonymous said...

i did not like this and not very interesting.

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